STRB Strasbaugh (CE)

Amendment No. 1 to

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 JUNE 30, 2008

| | 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 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 August 12, 2008, there were 14,201,587 shares of the issuer's common stock issued and outstanding.

EXPLANATORY NOTE

Strasbaugh (the "Company") is filing this Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2008, which report was originally filed on August 12, 2008 (the "Original Filing"), to add a column titled "Additional Paid-in Capital" that was mistakenly omitted from the Company's "Condensed Consolidated Statement Of Redeemable Convertible Preferred Stock And Shareholders' Equity (Deficit) For The Six Months Ended June 30, 2008." in the Original Filing.

All information in this amendment is as of the date of the Original Filing and does not reflect any subsequent information or events occurring after the date of the Original Filing. Forward-looking statements made reflect our expectations as of the date of our Original Filing and have not been adjusted to reflect subsequent information.

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, 2007, 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.

TABLE OF CONTENTS

 PART I
 FINANCIAL INFORMATION

 PAGE
 ----

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

 Condensed Consolidated Balance Sheets as of June 30, 2008
 (unaudited) and December 31, 2007................................1

 Condensed Consolidated Statements of Operations for the Three
 and Six Months Ended June 30, 2008 and 2007 (unaudited)..........2

 Condensed Consolidated Statement of Redeemable Convertible
 Preferred Stock and Shareholders' Equity (Deficit) for the
 Six Months Ended June 30, 2008 (unaudited).......................3

 Condensed Consolidated Statements of Cash Flows for the Three
 and Six Months Ended June 30, 2008 and 2007 (unaudited)..........4

 Notes to Condensed Consolidated Financial Statements for the
 Three and Six Months Ended June 30, 2008 (unaudited).............5

Item 2. Management's Discussion and Analysis of Financial Condition
 and Results of Operations.......................................23

Item 3. Quantitative and Qualitative Disclosures About Market Risk .......33

Item 4. Controls and Procedures ..........................................33

Item 4T. Controls and Procedures ..........................................34

 PART II
 OTHER INFORMATION

Item 1. Legal Proceedings ................................................36

Item 1A. Risk Factors .....................................................36

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ......37

Item 3. Defaults Upon Senior Securities ..................................37

Item 4. Submission of Matters to a Vote of Security Holders ..............37

Item 5. Other Information ................................................37

Item 6. Exhibits .........................................................37

Signatures ..................................................................38

Exhibits Filed with this Report

 PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 STRASBAUGH AND SUBSIDIARY

 CONDENSED CONSOLIDATED BALANCE SHEETS
 AS OF JUNE 30, 2008 (UNAUDITED)
 AND DECEMBER 31, 2007
 (IN THOUSANDS, EXCEPT SHARE DATA)
 ASSETS

 JUNE 30, DECEMBER 31,
 2008 2007
 ------------ ------------
CURRENT ASSETS (unaudited)

 Cash and cash equivalents $ 1,598 $ 1,864
 Accounts receivable, net of allowance for doubtful
 accounts of $219 at June 30, 2008 and $55 at
 December 31, 2007 1,894 2,985
 Investments in securities 10 244
 Inventories 5,745 6,169
 Prepaid expenses 335 282
 Short-term deposits and other assets 94 69
 ------------ ------------
 9,676 11,613
 ------------ ------------
PROPERTY, PLANT, AND EQUIPMENT 2,233 2,384
 ------------ ------------
OTHER ASSETS
 Investments in securities 461 885
 Capitalized intellectual property, net of accumulated
 amortization of $41 at June 30, 2008 and $29 at
 December 31, 2007 333 306
 ------------ ------------
 794 1,191
 ------------ ------------
 TOTAL ASSETS $ 12,703 $ 15,188
 ============ ============

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
 Notes payable, current portion $ 100 $ 100
 Accounts payable 678 517
 Accrued expenses 2,423 2,606
 Deferred revenue 77 119
 ------------ ------------
 3,278 3,342
 ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 8)
REDEEMABLE CONVERTIBLE PREFERRED STOCK
 Redeemable convertible preferred stock ("Series A"), no
 par value, $13,527 aggregate preference in liquidation,
 15,000,000 shares authorized, 5,909,089 shares issued
 and outstanding 11,360 11,542
 ------------ ------------
SHAREHOLDERS' EQUITY (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 27,258 27,926
 Accumulated other comprehensive loss (38) --
 Accumulated deficit (29,211) (27,678)
 ------------ ------------
 (1,935) 304
 ------------ ------------
TOTAL LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY (DEFICIT) $ 12,703 $ 15,188
 ============ ============

 The accompanying notes are an integral part of these statements.


 1

 STRASBAUGH AND SUBSIDIARY

 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)
 (IN THOUSANDS, EXCEPT PER SHARE DATA)

 THREE MONTHS ENDED SIX MONTHS ENDED
 JUNE 30, JUNE 30,
 ------------------------ ------------------------
 2007 2007
 (AS (AS
 2008 RESTATED) 2008 RESTATED)
 ---------- ---------- ---------- ----------
 (unaudited) (unaudited)
REVENUES
Tools $ 1,719 $ 3,768 $ 1,822 $ 8,820
Parts and Service 2,080 1,960 3,529 3,934
 ---------- ---------- ---------- ----------
NET REVENUES 3,799 5,728 5,351 12,754
 ---------- ---------- ---------- ----------
COST OF SALES

Tools 1,292 2,277 1,549 5,165
Parts and Service 968 946 1,660 2,234
 ---------- ---------- ---------- ----------
TOTAL COST OF SALES 2,260 3,223 3,209 7,399
 ---------- ---------- ---------- ----------
GROSS PROFIT 1,539 2,505 2,142 5,355
 ---------- ---------- ---------- ----------
OPERATING EXPENSES
Selling, general and administrative expenses 1,186 1,182 2,211 3,374
Research and development 732 483 1,642 852
 ---------- ---------- ---------- ----------
 1,918 1,665 3,853 4,226
 ---------- ---------- ---------- ----------
(LOSS) INCOME FROM OPERATIONS (379) 840 (1,711) 1,129
 ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Rental income 74 -- 105 --
Interest income 15 -- 24 --
Interest expense -- (80) -- (309)
Other income (expense), net 21 (63) 49 (62)
 ---------- ---------- ---------- ----------
 110 (143) 178 (371)
 ---------- ---------- ---------- ----------
(LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES (269) 697 (1,533) 758

PROVISION FOR INCOME TAXES -- 37 -- 64
 ---------- ---------- ---------- ----------

NET (LOSS) INCOME $ (269) $ 660 $ (1,533) $ 694
 ========== ========== ========== ==========
NET (LOSS) INCOME PER COMMON SHARE
Basic $ (0.05) $ 0.42 $ (0.16) $ 0.44
 ========== ========== ========== ==========
Diluted $ (0.05) $ 0.32 $ (0.16) $ 0.32
 ========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 14,202 14,400 14,202 14,363
 ========== ========== ========== ==========
Diluted 14,202 19,590 14,202 19,394
 ========== ========== ========== ==========


 The accompanying notes are an integral part of these statements.


 2

 STRASBAUGH AND SUBSIDIARY

 CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
 AND SHAREHOLDERS' EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
 (IN THOUSANDS, EXCEPT SHARE DATA)


 REDEEMABLE
 CONVERTIBLE
 PREFERRED STOCK COMMON STOCK PREFERRED STOCK
 -------------------------- -------------------------- -------------------------
 SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
 ----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 2007 5,909,089 $ 11,542 14,201,587 $ 56 -- $ --

Comprehensive income:
 Net loss

Other comprehensive loss:
 Unrealized gain (loss) on
 investment, net of tax of $0

Total comprehensive loss

Series A issuance costs -- (311) -- -- -- --

Stock-based compensation expenses -- -- -- -- -- --

Accretion of redeemable convertible
 preferred stock -- 235 -- -- -- --

Preferred stock dividend
accumulated -- 527 -- -- -- --

Preferred stock dividend paid -- (633) -- -- -- --
 ----------- ----------- ----------- ----------- ----------- -----------
Balance, June 30, 2008 5,909,089 $ 11,360 14,201,587 $ 56 -- $ --
 =========== =========== =========== =========== =========== ===========

 (CONTINUED ON NEXT PAGE)

 The accompanying notes are an integral part of these statements.

 3-A

 STRASBAUGH AND SUBSIDIARY

 CONDENSED CONSOLIDATED STATEMENT OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY (DEFICIT) FOR THE SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)
 (IN THOUSANDS, EXCEPT SHARE DATA)


(CONTINUED FROM PREVIOUS PAGE)

 TOTAL
 ACCUMULATED SHAREHOLDERS'
 OTHER EQUITY AND
 COMPRE- REDEEMABLE
 ADDITIONAL HENSIVE CONVERTIBLE
 PAID-IN INCOME ACCUMULATED PREFERRED
 CAPITAL (LOSS) DEFICIT STOCK
 ----------- ----------- ----------- -----------
Balance, December 31, 2007 $ 27,926 $ -- $ (27,678) $ 11,846

Comprehensive income:
 Net loss -- -- (1,533) (1,533)

Other comprehensive loss:
 Unrealized gain (loss) on
 investment, net of tax of $0 -- (38) -- (38)
 -----------
Total comprehensive loss (1,571)
 -----------
Series A issuance costs -- -- -- (311)

Stock-based compensation expenses 94 -- -- 94

Accretion of redeemable convertible
 preferred stock (235) -- -- --

Preferred stock dividend
accumulated (527) -- -- --

Preferred stock dividend paid -- -- -- (633)
 ----------- ----------- ----------- -----------
Balance, June 30, 2008 $ 27,258 $ (38) $ (29,211) $ 9,425
 =========== =========== =========== ===========

 The accompanying notes are an integral part of these statements.

 3-B

 STRASBAUGH AND SUBSIDIARY

 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007 (UNAUDITED)
 (IN THOUSANDS)

 SIX MONTHS ENDED
 JUNE 30,
 ------------------------
 2008 2007
 ---------- ----------
 (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 Net (loss) income $ (1,533) $ 694
 Adjustments to reconcile net (loss) income
 to net cash from operating activities:
 Depreciation and amortization 185 159
 Change in allowance for doubtful accounts 164 --
 Change in inventory reserve 106 47
 Noncash interest expense -- 113
 Stock-based compensation 94 8
 Changes in assets and liabilities:
 Accounts receivable 927 886
 Inventories 307 351
 Prepaid expenses (53) (84)
 Deposits and other assets (25) 70
 Accounts payable 161 (441)
 Accrued expenses (183) (164)
 Deferred revenue (42) (538)
 Accrued warrant -- (450)
 ---------- ----------
 Net Cash Provided By Operating Activities 108 651
 ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
 Proceeds from the sale of investment securities 387 --
 Proceeds from maturity of investment securities 233 --
 Purchase of property and equipment (11) (7)
 Capitalized cost for intellectual property (39) (70)
 ---------- ----------
 Net Cash Provided By (Used In) Investing Activities 570 (77)
 ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
 Net change in bank overdraft -- --
 Net change in line of credit -- (2,592)
 Repayment of notes payable -- (1,798)
 Repurchase of participating preferred stock -- (3,000)
 Issuance of redeemable convertible preferred stock -- 12,650
 Issuance cost of redeemable convertible preferred stock (311) (1,354)
 Issuance of warrants -- 350
 Proceeds from stock options exercised -- 38
 Proceeds from issuance of shares in share exchange transaction -- 63
 Preferred dividends paid (633) --
 Repurchase of common stock -- (750)
 ---------- ----------
 Net Cash (Used In) Provided By Financing Activities (944) 3,607
 ---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (266) 4,181
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,864 1,205
 ---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,598 $ 5,386
 ========== ==========

 The accompanying notes are an integral part of these statements.


 4

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (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 completed a share exchange transaction (the "Share Exchange Transaction") with R. H. Strasbaugh, a California corporation formerly known as Strasbaugh ("R. H. Strasbaugh"). Upon completion of the Share Exchange Transaction, Strasbaugh acquired all of the issued and outstanding shares of R. H. Strasbaugh's capital stock. In connection with the Share Exchange Transaction, Strasbaugh issued an aggregate of 13,770,366 shares of its common stock to R. H. Strasbaugh's shareholders. The Share Exchange Transaction has been accounted for as a recapitalization of R. H. Strasbaugh with R. H. Strasbaugh being the accounting acquiror. As a result, the historical financial statements of R. H. Strasbaugh will be the financial statements of the legal acquiror, Strasbaugh (formerly known as CTK Windup Corporation).

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

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.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (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 June 30, 2008 and the results of operations and cash flows for the related interim periods ended June 30, 2008 and 2007. 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, 2007.

RESTATEMENT FOR JUNE 30, 2007

Subsequent to the original issuance of the Company's financial statements as of and for the six months ended June 30, 2007, management determined that the Company did not properly classify shipping and handling charges. The Company originally netted these amounts in selling, general and administrative expenses. The proper treatment is to include costs billed to customers in revenues and the related shipping and handling costs incurred by the Company. The restatement resulted in an increase in revenues of $7,000, an increase in cost of sales of $34,000, and a decrease in selling, general and administrative expenses of $27,000. There was no impact on operating income, net income or earnings per share.

The effect of this restatement for the six months ended June 30, 2007 is a follows:

 AS PREVIOUSLY
 REPORTED AS RESTATED
 ------------- -----------
Income Statement
 Revenues - Parts and Service $3,927,000 $3,934,000
 Cost of sales - Parts and Service $2,200,000 $2,234,000
 Selling, general and administrative $3,401,000 $3,374,000

ESTIMATES AND ASSUMPTIONS

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America 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, the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates and those differences could be material. Significant estimates include the fair value of the Company's common stock and the fair value of options and warrants to purchase common stock, and depreciation and amortization.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 THREE MONTHS ENDED SIX MONTHS ENDED
 JUNE 30, JUNE 30,
 2008 2007 2008 2007
 -------- -------- -------- --------
Cash paid for interest $ -- $ 90,000 $ -- $199,000
 ======== ======== ======== ========
Fair value accretion on redeemable
 convertible preferred stock $122,000 $ 33,000 $235,000 $ 33,000
 ======== ======== ======== ========
Preferred stock dividend $264,000 $106,000 $527,000 $106,000
 ======== ======== ======== ========

CONCENTRATIONS OF CREDIT RISK

Financial instruments that subject the Company to credit risk consist primarily of cash and trade accounts receivable. With regard to cash and cash equivalents, we maintain our excess cash balances in checking and money market accounts at high-credit quality financial institution(s). We have not experienced any losses in any of the short-term investment instruments we have used for excess cash balances. We do not require collateral on our trade receivables. Historically, we have not suffered significant losses with respect to trade accounts receivable.

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 and six month periods ended June 30, 2008, the Company's top 10 customers accounted for 70% and 66% of net revenues, respectively, and 54% and 74% for the three and six month periods ended June 30, 2007, respectively. Sales to major customers (over 10%) as a percentage of net revenues were 47% and 39%, for the three and six month periods ended June 30, 2008, respectively, and 29% and 48% for the three and six month periods ended June 30, 2007, respectively.

A decision by a significant customer to substantially decrease or delay purchases from the Company, or the Company's inability to collect receivables from these customers, could have a material adverse effect on the Company's financial condition and results of operations. As of June 30, 2008, the amount due from the major customers (over 10%) discussed above represented 40% of total accounts receivable.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 INSTRUMENTS

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 the line of credit and notes payable approximate fair value because the interest rates on these instruments approximate market interest rates currently available to the Company.

Certain financial assets are measured at fair value on a recurring basis and are comprised of fixed income securities at June 30, 2008. The fair value of these financial assets was determined using the following inputs at June 30, 2008:

 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 $ 461,000 $ -- $ 461,000 $ --
 ---------- ---------- ---------- ----------

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

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

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEGMENT INFORMATION

The Company's results of operations for the three and six months ended June 30, 2008 and 2007, represent a single segment referred to as global semiconductor and semiconductor equipment, silicon wafer and silicon wafer equipment, LED, data storage and precision optics industries. Export sales represent approximately 14% and 17% of sales for the three and six months ended June 30, 2008, and approximately 29% and 52% of sales for the three and six months ended June 30, 2007, respectively.

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

 THREE MONTHS ENDED SIX MONTHS ENDED
 JUNE 30, JUNE 30,
 ---------------- -----------------
 2008 2007 2008 2007
 ------ ------ ------ ------
United States 86% 71% 83% 48%
Europe 8% 23% 8% 28%
Asia and Pacific Rim countries 6% 6% 9% 24%

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

 JUNE 30, DECEMBER 31,
 2008 2007
 ----------- -----------
United States 79% 50%
Europe 8% 42%
Asia and Pacific Rim countries 13% 8%

ACCOUNTS RECEIVABLE

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

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 June 30, 2008 is reasonably stated.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (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 contractual maturity date and are stated at amortized cost. Marketable securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and are reported at fair value, with unrealized gains and losses recognized in earnings. Debt and marketable equity securities not classified as held to maturity or as trading, are classified as available for sale, and are carried at fair market value, with the unrealized gains and losses, net of tax, are included in the determination of comprehensive income and reported in shareholders' equity.

At June 30, 2008, the short-term investments held to maturity include certificates of deposits maturing in over 90 days and less than one year. The Company's other investments have maturity dates generally from 2 to 10 years, are classified as available for sale and are included in non-current assets because the investments will likely be sold prior to maturity, however, they will likely be held over 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. The Company had no investments in securities at June 30, 2007. Investments in securities at June 30, 2008 were as follows:

 UNREALIZED
 AGGREGATE GAIN
 FAIR VALUE COST BASIS (LOSS)
 ---------- ---------- ----------
Certificates of Deposit, held to maturity $ 10,000 $ 10,000 $ --
US government debt securities 50,000 50,000 --
Corporate debt securities 169,000 174,000 (5,000)
State and municipal debt securities 242,000 275,000 (33,000)
 ---------- ---------- ----------
 471,000 509,000 (38,000)
Investments, current 10,000 10,000 --
 ---------- ---------- ----------
Investments, non-current $ 461,000 $ 499,000 $ (38,000)
 ========== ========== ==========

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Comprehensive income consists of net income and other gains and losses affecting shareholders' equity that, under generally accepted accounting principles are excluded from net income. For the three and six months ended June 30, 2008, the Company's accumulated other comprehensive loss consisted of unrealized losses on investments. There were no items of accumulated other comprehensive loss for the three or six months ended June 30, 2007.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION

The Company derives revenues principally from the sale of tools, parts and services. The Company recognizes revenue pursuant to 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.

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 the after the service has been completed.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

REVENUE RECOGNITION (CONTINUED)

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.

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

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

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SHIPPING COSTS

During the three and six month periods ended June 30, 2008, freight and handling amounts billed to customers by the Company and included in revenues totaled approximately $2,000 and $7,000, respectively, and $4,000 and $7,000 for the three and six month periods ended June 30, 2007, respectively. Freight and handling fees incurred by the Company of approximately $17,000 and $34,000 are included in cost of sales for the three and six month periods ended June 30, 2008, respectively, and $16,000 and $34,000 for the three and six month periods ended June 30, 2007, respectively.

STOCK BASED COMPENSATION

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

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

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

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 income per common share are as follows:

 FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
 JUNE 30, JUNE 30,
 ---------------------------- ----------------------------
 2008 2007 2008 2007
 ------------ ------------ ------------ ------------
Numerator:
 Net (loss) income $ (269,000) $ 660,000 $ (1,533,000) $ 694,000
 Preferred stock accretion (122,000) (33,000) (235,000) (33,000)
 Preferred stock dividend (264,000) (106,000) (527,000) (106,000)
 Excess of carrying value of preferred stock
 over cash paid upon redemption -- 5,595,000 -- 5,595,000
 ------------ ------------ ------------ ------------
 Net (loss) income available to common
 shareholders - basic (655,000) 6,116,000 (2,295,000) 6,150,000
 Adjustment to net (loss) income for
 assumed conversions -- 139,000 -- 139,000
 ------------ ------------ ------------ ------------
 Net (loss) income available to common
 shareholders - diluted $ (655,000) $ 6,255,000 $ (2,295,000) $ 6,289,000
 ============ ============ ============ ============

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

EARNINGS PER SHARE (CONTINUED)

 FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
 JUNE 30, JUNE 30,
 ------------------------- -------------------------
 2008 2007 2008 2007
 ---------- ---------- ---------- ----------
Denominator:
 Shares outstanding, beginning 14,201,587 14,541,694 14,201,587 13,992,828
 Weighted-average shares issued (repurchased) -- (141,893) -- 370,311
 ---------- ---------- ---------- ----------
 Weighted-average shares outstanding--basic 14,201,587 14,399,801 14,201,587 14,363,139
 ---------- ---------- ---------- ----------
 Effect of dilutive securities
 Weighted-average preferred stock outstanding -- 4,848,443 -- 4,464,410
 Weighted-average warrants outstanding (Note 7) -- 341,645 -- 462,347
 Weighted-average options outstanding -- -- -- 104,280
 ---------- ---------- ---------- ----------
 -- 5,190,088 -- 5,031,037
 ---------- ---------- ---------- ----------
 Weighted-average shares outstanding--diluted 14,201,587 19,589,889 14,201,587 19,394,176
 ========== ========== ========== ==========

For the three and six months ended June 30, 2008, the Company has excluded from the computation of diluted loss per common share 5,909,089 shares issuable pursuant to the Series A Preferred Stock, 1,271,797 shares issuable pursuant to outstanding warrants and 1,299,330 shares issuable upon exercise of outstanding stock options because the Company had a loss from continuing operations for the periods and to include the representative share increments would be anti-dilutive. Accordingly, for the three and six months ended June 30, 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 periods. For the three and six months ended June 30, 2007, the 1,271,797 shares issuable pursuant to outstanding warrants and 1,452,205 shares issuable upon the exercise of outstanding stock options were not included in the computation of diluted earnings per common share for the period because the exercise prices were greater than the average market price of the common stock, and therefore, the effects on dilutive earnings per common share would have been anti-dilutive.

INCOME TAXES AND DEFERRED INCOME TAXES

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

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (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, and considering EITF Issue No. 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock."

NOTE 2 - MANAGEMENT'S PLANS

For the six months ended June 30, 2008, the Company had a net loss of approximately $1,533,000 and as of June 30, 2008, the Company had an accumulated deficit of approximately $29,211,000. The Company has invested substantial resources in product development, which has negatively impacted its cost structure and contributed to a significant portion of its recent losses. Additionally, the decline in the semiconductor industry during 2007 and continuing into 2008 is expected to add to those losses as revenues decline.

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. In addition, though the Company has at its disposal its bank line of $7.5 million with current availability of approximately $3.5 million, management believes that barring unforeseen events and/or investment opportunities there will be no need to utilize the bank line in the foreseeable future. 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.

NOTE 3 - INVENTORIES

Inventories consist of the following:

 JUNE 30, DECEMBER 31,
 2008 2007
 ----------- -----------
Parts and raw materials $ 5,419,000 $ 5,876,000
Work-in-process 2,336,000 2,212,000
Finished goods 63,000 48,000
 ----------- -----------
 7,818,000 8,136,000
Inventory reserves (2,073,000) (1,967,000)
 ----------- -----------
 $ 5,745,000 $ 6,169,000
 =========== ===========

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 4 - PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

 JUNE 30, DECEMBER 31,
 2008 2007
 ------------ ------------
Buildings and improvements $ 2,198,000 $ 2,198,000
Shop and lab equipment 6,414,000 6,399,000
Transportation equipment 166,000 166,000
Furniture and fixtures 1,113,000 1,106,000
Computer equipment 2,326,000 2,326,000
 ------------ ------------
 12,217,000 12,195,000
Less: accumulated depreciation and amortization 9,984,000 9,811,000
 ------------ ------------
 $ 2,233,000 $ 2,384,000
 ============ ============

Depreciation expense totaled approximately $85,000 and $73,000 for the three month periods ended June 30, 2008 and 2007, respectively, and $173,000 and $153,000 for the six month periods ended June 30, 2008 and 2007, respectively.

NOTE 5 - STOCK COMPENSATION PLANS

2007 SHARE INCENTIVE PLAN

In February 2007, the Company established the 2007 Share Incentive Plan (the "2007 Plan"), under which 2,000,000 shares of the Company's common stock are available for issuance. On April 25, 2008, options to purchase 36,000 shares of common stock with an exercise price of $1.50 per share were granted to certain members of the Company's board of directors under the 2007 Plan. The options expire ten years from the date of issuance and vest over a period of three years.

The Company uses the Black-Scholes option pricing model to calculate the grant-date fair value of an award. The fair values of options granted during the three months ended June 30, 2008 were calculated using the following estimated weighted-average assumptions:

Options Granted 36,000
Weighted-average exercise prices of options $1.50
Weighted-average stock price $1.50
Assumptions:
Weighted-average expected volatility 49%
Weighted-average expected term 4.4 years
Risk-free interest rate 3.58%
Expected dividend yield 0% 0%

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 5 - STOCK COMPENSATION PLANS (CONTINUED)

2007 SHARE INCENTIVE PLAN (CONTINUED)

The $1.50 exercise price of the options was determined based on the market price of the Company's stock on the date of the grant. The fair value per share of the common stock on the date of grant was deemed to be equal to the closing selling price per share of the Company's common stock at the close of regular hours trading on the Pink Sheets(R) on that date, as the price was reported by the National Association of Securities Dealers. The volatility and expected life for the options have been determined based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies for a period equal to the expected life of the option. The risk-free interest rate is based on United States treasury instruments whose terms are consistent with the expected life of the stock options. The Company does not anticipate paying cash dividends on its shares of common stock; therefore, the expected dividend yield is assumed to be zero. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. As a result, the Company applied an estimated annual forfeiture rate, based on its historical forfeiture experience during previous years, of 12.5%.

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

 WEIGHTED AVERAGE
 REMAINING
 AVERAGE CONTRACTUAL TERM AGGREGATE
 SHARES PRICE (YEARS) INTRINSIC VALUE
 ---------- ---------- ----------------- ---------------
Outstanding at December 31, 2007 1,338,000 $ 1.71
Granted 36,000 $ 1.50
Forfeited (74,670) $ 1.71
 ----------
Outstanding at June 30, 2008 1,229,330 $ 1.70 8.9 $ --
 ==========
Exercisable at June 30, 2008 417,120 $ 1.71 8.9 $ --
 ==========

The weighted average grant-date fair value of options granted during the six months ended June 30, 2008 was $0.66. As of June 30, 2008, a total of 700,670 common shares were available for future grants under the Company's 2007 Plan.

The share based compensation expense for the three months ended June 30, 2008 and 2007 was $48,000 and $8,000, respectively, and $94,000 and $8,000 for the six months ended June 30, 2008 and 2007, respectively. For the three and six months ended June 30, 2008, share-based compensation expense totaling $35,000 and $68,000 was included in selling, general and administrative expenses, respectively, $7,000 and $14,000 was included in research and development expenses, respectively, and $6,000 and $12,000 was included in cost of sales, respectively. As of June 30, 2008, there was $370,000 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 1.9 years.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 6 - COMMITMENTS AND CONTINGENCIES

LITIGATION

During the year ended December 31, 2006, the Company entered into a legal dispute with its co-landlord, who is the former spouse of the chairman and significant shareholder of the Company, of its current facility regarding the Company's potential liability for capital repairs. 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. On July 22, 2008, the court appointed a referee to sell the property on which the Company's corporate headquarters are located. As required by the court, the parties met with the referee on August 1, 2008 to discuss whether the property can be sold by one party to the other. The parties were unable to agree on the sale of the property at that meeting. If the sale of the property by one party to the other cannot be negotiated by August 15, 2008, the referee must engage a real estate broker by no later than September 15, 2008 for the purpose of selling the property. The Company does not have a lease for its premises, except for a holdover month-to-month tenancy at this time. Although, management believes that one of the current landlords will ultimately buy out the other, management and a committee consisting of disinterested members of the Company's board of directors is exploring opportunities to secure a long term lease with the current owners of the property that will carry-over to any potential new owner.

On or about August 15, 2006, a complaint was filed in the Commonwealth of Massachusetts Superior Court against R. H. Strasbaugh alleging negligence and breach of implied warranty. The claimant alleges that he was injured while using a product the Company designed, manufactured and sold to his employer. The claimant demands a judgment in an amount sufficient to compensate him for his losses and damages but does not allege with specificity his injuries or the relief sought.

As of the date of these financial statements, management is unable to reasonably estimate a potential range of loss and, further, believes that the possibility of any payment is remote. The Company's insurance carrier has assumed the defense of this action.

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

During the quarter ended June 30, 2008, the Company entered into a sublease agreement with an unaffiliated third party. The sublease agreement provides for monthly rent in the amount of approximately $24,000 and expires on February 28, 2010. Rental income totaled approximately $74,000 and $105,000 for the three and six month periods ended June 30, 2008, respectively.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 7 - CONDITIONALLY 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.

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 our common stock exceeds 200% of the conversion price then in effect for 20 consecutive trading days. The holders of Series A Preferred Stock vote together as a single class with the holders of the Company's other classes and series of voting stock on all actions to be taken by its shareholders. Each share of Series A Preferred Stock entitles the holder to the number of votes equal to the number of shares of our common stock into which each share of Series A Preferred Stock is convertible. In addition, the holders of Series A Preferred Stock are afforded numerous customary protective provisions with respect to certain actions that may only be approved by holders of a majority of the shares of Series A Preferred Stock. The Company is also required at all times to reserve and keep available out of its authorized but unissued shares of Common Stock, such number of shares of Common Stock sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock. On or after May 24, 2012 the holders of then outstanding shares of our Series A Preferred Stock will be entitled to redemption rights. The redemption price is equal to the per-share purchase price of the Series A Preferred Stock, which is subject to adjustment as discussed above and in our articles of incorporation, plus any accrued but unpaid dividends. The Series A Preferred Stock contain provisions prohibiting certain conversions of the Series A Preferred Stock.

WARRANTS

In connection with the Series A Preferred Stock Financing, the Company issued to the investors five-year warrants ("Investor Warrants") to purchase an aggregate of 886,363 shares of common stock and issued to its placement agent, B. Riley and Co. Inc. and its assignees, five-year warrants ("Placement Warrants") to purchase an aggregate of 385,434 shares of common stock. The Investor Warrants and the Placement Warrants 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.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 8 - 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, then the Company is required to pay to each investor liquidated damages equal to 1% per month of the amount paid by the investor for the common shares still owned by the investor on the date of the default and 1% of the amount paid by the investor for the common shares still owned by the investor on each monthly anniversary of the date of the default that occurs prior to the cure of the default. The maximum aggregate liquidated damages payable to any investor will be equal to 10% of the aggregate amount paid by the investor for the shares of the Company's Series A Preferred Stock. Accordingly, the maximum aggregate liquidation damages that we would be required to pay under this provision is $1,300,000. The Company anticipates that it will have sufficient cash available to pay these liquidated damages, if required. However, the Company will not be obligated to pay any liquidated damages with respect to any shares of common stock not included on the registration statement as a result of limitations imposed by the SEC relating to Rule 415 under the Securities Act.

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

In accordance with FSP EITF Issue No. 00-19-2, on the date of the private offering the Company reviewed the terms of the registration rights agreements, and as of that date, management believed that the Company would meet all of the required deadlines under the agreement. However, as of June 30, 2008, management believes it is probable that penalties under the agreement will be incurred and believes the accrual of $249,000 of expense related to the Company's registration rights agreement is reasonable as calculated based on the terms of the agreement and the number of shares included in the latest registration statement filing. Management is unable to determine if any additional penalties may be incurred under the terms of the registration rights agreement due to the restrictions imposed upon the Company by the SEC relating to Rule 415 under the Securities Act.

STRASBAUGH AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 (UNAUDITED)

NOTE 9 - INCOME TAXES

The Company estimates its income tax expense for interim periods using an estimated annual effective tax rate. Tax expense for the three and six month periods ended June 30, 2007 resulted primarily from foreign taxes paid. 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.

The Company has federal and state net operating loss carryforwards of approximately $25,639,000 and $8,159,000, respectively, at June 30, 2008, 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 2013. Included in the balance at June 30, 2008, 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 June 30, 2008, 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 or six month periods ended June 30, 2008.

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 June 30, 2008.

NOTE 10 - SUBSEQUENT EVENTS

ISSUANCE OF OPTIONS

On August 1, 2008, the Company issued options to purchase 40,836 shares of its common stock with an exercise price of $1.38 per share to members of its board of directors under its 2007 Share Incentive Plan. The options expire August 1, 2018. The fair value is approximately $25,000.

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 and six months ended June 30, 2008 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, 2007 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 2007 as compared to 2006 and an overall net loss for 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, 2007 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 $1,929,000, or 34%, to $3,799,000 for the three months ended June 30, 2008 as compared to $5,728,000 for the three months ended June 30, 2007 and decreased by $7,403,000, or 58%, to $5,351,000 for the six months ended June 30, 2008 as compared to $12,754,000 for the six months ended June 30, 2007. We reported a net loss of $269,000 for the three months ended June 30, 2008 as compared to net income of $660,000 for the three months ended June 30, 2007 and a net loss of $1,533,000 for the six months ended June 30, 2008 as compared to net income of $694,000 for the six months ended June 30, 2007. The decline in our financial performance during the first half of 2008 is a direct result of a slowdown in the semiconductor industry worldwide. The decline in revenues commenced during the third quarter of 2007 and we expect that it will continue well into 2008. As a result, we expect to report lower revenues in 2008 as compared to 2007 and we expect to report a net loss for

2008. Our priority over the next several months is to find ways to strengthen our balance sheet and conserve cash. With that in mind, our total headcount has been further reduced to 70 full and part-time employees at June 30, 2008 (seven additional employees have been temporarily furloughed), down from approximately 100 employees during 2007. 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.

SHARE EXCHANGE TRANSACTION

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

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

CRITICAL ACCOUNTING POLICIES

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

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

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

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

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

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

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

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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

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 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.

 THREE MONTHS ENDED JUNE 30, 2008 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2007 (AS RESTATED

 RESULTS AS A PERCENTAGE
 OF NET REVENUES FOR THE
 THREE MONTHS ENDED DOLLAR PERCENTAGE THREE MONTHS ENDED
 JUNE 30, VARIANCE VARIANCE JUNE 30,
 ------------------------ ---------------------------- -------------------------
 2007 FAVORABLE FAVORABLE
 (AS ------------- -------------
 2008 RESTATED) (UNFAVORABLE) (UNFAVORABLE) 2008 2007
 ---------- ---------- ------------- ------------- ---------- ----------
 (IN THOUSANDS)

Net revenues $ 3,799 $ 5,728 $ (1,929) (34%) 100% 100%
Cost of sales 2,260 3,223 963 30% 59% 56%
 ---------- ---------- ---------- ---------- ---------- ----------
Gross profit 1,539 2,505 (966) (39%) 41% 44%
Selling, general and administrative expenses. 1,186 1,182 (4) 0% 31% 21%
Research and development expenses 732 483 (249) (52%) 19% 9%
 ---------- ---------- ---------- ---------- ---------- ----------
(Loss) income from operations (379) 840 (1,219) (145%) (10%) 14%
Total other income (expense) 110 (143) 253 177% 3% (2%)
 ---------- ---------- ---------- ---------- ---------- ----------
(Loss) income from operations before income
 taxes (269) 697 (966) (138%) (7%) 12%
Provision for income taxes 0 37 37 100% 0% 1%
 ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) income $ (269) $ 660 $ (929) (140%) (7%) 11%
 ========== ========== ========== ========== ========== ==========

NET REVENUES. The $1,929,000 decrease in net revenues is due in large part to a slowdown in the semiconductor and silicon wafer industry which commenced during the third quarter of 2007 and has continued into 2008. Because of this slowdown, our customers are requiring additional time to make final purchase decisions.

GROSS PROFIT. The $966,000 decrease in gross profit was primarily due to lower sales combined with lower gross margins of 41% in 2008 as compared to 44% in 2007. We anticipate that our gross profit margin will remain at approximately 40% of net revenues for the remainder of 2008.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $4,000 increase in selling, general and administrative expenses is considered a nominal change for the quarter. We expect that over the near term, our selling, general and administration expenses will decrease as a result of cost cutting measures, including lower head-count of employees, though this reduction may be potentially offset by increased legal and accounting fees associated with increased corporate governance activities in response to the Sarbanes-Oxley Act of 2002, recently adopted rules and regulations of the SEC, as well as the filing of a registration statement with the SEC to register for resale the shares of common stock underlying our Series A Preferred Stock and warrants issued in the Series A Preferred Stock Financing.

RESEARCH AND DEVELOPMENT EXPENSES. The $249,000 increase in research and development expense represents primarily on-going engineering improvements on existing product lines developed over the past five years. We expect that research and development spending will continue to increase during the remainder of 2008.

OTHER INCOME (EXPENSE). The $253,000 increase in other income was primarily due to a decrease in interest expense as a result of paying of certain indebtedness with the proceeds from our Series A Convertible Preferred Stock Financing.

 SIX MONTHS ENDED JUNE 30, 2008 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2007 (AS RESTATED)

 RESULTS AS A PERCENTAGE
 OF NET REVENUES FOR THE
 SIX MONTHS ENDED DOLLAR PERCENTAGE SIX MONTHS ENDED
 JUNE 30, VARIANCE VARIANCE JUNE 30,
 ------------------------ ---------------------------- -------------------------
 2007 FAVORABLE FAVORABLE
 (AS ------------- -------------
 2008 RESTATED) (UNFAVORABLE) (UNFAVORABLE) 2008 2007
 ---------- ---------- ------------- ------------- ---------- ----------
 (IN THOUSANDS)

Net revenues $ 5,351 $ 12,754 $ (7,403) (58%) 100% 100%
Cost of sales 3,209 7,399 4,190 57% 60% 58%
 ---------- ---------- ---------- ---------- ---------- ----------
Gross profit 2,142 5,355 (3,213) (60%) 40% 42%
Selling, general and administrative
 expenses 2,211 3,374 1,163 34% 41% 26%
Research and development expenses 1,642 852 (790) (93%) 31% 7%
 ---------- ---------- ---------- ---------- ---------- ----------
(Loss) income from operations (1,711) 1,129 (2,840) (252%) (32%) 9%
Total other income (expense) 178 (371) 549 148% 3% (3%)
 ---------- ---------- ---------- ---------- ---------- ----------
(Loss) income from operations before
 income taxes (1,533) 758 (2,291) (302%) (29%) 6%
Provision for income taxes 0 64 64 100% 0% 1%
 ---------- ---------- ---------- ---------- ---------- ----------
Net (loss) income $ (1,533) $ 694 $ (2,227) (321%) (29%) 5%
 ========== ========== ========== ========== ========== ==========

NET REVENUES. The $7,403,000 decrease in net revenues is due in large part to a slowdown in the semiconductor and silicon wafer industry which commenced during the third quarter of 2007 and has continued into 2008. Because of this slowdown, our customers are requiring additional time to make final purchase decisions.

GROSS PROFIT. The $3,213,000 decrease in gross profit was primarily due to lower sales combined with lower gross margins of 40% in 2008 as compared to 42% in 2007. The lower gross margin percentage was primarily attributable to relatively higher fixed overhead costs spread over the lower revenue base.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The $1,163,000 decrease in selling, general and administrative expenses is due in large part to cost cutting measures initiated by management, especially the reduction in headcount.

RESEARCH AND DEVELOPMENT EXPENSES. The $790,000 increase in research and development expense represents primarily on-going engineering improvements on existing product lines developed over the past five years.

OTHER INCOME (EXPENSE). The $549,000 increase in other income was primarily due to a decrease in interest expense as a result of paying of certain indebtedness with the proceeds from our Series A Preferred Stock, rental income as a result of sub-leasing office space to an un-affiliated third party, and an increase in interest income.

LIQUIDITY AND CAPITAL RESOURCES

During the six months ended June 30, 2008, we funded our operations primarily with the net proceeds of approximately $11.1 million from our Series A Preferred Stock Financing described below, and cash flow from operations. As of June 30, 2008, we had working capital of $6,398,000 as compared to $8,271,000 at December 31, 2007. At June 30, 2008 and December 31, 2007 we had an accumulated deficit of $29,211,000 and $27,678,000, respectively, and cash and cash equivalents of $1,598,000 and $1,864,000, respectively, as well as investments in securities of $471,000 and $1,129,000, respectively.

Our available capital resources at June 30, 2008 consisted primarily of approximately $1,598,000 in cash and cash equivalents and $471,000 of investments in securities. These amounts were primarily raised through the Series A Preferred Stock Financing. We expect that our future available capital resources will consist primarily of cash on hand, cash generated from our business, if any, and future debt and/or equity financings, if any. In addition, we have a credit facility with Silicon Valley Bank with availability of approximately $3.5 million at June 30, 2008.

Cash provided in operating activities for the six months ended June 30, 2008 was $108,000 as compared to $651,000 of cash provided by operating activities for the six months ended June 30, 2007, and includes a net loss of $1,533,000, depreciation and amortization of $185,000 and stock-based compensation of $94,000. Material changes in asset and liabilities at June 30, 2008 as compared to December 31, 2007 that affected these results include:

o a decrease in accounts receivable before reserves of $927,000;

o a decrease in inventory before reserves of $307,000 (inventory represented 45% of our total assets as of June 30, 2008); and

o a net decrease in accrued expenses of $183,000 which includes commissions payable in connection with shipments made during the quarter ended June 30, 2008 and vacation and sick pay accruals.

Cash provided by investing activities totaled $570,000 for the six months ended June 30, 2008 as compared to $77,000 of cash used in investing activities for the six months ended June 30, 2007. Included in the results for the six months ended June 30, 2008 are the sale of $387,000 of investments in securities, $233,000 proceeds from the maturity of investment securities, $11,000 of purchased equipment and $39,000 representing the capitalized cost for intellectual property.

Cash used by financing activities totaled $944,000 for the six months ended June 30, 2008 as compared to $3,607,000 provided for the six months ended June 30, 2007. This decrease was most affected by the issuance costs associated with our Series A Preferred Stock of $311,000 and dividends paid on our Series A Preferred Stock of $633,000.

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

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

The SVB Credit Facilities are subject to various financial covenants, applicable to us and our subsidiary, R. H. Strasbaugh, on a consolidated basis, including the following: the ratio of certain assets to current liabilities, measured on a monthly basis, must not be less than 1.0:1.0; and the ratio of total liabilities less subordinated debt to tangible net worth plus subordinated debt, measured on a monthly basis, must be not more than 0.60:1.0.

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

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

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

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

On May 24, 2007, immediately after the closing of the Share Exchange Transaction, we issued to 21 accredited investors 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. We refer to this offering of securities in this report as the "Series A Preferred Stock Financing." 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 include legal, accounting and consulting fees that totaled approximately $1,173,000 through June 30, 2008 and continue to be incurred in connection with various securities filings and the registration statement described below.

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

We believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including the credit facility we have with Silicon Valley Bank and the remaining proceeds we have from our Series A Preferred Stock Financing, 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 August 4, 2008, we had a backlog of approximately $5.8 million. Our backlog includes firm non-cancelable customer commitments for 5 tools and approximately $511,000 in parts and upgrades. Management believes that products in our backlog will be shipped by the end of September 2008.

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 March 2008, the Financial Accounting Standards Board, or FASB, issued SFAS No. 161, DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, an amendment of FASB Statement No. 133, which requires additional disclosures about the objectives of the derivative instruments and hedging activities, the method of accounting for such instruments under SFAS No. 133 and its related interpretations, and a tabular disclosure of the effects of such instruments and related hedged items on our financial position, financial performance, and cash flows. SFAS No. 161 is effective for us beginning January 1, 2009. We are currently assessing the potential impact that adoption of SFAS No. 161 may have on our financial statements.

In December 2007, the FASB, issued SFAS No. 141 (revised 2007), "Business Combinations," which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for us beginning July 1, 2009 and will apply prospectively to business combinations completed on or after that date.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51," which changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent's equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and, upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for us beginning July 1, 2009 and will apply prospectively, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently assessing the potential impact that adoption of SFAS No. 160 would have on our financial position, cash flows, or results of operations.

In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 will apply to us on January 1, 2008. We are currently evaluating the impact of adopting SFAS No. 159 on our financial position, cash flows, and results of operations.

In December 2006, the FASB issued FASB Staff Position, or FSP, EITF Issue No. 00-19-2, "Accounting for Registration Payment Arrangements." This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, "Accounting for Contingencies." As of June 30, 2008, management believes it is probable that penalties under the agreement will be incurred and has accrued $249,000 of expense related to our registration rights agreement calculated based on the terms of the agreement and the number of shares included in this filing. Management is unable to determine if any additional penalties may be incurred under the terms of the registration rights agreement due to the restrictions imposed upon Strasbaugh by the SEC relating to Rule 415 under the Securities Act.

In September 2006, the SEC issued SAB No. 108, "Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements," which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB No. 108 was effective for our fiscal year ended December 31, 2006. The adoption of SAB No. 108 has not had a material impact on our financial position, cash flows, or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 establishes a common definition for fair value to be applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS No. 157 was effective for fiscal years beginning after November 15, 2007. The adoption of SFAS No. 157 has not had a material impact on our financial position, cash flows or results of operations.

In July 2006, the FASB released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes," or FIN 48. FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken in the course of preparing our tax returns to determine whether the tax positions are "more-likely-than-not" of being sustained by the applicable tax authority. Tax benefits of positions not deemed to meet the "more-likely-than-not" threshold would be booked as a tax expense in the current year and recognized as: a liability for unrecognized tax benefits; a reduction of an income tax refund receivable; a reduction of deferred tax asset; an increase in deferred tax liability; or a combination thereof. We adopted FIN 48 for the year ending December 31, 2007.

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments," an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 155 permits fair value re-measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for us for all financial instruments acquired or issued after July 1, 2007. The adoption of SFAS No. 155 has not had a material effect on our financial position, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Not applicable.

ITEM 4T. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in SEC's rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of June 30, 2008 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weakness discussed immediately below.

In light of the material weakness, we performed additional analysis and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

A material weakness is internal control over financial reporting is defined by the Public Company Accounting Oversight Board's Audit Standard No. 5 as being a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency, which is less severe than a material weakness yet merits attention of those responsible for the oversight of the company's financial reporting, is a deficiency, or combination of deficiencies, in internal control over financial reporting that adversely affects the company's ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is a reasonable possibility that a misstatement of the company's annual or interim financial statements that is more than inconsequential will not be prevented or detected.

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

INHERENT LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control systems are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, no evaluation of internal control over financial reporting can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected.

These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

REMEDIATION OF INTERNAL CONTROL DEFICIENCIES AND EXPENDITURES

We are in the process of remediating the material weakness identified above in order to help prevent and detect further errors in the financial statement closing and reporting process. We are doing this by providing additional training of our present staff, evaluating on an on-going basis the effectiveness of that training and engaging the appropriate third party experts in compliance, presentation and internal control evaluation. Additionally, we are evaluating those areas which we may determine it necessary to hire in-house personnel with appropriate experience and skills sets. We are also in the process of installing additional software and IT capabilities which management believes will improve reporting, audit trials and timeliness of those reports. Management is unsure, at the time of the filing of this report, when the actions described above will remediate the material weakness also described above.

Management believes that providing additional training of our present staff, hiring in-house personnel and engaging the appropriate third party experts to assist us in satisfying our financial reporting obligations will cost approximately $75,000 to $125,000 annually

Through the steps described above, we believe that we are addressing the deficiencies that affected our internal control over financial reporting as of June 30, 2008. Because the remedial actions require providing additional training to our present staff, evaluating on an on-going basis the effectiveness of that training, and engaging the appropriate third party experts in compliance, presentation and internal control evaluation, the successful operation of these controls for at least several quarters may be required before management may be able to conclude that the material weakness has been remediated. We intend to continue to evaluate and strengthen our internal control over financial reporting systems. These efforts require significant time and resources. If we are unable to establish adequate internal control over financial reporting systems, we may encounter difficulties in the audit or review of our financial statements by our independent registered public accounting firm, which in turn may have a material adverse effect on our ability to prepare financial statements in accordance with GAAP and to comply with our SEC reporting obligations.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There was no change during our most recently completed fiscal quarter that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

On December 1, 2006, a complaint on joinder for declaratory relief was filed by April Paletsas requesting that we be joined to a matter in the San Luis Obispo Superior Court involving Alan Strasbaugh and his former wife, April Paletsas. The Court issued an order allowing our subsidiary, R. H. Strasbaugh to be joined, and management intends to vigorously defend this lawsuit. Ms. Palatses is requesting a declaration by the Court that 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 our corporate facilities, between Alan Strasbaugh and Ms. Paletsas, as co-landlords, and R. H. Strasbaugh, as lessee. The case against R. H. Strasbaugh was stayed by the Court, pending resolution of ownership issues between the co-landlords. On July 22, 2008, the Court appointed a referee to sell the property. As required by the court, the parties met with the referee on August 1, 2008 to discuss whether the property can be sold by one party to the other. The parties were unable to agree on the sale of the property at that meeting. If the sale of the property by one party to the other cannot be negotiated by August 15, 2008, the referee must engage a real estate broker by no later than September 15, 2008 for the purpose of selling the property. Although, management believes that one of the current landlords will ultimately buy out the other, management and a committee consisting of disinterested members of our board of directors is exploring opportunities to secure a long term lease with the current owners of the property that will carry-over to any potential new owner. With respect to the claims asserted against R. H. Strasbaugh, we are currently unable to evaluate the likelihood of an unfavorable result or the range of potential loss. However, we plan to vigorously defend this action and we believe that all of our defenses are meritorious.

On or about August 15, 2006, John Rzezuski filed a complaint in the Commonwealth of Massachusetts Superior Court against R. H. Strasbaugh alleging negligence and breach of implied warranty. Mr. Rzezuski alleges that he was injured while using a product we designed, manufactured and sold to Mr. Rzezuski's employer. Mr. Rzezuski demands a judgment in an amount sufficient to compensate him for his losses and damages but does not allege with specificity his injuries or the relief sought. We are unable to reasonably estimate a potential range of loss and, further, we believe that the possibility of any payment is remote. Our insurance carrier has assumed the defense of this action.

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, 2007, 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, 2007 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.

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.

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: August 14, 2008 By: /s/ RICHARD NANCE
 --------------------------------------------
 Richard Nance, Chief Financial Officer
 (principal financial and accounting officer)

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

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