Use these links to rapidly review the documentTABLE OF CONTENTS PART IV

Table of Contents



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, 2010ORo

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

LOGO

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.)1699 King Street, Enfield, Connecticut(Address of principal executive offices)

06082(Zip code)


Registrant's
telephone number, including area code:(860) 758-7300

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 ý    NO o

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.

Large accelerated filer o

Accelerated filer ý

Non-accelerated filer o (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 aggregate market value of the registrant's voting and non-voting common equity held by non-affiliates of the registrant as of
June 30, 2010 was $518,939,408 based on the price of the last reported sale on the New York Stock Exchange on that date.

On
March 7, 2011, the registrant had 41,507,247 outstanding shares of Common Stock, $0.01 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant's Proxy Statement for the 2011 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, 2010, are incorporated by reference into Part III of this Annual Report on Form 10-K.



---





Table of Contents



TABLE OF CONTENTS



PART IITEM 1.

Business


3ITEM 1A.

Risk Factors


18ITEM 1B.

Unresolved Staff Comments


40ITEM 2.

Properties


40ITEM 3.

Legal Proceedings


41ITEM 4.

(Removed and Reserved)


42PART IIITEM 5.

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


43ITEM 6.

Selected Financial Data


44ITEM 7.

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


45ITEM 7A.

Quantitative and Qualitative Disclosures About Market Risk


81ITEM 8.

Financial Statements and Supplementary Data


83ITEM 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure


122ITEM 9A.

Controls and Procedures


122ITEM 9B.

Other Information


123PART IIIITEM 10.

Directors, Executive Officers and Corporate Governance


123ITEM 11.

Executive Compensation


123ITEM 12.

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


123ITEM 13.

Certain Relationships and Related Transactions, and Director Independence


123ITEM 14.

Principal Accounting Fees and Services


123PART IVITEM 15.

Exhibits and Financial Statement Schedule


124


---





Table of Contents

PART I

ITEM 1.    Business

Overview

STR Holdings, Inc. and its subsidiaries ("we", "us","our" or the "Company") conduct business in two segments.

We
are a leading global provider of encapsulants to the solar module industry. The encapsulant is a critical component used in solar modules. We were the first to develop the original
ethylene-vinyl-acetate ("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 supply encapsulants to many of the major solar module
manufacturers and believe we were the primary supplier of encapsulants to the majority of our top 10 customers in 2010. We believe this is due to our superior product performance, global manufacturing
base, customer service and technical support. Our encapsulants are used in both crystalline silicon and thin-film solar modules.

Our
Quality Assurance business is a leader in the consumer products quality assurance market. We believe our Quality Assurance business represents the only global testing services
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, social and ethical 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, 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 $82 billion in 2010 up 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 megawatts and Germany had an out of cycle reduction mainly in
response to the reduced cost of solar panels and internal rate of returns in excess of what is required to stimulate growth. Germany and Italy enacted additional reductions that took place in the
second half of 2010. In 2011, Germany also enacted further legislation to accelerate the annual year-end feed-in-tariff reduction to July 1, 2011

3

---



Table of Contents

for
roof-top systems and September 1, 2011 for ground-mount projects. In the United States, government incentive programs are generally in the form of tax credits, loan guarantees
and grants. Also, many states, including California, have enacted renewable portfolio standards that require utilities to increase their production of renewable energy sources including solar PV. 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 and global warming from fossil fuels and the consequent tightening of emission controls and changing consumer preferences toward renewable energy sources.

Despite
the favorable conditions for the adoption of solar electricity generation, solar energy continues to represent only a very 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 megawatts.
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 2010, approximately 86% 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 14% in 2010 to
roughly 24% of total PV cell production by 2015 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

4

---



Table of Contents

(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 EVA, polyvinyl butyral ("PVB") and poly dimethyl siloxane or silicone. We use EVA to make all of
our encapsulant products. 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 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 melt and then to cure, or crosslink, 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

---

Shrinkage
or inadequate adhesion 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. 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.

5

---



Table of Contents

We
typically sell our encapsulants in square meters. However, because the solar industry's standard measurement for production volume and capacity is in watts, megawatts ("MW") or
gigawatts ("GW"), we convert our capacity and production volume from square meters to approximate 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 10,100 to 15,500 square meters 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 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.

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 global provider of encapsulants to the solar module industry. The encapsulant is a critical component used in 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 silicon 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 long-term stocking impractical. Encapsulants are generally 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:



6

---



Table of Contents



7

---



Table of Contents



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:





8

---





Table of Contents







9

---



Table of Contents



Our Solar Products

We have 12 commercial encapsulant formulations. We develop our formulations internally and work in conjunction with our customers to
meet their varying requirements and draw on our considerable accumulated experience. 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 silicon and thin-film
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 2010, we believe we were the primary supplier of encapsulants to
the majority of our top 10 customers. First Solar, Inc. ("First Solar") and Suntech Power Holdings Co. Ltd. ("Suntech"), each of which accounted for more than 10% of our Solar net
sales, together accounted for 27.8% of our Solar net sales for the year ended December 31, 2010. Sales to First Solar accounted for 27.1% and 19.1% of our Solar net sales in the years 2009 and
2008, respectively. Our top five customers in our Solar
segment accounted for approximately 43.2%, 55.0% and 47.0% of our Solar net sales in 2010, 2009 and 2008, respectively.

We
typically sell our encapsulants on a purchase order basis or through one year supply contracts that specify prices and delivery parameters, but can be canceled or postponed prior to
production. In the past couple of years, we have been executing on a strategy of entering into formal contractual relationships. These contracts provide for better operational and capital efficiency
as well as improved manufacturing visibility, allowing us to better serve the needs of our growing customers. We currently have contracts with six of our largest 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 expand our marketing
and sales efforts by increasing the resources in our global sales organization. We also plan to use independent sales consultants in relation to our Asian growth strategy.

Our Solar Operations

Facilities and Equipment

We currently have five operational production facilities that are located in Enfield, Connecticut; Somers, Connecticut;
St. Augustine, Florida; Asturias, Spain; and Johor, Malaysia. In December 2010, we acquired a 275,000 square foot manufacturing facility in East Windsor, Connecticut. This facility will

10

---



Table of Contents

provide
us needed space for capacity to meet future demand and enable us to consolidate our Connecticut-based Solar operations. We expect the build-out of the facility and transition of
manufacturing operations to occur during 2011.

We
currently have worldwide total annual production capacity of 7.5 GW. We expect our global production capacity to increase to approximately 11.0 GW by the end of 2011. 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 10,100 to 15,500 square meters 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.

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 12 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 computerized 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.

We
test our products in real-time and at a high frequency after production. Each of our manufacturing facilities possesses a quality department that follow our global quality
assurance program and has a mandate 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 6 week supply of resin to provide protection against supply interruptions resulting from inclement weather,
natural disasters and strikes as well as to provide an economic hedge against short-term price inflation. 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. We have qualified resin suppliers local to each of our manufacturing facilities and continue to pursue
qualification of 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.

11

---



Table of Contents

Seasonal Trends

Our Solar business could be adversely affected by seasonal trends due to economic incentives, weather patterns and other items. See
"Item 1ARisk Factors."

Our Solar Competition

We compete with a number of encapsulant manufacturers, including Bridgestone Corporation, Solutia Solar GmbH, Hangzhou First PV
Material Co., Ltd. and Mitsui Chemicals Group, Inc. We also face limited competition from suppliers of non-EVA encapsulants including Dow Corning Corporation, Dai
Nippon Printing Co., Ltd. and E.I. Du Pont De Nemours and Company ("Dupont"). 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 additional 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), IEC 61646 (thin-film), UL 1703 and IEEE 1262.

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.

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

12

---



Table of Contents

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 provide inspection, testing, auditing and consulting services that enable retailers and
manufacturers to determine whether products and facilities meet applicable safety, regulatory, quality, performance, social and ethical 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, 80 inspection and audit offices and 22 sales offices in over 40 countries. With an experienced team of over 950 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 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:



13

---



Table of Contents

The
development of a technical reputation, the depth of industry knowledge and internationally recognized accreditations are the primary barriers to entry. 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

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 50 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.

14

---





Table of Contents

Key Global Accreditations and Memberships

Accreditations

Underwriters Laboratories Inc. (UL) (Certified Agent
Program (CAP) Engineering and Administrative Agency, Approved Data Acceptance Program (DAP) Agency)

American National Standards Institute (ANSI)ISO/IEC
Guide 65 Accredited as a Product Certification Body for SQF Code 2000 Food Safety CertificationsInternational Organization for Standardization (ISO)
17025 Accreditation

United Kingdom Accreditation Scheme (UKAS) (Accredited
Laboratory)Cashmere and Camel Hair Manufacturers Institute
(CCMI)

Worldwide Responsible Accredited Production (WRAP)
Accredited MonitorHong Kong Accreditation Service (HKAS) (Accredited
Laboratory)

United Kingdom Accreditation Service (UKAS) (Notified
Body)China National Accreditation Service for Conformity
Assessment (CNAS)

ISO 17025 Accreditation in U.K., Switzerland and
TurkeyANSI/ASQ National Accreditation Board (ANAB)ISO/IEC
17021:2006 Accredited as a Management System Certification Body

Laboratory Accreditation, Correlation, Evaluation (LACE)
Textile Laboratory Accreditation Scheme (Accredited Laboratory)Social Accountability Accreditation Service
(SAAS)ISO/IEC 17021:2006 and SAAS Procedure 200 Accredited certification body

Responsible Jewellery Council (RJC) Accredited Third
Party Conformity Assessment Bodies (CAB)International Council of Toy Industries (ICTI):
Accredited Audit Company

U.S. Consumer Products Safety Commission (CPSC)
(Accredited Testing Laboratory)Turkish Accreditation Agency (TURKAK) (Accredited
Laboratory)

Swiss Accreditation Scheme (SAS) (Accredited
Laboratory)SQF Certification Body License issued by SQF (Safe
Quality Food) to provide ANSI ISO/IEC Guide 65 SQF Code 2000 Certifications

Taiwan Accreditation Foundation (TAF)


Memberships

British Standards Institute (BSI)

Occupational Safety & Health Council
(OSHC)American Association of Textile Chemists and Colorists
(AATCC)

American Society for Testing And Materials
(ASTM)Hong Kong Apparel Society Limited (HKAS)

Federation of Hong Kong Industries (FHKI)The Business and Institutional Furniture Manufacturers
Association (BIFMA) International

American Apparel & Footwear Association
(AAFA)


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 2010, with our top five clients accounting for approximately 16.1%, 22.1%
and 18.0% of our Quality Assurance net sales in the years

15

---



Table of Contents

ended
December 31, 2010, 2009 and 2008, respectively. The average length of our relationship with our top 10 clients in 2010 was approximately 12 years.

Employees

As of December 31, 2010, 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, 2010, 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


63

Chairman, President and Chief Executive OfficerBarry A. Morris


56

Executive Vice President and Chief Financial OfficerRobert S. Yorgensen


47

Vice President and President, STR SolarAlan N. Forman


50

Vice President and General CounselMark A. Duffy


48

Former 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 25 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.

Alan N. Forman.Alan N. Forman became our Vice President and General Counsel in May 2010. Mr. Forman is responsible for all
legal affairs of
the Company. Prior to joining us, Mr. Forman was a partner at Brown Rudnick LLP and a member of their CleanTech team. Mr. Forman brings extensive executive experience in corporate
and securities law including intellectual property, licensing agreements, financing transactions, corporate governance and mergers and acquisitions. Mr. Forman holds a B.A. from Emory
University in Economics and a J.D. from George Washington Law School.

16

---



Table of Contents

Mark A. Duffy.Mark A. Duffy was our Vice President and President of STR Quality Assurance from August 2009 until
December 31, 2010, the
effective date of his resignation. 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. We have initiated an outside
search firm to aid in finding our successor for President of STR Quality Assurance. Currently, Mr. Jilot is directly overseeing STR Quality Assurance.

Intellectual Property

Our intellectual property consists of 12 encapsulant formulations, as well as several processes and sub-processes, a
service mark on our corporate logo and our trademarks "STR®" and "PhotoCap®." As appropriate, we require employees, suppliers and customers to execute confidentiality
agreements.

We
own a number of trademarks, service marks, trade secrets and other intellectual property rights that relate to our products and services. 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. See "Item 3. Legal
ProceedingsGalica /JPS."

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. The costs of compliance with these laws and regulations are not material and 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. For example, during 2010, we performed a Phase II environmental site assessment at our 10 Water Street, Enfield, Connecticut location. During our
investigation, the site was found to contain a presence of volatile organic compounds. We have been in contact with the Department of Environmental Protection and we engaged a license contractor to
remediate this situation. The estimated cost we expect to pay to remediate the current

17

---



Table of Contents

contamination
is approximately $0.1 million. Although we 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 us, 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., 1699 King 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.

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

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. During
2010, we experienced significant raw material inflation, primarily of EVA resin which comprises approximately 50% to 55% of our cost of encapsulant sales. EVA resin cannot be hedged in the commodity
markets. 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.

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 a limited number of 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 gross margins

18

---



Table of Contents

could
be adversely affected. 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.

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:



19

---



Table of Contents



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.

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, in Germany, which is currently the largest
solar PV end-user market, the government enacted legislation that reduced feed-in tariffs beginning June 30, 2010. In early 2011, the German government enacted further
legislation to accelerate the annual year-end feed-in-tariff reduction to July 1, 2011 for roof-top systems and September 1, 2011 for
ground-mount projects. As such, this announcement may result 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 enactment of the decreased feed-in tariff incentives. As such, we may see atypical Solar sales during the first half of 2011 that might
not occur during the second half of 2011. If solar module demand in Germany continues to grow at a rate that the German government believes is excessive, it may consider capping the amount of PV
installations that may qualify for the feed-in-tariff incentives. 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.

More
recently, Italy has emerged as a significant solar market. The same risks identified for the German market now exist for the Italian market. Also, many European governments are
currently experiencing sovereign debt issues. As such, a risk exists that some of these governments may reduce current subsidies provided for PV installations in conjunction with overall lower fiscal
policy spending.

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.

20

---



Table of Contents

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, and we expect this concentration to increase. 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 and Suntech, each of which accounted for more than 10% of our Solar net sales, together accounted for 27.8% of our Solar net sales for the
year ended December 31, 2010. Sales to First Solar accounted for 27.1% and 19.1% of our Solar net sales in the years 2009 and 2008, respectively. In addition, the top five customers in our
Solar segment accounted for approximately 43.2%, 55.0% and 47.0% of our Solar net sales in 2010, 2009 and 2008, 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 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. Over the last couple of years, 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. If we are not able to supply encapsulants to these new entrants in the future, we could lose 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 33.8% and 38.7% of our accounts receivable balance as of December 31, 2010 and December 31, 2009, 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 the majority of our top 10 Solar
customers in 2010. 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

21

---



Table of Contents

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.

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 very competitive, rapidly evolving 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 and increased costs 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 only hold one patent 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.

As
previously disclosed, in October 2007, we filed a complaint against James P. Galica ("Galica") and JPS Elastomerics Corp. ("JPS") in the Massachusetts Superior Court in Hampshire
County (the "Court"). We alleged that the defendants misappropriated trade secrets and violated the Massachusetts

22

---



Table of Contents

Unfair
and Deceptive Trade Practices Act as well as breaches of contract, the implied covenant of good faith and fair dealing, and fiduciary duty against Galica (the "State Court Action"). The Court
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. On January 27, 2011, the Court awarded us the right to recover from the defendants (i) actual monetary damages of $1.1 million,
(ii) punitive damages of $2.2 million, (iii) reasonable attorneys fees of $3.9 million, (iv) reasonable costs of $1.1 million, and (v) 12% interest on
each of the monetary awards from the date of the judgment (except for the actual monetary damages which accrues interest from October 2, 2007, the date the complaint was entered). In addition,
the Court imposed a five year production injunction against producing low shrink EVA encapsulant,
and a permanent use injunction against the defendants using our trade secrets. On January 28, 2011, the defendants filed a motion seeking to stay certain elements of the injunction which was
denied by the Court on February 8, 2011. The defendants filed a motion appealing the Court's denial of its motion as well as a notice of appeal with respect to the Court's order in favor of us.
On February 28, 2011, the Massachusetts Appeals Court denied JPS's appeal of the lower court's denial of the request for a stay. On March 4, 2011, the defendants filed a petition to stay
or modify the injunction pending appeal with the Massachusetts Supreme Judicial Court as well as an emergency motion for an immediate stay pending full briefing and hearing of the petition. The
Supreme Judicial Court denied the defendants' emergency motion on March 7, 2011. To date, the Supreme Judicial Court has not taken action on the defendants' petition.

On
September 17, 2010, JPS filed an amended complaint against our wholly-owned subsidiary, Specialized Technology Resources, Inc. ("STR"), in the U.S. District Court for
the District of Massachusetts. The amended complaint alleged various antitrust and unfair competition claims and that the State Court Action (described above) was sham litigation initiated by STR in
an attempt to monopolize the domestic and international market for low-shrink EVA encapsulants. JPS also alleged other schemes to monopolize and unfair competition in violation of federal
and state laws. JPS sought $60.0 million in compensatory damages, treble damages, a permanent injunction against STR for various activities, reimbursement of legal fees for the State Court
Action as well as for this matter, and disgorgement of proceeds obtained by STR from allegedly anti-competitive and tortious acts. On October 13, 2010, we filed a motion to dismiss
the amended complaint, and on January 5, 2011 the Court held a hearing on STR's motion to dismiss. At the hearing, the Court ruled in favor of STR and dismissed the case. On January 14,
2011, the Court issued its written opinion dismissing the case and on January 24, 2011 STR filed a motion for Rule 11 sanctions against the defendants and their counsel. On
February 10, 2011, JPS filed a notice of appeal with the Appellate Court. The First Circuit Court of Appeals has scheduled a settlement conference and set a briefing schedule in this matter.
The settlement conference is set for April 14, 2011. JPS' brief is due on April 18, 2011 and STR's brief will be due thirty days after JPS serves its brief. We intend to continue to
vigorously defend this action which we consider meritless and to pursue our motion for Rule 11 sanctions against JPS and its counsel.

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, Hangzhou First PV Material Co., Ltd.,
Solutia Solar GmbH and Mitsui Chemicals Group, Inc. We also face limited competition from suppliers of non-EVA encapsulants including Dow Corning Corporation, Dai Nippon
Printing Co., Ltd. and DuPont. 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

23

---



Table of Contents

do.
Further, as the China solar market matures, we expect additional 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 and to obtain additional customers. The future success of our Solar business depends, in part, on our ability to increase production capacity to
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 East Windsor, Connecticut facility becoming operational and 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 normally takes about one 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:



24

---



Table of Contents

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.

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. It would also
limit our ability to obtain new customers. 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

25

---



Table of Contents

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 finished goods inventory write-offs.

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 are currently expanding
our Malaysia facility to double the size of our existing production and warehouse space for a capacity of up to 5.0 GW and also have on order an additional 1.2 GW of production capacity that is
expected to be installed during the third quarter of 2011. In December 2010, we acquired a 275,000 square foot manufacturing facility in East Windsor, Connecticut. This facility will provide us needed
space for capacity to meet future demand and enable us to consolidate our Connecticut-based Solar operations. We expect the transition of manufacturing operations to occur during 2011. We also have on
order an additional 1.2 GW of production capacity that is expected to be installed in the East Windsor facility during the third quarter of 2011. 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.

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 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 finished goods 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 and in some cases even longer, 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,

26

---



Table of Contents

sales
and marketing efforts and inventory for our Solar business and the time we generate Solar net sales, if any, from these expenditures.

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. There are various reasons for seasonality fluctuations, mostly related to economic incentives and weather patterns. Prior to 2010, the construction of solar
energy systems in Germany was concentrated in the second half of the calendar year, largely due to the annual reduction of the applicable minimum feed-in tariff. In early 2011, the German
government enacted further legislation to accelerate the annual year-end feed-in-tariff reduction to July 1, 2011 for roof-top systems and
September 1, 2011 for ground-mount projects. This announcement may result 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 enactment of the decreased feed-in tariff incentives. As such, we may see atypical Solar sales during the first half of 2011
that may not occur during the second half of 2011. 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 product
development efforts and significantly affect our customer relationships 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. For example, during the third quarter of 2010, we experienced production inefficiencies and scrap associated with ramping newly installed
production capacity at our Malaysia facility that negatively impacted our financial results. 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.

27

---



Table of Contents

Changes to existing regulations and capacity 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.

The
adoption of solar energy in most parts of the world will be dependent on the capacity of applicable electricity transmission grids to distribute the increased volume of electricity
to end-users. The lack of available capacity on the transmission grid could substantially impact the adoption of solar energy which could cause a significant reduction in demand for solar
modules and, in turn, our encapsulants.

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

28

---



Table of Contents

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 larger 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.

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.

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.

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

29

---



Table of Contents

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 one year.

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.

On
the other hand, if we expand our capacity or direct labor force too quickly, we may experience lower profitability if the anticipated level of sales volume does not occur. For
example, we expanded our direct labor force during the end of 2009 to ensure we had proper resources to support anticipated higher sales volume for 2010 that did not materialize. Due to certain
clients reducing the scope of services procured from us, we were required to initiate a cost reduction plan to better align our labor cost with actual net sales. As such, our 2010 Quality Assurance
business's profitability was lower than in 2009.

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.

30

---





Table of Contents

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 service providers 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.

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 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

31

---



Table of Contents

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 credit markets and overall worldwide economic conditions may have significant effects on our business, financial condition and results of operations.

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 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. If credit markets become disrupted or volatile, 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, Alan N. Forman, our Vice President and General Counsel 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

32

---



Table of Contents

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 40 countries. Of our total net sales, 57.2%, 44.2% and 49.3% were generated from outside the United States in the years ended
December 31, 2010, 2009 and 2008, respectively, and we expect that our international operations will continue to grow. As such, our international operations are subject to a number of risks
that could have a material adverse effect on
our business, financial condition, results of operations or cash flow, including:



33

---



Table of Contents

In
late 2008, in the course of routine monitoring of our internal control, we discovered payments made and expenses incurred in our international Quality Assurance operations in India
and China that may have been in violation of the FCPA as well as local law, which resulted in personnel changes and our adoption of enhanced FCPA-related policies, procedures, training and
controls. It is possible that despite these efforts, additional FCPA or anti-corruption issues may arise in the future. We also self-reported the existence of these payments to
the U.S. Department of Justice in 2009, which has not taken any action with respect to the reported matters. Any actions by this or any other governmental agencies, or any failure by us to comply with
the FCPA or other anti-corruption laws, could have a material adverse effect on our business, financial condition, results of operations or cash flow.

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.

We have a significant amount of indebtedness. As of December 31, 2010, we had total indebtedness of approximately
$238.5 million. Based on that level of indebtedness and interest rates applicable at December 31, 2010, our annual interest expense would have been $10.0 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 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:



34

---



Table of Contents



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, 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. Due to our interest rate swap expiring on September 30, 2010, we do not have any of our variable
interest rate debt hedged. We do not plan to hedge our variable interest rate debt in the near term.

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, 2010. 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.

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 restricted 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.

35

---



Table of Contents

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. 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. For example, during 2010, we performed a Phase II environmental site assessment at our 10 Water Street, Enfield, Connecticut location.
During our investigation, the site was found to contain a presence of volatile organic compounds. 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. See "Item 1BusinessEnvironmental Regulation."

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:



36

---



Table of Contents



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.

Beginning
in 2011, we will be considered an accelerated filer and our timing to file SEC financial statements will be shortened. In particular, our Quarterly Report on
Form 10-Q will be due within 40 days following the end of each fiscal quarter compared to within 45 days in 2010. We will also be required to comply with the SEC
requirement to file our financial statements in extensible business reporting language ("XBRL") which is a computer language for electronic communication of business and financial data.
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.

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

We have documented and tested 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 maintain adequate

37

---



Table of Contents

compliance
with the requirements of Section 404 in future years, 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.

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 33% of the
outstanding shares of our common stock at December 31, 2010. 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 may continue to 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 continue to be volatile and subject to wide price fluctuations in response to various factors, including:



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,

38

---



Table of Contents

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 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 7,
2011, we had 41,507,247 shares of our common stock outstanding, some of which is subject to vesting. Our directors, executive officers and affiliates hold 13,764,764 of these shares. Subject to
Rule 144 holding periods and vesting, these shares are eligible for sale in the public market. 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:



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.

39

---



Table of Contents

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 restrict 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 1699 King Street, Enfield, Connecticut 06082. As of December 31, 2010, our Solar
business had five production facilities that are currently operational and one newly acquired facility that is being prepared for operations, and our Quality Assurance business operated a network of
17 laboratories, 80 inspection and audit offices and 22 sales offices in over 40 countries.

40

---





Table of Contents

The following tables summarize information regarding our significant owned and leased properties as of December 31, 2010:

Location

Square Feet

Owned/LeasedCorporateEnfield, Connecticut


12,500

LeasedSolarEast Windsor, Connecticut


275,000

OwnedAsturias, 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

LeasedEnfield, Connecticut*


51,500

OwnedShanghai, China


45,000

LeasedCanton, Massachusetts


44,000

LeasedReading, United Kingdom


30,000

LeasedTaipei, Taiwan


18,000

LeasedHaryana, India


16,500

LeasedSteinach, Switzerland


16,000

LeasedNottingham, United Kingdom


12,000

LeasedIstanbul, Turkey


10,000

LeasedLos Angeles, California


6,000

LeasedStroudsburg, Pennsylvania


3,500

LeasedHo Chi Min City, Vietnam


1,000

LeasedEtonhouse, Singapore


1,000

Leased


*Co-located.


From
time to time, we evaluate our production and service needs and may close or consolidate existing facilities or open new 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

As previously disclosed, in October 2007, we filed a complaint against James P. Galica ("Galica") and JPS Elastomerics Corp. ("JPS") in
the Massachusetts Superior Court in Hampshire County (the "Court"). We alleged that the defendants misappropriated trade secrets and violated the Massachusetts Unfair and Deceptive Trade Practices Act
as well as breaches of contract, the implied covenant of good faith and fair dealing, and fiduciary duty against Galica (the "State Court Action"). The Court 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. On January 27, 2011, the Court awarded us the right to recover from the defendants (i) actual monetary damages of $1.1 million, (ii) punitive damages of

41

---



Table of Contents

$2.2 million,
(iii) reasonable attorneys fees of $3.9 million, (iv) reasonable costs of $1.1 million, and (v) 12% interest on each of the monetary awards from
the date of the judgment (except for the actual monetary damages which accrues interest from October 2, 2007, the date the complaint was entered). In addition, the Court imposed a five year
production injunction against producing low shrink EVA encapsulant, and a permanent use injunction against the defendants using our trade secrets. On January 28, 2011, the defendants filed a
motion seeking to stay certain elements of the injunction which was denied by the Court on February 8, 2011. The defendants filed a motion appealing the Court's denial of its motion as well as
a notice of appeal with respect to the Court's order in favor of us. On February 28, 2011, the Massachusetts Appeals Court denied JPS's appeal of the lower court's denial of the request for a
stay. On March 4, 2011, the defendants filed a petition to stay or modify the injunction pending appeal with the Massachusetts Supreme Judicial Court as well as an emergency motion for an
immediate stay pending full briefing and hearing of the petition. The Supreme Judicial Court denied the defendants' emergency motion on March 7, 2011. To date, the Supreme Judicial Court has
not taken action on the defendants' petition.

On
September 17, 2010, JPS filed an amended complaint against our wholly-owned subsidiary, Specialized Technology Resources, Inc. ("STR"), in the U.S. District Court for
the District of Massachusetts. The amended complaint alleged various antitrust and unfair competition claims and that the State Court Action (described above) was sham litigation initiated by STR in
an attempt to monopolize the domestic and international market for low-shrink EVA encapsulants. JPS also alleged other schemes to monopolize and unfair competition in violation of federal
and state laws. JPS sought $60.0 million in compensatory damages, treble damages, a permanent injunction against STR for various activities, reimbursement of legal fees for the State Court
Action as well as for this matter, and disgorgement of proceeds obtained by STR from allegedly anti-competitive and tortious acts. On October 13, 2010, we filed a motion to dismiss
the amended complaint, and on January 5, 2011 the Court held a hearing on STR's motion to dismiss. At the hearing, the Court ruled in favor of STR and dismissed the case. On January 14,
2011, the Court issued its written opinion dismissing the case and on January 24, 2011 STR filed a motion for Rule 11 sanctions against the defendants and their counsel. On
February 10, 2011, JPS filed a notice of appeal
with the Appellate Court. The First Circuit Court of Appeals has scheduled a settlement conference and set a briefing schedule in this matter. The settlement conference is set for April 14,
2011. JPS' brief is due on April 18, 2011 and STR's brief will be due thirty days after JPS serves its brief. We intend to continue to vigorously defend this action which we consider meritless
and to pursue our motion for Rule 11 sanctions against JPS and its counsel.

We
do not intend to record any gain related to the state court judgment until the settlement cash proceeds are received by us.

ITEM 4.    (Removed and Reserved)

42

---



Table of Contents

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 7, 2011, there were approximately 2,500 holders of record of our common stock.

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

Common Stock
Price RangeHigh

LowFiscal 20101st Quarter

$
25.20

$
15.062nd Quarter


23.98


17.803rd Quarter


27.66


18.114th Quarter


28.16


17.56




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, 2010, there were 41,458,478 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 7, 2011 was $16.24.

Dividend Program

We have not declared or paid cash dividends on our common stock during the two most recent fiscal years. We do not anticipate paying
any cash dividends on our common stock for the foreseeable future and are currently restricted 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:



43

---



Table of Contents

Issuer Purchases of Equity Securities

Our Board of Directors has not established a share repurchase program for our common stock. Share repurchases of our common stock are
currently restricted under the terms of our credit facilities. We have no plans to repurchase shares for the foreseeable future other than what is potentially allowed under our Agreements upon the
termination of an employee who exercises options for which we could repurchase up to $2 million in any fiscal year. Accordingly, as of December 31, 2010, no shares have been repurchased.

Sales of Unregistered Securities

We did not sell unregistered securities during 2010.

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, 2010, 2009, 2008, 2007 and 2006 and the statement of operations and other data for each of (i) the years ended December 31, 2010, 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 year ended December 31,
2006 are derived from our Consolidated Financial Statements. All amounts are stated in thousands except per share / unit amounts unless otherwise noted.

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 7Management's Discussion and Analysis of Financial Condition and Results of OperationsOverview."

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

44

---



Table of Contents

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,
2010

Year 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,
2006Statement of Operations:Net sales

$
371,829

$
264,945

$
288,578

$
109,284

$
64,760

$
130,607Operating income


85,700


48,102


70,567


24,634


7,522


29,657Net income

$
49,311

$
22,989

$
28,105

$
4,111

$
732

$
15,294Net income per share/unit data:Basic

$
1.22

$
0.63

$
0.78

$
0.11

$
0.08

$
1.81Diluted

$
1.17

$
0.61

$
0.75

$
0.11

$
0.08

$
1.68Weighted-average shares/units outstanding:Basic


40,302,509


36,638,402


36,083,982


35,846,880


8,632,893


8,439,658Diluted


42,126,502


37,514,790


37,411,765


36,636,433


9,134,536


9,122,840Amortization of intangibles

$
11,503

$
11,503

$
11,503

$
6,231

$
50

$
109Capital expenditures

$
19,426

$
17,833

$
35,288

$
10,064

$
3,510

$
2,604Cash and short-term investments

$
106,630

$
70,150

$
27,868

$
21,180

$


$
17,939Total assets

$
702,846

$
640,620

$
620,922

$
575,157

$


$
77,640Total debt

$
238,525

$
240,506

$
257,521

$
259,526

$


$
68,101Contingently redeemable units

$


$


$
2,930

$
1,463

$


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

$
328,040

$
271,270

$
211,967

$
185,382

$


$
(9,397
)


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 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. All amounts in thousands except share/unit amounts or unless otherwise noted.

Overview

We were founded in 1944 as a plastics research and development company and evolved into two core businesses: Solar encapsulant
manufacturing and Quality Assurance services. We launched our Quality Assurance business in 1973 and we commenced sales of our Solar encapsulant products in the late 1970s.

45

---



Table of Contents

We
are a leading global provider of encapsulants to the solar module industry. The encapsulant is 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 encapsulants to many of the major solar module manufacturers worldwide and believe we were the primary supplier of encapsulants to
the
majority of our top 10 customers in 2010. We believe this is due to our superior product performance, global manufacturing base, customer customer service and technical support. Our encapsulants are
used in both crystalline silicon and thin-film solar modules. Our Solar segment net sales have increased from $9.9 million in 2003 to $259.2 million in 2010, representing a
compound annual growth rate ("CAGR") of 59.4%.

Our
Quality Assurance business is a leader in the consumer products quality assurance market. We believe our Quality Assurance business represents the only global testing services
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, social and ethical standards. Our Quality Assurance net sales have increased from
$66.5 million in 2003 to $112.6 million in 2010, representing a CAGR of 7.8%.

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:



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

46

---



Table of Contents

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. 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.

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 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 $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


47

---



Table of Contents

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.

On
April 21, 2010, we closed our secondary offering of 8,050,000 shares of our common stock on behalf of certain stockholders at $18.75 per share. The total offering size
reflected the underwriters' exercise of their option to purchase an additional 1,050,000 shares from the selling stockholders to cover over-allotments. We did not receive any proceeds from
the offering.

Business Segments, Components of Net Sales and Expenses and Anticipated Trends

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

Net SalesSolar

Our Solar net sales are primarily derived from the sale of encapsulants to both crystalline silicon 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 and Suntech, each of which accounted for more than 10% of our Solar net sales, together accounted for 27.8% of our Solar net sales for the year ended December 31, 2010.
Sales to First Solar accounted for 27.1% and 19.1% of our Solar net sales in the years ended December 31, 2009 and 2008, respectively. The top five customers in our Solar segment accounted for
approximately 43.2%, 55.0% and 47.0% of our Solar net sales in the years ended December 31, 2010, 2009 and 2008, respectively. We are actively trying to penetrate a
number of Tier 1 Chinese module manufacturers to increase our market share, and we expect that a larger proportion of our future Solar net sales to come from the Asia-Pacific
region.

Net
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, renewed or are in negotiations to enter into, contracts that may include periods of exclusivity and/or 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, 2010, we had contracts with six of
our top ten customers.

Our
Solar net sales are significantly driven by end user demand for solar modules. As more solar modules are sold, there is greater demand from module manufacturers for our encapsulants.
The solar power industry is impacted by a variety of factors, including government subsidies and incentives, worldwide economic conditions, environmental concerns, energy costs, the availability of
polysilicon and other factors. A key demand driver for solar module growth in the future will be the ability of solar module manufacturers to reduce their cost structure. During 2010, overall solar
industry demand increased and drove capacity expansion in the solar module supply chain. Increased competition from low cost countries, particularly China, and continued vertical integration of many
manufacturers in the solar supply chain contributed to the increase in capacity. These events caused many module manufacturers to significantly reduce the average selling price of their modules. From
an industry standpoint, the reduction in module selling prices has improved rates of return on solar investments for the end-user and is a long-term industry trend that we
believe will help to bring solar energy closer to grid-parity and will drive increased demand for our encapsulants.

48

---



Table of Contents

Demand for our encapsulants also depends, in large part, on government incentives aimed to promote greater use of solar energy. The type of government incentives
vary from country to country and can change rapidly. For example, in Germany, which is currently the largest solar PV end-user market, the government enacted legislation that reduced
feed-in tariffs beginning June 30, 2010. This event and the potential for further reductions drove significant end user demand for solar modules in 2010 which positively impacted
our 2010 Solar net sales. In early 2011, the German government enacted further legislation to accelerate the annual year-end feed-in-tariff reduction to
July 1, 2011 for roof-top systems and September 1, 2011 for ground-mount projects. As such, this announcement may result 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 enactment of the decreased feed-in tariff
incentives. As such, we may see atypical Solar sales during the first half of 2011 that might not occur during the second half of 2011. If solar module demand in Germany continues to grow at a rate
that the German government believes is excessive, the amount of PV installations that may qualify for feed-in-tariff incentives could be capped which would negatively impact
our Solar net sales as overall solar module growth in the world's largest PV market would be limited. More recently, Italy has emerged as a significant solar market. The same risks identified for the
German market now exist for the Italian market. Also, many European governments are currently experiencing sovereign debt issues. As such, a risk exists that some of these governments may reduce
current subsidies provided for PV installations in conjunction with overall lower fiscal policy spending.

Even
though we may see flat or reduced solar module demand in the European Union in the next few years compared to the growth experienced in 2010, we expect a sharp increase in demand
for solar
energy in the United States as a result of the American Recovery and Reinvestment Act passed in February 2009, which provides financial incentives for the development of renewable energy, as well as
other renewable energy legislative initiatives. Also, many states, including California, have enacted renewable portfolio standards that require utilities to increase their production of energy from
renewable energy sources including solar PV. China, India, Taiwan, Japan and other countries have also announced significant plans to increase their use of renewable energy, including solar.

Our
Solar net sales are also affected by our ability to meet customer demand, both in terms of encapsulant production and timing of delivery. We have five operational encapsulant
manufacturing facilities located in the United States, Spain and Malaysia with such capacity approximately split equally among the three continents. 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 capacity as our customers, and the market for our products generally grow. We are in the process of increasing the size of our Malaysian facility's existing production and warehouse space
by the end of the first quarter of 2011 to provide for total capacity of up to approximately 5.0 GW. In December 2010, we also acquired a 275,000 square foot manufacturing facility in East Windsor,
Connecticut. This facility will provide us needed space for capacity to meet future demand and enable us to consolidate our Connecticut-based Solar operations. We expect the transition of
manufacturing operations to occur during 2011. In addition, we have ordered approximately 3.5 GW of production capacity to be installed in our facilities by the end of 2011. As such, we expect to
increase our global production capacity from 7.5 GW as of December 31, 2010 to approximately 11.0 GW by December 31, 2011.

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. For 2010, we experienced a price decline of approximately 17% from the prior year that was mainly driven by price concessions exchanged for increased volumes associated with
entering into formal contracts with some of our largest customers and customer mix. Encapsulant pricing has been more resilient than

49

---



Table of Contents

other
areas of the solar supply chain. We attribute this to several factors. Namely, our product is differentiated in terms of quality. These differences, which include greater dimensional stability,
faster curing times and superior long-term stability, can have a substantial impact on factory yields and lifetime module output. With our encapsulant typically representing less than five
percent of the cost of a module, our product continues to present a compelling internal rate of return. However, we do expect pricing pressure to continue throughout the industry and while we expect
to be affected to a lesser degree than many other parts of the supply chain, we will not be immune.

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 2010, with our top five clients accounting for approximately 16.1%, 22.1% and 18.0% of our Quality Assurance net sales in the
years ended December 31, 2010, 2009 and 2008, respectively. Our Quality Assurance business operates a network of 17 laboratories, 80 inspection and audit offices and 22 sales offices in over 40
countries. 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 and peak in the second or third 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.

During
2010, our Quality Assurance segment's net sales were negatively impacted by a reduction in services procured from us by certain clients in North America and Europe as well as
overall softness in the consumer product quality assurance industry as retailers continued to reduce discretionary spending as the result of the uncertain economic environment. However, we expect
future net sales to increase as worldwide economic conditions improve and as a result of the following favorable quality assurance industry trends:



50

---



Table of Contents

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, depreciation of fixed assets and amortization of intangibles as a result of the DLJ Transactions. Approximately 75% of our Solar
segment's cost of sales is variable in nature, 15% is step-variable and primarily relates to labor and utilities cost and is fixed in the short-term and the remaining 10% is
fixed. Resin constitutes the majority of our raw materials and components costs at approximately 50% to 55% of our cost of sales, 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, have been volatile and cannot be hedged in the commodity markets.

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 (i) more efficient absorption of fixed costs driven by economies of scale, (ii) production efficiencies and
(iii) continued cost reduction efforts.

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 of fixed assets and amortization of intangibles. Labor and benefits represented our largest cost of Quality Assurance sales in the
years 2010, 2009 and 2008 at 31.6%, 29.2% and 30.8% of Quality Assurance net sales, respectively. Our Quality Assurance segment is more fixed cost intensive than our Solar segment. As such, a
reduction in sales volume, as we experienced in 2010, can have a negative impact to our financial results due to lower absorption of fixed costs. 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 our focus to better optimize
direct labor costs with sales volumes and leveraging of fixed costs.

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. Also, our consolidated gross profit is impacted by the mix of our
segment net sales since net sales in our Solar segment provide higher gross margins as a percentage of net sales than our Quality Assurance segment.

Selling, General and Administrative Expenses

Our selling 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 mainly of outside professional fees and expenses for our executive,
finance, administrative, information technology, legal and human resource functions.

51

---



Table of Contents

Research
and development expense is also recorded in selling, general and administrative expenses. We incurred $1.8 million, $0.7 million and $0.4 million,
respectively of research and development expense in 2010, 2009 and 2008, respectively. We have a long history of innovation dating back to our establishment in 1944 as a plastic and polymer research
and development firm. As our operations have expanded from solely providing research and development activities into the manufacturing of solar encapsulants and providing quality assurance services,
we have created a separate research and development function for employees and costs that are fully dedicated to research and development activities. Due to our legacy of innovation, other employees
spend some of their time related to research and development activities. However, we do not allocate such costs or allocate overhead to research and development. Accordingly, such amounts are recorded
in selling, general and administrative expenses as incurred.

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 research and development, marketing, legal costs and stock-based
compensation expense.

We
expect our selling and marketing expenses and research and development expense to increase in absolute terms as we expand these functions. However, we do not expect them to increase
as a percentage of total net sales.

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 doubtful.

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, 2010 and December 31, 2009, our investment in
CTC-Asia, Ltd. was $1.0 million and $0.9 million, respectively, and classified as Other long-term assets in the Consolidated Balance Sheets.

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.

52

---



Table of Contents

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 remained at that
amount until the agreement expired on September 30, 2010. Under the interest rate swap agreement, we paid interest at 4.622% and received the floating three-month LIBOR rate from Credit Suisse
International on the notional principal amount. Unrealized gains and losses on this interest rate swap represented the change in the fair value of the interest rate swap based on the floating interest
rate and an assessment of counterparty credit risk. Our interest rate swap expired on September 30, 2010. We have not hedged any of our variable interest rate debt since the interest rate swap
expired and do not plan to in the near term.

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. We expect our effective tax rate to trend lower over time as we benefit from our ten year tax holiday in Malaysia.

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 collectability 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 sale.

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

53

---



Table of Contents

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 $2.9 million, $3.7 million and $5.0 million in the years ended December 31, 2010, December 31, 2009
and December 31, 2008, 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 deferred revenues represent cash received from clients in excess of revenues recognized on contracts as the report has not been delivered.

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 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 primary raw materials consist of resin, paper, packaging material and chemicals/additives. We typically maintain a 6 week
stock of raw material inventory to ensure we can meet demand for our products and to help mitigate short-term commodity cost inflation.

Our
finished goods inventories are made-to-order and possess a shelf life of six to nine months from the date of manufacture. 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 intangible asset amortization.

We
write inventory down to net realizable value when it is probable that our inventory 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.

54

---



Table of Contents

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 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, or certain Quality Assurance customers reducing the scope of services procured from us. We have assessed these
factors during 2010 and concluded that no impairment indicators exist that would require an impairment valuation assessment. However, if we experience significant future reductions in our Quality
Assurance 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, certain of our
intangible assets may be subject to future potential impairment.

55

---



Table of Contents

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 on October 1, 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 on October 1, 2010. At that time, step one of the
impairment analysis described in ASC 350 resulted in approximately $87.0 million of excess fair value over the carrying value. The excess of fair value over carrying value was approximately
$39.3 million, or 11.3%, and $47.7 million, or 24.4%, 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.

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.
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. To ensure the assumptions we used in our
estimate of our reporting units' fair value were reasonable, we reconciled the calculated fair values to the market capitalization of our common stock as of October 1, 2010 which was
approximately $863.0 million.

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.

56

---



Table of Contents

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 addresses 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 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. We are currently under applicable tax authority audits for 2007 and 2008 in the United States and 2006, 2007 and 2008 in
Spain.

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 during the year ended December 31, 2010 and 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

57

---



Table of Contents

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, 2010

Year Ended
December 31, 2009Volatility

57.90
%
61.61
%Risk-free interest rates

2.38
%
1.96
%Expected term

4.9 to 5.0 Years

2.7 to 4.9 YearsDividend yield

0.00
%
0.00
%Weighted-average grant-date fair value

$11.06

$4.59


In
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 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 volatility was based on a peer group of companies. 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 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, 2008Volatility

60.00
%Risk-free interest rate

1.71
%Expected term

2.2 YearsDividend yield

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

$7.26Performance-based

$8.16


58

---



Table of Contents

Consolidated Results of Operations

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, 2010, 2009 and 2008.

Year Ended
December 31,
2010

Year Ended
December 31,
2009

Year Ended
December 31,
2008(dollars in thousands)Statement of Operations Data:Net salesSolar

$
259,200

$
149,521

$
182,311Net salesQuality Assurance


112,629


115,424


106,267Total net sales


371,829


264,945


288,578Cost of salesSolar


151,824


91,213


103,717Cost of salesQuality Assurance


75,934


75,759


70,930Total cost of sales


227,758


166,972


174,647Gross profit


144,071


97,973


113,931Selling, general and administrative expenses


58,045


48,785


41,592Provision for bad debt expense


494


1,403


1,950Earnings on equity-method investments


(168
)

(317
)

(178
)Operating income


85,700


48,102


70,567Interest income


111


136


249Interest expense


(15,784
)

(17,068
)

(20,809
)Foreign currency transaction loss


(208
)

(134
)

(1,007
)Unrealized gain (loss) on interest rate swap


4,018


1,995


(3,025
)Income before income tax expense


73,837


33,031


45,975Income tax expense


24,526


10,042


17,870Net income

$
49,311

$
22,989

$
28,105


59

---



Table of Contents



Year Ended
December 31,
2010

Year Ended
December 31,
2009

Year Ended
December 31,
2008Statement of Operations Data:Net salesSolar


69.7
%

56.4
%

63.2
%Net salesQuality Assurance


30.3
%

43.6
%

36.8
%Total net sales


100.0
%

100.0
%

100.0
%Cost of salesSolar


58.6
%

61.0
%

56.9
%Cost of salesQuality Assurance


67.4
%

65.6
%

66.8
%Total cost of sales


61.3
%

63.0
%

60.5
%Gross profit


38.7
%

37.0
%

39.5
%Selling, general and administrative expenses


15.6
%

18.4
%

14.4
%Provision for bad debt expense


0.1
%

0.5
%

0.7
%Earnings on equity-method investments


0.0
%

0.1
%

0.1
%Operating income


23.0
%

18.2
%

24.5
%Interest income


0.0
%

0.1
%

0.1
%Interest expense


(4.2
)%

(6.4
)%

(7.2
)%Foreign currency transaction loss


(0.1
)%

(0.1
)%

(0.3
)%Unrealized gain (loss) on interest rate swap


1.1
%

0.8
%

(1.0
)%Income before income tax expense


19.9
%

12.5
%

15.9
%Income tax expense


6.6
%

3.8
%

6.2
%Net income


13.3
%

8.7
%

9.7
%


Non-GAAP Earnings Per Share

To supplement our consolidated financial statements, we use a non-GAAP financial measure called non-GAAP net
earnings per share ("EPS"). Non-GAAP EPS is defined for the periods presented in the following table. It should be noted that diluted weighted-average common shares outstanding are
determined on a GAAP basis and the resulting share count is used for computing both GAAP and non-GAAP diluted EPS. All amounts are stated in thousands except per share amounts unless
otherwise noted.

Management
believes that non-GAAP EPS provides meaningful supplemental information regarding our performance by excluding certain expenses that may not be indicative of the
core business operating results and may help in comparing current-period results with those of prior periods as well as with our peers. Non-GAAP EPS is one of the main metrics used by
management and our Board of Directors to plan and measure our operating performance. In addition, through 2010, non-GAAP EPS was the only metric used to determine annual bonus compensation
for our Chairman, President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, and was also used in conjunction with segment Adjusted EBITDA to determine annual
bonus compensation for our segment presidents under our management incentive plan.

Although
we use non-GAAP EPS as a measure to assess the operating performance of our business, non-GAAP EPS has significant limitations as an analytical tool
because it excludes certain material costs. Because non-GAAP EPS does not account for these expenses, its utility as a measure of our operating performance has material limitations. The
omission of the substantial amortization expense associated with our intangible assets and deferred financing costs and stock-based compensation expense further limits the usefulness of this measure.
Non-GAAP EPS also adjusts for the related tax effects of the adjustments and the payment of taxes is also a necessary element of our operations. Because of these limitations, management
does not view non-GAAP EPS in isolation and

60

---



Table of Contents

also
uses other measures, such as Adjusted EBITDA, net income, net sales, gross margin and operating income, to measure operating performance.

Year Ended
December 31, 2010
(unaudited)

Year Ended
December 31, 2009
(unaudited)

Year Ended
December 31, 2008
(unaudited)Net income

$
49,311

$
22,989

$
28,105Adjustments to net income:Amortization of intangibles


11,503


11,503


11,503Amortization of deferred financing costs


1,327


1,522


1,150Stock-based compensation expense


7,851


7,308


1,752Termination of monitoring agreement





2,622


Secondary offering expense


534





Tax effect of adjustments


(6,400
)

(7,674
)

(4,655
)Non-GAAP net income

$
64,126

$
38,270

$
37,855Diluted shares outstanding


42,126,502


37,514,790


37,411,765Diluted net earnings per share

$
1.17

$
0.61

$
0.75Diluted non-GAAP net earnings per share

$
1.52

$
1.02

$
1.01


Year Ended December 31, 2010 Compared to Year Ended December 31, 2009

The following tables set forth our consolidated results of operations in dollars and as a percentage of total net sales for the fiscal
years ended December 31, 2010 and 2009.

Net Sales

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Net salesSolar

$
259,200


69.7
%
$
149,521


56.4
%
$
109,679


73.4
%Net salesQuality Assurance

$
112,629


30.3
%
$
115,424


43.6
%
$
(2,795
)

(2.4
)%Total net sales

$
371,829


100.0
%
$
264,945


100.0
%
$
106,884


40.3
%


Our
consolidated net sales increased as a result of an increase in our Solar net sales, offset to a limited extent by a decrease in net sales in our Quality Assurance business as more
fully described below.

Net SalesSolar

Volume increased by approximately 109% mainly due to an industry wide improvement in the solar marketplace that increased demand for
our encapsulants and our continued growth with Asian module manufacturers. Our 2009 results were negatively impacted by the Spanish government change in its feed-in tariff policy that
occurred in 2008. This change resulted in reduced end user solar module demand that created excess module inventory in the supply chain. Additionally, there was a lack of available financing for solar
projects due to global banking conditions. During the latter part of 2009

61

---



Table of Contents

and
through the year ended December 31, 2010, overall solar industry conditions improved and we have increased our net sales to Asian module manufacturers. Demand in 2010 also benefited from
increased orders ahead of changes to feed-in tariffs in Germany that occurred at the end of June 2010. The German market continued to be strong during the second half of 2010 after the
feed-in tariffs were changed and the European market was also strengthened by strong demand in Italy. This has led to an increase in solar module sales and increased demand for our
encapsulants. The volume increase was partially offset by an average sales price decline of approximately 17%. The price decline was primarily driven by contracts entered into in the first half of
2010 with our largest customers where we obtained increased volume in exchange for a lower price. Also, the Euro declined approximately 5% which reduced the translation of our Europe net sales.

Net SalesQuality Assurance

The net sales decline for the year ended December 31, 2010 was driven by a reduction in services procured from us by certain
clients in North America and Europe as well as overall softness in the consumer product quality assurance industry as retailers continued to reduce
discretionary spending as a result of the uncertain economic environment that existed for the majority of 2010.

Cost of Sales

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Cost of salesSolar

$
151,824


40.8
%
$
91,213


34.4
%
$
60,611


66.4
%Cost of salesQuality Assurance

$
75,934


20.4
%
$
75,759


28.6
%
$
175


0.2
%Total cost of sales

$
227,758


61.3
%
$
166,972


63.0
%
$
60,786


36.4
%


Cost
of sales increased primarily due to increased raw material and direct labor costs associated with the increase in our Solar net sales as discussed above.

Cost of SalesSolar

The increase in our Solar segment's cost of sales was mainly due to increased variable costs associated with the 109% increase in sales
volume, raw material inflation of $6.8 million and higher labor and benefits of $2.9 million. The expansion of our Malaysia facility, which became operational in August 2009, resulted in
an incremental cost of $22.2 million for the year ended December 31, 2010 compared with the same period in 2009.

Non-cash
intangible asset amortization expense of $8.4 million was included in cost of sales for each of the years ended December 31, 2010 and 2009.

Cost of SalesQuality Assurance

The increase in our Quality Assurance's cost of sales was mainly due to higher labor costs to support increased sales volume that did
not materialize during 2010. However, the increased direct labor costs were partially mitigated by cost reductions initiated throughout 2010. Additionally, depreciation expense increased by
approximately $0.8 million in 2010, mainly due to information technology systems being placed in service during 2010.

Non-cash
intangible asset amortization expense of $3.1 million was included in cost of sales for each of the years ended December 31, 2010 and 2009.

62

---



Table of Contents

Gross Profit

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Gross profit

$
144,071


38.7
%
$
97,973


37.0
%
$
46,098


47.1
%


Gross
profit increased primarily due to the net sales increase in our Solar segment. Gross profit increased as a percentage of net sales primarily due to a higher mix of net sales in our
higher margin Solar segment which accounted for 69.7% and 56.4% of our consolidated net sales for the years ended December 31, 2010 and 2009, respectively. Also, our Solar segment experienced
increased operating leverage of fixed costs associated with our volume increase, partially offset by lower pricing, negative foreign exchange from our European operation and increased raw material
costs. Also, our Quality Assurance segment was negatively impacted by higher labor costs and depreciation expense as well as lower fixed cost absorption driven by the decline in net sales.

Non-cash
intangible asset amortization expense of $11.5 million reduced gross profit for each of the years ended December 31, 2010 and 2009.

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

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%SG&A

$
58,045


15.6
%
$
48,785


18.4
%
$
9,260


19.0
%


Salaries
and benefits increased $8.7 million for the year ended December 31, 2010 due to increased headcount in our sales, information technology and finance functions
necessary to support our anticipated growth and operations as a public company. The increase in information technology costs was partially the result of a portion of such expense being capitalized in
the prior year when the projects were in the development phase. We incurred $1.1 million of increased research and development expense as we continue to develop a pipeline of innovative
products. We incurred $2.0 million of higher professional fees relating to increased legal costs associated with our continued litigation with JPS Elastomerics Corporation ("JPS") and
accounting fees associated with Sarbanes-Oxley compliance. Non-cash stock-based compensation expense increased by approximately $0.5 million, mainly due to the issuance of stock
options, which have accelerated vesting clauses, in connection with our initial public offering ("IPO") that occurred in November 2009. At the IPO date, we issued stock options for incentive units
that only partially converted or did not convert to common shares. These stock options began vesting on January 31, 2010. Additional awards of options
and stock were also granted through the year ended December 31, 2010. We project that, based on current stock options issued and outstanding, our stock-based compensation expense will be
approximately $5.0 million for the year ending December 31, 2011. We incurred incremental expenses of $0.5 million in 2010 associated with the secondary offering by certain
selling stockholders. These increases were partially offset by the elimination of DLJ management advisory fees of $3.2 million that were paid in the prior year pursuant to the DLJ acquisition
agreements.

63

---



Table of Contents

Provision for Bad Debt Expense ("Bad debt")

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Bad debt

$
494


0.1
%
$
1,403


0.5
%
$
(909
)

(64.8
)%


Bad
debt expense decreased as a result of improved worldwide economic conditions. Also, we increased resources and improved accounts receivable processes in certain locations which have
improved our cash collections.

Interest Expense

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Interest expense

$
15,784


4.2
%
$
17,068


6.4
%
$
(1,284
)

(7.5
)%


The
decrease in the period was primarily the result of lower debt levels driven by the $15.0 million repayment made in November 2009 in conjunction with our IPO and
$0.2 million of lower amortization of deferred financing costs. Also, interest rates on our variable rate debt were slightly lower in 2010 compared to 2009 and were partially offset by lower
proceeds received from our interest rate swap.

Other Income Items

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Other income

$
3,921


1.1
%
$
1,997


0.8
%
$
1,924


96.3
%


During
the year ended December 31, 2010, we recognized a $4.0 million unrealized gain on our interest rate swap entered into during 2007 as a requirement under our credit
facilities compared to a $2.0 million unrealized gain in the corresponding 2009 period. Foreign currency transaction losses increased $0.1 million during the year ended
December 31, 2010 to a loss of $0.2 million from a loss of $0.1 million during the year ended December 31, 2009.

Income Taxes

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Income taxes

$
24,526


6.6
%
$
10,042


3.8
%
$
14,484


144.2
%


Our
effective income tax rate for the year ended December 31, 2010 was 33.2%, compared to the U.S. federal statutory tax rate of 35.0%. For the year ended December 31,
2010, we benefited from a change in estimate from an income-based to capital-based deferred tax liability estimate for the State of Connecticut that provided a 1% positive impact. Also, we benefited
from a higher mix of our domestic

64

---



Table of Contents

taxable
income being eligible for the United States Tax Code Section 199 Domestic Manufacturing Deduction due to increased transfer pricing payments received from certain subsidiaries. Our
effective tax rate was 30.4%, for the year ended December 31, 2009. The lower 2009 effective tax rate benefited
from income tax refunds received on prior year amended returns of approximately $1.0 million and reductions of deferred tax liabilities.

Net Income

Years Ended December 31,2010

2009Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Net income

$
49,311


13.3
%
$
22,989


8.7
%
$
26,322


114.5
%


Net
income increased due to higher Solar Adjusted EBITDA as discussed below, our gain on our interest rate swap and lower bad debt expense that more than offset the Quality Assurance
Adjusted EBITDA decline discussed below and our higher 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, which 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 for the year ended December 31, 2010
compared to the year ended December 31, 2009.

Solar

Years Ended December 31,2010

2009

ChangeAmount

Amount

Amount

%Net sales

$
259,200

$
149,521

$
109,679


73.4
%Adjusted EBITDA

$
114,197

$
67,253

$
46,944


69.8
%Adjusted EBITDA as % of segment net sales


44.1
%

45.0
%


Adjusted
EBITDA as percentage of net sales for this business segment decreased for the year ended December 31, 2010 compared to 2009 primarily as a result of reduced average
selling prices, raw material price inflation of $6.8 million, $2.9 million of increased labor and benefits and $1.7 million of higher professional fees relating to increased legal
costs associated with continued litigation with JPS offset in part by improved operating leverage as a result of increased Solar net sales and reduced scrap.

65

---



Table of Contents

Quality Assurance

Years Ended December 31,2010

2009

ChangeAmount

Amount

Amount

%Net sales

$
112,629

$
115,424

$
(2,795
)

(2.4
)%Adjusted EBITDA

$
15,022

$
22,857

$
(7,835
)

(34.3
)%Adjusted EBITDA as % of segment net sales


13.3
%

19.8
%


Adjusted
EBITDA as a percentage of net sales for this business segment decreased for the year ended December 31, 2010 compared to 2009 primarily due to the lower sales volume and
higher cost of sales as discussed above. Also, SG&A expenses increased due to $3.0 million of increased labor and benefits expense for the year ended December 31, 2010, compared to 2009,
primarily related to headcount added in 2009 to support the full year 2009 sales increase of 8.6% which did not occur in 2010 and increased labor associated with information technology systems. These
costs for the recently implemented systems were capitalized in 2009 and 2008 corresponding periods as the projects were in the development phase.

During
the year ended December 31, 2010, we recorded $0.2 million of expense in cost of sales for severance benefits related to the termination of approximately 100
employees in our Quality Assurance segment. The cost reduction plan was initiated to reduce the Quality Assurance segment's cost structure as a result of lower than anticipated forecasted revenue for
2010.

We
obtained pre-tax savings associated with the employee terminations of $1.1 million in 2010.

Changes
in the cost reduction accrual for the year ended December 31, 2010 were as follows:

December 31,
2010Balance at December 31, 2009

$
Additions


219Adjustments


(16
)Cash utilization


(203
)Balance at December 31, 2010

$



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

Net Sales

Years Ended December 31,2009

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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 net sales, partially offset by increased net sales in our Quality Assurance business.

66

---



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 increased their
purchase of solar panels prior to the anticipated reductions of feed-in tariffs that reduce the return on their investment. This led to an increase in solar module sales and increased
demand for our encapsulants.

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

---



Table of Contents

Cost of Sales

Years Ended December 31,2009

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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 finished goods 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

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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 net sales decline

68

---



Table of Contents

in
our Solar segment. As a percentage of net 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 net 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 net 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

Years Ended December 31,2009

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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 that took effect January 31, 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

Years Ended December 31,2009

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

Amount

%Bad debt

$
1,403


0.5
%
$
1,950


0.7
%
$
(547
)

(28.1
)%


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.

69

---



Table of Contents

Interest Expense

Years Ended December 31,2009

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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.

Net Income

Years Ended December 31,2009

2008Change% of
Total
Net Sales



% of
Total
Net SalesAmount

Amount

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

70

---



Table of Contents

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

The discussion that follows is a summary analysis of total revenues and the primary changes in Adjusted EBITDA by segment for the year
ended December 31, 2009 compared to the year ended December 31, 2008.

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 million 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.

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.

71

---



Table of Contents

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, 2010 and the year ended December 31, 2009.

Year Ended December 31, 2010First
Quarter

Second
Quarter

Third
Quarter

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

$
54,811

$
66,997

$
68,285

$
69,107Net salesQuality Assurance


24,962


29,657


29,491


28,519Total net sales


79,773


96,654


97,776


97,626Cost of salesSolar


31,454


38,306


40,831


41,233Cost of salesQuality Assurance


18,228


18,988


19,292


19,426Total cost of sales


49,682


57,294


60,123


60,659Gross profit


30,091


39,360


37,653


36,967Selling, general and administrative expenses


15,969


13,096


14,423


14,557Provision for bad debt expense


109


634


157


(406
)Earnings on equity-method investments


(19
)

(54
)

(30
)

(65
)Operating income


14,032


25,684


23,103


22,881Interest income


28


36


26


21Interest expense


(4,231
)

(4,411
)

(4,228
)

(2,914
)Foreign currency transaction (loss) gain


(43
)

373


(841
)

303Unrealized gain on interest rate swap


1,216


1,446


1,356


Income before income tax expense


11,002


23,128


19,416


20,291Income tax expense


3,242


8,102


6,095


7,087Net income

$
7,760

$
15,026

$
13,321

$
13,204Other Data:Amortization of intangiblesSolar

$
2,108

$
2,108

$
2,108

$
2,108Amortization of intangiblesQuality Assurance


768


768


768


767Total amortization of intangibles

$
2,876

$
2,876

$
2,876

$
2,875Stock-based compensationSolar

$
924

$
266

$
266

$
266Stock-based compensationQuality Assurance


581


239


264


173Stock-based compensationCorporate


2,286


878


847


861Total stock-based compensation

$
3,791

$
1,383

$
1,377

$
1,300Adjusted EBITDA:(1)Adjusted EBITDASolar

$
24,891

$
31,207

$
28,190

$
29,909Adjusted EBITDAQuality Assurance


1,638


4,539


5,061


3,784Adjusted EBITDACorporate


(2,818
)

(1,732
)

(3,009
)

(2,713
)Total Adjusted EBITDA


23,711


34,014


30,242


30,980Depreciation and amortization


(5,758
)

(6,276
)

(6,634
)

(6,554
)Interest income


28


36


26


21Interest expense


(4,231
)

(4,411
)

(4,228
)

(2,914
)Income tax expense


(3,242
)

(8,102
)

(6,095
)

(7,087
)Unrealized gain on interest rate swap


1,216


1,446


1,356


Secondary offering expense


(193
)

(341
)




Stock-based compensation


(3,791
)

(1,383
)

(1,377
)

(1,300
)Gain (loss) on disposal of property, plant and equipment


1


(11
)

1


(7
)Earnings on equity-method investments


19


54


30


65Net income

$
7,760

$
15,026

$
13,321

$
13,204


72

---



Table of Contents

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 (loss) gain


(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


(1)We
define Adjusted EBITDA as net income before interest income and expense, income tax expense, depreciation expense, intangible asset amortization,
stock-based compensation expense, transaction fees, equity earnings on investments and certain non-recurring income and expenses from the results of operations.
We
present Adjusted EBITDA because it is the main metric used by our management and our board of directors to plan and measure our Segments' operating performance. Our management believes that
Adjusted


73

---



Table of Contents

EBITDA
is useful to investors because Adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in their evaluation of the operating performance of companies in
industries similar to ours. We also believe Adjusted EBITDA is useful to our management and investors as a measure of comparative operating performance from period to period. The DLJ Transactions had
a significant impact on our capital structure and resulted in accounting charges that make period to period comparisons of our core operations difficult and resulted in expenses that may not be
indicative of our future operating performance. For example, as a result of the DLJ Transactions, we incurred significant non-cash amortization charges and increased interest expense.
Adjusted EBITDA removes the impact of changes to our capital structure (primarily interest expense) and asset base (primarily depreciation and amortization resulting from the DLJ Transactions). By
reporting Adjusted EBITDA, we provide a basis for comparison of our business operations between current, past and future periods. In addition, measures similar to Adjusted EBITDA are one of the
metrics utilized to measure performance based bonuses paid to our Segment Presidents and certain managers and are used to determine compliance with financial covenants under our credit facilities.

Adjusted
EBITDA, however, does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined in accordance with generally accepted accounting
principles, and our calculations thereof may not be comparable to similarly entitled measures reported by other companies. Although we use Adjusted EBITDA as a measure to assess the operating
performance of our business, Adjusted EBITDA has significant limitations as an analytical tool because it excludes certain material costs. For example, it does not include interest expense, which has
been a necessary element of our costs. Because we use capital assets, depreciation expense is a necessary element of our costs and ability to generate revenue. In addition, the omission of the
substantial amortization expense associated with our intangible assets further limits the usefulness of this measure. Adjusted EBITDA also does not include the payment of taxes, which is also a
necessary element of our operations. Because Adjusted EBITDA does not account for these expenses, its utility as a measure of our operating performance has material limitations. Because of these
limitations management does not view Adjusted EBITDA in isolation and also uses other measures, such as net income, net sales, gross margin and operating income, to measure operating performance.


Financial Condition, Liquidity and Capital Resources

We have financed our operations primarily through cash provided by operations. From 2003 through 2010, net cash provided by operating
activities has been sufficient to fund our working capital needs and capital expenditures. As of December 31, 2010, our principal sources of liquidity consisted of $106.6 million of cash
and $20.0 million of availability under the $20.0 million revolving portion of our first lien credit facilities. Our total indebtedness was $238.5 million as of
December 31, 2010.

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 and the need to fund higher accounts
receivable and raw materials 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 issuances or a combination of these potential sources of liquidity.

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 raise any needed
capital. Due to the current historically low interest rate environment, we are assessing the potential to refinance our debt to lower our overall interest expense.

Cash Flows

Cash Flow from Operating Activities

Net cash provided by operating activities was $58.7 million for the year ended December 31, 2010 compared to
$47.9 million for the year ended December 31, 2009. Due to the strength of our Solar

74

---



Table of Contents

segment,
cash earnings increased by approximately $24.1 million for the year ended December 31, 2010 compared to the same period in 2009. This was mostly offset by increased working
capital, primarily relating to increases in accounts receivable and raw materials inventory. The increase in working capital reflects the investment required to support our planned growth, increased
inventory safety stock associated with our continued capacity ramp up as well as to help mitigate short-term raw material inflation, timing related to our strong net sales growth in 2010
and payment terms customary in certain foreign locations.

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.

Cash Flow from Investing Activities

Net cash used for investing activities was $19.1 million for the year ended December 31, 2010 and primarily related to
$19.4 million of capital expenditures. We also purchased the remaining 49% interest of STR Registrar, which was previously consolidated for $0.6 million, net of cash acquired. These were
partially offset by the maturity of a money market account for which we sold for its face value of $1.0 million.

For
our Solar segment, we had capital expenditures of $15.5 million for the year ended December 31, 2010. Our Solar capital expenditures for this period consisted primarily
of equipment costs associated
with the addition of new production lines, construction costs for our Malaysia facility expansion and initial costs relating to our recently acquired East Windsor, Connecticut facility.

For
our Quality Assurance segment, we had capital expenditures of $3.4 million for the year ended December 31, 2010. Our Quality Assurance capital expenditures for this
period consisted primarily of costs associated with equipment purchases for the enhancement of our information systems.

We
expect 2011 consolidated capital expenditures to be approximately $61.0 million, of which Solar capital expenditures will represent approximately $50.0 million, Quality
Assurance capital expenditures will represent approximately $10.5 million and corporate capital expenditures will represent approximately $0.5 million.

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
negative economic conditions and having sufficient capacity for business levels. We purchased a certificate of deposit in the amount of $1.0 million with a greater than 90 day maturity,
which matured in 2010.

Net
cash used for investing activities for the year ended December 31, 2008 was $35.3 million for capital expenditures which consisted of construction costs for our
Malaysia facility, addition of new production lines, information technology costs and laboratory expenses in China.

We
use an alternative non-GAAP measure of liquidity called free cash flow. We define free cash flow as cash provided by operating activities less capital expenditures. Free
cash flow was $39.3 million, $30.0 million and $12.4 million in the years ended December 31, 2010, 2009 and 2008, respectively. We believe free cash flow is an important
measure of our overall liquidity and our ability to fund future growth and provide a return to stockholders. Free cash flow does not reflect, among other things, mandatory debt service, other
borrowing activity, discretionary dividends on our common stock and acquisitions.

75

---





Table of Contents

We consider free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the
business that, after the acquisition of property and equipment, including information technology infrastructure and land and buildings, can be used for strategic opportunities, including investing in
our business, making strategic acquisitions, and strengthening the balance sheet.

Analysis
of free cash flow also facilitates management's comparisons of our operating results to competitors' operating results. A limitation of using free cash flow versus the GAAP
measure of cash provided by operating activities as a means for evaluating our business is that free cash flow does not represent the total increase or decrease in the cash balance from operations for
the period because it excludes cash used for capital expenditures during the period. Our management compensates for this limitation by providing information about our capital expenditures on the face
of the cash flow statement and in the above discussion. We have computed free cash flow using the same consistent method from quarter to quarter and year to year.

Year Ended
December 31, 2010
(unaudited)

Year Ended
December 31, 2009
(unaudited)

Year Ended
December 31, 2008
(unaudited)Cash provided by operating activities

$
58,741

$
47,858

$
47,667Less: capital expenditures


(19,426
)

(17,833
)

(35,288
)Free cash flow

$
39,315

$
30,025

$
12,379


We
also use this non-GAAP financial measure for financial and operational decision making and as a means to evaluate period-to-period comparisons.

Cash Flow from Financing Activities

Net cash used in financing activities was $2.4 million for the year ended December 31, 2010 primarily for the payment of
IPO issuance costs of $1.5 million and $1.9 million for debt repayments partially offset by $1.1 million of the proceeds from the exercise of stock options and related tax
benefits received from the disqualifying dispositions of certain of those option exercises.

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 debt
repayments of $17.0 million during 2009,
including 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.

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, 2010,
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

76

---



Table of Contents

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 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, 2010 and December 31, 2009, the weighted-average interest rate under our credit facilities was 4.18% and 4.14%, respectively, before the effect of our
interest rate swap which expired on September 30, 2010. At the rate in effect on December 31, 2010 and assuming an outstanding balance of $238.5 million as of December 31,
2010, our annual debt service obligations would be $11.9 million, consisting of $10.0 million of interest and $1.9 million of scheduled principal payments. No mandatory principal
payment is required until June 30, 2011 due to the $15.0 million payment made in conjunction with the Company's initial public offering in November 2009. 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

77

---



Table of Contents

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, 2010, we were required to maintain a maximum first lien debt ratio of 4.00 to 1.00, a maximum total leverage ratio of
6.00 to 1.00 and a minimum interest coverage ratio of 1.80 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, 2010, we were required to maintain a maximum total leverage ratio of 6.25 to 1.00. As of December 31, 2010, our first lien
debt ratio was 0.46 to 1.00, our total leverage ratio was 1.07 to 1.00 and our interest coverage ratio was 8.49 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, 2011 and March 31, 2012, we are required to maintain a maximum first lien debt ratio of 3.00 to 1.00, a maximum total leverage ratio of 5.00 to 1.00 and a minimum interest
coverage ratio of 2.00 to 1.00. Based on the formulas set forth in the second lien credit agreement, as of March 31, 2011 and March 31, 2012, we are required to maintain a maximum total
leverage ratio of 5.25 to 1.00.

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 million 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 $55.0 million for the fiscal year ending December 31, 2010 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 is approximately $36.5 million for the year
beginning January 1, 2011. The amount of capital expenditure permitted under our credit agreements will allow us to execute our anticipated 2011 capital investment plan.

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, 2010, we were in compliance with all of our covenants and other obligations under the credit agreements.

78

---



Table of Contents

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 remained at that
amount until the agreement expired on September 30, 2010. Under the interest rate swap agreement, we paid interest at 4.622% and received the floating three-month LIBOR rate from Credit Suisse
International on the notional principal amount. As of December 31, 2010, none of our variable interest rate debt has been hedged and we do not plan to hedge any portion of our debt in the near
term.

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% as of December 31, 2010 and December 31, 2009. 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, 2010 and December 31, 2009.

Contractual Obligations and Other Commitments

As of December 31, 2010, our contractual obligations and other commitments were as follows:

Payments Due by PeriodTotal

2011

2012 - 2013

2014 - 2015

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

$
238,525

$
1,850

$
3,700

$
232,975

$
Interest costs(b)


34,509


9,959


19,686


4,864


Operating lease obligations


9,789


3,274


3,756


1,144


1,615Other contractual obligations(c)














Total

$
282,823

$
15,083

$
27,142

$
238,983

$
1,615


(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, 2010.(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.

79

---



Table of Contents

Effects of Inflation

Inflation generally affects us by increasing costs of raw materials, labor and equipment. In 2010, the price of our raw materials
increased and negatively impacted our cost of sales by approximately $6.8 million.

Recently Issued Accounting Standards

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) rising commodity costs, such as resin or paper used in our encapsulants, and our ability to successfully manage any increases in these commodity costs; (ii) our dependence
on a limited number of third party suppliers for raw materials for our encapsulants and materials used in our processes; (iii) demand for solar energy in general and solar modules in
particular; (iv) the timing and effects of the implementation of recently announced government incentives and policies for renewable energy, primarily in China and the United States;
(v) the effects of the announced reductions to solar incentives in Germany and Italy; (vi) customer concentration in our Solar business and our relationships with key customers;
(vii) our ability to protect our intellectual property; (viii) pricing pressures and other competitive factors; (ix) operating new manufacturing facilities and increasing
production capacity at existing facilities; (x) our reliance on vendors and potential supply chain disruptions, including those resulting from bankruptcy filings by customers or vendors;
(xi) potential product performance matters, product liability or professional liability claims and our ability to manage them; (xii) loss of professional accreditations and memberships;
(xiii) 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 and the continuing effects of
the ongoing recession on sales; (xiv) the impact negative credit markets may have on us or our customers or suppliers; (xv) the impact of changes in foreign currency exchange rates on
financial results, and the geographic distribution of revenues and earnings; (xvi) maintaining sufficient liquidity in order to fund future profitable growth and long term vitality;
(xvii) the extent to which we may be required to write-off accounts receivable or inventory; (xviii) outcomes of litigation and regulatory actions; and (xix) 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

80

---



Table of Contents

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

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, 2010, 2009 and 2008, approximately $170.4 million, or 45.8%,
$117.2 million, or 44.2% and $142.2 million, or 49.3%, 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 administrative 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, 2010 would have
caused a change in consolidated net assets of approximately $11.7 million and a change in net sales of approximately $17.0 million.

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 LIBO 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 LIBO 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.

81

---



Table of Contents

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. Prior to the expiration of our interest rate swap
agreement on September 30, 2010, our interest rate swap agreement was for a $130.0 million notional principal amount and had a fair value of a liability of $0 and $4.0 million as
of December 31, 2010 and 2009, 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, 2010, a change of one percentage point in the applicable interest rate, would cause an increase or decrease in
interest expense of approximately $2.4 million on an annual basis. As of December 31, 2010, none of our variable interest rate debt has been hedged and we do not plan to hedge any
portion of our debt in the near term. 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.

Raw Material 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, pulp prices and supply and demand dynamics in other industries. In 2010, the price of our raw
materials, primarily resin, has increased and negatively impacted our cost of sales by approximately $6.8 million. 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 raw material prices. However, we try to mitigate raw material inflation by holding inventory safety stock, taking
advantage of early payment discounts, adding inflation escalation price clauses in customer contracts and ensuring we have multiple sourcing alternatives for each of our raw materials. Increases in
raw material prices could have a material adverse effect on our gross margins and results of operations, particularly in circumstances where we have entered into fixed price contracts with our Solar
customers.

82

---





Table of Contents

ITEM 8.    Financial Statements and Supplementary Data



Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Stockholders 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, and of cash flows present fairly, in all material respects, the financial position of STR Holdings, Inc. and its subsidiaries at December 31, 2010 and 2009, and the results of
their operations and their cash flows for each of the three years in the period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on criteria established inInternal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the Report of Management on Internal Control over Financial
Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over
financial reporting based on our audit (which was an integrated audit in 2010). We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit
of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PricewaterhouseCoopers LLP

Hartford,
Connecticut
March 11, 2011

83

---





Table of Contents



STR Holdings, Inc. and Subsidiaries        CONSOLIDATED BALANCE SHEETS        All amounts in thousands except share and per share amounts

December 31,
2010

December 31,
2009ASSETSCURRENT ASSETSCash and cash equivalents

$
106,630

$
69,149Short-term investments





1,001Accounts receivable, trade, less allowances for doubtful accounts of $1,343 and $2,468 in 2010 and 2009, respectively


43,308


33,744Unbilled receivables


2,444


2,462Inventories


31,452


12,267Prepaid expenses


1,708


1,717Deferred tax assets


3,207


2,987Other current assets


6,780


1,796Total current assets


195,529


125,123Property, plant and equipment, net


73,259


68,895Intangible assets, net


204,660


216,163Goodwill


223,359


223,359Deferred financing costs


4,470


5,797Other long-term assets


1,569


1,283Total assets

$
702,846

$
640,620LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESCurrent portion of long-term debt

$
1,850

$
1,981Book overdraft





685Interest rate swap liability





4,018Accounts payable


20,371


10,404Deferred revenue


5,604


4,630Accrued liabilities


15,398


14,680Income taxes payable


8,242


3,587Total current liabilities


51,465


39,985Long-term debt, less current portion


236,675


238,525Deferred tax liabilities


84,353


87,722Other long-term liabilities


2,313


3,118Total liabilities


374,806


369,350COMMITMENTS AND CONTINGENCIES (Note 15)Stockholders' 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; 41,458,478 and 41,349,710 issued and outstanding in 2010 and 2009, respectively


407


402Additional paid-in capital


222,784


214,954Retained earnings


104,516


55,205Accumulated other comprehensive income, net


333


709Total stockholders' equity


328,040


271,270Total liabilities and stockholders' equity

$
702,846

$
640,620


See accompanying notes to these consolidated financial statements.

84

---





Table of Contents



STR Holdings, Inc. and Subsidiaries        CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME        All amounts in thousands except share and per
share amounts

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Net salesSolar

$
259,200

$
149,521

$
182,311Net salesQuality Assurance


112,629


115,424


106,267Total net sales


371,829


264,945


288,578Cost of salesSolar


151,824


91,213


103,717Cost of salesQuality Assurance


75,934


75,759


70,930Total cost of sales


227,758


166,972


174,647Gross profit


144,071


97,973


113,931Selling, general and administrative expenses


58,045


48,785


41,592Provision for bad debt expense


494


1,403


1,950Earnings on equity-method investments


(168
)

(317
)

(178
)Operating income


85,700


48,102


70,567Interest income


111


136


249Interest expense


(15,784
)

(17,068
)

(20,809
)Foreign currency transaction loss


(208
)

(134
)

(1,007
)Unrealized gain (loss) on interest rate swap


4,018


1,995


(3,025
)Income before income tax expense


73,837


33,031


45,975Income tax expense


24,526


10,042


17,870Net income

$
49,311

$
22,989

$
28,105Other comprehensive (loss) income:Foreign currency translation (net of tax effect of $191, $572, and $972, respectively)


(376
)

1,063


(1,805
)Other comprehensive (loss) income


(376
)

1,063


(1,805
)Comprehensive income

$
48,935

$
24,052

$
26,300Net income per share (Note 3):Basic

$
1.22

$
0.63

$
0.78Diluted

$
1.17

$
0.61

$
0.75Weighted-average shares outstanding (Note 3):Basic


40,302,509


36,638,402


36,083,982Diluted


42,126,502


37,514,790


37,411,765


See
accompanying notes to these consolidated financial statements.

85

---





Table of Contents

STR Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' / UNITHOLDERS' EQUITY

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

Units
Class A

Units
Class FCommon Stock



Accumulated
Other
Comprehensive
Income (Loss)



Total
Stockholders' /
Unitholders'
EquityAdditional
Paid-In
Capital

Retained
EarningsIssued

Amount

Issued

Amount

Issued

AmountBalance at January 1, 2008


17,865

$
178,649


294

$
1,171




$


$


$
1,451

$
4,111

$
185,382Stock-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

$
211,967Stock-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








25,013Stock-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

$
271,270Offering costs from IPO




$





$





$


$
(467
)
$


$


$
(467
)Proceeds from exercise of stock options














93,554


1


949








950Purchase of minority interest of STR Registrar




















(641
)







(641
)Option exercise recognized tax benefit




















142








142Stock-based compensation














470,802


4


7,847








7,851Net income


























49,311


49,311Foreign currency translation























(376
)




(376
)Balance at December 31, 2010




$





$



40,730,753

$
407

$
222,784

$
333

$
104,516

$
328,040


See accompanying notes to these consolidated financial statements.

86

---



Table of Contents



STR Holdings, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF CASH FLOWS

All amounts in thousands

Year Ended
December 31,
2010

Year Ended
December 31,
2009

Year Ended
December 31,
2008OPERATING ACTIVITIESNet income

$
49,311

$
22,989

$
28,105Adjustments to reconcile net income to net cash provided by operating activities:Depreciation


13,719


11,878


9,745Amortization of intangibles


11,503


11,503


11,503Amortization of deferred financing costs


1,327


1,522


1,150Stock-based compensation expense


7,851


7,308


1,752Unrealized (gain) loss on interest rate swap


(4,018
)

(1,995
)

3,025Earnings on equity investments


(168
)

(317
)

(178
)Loss (gain) on disposal of property, plant and equipment


16


67


(3
)Provision for bad debt expense


494


1,403


1,950Deferred income tax benefit


(3,396
)

(1,773
)

(4,392
)Changes in operating assets and liabilities:Accounts receivable


(9,406
)

1,710


(10,517
)Inventories


(19,437
)

6,607


(11,917
)Other current assets


(5,720
)

(1,071
)

(72
)Accounts payable


9,640


(3,240
)

6,181Accrued liabilities


1,757


(890
)

7,044Income taxes payable


4,797


(6,847
)

3,543Other, net


471


(996
)

748Net cash provided by operating activities


58,741


47,858


47,667INVESTING ACTIVITIESPurchase of minority interest of STR Registrar


(645
)




Capital expenditures


(19,426
)

(17,833
)

(35,288
)Purchase of investments





(1,001
)

Proceeds from sale of investments


1,002





Proceeds from sale of fixed assets


18





Net cash used in investing activities


(19,051
)

(18,834
)

(35,288
)FINANCING ACTIVITIESLong-term debt repayments


(1,850
)

(16,850
)

(1,850
)Principal payments on capital lease obligations


(131
)

(165
)

(155
)Proceeds from exercise of stock options


950





Option exercise recognized tax benefit


142





Proceeds received from issuance of common stock pursuant to IPO, net of offering costs





30,855


Other issuance costs


(1,535
)

(2,458
)

(3,266
)Net cash (used in) provided by financing activities


(2,424
)

11,382


(5,271
)Effect of exchange rate changes on cash


215


875


(420
)Net increase in cash and cash equivalents


37,481


41,281


6,688Cash and cash equivalents, Beginning of period


69,149


27,868


21,180Cash and cash equivalents, End of period

$
106,630

$
69,149

$
27,868SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATIONCash paid during the period for:Interest

$
14,359

$
15,820

$
19,792Income taxes

$
20,974

$
15,647

$
19,495NON-CASH INVESTING AND FINANCING ACTIVITIESConversion of contingently redeemable units to common stock

$


$
2,930

$



See accompanying notes to these consolidated financial statements.

87

---





Table of Contents

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

These consolidated financial statements reflect the financial statements of STR Holdings, Inc. ("Holdings") or (the
"Company") and its subsidiaries on a consolidated basis. The consolidated financial statements for the years ended December 31, 2010, 2009 and 2008, represent the new basis of accounting for
STR Holdings, Inc. and its subsidiaries that reflect the June 15, 2007 DLJ Transactions discussed below.

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 United 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 worldwide.

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

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 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 (the "Acquisition"). They acquired Specialized Technology Resources, Inc. for investment
purposes.

In
connection with the Acquisition:



88

---



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



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 ("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.

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.

On
December 7, 2009, the Company 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. The Company did not receive any of the proceeds from the sale of the shares as a result of the exercise of the
over-allotment option.

On
April 21, 2010, the Company closed its secondary offering of 8,050,000 shares of its common stock on behalf of certain stockholders at $18.75 per share. The total offering size
reflected the

89

---



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

underwriters'
exercise of their option to purchase an additional 1,050,000 shares from the selling stockholders to cover over-allotments. The Company did not receive any proceeds from the
offering.

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).

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 valuation of 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, 2010, the Company did not have any 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


Refer
to Note 14 for financial assets and liabilities that are reported at fair values and measured on a recurring basis. 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 currency is the U.S. Dollar. Assets and liabilities of international operations are translated at

90

---



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 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 of
$1.0 million as of December 31, 2009 was comprised of a money market account with a maturity of greater than three months.

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 sale.

QA
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 QA
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 QA 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 $2.9 million, $3.7 million and $5.0 million for the years ended December 31, 2010, 2009 and 2008, 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 deferred revenue represents cash received from clients in excess of revenues recognized on contracts as the report has not been delivered.

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 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.

91

---



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 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Inventories.The Company's inventories are stated at the lower of cost or market. The Company's primary raw materials consist of resin,
paper,
packaging material and chemicals/additives. 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. 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 expense and amortization of intangible assets.

The
Company will write down inventory to its net realizable value when it is probable that its inventory 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 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. Accordingly, the Company capitalized $6.7 million, $2.1 million and $0 for the years ended December 31, 2010, 2009 and
2008, respectively.

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 on October 1 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 2010, 2009 and 2008, which resulted in no impairments to the Company's goodwill.

92

---



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 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 (See Note 7).

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. The Company had no impairments of its long-lived assets in each of 2010, 2009 and 2008.

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

93

---



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 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

financing
costs was $1,327, $1,522 and $1,150 for the years ended December 31, 2010, 2009 and 2008, 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 in accordance with jurisdictional regulations.

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 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.

94

---



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 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Cost of SalesSolar.The Company includes the cost of inventory sold and related costs for the distribution of its product in cost
of
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, depreciation and amortization of intangibles. Shipping and handling costs are classified as a component of cost of sales. Customer
payments for shipping and handling costs are recorded as a component of net sales.

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

Research
and development expense is also recorded in selling, general and administrative expenses. The Company has a long history of innovation dating back to its establishment in 1944
as a plastic and polymer research and development firm. As the Company's operations have expanded from solely providing research and development activities into the manufacturing of solar encapsulants
and providing quality assurance services, it has created a separate research and development function for employees and costs that are fully dedicated to research and development activities. The
Company incurred $1.8 million, $0.7 million and $0.4 million, respectively of research and development expense in 2010, 2009 and 2008, respectively.

Due
to the Company's legacy of innovation, other employees spend some of their time related to research and development activities. However, the Company does not allocate such costs or
allocate overhead to research and development. Accordingly, such amounts are recorded in selling, general and administrative expenses as incurred.

Stock-Based Compensation.In accordance with ASC 718CompensationStock Compensation, the Company recognizes the grant
date fair value of stock-based awards as compensation expense over the vesting period of the awards (See Note 11).

Earnings Per Share.The Company computes net income per share 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).

95

---



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 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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.

Recent Accounting Pronouncements:

In October 2009, the FASB issued Accounting Standards Update ("ASU") 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.

The
impact of this issuance has been applied on a retrospective basis to determine earnings per share for 2009 and 2008. 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).

96

---



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 3EARNINGS PER SHARE (Continued)

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

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Basic and diluted earnings per shareNumerator:Net income

$
49,311

$
22,989

$
28,105Denominator:Weighted-average shares outstanding


40,302,509


36,638,402


36,083,982Add: dilutive effect of stock options


1,069,873





Add: dilutive effect of restricted common stock units


754,120


876,388


1,327,783Weighted-average shares outstanding with dilution


42,126,502


37,514,790


37,411,765Basic earnings per share

$
1.22

$
0.63

$
0.78Diluted earnings per share

$
1.17

$
0.61

$
0.75


193,236
and 3,495,685 stock options outstanding were not included in the computation of diluted weighted-average shares outstanding for the years ended December 31, 2010 and
December 31, 2009, respectively, because the effect would be anti-dilutive. There were no stock options outstanding for the year ended December 31, 2008.

NOTE 4INVENTORIES

Inventories consist of the following:

December 31,
2010

December 31,
2009Finished goods

$
4,338

$
2,547Raw materials


27,114


9,720$
31,452

$
12,267


97

---



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 5PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

Estimated
Useful
Lives

December 31,
2010

December 31,
2009Land




$
4,619

$
4,589Buildings and improvements


15 - 40


17,569


20,766Machinery and equipment


5 - 8


57,570


45,175Furniture, fixtures and computer equipment


3 - 5


17,029


8,242Automobiles


5 - 7


342


34297,129


79,114Less: accumulated depreciation





(33,372
)

(21,525
)63,757


57,589Construction in progress





9,502


11,306Property, plant and equipment, net




$
73,259

$
68,895


Depreciation
expense was $13,719, $11,878 and $9,745 for the years ended December 31, 2010, December 31, 2009 and December 31, 2008, 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 QA 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, 2010 and December 31, 2009, the Company's investment in CTC-Asia, Ltd. was $1,034 and $866,
respectively, and classified as Other long-term 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, 2010 and December 31, 2009, 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.

98

---



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 7INTANGIBLE ASSETS AND GOODWILL

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

December 31, 2010

December 31, 2009Gross
Carrying
Amount

Accumulated
Amortization

Net

Gross
Carrying
Amount

Accumulated
Amortization

Net

Useful
LivesCustomer relationships

$
102,700

$
18,186

$
84,514

$
102,700

$
13,051

$
89,649

20 yearsTrademarks


65,800


7,768


58,032


65,800


5,575


60,225

30 yearsProprietary technology


70,300


12,449


57,851


70,300


8,934


61,366

20 yearsAccreditations


6,600


2,337


4,263


6,600


1,677


4,923

10 years$
245,400

$
40,740

$
204,660

$
245,400

$
29,237

$
216,163


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 for each of the years ended December 31, 2010, 2009 and 2008.

Estimated
future amortization expense at December 31, 2010 is as follows:

2011

$
11,5032012


11,5032013


11,5032014


11,5032015


11,503Thereafter


147,145$
204,660


Goodwill
was $223,359 at December 31, 2010 and December 31, 2009. Goodwill was allocated to the Solar and QA segments as follows:

Solar

Quality
Assurance

ConsolidatedBalance at December 31, 2010 and December 31, 2009

$
146,472

$
76,887

$
223,359


Goodwill
is not deductible for tax purposes.

99

---



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,
2010

December 31,
2009First Lien term loan

$
163,525

$
165,375Second Lien term loan


75,000


75,000Capital leases (Note 9)





131$
238,525

$
240,506Less:Current portion of long-term debt


(1,850
)

(1,981
)Total long-term debt, less current portion

$
236,675

$
238,525


In
connection with the DLJ Transactions, 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 Credit Suisse 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 to facilitate the IPO, 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 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 domestic
subsidiaries are guarantors of the obligations. 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, restrict repurchases of common stock 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.

100

---



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 (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 was 1.5% with respect to ABR borrowings and 2.5% with respect to
Eurodollar loans. The weighted-average interest rate for 2010 was 2.77% and was 2.76% as of December 31, 2010. The weighted-average interest rate for 2009 was 2.85% and was 2.73% as of
December 31, 2009.

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 200 basis points. 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, 2010 and December 31, 2009.

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 $1,000. 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 one half of 1%.
Eurodollar loans bear interest at an applicable percentage rate plus a LIBO rate as determined by the lenders. The initial applicable percentage was 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 200 basis points. 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 2010 was 7.27% and was 7.26% as of December 31, 2010. The weighted-average interest rate for 2009 was 7.35% and was 7.23% as of December 31, 2009.

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.

As
of December 31, 2010, the Company was in compliance with all of its covenants and other obligations under the credit Agreements.

101

---



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 (Continued)

Interest Rate Swap

Effective September 13, 2007, the Company entered into an interest rate swap contract for $200,000 notional principal amount of
its variable rate debt. The notional principal amount decreased to $130,000 on October 1, 2008 and the contract expired 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 a 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 were recorded in the statement of operations. The fair value of the swap was a liability of $0 and $4,018 at December 31, 2010 and 2009, 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 (CHF500) bearing an interest rate of
approximately 4.25% as of December 31, 2010 and December 31, 2009. 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, 2010 and December 31, 2009.

Principal
repayments of long-term debt as of December 31, 2010 are as follows:

2011

$
1,8502012


1,8502013


1,8502014


232,975Total

$
238,525


No
mandatory payment is required until June 30, 2011 due to the $15.0 million payment made in conjunction with the IPO. However, the Company plans to continue to make such
debt payments based on the original required maturity schedule as shown above.

The
fair value of the Company's debt was approximately $220,400 and $208,700, determined by its mid-market bid/ask price as of December 31, 2010 and
December 31, 2009, respectively.

102

---



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 leased certain machinery and equipment under capital leases which expired during 2010. Capital lease assets and related accumulated depreciation, which were recorded as part
of property, plant and equipment, are as follows:

December 31,
2010

December 31,
2009Capital lease assets

$
556

$
556Accumulated depreciation


(556
)

(267
)Net capital lease assets

$


$
289


Depreciation
expense on capital lease assets was $289 for the year ended December 31, 2010 and $105 for each of the years ended December 31, 2009 and December 31,
2008.

The
Company leases various production and QA 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 vehicles and office equipment under operating leases. Future minimum payments under all
non-cancelable operating leases were as follows as of December 31, 2010:

2011

$
3,2742012


2,2372013


1,5192014


6182015


526Thereafter


1,615$
9,789


Rental
expense on office space and equipment operating leases was $5,128, $4,933 and $4,220 for the years ended December 31, 2010, December 31, 2009 and December 31,
2008, respectively.

NOTE 10STOCKHOLDERS' / UNITHOLDERS' EQUITY

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, 2010, 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, 2010 there
were 41,458,478 shares of issued and outstanding common stock. Each share of common stock is entitled to one vote per share. Included in the 41,458,478 shares are 40,730,753 vested common shares and
727,725 restricted unvested common shares.

103

---



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)

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 STR Holdings (New) LLC 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, if any, on unvested units were subject to deferral 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 were 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 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


104

---



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

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 has 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 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 Board of Directors or 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 the
Company or its affiliates, or a company acquired by the Company or with which it combines. Options outstanding generally vest monthly over a four-year period and expire ten years from the
date of grant.

During
the fourth quarter of 2010, the Company issued 6,996 restricted stock awards of the Company's common stock at a fair value of $25.73 per award to certain members of the Company's
Board of Directors under the 2009 Plan.

During
the third quarter of 2010, the Company issued 71,000 options to purchase shares of the Company's common stock at an exercise price of $18.80 to various employees and issued 8,218
restricted stock awards of the Company's common stock at a fair value of $24.34 per award to certain members of the Company's Board of Directors under the 2009 Plan.

During
the second quarter of 2010, the Company issued 185,000 options to purchase shares of the Company's common stock at exercise prices ranging from $22.60 to $23.06 to certain
employees under the 2009 Plan.

On
November 6, 2009, the Company issued 3,495,685 options to purchase shares of 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 also 40,000 restricted shares issued on the same date to certain members of the Company's Board of Directors.

On
November 30, 2010, the President of QA resigned effective December 31, 2010. As a result, the Company cancelled all 338,776 of the former President of QA's unvested
options as of December 31, 2010. There were 1,281,877 shares available for grant under the 2009 Plan as of December 31, 2010.

105

---



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)

In
connection with the 256,000 options granted during the year ended December 31, 2010, there are varying service terms. Following is a summary of the characteristics of each of
these options:

Shares

Service Condition60,000

Vests ratably in 48 equal monthly installments as of the last day of each month beginning May 31, 2010.125,000

Vests ratably in 48 equal monthly installments as of the last day of each month beginning June 30, 2010.71,000

Vests ratably in 16 equal quarterly installments as of the last day of each calendar quarter beginning September 30, 2010.256,000


The
fair value of the stock options issued were 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 during the periods presented below:

2010

2009Risk-free interest rate

2.38%

1.96%Expected volatility

57.9%

61.6%Expected life (in years)

4.9 to 5.0

2.7 to 4.9Dividend yield



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

$11.06

$4.59


106

---



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 stock option activity under the Company's 2009 Plan from the date of the Company's IPO through the year ended December 31, 2010:

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




$
4.59

$
32,685Options granted


256,000


21.77Exercised


(93,554
)

10.16







$
921Canceled/forfeited


(338,776
)

10.00Balance at December 31, 2010


3,319,355

$
11.59


8.76

$
5.02

$
27,916Vested and exercisable as of December 31, 2010


2,249,379

$
10.87


8.67

$
4.57

$
20,537Vested and exercisable as of December 31, 2010 and expected to vest thereafter


3,319,355

$
11.59


8.76

$
5.02

$
27,916


(1)The
aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $20.00 of
the Company's common stock on December 31, 2010.


During
2010, the total intrinsic value of options exercised (i.e., the difference between the market price on the date of exercise and the price paid by the employee to exercise
the options) was $862. There were no option exercises during 2009.

As
of December 31, 2010, there was $6,002 of unrecognized compensation cost related to outstanding stock option awards. This amount is expected to be recognized over a
weighted-average remaining vesting period of 2.7 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. The Company received proceeds of $950 related to the exercise of stock options for the year ended December 31, 2010.

107

---



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 restricted shares activity from the date of the Company's IPO through the year ended December 31, 2010:

Unvested
Restricted SharesNumber of
Shares

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


1,264,679

$
10.00Granted


40,000


10.00Vested


(121,366
)

10.00Canceled


Unvested at December 31, 2009


1,183,313

$
10.00Granted


15,214


24.98Vested


(470,802
)

10.00Canceled


Unvested at December 31, 2010


727,725

$
10.32Expected to vest after December 31, 2010


727,725

$
10.32


As
of December 31, 2010, there was $4,314 of unrecognized compensation cost related to unvested restricted shares. This amount is expected to be recognized over a weighted-average
remaining vesting period of 2.5 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 31,2010

2009

2008Selling, general and administrative expense

$
7,851

$
7,308

$
1,752Total recognized tax benefit

$
313

$


$



LLC Units Prior to Initial Public Offering

In connection with and subsequent to the DLJ Transactions, Class B, Class C, Class D, Class E and
Class F incentive units were issued to employees and certain non-employee investors, each class of

108

---



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)

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 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 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 DLJ Transactions 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.

109

---



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
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

60.0%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.

A
summary of unit activity for 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 ValueUnvested as of January 1, 2008





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


110

---



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)

Performance-Based Awards

Class D Units

Weighted-Average Grant-Date Fair ValueUnvested 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


NOTE 12INCOME TAXES

Income before income tax expense is as follows:

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Domestic

$
44,383

$
12,126

$
11,444Foreign


29,454


20,905


34,531Total

$
73,837

$
33,031

$
45,975


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

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Current tax expenseU.S. federal

$
14,539

$
4,338

$
10,515Foreign


12,024


6,916


10,895State and local


1,359


560


852Total current tax expense


27,922


11,814


22,262Deferred (benefit) tax expense:U.S. federal


(1,623
)

(1,308
)

(6,562
)Foreign


(938
)

406


376State and local


(835
)

(870
)

1,794Total deferred tax benefit


(3,396
)

(1,772
)

(4,392
)Total income tax expense

$
24,526

$
10,042

$
17,870


111

---



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)

Tax benefits of $142, $0 and $0 for the years ended December 31, 2010, 2009 and 2008, 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 benefit of $191, a tax expense of $572 and a tax benefit of $972 relating to the cumulative translation adjustment of the Company's foreign subsidiaries financial
statements is recorded in other comprehensive income for the years ended December 31, 2010, 2009 and 2008, respectively.

During
the years ended December 31, 2010 and 2009, the Company recorded adjustments to income tax and deferred income taxes related to a change in state taxable income
apportionment percents. Amounts recorded in 2010 and 2009 were to recognize a state deferred income tax benefit of $691 and $745, respectively.

During
the year ended December 31, 2008, the Company recorded adjustments to income tax expense and deferred income taxes related to the DLJ Transactions. 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.

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

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Expected tax at U.S. statutory income tax rate


35.0
%

35.0
%

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


0.1
%

(1.5
)%

3.7
%Foreign rate differential


(4.7
)%

(5.0
)%

(5.7
)%Foreign unremitted earnings


4.0
%

5.0
%

5.7
%Non-deductible fees and expenses


1.4
%

2.1
%

2.3
%Unrecognized tax benefits


0.4
%

(1.5
)%

1.1
%Other


(3.0
)%

(3.7
)%

(3.2
)%Effective tax rate


33.2
%

30.4
%

38.9
%


112

---



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)

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

December 31, 2010

December 31, 2009Deferred tax assets:Current deferred tax assets:Accrued bonuses

$
817

$
315Accrued vacation


29


41Bad debt reserves


214


568Inventories


491


341Product performance accrual


1,448


1,616Foreign deferred tax assets


133


Other current deferred tax assets


75


106Total current deferred tax assets

$
3,207

$
2,987Long-term deferred tax assets:Deferred compensation

$
721

$
728Interest rate swap





1,465Foreign tax credits


1,392


1,302State tax loss and credit carry forwards


23


23Non-Qualified stock option compensation


3,111


1,696Other long-term deferred tax assets


35


26Total long-term deferred tax assets

$
5,282

$
5,240Total deferred tax assets

$
8,489

$
8,227Deferred tax liabilities:Fixed assets


(4,838
)

(4,754
)Intangible assets


(73,899
)

(78,801
)Foreign unremitted earnings


(9,540
)

(6,842
)Earnings from equity owned entities


(337
)

(279
)Restricted stock compensation


(1,021
)

(1,481
)Foreign deferred tax liabilities





(805
)Total deferred tax liabilities


(89,635
)

(92,962
)Total net deferred tax liabilities

$
(81,146
)
$
(84,735
)


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 $612, $476 and $534 for the years ended December 31, 2010, 2009 and 2008, respectively. The Company
had approximately $1,955 and $1,492 for the payments of interest and penalties accrued at December 31, 2010 and December 31, 2009, respectively.

113

---



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:

Balance at January 1, 2008

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


117Reduction for tax position of prior years


(200
)Balance at December 31, 2008

$
1,258Additions for tax positions of prior years


2,653Reductions for tax positions of prior years


(333
)Balance at December 31, 2009

$
3,578Additions for tax positions of prior years


201Reductions for tax positions of prior years


(84
)Balance at December 31, 2010

$
3,695


The
amount of unrecognized tax benefit that would potentially impact the Company's effective tax rate was $2,543, $2,569 and $811 (excluding interest and penalties) as of
December 31, 2010, 2009 and 2008, 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 2007-2010 for U.S. federal tax purposes. The Company has open tax years from 2005-2010 with various state tax jurisdictions.
The Company has open tax years from 2000-2010 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, 2010 could be
reduced by approximately $376 for those years not under audit by taxing authorities.

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 differ. The Company is currently under applicable tax authority audits for 2007 and 2008 in the U.S. and 2006, 2007 and 2008 in Spain.

As
a result of the DLJ Transaction on June 15, 2007, the Company provided deferred taxes for the presumed repatriation of foreign earnings due to increased cash flow needs in the
United States. No U.S. taxes need to be provided for the undistributed earnings of a foreign subsidiary if the Company can assert that such earnings are planned to be reinvested indefinitely outside
of the United States. The Company periodically assesses its business operations and the cash flow needs of its foreign and

114

---



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)

domestic
subsidiaries to determine if the earnings of any of its foreign subsidiaries will be indefinitely reinvested outside the United States. The Company determined the undistributed earnings of
the Company's Malaysian subsidiary will be indefinitely reinvested outside of the United States. As such, no U.S. federal and state income taxes have been provided thereon. The Company is currently
pursuing an Asia 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 or repatriation
of cash 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. As of December 31, 2010, the Company continues to provide deferred taxes on all of its undistributed foreign earnings, except for Malaysia.

The
Company's state tax loss (tax-effected) and credit carryforwards total approximately $300, which if not utilized, will expire at various times through 2023.

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's expense under these plans was $951, $872 and $823 for the years ended December 31, 2010, 2009 and 2008, respectively.

The
Company also maintains defined contribution benefit plans for certain foreign employees. The expense under these plans was $909, $1,111 and $983 for the years ended
December 31, 2010, 2009 and 2008, respectively.

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, 2010 and
December 31, 2009:

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, 2009

$
4,018

$


$
4,018

$
Unrealized gain included in net income


(4,018
)




(4,018
)

Interest rate swap liability at December 31, 2010

$


$


$


$



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

115

---



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 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 2010
and 2009 that are probable and estimable based on its best estimate of ultimate expenditures that it may 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,
2010

December 31,
2009Balance as of beginning of period

$
4,210

$
4,736Additions


1,123


572Reductions


(1,224
)

(1,098
)Balance as of end of period

$
4,109

$
4,210


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.

During
2010, the Company performed a Phase II environmental site assessment at its 10 Water Street, Enfield, Connecticut location. During its investigation, the site was found to
contain a presence of volatile organic compounds. The Company has been in contact with the Department of Environmental Protection and has engaged a license contractor to remediate this situation. The
estimated cost the Company expects to pay to remediate the current contamination is approximately $100. Accordingly, the Company has accounted for this under ASC 450Contingencies as of
December 31, 2010.

116

---





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 15COMMITMENTS AND CONTINGENCIES (Continued)

As previously disclosed, in October 2007, the Company filed a complaint against James P. Galica ("Galica") and JPS Elastomerics Corp. ("JPS") in the Massachusetts Superior Court in
Hampshire County (the "Court"). The Company alleged that the defendants misappropriated trade secrets and violated the Massachusetts Unfair and Deceptive Trade Practices Act as well as breaches of
contract, the implied covenant of good faith and fair dealing, and fiduciary duty against Galica (the "State Court Action"). The Court determined that JPS and Galica had violated the Massachusetts
Unfair and Deceptive Trade Practices Act, finding that the technology for the Company's polymeric sheeting product is a trade secret and that JPS and Galica had misappropriated its trade secrets. On
January 27, 2011, the Court awarded the Company the right to recover from the defendants (i) actual monetary damages of $1,076, (ii) punitive damages of $2,151,
(iii) reasonable attorneys fees of $3,903, (iv) reasonable costs of $1,109, and (v) 12% interest on each of the monetary awards from the date of the judgment (except for the
actual monetary damages which accrues interest from October 2, 2007, the date the complaint was entered). In addition, the Court imposed a five year production injunction against producing low
shrink EVA encapsulant, and a permanent use injunction against the defendants using the Company's trade secrets. On January 28, 2011, the defendants filed a motion seeking to stay certain
elements of the injunction which was denied by the Court on February 8, 2011. The defendants filed a motion appealing the Court's denial of its motion as well as a notice of appeal with respect
to the Court's order in favor of the Company. On February 28, 2011, the Massachusetts Appeals Court denied JPS's appeal of the lower court's denial of the request for a stay. On March 4,
2011, the defendants filed a petition to stay or modify the injunction pending appeal with the Massachusetts Supreme Judicial Court as well as an emergency motion for an immediate stay pending full
briefing and hearing of the petition. The Supreme Judicial Court denied the defendants' emergency motion on March 7, 2011. To date, the Supreme Judicial Court has not taken action on the
defendants' petition.

On
September 17, 2010, JPS filed an amended complaint against the Company's wholly-owned subsidiary, Specialized Technology Resources, Inc. ("STR"), in the U.S. District
Court for the District of Massachusetts. The amended complaint alleged various antitrust and unfair competition claims and that the State Court Action (described above) was sham litigation initiated
by STR in an attempt to monopolize the domestic and international market for low-shrink EVA encapsulants. JPS also alleged other schemes to monopolize and unfair competition in violation
of federal and state laws. JPS sought $60,000 in compensatory damages, treble damages, a permanent injunction against STR for various activities, reimbursement of legal fees for the State Court Action
as well as for this matter, and disgorgement of proceeds obtained by STR from allegedly anti-competitive and tortious acts. On October 13, 2010, STR filed a motion to dismiss the
amended complaint, and on January 5, 2011 the Court held a hearing on STR's motion to dismiss. At the hearing, the Court ruled in favor of STR and dismissed the case. On January 14,
2011, the Court issued its written opinion dismissing the case and on January 24, 2011 STR filed a motion for Rule 11 sanctions against the defendants and their counsel. On
February 10, 2011, JPS filed a notice of appeal with the Appellate Court. The First Circuit Court of Appeals has scheduled a settlement conference and set a briefing schedule in this matter.
The settlement conference is set for April 14, 2011. JPS' brief is due on April 18, 2011 and STR's brief will be due thirty days after JPS serves its brief. The Company intends to
continue to vigorously defend this action which it considers meritless and to pursue its motion for Rule 11 sanctions against JPS and its counsel.

117

---



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 15COMMITMENTS AND CONTINGENCIES (Continued)

The
Company does not intend to record any gain related to the state court judgment until the settlement cash proceeds are received by the Company.

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 administrative agent and one of
its lenders. The Company had 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.

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 $1,400 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 DLJ Transactions.

A
former Board member and shareholder with 1,068,771 shares 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 DLJ Transactions and annual advisory services fees of $36. This former Board member was also awarded 27,126 of equivalent shares in connection
with the DLJ Transactions.

On
November 12, 2009, the Company closed its IPO and paid $2,600 to terminate all of the annual advisory services and monitoring agreements that it had entered into in connection
with the DLJ Transactions.

Total
expense under these advisory services agreements was $0, $3,224 and $638 for the years ended December 31, 2010, 2009 and 2008, 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 of directors to plan, forecast and review the Company's segment business performance. Adjusted EBITDA
represents net income before interest income and expense, income tax expense, depreciation, amortization, stock-based compensation expense, transaction fees, earnings on equity investments and certain
non-recurring income and expenses from the results of operations.

118

---



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

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Segment Adjusted EBITDASolar

$
114,197

$
67,253

$
83,042Quality Assurance


15,022


22,857


17,586Segment Adjusted EBITDA

$
129,219

$
90,110

$
100,628




Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Reconciliation of Adjusted EBITDA to Net IncomeSegment Adjusted EBITDA

$
129,219

$
90,110

$
100,628Corporate Adjusted EBITDA


(10,272
)

(8,479
)

(3,291
)Adjusted EBITDA


118,947


81,631


97,337Depreciation and amortization


(25,222
)

(23,381
)

(21,248
)Interest income


111


136


249Interest expense


(15,784
)

(17,068
)

(20,809
)Income taxes


(24,526
)

(10,042
)

(17,870
)Management advisory fees





(3,224
)

(638
)Unrealized gain (loss) on interest rate swap


4,018


1,995


(3,025
)Stock-based compensation


(7,851
)

(7,308
)

(1,752
)(Loss) gain on disposal of property, plant and equipment


(16
)

(67
)

3Earnings on equity-method investments


168


317


178Non-recurring items








(4,320
)Transaction fees


(534
)




Net Income

$
49,311

$
22,989

$
28,105


119

---



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

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Net SalesUnited States

$
159,065

$
147,742

$
146,383Spain


116,910


57,056


89,116Malaysia


42,382


6,643


Hong Kong


31,161


31,145


30,438Other


22,311


22,359


22,641Total Net Sales

$
371,829

$
264,945

$
288,578


Depreciation and Amortization by Reportable Segment

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Depreciation and AmortizationSolar

$
14,642

$
13,640

$
12,403Quality Assurance


10,000


9,212


8,316Corporate


580


529


529Total Depreciation and Amortization

$
25,222

$
23,381

$
21,248


Capital Expenditures by Reportable Segment

Year Ended
December 31, 2010

Year Ended
December 31, 2009

Year Ended
December 31, 2008Capital ExpendituresSolar

$
15,521

$
7,255

$
25,886Quality Assurance


3,378


10,469


8,946Corporate


527


109


456Total Capital Expenditures

$
19,426

$
17,833

$
35,288


120

---



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,
2010

December 31,
2009AssetsSolar

$
461,500

$
422,770Quality Assurance


211,004


188,534Corporate


30,342


29,316Total Assets

$
702,846

$
640,620


Long-Lived Assets by Geographic Segment

December 31,
2010

December 31,
2009Long-lived AssetsUnited States

$
28,930

$
23,854Malaysia


17,273


9,576Spain


16,316


22,308China


5,706


7,038Hong Kong


1,668


2,098Other countries


3,366


4,021Total Long-Lived Assets

$
73,259

$
68,895


Foreign
sales are based on the country in which the sales originated. Solar sales to two of the Company's major customers for the year ended December 31, 2010 was $72,130 in the
aggregate. 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 those customers
amounted to $6,763 as of December 31, 2010 and to that one customer amounted to $1,319 as of December 31, 2009.

121

---





Table of Contents

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

None.

ITEM 9A.    Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Securities
Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our
management, including our Chairman, President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.

As
of December 31, 2010, we carried out an evaluation, under the supervision and with the participation of our management, including our Chairman, President and Chief Executive
Officer and our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based upon that evaluation, our Chairman, President and Chief
Executive Officer and our Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures are effective.

Report of Management on Internal Control over Financial Reporting

We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial
reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of our
principal executive and principal financial officers and effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures
that:



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods
are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We
have assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, we used the criteria set forth by the
Committee of

122

---



Table of Contents

Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal ControlIntegrated Framework.

Based
on our assessment, management has concluded that, as of December 31, 2010, our internal control over financial reporting is effective.

The
effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears under Item 8.

Changes in Internal Control over Financial Reporting

There have not been any 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, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

ITEM 9B.    Other Information

None.

PART III

All information in this Part may be found in the Company's proxy statement (the "Proxy Statement") to be delivered to stockholders not
later than 120 days after the end of the fiscal year covered by this Annual Report in connection with the annual meeting of stockholders, which is scheduled for May 24, 2011 (the "Annual
Meeting") and such information is incorporated in this report by reference pursuant to General Instruction G(3) 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,
2006, 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.

123

---





Table of Contents

PART IV

ITEM 15.    Exhibits and Financial Statement Schedule

(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


83Consolidated Balance Sheets as of December 31, 2010 and 2009


84Consolidated Statements of Operations and Comprehensive Income for
the years ended December 31, 2010, 2009 and 2008


85Consolidated Statements of Changes in Stockholders' /
Unitholders' Equity for the years ended December 31, 2010, 2009 and 2008


86Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2009 and
2008


87Notes to Consolidated Financial Statements


88(2)
    Financial Statement Schedule:Schedule IIValuation and Qualifying
Accounts


125


124

---





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
PeriodYear ended December 31, 2010Accounts receivable allowance for doubtful accounts

$
2,468


494


(1,619
)
$
1,343Year 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
)
$
3,015




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).4.3

Form of Indenture for the Debt Securities, among STR Holdings, Inc. and U.S. Bank National Association. (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-3 filed on December 2,
2010 (file no. 001-34529) and incorporated herein by reference).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).


125

---



Table of Contents

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).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).


126

---



Table of Contents

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).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).


127

---



Table of Contents

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).10.28

Employment Agreement, dated as of April 12, 2010, between Specialized Technology Resources, Inc. and Alan N. Forman. (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q filed on
May 12, 2010 (file no. 001-34529) and incorporated herein by reference).*10.29

STR Holdings, Inc. 2010 Employee Stock Purchase Plan.*12

Computation of Ratio of Earnings to Fixed Charges.*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.


128

---





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 11, 2011

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 Name: Dennis L. Jilot

Chairman, President and Chief Executive Officer (Principal Executive Officer)

March 11, 2011By:

/s/ BARRY A. MORRIS Name: Barry A. Morris

Executive Vice President and Chief Financial Officer (Principal Financial Officer)

March 11, 2011By:

/s/ JOSEPH C. RADZIEWICZ Name: Joseph C. Radziewicz

Controller and Principal Accounting Officer (Principal Accounting Officer)

March 11, 2011By:

/s/ SCOTT S. BROWN Name: Scott S. Brown

Director

March 11, 2011By:

/s/ ROBERT M. CHISTE Name: Robert M. Chiste

Director

March 11, 2011By:

/s/ JOHN A. JANITZ Name: John A. Janitz

Director

March 11, 2011By:

/s/ UWE KRUEGER Name: Uwe Krueger

Director

March 11, 2011By:

/s/ ANDREW M. LEITCH Name: Andrew M. Leitch

Director

March 11, 2011By:

/s/ JASON L. METAKIS Name: Jason L. Metakis

Director

March 11, 2011By:

/s/ DOMINICK J. SCHIANO Name: Dominick J. Schiano

Director

March 11, 2011By:

/s/ SUSAN C. SCHNABEL Name: Susan C. Schnabel

Director

March 11, 2011By:

/s/ RYAN M. SPROTT Name: Ryan M. Sprott

Director

March 11, 2011


129

---