UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





(Mark
One)


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


OR


£
            TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934 for the transition period from ______ to
  ________




Commission
file number:000-23576





STRASBAUGH


(Exact
name of registrant as specified in its charter)





California
            77-0057484(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification No.)825
      Buckley Road
              San
      Luis Obispo, CA
            93401(Address
      of principal executive offices)
            (Zip
      Code)




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





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




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


Common
Stock, no par value


(Title of
class)





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




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 £ No S




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  S No £




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




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


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




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




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




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




DOCUMENTS
INCORPORATED BY REFERENCE: None.












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






PART
I




CAUTIONARY
STATEMENT




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




Item
1. Business.




Company
Overview




We
develop, manufacture, market and sell an extensive line of precision surfacing
products, including polishing, grinding and precision optics tools and systems,
to customers in the semiconductor and silicon wafer fabrication, data storage,
LED, and precision optics markets worldwide.




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




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




Our
business and technologies have grown with this changing market.  Our
equipment is configurable, and incorporates proprietary technology that we
believe results in higher yields for our manufacturing customers.  Our
newest product, nTrepidTM, is a next
generation 300mm wafer polisher and CMP system.   Other new
products include the nOvation®, a 300mm hybrid grinding
tool; nVisionTM, an
endpoint detection system for CMP wafer processes; and CMP EnhancementTM, an upgrade
for older CMP systems.


1




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




Company
History




We are a
California corporation incorporated on December 28, 1984 as AHJP
Corporation.  On January 8, 1985 we changed our name to Celeritek,
Inc. and on July 22, 2005, in connection with the approval of a plan of
dissolution described below, we changed our name to CTK Windup
Corporation.  On May 24, 2007, in connection with the Share Exchange
Transaction described below, we changed our name to Strasbaugh.  Our
wholly-owned operating subsidiary, R. H. Strasbaugh, is a California
corporation that commenced operations in 1948 as a sole proprietorship prior to
its incorporation in 1964.  Our principal executive offices are
located in San Luis Obispo, California and our main telephone number is (805)
541-6424.




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




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




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


2




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




Semiconductor
and Semiconductor Equipment Industries




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




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




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




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




Semiconductor
CMP




CMP
systems are designed to carry out an integral step in the semiconductor
fabrication process.  After deposition steps are performed to deposit
various layers of film onto a silicon wafer, and etching steps are utilized to
selectively remove certain materials, CMP steps are carried out.  CMP
tools polish the surface of the silicon wafer to create a planar (or flat)
surface before moving on to subsequent manufacturing steps.  This
process of creating a flat surface is critical, as it allows subsequent steps to
occur with greater accuracy and enables film layers to build up with minimal
height variation.




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




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


3




Semiconductor
Niche Markets




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




Research
and Development




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




Failure
Analysis




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




Backgrinding




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




Silicon
Wafer and Silicon Wafer Equipment Industry




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


4




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




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




Silicon
Wafer Niche Markets




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




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




Data
Storage Industry




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


5




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




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




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




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




LED
Industry




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




Precision
Optics Industry




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


6




Our
Competitive Strengths




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




●
            Quality,
      Excellence and Reliability.  Over the years, we have
      manufactured what we believe to be high quality products that are robust,
      reliable and long-lasting.  For example, nTegrityTM,our first
      generation CMP tool developed in 1991, is still being sold today and
      maintains a large installed base.




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




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




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




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




Our
Strategy




The
primary elements of our business strategy include:




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




Continue to focus
on underserved semiconductor niche markets and offer high value
products.With a comprehensive product line, we intend to
continue to look for semiconductor niche markets and new product applications
where we can quickly use our competencies to become a market
leader.  We believe that many of our target customers seek high value
products that combine quality, excellence and reliability at prices competitive
with other leading products offered in the marketplace.  We intend to
continue to focus on high value product offerings by promoting and offering our
products that are affordable alternatives to higher-priced products offered by
some of our competitors.


7




Expand our
presence in the People’s Republic of China.  We intend to
expand our marketing and sales efforts in the People’s Republic of
China.  Our strategy to expand our presence in the People’s Republic
of China is comprised of two main elements.  First, we intend to
leverage our low price advantage to become the equipment supplier of choice for
Chinese companies that acquire outdated chip production lines from the West,
where low capital equipment cost is a key to profitability.  This
strategy utilizes our existing product lines and sales
representatives.  Second, we intend to leverage our technical
capabilities, our new nTrepidTMCMP tool and our patent position to partner with a People’s Republic of
China-based semiconductor and silicon wafer manufacturer to assist them in their
pursuit of more mainstream semiconductor CMP and silicon wafer fabrication
applications in the People’s Republic of China and throughout the worldusing our technology and
products. Although both elements of our expansion strategy are in the initial
stages, they are beginning to show some success.  For example, our
equipment is currently used by several Chinese companies that have taken over
outdated chip production lines formerly manufactured in the West.  In
addition, on December 1, 2006, we entered into a non-binding Memorandum of
Understanding with the 45th
Research Institute, an agency funded by the government of the People’s Republic
of China, to enter into a joint venture to research, develop, design,
manufacture, sell and service within the People’s Republic of China advanced
next-generation CMP products.  The Memorandum of Understanding was
amended and restated on December 1, 2006 and expired in February
2008.  However, we and the 45th
Research Institute continue to negotiate the terms of a joint venture agreement
along the lines of the original Memorandum of Understanding.  In
addition, in March 2008, we entered into a sales representative agreement with
the 45th
Research Institute which allows the 45th
Research Institute to sell our existing product line on a non-exclusive basis in
the People’s Republic of China. Although we continue to have discussions with
the 45th
Research Institute with respect to a joint venture agreement, no assurance can
be given that we will be successful in entering into such agreement upon any
terms, including the terms set forth in the original Memorandum of
Understanding.




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




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




Products
and Services




We have a
comprehensive product line of polishing, grinding and optics tools that serve a
wide range of markets and product applications.  We have built a core
competency designing innovative and quality manufacturing tools that provide
high-yield cost-effective solutions to our customers.


8




nTrepidTM




Our
newest product offering, nTrepidTM, is a next
generation 300mm wafer polisher. nTrepidTMis designed to meet
the needs of customers in several market segments, including semiconductor CMP
and silicon wafer fabrication, data storage, and SOI.  We believe this
system has a much larger market potential than nTegrityTM,our previous
generation product.




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




After a
successful beta introduction, the first production version of nTrepidTM was shipped during
the first quarter of 2007.  We also plan to demonstrate a number of
nTrepidTMtools for
strategic customers throughout the world.




nOvation®




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




nVisionTM




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




CMP
EnhancementTM




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


9




nTegrityTM




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




nFinity®




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




nGenuityTM




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




nTellect®




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




nSpireTM




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




nHance®




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


10




nCompass®




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




Optics
Products




We offer
a full line of optical polishing (nFocusTM), ring lapping (nGaugeTM), continuous pitch
polishing (nSpecTM) and
curve generator (nLightenTM)
tools.  We have sold over 12,000 optical tools and we believe that we
have the world’s most comprehensive product line.  We also believe
that our optical tools provide more sophisticated and full-featured controls,
precise and reliable performance and long tool life than those of our
competitors.




Service,
Parts and Consumables




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




With a
large installed base of tools, we also enjoy a sizable parts and consumables
business.  Service, parts and consumables accounted for approximately
$6.5 million and $7.8 million in revenues for 2008 and 2007, respectively, or
68% and 40% of net revenues, respectively.  Parts include valves,
pulleys, belts, motors, joints, carriers and any of the thousands of parts used
in our tools.  Parts are purchased in three different ways: spare
parts kits that include the most commonly needed parts for each machine; single
parts as needed; and by consignment at customer
facilities.  Consumables include wafer retaining rings, wafer films,
shims, conditioning discs and other parts of the system that typically wear out
in conjunction with wafer processing.  Consumables sales are made on a
recurring basis and are generally more predictable than spare parts
sales.




Customers




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


11




Within
the semiconductor industry, we have a large installed base of tools at companies
such as Western Digital Corporation, NEC Corporation, Altis-IBM and United
Microelectronics Corporation.  In addition to these market leaders, we
have a large number of second- and third-tier specialty customers, including
Freescale and On Semiconductor, that prefer lower prices, better service and
more customized solutions.  We also sell a significant number of tools
to testing laboratories and research and development facilities at large device
manufacturers, as well as university research laboratories.




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




Sales
and Marketing




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




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




We
utilize a direct sales force for sales in the United States and Japan who are
employees of Strasbaugh and who are paid a base salary plus
commission.  In the United States, our sales professionals sell
equipment by geographic region – Eastern, Northern, Southern and Western United
States.  Another sales professional focuses exclusively on optics
worldwide.  With an average of eight years’ tenure at Strasbaugh, our
four sales professionals are extremely knowledgeable about our products and the
markets in which we sell.  Our Vice President of Worldwide Sales and
Marketing is responsible for managing our direct sales professionals and
international network of representatives and distributors.




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


12




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




Competition




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




Semiconductor
CMP




Applied
Materials and Ebara are the market leaders in mainstream semiconductor CMP
products.  The remaining market is divided among several smaller
companies.  We have traditionally focused on CMP niche and specialty
applications in which Applied Materials does not concentrate or materially
participate.  However, the launch of nTrepidTMprovides us with the
opportunity to compete on a technical basis in the significantly larger
mainstream semiconductor CMP market.  In this market, we plan to focus
on non-copper CMP applications where Ebara has a leading market share and avoid
competing directly with Applied Materials, which focuses on copper
applications.




Semiconductor
Niche Market and Applications




Within
our small niche markets and applications, we face competition from a variety of
companies.  In failure analysis, we face competition from other
manufacturers of semi-automated CMP tools, including Logitech and MAT,
Inc.  Logitech and MAT, Inc. tools are designed to compete against
nSpireTM and nHance®,
which are CMP tools adapted to this application.  In response to our
competition, we developed a next generation tool specifically for failure
analysis, nOvation®.  Currently,
we are not aware of any competition for nOvation®.




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




Silicon
Wafer Fabrication and Niche Markets




In
silicon wafer fabrication and niche markets, our primary competition is from
Lapmaster and Peter Wolters (now owned by Novellus). We believe that our nTrepidTM polisher is a
generation ahead of the tools offered by these competitors.


13




SOI/MEMS




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




MEMS are
mostly low volume applications where there is no need for sophisticated high
volume production tools.  We face competition in this market primarily
from de-commissioned Integrated Process Equipment Corp. CMP tools.




LED




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




Data
Storage




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




Optics




Our
optics products face competition from lower quality and cheaper tools from Asia,
as well as from products offered by small family-owned businesses.




Manufacturing




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




Product
Development




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


14




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




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




Intellectual
Property




We
believe that we have a broad intellectual property portfolio.  We
primarily own intellectual property protecting the design features or operating
methods for tools manufactured by us for polishing or grinding semiconductor and
silicon wafers.  Our portfolio consists of 147 trade secrets and
processes, 84 issued patents, 12 licensed patents, and 50 patents
pending.  Our ten most important patents were issued between June 1995
and July 2007.  The duration of these patents runs until between June
2012 and August 2024.  The patents in our entire portfolio expire
between June 2012 and August 2024.  With customers worldwide, we have
received international patents covering Japan, China, Taiwan, Europe, Korea and
Singapore.




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




Trademarks




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


15




Employees




As of
February 9, 2009, we employed 73 full and part-time
employees.  None of our employees are represented by labor unions, and
there have not been any unplanned work stoppages at our
facilities.  We generally consider our relationships with our
employees to be satisfactory.




Internet
Website




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




Item
1A. Risk
Factors.




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




Risks
Relating to Our Business




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




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




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




We
incurred net losses of $4.5 million and $777,000 for the years ended
December 31, 2008 and 2007, respectively, and we recorded net income of
$1.2 million for the year ended December 31, 2006.  We also
incurred net losses in each of the years ended December 31, 2002 through
2005.  We may incur losses in future years due to, among other
factors, instability in the industries within which we operate, uncertain
economic conditions worldwide or lack of acceptance of our products in the
marketplace.  If we incur losses in the future, it may make it
difficult for us to raise additional capital to the extent needed for our
continued operations, particularly if we are unable to maintain profitable
operations in the future.  Consequently, future losses will result in
negative cash flow, which may hamper current operations and may prevent us from
expanding our business.  We may be unable to attain, sustain or
increase profitability on a quarterly or annual basis in the
future.  If we do not attain, sustain or increase profitability, our
stock price may decline.


16




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




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




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




A
significant portion of our total net revenues are generated from a small number
of customers.  Our top five customers accounted for approximately 43%
and 50% of our net revenues during 2008 and 2007, respectively.  Two
customers each accounted for more than 10% of net revenues during 2008 and
2007.  Although the composition of the group comprising our largest
customers may vary from year to year, the loss of a significant customer or any
reduction in orders by any significant customer, including reductions due to
market, economic or competitive conditions in the industries in which we operate
could cause a significant decline in our net revenues and profitability.Our ability to increase
our net revenues in the future will depend, in part, upon our ability to obtain
orders from new customers, as well as the financial condition and success of our
existing customers and the general economy, which are largely beyond our ability
to control.




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




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


17




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




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




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




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




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




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




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




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


18




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




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




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




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




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




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




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




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




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


19




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




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




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




International
sales accounted for approximately 29% and 42% of our net revenues during 2008
and 2007, respectively.  Our international sales are subject to
certain risks, including the following:




●
            tariffs
      and other trade barriers;




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




●
            difficulties
      in managing foreign distributors;




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




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




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




●
            global
      or regional economic downturns; and




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




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


20




Risks
Relating to Ownership of our Common Stock




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




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




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


21




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




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




Our
common stock price has been volatile, which could result in substantial losses
for investors purchasing shares of our common stock




The
market prices of securities of technology-based companies currently are highly
volatile.  The market price of our common stock has fluctuated
significantly in the past.  During 2008, the high and low closing bid
prices of a share of our common stock were $2.30 and $0.50,
respectively.  On April 6, 2009, the last reported sale price of a
share of our common stock was $0.40.  The market price of our common
stock may continue to fluctuate in response to the following factors, in
addition to others, many of which are beyond our control:




●
            changes
      in market valuations of similar companies and stock market price and
      volume fluctuations generally;




●
            economic
      conditions specific to the industries within which we
    operate;




●
            the
      timing of introduction of new systems and technology announcements and
      releases and ability to transition between product
    versions;




●
            changes
      in the timing of product orders due to unexpected delays in the
      introduction of our products due to lifecycles of our products ending
      earlier than expected or due to declines in market acceptance of our
      products;




●
            delays
      in our introduction of new products or technological innovations or
      problems in the functioning of our current or new products or
      innovations;




●
            third
      parties’ infringement of our intellectual property
  rights;


22




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




●
            regulatory
      developments;




●
            fluctuations
      in our quarterly or annual operating
results;




●
            additions
      or departures of key personnel; and




●
            future
      sales of our common stock or other
securities.




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




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




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




We cannot
predict the effect, if any, that market sales of shares of our common stock or
the availability of shares of common stock for sale will have on the market
price prevailing from time to time.  As of March 31, 2009, we had
outstanding 14,201,587 shares of common stock, a substantial number of which
were restricted under the Securities Act of 1933, as amended, or Securities
Act.  As of March 31, 2009, we also had outstanding options, warrants,
and Series A Preferred Stock that were exercisable for or convertible into
approximately 8,508,302 shares of common stock.  Sales of shares of
our common stock in the public market, or the perception that sales could occur,
could adversely affect the market price of our common stock. Any adverse effect
on the market price of our common stock could make it difficult for us to raise
additional capital through sales of equity securities at a time and at a price
that we deem appropriate.




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




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


23




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




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




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




Sales of
a substantial number of shares of common stock issued upon conversion or
exercise of our Series A Preferred Stock, warrants and options, or even the
perception that such sales could occur, could adversely affect the market price
of our common stock.




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




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




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




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


24




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




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




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




Item
1B. Unresolved
Staff Comments.




None.




Item
2. Properties.




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




Item
3. Legal
Proceedings.





We are a
party to an action filed by April Paletsas, former wife of Alan Strasbaugh,
requesting a declaration by the Court that our subsidiary, R. H. Strasbaugh,
isrequired
to install a new roof on the leased facilities in San Luis Obispo under the
repair and maintenance covenants of the lease covering our corporate facilities,
between Alan Strasbaugh and Ms. Paletsas, as co-landlords, and R. H. Strasbaugh,
as lessee. The Court issued an order appointing a receiver to sell the property;
thereafter, the receiver received an offer to purchase the premises from Alan
Strasbaugh. The offer was accepted and confirmed by the San Luis Obispo County
Superior Court in March of 2009. Mr. Strasbaugh has until May 5, 2009 in which
to complete his purchase of the property. The Company does not have a lease for
its premises, except for a holdover month-to-month tenancy at this time.
Although, management believes that purchase of the property by Mr. Strasbaugh,
if consummated, may resolve the claim relating to roof maintenance, that claim
remains pending.  Management and a committee consisting of
disinterested members of the Company's board of directors is exploring
opportunities to secure a long term lease for the property.





25


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




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




None.




PART
II




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




Market
Information




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





High
            
            LowYear
      Ended December 31, 2007First
      Quarter
            
            $
            2.48
            
            
            $
            1.86Second
      Quarter
            
            $
            2.52
            
            
            $
            1.86Third
      Quarter
            
            $
            2.35
            
            
            $
            2.00Fourth
      Quarter
            
            $
            2.35
            
            
            $
            1.50Year
      Ended December 31, 2008First
      Quarter
            
            $
            2.30
            
            
            $
            1.55Second
      Quarter
            
            $
            2.00
            
            
            $
            1.10Third
      Quarter
            
            $
            1.38
            
            
            $
            1.20Fourth
      Quarter
            
            $
            1.38
            
            
            $
            0.50Year
      Ending December 31, 2009First
      Quarter
            
            $
            1.19
            
            
            $
            0.21




Various
factors materially affect the comparability of the stock price information
presented in the above table.  These factors relate primarily to the
announcement of and the consummation of the Share Exchange Transaction and the
closing of the Series A Preferred Stock Financing, both of which occurred
during the second quarter of 2007.  See “Business—Company
History.”


26




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




Dividends




Although
we have declared cash dividends on our common stock in the past, we currently
anticipate that we will not declare or pay cash dividends on our common stock in
the foreseeable future.  We will pay dividends on our common stock
only if and when declared by our board of directors.  Our board of
directors’ ability to declare a dividend is subject to restrictions imposed by
California law.  In determining whether to declare dividends, the
board of directors will consider these restrictions as well as our financial
condition, results of operations, working capital requirements, future prospects
and other factors it considers relevant.




Recent
Sales of Unregistered Securities




On
May 24, 2007, we completed a Share Exchange Transaction, with the
shareholders of R. H. Strasbaugh pursuant to which we issued an aggregate
of 13,770,366 shares of our common stock to the shareholders of R. H.
Strasbaugh and, in exchange, we acquired all of the issued and outstanding
shares of capital stock of R. H. Strasbaugh.




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




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




Item
6. Selected
Financial Data.




Not
applicable.




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




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


27




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




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




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




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




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




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




Overview




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




For the
year ended December 31, 2008, we reported revenues of $9,554,000 as
compared to $19,518,000 for the year ended December 31, 2007, or a decline
of 51%.  We reported a net loss for the year ended December 31,
2008 of $4,508,000 as compared to a net loss of $777,000 for the year ended
December 31, 2007.  The decline in our financial performance
during 2008 is a direct result of a slowdown in the semiconductor industry
worldwide.  The decline in revenues commenced during the third quarter
of 2007, continued throughout 2008 and we expect that it will continue well into
2009.  Semiconductor industry trade sources are estimating a decline
of approximately 29% in 2009, compared to 2008.  As a result, we
expect to report losses from operations at least into the first two quarters of
2009 and potentially beyond.  Our priority over the next several
months is to find ways to strengthen our balance sheet and conserve
cash.  With that in mind, our total headcount has been further reduced
to 73 full and part-time employees at February 9, 2009, down from approximately
100 employees at the beginning of 2007.  While additional headcount
reductions are not planned at this time, we may need to further reduce our
headcount and/or initiate work-stoppages in the form of unpaid time off in order
to reduce expenses if the decline in our business continues for a prolonged
length of time.




Share
Exchange Transaction




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


28




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




Critical
Accounting Policies




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




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




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




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




We have
evaluated our arrangements with customers and revenue recognition policies under
Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables,” and determined that our components of
revenue are separate units of accounting.  Each unit has value to the
customer on a standalone basis, there is objective and reliable evidence of the
fair value of each unit, and there is no right to cancel, return or refuse an
order.  Our revenue recognition policies for our specific units of
accounting are as follows:




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




●
            Parts
      – We recognize revenue when the parts are
  shipped.




●
            Service
      – Revenue from maintenance contracts is deferred and recognized over the
      life of the contract, which is generally one to three
      years.  Maintenance contracts are separate components of revenue
      and not bundled with our tools.  If a customer does not have a
      maintenance contract, then the customer is billed for time and material
      and we recognize the revenue after the service has been
      completed.


29




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




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




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




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




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




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


30




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




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




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




Series A Preferred Stock and
Warrants. We evaluate our Series A Preferred Stock and warrants on an
ongoing basis considering the provisions of SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity,” which establishes standards for issuers of financial instruments with
characteristics of both liabilities and equity related to the classification and
measurement of those instruments.  The Series A Preferred Stock
conversion feature and warrants are evaluated considering the provisions of SFAS
No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, and EITF Issue No. 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own
Stock.”




Results
of Operations




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




●
            The
      first two data columns in each table show the absolute results for each
      period presented.




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




●
            The
      last two columns in each table show the results for each period as a
      percentage of net revenues.


31




Year
Ended December 31, 2008 Compared to the Year Ended December 31,
2007


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






Net revenues.The
$9,964,000 decrease in net revenues for 2008 was primarily due to a slowdown in
the semiconductor industry which commenced during the third quarter of
2007.




Gross
Profit.Gross profit decreased by $5,675,000 for 2008, and
gross profit as a percentage of net revenues decreased to 26% for 2008 as
compared to 42% for 2007.  The decrease in gross profit margin was
primarily due to the lower sales volume for 2008 coupled with excess capacity in
the Company’s factory.




Selling, General and Administrative
Expenses.The $1,532,000 decrease in selling, general and
administrative expenses for 2008 as compared to 2007 is a result of a lower
headcount which was initiated in 2007 and carried into 2008.  In
addition, the Company’s management has initiated various cost-cutting measures,
including requiring workers to take one week unpaid time off several times
during the year as needed.  Management expects these unpaid days off
will continue into 2009 depending on business and economic
conditions.




Research and Development
Expenses. The $374,000 increase in research and development expenses in
2008 over 2007 was primarily due to ongoing and recurring engineering of
existing products as well as the development of new technology which the company
is expected to release in late 2009 or early 2010.




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


32




Liquidity
and Capital Resources




During
the year ended December 31, 2008, we funded our operations primarily from
available cash reserves and liquidating investments in securities.  As
of December 31, 2008, we had working capital of $4,009,000 as compared to
$8,271,000 at December 31, 2007.  At December 31, 2008 and 2007
we had an accumulated deficit of $32,186,000 and $27,678,000, respectively, and
cash and cash equivalents of $49,000 and $1,864,000, respectively, as well as
investments in securities of $239,000 and $1,129,000, respectively.




Our
available capital resources at December 31, 2008 consist primarily of
approximately $49,000 in cash, $239,000 of investments in securities, and
$1,309,000 in accounts receivable.  We expect that our future
available capital resources will consist primarily of cash on hand, cash
generated from our business, and future debt and/or equity financings, if
any.  In addition, we have a credit facility with Silicon Valley Bank,
as discussed below.




Cash used
in operating activities for the years ended December 31, 2008 and 2007 were
$1,207,000 and $951,000, respectively, including net losses of $4,508,000 and
$777,000 for the years ended December 31, 2008 and 2007,
respectively.  Non-cash charges included in the 2008 net loss for
costs such as depreciation and amortization, stock-based compensation expense,
and reserve provisions for inventory and receivables totaled
$2,629,000.  Material changes in asset and liabilities at December 31,
2008 as compared to December 31, 2007 that affected these results
include:




●
            An
      increase in inventory (before reserves) of $1,037,000;
  and




●
            a
      net decrease in accrued expenses of $657,000 which includes commissions
      payable and vacation and sick pay
accruals.




Cash
provided by investing activities for the year ended December 31, 2008 was
$546,000 while cash used in investing activities was $1,331,000 for
2007.  For the year ended December 31, 2008, the primary activity
related to the sale and maturity of investments in securities totaling
$823,000.




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




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


33




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




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




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




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




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




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




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


34




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




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




Backlog




As of
March 19, 2009, we had a backlog of approximately $4.3
million.  Our backlog includes firm non-cancelable customer
commitments for 8 tools and approximately $546,000 in parts and
upgrades.  Management believes that products in our backlog will be
shipped by the end of July 2009.




Effects
of Inflation




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




Impacts
of New Accounting Pronouncements





In
October 2008, the FASB issued FSP FAS No. 157-3, "Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active." This FASB Staff
Position ("FSP") clarifies the application of SFAS No. 157, "Fair Value
Measurements," in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. This FSP applies to
financial assets within the scope of accounting pronouncements that require or
permit fair value measurements in accordance with SFAS No. 157. This FSP was
effective upon issuance, including prior periods for which financial statements
have not been issued. Revisions resulting from a change in the valuation
technique or its application shall be accounted for as a change in accounting
estimate (SFAS No. 154, "Accounting Changes and Error Corrections," paragraph
19). The disclosure provisions of SFAS No. 154 for a change in accounting
estimate are not required for revisions resulting from a change in valuation
technique or its application. The adoption of this statement has not had a
significant impact on the Company's financial condition, cash flows or results
of operations.





35


In June
2008, the FASB issued FSP EITF Issue No. 03-6-1, "Determining Whether
Instruments Granted in Share-based Payment Transactions are Participating
Securities." FSP EITF Issue No. 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
"Earnings Per Share." Under the guidance of FSP EITF Issue No. 03-6-1, unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings-per-share pursuant to the
two-class method. FSP EITF Issue No. 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on its earnings per share
calculation.





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





In May
2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. The Company expects no impact on its
financial condition, cash flows or results of operations resulting from this
statement.





In April
2008, the FASB issued FSP FAS No. 142-3 "Determination of the Useful Life of
Intangible Assets."  This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets."  The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141 (revised 2007), "Business Combinations," and other
GAAP.  FSP FAS No. 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008.  Management is
currently assessing the impact, if any, of adopting this statement on the
Company's financial condition, cash flows and results of
operations.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” an amendment of FASB Statement
No. 133, which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on the Company’s financial position, financial performance, and cash flows. SFAS
No. 161 is effective for the Company beginning January 1, 2009. The
Company is currently assessing the potential impact that adoption of SFAS
No. 161 may have on the Company’s financial statements.


36




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The
Company is currently assessing the potential impact that adoption of
SFAS 160 may have on the Company’s financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for business
combinations once adopted, but the effect is dependent upon acquisitions at that
time.




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




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




In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF Issue No.
00-19-2, “Accounting for Registration Payment Arrangements.”  This FSP
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, “Accounting for Contingencies.”  The adoption of
FSP EITF Issue No. 00-19-2 had a material effect on the Company’s financial
position, cash flows, and results of operations as the Company accrued costs
totaling $223,000 and $208,000 towards this expense as of December 31, 2008 and
2007, respectively.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  SFAS No. 157 establishes a common definition for fair
value to be applied to U.S. GAAP guidance requiring use of fair value,
establishes a framework for measuring fair value, and expands disclosure about
such fair value measurements.  SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007.  The adoption of SFAS No. 157
did not have a material impact on the Company’s financial position, cash flows,
or results of operations.


37




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




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





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





The
Company’s convertible Series A Preferred Stock (Note 10) has been recognized as
“temporary equity,” or outside of permanent equity and liabilities, in the
Company’s statement of financial position.  The Series A Preferred
Stock does not meet the definition of mandatorily redeemable under SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity,” because redemption is contingent upon the holders not
exercising their conversion option and the host contract is classified as
temporary equity in accordance with ASR 268 and EITF Abstracts, Topic D-98,
“Classification and Measurement of Redeemable Securities.”  The two
embedded features in the Series A Preferred Stock did not require bifurcation
under SFAS No. 133 since the conversion feature met the paragraph 11(a) scope
exception and the applicable criteria in EITF Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” and the redemption feature was determined to be clearly
and closely related to the host contract, therefore, failing the paragraph 12
(a) criteria requiring bifurcation.  Since there was no bifurcation of
the embedded features there was no separate accounting for those
features.





The
Investor Warrants (Note 10) have been recognized as permanent equity in the
Company’s statement of financial position.  The Investor Warrants were
classified as permanent equity because they met the paragraph 11(a) scope
exception in SFAS No. 133 and all of the criteria in EITF Issue No.
00-19.  However, both the convertible Series A Preferred Stock
conversion feature and Investor Warrants contain settlement provisions such that
if the Company makes certain equity offerings in the future at a price lower
than the conversion prices of the instruments, the conversion ratio would be
adjusted.





38


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





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





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





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





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


39




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




Not
applicable.




Item
8. Financial
Statements and Supplementary Data.




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




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





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




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





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





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




40






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




Item
9A. Controls
and Procedures.




Not
applicable.




Item
9A (T). Controls
and Procedures.




Evaluation
of Disclosure Controls and Procedures





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




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




Changes
in Internal Control Over Financial Reporting





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


41




Management’s
Report on Internal Control over Financial Reporting




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




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




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




Item
9B. Other
Information.




None.


42




PART
III




Item
10. Directors,
Executive Officers and Corporate Governance.




Directors
and Executive Officers




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





Name
              Age
              Positions
      HeldAlan
      Strasbaugh
              60
              Chairman
      of the BoardChuck
      Schillings
              50
              President
      and Chief Executive OfficerRichard
      Nance
              60
              Executive
      Vice President and Chief Financial OfficerMichael
      Kirkpatrick
              50
              Director
      of Sales and MarketingAllan
      Paterson
              57
              Vice
      President of Business DevelopmentWesley
      Cummins
              31
              DirectorDavid
      Porter
      (1)
              66
              DirectorJohn
      Givens
      (1)
              46
              DirectorDanilo
      Cacciamatta
      (1)
              63
              Director







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




Alan Strasbaugh has served as
our Chairman of the Board since May 2007 and as Chairman of the Board of our
operating subsidiary, R. H. Strasbaugh, since 1978.  Mr.
Strasbaugh also served as R. H. Strasbaugh’s Chief Executive Officer from
1988 to 1998.  Prior to that, he served as the Director of Operations
of R. H. Strasbaugh for 10 years.  Mr. Strasbaugh has been
awarded eight United States patents related to semiconductor
manufacturing.  Mr. Strasbaugh is also employed by us as a technical
advisor.  Mr. Strasbaugh holds a B.S. degree in Mechanical Engineering
from California Polytechnic State University, Pomona.




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




Richard Nancehas served as
our Executive Vice President and Chief Financial Officer since May 2007 and as
Chief Financial Officer and Vice President - Finance of R. H. Strasbaugh
since 2002.  Prior to that, Mr. Nance was the Chief Financial Officer
of Greentrac, a privately held software company.  He has worked as a
chief financial officer for both public and private companies involved in
software technology, manufacturing and international sales and distribution. Mr.
Nance is a licensed Certified Public Accountant with prior experience as a
National Bank Examiner with the United States Comptroller of the Currency, a
commercial banker, and has over 13 years of experience in business consulting,
strategic planning and advisory services. Mr. Nance holds a B.B.A. degree in
Banking and Finance from North Texas State University, a B.S. degree in
Accounting from Central State University of Oklahoma and a membership in the
California Society of CPAs.


43




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




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




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




David Porter has served as a
member of our board of directors since May 2007.  Prior to his
retirement on January 1, 2000, Mr. Porter was employed at Ford Motor Company for
thirty-six years.  During his retirement, Mr. Porter has served on the
Board of Directors of the San Luis Obispo Botanical Gardens and as the
chairperson of the Gardens of Exploration Task Force and is a private
investor.  Mr. Porter’s education includes an Executive Business
Program at the University of Michigan and an A.B. in Chinese History from
Stanford University.




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


44




Danilo Cacciamatta has served
as a member of our board of directors since April 2008.  Mr.
Cacciamatta has been the Chief Executive Officer of Cacciamatta Accountancy
Corporation, a Public Company Accounting Oversight Board registered firm, for
more than the past five years. Prior to forming Cacciamatta Accountancy
Corporation, Mr. Cacciamatta was employed by KPMG Peat Marwick from 1972 to 1988
in a variety of positions, including audit partner from 1980 to 1988. Mr.
Cacciamatta currently serves on the boards of directors and audit committee of
California First National Bancorp (NasdaqGM: CFNB).  Mr. Cacciamatta
is a member of the American Institute of Certified Public Accountants and the
California Society of Certified Public Accountants.  Mr. Cacciamatta
received a B.A. degree from Pomona College and an M.B.A. degree from the
University of California at Riverside.




Section
16(a) Beneficial Ownership Reporting Compliance




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




Composition
of the Board of Directors




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




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




For so
long as our shares of Series A Preferred Stock remain outstanding, the holders
of at least a majority of our issued and outstanding shares of Series A
Preferred Stock are entitled to nominate one member of our board of
directors.  In addition, the holders of at least a majority of our
issued and outstanding shares of Series A Preferred Stock are entitled to
nominate a second member of our board of directors for successive one-year-terms
upon the accumulation of accrued and unpaid dividends for three or more
six-month periods or our failure to comply with the covenants or agreements set
forth in our articles of incorporation.  The right to nominate a
second director will terminate upon the cure of the defaults creating the right
to nominate a second director.  Our executive officers are appointed
by and serve at the discretion of our board of directors. There are no family
relationships among our executive officers and directors.




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


45




Corporate
Governance




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




Our board
of directors has adopted a Code of Ethics and Corporate Conduct that applies to
all of our directors, officers and employees and an additional Code of Business
Ethics that applies to our Chief Executive Officer and senior financial
officers.  The Codes of Ethics, as applied to our principal executive
officer, principal financial officer and principal accounting officer
constitutes our “code of ethics” within the meaning of Section 406 of the
Sarbanes-Oxley Act of 2002.




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




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




Director
Independence




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




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




Our board
of directors has determined that all directors are independent under these
standards, except for Mr. Strasbaugh, who serves as our Chairman of the
Board, and Mr. Cummins, who is employed by B. Riley and Co.
Inc.    See “Certain Relationships and Related Transactions”
below.




Shareholder
Communications with our Board of Directors




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


46




Committees
of the Board of Directors




Our board
of directors has established standing Audit, Compensation and Nominating and
Corporate Governance Committees.  Each committee has a written charter
that is reviewed annually and revised as appropriate.




Audit
Committee




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




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




Compensation
Committee




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




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




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


47




Nominating
and Corporate Governance Committee




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




●
            the
      candidate’s independence from
management;




●
            whether
      the candidate has relevant business
experience;




●
            judgment,
      skill, integrity and reputation;




●
            existing
      commitments to other businesses;




●
            corporate
      governance background;




●
            financial
      and accounting background, to enable the committee to determine whether
      the candidate would be suitable for Audit Committee membership;
      and




●
            the
      size and composition of our board of
directors.




Our
Nominating and Corporate Governance Committee operates pursuant to a charter
approved by our board of directors and our Nominating and Corporate Governance
Committee.  Our Nominating and Corporate Governance Committee consists
of Messrs. Cacciamatta, Givens and Porter.  Mr. Porter acts as
chairman of our Nominating and Corporate Governance Committee.  Our
board of directors has determined that each of Messrs. Porter, Cacciamatta
and Givens is “independent” under the NASDAQ Marketplace Rules.




Compensation
Committee Interlocks and Insider Participation




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




Item
11. Executive
Compensation.




Summary
Compensation Table




The
following table also shows for the years ended December 31, 2007 and
December 31, 2008, the compensation awarded or paid to, or earned by, our
current Chief Executive Officer and two most highly compensated executive
officers, or named executive officers.


48




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





(1)
            The
      amount reflected in this column is the compensation cost we recognized for
      financial statement reporting purposes during 2007 and 2008 under SFAS No.
      123(R), excluding estimates of forfeitures related to service based
      vesting conditions.  The fair value of each grant is estimated
      on the date of grant using the Black-Scholes option-pricing model based on
      assumptions described in Note 9 to our consolidated financial
      statements.


(2)
            Mr.
      Schillings was appointed our chief executive officer on May 24,
      2007.


(3)
            Amounts
      for 2008 represent compensation received for services provided as an
      executive officer of Strasbaugh and R. H.
  Strasbaugh.


(4)
            Represents
      our contributions to the employee’s 401(k)
plan.







Employment
Agreements




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




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




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




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


49




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




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




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




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




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




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


50




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




Employment
Agreement dated May 24, 2007 with Alan Strasbaugh




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




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




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




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


51




Outstanding
Equity Awards At Fiscal Year-End




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





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





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




Option
Exercises and Stock Vested




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




Compensation
of Directors




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




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




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




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




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


52




Director
Compensation Table




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





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







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


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


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


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


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


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


53




Indemnification
of Directors and Officers




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




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




●
            for
      acts or omissions that a director believes to be contrary to the best
      interests of Strasbaugh or our shareholders or that involve the absence of
      good faith on the part of the
director;




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




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




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




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




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




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




●
            by
      our board of directors by a majority vote of a quorum consisting of
      directors who were not parties to the action, suit or proceeding which is
      the subject of the request for indemnification;
  or


54




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




●
            by
      a majority of our shareholders.




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




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




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




The
following table sets forth information with respect to the beneficial ownership
of our voting stock as of March 1, 2009, the date of the table, by:




●
            each
      person known by us to beneficially own more than 5% of the outstanding
      shares any class of our voting
stock;




●
            each
      of our directors;




●
            each
      of our current executive officers identified at the beginning of the
      “Management” section of this; and




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




55


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


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




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




56




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





*
            Less
      than 1%.


(1)
            Includes
      5,940 shares underlying options.  Also includes 196 shares of
      common stock held by Mr. Strasbaugh’s
wife.


(2)
            Includes
      66,000 shares underlying options.


(3)
            Represents
      shares underlying options.


(4)
            Represents
      shares underlying options.


(5)
            Represents
      48,198 shares underlying a Placement Warrant and 5,940 shares underlying
      options.


(6)
            Includes2,045 shares of
      outstanding common stock, 1,000,000 shares underlying Series A Preferred
      Stock and 150,000 shares underlying Investor Warrants held directly by
      Lloyd I. Miller, III.  Also includes 1,155,629 shares of common
      stock represented in this table as beneficially owned by Milfam II
      L.P.  Further, includes the following shares of common stock
      over which Mr. Miller has the sole power to vote or dispose of: 109 shares
      held by the Catherine C. Miller - Irrevocable Trust Agreement; 109 shares
      held by the Kimberly S. Miller - Irrevocable Trust Agreement; 48 shares
      held by Milfam LLC; 48 shares held by Lloyd I. Miller, IV and 209 shares
      held by Alexandra B. Miller.  Also includes the following shares
      of common stock over which Mr. Miller has shared power to vote or dispose
      of: 622 shares held by the Trust A-4 - Lloyd I. Miller; 661 shares held by
      Trust C - Lloyd I. Miller and 48 shares held by the Lloyd Crider -
      Irrevocable Trust Agreement. On May 30, 2007,
      Mr. Miller waived the 4.99% beneficial ownership limitation applicable to
      the Series A Preferred Stock and Investor Warrants held by himself and
      Milfam II L.P.  The address for Lloyd I. Miller, III is
      4550 Gordon Drive, Naples, Florida
34102.


57






(7)
            Includes
      1,000,000 shares of Series A Preferred Stock owned by Mr. Miller and
      1,000,000 shares of Series A Preferred stock represented in this table as
      held by Milfam II L.P.


(8)
            Represents
      5,629 shares of outstanding common stock, 1,000,000 shares underlying
      Series A Preferred Stock and 150,000 shares underlying Investor
      Warrants.  Mr. Lloyd I. Miller, III has the power to vote
      or dispose of the shares beneficially held by Milfam II
      L.P.  Milfam LLC is the general partner of Milfam II L.P. and
      Lloyd I. Miller, III is the manager of Milfam LLC.  On May 30,
      2007, Mr. Miller waived the 4.99% beneficial ownership limitation
      applicable to the Series A Preferred Stock and Investor Warrants held by
      Milfam II LP.  The address for Milfam II L.P. is c/o
      Lloyd I. Miller, III, 4550 Gordon Drive, Naples, Florida
      34102.


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




58






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










59




Equity
Compensation Plan Information




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


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







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


(2)
            Represents
      shares of common stock available for issuance under options that may be
      issued under our 2007 Share Incentive
Plan.




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




Policy
Regarding Related Party Transactions




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




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




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


60




Share
Exchange Transaction




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




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




Employment
Agreements




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




Indemnification
Agreements




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




Facilities
Lease




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


61




Repayment
of Loans




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




On May
24, 2007, R. H. Strasbaugh paid $761,799 to Agility, then a beneficial
owner of 6.9% of the then issued and outstanding shares of common stock of
R. H. Strasbaugh, in full discharge of all obligations under a Loan
Agreement dated September 23, 2005.




Series
A Preferred Stock Financing




On May
24, 2007, we issued to Lloyd I. Miller, III 1,000,000 shares of our
Series A Preferred Stock at a price of $2.20 per share, for an aggregate
purchase price of $2,200,000.  On the same date, we also issued to
Milfam II L.P. 1,000,000 shares of our Series A Preferred Stock at a price
of $2.20 per share, for an aggregate purchase price of
$2,200,000.  Lloyd I. Miller, III has the power to vote or dispose of
the shares held by Milfam II L.P.  On May 30, 2007, Lloyd I. Miller,
III waived the 4.99% conversion limitation with respect to the shares of Series
A Preferred Stock and Investor Warrants held by him and Milfam II
L.P.  Thus, the waiver was effective as of July 30, 2007 and both
Mr. Miller and Milfam II L.P. are beneficial owners of more than 5% of our
common stock.




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




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




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




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


62




Repurchase
of Preferred Stock




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




Repurchase
of Common Stock and Warrants




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




Item
14. Principal
Accounting Fees and Services.




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







2008Audit
      Fees
            
            $
            5,100Audit-Related
      Fees
            
            
            -0-Tax
      Fees
            
            
            -0-All
      Other Fees
            
            
            -0-Total
            
            $
            5,100









The
following table presents the aggregate fees billed to us for professional audit
services rendered by Windes & McClaughry (“Windes”), our former independent
accountants, for the year ended December 31, 2007:







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




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


63




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




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




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




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




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






PART
IV




Item
15. Exhibits,
Financial Statement Schedules.




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




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




(a)(3)
and (b) Exhibits




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


64




STRASBAUGH
AND SUBSIDIARY




INDEX
TO FINANCIAL STATEMENTS




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







F-1




REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and


Shareholders
of Strasbaugh








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





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





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








/s/
Farber Hass Hurley LLP




Granada
Hills, California


April 15,
2009


F-2






REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the
Board of Directors and


Shareholders
of Strasbaugh





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





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





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





/S/
WINDES & McCLAUGHRY





Irvine,
California


June 9,
2008


F-3


STRASBAUGH
AND SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)




ASSETS




December
      31,2008
            
            
            2007CURRENT
      ASSETSCash
      and cash equivalents
            
            $
            49
            
            
            $
            1,864Accounts
      receivable, net of allowance for doubtful accountsof
      $224 and $55 in 2008 and 2007, respectively
            
            
            1,309
            
            
            
            2,985Investments
      in securities
            
            
            239
            
            
            
            244Inventories
            
            
            5,659
            
            
            
            6,169Prepaid
      expenses
            
            
            264
            
            
            
            282Deposits
      and other assets
            
            
            —
            
            
            
            697,520
            
            
            
            11,613PROPERTY
      AND EQUIPMENT, NET
            
            
            2,150
            
            
            
            2,384OTHER
      ASSETSInvestments
      in securities
            
            
            —
            
            
            
            885Capitalized
      intellectual property, net of amortization of$54
      and $29 in 2008 and 2007, respectively
            
            
            381
            
            
            
            306Deposits
      and other assets
            
            
            36
            
            
            
            —417
            
            
            
            1,191TOTAL
      ASSETS
            
            $
            10,087
            
            
            $
            15,188LIABILITIES
      AND SHAREHOLDERS’ EQUITY (DEFICIT)CURRENT
      LIABILITIESNotes
      payable
            
            $
            100
            
            
            $
            100Accounts
      payable
            
            
            1,231
            
            
            
            517Accrued
      expenses
            
            
            1,963
            
            
            
            2,606Deferred
      revenue
            
            
            217
            
            
            
            1193,511
            
            
            
            3,342COMMITMENTS AND
      CONTINGENCIES (Notes 8, 9, 10 and 12)REDEEMABLE
      CONVERTIBLE PREFERRED STOCKRedeemable
      convertible preferred stock (“Series A”), no par value, aggregate
      preference in liquidation $14,071, 15,000,000 shares authorized, 5,909,089
      shares issued and outstanding
            
            
            11,964
            
            
            
            11,542SHAREHOLDERS’
      EQUITY (DEFICIT)Preferred
      stock, no par value, 5,769,736 shares authorized,4,087,980
      shares issued and outstanding
            
            
            —
            
            
            
            —Common
      stock, no par value, 100,000,000 shares authorized 14,201,587 issued and
      outstanding
            
            
            56
            
            
            
            56Additional
      paid-in capital
            
            
            26,803
            
            
            
            27,926Accumulated
      other comprehensive loss
            
            
            (61
            )
            
            
            —Accumulated
      deficit
            
            
            (32,186
            )
            
            
            (27,678
            )(5,388
            )
            
            
            304TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
            
            $
            10,087
            
            
            $
            15,188




The
accompanying notes are an integral part of these statements.


F-4


STRASBAUGH
AND SUBSIDIARY


(In
thousands, except per share data)





Years
      EndedDecember
      31,2008
            
            
            2007REVENUESTools
            
            $
            3,041
            
            
            $
            11,703Parts
      and service
            
            
            6,513
            
            
            
            7,815NET
      REVENUES
            
            
            9,554
            
            
            
            19,518COST
      OF SALESTools
            
            
            2,777
            
            
            
            7,491Parts
      and service
            
            
            4,331
            
            
            
            3,906TOTAL
      COST OF SALES
            
            
            7,108
            
            
            
            11,397GROSS
      PROFIT
            
            
            2,446
            
            
            
            8,121OPERATING
      EXPENSESSelling,
      general and administrative expenses
            
            
            4,429
            
            
            
            5,961Research
      and development
            
            
            2,954
            
            
            
            2,5807,383
            
            
            
            8,541LOSS
      FROM OPERATIONS
            
            
            (4,937
            )
            
            
            (420
            )OTHER
      INCOME (EXPENSE)Rental
      income
            
            
            321
            
            
            
            2Interest
      income
            
            
            35
            
            
            
            86Interest
      expense
            
            
            (14
            )
            
            
            (311
            )Other
      (expense) income, net
            
            
            87
            
            
            
            (124
            )429
            
            
            
            (347
            )LOSS
      BEFORE PROVISION FOR INCOME TAXES
            
            
            (4,508
            )
            
            
            (767
            )PROVISION
      FOR INCOME TAXES
            
            
            —
            
            
            
            10NET
      LOSS
            
            $
            (4,508
            )
            
            $
            (777
            )NET
      (LOSS) INCOME PER COMMON SHAREBasic
            
            $
            (0.43
            )
            
            $
            0.28Diluted
            
            $
            (0.43
            )
            
            $
            0.24WEIGHTED
      AVERAGE COMMON SHARES OUTSTANDINGBasic
            
            
            14,202
            
            
            
            14,281Diluted
            
            
            14,202
            
            
            
            19,758





The
accompanying notes are an integral part of these statements.
 F-5


STRASBAUGH
AND SUBSIDIARY


AND
SHAREHOLDERS’ EQUITY (DEFICIT)


(In
thousands, except share data)





TotalShareholders’Accumulated
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Equity
      andRedeemable
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Other
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                RedeemableConvertible
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                Additional
                                                                
                                                                
                                                                Comprehensive
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                ConvertiblePreferred
      Stock
                                                                
                                                                
                                                                Preferred
      Stock
                                                                
                                                                
                                                                Common
      Stock
                                                                
                                                                
                                                                Paid-In
                                                                
                                                                
                                                                Income
                                                                
                                                                
                                                                Accumulated
                                                                
                                                                
                                                                PreferredShares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Shares
                                                                
                                                                
                                                                Amount
                                                                
                                                                
                                                                Capital
                                                                
                                                                
                                                                (Loss)
                                                                
                                                                
                                                                Deficit
                                                                
                                                                
                                                                StockBALANCE,
      JANUARY 1, 2007
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                4,087,980
                                                                
                                                                
                                                                $
                                                                8,595
                                                                
                                                                
                                                                
                                                                13,992,828
                                                                
                                                                
                                                                $
                                                                17
                                                                
                                                                
                                                                $
                                                                23,409
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                (26,901
                                                                )
                                                                
                                                                $
                                                                5,120Comprehensive
      loss:Net
      loss
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (777
                                                                )
                                                                
                                                                
                                                                (777
                                                                )Other
      comprehensive loss:
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —Unrealized
      loss on investments,net
      of tax of $0
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                —Total
      comprehensive loss
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                
                                                                (777
                                                                )Repurchase
      of participating preferred stock for $3,000
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (4,087,980
                                                                )
                                                                
                                                                
                                                                (8,595
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                5,595
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (3,000
                                                                )Issuance
      of common stock to CTK,net
      of issuance costs of $312
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                431,221
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                62
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                63Sale
      of Series A redeemableconvertible
      preferred stock,net
      of issuance costs of $2,311
                                                                
                                                                
                                                                5,909,089
                                                                
                                                                
                                                                
                                                                10,689
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                10,689Fair
      value of warrants issued (Note 11)
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                350
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                350Repurchase
      of common stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (771,327
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (751
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (751
                                                                )Issuance
      of common stock fromexercise
      of options
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                548,865
                                                                
                                                                
                                                                
                                                                38
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                38Stock-based
      compensation expense
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                114
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                114Accretion
      of redeemable convertible preferred stock
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                220
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (220
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —Preferred
      stock dividend
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                633
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (633
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                —BALANCE,
      DECEMBER 31, 2007
                                                                
                                                                
                                                                5,909,089
                                                                
                                                                
                                                                $
                                                                11,542
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                
                                                                14,201,587
                                                                
                                                                
                                                                $
                                                                56
                                                                
                                                                
                                                                $
                                                                27,926
                                                                
                                                                
                                                                $
                                                                —
                                                                
                                                                
                                                                $
                                                                (27,678
                                                                )
                                                                
                                                                $
                                                                11,846


The
accompanying notes are an integral part of these
statements.


F-6







STRASBAUGH
AND SUBSIDIARY


AND
SHAREHOLDERS’ EQUITY (DEFICIT) (Continued)


(In
thousands, except share data)




TotalShareholders’Accumulated
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Equity
      andRedeemable
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Other
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      RedeemableConvertible
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Additional
                                                                                      
                                                                                      
                                                                                      Comprehensive
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      ConvertiblePreferred
      Stock
                                                                                      
                                                                                      
                                                                                      Preferred
      Stock
                                                                                      
                                                                                      
                                                                                      Common
      Stock
                                                                                      
                                                                                      Paid-In
                                                                                      
                                                                                      
                                                                                      Income
                                                                                      
                                                                                      Accumulated
                                                                                      
                                                                                      
                                                                                      PreferredShares
                                                                                      
                                                                                      
                                                                                      Amount
                                                                                      
                                                                                      
                                                                                      Shares
                                                                                      
                                                                                      
                                                                                      Amount
                                                                                      
                                                                                      
                                                                                      Shares
                                                                                      
                                                                                      
                                                                                      
                                                                                      Amount
                                                                                      
                                                                                      Capital
                                                                                      
                                                                                      
                                                                                      (Loss)
                                                                                      
                                                                                      Deficit
                                                                                      
                                                                                      
                                                                                      StockBALANCE,
      JANUARY 1, 2008
                                                                                      
                                                                                      
                                                                                      5,909,089
                                                                                      
                                                                                      
                                                                                      $
                                                                                      11,542
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      $
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,201,587
                                                                                      
                                                                                      
                                                                                      $
                                                                                      56
                                                                                      
                                                                                      
                                                                                      $
                                                                                      27,926
                                                                                      
                                                                                      
                                                                                      $
                                                                                      —
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (27,678
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      11,846Comprehensive
      loss:Net
      loss
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      (4,508
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (4,508
                                                                                      )Other
      comprehensive loss:Unrealized
      loss on investmentsnet
      of tax of $0
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      (61
                                                                                      )
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      (61
                                                                                      )Total
      comprehensive loss
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      (4,569
                                                                                      )Series
      A issuance costs
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      (521
                                                                                      )
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      (521
                                                                                      )Stock-based
      compensation expense
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      453
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      453Accretion
      of redeemable convertible preferred stock
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      505
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      (505
                                                                                      )
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —Preferred
      stock dividend accumulated
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,071
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      (1,071
                                                                                      )
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —Preferred
      stock dividend paid
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      (633
                                                                                      )
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      (633
                                                                                      )BALANCE,
      DECEMBER 31, 2008
                                                                                      
                                                                                      
                                                                                      5,909,089
                                                                                      
                                                                                      
                                                                                      $
                                                                                      11,964
                                                                                      
                                                                                      
                                                                                      
                                                                                      —
                                                                                      
                                                                                      
                                                                                      $
                                                                                      —
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,201,587
                                                                                      
                                                                                      
                                                                                      $
                                                                                      56
                                                                                      
                                                                                      
                                                                                      $
                                                                                      26,803
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (61
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      (32,186
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      6,576


The
accompanying notes are an integral part of these statements.


F-7


STRASBAUGH
AND SUBSIDIARY


(In
thousands)





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




The
accompanying notes are an integral part of these statements.


F-8




NOTE
1 – Summary of Significant Accounting Policies




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




Organization
and Description of Business




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




The
Company designs and manufactures precision surfacing systems and solutions for
the global semiconductor, electronics, precision optics, and aerospace
industries. Products are sold to customers throughout the United States, Europe,
and Asia and Pacific Rim countries.




Share
Exchange Transaction




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




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





F-9







NOTE
1 – Summary of Significant Accounting Policies (continued)




Estimates
and Assumptions





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




Concentrations
of Credit Risk





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




The
Company sells its products on credit terms, performs ongoing credit evaluations
of its customers, and maintains an allowance for potential credit
losses.  During the years ended December 31, 2008 and 2007, the
Company’s top 10 customers accounted for 57% and 68% of net revenues,
respectively.  Sales to major customers (over 10%) as a percentage of
net revenues were 26% and 36% for the years ended December 31, 2008 and
2007, respectively.




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





F-10







NOTE
1 – Summary of Significant Accounting Policies (continued)




Product
Warranties




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




Fair
Value of Financial Instruments




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




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





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





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





There are
no liabilities carried at fair value and there are no assets or liabilities
measured at fair value on a nonrecurring basis.






F-11




NOTE
1 – Summary of Significant Accounting Policies (continued)




Segment
Information





The
Company’s results of operations for the years ended December 31, 2008 and 2007
represent a single segment referred to as global semiconductor, and
semiconductor equipment, silicon wafer and silicon wafer equipment, LED, data
storage and precision optics industries.  Export sales represent
approximately 29% and 42% of sales for the years ended December 31, 2008 and
2007, respectively.




The
geographic breakdown of the Company’s sales was as follows:


For
      the Year EndedDecember
      31,2008
            
            2007United
      States
            
            
            71
            %
            
            
            58
            %Europe
            
            
            19
            %
            
            
            23
            %Asia
      and Pacific Rim countries
            
            
            10
            %
            
            
            19
            %





The
geographic breakdown of the Company’s accounts receivable was as
follows:





December
      31,2008
            
            2007United
      States
            
            
            43
            %
            
            
            50
            %Europe
            
            
            21
            %
            
            
            42
            %Asia
      and Pacific Rim countries
            
            
            36
            %
            
            
            8
            %









Cash
and Cash Equivalents




For
purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.




Accounts
Receivable




Accounts
receivable are due from companies operating primarily in the global
semiconductor, electronics, precision optics, and aerospace industries located
throughout the United States, Europe, and Asia and Pacific Rim
countries.  Credit is extended to both domestic and international
customers based on an evaluation of the customer’s financial condition and,
generally collateral is usually not required.  For international
customers, additional evaluation steps are performed, where required, and more
stringent terms, such as letters of credit, are used as necessary.





F-12







NOTE
1 – Summary of Significant Accounting Policies (continued)




Accounts
Receivable (continued)




The
Company estimates an allowance for uncollectible accounts
receivable.  The allowance for probable uncollectible receivables is
based on a combination of historical data, cash payment trends, specific
customer issues, write-off trends, general economic conditions and other
factors.  These factors are continuously monitored by management to
arrive at the estimate for the amount of accounts receivable that may be
ultimately uncollectible.  In circumstances where the Company is aware
of a specific customer’s inability to meet its financial obligations, the
Company records a specific allowance for doubtful accounts against amounts due,
to reduce the net recognized receivable to the amount it reasonably believes
will be collected.  Management believes that the allowance for
doubtful accounts at December 31, 2008 is reasonably stated.




Investments
in Securities




The
Company determines the appropriate classification of its investments in debt and
equity securities at the time of purchase and reevaluates such determinations at
each balance-sheet date. Debt securities are classified as held to maturity when
the Company has the positive intent and ability to hold the securities to
maturity.  Debt securities for which the Company does not have the
intent or ability to hold to maturity are classified as available for sale.
Held-to-maturity securities are recorded as either short term or long term on
the Consolidated Balance Sheet based on contractual maturity date and are stated
at amortized cost. Marketable securities that are bought and held principally
for the purpose of selling them in the near term are classified as trading
securities and are reported at fair value, with unrealized gains and losses
recognized in earnings. Debt and marketable equity securities not classified as
held to maturity or as trading, are classified as available for sale, and are
carried at fair market value, with the unrealized gains and losses, net of tax,
included in the determination of comprehensive income (loss) and reported in
shareholders’ equity (deficit).




At
December 31, 2007, the short-term investments held to maturity included
certificates of deposits maturing in over 90 days and less than one year. The
Company’s other investments have maturity dates generally from 2 to 10 years,
are classified as available for sale and are included in current assets at
December 31, 2008 because the investments will likely be sold prior to maturity
and within one year from the balance sheet date. The Company had realized losses
on the sales of securities of $6,000 during the year ended December 31, 2008,
and no realized gains or losses on sales of securities in 2007.  The
Company’s unrealized losses on investments in securities at December 31, 2008
and 2007 were $61,000 and $0, respectively.  Investments in
securities, by major security type, were as follows:





December
      31, 2008Aggregate
                Fair
      Value
            
            
            Cost
      Basis
            
            
            Unrealized
      Gain
                (Loss)Corporate
      debt securities
            
            $
            118,000
            
            
            $
            125,000
            
            
            $
            (7,000
            )Municipal
      and State debt securities
            
            
            121,000
            
            
            
            175,000
            
            
            
            (54,000
            )$
            239,000
            
            
            $
            300,000
            
            
            $
            (61,000
            )










F-13







NOTE
1 – Summary of Significant Accounting Policies (continued)




Investments
in Securities (continued)







December
      31, 2007Aggregate
                Fair
      Value
            
            
            Cost
      Basis
            
            
            Unrealized
      Gain
                (Loss)Certificates
      of deposit
            
            $
            244,000
            
            
            $
            244,000
            
            
            $
            —U.S.
      government debt securities
            
            
            437,000
            
            
            
            436,000
            
            
            
            1,000Corporate
      debt securities
            
            
            49,000
            
            
            
            49,000
            
            
            
            —Municipal
      and State debt securities
            
            
            399,000
            
            
            
            400,000
            
            
            
            (1,000
            )1,129,000
            
            
            
            1,129,000
            
            
            
            —Investments,
      current
            
            
            244,000
            
            
            
            244,000
            
            
            
            —Investments,
      noncurrent
            
            $
            885,000
            
            
            $
            885,000
            
            
            $
            —









Inventories




Inventories
are maintained on the first-in, first-out method and are stated at the lower of
cost or market based on the lower of replacement cost or net realizable
value.  Costs include material, labor and overhead required in the
warehousing and production of the Company’s products.  Inventory
reserves are maintained for the estimated value of the inventory that may have a
lower value than stated or quantities in excess of estimated future production
needs.




Property,
Plant, and Equipment




Property,
plant, and equipment items are stated at cost, less accumulated
depreciation.  Additions, improvements, and major renewals are
capitalized, while maintenance, repairs, and minor renewals are expensed as
incurred.  When assets are retired or disposed of, the assets and
related accumulated depreciation are removed from the accounts and the resulting
gain or loss is reflected in operations.  Depreciation is computed
principally using straight-line and accelerated methods over their estimated
useful lives of three to thirty years.  Amortization of leasehold
improvements is computed using straight-line and accelerated methods over the
shorter of the terms of the leases or their estimated useful
lives.  Periodically, the Company may transfer a completed tool from
inventory to property, plant and equipment for use as a laboratory tool, or for
customer demonstration purposes.  The tools are transferred at the
lower of cost or market and then depreciated over its estimated useful
life.  If the tool is subsequently sold to an end user, it may be
transferred back to inventory at net book value and shipped to that
customer.










F-14







NOTE
1 – Summary of Significant Accounting Policies (continued)




Intellectual
Property




During
2006, the Company changed its policy of expensing direct legal costs associated
with the application and successful defense of patents as incurred, and began
capitalizing and expensing these costs over the life of the patents, not to
exceed 15 years.  Approximately $100,000 and $132,000 of such costs
were capitalized during the years ended December 31, 2008 and 2007,
respectively. Amortization expense for these patent costs totaled $25,000 and
$18,000 during the years ended December 31, 2008 and 2007,
respectively.




Impairment
of Long-Lived Assets




Long-lived
assets, such as property, plant, and equipment, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.  Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset to
estimated undiscounted future cash flows expected to be generated by the
asset.  If the carrying amount of an asset exceeds its estimated
future cash flows, an impairment charge is recognized by the amount by which the
carrying amount of the asset exceeds the fair value of the
asset.  Management has evaluated its long-lived assets and has not
identified any impairment at December 31, 2008 and 2007.




Deferred
Revenue





Deferred
revenue represents service contract revenue which is deferred and recognized
ratably over the life of the service contract, which is generally one
year.





Accumulated
Other Comprehensive Income (Loss)




Comprehensive
income (loss) consists of net income (loss) and other gains and losses affecting
shareholders’ equity (deficit) that, under GAAP are excluded from net income
(loss).  For the years ended December 31, 2008 and 2007, the Company’s
accumulated other comprehensive losses consisted of unrealized losses on
investments in securities totaling $61,000 and $0, respectively.




Revenue
Recognition




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





F-15







NOTE
1 – Summary of Significant Accounting Policies (continued)




Revenue
Recognition (continued)




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




The
Company has evaluated its arrangements with customers and revenue recognition
policies under Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting
for Revenue Arrangements with Multiple Deliverables,” and determined that its
components of revenue are separate units of accounting.  Each unit has
value to the customer on a standalone basis, there is objective and reliable
evidence of the fair value of each unit, and there is no right to cancel, return
or refuse an order.  The Company’s revenue recognition policies for
its specific units of accounting are as follows:




Tools –
The Company recognizes revenue once a customer has visited the plant and signed
off on the tool or it has met the required specifications and the tool is
completed and shipped.




Parts –
The Company recognizes revenue when the parts are shipped.




Service –
Revenue from maintenance contracts is deferred and recognized over the life of
the contract, which is generally one to three years.  Maintenance
contracts are separate components of revenue and not bundled with our
tools.  If a customer does not have a maintenance contract, then the
customer is billed for time and material and the Company recognizes revenue
after the service has been completed.




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





F-16






NOTE
1 – Summary of Significant Accounting Policies (continued)




Revenue
Recognition (continued)




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




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




Research
and Development




Costs
related to designing and developing new products are expensed as research and
product development expenses as incurred.  Research and development
expenses totaled approximately $2,954,000 and $2,580,000 for the years ended
December 31, 2008 and 2007, respectively.




Shipping
Costs




During
the years ended December 31, 2008 and 2007, freight and handling amounts
incurred by the Company totaled approximately $63,000 and $68,000, respectively,
and are included in the cost of sales.  Freight and handling fees
billed to customers of approximately $7,000 and $6,000 are included in revenues
for the years ended December 31, 2008 and 2007, respectively.





F-17







NOTE
1 – Summary of Significant Accounting Policies (continued)




Stock-Based
Compensation




In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard (“SFAS”) No. 123 (revised 2004),
“Share-Based Payment,” (“SFAS No. 123(R)”), which is a revision of SFAS No. 123,
“Accounting for Stock Issued to Employees.”  SFAS No. 123(R)
supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” and amends SFAS No. 95, “Statement of Cash
Flows.”  Generally, the approach in SFAS No.123(R) is similar to the
approach described in SFAS No. 123.  However, SFAS No. 123(R) requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the income statement based on their fair
values.  Pro forma disclosure is no longer an
alternative.




SFAS No.
123(R) also established accounting requirements for measuring, recognizing and
reporting share-based compensation, including income tax
considerations.  One such change was the elimination of the
minimum-value method, which under SFAS No. 123 permitted the use of zero
volatility when performing Black-Scholes valuations.  Under SFAS No.
123(R), companies are required to use expected volatilities derived from the
historical volatility of the company’s stock, implied volatilities from traded
options on the company’s stock and other factors.  SFAS No. 123(R)
also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow as required under previous accounting
literature.




The
provisions of SFAS No. 123(R) were effective for and adopted by the Company as
of January 1, 2006. Prior to the adoption, the Company was using the
intrinsic-value method of accounting for stock based compensation pursuant to
APB Opinion No. 25. Required pro-forma information was presented under the fair
value method using a Black-Scholes option-pricing model pursuant to SFAS No.
123. The adoption of SFAS No. 123(R) was made using the prospective transition
method. Under this method, the statement applies to new awards and awards
modified, repurchased or cancelled after the required effective date.
Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered that are outstanding as of effective
date is recognized as the requisite service is rendered.  The adoption
of SFAS No. 123(R) did not have a significant impact on the Company’s results of
operations, income taxes or earnings per share.




Foreign
Currency Transactions




The
accounts of the Company are maintained in U.S. dollars.  Transactions
denominated in foreign currencies are recorded at the rate of exchange in effect
on the dates of the transactions.  Balances payable in foreign
currencies are translated at the current rate of exchange when
settled.




Earnings
Per Share




Basic net
income (loss) per share is computed by dividing net income (loss) available to
common stockholders by the weighted-average number of outstanding common shares
for the period.  Diluted net income per share is computed by using the
treasury stock method and dividing net income available to common stockholders,
plus the effect of assumed conversions (if applicable), by the weighted-average
number of outstanding common shares after giving effect to all potential
dilutive common stock, including options, warrants, common stock subject to
repurchase, and convertible preferred stock, if any.





F-18







NOTE
1 – Summary of Significant Accounting Policies (continued)




Earnings
Per Share (continued)




For the
year ended December 31, 2007, in accordance with EITF Topic D-53: “Computation
of Earnings Per Share for a Period That Includes a Redemption or an Induced
Conversion of a Portion of a Class of Preferred Stock,” the computation of net
income available to common shareholders includes the excess of the carrying
value of the Company’s preferred stock repurchased during the period over its
carrying value.




Reconciliations
of the numerator and denominator used in the calculation of basic and diluted
net (loss) income per common share are as follows:





For
      the Year EndedDecember
      31,2008
            
            
            2007Numerator:Net
      loss
            
            $
            (4,508,000
            )
            
            $
            (777,000
            )Preferred
      stock accretion
            
            
            (505,000
            )
            
            
            (220,000
            )Preferred
      stock dividend
            
            
            (1,071,000
            )
            
            
            (633,000
            )Excess
      of carrying value of preferred stock over cash paid upon
      redemption
            
            
            —
            
            
            
            5,595,000Net
      (loss) income available to common shareholders – basic
            
            
            (6,084,000
            )
            
            
            3,965,000Adjustment
      to net (loss) income for assumed conversions
            
            
            —
            
            
            
            853,000Net
      (loss) income available to common shareholders – diluted
            
            $
            (6,084,000
            )
            
            $
            4,818,000Denominator:Shares
      outstanding, beginning
            
            
            14,201,587
            
            
            
            13,992,828Weighted-average
      shares issued
            
            
            —
            
            
            
            287,871Weighted-average
      shares outstanding – basic
            
            
            14,201,587
            
            
            
            14,280,699Effect
      of dilutive securitiesWeighted-average
      preferred stock outstanding
            
            
            —
            
            
            
            5,195,613Weighted-average
      warrants outstanding (Notes 6 and 9)
            
            
            —
            
            
            
            227,918Weighted-average
      options outstanding
            
            
            —
            
            
            
            53,833—
            
            
            
            5,477,364Weighted-average
      shares outstanding—diluted
            
            
            14,201,587
            
            
            
            19,758,063








F-19







NOTE
1 – Summary of Significant Accounting Policies (continued)




Earnings
Per Share (continued)





For the
year ended December 31, 2008, the Company has excluded from the computation of
diluted loss per common share 5,909,089 shares issuable pursuant to the Series A
Preferred Stock, 1,271,797 shares issuable pursuant to outstanding warrants and
1,327,416 shares issuable upon exercise of outstanding stock options because the
Company had a loss from continuing operations for the periods and to include the
representative share increments would be anti-dilutive. Accordingly, for the
year ended December 31, 2008, basic and diluted net loss per common share is
computed based solely on the weighted average number of shares of common stock
outstanding during the period. For the year ended December 31, 2007, the
1,271,797 shares issuable pursuant to outstanding warrants and 1,452,205 shares
issuable upon the exercise of outstanding stock options were not included in the
computation of diluted earnings per common share for the period because the
exercise prices were greater than the average market price of the common stock,
and therefore, the effects on dilutive earnings per common share would have been
anti-dilutive.




Income
Taxes and Deferred Income Taxes




Income
taxes are provided for the effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes related
primarily to differences between the basis of certain assets and liabilities for
financial and income tax reporting.  Deferred taxes are classified as
current or noncurrent depending on the classification of the assets and
liabilities to which they relate.  Deferred taxes arising from
temporary differences that are not related to an asset or liability are
classified as current or noncurrent, depending on the periods in which the
temporary differences are expected to reverse.  A valuation allowance
is established when necessary to reduce deferred tax assets if it is more likely
than not that all, or some portion of, such deferred tax assets will not be
realized.




Series
A Preferred Stock and Warrants




The
Company evaluates its Series A Preferred Stock and Warrants (as defined in Note
10) on an ongoing basis considering the provisions of SFAS No. 150, “Accounting
for Certain Financial Instruments with Characteristics of Both Liabilities and
Equity,” which establishes standards for issuers of financial instruments with
characteristics of both liabilities and equity related to the classification and
measurement of those instruments. The Series A Preferred Stock conversion
feature and Warrants are evaluated considering the provisions of SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” which
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities, and considering EITF Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock.”




Supplemental
Disclosure of Cash Flow Information




Additional
information to the statements of cash flows with regard to certain noncash
investing and financing transactions includes inventory transferred from
property and equipment of $82,000 for the year ended December 31, 2008,
inventory transferred to property and equipment of $660,000 in
2007.  Inventory is transferred at the lower of cost, market or net
book value and is depreciated over its useful life once transferred to property,
plant and equipment.  These items are typically tools used for
testing, demonstrations and on-going engineering and are sometimes sold as used
tools to customers in the future as needed.





F-20







NOTE
1 – Summary of Significant Accounting Policies (continued)




New
Accounting Pronouncements





In
October 2008, the FASB issued FSP FAS No. 157-3, "Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active." This FASB Staff
Position ("FSP") clarifies the application of SFAS No. 157, "Fair Value
Measurements," in a market that is not active and provides an example to
illustrate key considerations in determining the fair value of a financial asset
when the market for that financial asset is not active. This FSP applies to
financial assets within the scope of accounting pronouncements that require or
permit fair value measurements in accordance with SFAS No. 157. This FSP was
effective upon issuance, including prior periods for which financial statements
have not been issued. Revisions resulting from a change in the valuation
technique or its application shall be accounted for as a change in accounting
estimate (SFAS No. 154, "Accounting Changes and Error Corrections," paragraph
19). The disclosure provisions of SFAS No. 154 for a change in accounting
estimate are not required for revisions resulting from a change in valuation
technique or its application. The adoption of this statement has not had a
significant impact on the Company's financial condition, cash flows or results
of operations.





In June
2008, the FASB issued FSP EITF Issue No. 03-6-1, "Determining Whether
Instruments Granted in Share-based Payment Transactions are Participating
Securities." FSP EITF Issue No. 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting,
and therefore need to be included in the earnings allocation in computing
earnings per share under the two-class method as described in SFAS No. 128,
"Earnings Per Share." Under the guidance of FSP EITF Issue No. 03-6-1, unvested
share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and
shall be included in the computation of earnings-per-share pursuant to the
two-class method. FSP EITF Issue No. 03-6-1 is effective for financial
statements issued for fiscal years beginning after December 15, 2008 and all
prior-period earnings per share data presented shall be adjusted
retrospectively. Early application is not permitted. The Company is assessing
the potential impact of this FSP on its earnings per share
calculation.





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





In May
2008, the FASB issued SFAS No. 162 "The Hierarchy of Generally Accepted
Accounting Principles." SFAS No. 162 identifies the sources of accounting
principles and the framework for selecting the principles to be used in the
preparation of financial statements of nongovernmental entities that are
presented in conformity with GAAP. The Company expects no impact on its
financial condition, cash flows or results of operations resulting from this
statement.





F-21







NOTE
1 – Summary of Significant Accounting Policies (continued)




New
Accounting Pronouncements (continued)





In April
2008, the FASB issued FSP FAS No. 142-3 "Determination of the Useful Life of
Intangible Assets."  This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and
Other Intangible Assets."  The intent of this FSP is to improve the
consistency between the useful life of a recognized intangible asset under SFAS
No. 142 and the period of expected cash flows used to measure the fair value of
the asset under SFAS No. 141 (revised 2007), "Business Combinations," and other
GAAP.  FSP FAS No. 142-3 is effective for financial statements issued
for fiscal years beginning after December 15, 2008.  Management is
currently assessing the impact, if any, of adopting this statement on the
Company's financial condition, cash flows and results of
operations.




In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” an amendment of FASB Statement
No. 133, which requires additional disclosures about the objectives of the
derivative instruments and hedging activities, the method of accounting for such
instruments under SFAS No. 133 and its related interpretations, and a
tabular disclosure of the effects of such instruments and related hedged items
on the Company’s financial position, financial performance, and cash flows. SFAS
No. 161 is effective for the Company beginning January 1, 2009. The
Company is currently assessing the potential impact that adoption of SFAS
No. 161 may have on the Company’s financial statements.




In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51” (“SFAS 160”), which establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the
amount of consolidated net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest and the
valuation of retained non-controlling equity investments when a subsidiary is
deconsolidated. The Statement also establishes reporting requirements that
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. SFAS
160 is effective for fiscal years beginning after December 15, 2008. The
Company is currently assessing the potential impact that adoption of
SFAS 160 may have on the Company’s financial statements.




In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”), which replaces SFAS No. 141. SFAS No. 141(R) establishes principles
and requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any
non-controlling interest in the acquiree and the goodwill acquired. The
Statement also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS
141(R) is effective for fiscal years beginning after December 15, 2008. The
adoption of SFAS 141(R) will have an impact on accounting for business
combinations once adopted, but the effect is dependent upon acquisitions at that
time.




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





F-22







NOTE
1 – Summary of Significant Accounting Policies (continued)




New
Accounting Pronouncements (continued)




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




In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF Issue No.
00-19-2, “Accounting for Registration Payment Arrangements.”  This FSP
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether issued
as a separate agreement or included as a provision of a financial instrument or
other agreement, should be separately recognized and measured in accordance with
FASB Statement No. 5, “Accounting for Contingencies.”  The adoption of
FSP EITF Issue No. 00-19-2 had a material effect on the Company’s financial
position, cash flows, and results of operations as the Company accrued costs
totaling $223,000 and $208,000 towards this expense as of December 31, 2008 and
2007, respectively.




In
September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.”  SFAS No. 157 establishes a common definition for fair
value to be applied to U.S. GAAP guidance requiring use of fair value,
establishes a framework for measuring fair value, and expands disclosure about
such fair value measurements.  SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007.  The adoption of SFAS No. 157
did not have a material impact on the Company’s financial position, cash flows,
or results of operations.




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




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





F-23







NOTE
1 – Summary of Significant Accounting Policies (continued)




New
Accounting Pronouncements (continued)





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





The
Company’s convertible Series A Preferred Stock (Note 10) has been recognized as
“temporary equity,” or outside of permanent equity and liabilities, in the
Company’s statement of financial position.  The Series A Preferred
Stock does not meet the definition of mandatorily redeemable under SFAS No. 150,
“Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity,” because redemption is contingent upon the holders not
exercising their conversion option and the host contract is classified as
temporary equity in accordance with ASR 268 and EITF Abstracts, Topic D-98,
“Classification and Measurement of Redeemable Securities.”  The two
embedded features in the Series A Preferred Stock did not require bifurcation
under SFAS No. 133 since the conversion feature met the paragraph 11(a) scope
exception and the applicable criteria in EITF Issue No. 00-19, “Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” and the redemption feature was determined to be clearly
and closely related to the host contract, therefore, failing the paragraph 12
(a) criteria requiring bifurcation.  Since there was no bifurcation of
the embedded features there was no separate accounting for those
features.





The
Investor Warrants (Note 10) have been recognized as permanent equity in the
Company’s statement of financial position.  The Investor Warrants were
classified as permanent equity because they met the paragraph 11(a) scope
exception in SFAS No. 133 and all of the criteria in EITF Issue No.
00-19.  However, both the convertible Series A Preferred Stock
conversion feature and Investor Warrants contain settlement provisions such that
if the Company makes certain equity offerings in the future at a price lower
than the conversion prices of the instruments, the conversion ratio would be
adjusted.





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





F-24







NOTE
1 – Summary of Significant Accounting Policies (continued)




New
Accounting Pronouncements (continued)





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





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





F-25







NOTE
1 – Summary of Significant Accounting Policies (continued)




New
Accounting Pronouncements (continued)





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





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




NOTE
2 – Management’s Plans





For the
year ended December 31, 2008, the Company had a net loss of approximately
$4,508,000 and as of December 31, 2008, the Company had an accumulated deficit
of approximately $32,186,000. The Company has invested substantial resources in
product development, which has negatively impacted its cost structure and
contributed to a significant portion of its recent
losses.  Additionally, the decline in the semiconductor industry
during 2007 and 2008 has added to those losses as revenues
declined.





Management's
plans with respect to these matters include efforts to increase revenues through
the sale of existing products and new technology and continuing to reduce
certain operating expenses. Management believes that the Company's current
backlog and working capital is sufficient to maintain operations in the near
term and that product development can be reduced or curtailed in the future to
further manage cash expenditures. There are no current plans to seek additional
outside capital at this time. There are no assurances that the Company will
achieve profitable operations in the future or that additional capital will be
raised or obtained by the Company if cash generated from operations is
insufficient to pay current liabilities.





The
Company has a $7.5 million line of credit with Silicon Valley Bank (“SVB”) that
expires on December 4, 2009. The Company was not in compliance with all of the
covenants in the agreements as of December 31, 2008.  At December 31,
2008 and at certain times during 2008 the Company was not in compliance with the
Quick Ratio covenant (Note 5). There are no amounts outstanding under the credit
facility, and management believes that, barring unforeseen events, there will be
no need to utilize the credit facility in the foreseeable future.




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





F-26







NOTE
3 – Inventories




Inventories
consist of the following:




December
      31,2008
            
            
            2007Raw
      materials
            
            $
            5,562,000
            
            
            $
            5,876,000Work-in-process
            
            
            2,156,000
            
            
            
            2,212,000Finished
      goods
            
            
            1,537,000
            
            
            
            48,0009,255,000
            
            
            
            8,136,000Inventory
      Reserves
            
            
            (3,596,000
            )
            
            
            (1,967,000
            )$
            5,659,000
            
            
            $
            6,169,000




At
December 31, 2008, finished goods inventory includes two tools shipped prior to
year end which were in-transit at year end and had not been accepted by the
customer.




NOTE
4 – Property, Plant, and Equipment




Property,
plant, and equipment consist of the following:




December
      31,2008
            
            
            2007Buildings
      and improvements
            
            $
            2,283,000
            
            
            $
            2,198,000Shop
      and lab equipment
            
            
            6,012,000
            
            
            
            6,399,000Transportation
      equipment
            
            
            166,000
            
            
            
            166,000Furniture
      and fixtures
            
            
            1,113,000
            
            
            
            1,106,000Computer
      equipment
            
            
            2,326,000
            
            
            
            2,326,00011,900,000
            
            
            
            12,195,000Less:  accumulated
      depreciation and amortization
            
            
            (9,750,000
            )
            
            
            (9,811,000
            )$
            2,150,000
            
            
            $
            2,384,000




Depreciation
expense totaled approximately $335,000 and $295,000 for the years ended December
31, 2008 and 2007, respectively.




NOTE
5 – Line of Credit




The
Company had a line of credit agreement (“Loan Agreement”) and guaranty agreement
(“Exim Agreement”) with a bank through February 2007. The agreements were
secured by substantially all of the Company’s assets. The borrowing amounts
under the agreements were based on eligible accounts receivable. The agreements
allowed the Company to borrow up to $3 million at the prime rate plus 3.5% under
the Loan Agreement and $500,000 at the prime rate plus 4% under the Exim
Agreement. In addition, the Company paid an administrative fee of 0.5% of the
face amount of each receivable when first financed under both of the agreements.
Both agreements included affirmative, negative and financial covenants. The
notes payable to the majority stockholder were subordinated to these agreements
(See Note 5). These agreements were amended and renewed at various times during
2007 to increase the Company’s credit line from $3.5 million to $7.5 million and
to extend the term of the credit facility to October 16, 2007. Upon expiration,
all amounts due under these agreements were paid in full.





F-27







NOTE
5 – Line of Credit (continued)




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




The SVB
Credit Facilities are subject to various financial covenants, applicable to the
Company and its subsidiary, R.H. Strasbaugh, on a consolidated basis, including
the following: the ratio of certain assets to current liabilities (the “Quick
Ratio”), measured on a monthly basis, must not be less than 1.0:1.0; and the
ratio of total liabilities less subordinated debt to tangible net worth plus
subordinated debt, measured on a monthly basis, must be not more than
0.60:1.0.  The facilities define the Company’s equity position to
include the Series A Redeemable Convertible Preferred stock regardless of its
classification on the balance sheet.





At
December 31, 2008 and at certain times during 2008 the Company was not in
compliance with the Quick Ratio covenant.  However, there are no
amounts outstanding under the credit facility.   The Company has
been in negotiations with SVB as to extension of the SVB Credit Facilities, but
we do not anticipate that we will agree on an extension.  If no such
extension is agreed, we will attempt to secure an alternative credit facility.
However, because of the condition of the credit markets, we cannot be sure that
an alternative credit facility will be available to us.




The
Non-EXIM Facility is formula-based which generally provides that the outstanding
borrowings under the line of credit may not exceed an aggregate of 85% of
eligible accounts receivable and 30% of eligible inventory. The EXIM Facility is
also formula-based and provides that the outstanding borrowings under the line
of credit may not exceed an aggregate of 90% of eligible accounts receivable and
50% of eligible inventory.




Interest
on the SVB Credit Facilities is payable monthly. The interest rate applicable to
the SVB Credit Facilities is a variable per annum rate equal to 0.75 percentage
points above the prime rate as published by Silicon Valley Bank. Upon the
occurrence and during the continuation of an event of default, the interest rate
applicable to the outstanding balance under the SVB Credit Facilities will
increase by five percentage points above the per annum interest rate that would
otherwise be applicable. Both the EXIM Facility and the Non-EXIM Facility are
subject to an unused line fee of 0.25% per annum, payable monthly, on any unused
portion of the respective revolving credit facility.




NOTE
6 – Notes Payable




The
Company had a note payable to Agility Capital, LLC (“Agility”) which was secured
by substantially all of the Company’s assets. The note was payable in monthly
installments of $55,000 including interest at 12%, with the balance due in
September 2007. The note was paid in full for $762,000 in May 2007.





F-28







NOTE
6 – Notes Payable (continued)




In
addition, the Company had a subordinated unsecured note payable to a majority
Stockholder which was payable in monthly interest-only payments at the prime
rate plus 1%. The note was originally due in February 2007 and was subsequently
extended until June 2007. The outstanding balance on the note and the unpaid
accrued interest totaling approximately $747,000 was paid in full in May
2007.




The
Company had unsecured notes payable totaling $100,000 at December 31, 2008 and
2007.




NOTE
7 – Agility Warrant




During
2005, the Company issued a warrant to Agility (the “Agility Warrant”), in
connection with a financing transaction (Note 6). Pursuant to APB No. 14, the
fair value of the warrant was allocated as a discount to the new debt. The
values for each security were determined separately, based on their values at
the time of issuance, and the debt discount was computed by comparing the value
attributed to the debt securities with the face value of the debt.




The
Agility Warrant allowed the holder to purchase up to 4.1% of the Company’s
equity on a fully-diluted basis at $0.01 per share. The warrant also contained a
provision that could have required the Company to cash settle the warrant for
$450,000 if the Company did not receive at least $5 million of net proceeds from
the sale or issuance of its equity securities on or before September 16, 2007.
The shares underlying the warrant vested upon issuance and the warrant was to
expire in September 2017.  The warrant was repurchased by the Company
in May 2007 for its carrying value of $450,000.




NOTE
8 – Commitments and Contingencies




Lease
Commitments




The
Company leases its manufacturing and sales facility from the chairman of the
Company, who is a significant shareholder of the Company, and his former
spouse.  This 15-year lease agreement commenced on May 1, 1990 and
ended on April 30, 2005.  Under the original terms of the
lease, the Company paid monthly lease payments and was liable for all property
taxes, insurance, repairs, and maintenance.  The lease also provided
for periodic adjustments in minimum lease payments based upon the
CPI.




Effective
May 1, 2005, the Company exercised the holdover provision within the lease
agreement for its manufacturing and sales facility when it did not elect to
execute an automatic five-year extension but remained in possession of the
premises.  The holdover provision within the lease agreement allows
the Company to remain the tenant on a month-to-month basis under the terms that
existed at the end of the original lease term, as defined.  The
holdover provision remains valid as long as the Company remains in possession
and makes timely monthly rent payments.  The monthly rent is currently
$84,000.





F-29







NOTE
8 – Commitments and Contingencies (continued)




Lease
Commitments (continued)




The
Company leases a postal mailing system under a noncancelable operating lease,
which expired in December 2008.  The Company also leased a sales
facility in Tokyo, Japan, under an agreement which expired in April
2007.  The Company extended the lease on a month-to-month basis and
then terminated the lease in June 2007.  There are no leases with a
term in excess of one year as of December 31, 2008.




Rent
expense under the Company’s operating leases totaled approximately $1,014,000
and $1,020,000 for the years ended December 31, 2008 and 2007, respectively, of
which approximately $1,000,000 was related to the shareholder lease for each
year.




Sublease
Agreement





The
Company entered into two sublease agreements with unaffiliated third parties
during 2008.  The first sublease agreement provides for monthly rent
of approximately $24,000 and expires on February 28, 2010 and the second
agreement provides for monthly rent of approximately $11,000 and expires July
31, 2011.  Rental income totaled approximately $321,000 for year ended
December 31, 2008.




Litigation





The
Company is a party to an action filed by April Paletsas, former wife of Alan
Strasbaugh, Chairman and a significant shareholder of the Company, requesting a
declaration by the court that its subsidiary, R. H. Strasbaugh, isrequired
to install a new roof on the leased facilities in San Luis Obispo under the
repair and maintenance covenants of the lease covering its corporate facilities,
between Alan Strasbaugh and Ms. Paletsas, as co-landlords, and R. H. Strasbaugh,
as lessee. The Company is presently unable to evaluate the likelihood of an
unfavorable result in this dispute or the range of potential loss. However,
management intends to vigorously defend against this case and believes that all
of its defenses are meritorious.





The court
issued an order appointing a receiver to sell the property; thereafter, the
receiver received an offer to purchase the premises from Alan Strasbaugh. The
offer was accepted and confirmed by the San Luis Obispo County Superior Court in
March of 2009. Mr. Strasbaugh has until May 5, 2009 in which to complete his
purchase of the property.





The
Company does not have a lease for its premises, except for a holdover
month-to-month tenancy at this time. Although, management believes that purchase
of the property by Mr. Strasbaugh, if consummated, may resolve the claim
relating to roof maintenance, that claim remains pending.





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





F-30







NOTE
8 – Commitments and Contingencies (continued)




Litigation
(continued)





The
Company is subject to various lawsuits and claims with respect to such matters
as product liabilities, employment matters and other actions arising out of the
normal course of business. While the effect on future financial results is not
subject to reasonable estimation because considerable uncertainty exists, in the
opinion of Company management, the ultimate liabilities resulting from such
lawsuits and claims will not materially affect the financial condition or
results of operations.




NOTE
9 – Stock Compensation Plans




2000
Stock Option Agreement —R. H. Strasbaugh




During
2000, the board of directors of R. H. Strasbaugh granted options to
purchase 1,646,557 shares of R. H. Strasbaugh common stock at an exercise
price of $.07 per share to four vice presidents.  The options were
subject to a number of restrictions as defined in the agreement, including a
buy-sell provision with R. H. Strasbaugh.  The options expire ten
years from the date of issuance and automatically cancel 30 days after
termination, as defined in the agreements.  At January 1, 2007, there
were 548,866 options outstanding under the plan with an expiration date of
December 31, 2007, which were exercised on February 6, 2007.  There
was no compensation expense related to the Company’s 2000 Stock Option Agreement
in 2008 or 2007.




The
status of the options under this plan is summarized below:





Shares
              
              Average
      Price
              
              Intrinsic
                  ValueOutstanding
      at January 1, 2007
              
              
              548,866Exercises
      on February 6, 2007
              
              
              (548,866
              )
              
              $
              0.07
              
              
              $
              0.00Outstanding
      at December 31, 2007
              
              
              —




2007
Share Incentive Plan




In
February 2007, the Company established the 2007 Share Incentive Plan (the “2007
Plan”), under which 2,000,000 shares of the Company’s common stock are available
for issuance. The 2007 Plan is administered by the Compensation Committee of the
Company’s Board of Directors.




The 2007
Plan provides for the granting of options, restricted stock awards, restricted
stock units, stock appreciation rights, direct stock issuances and other
stock-based awards, or equity awards, made to executive officers and
non-employee board members, as well as to all other eligible
individuals.





F-31







NOTE
9 – Stock Compensation Plans (continued)




2007
Share Incentive Plan (continued)




Under the
2007 Plan, stock options will have an exercise price per share determined by the
plan administrator, provided that the exercise price will not be less than 85%
or 100% of the fair market value of a share on the grant date in the case of
non-statutory or incentive options, respectively. No granted option will have a
term in excess of ten years. Options generally will become exercisable in one or
more installments over a specified period of service measured from the grant
date. However, options may be structured so that they will be immediately
exercisable for any or all of the option shares.





On May
24, 2007, the Compensation Committee granted stock options to purchase an
aggregate of 1,375,000 shares of common stock with an exercise price of $1.71
per share.  On April 25, 2008, options to purchase 36,000 shares of
common stock with an exercise price of $1.50 per share, and on August 1, 2008,
options to purchase 40,836 shares of common stock with an exercise price of
$1.38 per share, were granted to certain members of the Company's board of
directors under the 2007 Plan.  In addition, on October 10, 2008,
options to purchase 5,000 shares of common stock with an exercise price of $1.20
per share, were granted to new employees under the 2007 Plan.  The
options expire ten years from the date of issuance and vest over a period of
three years. The fair values of options granted were calculated using the
Black-Scholes option pricing model and the following:





December
      31,2008
            
            2007Options
      granted
            
            
            81,836
            
            
            
            1,375,000Weighted-average
      stock price
            
            $
            1.42
            
            
            $
            1.71Weighted-average
      exercise prices of stock options
            
            $
            1.42
            
            
            $
            1.71Assumptions:Weighted-average
      expected volatility
            
            
            49%
            
            
            
            48%Weighted-average
      expected term (in years)
            
            6.5
      years
            
            
            6.5
      yearsRisk-free
      interest rate
            
            
            3.41%
            
            
            
            4.81%Expected
      dividend yield 0%
            
            
            0%
            
            
            
            0%




The $1.71
exercise price of the May 24, 2007 option grants was determined based on the
market price of the Company’s stock on the date of the grant. The fair value per
share of the common stock on the date of grant was deemed to be equal to the
closing selling price per share of the Company’s common stock at the close of
regular hours trading on the Pink Sheets(R) on
that date, as the price was reported by the National Association of Securities
Dealers, multiplied by 31 to reflect the 1-for-31 reverse stock split that
occurred on the same date. The volatility for options granted in 2007 has been
determined based on an analysis of reported data for a peer group of companies
that issued options with substantially similar terms. The expected volatility of
options granted has been determined using an average of the historical
volatility measures of this peer group of companies for a period equal to the
expected life of the option. The expected life of the options has been
determined utilizing the “simplified” method as prescribed by SAB No. 110,
“Share-Based Payment.”





F-32







NOTE
9 – Stock Compensation Plans (continued)




2007 Share Incentive Plan
(continued)




The
exercise prices of the options granted in 2008 were determined based on the
market price of the Company's stock on the date of the grant. The fair value per
share of the common stock on the date of grant was deemed to be equal to the
closing selling price per share of the Company's common stock at the close of
regular hours trading on the Pink OTC Markets on that date, as the price was
reported by the National Association of Securities Dealers.  The
volatility and expected life for the options granted in 2008 have been
determined based on an analysis of reported data for a peer group of companies
that issued options with substantially similar terms.  The expected
volatility of options granted has been determined using an average of the
historical volatility measures of this peer group of companies for a period
equal to the expected life of the option.




The
risk-free interest rate for all option grants is based on United States treasury
instruments whose terms are consistent with the expected life of the stock
options. The Company does not anticipate paying cash dividends on its shares of
common stock; therefore, the expected dividend yield for all option grants is
assumed to be zero.  In addition, SFAS No. 123(R) requires companies
to utilize an estimated forfeiture rate when calculating the expense for the
period. The Company uses estimated annual forfeiture rates ranges from 0% to 29%
based on classifications such as director grants and grants to different
categories of employees.  We revise those estimates based on actual
results taking into account cancellations related to terminations, as applicable
to each classification. The estimation of actual forfeiture experience within
each classification requires judgment. When our revised estimates result in a
change to the number of options expected to vest, we record an
adjustment in the current period.




The
status of the options under the 2007 Plan is summarized below:





Shares
              
              Weighted-Average
      Price
              
              Weighted-Average
      Contractual Term (in Years)
              
              Aggregate
      Intrinsic ValueOutstanding
      at January 1, 2007
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              —Granted
              
              
              1,375,000
              
              
              $
              1.71Forfeited
              
              
              (37,000
              )
              
              $
              1.71Outstanding
      at December 31, 2007
              
              
              1,338,000
              
              
              $
              1.71
              
              
              
              
              
              
              $
              —Granted
              
              
              81,836
              
              
              $
              1.42Forfeited
              
              
              (92,420
              )
              
              $
              1.71Outstanding
      at December 31, 2008
              
              
              1,327,416
              
              
              $
              1.69
              
              
              
              
              
              
              $
              —Vested
      and expected to vest at December 31, 2008
              
              
              1,194,606
              
              
              $
              1.69
              
              
              
              
              
              
              $
              —Exercisable
      at December 31, 2008
              
              
              415,193
              
              
              $
              1.71
              
              
              
              8.6
              
              
              $
              —




F-33







NOTE
9 – Stock Compensation Plans (continued)




2007 Share Incentive Plan
(continued)




The
weighted average grant-date fair value of options granted during the year ended
December 31, 2008 and 2007 was $0.63 and $0.93, respectively.  As of
December 31, 2008 there were 691,456 shares vested under the 2007
Plan.




As of
December 31, 2008, a total of 672,584 common shares were available for future
grants under the Company’s 2007 Plan.




The share
based compensation expense was $453,000 and $114,000 for the years ended
December 31, 2008 and 2007, respectively. For the year ended December 31, 2008,
share-based compensation expense totaling approximately $342,000 was included in
selling, general and administrative expenses, approximately $64,000 was included
in research and development expenses and approximately $47,000 was included in
cost of sales.  Stock-based compensation costs capitalized as part of
the cost of inventory was insignificant in 2008 and
2007.  Compensation cost on non-vested awards that has not yet been
recognized through December 31, 2008 and is expected to be recognized is as
follows:





Year
      Ending
                    December
      31,2009
                
                $
                362,0002010
                
                
                153,0002011
                
                
                7,000$
                522,000






NOTE
10 - Redeemable Convertible Series A Preferred Stock




Series
A Preferred Stock Financing




On May
24, 2007, immediately after the closing of the Share Exchange Transaction, the
Company entered into an agreement with 21 accredited investors for the sale by
it in a private offering of 5,909,089 shares of its Series A Preferred Stock at
a purchase price of $2.20 per share for gross proceeds of $13
million.





F-34







NOTE
10 - Redeemable Convertible Series A Preferred Stock (continued)




Series
A Preferred Stock Financing (continued)




The
Series A Preferred Stock ranks senior in liquidation and dividend preferences to
the Company’s common stock. Holders of the Series A Preferred Stock are entitled
to semi-annual cumulative dividends payable in arrears in cash in an amount
equal to 8% of the purchase price per share of the Series A Preferred
Stock.  Each share of Series A Preferred Stock is convertible by the
holder at any time after its initial issuance at an initial conversion price of
$2.20 per share such that one share of common stock would be issued for each
share of Series A Preferred Stock. Subject to certain exceptions, the conversion
ratio is subject to customary antidilution adjustments and antidilution
adjustments if the Company subsequently issues certain equity securities at a
price equivalent of less than $2.20 per share. The Company has no present
intention to issue equity securities at a price equivalent of less than $2.20
per share. The shares of Series A Preferred Stock are also subject to forced
conversion, at a conversion price as last adjusted, anytime after May 24, 2008,
if the closing price of our common stock exceeds 200% of the conversion price
then in effect for 20 consecutive trading days. As of December 31, 2008, the
shares of Series A Preferred Stock have not been subject to forced
conversion.  The holders of Series A Preferred Stock vote together as
a single class with the holders of the Company’s other classes and series of
voting stock on all actions to be taken by its shareholders. Each share of
Series A Preferred Stock entitles the holder to the number of votes equal to the
number of shares of our common stock into which each share of Series A Preferred
Stock is convertible. In addition, the holders of Series A Preferred Stock are
afforded numerous customary protective provisions with respect to certain
actions that may only be approved by holders of a majority of the shares of
Series A Preferred Stock. The Company is also required at all times to reserve
and keep available out of its authorized but unissued shares of Common Stock,
such number of shares of Common Stock sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock. On or after May 24, 2012 the
holders of then outstanding shares of our Series A Preferred Stock will be
entitled to redemption rights. The redemption price is equal to the per-share
purchase price of the Series A Preferred Stock, which is subject to adjustment
as discussed above and in our articles of incorporation, plus any accrued but
unpaid dividends. The Series A Preferred Stock contain provisions prohibiting
certain conversions of the Series A Preferred Stock.




The
carrying amount of the Series A Preferred Stock is its fair value of
approximately $10,168,000. The fair value at the issuance date was the gross
proceeds from the sale of the securities less issuance costs of approximately
$2,832,000. The issuance costs included approximately $2,482,000 of direct
incremental costs of the issuance including legal, investment banking
commissions, registration fees, as well as the fair value of warrants issued in
connection with the financing totaling approximately $350,000.




The
changes in the redemption value of the Series A Preferred Stock are accreted
over the period from the date of issuance to the earliest redemption date (May
24, 2012) using the interest method. The accretion of unpaid dividends and
issuance costs for the year ended December 31, 2008 and 2007 was approximately
$1,576,000 and $853,000, respectively.





F-35







NOTE
10 - Redeemable Convertible Series A Preferred Stock (continued)




Series
A Preferred Stock Financing (continued)




SFAS No.
150 requires an issuer to classify the following instruments as liabilities (or
assets in some circumstances): A financial instrument issued in the form of
shares that is mandatorily redeemable--that embodies an unconditional obligation
requiring the issuer to redeem it by transferring its assets at a specified or
determinable date (or dates) or upon an event that is certain to occur.
Management of the Company has determined the redemption feature of the Series A
Preferred Stock has a “condition” to redemption which means it is not
mandatorily redeemable and is not within the scope of SFAS No. 150 for the first
5 years, and should be treated as “temporary equity,” outside of permanent
equity and below liabilities and in accordance with EITF Abstracts, Topic D-98,
“Classification and Measurement of Redeemable Securities.” Under the terms of
the Series A Preferred Stock, the holders have the right, but not the obligation
to convert their shares into common stock, whether or not registered, and
because the redemption is conditional, contingent upon the holder’s not
exercising its option to convert into common shares, the Series A Preferred
Stock does not meet the definition of mandatorily redeemable in accordance with
SFAS No. 150. Recent guidance from the Commission states the staff will no
longer accept liability classification for financial instruments (or host
contracts) that meet the conditions for temporary equity classification under
ASR 268 and Topic D-98.  Consistent with Commission Regulation S-X,
Articles 5-02, 7-03, and 9-03, these financial instruments should be classified
on the balance sheet between captions for liabilities and shareholder’s
equity.




The
Company also evaluated the conversion and redemption features for potential
embedded derivatives in accordance with SFAS No. 133 and determined that
accounting for potential embedded derivatives is not required with respect to
its Series A Preferred Stock. The redemption feature is considered clearly and
closely related to the host contract, and the conversion feature is considered
to be (i) indexed to the Company’s stock and (ii) classified in shareholders
equity in its statement of financial position. In each case SFAS No. 133 does
not require separation of the feature as an embedded derivative. SFAS No. 133
defines derivative instruments as a financial instrument or other contract with
all three of the following characteristics:




(i)
            It
      has (a) one or more underlyings and (b) one or more notional amounts or
      payment provisions or both. Those terms determine the amount of the
      settlement or settlements, and, in some cases, whether or not a settlement
      is required.




(ii)
            It
      requires no initial net investment or an initial net investment that is
      smaller than would be required for other types of contracts that would be
      expected to have a similar response to changes in market
      factors.




(iii)
            Its
      terms require or permit net settlement, it can readily be settled net by a
      means outside the contract, or it provides for delivery of an asset that
      puts the recipient in a position not substantially different from net
      settlement.





F-36







NOTE
10 - Redeemable Convertible Series A Preferred Stock (continued)




Series
A Preferred Stock Financing (continued)




SFAS No.
133 provides guidance on derivative instruments and contracts that do not in
their entirety meet the definition of a derivative instrument but may contain
“embedded” derivative instruments. The Statement requires that an embedded
derivative instrument be separated from the host contract and accounted for as a
derivative instrument if specified criteria are met. The Statement also
indicates the necessary criteria for bifurcation including (i) that the economic
characteristics and risks of the embedded derivative instrument are not clearly
and closely related to the economic characteristics and risks of the host
contract, as well as (ii) that a separate instrument with the same terms as the
embedded derivative instrument would be a derivative instrument subject to the
requirements of the Statement.




The
Company has evaluated the redemption feature and determined that the economic
characteristics and risks are clearly and closely related to the host primarily
because the host contract contains no residual equity interest and is therefore
considered more akin to debt.




The
Company believes that the conversion feature in its Series A Preferred Stock
meets the conditions specified in paragraphs 6-10 of SFAS No. 133 to be
considered a potential embedded derivative instrument. However, the Company
believes the conversion feature should not be considered a derivative instrument
based on the guidance in paragraph 11 of SFAS No. 133 regarding contracts that
should not be considered and accounted for as derivative instruments including
contracts issued or held by that reporting entity that are both (i) indexed to
its own stock and (ii) classified in stockholders’ equity in its statement of
financial position.




EITF
Issue No. 00-19 provides guidance in determining whether an embedded derivative
would be classified in stockholders’ equity in accordance with SFAS No. 133 if
it were freestanding. In analyzing the conditions necessary for equity
classification in paragraphs 12-32 of EITF Issue No. 00-19, the Company
considered that there are no provisions in the Series A Preferred Stock that
could require net-cash settlement, the Company may settle the contract in
unregistered shares, the number of shares issuable under the conversion option
are fixed, and there are sufficient authorized and unissued shares available to
settle the contract after consideration of all other commitments that may
require the issuance of stock during the maximum period the contract could
remain outstanding, there are no provisions in the conversion option indicating
rights that rank higher than those of the common stockholders, and there is no
requirement to post collateral.





F-37







NOTE
10 - Redeemable Convertible Series A Preferred Stock (continued)




Series
A Preferred Stock Financing (continued)




The
Company also considered that the Series A Preferred Stock contains standard
antidilution provisions and provisions that are solely within the control of the
Company. EITF Issue No. 00-19, states that instruments that contain “standard”
antidilution provisions would not preclude a conclusion that the instrument is
convertible into a fixed number of shares. Standard antidilution provisions are
those that result in adjustments to the conversion ratio in the event of an
equity restructuring transaction (as defined) that are designed to maintain the
value of the conversion option. The Series A Preferred Stock also contains a
provision that if the Company makes certain equity offerings in the future at a
price lower than the conversion price, the conversion ratio would also be
adjusted for dilution. However, the Company is required at all times to maintain
adequate authorized and unissued common shares to effect conversion of its
convertible securities and warrants and must control the number of shares
issuable on conversion, additionally, the Company has no plans to make such
future equity offerings. The Series A Preferred also contains a buy-in provision
that in the event the Company fails to deliver to the holder the required number
of shares upon exercise the Company may be required to pay the difference
between the market value of the shares at the exercise date and the conversion
price. This provision is similar to giving the Company the option to settle in
shares or in cash, as the Company may settle the conversion shares at any time
with authorized and unregistered shares and delivery is solely in the control of
the Company.




Accordingly,
the Company believes it controls the actions or events necessary to issue the
maximum number of shares that could be required to be delivered under share
settlement of the conversion feature and meets the conditions necessary for
equity classification in accordance with EITF Issue No. 00-19 and qualifies for
the paragraph 11 scope exception in SFAS No. 133. Therefore, the embedded
conversion option is not bifurcated from the host and accounted for as a
derivative instrument.




Warrants




In
connection with the Series A Preferred Stock Financing, the Company issued to
the investors five-year warrants (“Investor Warrants”) to purchase an aggregate
of 886,363 shares of common stock and issued to its placement agent, B. Riley
and Co. Inc. and its assignees, five-year warrants (“Placement Warrants”) to
purchase an aggregate of 385,434 shares of common stock. The Investor Warrants
and the Placement Warrants are collectively referred to as the “Warrants.” The
Investor Warrants and the Placement Warrants have an exercise price of $2.42 per
share. The Investor Warrants are exercisable beginning 180 days after May 24,
2007 and the Placement Warrants became immediately exercisable upon issuance on
May 24, 2007. The Company determined the $350,000 fair value of the Warrants,
using the Black-Scholes option-pricing model, utilizing a volatility factor of
48%, risk-free interest rate of 4.81%, an expected life of five years and a fair
value per share of the Company’s common stock of $1.71 on the date
issued.




The
Warrants contain cashless exercise features which could require the Company to
issue fewer shares to the holder, but without cash payment, under a net-share
settlement formula. The number of shares issuable under the cashless exercise
feature is based on a formula that considers the excess of the market value of
the Company’s common stock on the exercise date over the stated exercise price,
as defined in the Warrant.





F-38







NOTE
10 - Redeemable Convertible Series A Preferred Stock (continued)




Warrants
(continued)




The
exercise price and number of Warrant Shares issuable upon exercise of the
Warrants are subject to adjustment from time to time for (i) stock dividends and
splits, and (ii) “fundamental transactions” including a merger or consolidation,
any sale of all or substantially all of the Company’s assets, any tender offer
or exchange offer is completed pursuant to which holders of the Company’s common
stock are permitted to tender or exchange their shares for other securities,
cash or property, or any reclassification of the Company’s common stock or any
compulsory share exchange pursuant to which the Company’s common stock is
effectively converted into or exchanged for other securities, cash or property.
In the case of a fundamental transaction, the Warrant holders will be entitled
to rights equivalent to the common shareholders as if the Warrant Shares were
issued immediately prior to the fundamental transaction. The Investor Warrants
also provide that if the Company offers or sells stock in subsequent equity
sales at a price below the Warrant exercise price then in effect, then the
number of Warrant Shares issuable will be increased such that the aggregate
exercise price of the Warrants, after taking into account an equivalent price
decrease, shall be equal to the aggregate exercise price prior to such
adjustment (the “Reset Provisions”).




The
Placement Warrants include “piggyback” registration rights. In addition, each
holder of the Placement Warrants is either an “accredited investor” as defined
in Rule 501(a) under the Securities Act or a “qualified institutional buyer” as
defined in Rule 144A(a) under the Securities Act. The Warrants may be
transferred by the original holder to any other Person provided such Person is
an “accredited investor” as defined in Rule 501(a).




Prior to
exercise of the Warrants, the holders are not entitled to any rights of a
shareholder with respect to the Warrant Shares. In addition, under the terms of
the Warrants, the Company is required at all times to reserve and keep available
out of the aggregate of its authorized but unissued and otherwise unreserved
common stock, adequate shares for the purpose of enabling it to issue Warrant
Shares upon exercise of the Warrants.




In order
to assess the accounting treatment of the Warrants, management analyzed the
terms of the Warrants and considered the provisions of paragraphs 10 through 32
of EITF Issue No. 00-19 which discuss the conditions necessary for a derivative
indexed to, and potentially settled in, a company’s own stock to be classified
in shareholders’ equity. Management’s determination that the Warrants are
appropriately classified as shareholders’ equity included the following
principal considerations:




●
            The
      Company can settle the Warrants in unregistered shares (although under the
      registration rights agreement, commercially reasonable efforts are to be
      made to register the shares and maintain the effectiveness of the
      registration statement for a stated period of
  time);




●
            The
      Company has sufficient authorized but unissued shares of common stock
      available to settle the Warrants after considering all other commitments
      that may require the issuance of shares of common stock during the period
      the Warrants could remain
outstanding;




●
            There
      is no requirement in the Warrants to post collateral at any point or for
      any reason;




●
            There
      are no required cash payments to the Warrant
  holders;





F-39







NOTE
10 - Redeemable Convertible Series A Preferred Stock (continued)




Warrants
(continued)




●
            There
      are no provisions in the Warrants that indicate the Warrant holders have
      rights that rank higher than those of the shareholders of the common stock
      underlying the Warrants; and




●
            The
      change in control provision included in the Warrants requires that the
      Warrant holders receive or deliver upon settlement the same form of
      consideration as holders of the shares of common stock underlying the
      Warrants.




The
cashless, net-share settlement features were analyzed under EITF Issue No. 00-19
guidelines and because the maximum number of shares that could be required to be
delivered under the features is limited to the total number of shares under the
warrants (886,363 shares under the Investor Warrants and 385,434 shares under
the Placement Warrants), and since the Company has sufficient available
authorized and unissued shares to settle the total number of shares under
warrant, it was determined that the Company controls the net-share settlement,
and thus equity treatment is appropriate if other requirements are
met.




Management
also considered that the Warrants contain standard antidilution provisions and
provisions that are solely within the control of the Company. EITF Issue No.
00-19 states that instruments that contain “standard” antidilution provisions
would not preclude a conclusion that the instrument is convertible into a fixed
number of shares. Standard antidilution provisions are those that result in
adjustments to the conversion ratio in the event of an equity restructuring
transaction (as defined) that are designed to maintain the value of the
conversion option. The Investor Warrant Reset Provision could increase the
number of shares issuable in the event of certain equity offerings in the
future. However, the Company is required at all times to maintain adequate
authorized and unissued common shares to effect the exercise of its convertible
securities and warrants and must control the number of shares issuable on
conversion.  Additionally, the Company has no plans to make such
future equity offerings. The Warrants also contain a buy-in provision that in
the event the Company fails to deliver to the Warrant holder the required number
of shares upon exercise, the Company may be required to pay the difference
between the market value of the shares at the exercise date and the conversion
price. This provision is similar to giving the Company the option to settle in
shares or in cash, as the Company may settle the warrant shares at any time with
authorized and unregistered shares and delivery is solely in the control of the
Company.




Accordingly,
management believes it controls the actions or events necessary to issue the
maximum number of shares that could be required to be delivered under share
settlement of the Warrants and meets the conditions necessary for equity
classification in accordance with EITF Issue No. 00-19.




Management
determined there is no beneficial conversion feature related to the Series A
Preferred Stock. Consistent with guidance in EITF Issue No. 00-27, “Application
of Issue No. 98-5 to Certain Convertible Instruments” and EITF Issue No. 98-05,
“Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios,” management determined there is no
beneficial conversion feature as the fair value of the underlying common stock
was less than the conversion price.





F-40







NOTE
11 - Stockholders’ Equity




Repurchase
of Preferred Stock




In May
2007, R. H. Strasbaugh repurchased all of its issued and outstanding
participating preferred stock owned by Lam Research, Inc. for $3,000,000. The
participating preferred stock had a carrying value of $8,595,000 at the
repurchase date. The excess of the carrying value over the cash paid at
repurchase was recorded to additional paid in capital.




Repurchase
of Common Stock




In May
2007, R. H. Strasbaugh repurchased 771,327 shares of outstanding common stock
held by Agility for a cash payment of $750,000.




Registration
Rights Agreement




The
Company is obligated under a registration rights agreement related to the Series
A Preferred Stock Financing to file a registration statement with the
Commission, registering for resale shares of common stock underlying the Series
A Preferred Stock and shares of common stock underlying Investor Warrants,
issued in connection with the Series A Preferred Stock Financing. The
registration obligations required, among other things, that a registration
statement be declared effective by the Commission on or before October 6, 2007.
As the Company was unable to meet this obligation in accordance with the
requirements contained in the registration rights agreement the Company entered
into with the investors, the Company is required to pay to each investor
liquidated damages equal to 1% per month of the amount paid by the investor for
the common shares still owned by the investor on the date of the default and 1%
of the amount paid by the investor for the common shares still owned by the
investor on each monthly anniversary of the date of the default that occurs
prior to the cure of the default. The maximum aggregate liquidated damages
payable to any investor will be equal to 10% of the aggregate amount paid by the
investor for the shares of the Company’s Series A Preferred Stock. Accordingly,
the maximum aggregate liquidation damages that we would be required to pay under
this provision is $1.3 million.  However, the Company is not obligated
to pay any liquidated damages with respect to any shares of common stock not
included on the registration statement as a result of limitations imposed by the
SEC relating to Rule 415 under the Securities Act.




In
December 2006, the FASB issued FASB Staff Position (“FSP”) EITF Issue No.
00-19-2, “Accounting for Registration Payment Arrangements.” This FSP specifies
that the contingent obligation to make future payments or otherwise transfer
consideration under a registration payment arrangement, whether issued as a
separate agreement or included as a provision of a financial instrument or other
agreement, should be separately recognized and measured in accordance with FASB
Statement No. 5, “Accounting for Contingencies.”





F-41







NOTE
11 - Stockholders’ Equity (continued)




Registration
Rights Agreement (continued)




In
accordance with FSP EITF Issue No. 00-19-2, on the date of the private offering
the Company reviewed the terms of the registration rights agreements, and as of
that date, management believed that the Company would meet all of the required
deadlines under the agreement. However, as of December 31, 2007, management
believed it is probable that penalties under the agreement would be incurred and
accrued $208,000 of expense related to the Company’s registration rights
agreement calculated based on the terms of the agreement and the number of
shares included in the latest registration statement filing as of that date. The
agreement also includes a provision for interest to accrue at a rate of 10% per
annum on the unpaid amount of liquidated damages.  The Company’s
registration statement was declared effective by the SEC on November 6,
2008.  Based on the number of shares registered and the length of the
default period, the penalties and interest under the agreement are estimated to
be $223,000, which is accrued at December 31, 2008.  Accordingly, in
2008 additional expenses totaling $15,000 related to the Company’s registration
rights agreement were recorded.




NOTE
12 – Income Taxes




The
provision for income taxes consists of the following:





For
      the Year EndedDecember
      31,2008
            
            
            2007Current:Federal
            
            $
            —
            
            
            $
            —State
            
            
            —
            
            
            
            4,000Foreign
            
            
            —
            
            
            
            6,000Deferred:
            
            
            —
            
            
            
            10,000Federal
            
            
            —
            
            
            
            —State
            
            
            —
            
            
            
            —Foreign
            
            
            —
            
            
            
            —$
            —
            
            
            $
            10,000




The
reconciliation of the Company’s expected tax rate to the effective tax rate is
as follows:





For
      the Year EndedDecember
      31,2008
            
            
            2007Statutory
      federal rate
            
            $
            (1,533,000
            )
            
            $
            (264,000
            )State
      income taxes, net of federal benefit
            
            
            (179,000
            )
            
            
            (38,000
            )Nondeductible
      expenses
            
            
            5,000
            
            
            
            43,000Change
      in valuation allowance
            
            
            1,869,000
            
            
            
            188,000Other
            
            
            (163,000
            )
            
            
            81,000$
            —
            
            
            $
            10,000










F-42







NOTE
12 – Income Taxes (continued)




Deferred
taxes consist of the following:


December
      31,2008
            
            
            2007Deferred
      tax assetsAccrued
      vacation
            
            $
            112,000
            
            
            $
            124,000Allowance
      for doubtful accounts
            
            
            86,000
            
            
            
            22,000Accrued
      warranty
            
            
            52,000
            
            
            
            160,000Inventory
      reserve
            
            
            1,361,000
            
            
            
            947,000Additional
      inventory costs
            
            
            129,000
            
            
            
            161,000Other
      accruals
            
            
            84,000
            
            
            
            14,000Stock
      based compensation
            
            
            221,000
            
            
            
            45,000Federal
      net operating losses
            
            
            9,458,000
            
            
            
            8,255,000State
      deferred income taxes
            
            
            152,000
            
            
            
            152,000State
      net operating losses
            
            
            858,000
            
            
            
            738,000Federal
      tax credits
            
            
            311,000
            
            
            
            311,000Total deferred tax
      assets
            
            
            12,824,000
            
            
            
            10,929,000Deferred
      tax liabilitiesPatent
      costs
            
            
            (149,000
            )
            
            
            (123,000
            )Total deferred tax
      liabilities
            
            
            (149,000
            )
            
            
            (123,000
            )Net deferred tax assets before
      valuation allowance
            
            
            12,675,000
            
            
            
            10,806,000Valuation
    allowance
            
            $
            (12,675,000
            )
            
            $
            (10,806,000
            )None
            
            
            None




The
Company had federal and state net operating losses of approximately $27,541,000
and $9,901,000, respectively, at December 31, 2008, which begin to expire in
2019 for federal purposes. Annual utilization of the federal net operating loss
may be limited for federal tax purposes as a result of Internal Revenue Code
Section 382 change of ownership rules.  The state net operating losses
expire at various dates through 2028.




The
Company has a foreign tax credit and alternative minimum tax credit
carryforwards of approximately $311,000 as of December 31, 2008.  The
valuation allowance increased by approximately $1,869,000 during the year ended
December 31, 2008.




The
Company adopted the provisions of FIN No. 48, “Accounting for Uncertainty
in Income Taxes,” on January 1, 2007.  As a result of the
implementation of Interpretation 48, the Company recognized no increase in the
liability for unrecognized tax benefits.  The amount of unrecognized
tax benefits was $0 as of January 1, 2007, and December 31, 2008 and
2007.




Included
in the balance at January 1, 2007 are $0 of tax positions for which the
ultimate deductibility is highly certain but for which there is uncertainty
about the timing of such deductibility. Because of the impact of deferred tax
accounting, other than interest and penalties, the disallowance of the shorter
deductibility period would not affect the annual effective tax rate but would
accelerate the payment of cash to taxing authorities to an earlier
period.  Also included in the balance at January 1, 2007 are $0
of unrecognized tax benefits that, if recognized, would impact the effective tax
rate.  The Company made no adjustment to its amount of unrecognized
tax benefits during 2008 or 2007.
  The
Company recognizes interest and penalties accrued related to unrecognized tax
benefits in income tax expense.  The Company had no amount accrued for
the payment of interest and penalties at December 31, 2008.





F-43






INDEX
TO EXHIBITS





Exhibit
                Number
            Description2.1
            Share
      Exchange Agreement by and between the Registrant and R. H. Strasbaugh
      dated January 31, 2007 (1)2.2
            Amendment
      No. 1 to Share Exchange Agreement between the Registrant and R. H.
      Strasbaugh dated April 30, 2007 (1)3.1
            Amended
      and Restated Articles of Incorporation of the Registrant
    (1)3.2
            Amended
      and Restated Bylaws of the Registrant (1)4.1
            Securities
      Purchase Agreement dated May 24, 2007 by and among the Registrant and
      the investors who are parties thereto (1)4.2
            Registration
      Rights Agreement dated May 24, 2007 by and among the Registrant and
      the investors who are parties thereto (1)4.3
            Specimen
      Common Stock Certificate (1)4.4
            Specimen
      Preferred Stock Certificate (1)4.5
            Form
      of Warrant dated May 24, 2007 issued by the Registrant to certain
      investors pursuant to the Securities Purchase Agreement filed as Exhibit
      4.1 hereto (1)4.6
            Form
      of Placement Agent Warrant dated effective May 24, 2007 issued by the
      Registrant to B. Riley and Co. Inc. Inc. and its assignees
      (1)4.7
            Article
      IV of Amended and Restated Articles of Incorporation of Registrant
      (contained in Exhibit 3.1 to this Registration Statement)
      (1)10.1
            Strasbaugh
      2007 Share Incentive Plan (#)(1)10.2
            Form
      of the Strasbaugh 2007 Share Incentive Plan Stock Option Grant Notice and
      Stock Option Agreement (#)(1)10.3
            Form
      of Indemnification Agreement for officers and directors
    (#)(1)10.4
            Executive
      Employment Agreement by and between the Registrant and Chuck
      Schillings (#)(1)10.5
            Executive
      Employment Agreement by and between the Registrant and Richard Nance
      (#)(1)10.6
            Employment
      Agreement by and between the Registrant and Alan Strasbaugh
      (#)(1)10.7
            License
      Agreement by and between Lam Research Corporation and R. H.
      Strasbaugh dated December 20, 2000 (1)10.8
            Loan
      and Security Agreement by and between Silicon Valley Bank and R. H.
      Strasbaugh dated August 23, 2004 (1)10.9
            Amendment
      to Loan Documents by and between Silicon Valley Bank and R. H.
      Strasbaugh dated February 28, 2007 (1)10.10
            Amendment
      to Loan and Security Agreement by and between Silicon Valley Bank and
      R. H. Strasbaugh dated May 22, 2007 (1)10.11
            Amendment
      to Loan and Security Agreement by and between Silicon Valley Bank and
      R. H. Strasbaugh dated September 6, 2007 (2)10.12
            Standard
      Industrial Lease by and between Larry and Alan Strasbaugh and R. H.
      Strasbaugh dated as of May 1, 1990 (1)10.13
            Assignment
      dated April 14, 1995 by Larry Strasbaugh of his interest in the Standard
      Industrial Lease by and between Larry and Alan Strasbaugh and R. H.
      Strasbaugh dated as of May 1, 1990 to Alan and April Strasbaugh
      (1)10.14
            Agreement
      dated October 18, 2007 by and between B. Riley and Co. Inc. and R. H.
      Strasbaugh (2)10.15
            Assignment
      and Assumption Agreement dated May 24, 2007 by and among the Registrant,
      R. H. Strasbaugh and B. Riley and Co. Inc.
  (2)


10.16
            Loan
      and Security Agreement dated December 3, 2007 by and among Silicon
      Valley Bank, the Registrant and R. H. Strasbaugh
  (3)10.17
            Loan
      and Security Agreement (EXIM Facility) dated December 3, 2007 by and
      among Silicon Valley Bank, the Registrant and R. H. Strasbaugh
      (3)10.18
            Memorandum
      of Understanding dated December 1, 2006 by and between the Registrant
      and the 45th
      Research Institute the People’s Republic of China Electronic Technology
      Corporation (3)14.1
            Code
      of Ethics (1)21
            Subsidiaries
      of the Registrant (1)31.1
            Certification
      Required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as
      amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002 (*)31.2
            Certification
      Required by Rule 13a-14(a) of the Securities and Exchange Act of 1934, as
      amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act
      of 2002 (*)31.3
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to
      18U.S.C. Section 350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002 (*)





*
            Filed
      herewith.


(#)
            This
      exhibit is a management contract or a compensatory plan or
      arrangement.


(1)
            Incorporated
      by reference to Registrant’s registration statement on Form SB-2
      (Registration Statement No.:
333-144787).


(2)
            Incorporated
      by reference to Registrant’s registration statement on Form SB-2/A
      (Registration Statement No.: 333-144787) filed on September 17,
      2007.


(3)
            Incorporated
      by reference to Registrant’s registration statement on Form SB-2/A
      (Registration Statement No.: 333-144787) filed on December 14,
      2007.















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 on this 15th day of April,
2009.




STRASBAUGHBy:
                /s/ CHUCK
      SHILLINGSChuck
      ShillingsPresident
      and Chief Executive
Officer




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 dates indicated.





Name
            
            Title
            
            Date/s/ CHUCK SCHILLINGS
              Chuck
      Schillings
            
            President
      and Chief Executive Officer (principal executive officer)
            
            April
      15, 2009/s/ RICHARD NANCE

                Richard
      Nance
            
            Chief
      Financial Officer (principal financial officer and principal accounting
      officer)
            
            April 15,
      2009/s/ ALAN STRASBAUGH

                Alan
      Strasbaugh
            
            Chairman
      of the Board and Director
            
            April 15,
      2009/s/ WESLEY CUMMINS

                Wesley
      Cummins
            
            Director
            
            April 15,
      2009/s/ DAVID PORTER
              David
      Porter
            
            Director
            
            April 15,
      2009/s/ JOHN GIVENS
              John
      Givens
            
            Director
            
            April 15,
      2009/s/ DANILO CACCIAMATTA
              Danilo
      Cacciamatta
            
            Director
            
            April 15,
      2009
















EXHIBITS
FILED WITH THIS REPORT


Exhibit
              Number
            Description31.1
            Certification
      Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
      amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200231.2
            Certification
      Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as
      amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
      200232.1
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002