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================================================================================
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                                   (Mark One)

           |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the quarterly period ended MARCH 31, 2009

          | | 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                      (I.R.S. Employer
       of incorporation or organization)                   Identification No.)


           825 BUCKLEY ROAD, SAN LUIS OBISPO, CALIFORNIA              93401
             (Address of principal executive offices)               (Zip Code)


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

                                 NOT APPLICABLE.
              (Former name, former address and former fiscal year,
                         if changed since last report)

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

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

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

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

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

         As of April 30, 2009, there were 14,201,587 shares of the issuer's
common stock issued and outstanding.


================================================================================

                              CAUTIONARY STATEMENT

         All statements included or incorporated by reference in this Quarterly
Report on Form 10-Q, 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 set forth in the "Risk Factors" section of our Annual Report on
Form 10-K for the year ended December 31, 2008, which 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. 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.


                                      -i-


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                                                  TABLE OF CONTENTS

                                                       PART I
                                                FINANCIAL INFORMATION

                                                                                                               PAGE

Item 1.    Financial Statements...................................................................................1

           Condensed Consolidated Balance Sheets as of March 31, 2009 (unaudited) and
              December 31, 2008 (audited).........................................................................1

           Condensed Consolidated Statements of Operations for the Three Months Ended
              March 31, 2009 and 2008 (unaudited).................................................................2

           Condensed Consolidated Statement of Redeemable Convertible Preferred Stock
              and Shareholders' Equity (Deficit) for the Three Months Ended March 31, 2009 (unaudited)............3

           Condensed Consolidated Statements of Cash Flows for the Three Months Ended
              March 31, 2009 and 2008 (unaudited).................................................................4

           Notes to Condensed Consolidated Financial Statements for the Three Months Ended
              March 31, 2009 (unaudited)..........................................................................5

Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.................26

Item 3.    Quantitative and Qualitative Disclosures About Market Risk ...........................................36

Item 4.    Controls and Procedures ..............................................................................38

Item 4T.   Controls and Procedures ..............................................................................38

                                                       PART II
                                                  OTHER INFORMATION

Item 1.    Legal Proceedings ....................................................................................38

Item 1A.   Risk Factors .........................................................................................39

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds ..........................................39

Item 3.    Defaults Upon Senior Securities ......................................................................39

Item 4.    Submission of Matters to a Vote of Security Holders ..................................................39

Item 5.    Other Information ....................................................................................39

Item 6.    Exhibits .............................................................................................40

Signatures ......................................................................................................41

Exhibits Filed with this Report
</TABLE>


                                                        -ii-

<page>


                         PART I - FINANCIAL INFORMATION

The accompanying notes are an integral part of these condensed consolidated
financial statements.


ITEM 1.       FINANCIAL STATEMENTS
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                                        STRASBAUGH AND SUBSIDIARY

                                  CONDENSED CONSOLIDATED BALANCE SHEETS
                    AS OF MARCH 31, 2009 (UNAUDITED) AND DECEMBER 31, 2008 (AUDITED)
                                    (IN THOUSANDS, EXCEPT SHARE DATA)
                                                 ASSETS
                                                                                   MARCH 31,  DECEMBER 31,
                                                                                     2009        2008
                                                                                   --------    --------
CURRENT ASSETS                                                                    (unaudited)

   Cash and cash equivalents                                                       $    975    $     49
   Accounts receivable, net of allowance for doubtful accounts of $224 at March
     31, 2009 and December 31, 2008                                                     722       1,309
   Investments in securities                                                            109         239
   Inventories                                                                        5,669       5,659
   Prepaid expenses                                                                     150         264
                                                                                   --------    --------
                                                                                      7,625       7,520
                                                                                   --------    --------
PROPERTY, PLANT, AND EQUIPMENT                                                        2,181       2,150
                                                                                   --------    --------
OTHER ASSETS
   Capitalized intellectual property, net of accumulated amortization
     of $59 at March 31, 2009 and $54 at December 31, 2008                              386         381
    Other assets                                                                         34          36
                                                                                   --------    --------
                                                                                        420         417
                                                                                   --------    --------
   TOTAL ASSETS                                                                    $ 10,226    $ 10,087
                                                                                   ========    ========
               LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
                            AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
   Notes payable, current portion                                                  $    100    $    100
   Accounts payable                                                                     788       1,231
   Accrued expenses                                                                   2,061       1,963
   Customer deposits                                                                  1,802         147
   Deferred revenue                                                                      62          70
                                                                                   --------    --------
                                                                                      4,813       3,511
                                                                                   --------    --------
OTHER LIABILITIES
   Preferred stock related embedded derivative                                           75          --
    Warrants                                                                              9          --
                                                                                   --------    --------
                                                                                         84          --
                                                                                   --------    --------
COMMITMENTS AND CONTINGENCIES (NOTES 6, 7 AND 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
   Redeemable convertible preferred stock ("Series A"), no par value, $14,352
     aggregate preference in liquidation at March 31, 2009, 15,000,000 shares
     authorized, 5,909,089 shares issued and outstanding                              9,354      11,964
SHAREHOLDERS' DEFICIT
   Preferred stock ("Participating"), no par value, 5,769,736 shares authorized,
     zero shares issued and outstanding                                                  --          --
   Common stock, no par value, 100,000,000 shares authorized, 14,201,587 issued
     and outstanding                                                                     56          56
   Additional paid-in capital                                                        25,175      26,803
   Accumulated other comprehensive loss                                                 (16)        (61)
   Accumulated deficit                                                              (29,240)    (32,186)
                                                                                   --------    --------
                                                                                     (4,025)     (5,388)
                                                                                   --------    --------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND SHAREHOLDERS'
DEFICIT                                                                            $ 10,226    $ 10,087
                                                                                   ========    ========

 The accompanying notes are an integral part of these condensed consolidated financial statements.

                                                   1

<page>

                                       STRASBAUGH AND SUBSIDIARY


                            CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                    FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
                                 (IN THOUSANDS, EXCEPT PER SHARE DATA)


                                                                             THREE MONTHS ENDED
                                                                                 MARCH 31,
                                                                           2009                2008
                                                                       -------------    -------------
                                                                        (unaudited)
REVENUES
Tools                                                                  $         497    $         103
Parts and Service                                                              1,010            1,449
                                                                       -------------    -------------
NET REVENUES                                                                   1,507            1,552
                                                                       -------------    -------------
COST OF SALES

Tools                                                                            314              257
Parts and Service                                                                706              692
                                                                       -------------    -------------
TOTAL COST OF SALES                                                            1,020              949
                                                                       -------------    -------------
GROSS PROFIT                                                                     487              603
                                                                       -------------    -------------
OPERATING EXPENSES
Selling, general and administrative expenses                                     960            1,025
Research and development                                                         960              910
                                                                       -------------    -------------
                                                                               1,920            1,935
                                                                       -------------    -------------
LOSS FROM OPERATIONS                                                          (1,433)          (1,332)
                                                                       -------------    -------------
OTHER INCOME (EXPENSE)
Rental income                                                                    148               31
Interest income                                                                    4                9
Interest expense                                                                  (5)              --
Gain on change in value of embedded derivative and warrants (Note 2)           1,608               --
Other income (expense), net                                                      (12)              28
                                                                       -------------    -------------
                                                                               1,743               68
                                                                       -------------    -------------
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES                                  310           (1,264)

PROVISION FOR INCOME TAXES                                                         1               --

NET INCOME (LOSS)                                                      $         309    $      (1,264)
                                                                       =============    =============
NET LOSS PER COMMON SHARE
Basic                                                                  $       (0.02)   $       (0.12)
                                                                       =============    =============
Diluted                                                                $       (0.02)   $       (0.12)
                                                                       =============    =============

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic                                                                         14,202           14,202
                                                                       =============    =============
Diluted                                                                       14,202           14,202
                                                                       =============    =============
The accompanying notes are an integral part of these condensed consolidated financial statements.


                                                  2

<page>


                                                     STRASBAUGH AND SUBSIDIARY

                             CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
                          AND SHAREHOLDERS' DEFICIT FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)
                                                 (IN THOUSANDS, EXCEPT SHARE DATA)


                                                                                                                           TOTAL
                                                                                                  ACCUMULATED          SHAREHOLDERS'
                                 REDEEMABLE                                                         OTHER                DEFICIT AND
                                CONVERTIBLE                                                         COMPRE-              REDEEMABLE
                              PREFERRED STOCK    PREFERRED STOCK       COMMON STOCK     ADDITIONAL  HENSIVE              CONVERTIBLE
                           --------------------- ----------------  -------------------   PAID-IN     INCOME ACCUMULATED   PREFERRED
                            SHARES      AMOUNT   SHARES   AMOUNT     SHARES    AMOUNT    CAPITAL     (LOSS)   DEFICIT       STOCK
                           ---------  ---------- -------  -------  ----------  -------  ----------  -------  ----------  ----------

Balance, December
  31, 2008                 5,909,089  $   11,964      --  $    --  14,201,587  $    56  $   26,803  $   (61) $  (32,186) $    6,576
Cumulative effect of
  change in accounting
  principle (Note 2)              --      (3,191)     --       --          --       --      (1,138)      --       2,637      (1,692)
Comprehensive income:
  Net income                                                                                             --         309         309
Other comprehensive loss:
  Unrealized gain on
    (loss) on investment,
    net of tax of $0                                                                                     45         --           45
                                                                                                                         ----------
Total comprehensive income                                                                                                      354
                                                                                                                         ----------
Stock-based compensation
  expenses                        --          --      --       --          --       --          91       --          --          91
Accretion of redeemable
  convertible preferred
  stock                           --         301      --       --          --       --        (301)      --          --          --
Preferred stock dividend
  accumulated                     --         280      --       --          --       --        (280)      --          --          --
                           ---------  ---------- -------  -------  ----------  -------  ----------  -------  ----------  ----------
Balance, March 31, 2009    5,909,089  $    9,354      --  $    --  14,201,587  $    56  $   25,175  $   (16) $  (29,240) $    5,329
                           =========  ========== =======  =======  ==========  =======  ==========  =======  ==========  ==========


                 The accompanying notes are an integral part of these condensed consolidated financial statements.


                                                                  3

<page>

                            STRASBAUGH AND SUBSIDIARY

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
         FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008 (UNAUDITED)
                                 (IN THOUSANDS)
                               THREE MONTHS ENDED
                                                                       MARCH 31,
                                                                   2009         2008
                                                                 -------      -------
                                                                     (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
   Net income (loss)                                             $   309      $(1,264)
   Adjustments to reconcile net income (loss)
    to net cash from operating activities:
     Depreciation and amortization                                    90           93
     Change in inventory reserve                                     (67)          93
     Noncash interest expense                                          5           --
     Stock-based compensation                                         91           46
     Gain on embedded derivative (Note 2)                         (1,418)          --
     Gain on warrant (Note 2)                                       (190)          --
     Changes in assets and liabilities:
       Accounts receivable                                           587        1,492
       Inventories                                                    57         (219)
       Prepaid expenses                                              114         (105)
       Deposits and other assets                                      --          (21)
       Accounts payable                                             (443)          40
       Accrued expenses                                               93         (389)
       Deferred revenue                                               (8)          (1)
       Customer deposits                                           1,655           --
                                                                 -------      -------
         Net Cash Provided By (Used In) Operating Activities         875         (235)
                                                                 -------      -------
CASH FLOWS FROM INVESTING ACTIVITIES
   Proceeds from the sale of investment securities                   175          327
   Proceeds from maturity of investment securities                    --          234
   Purchase of property and equipment                               (114)          --
   Capitalized cost for intellectual property                        (10)         (13)
                                                                 -------      -------
         Net Cash Provided By Investing Activities                    51          548
                                                                 -------      -------
CASH FLOWS FROM FINANCING ACTIVITIES
   Issuance cost of redeemable convertible preferred stock            --         (188)
   Preferred dividends paid                                           --         (633)
                                                                 -------      -------
         Net Cash Used In Financing Activities                        --         (821)
                                                                 -------      -------
NET CHANGE IN CASH AND CASH EQUIVALENTS                              926         (508)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                        49        1,864
                                                                 -------      -------
CASH AND CASH EQUIVALENTS, END OF PERIOD                         $   975      $ 1,356
                                                                 =======      =======

The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                       4

<page>


                            STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION AND DESCRIPTION OF BUSINESS

The condensed 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 (formerly known as CTK Windup Corporation) completed
a share exchange transaction (the "Share Exchange Transaction") with R. H.
Strasbaugh (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 exchange for an aggregate of 13,770,366 shares
of Strasbaugh's common stock. 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 are 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 (i)
effectuate a 1-for-31 reverse split of its common stock, (ii) change its name
from CTK Windup Corporation to Strasbaugh, (iii) increase its authorized common
stock from 50,000,000 shares to 100,000,000 shares, (iv) 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 (v) 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.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission (the "SEC" or the "Commission") and therefore do not include
all information and footnotes necessary for a complete presentation of the
financial position, results of operations and cash flows in conformity with
accounting principles generally accepted in the United States of America.



                                       5

<page>

                            STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF PRESENTATION (CONTINUED)

The unaudited condensed consolidated financial statements do, however, reflect
all adjustments, consisting of only normal recurring adjustments, which are, in
the opinion of management, necessary to state fairly the financial position as
of March 31, 2009 and the results of operations and cash flows for the related
interim periods ended March 31, 2009 and 2008. However, these results are not
necessarily indicative of results for any other interim period or for the year.
It is suggested that the accompanying condensed consolidated financial
statements be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2008.

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 increases and decreases in
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, preferred stock related embedded derivatives and warrants to
purchase common stock, inventory obsolescence, and depreciation and
amortization. Certain prior year amounts in the accompanying condensed
consolidated financial statements have been reclassified to conform to the
current year's presentation.

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

                                                           THREE MONTHS ENDED
                                                                MARCH 31,
                                                          ---------------------
                                                            2009         2008
                                                          --------     --------
Cash paid for interest                                    $  5,000     $     --
                                                          ========     ========
Cash paid for income taxes                                $  1,000     $ 21,000
                                                          ========     ========
Fair value accretion on redeemable
   convertible preferred stock                            $301,000     $113,000
                                                          ========     ========
Preferred stock dividend                                  $280,000     $263,000
                                                          ========     ========
Property and equipment transferred to/from inventory,
   net                                                    $     --     $ 11,000
                                                          ========     ========



                                       6

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                            STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

CONCENTRATIONS OF CREDIT RISK

Financial instruments that subject the Company to credit risk consist primarily
of cash, cash equivalents and trade accounts receivable. 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 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 three months ended March 31, 2009 and 2008, the Company's top
10 customers accounted for 72% and 54% of net revenues, respectively. Sales to
major customers (over 10%) as a percentage of net revenues were 11% and 13%, for
the three months ended March 31, 2009 and 2008, respectively.

A decision by a significant customer to substantially decrease or delay
purchases from the Company, or the Company's inability to collect receivables
from these customers, could have a material adverse effect on the Company's
financial condition and results of operations. As of March 31, 2009, the amount
due from the major customers (over 10%) discussed above represented 24% of the
Company's total accounts receivable.

PRODUCT WARRANTIES

The Company provides limited warranty for the replacement or repair of defective
product 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 of 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 ASSETS AND LIABILITIES

The carrying value of financial instruments approximates 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 notes payable approximate
fair value because the interest rates on these instruments approximate market
interest rates currently available to the Company.


                                       7

<page>


                            STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES (CONTINUED)

The Company's assets and liabilities measured at fair value on a recurring basis
were determined using the following inputs at March 31, 2009:

<TABLE>
<CAPTION>
<S>     <C>

                                                           FAIR VALUE MEASUREMENTS AT REPORTING DATE USING
                                                    --------------------------------------------------------------
                                                                        QUOTED
                                                                      PRICES IN
                                                                        ACTIVE      SIGNIFICANT
                                                                      MARKETS FOR      OTHER           SIGNIFICANT
                                                                       IDENTICAL      OBSERVABLE       UNOBSERVABLE
                                                                        ASSETS          INPUTS             INPUTS
                                                       TOTAL           (LEVEL 1)       (LEVEL 2)         (LEVEL 3)

Fixed income available-for-sale securities           $109,000          $   --          $109,000          $     --

Preferred stock related embedded derivative          $ 75,000          $   --          $     --          $ 75,000

Warrants                                             $  9,000          $   --          $     --          $  9,000
</TABLE>


The Company's investments are comprised of available-for-sale securities with
carrying amounts totaling $109,000 at March 31, 2009. 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 March 31, 2009.

The Company's fixed income available-for-sale securities include 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.

Beginning January 1, 2009, the Company carried its preferred stock related
embedded derivative and investor warrants on its balance sheet as liabilities
(see Note 2) carried at fair value determined by using the Black Scholes
valuation model. As of March 31, 2009, the assumptions used in the valuation of
the preferred stock related embedded derivative included the Series A Preferred
Stock conversion price of $2.20 and in the valuation of the investor warrants
the conversion price of $2.42, as well as the Company's stock price of $0.40,
discount rate of 1.2%, and volatility of 53%.

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


                                       8

<page>

                            STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEGMENT INFORMATION

The Company's results of operations for the three months ended March 31, 2009
and 2008 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
16% and 21% of sales for the three months ended March 31, 2009 and 2008,
respectively.

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

                                                      THREE MONTHS ENDED
                                                           MARCH 31,
                                                   ------------------------
                                                    2009               2008
                                                   ------            ------
     United States                                  84%                 79%
     Europe                                         11%                  9%
     Asia and Pacific Rim countries                  5%                 12%

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


                                                   MARCH 31,       DECEMBER 31,
                                                      2009             2008
                                                   ---------       -----------
     United States                                    61%               43%
     Europe                                            7%               21%
     Asia and Pacific Rim countries                   32%               36%

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, Asia and the 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.

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 March 31, 2009 is reasonably stated.


                                       9

<page>

                            STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS IN SECURITIES

The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. 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 Balance Sheet
based on the 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
(loss). 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, are included in
the determination of comprehensive income (loss) and reported in shareholders'
equity (deficit).

At March 31, 2009, the Company's investments in corporate debt securities have
maturity dates ranging from approximately 2 to 5 years, are classified as
available-for-sale and are included in current assets because the investments
will likely be sold prior to maturity and within one year from the balance sheet
date. The Company had no material realized gains or losses on the sales of
securities in 2008 or 2007. Investments in securities at March 31, 2009 were as
follows:

<TABLE>
<CAPTION>
<S>     <C>
                                     AGGREGATE FAIR                            UNREALIZED GAIN
                                         VALUE             COST BASIS               (LOSS)
                                         -----             ----------               ------
Corporate debt securities           $   109,000          $     125,000         $    (16,000)
</TABLE>


ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) consists of net income (loss) and other gains and
losses affecting shareholders' equity (deficit) that, under generally accepted
accounting principles are excluded from net income (loss). For the three months
ended March 31, 2009 and 2008, the Company's accumulated other comprehensive
losses of $16,000 and $23,000, respectively, consisted of unrealized losses on
investments.

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.


                                       10

<page>

                           STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



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:

         o        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.

         o        Parts - The Company recognizes revenue when the parts are
                  shipped.

         o        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.

         o        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.


                                       11

<page>

                           STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



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
either by the customer or by 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.

DERIVATIVE INCOME

In accordance with Emerging Issues Task Force ("EITF") Issue No. 07-5 (Note 2),
the Company is required to account for the preferred stock related embedded
derivative and investor warrants as derivative liabilities. The Company is
required to mark to market each reporting quarter the value of the embedded
derivative and investor warrants. The Company revalues these derivative
liabilities at the end of each reporting period. The periodic change in value of
the derivative liabilities is recorded as either non-cash derivative income (if
the value of the embedded derivative and investor warrants decrease) or as
non-cash derivative expense (if the value of the embedded derivative and
investor warrants increase). Although the value of the warrants is affected by
interest rates, the remaining contractual conversion period and the Company's
stock volatility, the primary cause of the change in the value of the embedded
derivative and investor warrants will be the value of the Company's Common
Stock. If the stock price goes up, the value of these derivatives will generally
increase and if the stock price goes down the value of these derivatives will
generally decrease.


                                       12

<page>


                           STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SHIPPING COSTS

During the three months ended March 31, 2009 and 2008, freight and handling
amounts billed to customers by the Company and included in revenues totaled
approximately $3,000 and $2,000, respectively. Freight and handling fees
incurred by the Company of approximately $12,000 and $17,000 are included in
cost of sales for the three months ended March 31, 2009 and 2008, respectively.

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.

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

<TABLE>
<CAPTION>
<S>     <C>

                                                                   FOR THE THREE MONTHS ENDED
                                                                           MARCH 31,
                                                                     2009            2008
                                                                  -----------     -----------
Numerator:
  Net income (loss)                                               $   309,000     $(1,264,000)
  Preferred stock accretion                                          (301,000)       (113,000)
  Preferred stock dividend                                           (280,000)       (263,000)
                                                                  -----------     -----------
     Net loss available to common shareholders - basic               (272,000)     (1,640,000)
     Adjustment to net loss for assumed conversions                        --              --
                                                                  -----------     -----------
     Net loss available to common shareholders - diluted          $  (272,000)    $(1,640,000)
                                                                  ===========     ===========
</TABLE>


                                       13

<page>

                           STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE (CONTINUED)

                                                   FOR THE THREE MONTHS ENDED
                                                           MARCH 31,
                                                      2009          2008
                                                   ----------     ----------

Denominator:
  Shares outstanding, beginning                    14,201,587     14,201,587
  Weighted-average shares issued                           --             --
                                                   ----------     ----------
  Weighted-average shares outstanding--basic       14,201,587     14,201,587
                                                   ----------     ----------
  Effect of dilutive securities                            --             --
                                                   ----------     ----------

  Weighted-average shares outstanding--diluted     14,201,587     14,201,587
                                                   ==========     ==========

For the three months ended March 31, 2009, the Company has excluded from the
computation of diluted income (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 1,399,166 shares issuable upon exercise of outstanding
stock options for the period because the exercise prices were greater than the
average market price of the common stock, and therefore, the effects on diluted
earnings per common share would have been anti-dilutive. For the three months
ended March 31, 2008, the 5,909,089 shares issuable pursuant to the Series A
Preferred Stock, 1,271,797 shares issuable pursuant to outstanding warrants and
1,339,000 shares issuable upon the exercise of outstanding stock options were
excluded from the computation of diluted earnings per share because the Company
had a loss from continuing operations for the period and to include the
representative share increments would have been anti-dilutive. Accordingly, for
the three months ended March 31, 2009 and 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.

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.

                                       14

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SERIES A PREFERRED STOCK AND WARRANTS

The Company evaluates its Series A Preferred Stock and Warrants (as defined in
Note 7) 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, considering EITF Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," and EITF Issue No. 07-5, "Determining Whether an Instrument (Or an
Embedded Feature) is Indexed to an Entity's Own Stock"

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS

In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) Financial Accounting Standard (FAS) 157-4 "Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly".
Based on the guidance, if an entity determines that the level of activity for an
asset or liability has significantly decreased and that a transaction is not
orderly, further analysis of transactions or quoted prices is needed, and a
significant adjustment to the transaction or quoted prices may be necessary to
estimate fair value in accordance with Statement of Financial Accounting
Standards (SFAS) No. 157 "Fair Value Measurements". This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
The company will adopt this FSP for its quarter ending June 30, 2009. There is
no expected impact on the Consolidated Financial Statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition and
Presentation of Other-Than-Temporary Impairments". The guidance applies to
investments in debt securities for which other-than-temporary impairments may be
recorded. If an entity's management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to
sell the security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. The company will
adopt this FSP for its quarter ending June 30, 2009. There is no expected impact
on the Consolidated Financial Statements.


                                       15

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

IMPACTS OF NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board
(APB) 28-1 "Interim Disclosures about Fair Value of Financial Instruments". The
FSP amends SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
to require an entity to provide disclosures about fair value of financial
instruments in interim financial information. This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
The company will include the required disclosures in its quarter ending June 30,
2009.


In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (Or an Embedded Feature) is Indexed to an Entity's Own Stock." EITF
Issue No. 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF Issue No. 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Early application is not permitted. Implementation of this EITF has had a
significant impact on the Company's financial condition and results of
operations (See Note 2).

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 ending 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. Implementation of this EITF has had no impact on the
Company's financial condition or results of operations.

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. Implementation of this EITF has had no impact
on the Company's financial condition or results of operations.


                                       16

<page>


NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
         INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S
         OWN STOCK"

In June 2008, the FASB ratified EITF Issue No. 07-5 which 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 8) has been recognized
as "temporary equity," or outside of permanent equity and liabilities, in the
Company's consolidated balance sheet. 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, prior to
the implementation of EITF Issue No. 07-5, 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 8) have previously been recognized as permanent
equity in the Company's statement of financial position. Prior to the
implementation of EITF Issue No. 07-5, 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.



                                       17

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)
\

NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
         INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN
         STOCK" (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 no longer qualified for the paragraph 11(a) scope
exception in SFAS No. 133, and was 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 no longer qualified for the paragraph 11(a) scope
exception in FAS 133, and were 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 are 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 is 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 is 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 is
bifurcated from the host instrument and recognized as a liability on the
Company's consolidated balance sheet. The Investor Warrants are 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, are recognized as a discount to
the Series A Preferred Stock host. The discount will be accreted to the Series A
Preferred Stock host from 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.


                                       18

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
         INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN
         STOCK" (CONTINUED)

The following table illustrates the changes to the Company's consolidated
balance sheet resulting from the implementation of EITF Issue No. 07-5 effective
January 1, 2009:

<TABLE>
<CAPTION>
<S>     <C>

                                                        BALANCE          CUMULATIVE        BALANCE
                                                     DECEMBER 31,          EFFECT         JANUARY 1,
                                                         2008            ADJUSTMENT         2009
                                                     ------------      ------------      ------------


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


The fair value of the Series A Conversion Feature at the issuance date of the
Series A Preferred Stock (May 24, 2007) was estimated to be $4,085,000 using the
Black Scholes model. The assumptions used in the model included the Series A
Preferred Stock conversion price of $2.20, the Company's stock price of $1.71,
discount rate of 4.8%, and volatility of 48%. The accretion of the additional
discount to the preferred stock resulting from bifurcating the Series A
Conversion Feature totaled $894,000 through January 1, 2009. The cumulative
effect of these adjustments on January 1, 2009 was a reduction of the Series A
Preferred Stock balance of $3,191,000.

The fair value of the Investor Warrants of $244,000 was included in additional
paid in capital on the issuance date of the warrants (May 24, 2007). As a result
of reclassifying these warrants from equity to liabilities, and the additional
preferred stock accretion noted above, the cumulative effect of these
adjustments on January 1, 2009 was a reduction of additional paid in capital of
$1,138,000.

The fair value of the Series A Conversion Feature, included in "Preferred stock
related embedded derivative" liability on the Company's consolidated balance
sheet, on January 1, 2009 was estimated to be $1,493,000 using the Black Scholes
model. The assumptions used in the model included the Series A Preferred Stock
conversion price of $2.20, the Company's stock price on January 1, 2009 of
$1.19, discount rate of 1.12%, and volatility of 53%. The fair value of the
Investor Warrants, included in "Warrants" liability on the Company's
consolidated balance sheet, on January 1, 2009 was estimated to be $199,000
using the Black Scholes model. The assumptions used in the model included the
Investor Warrants conversion prices of $2.42, the Company's stock price on
January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of 53%.

The Company determined that, using the Black Scholes model, the fair value of
the preferred stock related embedded derivative and investor warrants had
declined as of January 1, 2009. Accordingly, the Company recorded as a
cumulative effect adjustment, the reduction of the fair value of these
derivative liabilities totaling $2,637,000 as a reduction of the Company's
accumulated deficit.


                                       19

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 2 - IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN
         INSTRUMENT (OR AN EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN
         STOCK" (CONTINUED)

As of March 31, 2009, the Company determined that, using the Black Scholes
model, the fair value of the preferred stock related embedded derivative and the
investor warrants had declined. Accordingly, the Company recorded a "Gain on
change in value of embedded derivative and warrants" and recorded a
corresponding reduction in the "Preferred stock related embedded derivative" and
"Warrant" liabilities of $1,418,000, and $190,000, respectively, for the period
from January 1, 2009 to March 31, 2009. The effect of the income from these
derivatives on income from continuing operations and net income was to change a
net loss of $1,299,000 to net income of $309,000, and to reduce the net loss per
common share from $0.13 to a net loss per common share of $0.02.

NOTE 3 - MANAGEMENT'S PLANS

For the three months ended March 31, 2009, the Company had net income of
approximately $309,000; however, excluding the non-cash gains from the preferred
stock related embedded derivative and warrants, the loss from operations was
approximately $1,299,000, and as of March 31, 2009, the Company had an
accumulated deficit of approximately $29,240,000. 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, 2008 and
into 2009 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 expired on December 4, 2009. The Company was not in compliance with all of
the covenants in the agreements as of March 31, 2009. 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.



                                       20

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 4 - INVENTORIES

Inventories consist of the following:

                                  MARCH 31,       DECEMBER 31,
                                    2009             2008
                                 -----------      -----------
                                (unaudited)

     Parts and raw materials     $ 5,291,000      $ 5,562,000
     Work-in-process               2,312,000        2,156,000
     Finished goods                1,595,000        1,537,000
                                 -----------      -----------
                                   9,198,000        9,255,000
     Inventory reserves           (3,529,000)      (3,596,000)
                                 -----------      -----------
                                 $ 5,669,000      $ 5,659,000
                                 ===========      ===========

NOTE 5 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                          MARCH 31,         DECEMBER 31,
                                                            2009               2008
                                                         ------------      ------------
                                                          (unaudited)

     Buildings and improvements                          $  2,282,000      $  2,283,000
     Shop and lab equipment                                 6,126,000         6,012,000
     Transportation equipment                                 166,000           166,000
     Furniture and fixtures                                 1,113,000         1,113,000
     Computer equipment                                     2,326,000         2,326,000
                                                         ------------      ------------
                                                           12,013,000        11,900,000
     Less: accumulated depreciation and amortization       (9,832,000)       (9,750,000)
                                                         ------------      ------------
                                                         $  2,181,000      $  2,150,000
                                                         ============      ============
</TABLE>

Depreciation expense totaled approximately $83,000 and $88,000 for the three
months ended March 31, 2009 and 2008, respectively.

NOTE 6 - STOCK COMPENSATION PLANS

Share based compensation expense is measured at grant date, based on the fair
value of the award, and is recognized over the employees requisite service
period. The share based compensation expense for the three months ended March
31, 2009 and 2008 was $91,000 and $46,000, respectively. For the three months
ended March 31, 2009 and 2008, share-based compensation expense totaling $69,000
and $33,000 was included in selling, general and administrative expenses,
respectively, $13,000 and $7,000 was included in research and development
expenses, respectively, and $9,000 and $6,000 was included in cost of sales,
respectively. As of March 31, 2009, there was $431,000 of total unrecognized
compensation cost related to nonvested share-based compensation arrangements.
The cost is expected to be recognized over a weighted-average remaining
recognition period of 0.9 years.


                                       21

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 7 - COMMITMENTS AND CONTINGENCIES

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. The action
seeks a declaration by the court that our subsidiary, R. H. Strasbaugh, is
required 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 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. The court imposed a deadline
of May 5, 2009 for Mr. Strasbaugh to complete his purchase of the property, or
it would again be placed on the open market for sale. He was unable to complete
the purchase by the deadline, but he has advised the Company that he plans to
make another offer in the near future and seek the necessary financing.

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

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 counsel, the ultimate liabilities resulting from such
lawsuits and claims will not materially affect the financial condition or
results of operations.

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 on July 31, 2011.
Rental income totaled approximately $144,000 and $31,000 for the three months
ended March 31, 2009 and 2008, respectively.

NOTE 8 - 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
$13,000,000.


                                       22

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 8 - 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 if the Company
subsequently issues certain equity securities at a price equivalent of less than
$2.20 per share. The conversion ratio is not subject to an antidilution
adjustment as a result of stock option grants under the Company's 2007 Plan with
exercise prices lower than the conversion price of the Series A Preferred Stock.
In addition, 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 the Company's
common stock exceeds 200% of the conversion price then in effect for 20
consecutive trading days. As of March 31, 2009, 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 the
Company's 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.

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. As of March 31, 2009,
the Investor Warrants and the Placement Warrants remain outstanding and have an
exercise price of $2.42 per share. The Investor Warrants became exercisable
beginning 180 days after May 24, 2007 and the Placement Warrants became
immediately exercisable upon issuance on May 24, 2007.


                                       23

<page>

                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 9 - EQUITY

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 require, 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 the Company would be required to
pay under this provision is $1,300,000. The Company anticipates that it will
have sufficient cash available to pay these liquidated damages, if required.
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.

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 were estimated
and accrued at March 31, 2009 and December 31, 2008, in the amounts of $228,000
and $223,000, respectively.

NOTE 10 - INCOME TAXES

The Company estimates its income tax expense for interim periods using an
estimated annual effective tax rate. Tax expense for the three months ended
March 31, 2009 resulted from minimum tax payments as any taxable income is
offset by net operating loss carryforwards. There was no provision for the three
months ended March 31, 2008 as a result of the net operating loss. The Company
has a valuation allowance covering its deferred tax assets, including its net
operating loss carryforwards, because management believes that it is more likely
than not that all, or some portion of, such deferred tax assets will not be
realized.



                                       24

<page>


                          STRASBAUGH AND SUBSIDIARY

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE THREE MONTHS ENDED MARCH 31, 2009 (UNAUDITED)



NOTE 10 - INCOME TAXES (CONTINUED)

The Company has federal and state net operating loss carryforwards of
approximately $28,750,000 and $11,030,000, respectively, at March 31, 2009,
which will begin to expire in 2019 for federal purposes. Annual utilization of
the federal net operating loss carryforward may be limited for federal tax
purposes as a result of an Internal Revenue Code Section 382 change in ownership
rules. The state net operating loss carryforwards expire at various dates
through 2029. Included in the balance at March 31, 2009, 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 March 31, 2009, 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 the
three month period ended March 31, 2009.

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 March 31, 2009.



                                       25

<page>



ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

         The following discussion should be read in conjunction with our
unaudited condensed consolidated financial statements for the three months ended
March 31, 2009 and the related notes and the other financial information
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. Our actual
results could differ materially from those expressed in these forward-looking
statements as a result of any number of factors, including those set forth under
the "Risk Factors" section of our Annual Report on Form 10-K for the year ended
December 31, 2008 and elsewhere in this report. The forward-looking statements
and associated risks may include, relate to or be qualified by other important
factors, including, without limitation:

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

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

         o        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 the years ended December 31, 2008
                  and 2007; and

         o        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 the "Risk Factors" section of
our Annual Report on Form 10-K for the year ended December 31, 2008 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.

         Our net revenues decreased by $45,000, or 3%, to $1,507,000 for the
three months ended March 31, 2009 as compared to $1,552,000 for the three months
ended March 31, 2008. We reported net income of $309,000 for the three months
ended March 31, 2009 as compared to a net loss of $1,264,000 for the three
months ended March 31, 2008. Excluding the non-cash gains totaling $1,608,000 on
our preferred stock related embedded derivative and warrants during the three
months ended March 31, 2009, our net income decreased by $35,000. Our financial
performance during the first three months of 2009 and 2008 has been negatively
affected by a slowdown in the semiconductor industry. As a result of the
industry slowdown, we experienced a substantial decline in tool system sales as
customers delayed major purchasing decisions and we expect this slowdown to
continue well into 2009. Our priority over the next several months is to
continue to find ways to strengthen our balance sheet and conserve cash. With

                                       26

<page>

that in mind, our total headcount has been reduced to 70 full and part-time
employees at March 31, 2009. While additional headcount reductions are not
planned at this time, we may need to further reduce our headcount in order to
reduce expenses if the decline in our business continues for a prolonged length
of time.

IMPLEMENTATION OF EITF ISSUE NO. 07-5, "DETERMINING WHETHER AN INSTRUMENT (OR AN
EMBEDDED FEATURE) IS INDEXED TO AN ENTITY'S OWN STOCK"

         In June 2008, the FASB ratified EITF Issue No. 07-5 which 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 8) has been
recognized as "temporary equity," or outside of permanent equity and
liabilities, in the Company's consolidated balance sheet. 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, prior to the implementation of EITF Issue No. 07-5, 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 8) have previously been recognized as
permanent equity in the Company's statement of financial position. Prior to the
implementation of EITF Issue No. 07-5, 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.


                                       27

<page>

         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 no longer qualified for the paragraph
11(a) scope exception in SFAS No. 133, and was 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 no longer qualified for the paragraph 11(a) scope
exception in FAS 133, and were 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 are 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 is 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 is 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
is bifurcated from the host instrument and recognized as a liability on the
Company's consolidated balance sheet. The Investor Warrants are 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, are recognized as a discount to
the Series A Preferred Stock host. The discount will be accreted to the Series A
Preferred Stock host from 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.

            The following table illustrates the changes to the Company's
consolidated balance sheet resulting from the implementation of EITF Issue No.
07-5 effective January 1, 2009:

<TABLE>
<CAPTION>
<S>     <C>
                                                        BALANCE        CUMULATIVE
                                                      DECEMBER 31,        EFFECT         JANUARY 1,
                                                          2008           ADJUSTMENT          2009
                                                     ------------      ------------      ------------
     Preferred stock related embedded derivative     $         --      $  1,493,000      $  1,493,000
      Warrants                                       $         --      $    199,000      $    199,000
     Series A preferred stock                        $ 11,964,000      $ (3,191,000)     $  8,733,000
     Additional paid-in capital                      $ 26,803,000      $ (1,138,000)     $ 25,665,000
     Accumulated deficit                             $(32,186,000)     $  2,637,000      $(29,549,000)
</TABLE>

         The fair value of the Series A Conversion Feature at the issuance date
of the Series A Preferred Stock (May 24, 2007) was estimated to be

                                       28

<page>

$4,085,000 using the Black Scholes model. The assumptions used in the model
included the Series A Preferred Stock conversion price of $2.20, the Company's
stock price of $1.71, discount rate of 4.8%, and volatility of 48%. The
accretion of the additional discount to the preferred stock resulting from
bifurcating the Series A Conversion Feature totaled $894,000 through January 1,
2009. The cumulative effect of these adjustments on January 1, 2009 was a
reduction of the Series A Preferred Stock balance of $3,191,000.

         The fair value of the Investor Warrants of $244,000 was included in
additional paid in capital on the issuance date of the warrants (May 24, 2007).
As a result of reclassifying these warrants from equity to liabilities, and the
additional preferred stock accretion noted above, the cumulative effect of these
adjustments on January 1, 2009 was a reduction of additional paid in capital of
$1,138,000. The fair value of the Series A Conversion Feature, included in
"Preferred stock related embedded derivative" liability on the Company's
consolidated balance sheet, on January 1, 2009 was estimated to be $1,493,000
using the Black Scholes model. The assumptions used in the model included the
Series A Preferred Stock conversion price of $2.20, the Company's stock price on
January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of 53%. The
fair value of the Investor Warrants, included in "Warrants" liability on the
Company's consolidated balance sheet, on January 1, 2009 was estimated to be
$199,000 using the Black Scholes model. The assumptions used in the model
included the Investor Warrants conversion prices of $2.42, the Company's stock
price on January 1, 2009 of $1.19, discount rate of 1.12%, and volatility of
53%.

         The Company determined that, using the Black Scholes model, the fair
value of the preferred stock related embedded derivative and investor warrants
had declined as of January 1, 2009. Accordingly, the Company recorded as a
cumulative effect adjustment, the reduction of the fair value of these
derivative liabilities totaling $2,637,000 as a reduction of the Company's
accumulated deficit.

         As of March 31, 2009, the Company determined that, using the Black
Scholes model, the fair value of the preferred stock related embedded derivative
and the investor warrants had declined. Accordingly, the Company recorded a
"Gain on change in value of embedded derivative and warrants" and recorded a
corresponding reduction in the "Preferred stock related embedded derivative" and
"Warrant" liabilities of $1,418,000, and $190,000, respectively, for the period
from January 1, 2009 to March 31, 2009. The effect of the income from these
derivatives on income from continuing operations and net income was to change a
net loss of $1,299,000 to net income of $309,000, and to reduce the net loss per
common share from $0.13 to a net loss per common share of $0.02.

CRITICAL ACCOUNTING POLICIES

         Our 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

                                       29

<page>

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:

         o        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.

         o        Parts - We recognize revenue when the parts are shipped.

         o        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
                  revenue after the service has been completed.

         o        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


                                       30

<page>

may be included in tool upgrade contracts. Our software is incidental to the
tool contracts as a whole. The software and physical tool modifications occur
and are completed concurrently. The completed tool is tested by either the
customer or us to ensure it has met all required specifications and then
accepted by the customer prior to shipment, at which point revenue is
recognized. The revenue recognition requirements of Statement of Position
("SOP") 97-2, "Software Revenue Recognition," are met when there is persuasive
evidence an arrangement exists, the fee is fixed or determinable, collectibility
is probable and delivery and acceptance of the equipment has occurred, including
upgrade contracts for parts and/or software, to the customer.

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


         DERIVATIVE INCOME. In accordance with Emerging Issues Task Force
("EITF") Issue No. 07-5 (see "Accounting Change"), the Company is required to
account for the preferred stock related embedded derivative and investor
warrants as derivative liabilities. The Company is required to mark to market
each reporting quarter the value of the embedded derivative and investor
warrants. The Company revalues these derivative liabilities at the end of each
reporting period. The periodic change in value of the derivative liabilities is
recorded as either non-cash derivative income (if the value of the embedded
derivative and investor warrants decrease) or as non-cash derivative expense (if
the value of the embedded derivative and investor warrants increase). Although
the value of the warrants is affected by interest rates, the remaining
contractual conversion period and the Company's stock volatility, the primary
cause of the change in the value of the embedded derivative and investor
warrants will be the value of the Company's Common Stock. If the stock price
goes up, the value of these derivatives will generally increase and if the stock
price goes down the value of these derivatives will generally decrease.

         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 collectability of our
receivables at least quarterly. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Management believes that our current
allowances for doubtful accounts are adequate to meet any foreseeable
contingencies.

         INVENTORY. We write down our inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value-based upon assumptions about future demand, future
pricing and market conditions. If actual future demand, future pricing or market
conditions are less favorable than those projected by management, additional

                                       31

<page>

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.

         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, considering EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock," and EITF Issue No. 07-5, "Determining
Whether an Instrument (Or an Embedded Feature) is Indexed to an Entity'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:

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

         o        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


                                       32

<page>

                  positive and unfavorable changes as 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.

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

<TABLE>
<CAPTION>
<S>     <C>
                        THREE MONTHS ENDED MARCH 31, 2009 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2008
                                                                                                                    RESULTS AS A
                                                                                                                    PERCENTAGE
                                                                                                             OF NET REVENUES FOR THE
                                                     THREE MONTHS ENDED            DOLLAR    PERCENTAGE        THREE MONTHS ENDED
                                                           MARCH 31,              VARIANCE     VARIANCE            MARCH 31,
                                                     -----------------------   -----------   ------------    -----------------------
                                                                                 FAVORABLE    FAVORABLE
                                                                               -----------   ------------
                                                       2009          2008     (UNFAVORABLE)  (UNFAVORABLE)    2009            2008
                                                       (IN THOUSANDS)
     Net revenues                                   $ 1,507        $ 1,552       $   (45)           (3%)      100%            100%
     Cost of sales                                    1,020            949           (71)           (7%)       68%             61%
     Gross profit                                       487            603          (116)          (19%)       32%             39%
     Selling, general and administrative expenses       960          1,025            65             6%        64%             66%
     Research and development expenses                  960            910           (50)           (5%)       64%             59%
     Loss from operations                            (1,433)        (1,332)         (101)           (8%)      (96%)           (86%)
     Total other income (expense)                     1,743             68         1,675         2,463%       117%              5%
     Loss from operations before income taxes           310         (1,264)        1,574           125%        21%            (81%)
     Provision for income taxes                           1             --            (1)           --         --              --
     Net loss                                       $   309        $(1,264)      $ 1,573           124%        21%            (81%)
</TABLE>

         NET REVENUES. The net revenues decreased by $45,000 to $1,507,000 in
the first quarter of 2009 compared to the same period in 2008. Sales of tool
systems increased by $394,000 to $497,000, in the first quarter of 2009 compared
to $103,000 for the same period in 2008. Revenue from parts and services
declined by $439,000 to $1,010,000, in the first quarter of 2009, compared to
$1,449,000 for the same period in 2008.

         GROSS PROFIT. The $116,000 decrease in gross profit was primarily due
to lower sales and an increased mix of lower-margin product shipments. The gross
margin as a percentage of sales was higher for the first three months of 2008
compared to the same period in 2009 primarily as a result of a higher volume of
higher-margin parts sales. We anticipate that our gross profit margin will be
approximately 40% of net revenues for the remainder of 2009.

         SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $65,000 decrease in
selling, general and administrative expenses is a result of cost cutting
measures, including a lower headcount of employees, initiated during 2008.

         RESEARCH AND DEVELOPMENT EXPENSES. The $50,000 increase in research and
development expense represents primarily on-going engineering improvements on
existing product lines developed over the past five years, as well as efforts to
develop new technology for our future. We expect that research and development
spending will continue to increase during the remainder of 2009.

         OTHER INCOME (EXPENSE). The $1,675,000 increase in other income was
primarily due to non-cash gains totaling $1,608,000 resulting from the decrease
in the fair value of our preferred stock related embedded derivative and warrant
liabilities during the three months ended March 31, 2009.


                                       33

<page>

LIQUIDITY AND CAPITAL RESOURCES

         As of March 31, 2009, we had working capital of $2,812,000 as compared
to $4,009,000 at December 31, 2008 as cash from collections of receivables and
customer deposits on tool contracts were used to support operations. At March
31, 2009 and December 31, 2008 we had an accumulated deficit of $29,240,000 and
$32,186,000, respectively, and cash and cash equivalents of $975,000 and
$49,000, respectively, as well as investments in securities of $109,000 and
$239,000, respectively.

         Our available capital resources at March 31, 2009 consisted primarily
of approximately $975,000 in cash and cash equivalents, $722,000 in accounts
receivable, and $109,000 of investments in securities. 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.

         Cash provided by operating activities for the three months ended March
31, 2009 was $875,000 as compared to $235,000 of cash used in operating
activities for the three months ended March 31, 2008, and included net income of
$309,000 and a net loss of $1,264,000 for the three months ended March 31, 2009
and 2008, respectively. Non-cash gains of $1,608,000 from derivative liabilities
were included in the first quarter of 2009 net income as well as non-cash
charges for depreciation and amortization of $90,000 and stock-based
compensation of $91,000. Material changes in asset and liabilities at March 31,
2009 as compared to December 31, 2008 that affected these results include:

         o        a decrease in accounts receivable before reserves of $587,000;

         o        a decrease in inventory before reserves of $57,000;

         o        a decrease in accounts payable of $443,000; and

         o        an increase in customer deposits of $1,655,000

         Cash provided by investing activities totaled $51,000 for the three
months ended March 31, 2009 as compared to $548,000 of cash provided by
investing activities for the three months ended March 31, 2008. Included in the
results for the three months ended March 31, 2009 are the sale of $175,000 of
investments in securities, $114,000 of purchased equipment and $10,000
representing the capitalized cost for intellectual property.

         There were no cash flows from financing activities in the first quarter
of 2009 compared to net cash used in financing activities totaling $821,000 for
the three months ended March 31, 2008. The dividend payment and issuance costs
related to the Series A Preferred Stock resulted in the cash used in financing
activities in the first quarter of 2008.

         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 Facility. 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

                                       34

<page>

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 component of the SVB Credit Facility
will constitute an event of default on the other SVB Credit Facility. At
September 30, 2008, there was no outstanding balance on the SVB Credit Facility.

         The SVB Credit Facility is 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 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 March 31, 2009, 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 Facility is payable monthly. The interest
rate applicable to the SVB Credit Facility 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
Facility will increase by five percentage points above the per annum interest
rate that would otherwise be applicable.

         Terms of the SVB Credit Facility 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 for an amendment of the SVB
Credit Facilities, but we do not anticipate that we will agree on an amendment
with acceptable terms and conditions. If no such amendment is secured, 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, immediately after the closing of the Share Exchange
Transaction, we issued to 21 accredited investors in the Series A Preferred
Stock Financing an aggregate of 5,909,089 shares of our Series A Preferred Stock
at a purchase price of $2.20 per share and five-year investor warrants, or
Investor Warrants, to purchase an aggregate of 886,363 shares of common stock at
an exercise price of $2.42 per share, for total gross proceeds of $13,000,000.
The Investor Warrants are initially exercisable 180 days after May 24, 2007. We
paid cash placement agent fees and expenses of approximately $1.1 million and
issued five-year placement warrants, or Placement Warrants, to purchase 385,434
shares of common stock at an exercise price of $2.42 per share in connection
with the offering. Additional costs related to the financing including placement
agent, legal, accounting and consulting fees that totaled approximately
$2,482,000 through December 31, 2008.

         We are obligated under a registration rights agreement related to the
Series A Preferred Stock Financing to file a registration statement with the
SEC, registering for resale shares of common stock underlying the Series A
Preferred Stock and shares of common stock underlying Investor Warrants, issued
in connection with the Series A Preferred Stock Financing. The registration
obligations require, among other things, that a registration statement be
declared effective by the SEC on or before October 6, 2007. Because we were

                                       35

<page>

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 common 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 are 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. 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
$228,000 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 April 30, 2009, we had a backlog of approximately $4.3 million.
Our backlog includes firm non-cancelable customer commitments for 8 tools and
approximately $687,000 in parts and upgrades. Management believes that all
products currently in our backlog will be shipped by June 30, 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 April 2009, the Financial Accounting Standards Board (FASB) issued
FASB Staff Position (FSP) Financial Accounting Standard (FAS) 157-4 "Determining
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly".
Based on the guidance, if an entity determines that the level of activity for an
asset or liability has significantly decreased and that a transaction is not
orderly, further analysis of transactions or quoted prices is needed, and a
significant adjustment to the transaction or quoted prices may be necessary to
estimate fair value in accordance with Statement of Financial Accounting
Standards (SFAS) No. 157 "Fair Value Measurements". This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
The company will adopt this FSP for its quarter ending June 30, 2009. There is
no expected impact on the Consolidated Financial Statements.

         In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition
and Presentation of Other-Than-Temporary Impairments". The guidance applies to
investments in debt securities for which other-than-temporary impairments may be
recorded. If an entity's management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to
sell the security before recovery of its cost basis, then an entity may separate

                                       36

<page>

other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. The company will
adopt this FSP for its quarter ending June 30, 2009. There is no expected impact
on the Consolidated Financial Statements.

         In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles
Board (APB) 28-1 "Interim Disclosures about Fair Value of Financial
Instruments". The FSP amends SFAS No. 107 "Disclosures about Fair Value of
Financial Instruments" to require an entity to provide disclosures about fair
value of financial instruments in interim financial information. This FSP is to
be applied prospectively and is effective for interim and annual periods ending
after June 15, 2009 with early adoption permitted for periods ending after March
15, 2009. The company will include the required disclosures in its quarter
ending June 30, 2009.

In June 2008, the FASB ratified EITF Issue No. 07-5, "Determining Whether an
Instrument (Or an Embedded Feature) is Indexed to an Entity's Own Stock." EITF
Issue No. 07-5 provides that an entity should use a two-step approach to
evaluate whether an equity-linked financial instrument (or embedded feature) is
indexed to its own stock, including evaluating the instrument's contingent
exercise and settlement provisions. EITF Issue No. 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008.
Early application is not permitted. Implementation of this EITF has had a
significant impact on the Company's financial condition and results of
operations (See "Accounting Change" above).

            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 ending 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. Implementation of this EITF has had no impact on the
Company's financial condition or results of operations.

            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. Implementation of this EITF has had no
impact on the Company's financial condition or results of operations.

ITEM 3.       QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         Not applicable.


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<page>

ITEM 4.       CONTROLS AND PROCEDURES

         Not applicable.

ITEM 4T.      CONTROLS AND PROCEDURES

         An evaluation of the effectiveness of the design and operation of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange
Act")) was carried out under the supervision and with the participation of the
Company's management, including the Chief Executive Officer and the Chief
Financial Officer ("the Certifying Officers") as of March 31, 2009. Based on
that evaluation, the Certifying Officers concluded that the Company's disclosure
controls and procedures are effective.

          There have been no changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the quarter ended March 31, 2009 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         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.
The action seeks a declaration by the court that our subsidiary, R. H.
Strasbaugh, is required 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 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. The court imposed a deadline
of May 5, 2009 for Mr. Strasbaugh to complete his purchase of the property, or
it would again be placed on the open market for sale. He was unable to complete
the purchase by the deadline, but he has advised the Company that he plans to
make another offer in the near future and seek the necessary financing.

         Although management believes that purchase of the property by Mr.
Strasbaugh, if consummated, may resolve the claim relating to roof maintenance,
that action remains pending. 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.

         We are subject to various legal proceedings, claims and litigation with
respect to such matters as product liabilities, employment matters and other
actions arising out of the normal course of business. While the amounts claimed
may be substantial, the ultimate liability cannot presently be determined
because of considerable uncertainties that exist. Therefore, it is possible that
the outcome of those legal proceedings, claims and litigation could adversely
affect our quarterly or annual operating results or cash flows when resolved in
a future period. However, based on facts currently available, management
believes such matters will not adversely affect our financial position, results
of operations or cash flows.


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<page>

ITEM 1A.   RISK FACTORS

           In addition to the other information set forth in this report, you
should carefully consider the factors discussed under "Risk Factors" in our
Annual Report on Form 10-K for the year ended December 31, 2008, which could
materially affect our business, financial condition and results of operations.
The risks described in our Annual Report on Form 10-K for the year ended
December 31, 2008 are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and results of operations.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         None.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.

ITEM 5.  OTHER INFORMATION

         None.


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<page>


ITEM 6.   EXHIBITS

Exhibit
Number    Description
------    -----------

31.1     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 2002 (*)

31.2     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 2002 (*)

32.1     Certification of President 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(*)

-------------------
* Filed herewith.


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<page>



                                   SIGNATURES

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

                                         STRASBAUGH


Dated:  May 19, 2009                     By:  /S/ RICHARD NANCE
                                              ----------------------------------
                                                Richard Nance, Chief Financial
                                                Officer (principal financial
                                                and accounting officer)



                                       41

<page>

                         EXHIBITS FILED WITH THIS REPORT

Exhibit
Number   Description
------   -----------

31.1     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 2002

31.2     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 2002

32.1     Certification of President 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


                                       42