Clean Energy Technologies, Inc. - Annual Report: 2009 (Form 10-K)

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Table of Contents Financial Statements

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

[X]

ANNUAL REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009.

[ ]

TRANSITION REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

Commissions file number 333-125678

PROBE MANUFACTURING, INC.

(Exact name of issuer as specified in its charter)

NEVADA 20-2675800

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

17475 Gillette Avenue, Irvine CA 92614

(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (949) 206-6868

Securities registered under Section 12(b) of the Exchange Act: NONE.

Securities registered under Section 12(g) of the Exchange Act:

COMMON STOCK, PAR VALUE $0.001 PER SHARE.

(Title of class)

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. [ ]

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past twelve months (or 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. [X] Yes [ ] No

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

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

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o

Smaller reporting company x

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

State issuer's revenues for its most recent fiscal year: $2,153,141

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of December 31, 2009, was approximately $400,000. The company is currently selling its common equity on the OCTBB.

State the number of shares outstanding of each of the registrant's classes of common stock as of April 14, 2010: 184,638,320

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PROBE MANUFACTURING, INC.

10-K

TABLE OF CONTENTS

Part I


		Page
Item 1.	Business	3
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	11
Item 2.	Properties	11
Item 3.	Legal Proceedings	11
Item 4.	Removed and Reserved	12

Part II


Item 5.	Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity securities	12
Item 6.	Selected Financial Data	13
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 8.	Financial Stat ements and Supplementary Data	26
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	56
Item 9A	Controls and Procedures	57
Item 9B	Other Information	57

Part III


Item 10	Directors, Executive Officers and Corporate Governance	57
Item 11	Executive Compensation	58
Item 12	Security Ownership Of Certain Beneficial Owners And Management And Related Stockholder Matters	60
Item 13	Certain Relationships And Related Transactions, and Director Independence	61
Item 14	Principal Accounting Fees And Services	62
Item 15	Exhibits	63
	Signatures	67

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PART I

ITEM 1. BUSINESS.

Our Company

Probe Manufacturing Industries, Inc. was incorporated on July 7, 1995. On April 21, 2005, the Company was re-domiciled from California to Nevada, and changed its name to Probe Manufacturing, Inc. We provide a range of engineering, manufacturing and integrated supply chain services to companies who design and market electronic products, Original Equipment Manufacturers (OEM). Our revenue is generated from sales of our services primarily to customers in the medical device, aerospace, alternative fuel and industrial products manufacturers. The Company provides OEMs with lowest cost of ownership, flexibility, and quality that improves their competitive advantage. The services that we provide are commonly referred to as Electronics Manufacturing Services (EMS). Probe's EMS offerings include new product introduction, collaborative design, procurement and materials management, product manufacturing, product warranty repair, and end-of-life support. We offer our customers comprehensive and integrated design and manufacturing services, from initial product design to production and direct order fulfillment. Our engineering services include product design, printed circuit board layout, prototyping, and test development. Our supply chain management solutions include purchasing, management of materials, and order fulfillment. Our manufacturing services include surface mount and through-hole assembly, cable assembly, mechanical assembly, and fully integrated box build systems for high complexity electronics.

For example, Probe builds an Engine Control Unit (ECU) for a customer which is used in alternative fuel engines. We have supported this customer from the inception of its product. Our services started with full design review for manufacturability and testability of the product. Once the design review and recommendations were completed we source the materials and procure the components. Then we take responsibility for assembling the components on to the boards, assembling the mechanical parts, installing the product inside the enclosure, and finally we perform a full functional test. Then the finished product is shipped to the customer, who integrates it into their final fuel delivery system and it’s then delivered to the end customer.

The majority of our revenue is driven from manufacturing a mix of complex Printed Circuit Board Assemblies (PCBA), and box build assemblies. Some examples of our customer’s finished goods products includes Medical devices such as ventilators, electronic control units that help vehicles run on natural gas or hydrogen, electronic control units for welding equipment, control units for electric-hybrid drives, portable ultrasound and electro-stimulation therapy equipment, fluid control units for airliners, and devices for defense industry.

We believe that the EMS industry will grow, driven largely by the needs of OEMs to respond to rapidly changing markets and technologies and to reduce product costs. Additionally, we believe that there are significant opportunities for EMS providers to win additional business from OEMs in certain markets or industry segments that have yet to substantially utilize EMS providers.

EMS companies are the principal beneficiaries of the increased use of outsourced manufacturing services by the electronics and other industries. Outsourced manufacturing refers to OEM’s use of EMS companies to manufacture their products, rather than internal manufacturing. Historically, EMS companies only manufactured components or sub assemblies. As the EMS industry has evolved, OEMs have increased their reliance on EMS companies for additional, more complex manufacturing services, including collaborative product design services, supply chain management and full box manufacturing. EMS companies now often participate in designing, manufacturing and testing of complete systems and manage the entire supply chains of their OEM customers. Industry leading EMS companies offer end-to-end services, including product design and engineering, volume manufacturing, final system assembly and testing, direct order fulfillment, after-sale product service and support and global supply chain management. Outsourcing demand for advanced manufacturing capabilities, design and engineering services and after-market services continues to grow rapidly. This demand continues to increase for several reasons, including the intensely competitive nature of the electronics industry, the continually increasing complexity and sophistication of electronics products, pressure on OEMs to reduce product costs, and shorter product life cycles. As a result, the number of OEMs that utilize EMS providers as part of their business and manufacturing strategies continues to increase. Utilizing EMS providers allows OEMs to take advantage of the global design, manufacturing and supply chain management expertise of EMS providers, and enables OEMs to concentrate on product research, development, marketing and sales. We believe that OEMs realize the following benefits through their strategic relationships with EMS providers:

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• Reduction in Operating Costs and Capital Investment. In the competitive global market, OEMs are under significant pressure to reduce manufacturing costs and capital expenditures. EMS companies can provide OEMs with flexible, cost-efficient manufacturing services. In addition, as OEM products have become more technologically advanced, the manufacturing and system test processes have become increasingly automated and complex, requiring significant capital investments. EMS companies enable OEMs to access technologically advanced manufacturing and test equipment and facilities, without additional capital expenditures.

• Focus on Core Competencies. The electronics industry is highly competitive and subject to rapid technological change. As a result, OEMs are increasingly focusing their resources on activities and technologies in which they expect to add the greatest value. By offering comprehensive manufacturing services and supply chain management, EMS companies enable OEMs to focus on their core competencies, including next generation product design and development as well as marketing and sales.

• Access Leading Design and Engineering Capabilities. The design and engineering of electronics products has become more complex and sophisticated and in an effort to become more competitive, OEMs are increasingly relying on EMS companies to provide product design and engineering support services. EMS companies’ design and engineering services can provide OEMs with improvements in the performance, cost and time required to bring products to market. EMS companies are providing more sophisticated design and engineering services to OEMs, including the design and engineering of complete products following an OEM’s development of a product concept.

• Improve Inventory and Purchasing Power. OEMs face challenges in planning, procuring and managing their inventories efficiently due to fluctuations in customer demand, product design changes, short product life cycles and component price fluctuations. EMS companies employ sophisticated production management systems to manage their procurement and manufacturing processes in an efficient and cost-effective manner so that, when possible, components arrive on a just-in-time; as-and-when needed basis. EMS companies are significant purchasers of electronic components and other raw materials, and can capitalize on economies of scale associated with their relationships with suppliers to negotiate price discounts, obtain components and other raw materials that are in short supply, and return excess components. EMS companies’ expertise in supply chain management and their relationships with suppliers across the supply chain enable them to help OEMs reduce their cost of goods sold and inventory exposure.

• Access Global Manufacturing Services. OEMs seek to reduce their manufacturing costs by having EMS companies manufacture their products in the lowest cost locations that are appropriate for their products and end customers. OEMs also are increasingly requiring particular products to be manufactured simultaneously in multiple locations, often near end users, to bring products to market more quickly, reduce shipping and logistics costs and meet local product content requirements. Global EMS companies are able to satisfy these requirements by capitalizing on their geographically dispersed manufacturing facilities, including those in lower cost regions.

• Accelerate Time to Market. OEMs face increasingly short product life cycles due to increased competition and rapid technological changes. As a result, OEMs need to reduce the time required to bring their products to market. OEMs can bring a product to market faster by using EMS companies’ expertise in new product introduction, including manufacturing design, engineering support and prototype production. OEMs can more quickly achieve volume production of their products by capitalizing on EMS companies’ manufacturing expertise and global presence and infrastructure.

Plan of Operation

Management is taking the following steps to address a downturn in business that we experience during 2009: (a) to improve operational efficiencies by: (i) global expansion of our material sourcing and reducing our direct cost of materials (ii) by creating a strategic alliance with global suppliers in lower cost regions and outsourcing some of our end-to-end services (iii) by making a settlement with our note holders (iv) increase revenue by focusing on organic growth and acquisition of new domestic customers by offering both local and lower cost off shore end-to-end solutions (v) and investing into technology by becoming an incubator to technology innovators.

Our future success is likely dependent on its ability to attain additional capital to support growth and ultimately, upon its ability to reach profitability and then maintain that profitability. There can be no assurance that we will be successful in obtaining any such financing, or that it will be able to generate sufficient positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, we will have sufficient funds to execute its business plans. The financial statements do not include any adjustments relating to the

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recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

On June 17, 2009, we entered into a stock purchase agreement with KB Development Group, LLC. to sell 152,000,000 shares of our common stock for $120,000. Concurrently; we entered into Settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Subsequently; between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $708,708 and a reduction in our notes payable of $840,203.

On July 13, 2009, we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464.

Our Products and Services

Engineering. Our approach is to coordinate and integrate our design, prototype and other engineering capabilities. Through this approach, we provide a broad range of engineering services and, in some cases, dedicated production lines for prototypes. These services strengthen our relationships with customers and attract new customers requiring specialized engineering services. To assist customers with initial design, we offer computer assisted engineering, computer assisted design, engineering for manufacturability, circuit board layout and test development. We also coordinate industrial design and tooling for product manufacturing. After product design, we offer quick-turn prototyping, which means a rapid process of prototyping. During this process, we assist with the transition to production. By participating in product design and prototype development, we can reduce manufacturing costs and accelerate the cycle from product introduction to production.

Supply Chain Management. Supply chain management consists of the planning, purchasing, expediting and warehousing of components and materials. Our inventory management and volume procurement capabilities contribute to cost reductions and reduce total cycle time.

Assembly and Manufacturing. Our manufacturing operations include printed circuit board assembly, subsystem assembly, box build and system integration, the process of integrating sub-systems and downloading software before producing a fully configured product. We purchase the printed circuit boards used in our assembly operations from third parties. We employ various inventory management techniques, such as just-in-time, ship-to-stock and auto-replenish, which are programs designed to ensure timely, convenient and efficient delivery of assembled products to our customers. As OEMs seek to provide greater functionality in smaller products, they increasingly require more sophisticated manufacturing technologies and processes. Our investment in advanced manufacturing equipment and our experience in innovative packaging and interconnect technologies enable us to offer a variety of advanced manufacturing solutions.

Testing. We offer computer-aided, in-circuit testing of assembled printed circuit boards, which contributes significantly to our ability to deliver high-quality products on a consistent basis. We work with our customers to develop product-specific test strategies. Our test capabilities include manufacturing defect analysis, in-circuit tests to test the circuitry of the board, and functional tests to confirm that the board or assembly operates in accordance with its final design and manufacturing specifications. We either custom design test equipment and software ourselves or use test equipment and software provided by our customers. In addition, we provide environmental stress tests of assemblies of boards and systems.

Final System Assembly and Test. We provide final system assembly and test assemblies and modules in which they are combined to form complete, finished products. We integrate printed circuit board assemblies manufactured by us with enclosures, electronic and mechanical sub-assemblies, cables and memory modules. We assemble systems to a specific customer order and we also build to standard configurations. The complex, finished products that we produce typically require extensive test protocols. Our test services include in-circuit testing, functional and environmental tests. We also test products for conformity to applicable industry, product integrity and regulatory standards. Our test engineering expertise enables us to design functional test processes that assess critical performance elements, including hardware, software and reliability. By incorporating rigorous test processes into the manufacturing process, we can help to assure customers that their products will function as designed. We provide direct order fulfillment services shipping completed systems directly to the end consumer.

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Distribution. We offer our customers flexible, just-in-time delivery programs allowing product shipments to be closely coordinated with customers' inventory and consumption requirements. We have the ability to ship products directly into customers' distribution channels or directly to the end-user. We believe that this service can provide our customers with a more comprehensive solution and enable them to be more responsive to market demands.

Sales and Marketing

Sales and marketing efforts are divided into segments as follows:

Medical Device Manufacturing

Aerospace-Defense

Alternative fuel-Automotive

Industrial

Our divisional and executive management teams are an integral part of our sales and marketing teams. We may enter into Manufacturing Services Agreements with our customers. These agreements, similar to purchase orders, generally govern the conduct of business between our customer and the company relating to, among other things, the manufacture of products which in many cases were previously produced by the customer itself. Such arrangements generally identify the specific products to be manufactured, quality and production requirements, product pricing and materials management. There can be no assurance that at any time these agreements will remain in effect or be renewed.

Our customer accounts are managed by dedicated program managers directly responsible for account management. The program managers coordinate activities across divisions to effectively satisfy customer requirements and have direct access to our executive management to quickly address customer concerns. In addition, our executive management is involved in customer relations and devotes significant attention to broadening existing, and developing new customer relationships.

Partnership Approach

Our partnership strategy is to engage potential customers as a total solution to their product life cycle and inventory management. To do this, we review our customer designs for manufacturability and test, and make recommendations for technology, quality, delivery and cost improvements. This helps to maintain inventory at its lowest value point. We also review our customer’s processes to identify value added processes, and reduce redundancy. This process has been an effective way of integrating our process to customer’s needs and has resulted in improving our customer’s performance.

Competition

The EMS industry is large, competitive and diverse, and is serviced by many companies, including several that have achieved significant market share We compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Plexus Corp.; Sanmina-SCI Corporation; CTS Electronics.; Express Manufacturing, Inc., and others. Because of our market’s size and diversity, we do not typically compete for contracts with a discreet group of competitors. We compete with different companies depending on the type of service and/or geographic area. Certain of our competitors may have greater manufacturing, financial, research and development and marketing resources. We also face competition from current and prospective customers that evaluate our capabilities against the merits of manufacturing products internally.

COMPETITIVE POSITIONING

We believe our primary competitive advantages are integrated services which include design, manufacturing, testing and supply chain management capabilities. We offer our customers flexible manufacturing solutions throughout the life cycle of their products. These solutions provide accelerated time-to-market, time-to-volume production, and reduced production and inventory costs. As a result of working closely with our customers and responding promptly to their needs, we become an integral part of their operations. In addition, our business processes are continually being improved for systemic optimization.

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Strategy

Our strategy is to attract new customers and become profitable by using market-focused expertise and capabilities; and to offer the most competitive vertically-integrated EMS services to our customers. To achieve this goal, we are enhancing our core EMS engineering, manufacturing and procurement/inventory management services with industry-specific expertise. To ensure long term sustainability, and growth of the company we have initiated new sales activities towards growth markets of the future such as medical, automotive, industrial, aerospace and renewable energy technologies.

Market Focused Approach. We intend to continue to invest in growing our market-focused expertise and capabilities in Medical Device, Aerospace-Defense and renewable energy industries. By focusing our resources on serving specific markets, we are able to better understand complex market dynamics and anticipate trends that impact our OEM customers’ businesses, and we can help improve their market positioning by effectively adjusting product plans and roadmaps to deliver low-cost, high quality products, and meet their time-to-market requirements.

Expand our Vertically-Integrated Service Offering. One of our core strategies is to continue to expand our vertically-integrated services. We are actively pursuing acquisitions and internal development to strengthen our vertically-integrated capabilities.

Expand Our Design and Engineering Capabilities. We have expanded our design and engineering resources as part of our strategy to offer services that help our OEM customers achieve time-to-market, cost containment and savings for their products. We intend to continue to expand our design and engineering capabilities by expanding our internal design and engineering resources, and by developing, licensing and acquiring technologies.

Streamline Business Processes through Continual process improvement. We use a systemic approach to our business processes. We are committed to improving our systems and processes as fast and as often as we can.

Focus on long term sustainability. We leverage our expertise in new product introduction, procurement and manufacturing to help commercialize new propriety product line. We believe our recent acquisition of Solar Masters will help diversify our product offering and mitigate market risk.

Personnel

We presently have approximately 30 employees, including production, program management, materials management, engineering, sales, quality, and administrative and management personnel. We have never experienced work stoppages, and are not a party to any collective bargaining agreement.

REGULATORY RESTRICTIONS ON OUR BUSINESS

Our operations, and the operations of businesses that we may acquire, are subject to certain foreign, federal, state and local regulatory requirements relating to environmental, waste management, and health and safety matters. We believe we operate in substantial compliance with all applicable requirements. However, material costs and liabilities may arise from these requirements or from new, modified or more stringent requirements. Material cost may rise due to additional manufacturing cost of raw or made parts with the application of new regulations. Our liabilities may also increase due to additional regulations imposed by foreign, federal, state and local regulatory requirements relating to environmental, waste management, and health and safety matters. In addition, our past, current and future operations, and those of businesses we acquire, may give rise to claims of exposure by employees or the public or to other claims or liabilities relating to environmental, waste management or health and safety concerns.

ITEM 1A. RISK FACTORS

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RISKS ABOUT OUR BUSINESS

OUR INDEPENDENT ACCOUNTANTS HAVE ISSUED A GOING CONCERN OPINION AND IF WE CANNOT OBTAIN ADDITIONAL FINANCING AND/OR REDUCE OUR OPERATING COSTS SUFFICIENTLY, WE MAY HAVE TO CURTAIL OPERATIONS AND MAY ULTIMATELY CEASE TO EXIST.

The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. The Company had a net profit of $27,499, generated $86,282 in net cash from operations and improved their total stockholder’s deficit by $155,730 and a working capital surplus of $50,810 for the year ended December 31, 2009; however, we still had shareholder deficit of $86,887 as of December 31, 2009. Therefore the ability of the Company to operate as a going concern is still dependent upon its ability (1) to obtain sufficient debt and/or equity capital and/or (2) to generate positive cash flow from operations.

WE HAVE AN ACCUMULATED DEFICIT AND MAY INCUR ADDITIONAL LOSSES; THEREFORE WE MAY NOT BE ABLE TO OBTAIN THE ADDITIONAL FINANCING NEEDED FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND TO MEET OUR DEBT SERVICE OBLIGATIONS.

As of December 31, 2009, we had current liabilities of $475,065. Our debt could limit our ability to obtain additional financing for working capital, capital expenditures, debt service requirements, or other purposes in the future, as needed; to plan for, or react to, changes in technology and in our business and competition; and to react in the event of an economic downturn.

We may not be able to meet our debt service obligations. If we are unable to generate sufficient cash flow or obtain funds for required payments, or if we fail to comply with covenants in our revolving lines of credit, we will be in default. We have a number of obligations as outlined below that are currently in default.

WE FACE INTENSE COMPETITION, WHICH MAY REDUCE OUR SALES, OPERATING PROFITS, OR BOTH.

The market segments in which we compete are rapidly evolving and intensely competitive. The electronic manufacturing service or “EMS” industry is extremely competitive and includes hundreds of companies, several of which have achieved substantial market share. We compete with numerous domestic and foreign EMS firms, including Benchmark Electronics, Inc.; Celestica Inc; Flextronics International Ltd.; Jabil Circuit, Inc.; Plexus Corp.; Sanmina-SCI Corporation; CTS Electronics; Express Manufacturing, Inc. and others. Current and prospective customers also evaluate our capabilities against the merits of internal production. Some of our competitors may have greater design, manufacturing, financial or other resources than us. Additionally, we face competition from Taiwanese ODM suppliers, who have a substantial share of the global market for information technology hardware production, primarily related to notebook and desktop computers and personal computer motherboards, as well as provide consumer products and other technology manufacturing services.

In recent years, many participants in the industry, including us, have substantially expanded their manufacturing capacity. The overall demand for electronics manufacturing services has decreased, resulting in increased capacity and substantial pricing pressures, which has harmed our operating results. Certain sectors of the EMS industry are currently experiencing increased price competition, and if this increased level of competition should continue, our revenues and gross margin may continue to be adversely affected.

WE MAY BE ADVERSELY AFFECTED BY SHORTAGES OF REQUIRED ELECTRONIC COMPONENTS. IN ADDITION, WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS TO PROCURE OUR PARTS FOR PRODUCTION WHICH IF AVAILABILITY OF PRODUCTS BECOMES COMPROMISED IT COULD ADD TO OUR COST OF GOODS SOLD AND AFFECT OUR REVENUE GROWTH.

At various times, there have been shortages of some of the electronic components that we use, as a result of strong demand for those components or problems experienced by suppliers. These unanticipated component shortages have resulted in curtailed production or delays in production, which prevented us from making scheduled shipments to customers in the past and may do so in the future. Our inability to make scheduled shipments could cause us to experience a reduction in our sales

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and an increase in our costs and could adversely affect our relationship with existing customers as well as prospective customers. Component shortages may also increase our cost of goods sold because we may be required to pay higher prices for components in short supply and redesign or reconfigure products to accommodate substitute components. As a result, component shortages could adversely affect our operating results for a particular period due to the resulting revenue shortfall and increased manufacturing or component costs. In addition, we depend upon a number of major suppliers for our products. We do not have long-term agreements with our major suppliers, except for our purchase orders. There is an inherent risk that certain products will be unavailable for prompt delivery or, in some cases, discontinued. We will have only limited control over any third-party manufacturer as to quality controls, timeliness of production and deliveries and various other factors. Lack of long-term agreement with our major suppliers could also impact material availability and could delay shipments. Should the availability of products be compromised, it could also force us to develop alternative products, which could add to the cost of goods sold and compromise delivery commitments.

OUR PRINCIPAL SHAREHOLDERS, DIRECTORS AND EXECUTIVE OFFICERS , IN THE AGGREGATE, BENEFICIALLY OWN MORE THAN 50% OF OUR OUTSTANDING COMMON STOCK AND THESE SHAREHOLDERS, IF ACTING TOGETHER, WILL BE ABLE TO EXERT SUBSTANTIAL INFLUENCE OVER ALL MATTERS REQUIRING APPROVAL OF OUR SHAREHOLDERS .

Our principal shareholders, directors and executive officers in the aggregate, beneficially own more than 50% our outstanding common stock on a fully diluted basis. These shareholders, if acting together, will be able to exert substantial influence over all matters requiring approval of our shareholders, including amendments to our Articles of Incorporation, fundamental corporate transactions such as mergers, acquisitions, the sale of the company, and other matters involving the direction of our business and affairs and specifically the ability to determine the members of our board of directors. (See: “Principal Shareholders”)

WE CURRENTLY SERVICE AND ATTEMPT TO OBTAIN THE MAJORITY OF OUR CUSTOMERS IN THE LIMITED GEOGRAPHIC OF SOUTHERN CALIFORNIA WHICH IS A SMALL ADDRESSABLE MARKET AND COULD BE SUBJECT TO ECONOMIC HARDSHIP OR SLOWDOWN, AS A RESULT OUR GROWTH COULD BE LIMITED AND ADVERSELY AFFECT OUR PROJECTED SALES AND OPERATING INCOME.

We currently service, attempt to solicit new, and direct majority of our marketing efforts to customers in the Southern California region. This is a very small addressable market which ultimately limits the amount of growth we could experience. In addition, this region could experience an economic recession or other market contraction which would cause our current customers and any potential customers to also contract their businesses as well and cease outsourcing any current products that we currently service and would attempt to obtain. Both the size of the market and any potential economic hardship affecting this small regional market could adversely affect our project sales and operating incomer. If we are forced to expand our marketing efforts outside this region we could also incur significant costs in an attempt to penetrate other regional or national markets.

WE DEPEND ON LOW TO MEDIUM VOLUME HIGH MIX TECHNOLOGY PRODUCTS THAT ARE BUILT DOMESTICALLY. THESE APPLICATIONS INCLUDE INDUSTRIAL INSTRUMENTATION, MEDICAL DEVICES, AEROSPACE-DEFENSE, ALTERNATIVE FUEL TECHNOLOGIES, SCIENTIFIC COMMUNICATION, SEMICONDUCTOR AND AUTOMOTIVE PRODUCTS, WHICH CONTINUALLY PRODUCE TECHNOLOGICALLY ADVANCED PRODUCTS WITH SHORT LIFE CYCLES; OUR INABILITY TO CONTINUALLY MANUFACTURE SUCH PRODUCTS ON A COST-EFFECTIVE BASIS COULD HARM OUR BUSINESS.

During the twelve months ended December 31, 2009, we derived approximately 30% of our revenue from customers in the Medical Device Manufacturing, 40% Industrial Products, 4% from customers in the Semiconductor industry, 8% from customers in Alternative Fuel and Green Technologies, and 18% from customers in aerospace/Defense industries.

Factors affecting these industries in general could seriously harm our customers and, as a result, us. These factors include:

Rapid changes in technology, which result in short product life cycles, often reduce the volume and market share for our customers and ultimately us. It will lead to the loss of previous design wins and frequent new product

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introductions and substantial development costs. This could result in loss of revenue and it could adversely affect our operating income.

Seasonality of demand for our customers’ products would force our customers to manage their inventories for seasonal variations and inventory management and excess build ups. Customers could dramatically increase their request for production quantities, which could cause lead time problems with getting the components or we may not be able to build enough products which could have loss of revenue for our customers. As a result we could lose these customers and it would adversely affect our projected sales. If the projected sales will not materialize, we will have loss of revenue and reduced margins. Any cancellation or delay in production would also have the same adverse effect on our sales projections and profitability.

The inability of our customers to successfully market their products, and the failure of these products to gain widespread commercial acceptance; could effect their long term business plans and sales. Our success depends upon the ability of our customers to successfully market their products and if they fail, it could result in cancellations or rescheduling orders lower sales volume and operating income.

Recessionary periods in our customers’ markets will affect both our customers and our overall business output. It would require dramatic changes to the overall business model, layoffs and major adjustments to the business overhead. If we fail to adjust to new recessionary environment, our business would be adversely affected and we may not be able to compete successfully against other companies in our industry and achieve profitability.

THE MAJORITY OF OUR SALES COME FROM A SMALL NUMBER OF CUSTOMERS WITH WHOM WE DO NOT HAVE LONG TERM CONTRACTS; IF WE LOSE ANY OF THESE CUSTOMERS, OUR SALES COULD DECLINE SIGNIFICANTLY.

Sales to our five largest customers have represented a significant percentage of our net sales in recent periods. Our five largest customers accounted for approximately 73% of net sales during the twelve months ended December 31, 2009.

Our principal customers have varied from year to year, and our principal customers may not continue to purchase services from us at current levels, if at all. Significant reductions in sales to any of these customers, or the loss of major customers, would seriously harm our business. If we are not able to timely replace expired, canceled or reduced contracts with new business, our revenues could be harmed.

The part number, quantity, price, workmanship standards, and scheduled delivery dates of the products to be Manufactured are determined by written purchase orders given by our customers and accepted or confirmed by us in writing or via email. We agree to deliver the products manufactured pursuant to each purchase order in accordance with the terms and conditions set forth in the purchase order. Probe manufactures hundreds of different types of assemblies on an ongoing basis and each product has a purchase order associated with it. Please see attcahed filing of several samples of these purchase orders.

We do not have any long term agreements with our customers, and our principal customers may not continue to purchase services from us. The duration of a purchase order is usually from 30 to 360 days. These purchase orders could be cancelled or rescheduled at any time. Significant reductions in sales to any of these customers would reduce our projected sales, adversely affect our profits, and seriously harm our business.

IF WE LOSE KEY SENIOR MANAGEMENT PERSONNEL OUR BUSINESS COULD BE NEGATIVELY AFFECTED. FURTHER, WE WILL NEED TO RECRUIT AND RETAIN ADDITIONAL SKILLED MANAGEMENT PERSONNEL AND IF WE ARE NOT ABLE TO DO SO, OUR BUSINESS AND OUR ABILITY TO CONTINUE TO GROW COULD BE HARMED.

Our success depends to a large extent upon the continued services of our executive officers. Generally our employees are not bound by employment or non-competition agreements, and we cannot assure that we will retain our executive officers and other key employees. We could be seriously harmed by the loss of any of our executive officers. In order to manage our growth, we will need to recruit and retain additional skilled management personnel and if we are not able to do so, our business and our ability to continue to grow could be harmed. Although a number of companies in our industry have implemented workforce reductions, there remains substantial competition for highly skilled employees.

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WE ARE SUBJECT TO ENVIRONMENTAL COMPLIANCE RISKS AND UNEXPECTED COSTS THAT WE MAY INCUR WITH RESPECT TO ENVIRONMENTAL MATTERS MAY RESULT IN ADDITIONAL LOSS CONTINGENCIES, THE QUANTIFICATION OF WHICH CANNOT BE DETERMINED AT THIS TIME.

We are subject to various federal, state, local and foreign environmental laws and regulations, including those governing the use, storage, discharge and disposal of hazardous substances in the ordinary course of our manufacturing process. If more stringent compliance or cleanup standards under environmental laws or regulations are imposed, or the results of future testing and analyses at our current or former operating facilities indicate that we are responsible for the release of hazardous substances, we may be subject to additional remediation liability. Further, additional environmental matters may arise in the future at sites where no problem is currently known or at sites that we may acquire in the future. Currently unexpected costs that we may incur with respect to environmental matters may result in additional loss contingencies, the quantification of which cannot be determined at this time.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES.

Facilities

On October 14, 2009 we entered into a 5 year lease with Bernard family trust, with a commencement date of December 31, 2009. The facility is approximately 19,701 square feet and located at 17475 Gillette, Irvine CA, 92614.


Year	Monthly Rent
1	7,880
2	9,850
3	10,835
4	11,820
5	12,805

Solar Masters entered into a lease agreement effective September 26, 2008 for a one year lease with rent beginning December 1, 2008. For approximately 1260 sq ft. of office and warehouse space, the monthly rent is $1273. The facility is located at 17451 Mr. Herrmann Street, Suite D, Fountain Valley, CA 92708.

ITEM 3. LEGAL PROCEDINGS.

The Company may be involved from time to time in various claims, lawsuits, and disputes with third parties, actions involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business.

As of December 31, 2009, we believe that there are no other claims or litigation pending, the outcome of which could have a material adverse effect on our financial condition or operating results. However, if litigation should arise and the company was to receive an unfavorable ruling, there is a possibility that it would have a material adverse impact on our financial condition, results of operations, or liquidity of the period in which the ruling occurs, or future periods.

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ITEM 4. (Removed and Reserved)

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

Bid and ask quotations for our common shares are routinely submitted by registered broker dealers who are members of the National Association of Securities Dealers on the NASD Over-the-Counter Electronic Bulletin Board. These quotations reflect inner-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. The high and low bid information for our shares for each quarter for the last two years, so far as information is reported, through the quarter ended December 31, 2008, as reported by the Bloomberg Financial Network, are as follows:


2009 FISCAL YEAR	High	Low
First Quarter	$0.04	$0.03
Second Quarter	$0.03	$0.03
Third Quarter	$0.05	$0.01
Fourth Quarter	$0.02	$0.01


2008 FISCAL YEAR	High	Low
First Quarter	$0.17	$0.03
Second Quarter	$0.17	$0.04
Third Quarter	$0.17	$0.07
Fourth Quarter	$0.12	$0.04

DIVIDEND POLICY

We have never declared a cash dividend on our common stock and our Board of Directors does not anticipate that we will pay cash dividends in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our board of directors and will depend upon our financial condition, operating results, capital requirements, restrictions contained in our agreements and other factors which our Board of Directors deems relevant.

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

The following table summarizes securities authorized for issuance under equity compensation plans:


	Equity Compensation Plan Information
Plan Category	Number of shares of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)
	(a)	(b)	(c )
Qualified Equity compensation plans approved by security holders	212,735.00	$0.17	3,480,031.30
Non-Qualified Equity compensation plans approved by security holders	900,000.00	$0.13	-

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Total	1,112,735.00	$0.14	3,480,031.30

On November 5, 2007 the Company entered into a consulting services agreement with Global Capital Management (GCM), to provide investment banking services, for one year. As a result we issued 1,275,000 warrants to purchase 1,275,000 shares of common stock at a price of $.133 per share. As a result we recognized share based compensation expense in the amount of $16,607 for the year ended December 31, 2007. These warrants expire November 5, 2010.

RECENT SALES OF UNREGISTERED SECURITIES

On February 11, 2008, the Company issued 472,599 shares of common stock for officer compensation.

On April 12, 2008, the Company issued 113,424 shares of common stock for officer compensation.

On August 11, 2008 the board of directors of the issuer approved a 3-for-1 forward stock split of its outstanding and issued common stock. Pursuant to the forward stock split the Company’s issued and outstanding share capital will increase from 10,594,258 shares of common stock to 31,782,774 shares of common stock. The effective date of the forward stock split will be September 1, 2008. All computations for common shares and equivalents have been adjusted accordingly.

On August 13, 2008, the Company issued 105,465 shares of common stock for officer compensation..

On September 30, 2008 the Company issued 750,000 shares of its common stock for the purchase of the assets of Solar Masters, Inc.

On July 11, 2009, we issued 152,000,000 shares to KB Development Group, LLC, of which Kambiz Mahdi is the managing partner and also is our chief executive officer and a member of our board of directors.

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

ITEM 6 - SELECTED FINANCIAL DATA

The following selected historical financial information of Probe Manufacturing, Inc. has been derived from the historical results are not necessarily indicative of the results to be expected in the future. The following table is qualified by reference to and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 8, “Financial Statements and Supplementary Data.”


Probe Manufacturing, Inc.
Consolidated Statement of Operations
for the years ended December 31,


	2009	2008

Sales	$ 2,153,141	$ 7,394,610
Cost of Goods Sold	1,679,687	5,816,475
Gross Profit	473,454	1,578,135

General And Administrative	922,510	1,371,895
Share Based Compensation	8,232	47,009
Research and Development	-	140,667

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Net Profit / (Loss) From Operations	(457,288)	18,564

Other Income / (Expenses)		(585)
Gain debt settlement	708,708	-
Loss on sale of subsidiary	(190,464)	-
Interest Expense	(33,457)	(134,575)
Net Profit / (Loss) Before Income Taxes	27,499	(116,596)
Income Tax Expense	-	-
Net Profit / (Loss)	$ 27,499	$ (116,596)


Per Share Information:
Basic weighted average number
of common shares outstanding	105,931,471	31,932,579

Net Profit / (Loss) per common share	$ 0.000	$ (0.004)


Per Share Information:
Diluted, weighted average number
of common shares outstanding	121,404,210	31,932,579

Diluted, Net Profit / (Loss) per common share	$ 0.000	$ (0.004)


PROBE MANUFACTURING, INC.
Condensed consolidated Balance sheet
as of December 31,

	2009	2008

Working Capital	$ 50,810	$ (241,694)
Total Assets	653,959	1,760,464
Long term Debt	265,781	212,127
Stockholder Equity	$ (86,887)	$ (242,617)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read this section together with our consolidated financial statements and related notes thereto included elsewhere in this report.

We intend that our forward-looking statements be subject to the safe harbors created by the Exchange Act. The forward-looking statements are generally accompanied by words such as “intend,” “anticipate,” “believe,” “estimate,” “expect” and other similar words and statements and variations or negatives of these words. Our forward-looking statements are based on current expectations, forecasts and assumptions and are subject to risks, uncertainties and changes in condition, significance, value and effect, including those discussed under the heading “Risk Factors” in this report filed with the Securities and Exchange Commission. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from our anticipated outcomes. Although we believe that the assumptions underlying the

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forward-looking statements are reasonable, any of the assumptions could prove inaccurate. Therefore, we can give no assurance that the results implied by these forward-looking statements will be realized. The inclusion of forward-looking information should not be regarded as a representation by our company or any other person that the future events, plans or expectations contemplated by Probe Manufacturing, Inc. will be achieved. We disclaim any intention or obligation to update or revise any forward-looking statements contained in the documents incorporated by reference herein, whether as a result of new information, future events or otherwise.

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Overview

Probe Manufacturing, Inc. was founded in 1993. Probe is a high quality global electronics manufacturing service (EMS) company. We provide a full range of engineering, manufacturing and integrated supply chain services to original equipment manufacturers (OEM) companies, who design and market electronic products.. Currently, our revenue is generated from sales of our services primarily to customers in the medical device, aerospace, alternative fuel, industrial and instrumentation products manufacturers. Probe's EMS offerings include new product introduction, collaborative design, materials management, product manufacturing, product testing and product warranty repair, and end-of-life support. Because our core business is a service company, we’re impacted by our customer’s ability to appropriately predict market demand for their products. While we work with our customers to understand their demand needs, we are removed from the actual end-market served by our customers. Consequently determining future trends and estimates of activity can be very difficult.

On August 13, 2008 the issuer entered a definitive agreement for the sale and purchase of business assets of Solar Masters. Solar Masters is a wholly-owned subsidiary of Probe. Solar Masters is an importer and distributor of solar powered products. The purchase price of the assets was: $2,719 in cash payable to Solar Masters, LLC. plus 250,000 shares of Probe common stock valued at $.40 each which equals to $100,000, for a total of $102,719. Solar Masters, inc. was formed and is our wholly owned subsidiary. The assets of Solar Masters included $10,500 of inventory and a deposit on inventory of $25000, the web site the rights to the name Solar Masters and the customer base. The allocation to the purchase price was $10,500 in inventory, $25,000 deposit on inventory and $67,594 intangible assets - goodwill under Solar Masters, Inc.

The main product line of Solar Masters consists of various solar powered barricade lights. Solar Masters also offers a solar powered battery charger, solar powered outdoor lighting and a solar powered flashlight. It is the intent of Solar Masters to grow the product line as it sees demand for various other products. Solar Masters recently made its first sale of solar panels.

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

On July 13, 2009, we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a note receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464. Barrett Evans, Interim CEO and a member of our board of directors resigned on July 27, 2009 and took a position with Solar Masters as a consultant. Kambiz Mahdi was a member of the board of directors of Solar Masters and resigned on July 14, 2009.

On June 17, 2009 we entered into a stock purchase agreement with KB Development Group, LLC. to sell 152,000,000 shares of our common stock for $120,000. Concurrently; we entered into settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $708,708 and a reduction in our notes payable of $840,203. Kambiz Mahdi, a member of our board of directors is the managing partner of KB Development Group, LLC.

On July 27, 2009, our board of directors appointed Kambiz Mahdi as Chief Executive officer.

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Plan of Operations

We have seen a dramatic drop in revenue beginning in the fourth quarter of 2008 and continuing through 2009. We have made significant expense cuts as a direct result of this drop in revenue. In addition to the steps discussed below, we have initiated a major sales push in an attempt to gain new revenue; however no guarantees can be made as to whether or not we will be successful in winning the quoted business or if it will be able to keep its existing business.

Management is taking the following steps to address this situation: (i) global expansion of our material sourcing and reducing our direct cost of materials (ii) by creating strategic alliance with global suppliers in lower cost regions and outsourcing some of our end-to-end services (iii) by expanding our service offering to plastics, sheet metal and cable (iv) by making settlement with our note holders (v) increase revenue by focusing on organic growth and acquisition of new domestic customers by offering both local and lower cost off shore end-to-end solutions (vi) and investing into technology by becoming an incubator to technology innovators and obtain manufacturing rights and equity.

Our future success is likely dependent on our ability to attain growth capital in order to sustain growth and profitability. There can be no assurance that we will be successful in obtaining any such financing, or that it will be able to generate sufficient positive cash flow from operations. The successful outcome of these or any future activities cannot be determined at this time and there is no assurance that if achieved, we will have sufficient funds to execute its business plans. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

Summary of Results:

For the year ended December 31, 2009, we had a net profit of $27,499 of which $708,708 was from a gain on notes settlements and $(190,464) was from a loss on the sale of Solar Masters, compared to loss of $116,596 for the same period in 2008.

For the year ended December 31, 2009, our revenue was $2,153,141 compared to $7,394,610 for the same period in 2008, due to the loss of 3 major customers and reduced orders from existing accounts.

For the year ended December 31, 2009, our cost of goods sold was 78% compared to 79% for the same period in 2008, mainly due to the increase in direct labor as a percent of the sales.

For the nine month period ended December 31, 2009, our gross margin was 22% compared to 21% for the same period in 2008.

For the twelve month ended December 31, 2009, our SG&A cost was 43% compared to 19% for the same period in 2008.

For the year ended December 31, 2009, we had a net profit of $27,499 and a working capital surplus of $35,549. Our total stockholder’s deficit reduced to 86,887, resulting in shareholder surplus of $16,434 as of December 31, 2009;

As of December 31, 2009, we had a working capital surplus of $50,810 compared to working capital deficit of ($241,694) as of December 31, 2008, an increase of $302,243.

Key performance indicators for the nine months ended December 31, 2009 and 2008:


Key performance indicators:

	2009	2008
Inventory Turns	4.1	6.7
Days Sales in Backlog	167	239
Days Receivables Outstanding	74	43
Days Payables Outstanding	87	66

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Inventory turns: are calculated as the ratio of cost of material compared to the average inventory for that period. For the year ended December 31, 2009, our inventory turns were 4.1 compared to 6.7 for the same period in 2008.

Days sales in backlog are calculated based on our back log divided by average daily sales during that period. For the year ended December 31, 2009, Days Sales in Backlog was 167 days compared to 239 days for the same period in 2008.

Days receivables outstanding is calculated as the ratio of average accounts receivable during that period compared to average daily sales for the same period, this has worsened as a result of our customers stretching out payments and the economy in general. For the year ended December 31, 2009, days receivables outstanding was 74 days compared to 43 days for the same period in 2008.

Days payable outstanding is calculated as the ratio of average accounts payable during that period compared to average daily sales for the same period. For the year ended December 31, 2009, days payable outstanding was 87 days compared to 66 days for the same period in 2008.

Critical Accounting Policies and basis of presentation

The accompanying financial statements of the Company have been prepared in accordance with the instructions to Form 10-K and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with generally accepted accounting principles. It is suggested that these condensed financial statements should be read in conjunction with the Company's financial statements and notes thereto included in the Company's audited financial statements on Form 10-K for the fiscal year ended December 31, 2009.

We follow United States Generally Accepted Accounting Principles, or GAAP. Certain of the principles involve selection among alternatives and choices of methods, which are described in the footnotes to our financial statements.

Cash and Cash Equivalents

We maintain the majority of its cash accounts at a commercial bank. The total cash balance is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 per commercial bank. For purposes of the statement of cash flows we consider all cash and highly liquid investments with initial maturities of one year or less to be cash equivalents.

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Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates may be materially different from actual financial results. Significant estimates include the recoverability of long-lived assets, the collection of accounts receivable and valuation of inventory and reserves.

Accounts Receivable

We grant credit to its customers located within the United States of America; and do not require collateral. Our ability to collect receivables is affected by economic fluctuations in the geographic areas and industries served by us.

Reserves for un-collectable amounts are provided, based on past experience and a specific analysis of the accounts. Although we expect to collect amounts due, actual collections may differ from the estimated amounts. As of December 31, 2009, we had a reserve for potentially un-collectable accounts of $16,620. Five (5) customers accounted for approximately 73% of accounts receivable at December 31, 2009 and one customer accounted for 21% of the accounts receivable balance. Our trade accounts primarily represent unsecured receivables. Historically, our bad debt write-offs related to these trade accounts have been insignificant.

Inventory

Inventories are valued at the lower of weighted average cost or market value. Our industry experiences changes in technology, changes in market value and availability of raw materials, as well as changing customer demand. We make provisions for estimated excess and obsolete inventories based on regular audits and cycle counts of our on-hand inventory levels and forecasted customer demands and at times additional provisions are made. Any inventory write offs are charged to the reserve account. As of December 30, 2009, we had a reserve for potentially obsolete inventory of $350,000.

Property and Equipment

Property and equipment are stated at cost. Assets held under capital leases are recorded at lease inception at the lower of the present value of the minimum lease payments or the fair market value of the related assets. We follow the practice of capitalizing property and equipment purchased over $5,000. The cost of ordinary maintenance and repairs is charged to operations. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives of the related assets:

Furniture and fixtures

3 to 7 years

Equipment

7 to 10 years

Leasehold improvements

2 years (life of the lease)

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Long –Lived Assets

Our management assesses the recoverability of its long-lived assets by determining whether the depreciation and amortization of long lived assets over their remaining lives can be recovered through projected undiscounted future cash flows. The amount of long-lived asset impairment if any, is measured based on fair value and is charged to operations in the period in which long-lived assets impairment is determined by management. There can be no assurance however, that market conditions will not change or demand for our services will continue, which could result in impairment of long-lived assets in the future.

Revenue Recognition

Revenue from product and services are recognized at the time goods are shipped or services are provided to the customer, with an appropriate provision for returns and allowances. Terms are generally FOB origination with the right of inspection and acceptance. We have not experienced a material amount of rejected or damaged product.

Fair Value of Financial Instruments

The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.

Other Comprehensive Income

We have no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.

Net Profit / (Loss) per Common Share

Basic profit / (loss) per share is computed on the basis of the weighted average number of common shares outstanding. At December 31, 2009, we had outstanding common shares of 184,638,320 used in the calculation of basic earnings per share. Basic Weighted average common shares and equivalents at for the years ended December 31, 2009 and 2008 were 105,931,471 and 31,932,579 respectively. As of December 31, 2009, we had outstanding warrants to purchase 14,247,330 additional common shares and options to purchase 1,112,735 additional common shares, which may dilute future earnings per share. Fully diluted weighted average common shares and equivalents for the years ended 2009 and 2008 were 121,404,210 and 15,890,275 respectively, however for the period ended December 31, 2008, all of the Company's common stock equivalents were excluded from the calculation of diluted loss per common share because they were anti-dilutive, due to the Company's net loss in that period.

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Research and Development:

We are curtailing its research and development and focusing our business on its core business of electronics contract manufacturing.

Research and Development Costs incurred in association with the alternative fuels technology development (which include salaries and equipment) were expensed as incurred. We expensed $0 in R&D during the three and nine months ended December 31, 2009. We expensed $21,093 and $140,667 for the 3 months and nine months ended December 31, 2008, for the acquisition of a 125 KW natural gas distributed power generator converted to run on hydrogen fuel. We have tabled the development of this project. Our second research and development project involves an Engine Control Unit (ECU) to help convert gasoline cars to run on natural gas. The Solaris project is in prototype stage. We have suspended the development of these projects.

Segment Information

Except as identified above in the research and development section, we operate our primary business of electronics contract manufacturing.

Share Based Compensation

For a discussion on share based compensation and recently issued accounting pronouncements relating to share based compensation, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our accompanying unaudited financial statements.

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Income Taxes

For a discussion income taxes and recently issued accounting pronouncements relating to share based compensation, see Note 2, Basis of Presentation and Summary of Significant Accounting Policies, to our accompanying unaudited financial statements.

Result of operations:

The following table summarizes certain items in the statements of operations as a percentage of net sales. The financial information and discussion below should be read in conjunction with the accompanying financial statements and notes thereto.


Probe Manufacturing, Inc.
Consolidated Statement of Operations
for the years ended December 31,


	2009	2008

Sales	100%	100%
Cost of Goods Sold	78%	79%
Gross Profit	22%	21%

General And Administrative	43%	18%
Share Based Compensation	0%	1%
Research and Development	0%	1%
Net Profit / (Loss) From Operations	-21%	1%

Other Income / (Expenses)	0%	0%
Gain debt settlement	33%	0%
Loss on sale of subsidiary	-9%	0%
Interest Expense	-2%	-2%
Net Profit / (Loss) Before Income Taxes	1%	-2%
Income Tax Expense	0%	0%
Net Profit / (Loss)	1%	-2%

Net Sales

For the year ended December 31, 2009, our revenue was $2,153,141 compared to $7,394,610 for the same period in 2008. Our revenue decreased $5,241,469 for the year ended December 31, 2009, compared to the same period in 2008. The decrease in revenue was the result fewer orders from our customer base as well as a loss of 3 major customers.

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Major Customers

Our top 5 customers accounted for approximately 73% of our net sales for the year ended December 31, 2009, compared to 84%, for the same period in 2008. We believe that our ability to grow our core business depends on increasing sales to existing customers, and on successfully attracting new customers. Customer contracts can be canceled and volume levels can be changed or delayed based on our customer’s performance and the end users’ markets which we have no control over. The timely replacement of delayed, canceled or reduced orders with new business cannot be ensured. In addition, we cannot assume that any of our current customers will continue to utilize our services. Consequently, our results of operations may be materially adversely affected.

Gross Profit

For the year ended December 31, 2009, our gross profits were 22% from 21% in the same period in 2008. Our gross profits could vary from period to period and is affected by a number of factors, including product mix, production efficiencies, component availability and costs, pricing, competition, customer requirements and unanticipated restructuring or inventory charges and potential scrap.

Selling, General and Administrative (SG&A) Expenses

For the year ended December31, 2009, our SG&A expense was 43% compared to 19% for the same period in 2008. This increase is primarily due to the decrease in revenue. We have made adjustments to decrease SG&A expense.

Net Income/ (Loss) from operations

For the year ended December 31, 2009, our net loss from operations was (21%) compared to net income from operations of 1% for the same period in 2008. This was primarily due to a decrease in orders from customers.

For the year ended December 31, 2009 interest expense was ($33,457) compared to ($134,575) for the same period in 2008, this was to due to the settlement agreements referenced in Note 13.

Liquidity and Capital Resources:


PROBE MANUFACTURING, INC.
Condensed Statements of Cash Flows
for the years ended December 31,

	2009	2008
Net Cash provided / (Used) In Operating Activities	$ 86,282	$ 93,967
Cash Flows Used In Investing Activities	(12,236)	(2,720)
Cash Flows Provided / (used) By Financing Activities	(74,046)	(110,983)
Net (Decrease) Increase in Cash and Cash Equivalents	$ -	$ (19,736)

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Capital Requirements for long-term Obligations


Capital Requirements for long-term Obligations	2010	2011	2012	2013
Notes Payable	-	-	-	-
Other Long term debt		-	-	-
Capital Lease Settlement Obligations	73,747	79,078	84,795	27,932
Total	$ 73,747	$ 79,078	$ 84,795	$ 27,932

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004 the Company had outstanding balances of $457,604 and $556,293 on the two leases and was unable to make the monthly lease payments. As a result, the Company entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004, we had outstanding balances of $457,604 and $556,293 on the two leases and were unable to make the monthly lease payments. As a result, we entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:

The CIT Group would release us and its guarantors if one of the following payments were made, less the total of all monthly payments made to that date:

$375,000 if paid by October 25, 2004

$425,000 if paid by December 25, 2004

$500,000 if paid by June 25, 2005

$550,000 if paid by December 25, 2005

$600,000 if paid by June 25, 2006

$650,000 if paid by December 25, 2006

$700,000 if paid by June 25, 2007

On June 1, 2007, an amended forbearance agreement was entered into:

In consideration of CIT entering into this Addendum, Probe will pay CIT the sum of $7,500 on or before June 25, 2007, which was paid.

Recital B is amended to state that as of June 25, 2007 Probe’s payment obligation to CIT totals $457,500.

Section 2.3 of the Forbearance Agreement is amended to state that probe will pay CIT the amount of $457,500 in sixty-one (61) monthly installments of $7,500 each, commencing on July 25, 2007 and ending on July 25, 2012. If at any time Probe elects to pay in full the remaining balance, upon 30 day written notice, CIT will provide a payoff figure for the remaining balance using a present value rate of 7.0%.

We imputed interest at 7.00% over the term of the payments, which resulted in a present value of $384,025 and a gain of $324,330 which had an effect on Net profit per common share of $0.031 and Diluted Net Profit per common share of $0.022.

As of December 31, 2009 the outstanding balance was $260,960.

Subsequently, On April 9, 2009 we entered into an agreement with CIT to pay off the balance in full for $70,000. This realizes a net gain of $190,960.

As of June 30, 2009, we had outstanding note balances totaling 690,708, all of which were in default. On June 17, we entered into a stock purchase agreement with KB Development group to sell 152,000,000 shares of our common stock for $120,000. Concurrently we entered into Settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Subsequently; between July 13, 2009 and July

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27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $708,708 and a reduction in our notes payable of $840,203.

Off-balance Sheet Arrangement

We currently have no off-balance sheet arrangements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.

PROBE MANUFACTURING, INC.

10-Q

TABLE OF CONTENTS

PART 1 – FINANCIAL INFORMATION

Item 1.

Financial Statements

PROBE MANUFACTURING, INC.

10-Q

TABLE OF CONTENTS


Financial Statements	Page
Report of independent registered public accounting firm	27
Balance Sheet as of December 31, 2009 and December 31, 2008	28
Statement of Operations for the years ended December 31, 2009 and 2008	29
Statements of Cash flows for the years ended December 31, 2009 and 2008	33
Footnotes to the Financial Statements	35

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W. T. UNIACK & CO. CPA’S, P.C.

CERTIFIED PUBLIC ACCOUNTANTS

1003 Weatherstone Pkwy., Ste. 320 12600 Deerfield Pkwy., Ste 100

Woodstock, GA 30188 Alpharetta, GA 30004

Phone: 770-592-3233 Phone: 678-566-3774

______________________________________________________________________________

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

April 15, 2010

Board of Directors

Probe Manufacturing, Inc.

We have audited the accompanying consolidated balance sheet of Probe Manufacturing, Inc.(the “Company”) as of December 31, 2009 and 2008 and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the years ended December 31, 2009 and 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2009 and 2008, and the results of its operations and changes in stockholders’ deficit and its cash flows for the years ended December 31, 2009 and 2008, in conformity with accounting principles generally accepted in the United States of America.

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

As discussed in Note 1 of the notes to the accompanying consolidated financial statements, the financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in the footnotes, the Company has current assets of $525,870 and current liabilities of $475,065. Sales have decreased from $7,394,610 in 2008 to $2,153,141 for the comparable period. In addition, the Company has an accumulated deficit of $572,790 and is dependent

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on at least maintaining current revenue levels. Those conditions raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

W. T. Uniack & Co. CPA’s P.C.

Certified Public Accountants

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PROBE MANUFACTURING, INC.
Consolidated Balance Sheet
as of December 31,

		2009	2008
Assets
Current Assets:
	Cash	$ -	$ 9,754
	Accounts receivable - trade - net	100,381	700,490
	Inventory	402,867	786,416
	Deposits	22,627	52,600
	Total Current Assets	525,875	1,549,260

Property And Equipment - Net		103,084	143,610

	N/R Solar Acquisition corp.	25,000	-
	Goodwill	-	67,594
Total Assets		$ 653,959	$ 1,760,464

Liabilities And Stockholders' ( Deficit )
Current Liabilities:
	Bank overdraft	$ 60,674	$ 105,882
	Accounts payable - trade	187,948	668,464
	Customer Deposits	25,434	31,540
	Accrued Expenses	185,829	194,764
	Notes payable - Related Party	-	414,948
	Notes payable	-	302,979
	Current Portion of Long Term Debt	15,180	72,377
	Total Current Liabilities	475,065	1,790,954
Long-Term Debt:
	Capital lease settlement obligations	260,961	284,504
	Notes Payable	20,000
	Less Current portion of Long Term Debt	(15,180)	(72,377)
	Net Long-Term Debt	265,781	212,127
Total Liabilities		740,846	2,003,081

Stockholders' ( Deficit )
	Common stock, $.001 par value; 200,000,000 shares authorized; 184,638,320 and 32,638,320 shares issued and outstanding respectively	184,638	32,638
	Additional paid-in capital	301,265	325,033
	Accumulated deficit	(572,790)	(600,288)
	Total Stockholders' ( Deficit )	(86,887)	(242,617)
Total Liabilities And Stockholders' Deficit		$ 653,959	$ 1,760,464

The accompanying footnotes are an integral part of these financial statements

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Probe Manufacturing, Inc.
Consolidated Statement of Operations
for the years ended December 31,


	2009	2008

Sales	$ 2,153,141	$ 7,394,610
Cost of Goods Sold	1,679,687	5,816,475
Gross Profit	473,454	1,578,135

General And Administrative	922,510	1,371,895
Share Based Compensation	8,232	47,009
Research and Development	-	140,667
Net Profit / (Loss) From Operations	(457,288)	18,564

Other Income / (Expenses)		(585)
Gain debt settlement	708,708	-
Loss on sale of subsidiary	(190,464)	-
Interest Expense	(33,457)	(134,575)
Net Profit / (Loss) Before Income Taxes	27,499	(116,596)
Income Tax Expense	-	-
Net Profit / (Loss)	$ 27,499	$ (116,596)


Per Share Information:
Basic weighted average number
of common shares outstanding	105,931,471	31,932,579

Net Profit / (Loss) per common share	$ 0.000	$ (0.004)


Per Share Information:
Diluted, weighted average number
of common shares outstanding	121,404,210	31,932,579

Diluted, Net Profit / (Loss) per common share	$ 0.000	$ (0.004)

The accompanying footnotes are an integral part of these financial statements

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Probe Manufacturing, Inc.
Consolidated Statement of Stockholders Equity
as of December 31, 2009


	Preferred Stock A $1,000 Stated Value		Preferred Stock B $100 Stated Value		Preferred Stock C No Par		Common Stock .001 Par		Shares to be Issued
Description	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Shares	Amount	Additional Paid in Capital	Accumulated Deficit	Stock holders' Deficit Totals
Balance, December 31, 2004	440	$ 440,000	12,500	$ 1,250,000	-	$ -	7,839,375	$ 7,839			$ (2,334,899)	$ (375,378)	$ (1,012,438)
Stock issued for cash							2,145,000	2,145			569,855		572,000
Stock issued in lieu of Interest payments							93,354	93			24,801		24,894
Net Loss								-				(634,105)	(634,105)
Balance 12/31/05	440	440,000	12,500	1,250,000	-	-	10,077,729	10,078			(1,740,243)	(1,009,483)	(1,049,649)

Stock Issued in lieu of Interest Payments							215,208	215	-	-	57,179	-	57,394
Stock Issued for compensation - Reza							12,615	13	332,139	42,533	3,353	-	45,899
Stock issued for Services							1,500,000	1,500			48,500		50,000
Stock Converted from Preferred B to Preferred C			(12,500)	(1,250,000)	14,040	1,404,000					(154,000)	-	-
Series C Conversion @ .80					(14,040)	(1,404,000)	5,265,000	5,265			1,398,735		-
Series A Conversion shares @ 44%	-440	(440,000)					13,417,272	13,417			426,583		0
													-
Net Income 2006												150,894	150,894
Balance 12/31/06	-	-	-	-	-	-	30,487,824	30,488	332,139	42,533	40,107	(858,589)	(745,462)

Stock issued compensation - Reza							332,139	332	(332,139)	-42533	42200.861		-
Stock to be issued for compensation - Reza									109,062	18904			18,904
Stock to be issued for compensation - Reza									126,027	18904			18,904
Stock to be issued for compensation - Reza .40									141,780	18,904			18,904
							235,089	235	(235,089)	(37,808)	37,573		0

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Stock Issued for compensation - Reza @							141,780	142	(141,780)	(18,904)	18,762		(0)
									472,599	18,904			18,904
Share Based compensation											21,920		21,920

Net Profit 2007												374,896	374,896
Balance 12/31/2007	-	$ -	-	$ -	-	$ -	31,196,832	$ 31,197	472,599	$ 18,904	$ 160,563	$ (483,693)	$ (273,030)

Stock issued for Services							472,599	473	(472,599)	(18,904)	18,431		(0)
Stock to be issued for compensation - Reza .50									113,424	18,904			18,904
Share based Option Amortization									-		2,058		2,058
Stock issued for Services							113,424	113	(113,424)	(18,904)	18,791		-
Stock to be issued for compensation - Reza .50									105,465	14,062			14,062
Share based Comp - W&O									-		5,811		5,811
Share based Option Amortization											2,058		2,058
Stock issued for Services							105,465	105	(105,465)	(14,062)	13,957		-
Date the stock was split
Stock to be issued for compensation - Reza .50													-
Share based Comp - W&O													-
Share based Option Amortization											2,058		2,058
Shares issued for Solar Masters Assets							750,000	750			99,250		100,000
Share based Option Amortization											2,058		2,058
													-
Net Profit 2008												(116,596)	(116,596)
												-	-
													-
Balance 12/31/08	-	$ -	-	$ -	-	$ -	32,638,320	$ 32,638	-	$ -	$ 325,034	$ (600,289)	$ (242,617)


Share based Option Amortization											8,232		8,232
													-
Stock Issued							152,000,000	152,000			(32,000)		120,000
Net Profit												61,089	61,089
Reduction in Net Asset Value from

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Solar Master sale												(33,589)	(33,589)
													-
Balance 12/31/2009	-	$ -	-	$ -	-	$ -	184,638,320	$ 184,638	-	$ -	$ 301,266	$ (572,789)	$ (86,885)

The accompanying footnotes are an integral part of these financial statements

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PROBE MANUFACTURING, INC.
Consolidated Statements of Cash Flows
for the years ended December 31,


			2009	2008
Cash Flows from Operating Activities:
	Net Income / ( Loss )		$ 27,499	$ (116,596)
	Adjustments to reconcile net loss to net cash used in operating activity:
		Depreciation and amortization	52,762	68,172
		Share based compensation	8,232	14,043
		Gain on debt settlement	(708,707)	-
		Loss on from disposition of subsidiary	190,466	-
		Net Profit of subsidiary	(4,504)
		Stock issued for Services		32,966
		Changes in assets and liabilities (net of disposition of subsidiary)
		(Increase) decrease in accounts receivable	593,337	1,562
		(Increase) decrease in inventory	243,470	167,387
		(Increase) decrease in other assets	(22,627)	(52,600)
		(Decrease) increase in accounts payable	(441,039)	68,059
		(Decrease) increase in customer deposits		(3,289)
		(Decrease) increase in accrued expenses (net of gain settlement)	147,393	(85,737)
Net Cash provided / (Used) In Operating Activities			86,282	93,967

Cash Flows from Investing Activities
	Purchased of Property and equipment		(12,236)	-
	Investment in Solar Masters		-	(2,720)
Cash Flows Used In Investing Activities			(12,236)	(2,720)

Cash Flows from Financing Activities
	Bank Overdraft / (Repayment)		(45,208)	105,882
	Proceeds from sale of common stock		120,000	-
	Payments on capital lease settlement obligations		(23,543)	(67,497)
	Stock issued for investment			35,125
	Payments on notes payable		(125,295)
	Proceeds / (Payments) on notes payable			(184,493)
Cash Flows Provided / (used) By Financing Activities			(74,046)	(110,983)

Net (Decrease) Increase in Cash and Cash Equivalents			-	(19,736)

Cash and Cash Equivalents at Beginning of Period			-	29,490

Cash and Cash Equivalents at End of Period			$ -	$ 9,754

Supplemental Information:
	Stock issued for investment			100,000

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Interest Paid		$ 8,652	$ 137,043
Net effect of Disposition of Subsidiary
	Change in Cash	9,923	-
	Change in Accounts Receivable	51,227	-
	Change in Inventory	68,875	-
	Change in Deposits	27,845	-
	Change in Goodwill	67,594	-
	Change in Note Receivable Solar Acquisition corp.	(25,000)	-
	Change in Note Payable Conrad	(10,000)	-
Loss from disposition of subsidiary		$ 190,464	$ -

The accompanying footnotes are an integral part of these financial statements

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS

For the years ended December 31, 2009 and 2008

Notes 1- GENERAL

The Company

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

On July 27, 2009, our board of directors appointed Kambiz Mahdi as Chief Executive officer.

Going Concern

The financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the normal course of business. Although; for the year ended December 31, 2009, we had a net profit of $27,499 and a working capital surplus of $50,810 and a shareholder deficit of $(86,887) our

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ability to operate as a going concern is still dependent upon our ability (1) to obtain sufficient debt and/or equity capital and/or (2) continue to generate positive cash flow from operations.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Plan of Operations

NOTE 2 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Cash and Cash Equivalents

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Estimates

Accounts Receivable

Inventory

Property and Equipment

Furniture and fixtures

3 to 7 years

Equipment

7 to 10 years

Leasehold improvements

2 years (life of the lease)

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Long –Lived Assets

Revenue Recognition

Fair Value of Financial Instruments

The carrying amount of accounts payable and accrued expenses are considered to be representative of their respective fair values because of the short-term nature of these financial instruments.

Other Comprehensive Income

We have no material components of other comprehensive income (loss) and accordingly, net loss is equal to comprehensive loss in all periods.

Net Profit / (Loss) per Common Share

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Research and Development:

We are curtailing its research and development and focusing our business on its core business of electronics contract manufacturing.

Segment Information

Except as identified above in the research and development section, we operate our primary business of electronics contract manufacturing.

Share Based Compensation

The company has adopted the use of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (SFAS No. 123R) (now contained in FASB Codification Topic 718, Compensation-Stock Compensation), which supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and its related implementation guidance and eliminates the alternative to use Opinion 25’s intrinsic value method of accounting that was provided in Statement 123 as originally issued. This Statement requires an entity to measure the cost of employee services received in exchange for an award of an equity instruments, which includes grants of stock options and stock warrants, based on the fair value of the award, measured at the grant date, (with limited exceptions). Under this standard, the fair value of each award is estimated on the grant date, using an option-pricing model that meets certain requirements. We use the Black- Scholes option-pricing model to estimate the fair value of our equity awards, including stock options and warrants. The Black-Scholes model meets the requirements of SFAS No. 123R; however the fair values generated may not reflect their actual fair values, as it does not consider certain factors, such as vesting requirements, employee attrition and transferability limitations. The Black-Scholes model valuation is affected by our stock price and a number of assumptions, including expected volatility, expected life, risk-free interest rate and expected dividends. We estimate the expected volatility and estimated life of our stock options at grant date based on historical volatility; however, due to the thinly traded nature of our stock, we have chosen to use an average of the annual volatility of like companies in our industry. For the “risk-free interest rate”, we use the Constant Maturity Treasury rate on 90 day government securities. The term is equal to the time until the option expires. The dividend yield is not applicable, as the company has not paid any dividends, nor do we anticipate paying them in the foreseeable future. The fair value of our restricted stock is based on the market value of our free trading common stock, on the grant date calculated using a 20 trading day average. At the time of grant, the share based-compensation expense is recognized in our financial statements based on awards that are ultimately expected to vest using historical employee attrition rates and the expense is reduced accordingly. It is also adjusted to account for the restricted and thinly traded nature of the shares. The expense is reviewed and adjusted in subsequent periods if actual attrition differs from those estimates.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

We re-evaluate the assumptions used to value our share-based awards on a quarterly basis and if changes warrant different assumptions, the share-based compensation expense could vary significantly from the amount expensed in the past. We may be required to adjust any remaining share-based compensation expense, based on any additions, cancellations or adjustments to the share based awards. The expense is recognized over the period during which an employee is required to provide service in exchange for the award—the requisite service period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. For the years ended December 31, 2009 and 2008 $8,232 and $37,082 respectively, in share based expense, due to the issuance of our options and warrants. We also had $5,442 in non-vested expense to be recognized over the next three years.

Income Taxes

The Company accounts for income taxes under SFAS No. 109 (now contained in FASB Codification Topic 740-10-25, Accounting for Uncertainty in Income Taxes), which requires the asset and liability approach to accounting for income taxes. Under this method, deferred tax assets and liabilities are measured based on differences between financial reporting and tax bases of assets and liabilities measured using enacted tax rates and laws that are expected to be in effect when differences are expected to reverse. As of December 31, 2009, we had a net operating loss carry forward of $(572,790) and a deferred tax asset of $194,749 using the statutory rate of 34%. The deferred tax asset may be recognized in future periods, not to exceed 20 years. However, due to the uncertainty of our ability to operate as a going concern, we have not booked any deferred tax asset as a result.

NOTE 3 – INVENTORY

Inventories by major classification were comprised of the following at:


	December 31, 2009	December 31, 2008
Raw Material	$ 678,492	$ 1,036,258
Work in Process	71,161	68,170
Finished Goods	3,214	6,208
Total	752,867	1,110,636
Less Reserve for excess or obsolete inventory	(350,000)	(450,000)
Total Inventory	$ 402,867	$ 660,636

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

NOTE 4 – PROPERTY AND EQUIPMENT

Property and equipment were comprised of the following at:


	December 31, 2009	December 31, 2008
Furniture and fixtures	$ 33,558	$ 57,044
Equipment	1,854,184	2,397,325
Leasehold improvements	19,686	210,403
Total	1,907,428	2,664,772
Accumulated Depreciation	(1,804,344)	(2,521,162)
Net Fixed Assets	$ 103,084	$ 143,610

NOTE 5 – ACCRUED EXPENSES


	December 30, 2009	December 31, 2008

Accrued Wages	$ 26,681	$ 49,248
Accrued Interest	650	2,512
Accrued Professional Fees	10,000	37,000
Accrued Other	45,214	1,639
Accrued Rent	80,432	-
Accrued CEO Compensation	-	45,000
Accrued Vacation	22,852	59,365
Total Accrued Expenses	$ 185,829	$ 194,764

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

NOTE 7 - CAPITAL LEASE SETTLEMENT OBLIGATIONS

On July 9, 1997 and December 21, 1997, we entered into two lease agreements, with Crocker capital, which subsequently assigned the leases to The CIT Group. In September 2004, we had outstanding balances of $457,604 and $556,293 on the two leases and was unable to make the monthly lease payments. As a result, we entered into a forbearance agreement with The CIT Group, with monthly payments of $7,500 and an early payment schedule as follows:

The CIT Group would release us and its guarantors if one of the following payments were made, less the total of all monthly payments made to that date:

$375,000 if paid by October 25, 2004

$425,000 if paid by December 25, 2004

$500,000 if paid by June 25, 2005

$550,000 if paid by December 25, 2005

$600,000 if paid by June 25, 2006

$650,000 if paid by December 25, 2006

$700,000 if paid by June 25, 2007

On June 1, 2007 an amended forbearance agreement was entered into:

In consideration of CIT entering into this Addendum, Probe will pay CIT the sum of $7,500 on or before June 25, 2007, which was paid.

Recital B is amended to state that as of June 25, 2007 Probe’s payment obligation to CIT totals $457,500.

We imputed interest at 7.00% over the term of the payments, which resulted in a present value of $384,025 and a gain of $324,330 which had an effect on Net profit per common share of $.031 and Diluted Net Profit per common share of $.022.

As of December 31, 2009 the outstanding balance was $ 260,960.

Unaudited - Subsequently, On April 9, 2009 we entered into an agreement with CIT to settle the balance in full for $70,000, as a result we realized a gain of $190,960.

NOTE 8 – NOTES PAYABLE

Note Payable - dated March 10, 2006 – special use, line of credit in the amount of $90,000, unsecured, 12.00% interest paid in cash due May 10, 2007, payable to Ashford Capital, LLC. This note was converted to a term note payable, with an effective date of June 30, 2006, unsecured, 12.00% interest rate, with a 36 month amortization, payments of $1,997 and a balloon payment of $33,068 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 21, 2009 this note was settled in full for $8,268 and recognized a gain of $22,221. As of December 31, 2009 the outstanding balance was zero.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Ed Lassiter. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $ $4,650 and a balloon payment of $77,014 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 20, 2009 this note was settled in full for $20,014 and recognized a gain of $53,788. As of December 31, 2009 the outstanding balance was zero.

Note Payable -- This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in common stock in the Company) per annum, payable to William Duncan. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. On April 15, 2008, we were unable to meet the balloon payment and the note is in default. On July 13, 2009 this note was settled in full for $6,798 and recognized a gain of $18,270. As of December 31, 2009 the outstanding balance was zero.

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Benner Exemption Trust. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, payments of $4,650 and a balloon payment of $77,014 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 13, 2009 this note was settled in full for $19,450 and recognized a gain of $52,270. As of December 31, 2009 the outstanding balance was zero.

Note Payable – This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Ashford Capital, LLC. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $3,321 and a balloon payment of $55,010 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 20, 2009 this note was settled in full for $14,133 and recognized a gain of $37,982. As of December 31, 2009 the outstanding balance was zero.

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 15.00% per annum, payable to Hoa Mai. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 13, 2009 this note was settled in full for $2,605 and recognized a gain of $7,002. As of December 31, 2009 the outstanding balance was zero.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Related Party – Notes payable

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in cash and 10% paid in our common stock shares), Due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Kambiz Mahdi. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $14,227. As of December 31, 2009 the outstanding balance was zero.

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in Cash and 10.00% paid in our common stock shares), Due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares due on May 10, 2007, Payable to Kambiz Mahdi. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 10.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $124,304. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $34,583 and recognized a gain of $92,941. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. As of June 30, 2008 the outstanding balance was $42,893. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $10,563 and recognized a gain of $28,388. As of December 31, 2009 the outstanding balance was zero.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party. This is a term note payable, with an effective date of January 15, 2008, payable to Jeff Conrad, Esq. at a 12.00% interest rate, with a 30 month amortization and monthly payments of $1,162. As of June 30, 2009 the note was in default with outstanding balance of $27,796. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $27,796. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party. This is a term note payable, unsecured, dated November 03, 2009 payable to Linwood Goddard at a 12.00% interest rate, with a 36 month amortization and monthly payments of $334.14. As of December 31, 2009 the balance was $10,000.

Note Payable – related party. This is a term note payable, unsecured, dated December 24, 2009 payable to Linwood Goddard at a 12.00% interest rate, with a 36 month amortization and monthly payments of $334.14. As of December 31, 2009 the balance was $10,000.

Other Long-Term Debt

1) We have reached a settlement with I-Source, a supplier, with monthly payments of $2,500. As of December 31, 2009 the outstanding balance was $11,925.

2) We negotiated a settlement with the IRS and have entered into a payment plan with them in which we pay the IRS $3,000 per month. All payments to date are current. The balance is included in other long-term debt. This was paid in full in October of 2009 and as of December 31, 2009 the balance was $0.

NOTE 9 – COMMITMENTS AND CONTIGENCIES

Operating Rental Leases

On September 11, 2006 we entered into a sublease agreement for 10,000 sq ft. of manufacturing space which includes office space with Quantum Fuel System Technologies Worldwide, Inc. for $15,500 per month. On May 19, 2008 we entered into a new extension of the sublease agreement with an effective termination date of August 31, 2009. The facility is located at 25242 Arctic Ocean Drive, Lake Forest, CA 92630. On October 14, 2009 we entered into a 5 year lease with Bernard family trust, with a commencement date of December 31, 2009. The facility is approximately 19,701 square feet and located at 17475 Gillette, Irvine CA, 92614.


Year	Monthly Rent
1	7,880
2	9,850
3	10,835
4	11,820
5	12,805

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

Litigation

The Company may be involved from time to time in various claims, lawsuits, and disputes with third parties, action involving allegations or discrimination or breach of contract actions incidental in the normal operations of the business. As of December 31, 2009, we believe that there are no claims or litigation pending.

NOTE 10 – CAPITAL STOCK TRANSACTIONS

On April 21, 2005, our Board of Directors and shareholders approved the following capital stock transactions:

We re-domiciled in the state of Nevada, whereby increasing the number of authorized common shares to 200,000,000 and designating a par value of $.001 per share.

On May 25, 2006, our Board of Directors and shareholders approved the following capital stock transactions:

An amendment to the Articles of Incorporation of the Company authorizing a new series of Preferred stock, which shall be designated as Series C, and shall consist of 15,000 shares.

Common Stock transactions:

On February 11, 2008, we issued 472,599 shares of common stock for officer compensation.

On April 12, 2008, we issued 113,424 shares of common stock for officer compensation.

On August 11, 2008, our board of directors approved a 3-for-1 forward stock split of its outstanding and issued common stock. Pursuant to the forward stock split our issued and outstanding share capital will increase from 10,594,258 shares of common stock to 31,782,774 shares of common stock. The effective date of the forward stock split will be September 1, 2008. All computations for common shares and equivalents have been adjusted accordingly.

On August 13, 2008, we issued 105,465 shares of common stock for officer compensation..

On December 31, 2008 we issued 750,000 shares of its common stock for the purchase of the assets of Solar Masters, Inc.

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

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PROBE MANUFACTURING, INC.

NOTES TO FINANCIAL STATEMENTS – (Continued)

COMMON STOCK

Our Articles of Incorporation authorize us to issue 200,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2009 there were 184,638,320 shares of common stock issued and outstanding, respectively. All outstanding shares of common stock are, and the common stock to be issued will be, fully paid and non-assessable. Each share of our common stock has identical rights and privileges in every respect. The holders of our common stock are entitled to vote upon all matters submitted to a vote of our shareholders and are entitled to one vote for each share of common stock held. There are no cumulative voting rights.

The holders of our common stock are entitled to share equally in dividends and other distributions that our Board of Directors may declare from time to time out of funds legally available for that purpose, if any, after the satisfaction of any prior rights and preferences of any outstanding preferred stock. If we liquidate, dissolve or wind up, the holders of shares of common stock will be entitled to share ratably in the distribution of all of our assets remaining available for distribution after satisfaction of all our liabilities and our obligations to holders of our outstanding preferred stock.

PREFERRED STOCK

Our Articles of Incorporation authorize us to issue 10,000,000 shares of preferred stock. We authorized 440 shares of Series A Convertible Preferred Stock and 20,000 shares of Series B Convertible Preferred Stock. On May 25, 2006 the Articles of Incorporation were amended authorizing 15,000 shares Series C Convertible Preferred Stock.

As of August 20, 2006 all preferred stock has been converted into Common stock and there are no outstanding Preferred shares as of December 31, 2008.

Preferred Series A

Previously, there were 440 shares of Convertible A Preferred Stock outstanding, with a stated value of $1,000. Each share is convertible into 0.1% percent of the shares of our common stock outstanding at the date of conversion, which shall convert upon election of the holder. The holders of series A Preferred stock have the right to vote with the holders of common stock on any matter to which the common stock holders are entitled to vote and they are entitled to vote number of shares of common stock into which the series A Preferred Stock is convertible. If we are liquidated, distribute our assets, dissolve or wind-up, the holders of Convertible A Preferred Stock shall receive the greater of (i) $2,500 per share of Convertible A Preferred Stock they hold at the time of such liquidation, or (ii) their pro rata share of the total value of our assets and funds to be distributed, assuming the Convertible A preferred stock is converted to common stock. On August 14, 2006 the holders converted 440 shares of the Preferred Series A for 4,544,188 shares ofour common stock.

Preferred Series B

Previously there were 12,500 shares of Series B Convertible stock outstanding, with a stated value of $100. Each share of Series B Stock shall be converted into a number of shares of common stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series B, whichever is greater. The minimum conversion price which Series B shareholders shall convert their Series B shares to common stock shall be $0.10.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

Exchange of Preferred Series B to Preferred Series C

On May 25, 2006 the Board of Directors approved the exchange of Series B Convertible Preferred Stock for Series C No-Par, Convertible Preferred Stock for its Series B stockholders. After the exchange took place Series B Convertible Preferred Stock was cancelled. The Series C Convertible Preferred Stock carries the same rights as Series B Convertible Preferred Stock except that Series C Convertible Preferred Stock can be redeemed by us. At any time, we may, in its sole discretion, redeem some or all of the outstanding shares of Series C Stock at a “Redemption Price” equal to the greater of $120.00 per share for the first year from the date of this certificate and after which the redemption price shall increase by twelve percent (12%) per year until all outstanding shares of Series C have been redeemed. To redeem Series C Stock, we, at least five (5) days prior to the date on which it desires to redeem such stock (the “Redemption Date”), shall send the applicable holder of Series C Stock a notice of the redemption provided, however, that failure to give such notice or any defect therein or in the mailing thereof shall not affect the validity of the proceedings for the redemption of any shares of Series C Stock. Such notice shall state: (i) the redemption date; (ii) the redemption price; and (iii) the number of shares of Series C Stock to be redeemed. Furthermore, the holders of Series C Convertible Preferred Stock shall receive one A Warrant and one B Warrant for every Ten (10) shares of common stock received from converting a share of our Series C Convertible Preferred stock. This series A and B Warrants are pursuant to the terms and conditions of our Series A and B warrant agreement as amended.

Preferred Series C

Previously there were 14,040 shares of Convertible C Preferred Stock outstanding. Originally as filed on May 25, 2006 each share of Series C Stock shall be converted into a number of shares of Common Stock that is equal to each share being divided by the average of the 3 lowest intraday bids in the twenty (20) days prior to conversion or $0.10, whichever is greater, multiplied by 100 (1 divided by x, multiplied by 100), or 125 shares per Series C, whichever is greater. However, on August 07, 2006 the terms of Series C were amended as follows: Each share of Series C stock shall be converted into a number of shares of Common Stock that is equal to each share divided $0.267 multiplied by 100 (1 divided by $0.267, multiplied by 100).

On August 14, 2006 the holders of Preferred Series C elected to convert their shares into common stock. As a result 14,040 shares of Preferred Series C were converted into 5,265,000 shares of common stock.

Our Board of Directors has the authority to issue additional shares of preferred stock in one or more series, and fix for each series, the designation of and number of shares to be included in each such series. Our Board of Directors is also authorized to set the powers, privileges, preferences, and relative participating, optional or other rights, if any, of the shares of each such series and the qualifications, limitations or restrictions of the shares of each such series.

Unless our Board of Directors provides otherwise, the shares of all series of preferred stock will rank on parity with respect to the payment of dividends and to the distribution of assets upon liquidation. Any issuance by us of shares of our preferred stock may have the effect of delaying, deferring or preventing a change of our control or an unsolicited acquisition proposal. The issuance of preferred stock also could decrease the amount of earnings and assets available for distribution to the holders of common stock or could adversely affect the rights and powers, including voting rights, of the holders of common stock.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

Warrants

Series A - Common Stock Warrants

We currently have 1,192,875 Series A Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock (5,964,375 total shares) at $.33 per share. The Series A Warrants expire on November 15, 2010.

Series B - Common Stock Warrants

We currently have 1,192,875 Series B Warrants issued and outstanding. Each warrant gives the holder the right to purchase 5 shares of common stock (5,964,375 total shares) at $.50 per share. The Series B Warrants will expire on May 15, 2011.

Series C – Common Stock Warrants

We currently have 600,000 Series C Warrants issued and outstanding. Each warrant gives the holder the right to purchase 1 shares of common stock (600,000 total shares) at $.267 per share. The Series C Warrants expire on November 5, 2010.

Series D – Common Stock warrants

We currently have 1,718,580 Series D Warrants issued and outstanding. Each warrant gives the holder the right to purchase 1 share of common stock (1,718,580 total shares) at $.133 per share. The Series D Warrants expire on November 5, 2012.

For the year ended December 31, 2008 and 2009, we recognized share based compensation expense of d $14,403 and $8,232 from the issuance of options and Warrants.

Warrants Activity for the Period and Summary of Outstanding Warrants

On April 2, 2008, the following notes were converted and series D warrants were issued:

Note Payable – This Note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 15.00% per annum, payable to Hoa Mai. This note was converted to a term note payable, with an effective date of December 31, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $1,661 and a balloon payment of $27,505 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date.. On July 13, 2009 this note was settled in full for $2,605 and recognized a gain of $7,002. As of December 31, 2009, the note had outstanding balance of zero.

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares), Due May 10, 2007. This note was converted to a term note payable, with an effective date of December 31, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of December 31, 2009, the note had outstanding balance of zero.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of December 31, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009

this note was settled in full for $10,563 and recognized a gain of $28,388. As of December 31, 2009, the note had outstanding balance of zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of December 31, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008.. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date.. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of December 31, 2009, the note had outstanding balance of zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our company stock shares) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of December 31, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $34,583 and recognized a gain of $92,941. As of December 31, 2009, the note had outstanding balance of zero.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

A summary of warrant activity for the periods is as follows:


		Warrants - Common Share Equivalents	Weighted Average Exercise price	Warrants exercisable - Common Share Equivalents	Weighted Average Exercise price
Outstanding December 31, 2003		-		-
	Granted	5,118,750	0.42	5,118,750	0.42
	Exercised	-		-
Outstanding December 31, 2004		5,118,750	0.42	5,118,750	0.42
	Granted	2,145,000	0.42	2,145,000	0.42
	Exercised	-		-
Outstanding December 31, 2005		7,263,750	0.42	7,263,750	0.42
	Granted	5,265,000	0.42	5,265,000	0.42
	Exercised	-		-
Outstanding December 31, 2006		12,528,750	0.42	12,528,750	0.42
	Granted	1,275,000	0.13	1,275,000	0.13
	Exercised	-		-
Outstanding December 31, 2007		13,803,750	0.38	13,803,750	0.38
	Granted	443,580	0.13	443,580	0.13
	Exercised	-		-
Outstanding December 31, 2008		14,247,330	0.38	14,247,330	0.38
	Granted	-	-	-	-
	Exercised	-	-	-
Outstanding September 30, 2009		14,247,330	0.38	14,247,330	0.38

Note: The weighted average exercise price has been adjusted retroactively due to price decreases in the warrant strike prices.


	Warrants Outstanding			Warrants Exercisable
Range of Warrant Exercise Price	Warrants - Common Share Equivalents	Weighted Average Exercise price	Weighted Average Remaining Contractual life	Warrants - Common Share Equivalents	Weighted Average Exercise price
0.33	5,964,375	$0.33	0.87	5,964,375	$0.33
0.50	5,964,375	$0.50	1.38	5,964,375	$0.50
0.27	600,000	$0.27	1.35	600,000	$0.27
0.13	1,275,000	$0.13	3.1	1,275,000	$0.13

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0.13	443,580	$0.13	3.1	443,580	$0.13
Total	14,247,330			14,247,330

STOCK OPTIONS

On February 8, 2007 pursuant to our 2006 Qualified Incentive Option Plan which was adopted by our Board of Directors granted Company employees an incentive stock option to purchase up to 652,766 shares of our common stock. These options were granted at $.173 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As of December 31, 2009 we had a reduction in the outstanding stock options of 403,779 as a result of employee termination and forfeiture of the options. As of December 31, 2009 there were 212,735 outstanding options under this plan.

On February 8, 2008, we granted stock options to its key employees, to purchase up to 750,000 shares of our common stock, which was approved by our Board of Directors. These options were granted at $.173 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As a result, we recognized share-based compensation expense in the amount of $5,313 for the year ended December 31, 2007; $2,657 for the year ended December 31, 2008 and $2,656 for the year ended December 31, 2009, with a balance to be expensed over the next year of $2,656. As of December 31, 2009 the balance of the outstanding options under this plan is 600,000.

On February 28, 2008 our granted stock options to a key employee, to purchase up to 300,000 shares of our common stock, which was approved by our Board of Directors. These options were granted at $.033 cents, the fair market value of the Company at the time of the grant. These options expire on February 8, 2017. As a result, we recognized share-based compensation expense in the amount of $5,574 year ended December 31, 2008 and $5,576 for the year ended December 31, 2009, with a balance to be expensed over the next year of $2,786.

Stock to be issued under option and warrant plans

Any shares issued under the existing option or warrant plans will come from the company’s authorized but un-issued, un-registered shares.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

NOTE 11 – RELATED PARTY TRANSACTIONS

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in Cash and 10.00% paid in our common stock shares), Due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. As of December 31, 2008 the note was in default. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $10,563 and recognized a gain of $28,388. As of December 31, 2009 the outstanding balance was zero.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of December 31, 2009 the outstanding balance was zero.

On June 17, 2009, we entered into a stock purchase agreement with KB Development group to sell 152,000,000 shares of our common stock for $120,000. Concurrently we entered into Settlement agreements with each of our note holders to settle the outstanding notes payable for $120,000 and the assumption of a $10,000 note by Solar Masters. Subsequently; between July 13, 2009 and July 27, 2009 all of the notes were paid and settled, which resulted in a realized gain of $710,203 and a reduction in our notes payable of $840,203. Kambiz Mahdi, a member of our board of directors and chief executive officer is the managing partner of KB Development Group, LLC.

On July 12, 2009, we agreed to convert a note receivable from Solar Masters in the amount of $89,156 into 8,000,000 shares of common stock in Solar Masters.

On July 13, 2009, we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464. Barrett Evans a member of our board of directors on December 31, 2009, subsequently resigned on July 27, 2009 and took a position with Solar Masters as a consultant. Kambiz Mahdi was a member of the board of directors of Solar Masters as of December 31, 2009, subsequently resigned on July 14, 2009.

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NOTES TO FINANCIAL STATEMENTS – (Continued)

NOTE 12 – Acquisition of Solar Masters

On August 13, 2008, we entered a definitive agreement for the sale and purchase of business assets of Solar Masters Company. The purchase price of the assets was: $2,719.65 in cash payable to Solar Masters, LLC. plus 250,000 shares of Probe common stock valued at $.40 each = $100,000.00, for a total of $102,719.65. Solar Masters, inc. was formed and is our wholly owned subsidiary. The assets of Solar Masters included $10,125 of inventory, $25,000 in deposits paid by the previous owner on the container of product the web site, the rights to the name Solar Masters and the customer base. The allocation to the purchase price was as follows:


Inventory		10,125.00
Deposit on Container		25,000.00
Goodwill		67,594.65

On July 13, 2009 we entered into a stock sale agreement with Solar Masters Acquisition Company, to sell its entire interest in its investment in Solar Masters, Inc. (a wholly owned subsidiary) for $35,000, consisting of a Note Receivable for $25,000 and the assumption of $10,000 in notes payable referenced above. This resulted in a loss on sale of investment of $190,464.

NOTE 13 – Subsequent Events (Unaudited)

As of December 13, 2009 our balance due on the 2 leases from CIT group was 260,960. Subsequently, On April 9, 2009 we entered into an agreement with CIT to settle the balance in full for $70,000, as a result we realized a gain of $190,960.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

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

As of December 31, 2009, we carried out 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, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.

Report of Management on Internal Control over Financial Reporting

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

pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and disposition of our assets;

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

We have assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework.

Based on our assessment, we believe that, as of December 31, 2009, our internal control over financial reporting is effective at a reasonable assurance level based on these criteria.

This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal controls over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only Management’s Report in this Annual Report.

Changes in Internal Control over Financial Reporting

There have been no other changes in our internal control over financial reporting that occurred during the period covered by this Annual Report on Form 10-K that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION.

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.

The following table sets forth the name, age, and positions for the past five years as of April 14, 2009, of our executive officers and directors. Members of the board are elected and serve for one year

NAME

AGE

POSITION

Kambiz Mahdi

Chief Executive Officer, Director

Reza Zarif

Former Chief Executive Officer, Former Director

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Barrett Evans

Former Interim Chief Executive Officer, Former Director

Jeffrey Conrad

Former Director

John Bennett

Chief Financial Officer

BIOGRAPHIES OF OFFICERS AND DIRECTORS

Set forth below is a brief description of the background of our officers and directors based on information provided by them to us.

KAMBIZ MAHDI is a co-founder and a member of our board of directors. Mr. Mahdi was the Technical Sales Manager for six years with Future Electronics, a billion dollar electronics distributor. While at Future Electronics, Mr. Mahdi developed technical management leadership and management tools for their highest technology customers and applications. Mr. Mahdi has a BS degree in Electrical Engineering.

REZA ZARIF is a co-founder, former director and our former chief executive officer. Mr. Zarif was responsible for all operational activities as well as developing and guiding the company's vision and cultural values. Prior to Probe, Mr. Zarif was at Graphtec Incorporated of Japan for 7 years where he was responsible for transferring manufacturing and associated technologies from Japan to the United States. Mr. Zarif has a BA and MA in Cultural Anthropology and earned the status of "Summa Cum Laude" at the University of California, Irvine.

BARRETT EVANS has been our director since July 15, 2004. Mr. Evans is our current chief executive officer. Mr. Evans is eFund Capital Partner's Managing Partner. Mr. Evans has been involved in private equity, corporate restructuring and investment banking since 1990. At eFund Capital Partners, Mr. Evans has utilized his institutional contacts to help fund numerous start-up companies and has advised these companies on a wide range of issues including raising capital, securing management and overall business strategy. Mr. Evans received his Bachelor's degree from the University of California, Santa Barbara. He also serves as a director for Abviva, Inc. and several private companies from time to time.

JEFFREY CONRAD has been our director since July 15, 2004 and currently serves as the Secretary of the Company and as corporate counsel to the Company. Mr. Conrad is a securities attorney and is venture partner of eFund Capital Partners, LLC. He has accumulated successful experience in all facets of investment banking including portfolio management, mergers and acquisitions, financial analysis, restructuring and legal analysis. He was formerly with Gibson, Dunn and Crutcher and Universal Pictures. Mr. Conrad is a graduate of the University of California, Los Angeles and received his Juris Doctorate degree from Loyola Law School. Mr. Conrad is an active member of the State Bar of California. Mr. Conrad also serves as a director to Abviva, Inc.

JOHN BENNETT has been with the company for 4 years. Mr. Bennett joined the company as the controller and was promoted to the Chief financial officer in 2007. Mr. Bennett was formerly with Aim Technologies, Inc. for 8 years as the Chief financial officer and previously with Electritek, Inc for 10 years as the Chief financial officer. Mr. Bennett has a Bachelors of Science in accounting from Mesa College and a Masters of Science in Finance from University of Colorado.

AUDIT COMMITTEE

We do not have a separate Audit Committee. Our full Board of Directors performs the functions usually designated to an Audit Committee. Mr. Mahdi, a Director, qualifies as an "audit committee financial expert" as defined in Item 401(e)(2) of Regulation S-K.

CODE OF ETHICS

We have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have filed our Code of Ethics as a Report on Form 10-KSB for the year ended December 31, 2005 as Exhibit 14.1. Our Code of Ethics is available upon request at no charge to any shareholder and is available on our website at www.probemi.com.

ITEM 11. EXECUTIVE COMPENSATION.

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The following table presents a summary of the compensation paid to our Chief Executive Officer and Chief Operating Officer. No other executive officer received compensation in excess of $100,000 during 2005. Except as listed below, there are no bonuses, other annual compensation, restricted stock awards or stock options/SARs or any other compensation paid to the executive officers


Name		Year	Salary ($)	Bonus ($)	Stock Awards ($)(2)	Option Awards ($)	Non-Equity Incentive Plan Compensation ($)	Nonqualified Deferred Compensations Earnings ($)	All Other Compensation ($)	Total ($)
Kambiz Mahdi	Chief Executive Officer and Director	2009	-	-	-	-	-	-	-	-
Barrett Evans	Chief Executive Officer and Director	2008	60,000	-	-	-	-	-	-	60,000
Reza Zarif	Chief Executive Officer and Director	2008	116,667	-	32,966	-	-	-	-	149,633
John Bennett	Chief Financial Officer	2008	135,899	-	-	13,935	-	-	-	149,834
		2009	110,000	-	-	-	-	-	-	110,000

Effective June 7, 2006 the Company entered into a two year employment contract whereby the Company shall pay its Chief Executive Officer, Reza Zarif a monthly salary of $20,833, which is equivalent to $250,000 on an annualized basis. Mr. Zarif’s salary will be payable pursuant to the Company’s standard payroll practices, which currently consist of twenty-six (26) payroll periods per year. The difference between Mr. Zarif’s current salary of $175,000 and the proposed $250,000 can be paid in stock at the Company’s Board of Director’s option. The price of the shares pursuant to the stock grant shall be set at the closing market price of the Company’s common stock on the date of the grant. The stock grants will take place on the final day of each fiscal quarter.

On December 15, 2006, our controller, John Bennett was promoted to Chief Financial Officer which took effect January 1, 2007. His new employment package includes $110,000 base salary plus a 100,000 stock option package that vests over five years with one year fully vested upon execution. On February 28, 2008 the company entered into an amended employment contract with Mr. Bennett whereby he will receive 140,000 per year as a base salary and received options to purchase the Company’s common stock at $0.10 per share. In 2009 as a result in the down turn in the economy Mr. Bennett agreed to a pay cut for that year for a salary of $110,000.

On September 4, 2008 the board of directors of the issuer decided not to renew the month-month employment agreement of Reza Zarif, our Chief Executive Officer effective September 7, 2008. As a result, Mr. Zarif has left the Company to pursue other opportunities. Mr. Zarif will remain on the board of directors of the Company. On September 18, 2008, Mr. Zarif resigned from the Board of Directors.

On September 8, 2008 the Company entered into an Executive Consulting Agreement with Barrett Evans to act as the Company’s interim Chief Executive Officer. Mr. Evans shall receive a Base Salary at an annual rate of One Hundred

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Seventy Five Thousand Dollars ($175,000), payable on the 1^st and 15^th of the month. All compensation payable to Evans hereunder shall be paid on an independent contractor basis. On July 27, 2009 Mr. Evans resigned from the Board of directors and his position as Chief Executive Officer.

On July 27, 2009, our board of directors appointed Kambiz Mahdi as Chief Executive officer; he has agreed to work for no salary through March of 2010. Kambiz Mahdi is a member of our board of directors and the managing partner of KB Development Group, LLC.

DIRECTOR COMPENSATION

We currently have one member on our board of directors, who is elected to annual terms and until their successors are elected and qualified. Executive officers are appointed by the board of directors on an annual basis and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors, officers or key employees.

We currently reimburse directors for travel expenses associated with their work for the company but our directors currently do not receive any other compensation.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

The following table sets forth certain information concerning the beneficial ownership of our outstanding classes of stock as of April 14, 2010, by each person known by us to (i) own beneficially more than 5% of each class, (ii) by each of our Directors and Executive Officers and (iii) by all Directors and Executive Officers as a group. Unless otherwise indicated below, to our knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock except to the extent that authority is shared by spouses under applicable law.

The number of shares of common stock issued and outstanding on April 14, 2010 was 184,638,320 shares. The calculation of percentage ownership for each listed beneficial owner is based upon the number of shares of common stock issued and outstanding on April 14, 2008, plus shares of common stock subject to options / warrants held by such person on April 14, 2010 and exercisable within 60 days thereafter.


Name of Beneficial Owner	Number of Shares Beneficially Owned	Percentage of Ownership (1)
KB Development, LLC. (3)	152,000,000	82.32%
Kambiz Mahdi (2)	7,507,368	4.07%
John Bennett (4)	540,000	0.29%
Total	160,047,368	55.77%

Total of All officers and directors	8,047,368	4.36%

The percentage of ownership includes shares underlying other classes of securities held by the individuals, Series A, Series B, Series C and Series D Warrants which can be converted into common stock within 60 days of this offering.

Kambiz Mahdi is one of our founders and a director of ours. Mr. Mahdi has dispositive and voting power over his shares and claims beneficial ownership of them. He is all the rights pursuant to such ownership. Mr. Mahdi acquired his shares as a founder of Probe.

Kambiz Mahdi, a member of our board of directors is the managing partner of KB Development Group, LLC.

John Bennett is our chief financial officer. Mr. Bennett’s shares are represented by his exercisable stock options that he is vested for.

The number of shares of common stock issued and outstanding on April 14, 2010 was 184,638,320 shares.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

Related Party – Notes payable

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in cash and 10% paid in our common stock shares), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Kambiz Mahdi. On April 15, 2008 we were unable to meet the balloon payment and the note is in default. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $14,227. As of December 31, 2009 the outstanding balance was zero.

Note Payable - dated March 10, 2006 – related party, special use, line of credit in the amount of $45,000, unsecured, 20.00% interest (10.00% paid in Cash and 10.00% paid in our common stock shares), due May 10, 2007. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $1,001 and a balloon payment of $16,588 on April 15, 2008. This note is payable to Reza Zarif. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date.. On July 27, 2009 this note was settled in full for $3,585 and recognized a gain of $9,636. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party, unsecured, 20.00% interest (10.00% paid in cash and 10.00% paid in our common stock shares) due on May 10, 2007, Payable to Reza Zarif. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $7,871 and a balloon payment of $130,366 on April 15, 2008. As of June 30, 2008 the outstanding balance was $126,759. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $34,583 and recognized a gain of $92,941. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8.00% paid in our common stock shares) per annum, payable to Rufina Paniego. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, 12.00% interest rate, with a 36 month amortization, monthly payments of $2,491 and a balloon payment of $39,759 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $10,563 and recognized a gain of $28,388. As of December 31, 2009 the outstanding balance was zero.

Note Payable – related party. This note was an operating line of credit, secured by the assets of the Company. Borrowings under this line of credit were at an interest rate of 20.00% (12.00% paid in cash and 8% paid in our common stock shares) per annum, payable to eFund Capital Partners. This note was converted to a term note payable, with an effective date of June 30, 2006, un-secured, at 12.00% interest rate, with a 36 month amortization, monthly payments of $4,982 and a balloon payment of $82,516 on April 15, 2008. The note was extended by 18 months, with an interest rate of 13.00% per annum. The holder was also issued 3 series D Warrants for every $2.00 of outstanding note balance on that date. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $81,879. As of December 31, 2009 the outstanding balance was zero.

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Note Payable – related party. This is a term note payable, with an effective date of January 15, 2008, payable to Jeff Conrad, Esq. at a 12.00% interest rate, with a 30 month amortization and monthly payments of $1,162. On July 27, 2009 this note was settled in full for $0 and recognized a gain of $27,796. As of December 31, 2009 the outstanding balance was zero.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

AUDIT FEES

On November 10, 2008 the board of directors voted to engage W. T. Uniack & Co. CPA’s P.C. as the issuer’s new independent auditors for the year ended December 31, 2008 and quarterly reviews thereon. The Company did not consult its new auditor W. T. Uniack & Co. CPA’s P.C concerning the registrant's two most recent fiscal years ended 2006 and 2007, and the subsequent interim periods prior to engaging that accountant regarding whether the application of accounting principles to a specified transaction, either completed or proposed; nor the type of audit opinion that might be rendered on the registrant's financial statements, and no written report was provided to the registrant or oral advice was provided that the new accountant concluded was an important factor considered by the registrant in reaching a decision as to any accounting, auditing or financial reporting issue.

On October 21, 2008 by an order of the Public Company Accounting Oversight Board ("Board" or "PCAOB") revoked the registration of Jaspers and Hall, P.C. and barring its two partners, Thomas M. Jaspers, CPA and Patrick A. Hall, CPA, from being associated persons of a registered public accounting firm. Thus, Board of Directors voted on November 10, 2008 to terminate its relationship with its independent auditors. There were no disagreements with Jaspers and Hall, P.C. on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure for the fiscal years ended 2006 and 2007 and the subsequent interim period through November 10, 2008. For the annual reports on Form 10-K fiscal years ended 2006 and 2007 and quarterly reports on Form 10-Q from 2006 up through November 10, 2008 our auditor’s had issued opinions in each of the reports covered during the periods described above regarding the Company’s ability to continue as a going concern.

W. T. Uniack & Co. CPA’s P.C. has been paid $6,000.00 and $XXXXX for the 2008 and 2009 audits, respectively.

AUDIT RELATED FEES

None.

TAX FEES

None.

ALL OTHER FEES

None.

THE BOARD OF DIRECTORS PRE-APPROVAL POLICY AND PROCEDURES

We do not have a separate Audit Committee. Our full Board of Directors performs the functions of an Audit Committee. During fiscal year 2008, the Board of Directors adopted policies and procedures for the pre-approval of audit and non-audit services for the purpose of maintaining the independence of our independent auditors. We may not engage our independent auditors to render any audit or non-audit service unless either the service is approved in advance by the Board of Directors or the engagement to render the service is entered into pursuant to the Board of Director's pre-approval policies and procedures. On an annual basis, the Board of Directors may pre-approve services that are expected to be provided to us by the independent auditors during the following 12 months. At the time such pre-approval is granted, the Board of Directors must (1) identify the particular pre-approved services in a sufficient level of detail so that management will not be called upon to make judgment as to whether a proposed service fits within the pre-approved services and (2) establish a monetary limit with respect to each particular pre-approved service, which limit may not be exceeded without obtaining further pre-approval under the policy.

The Board has considered whether the provision of the services described above under the caption "All Other Fees" is compatible with maintaining the auditor's independence.

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ITEM 15. EXHIBITS

EXHIBIT

NUMBER DESCRIPTION

3.1 Articles of Incorporation (included as exhibit 3.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

3.2 Bylaws (included as exhibit 3.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

4.1 Certificate of Designation for Series A Convertible Preferred Stock, dated May 20, 2004 (included as exhibit 4.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

4.2 Certificate of Designation for Series B Convertible Preferred Stock dated December 31, 2004 (included as exhibit 4.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

4.3 Sample Series A Warrant Purchase Agreement (included as exhibit 4.3 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

4.4 Sample Series B Warrant Purchase Agreement (included as exhibit 4.4 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

4.5 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 4.5 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).

4.6 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 4.6 to the Form SB-2/A filed on November 25, 2005 and incorporated herein by reference).

4.7. Certificate of Designation of Series C Convertible Preferred Stock dated May 25, 2006 (included as exhibit 4.1 to the Form 8-K filed on June 14, 2006 and incorporated herein by reference).

4.8 Amended Certificate of Designation of Series C Convertible Preferred Stock dated May 25, 2006 (included as exhibit 4.1 to the Form 8-K filed on August 14, 2006 and incorporated herein by reference).

4.9 Sample Amended Series A Warrant Purchase Agreement (included as exhibit 10.1 to the Form 8-k filed on November 15, 2006 and incorporated herein by reference).

4.10 Sample Amended Series B Warrant Purchase Agreement (included as exhibit 10.2 to the Form 8-k filed on November 15, 2006 and incorporated herein by reference).

10.1 Lease Agreement between Probe Manufacturing, Inc. (F.K.A. Probe Manufacturing Industries, Inc. and Reza Zarif and Kambiz Mahdi, dated May 2, 1997 (included as exhibit 10.1 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.2 Consulting Agreement between Probe Manufacturing Industries and Anthony Reed dated December 31, 2004 (included as exhibit 10.2 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.3 Legal retainer agreement between Probe Manufacturing, Inc. and Jeffrey Conrad dated (included as exhibit 10.3 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.4 Line of Credit agreement between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated January 1, 2005 (included as exhibit 10.4 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.5 Line of Credit agreement between Probe Manufacturing, Inc. and Ashford Capital, LLC dated January 1, 2005 (included as exhibit 10.5 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

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10.6 Line of Credit agreement between Probe Manufacturing, Inc. and Benner Exemption Trust dated March 8, 2005 (included as exhibit 10.6 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.7 Line of Credit agreement between Probe Manufacturing, Inc. and Edward Lassiter dated March 22, 2005 (included as exhibit 10.7 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.8 Line of Credit agreement between Probe Manufacturing, Inc. and Rufina V. Paniego dated January 1, 2004 (included as exhibit 10.8 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.9 Promissory Note between Probe Manufacturing, Inc and Ashford Transitional Fund, L.P. dated September 20, 2004 (included as exhibit 10.9 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.10 Engagement Letter between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated May 20, 2004 (included as exhibit 10.10 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.11 Series A Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated May 20, 2004 (included as exhibit 10.11 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.12 Series A Convertible Preferred Stock Purchase Agreement with Reza Zarif dated May 20, 2004 (included as exhibit 10.12 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.13 Series A Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated May 20, 2004. (included as exhibit 10.13 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.14 Series B Convertible Preferred Stock Purchase Agreement with eFund Capital Partners, LLC dated December 31, 2004 (included as exhibit 10.14 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10. 15 Series B Convertible Preferred Stock Purchase Agreement with Reza Zarif dated December 31, 2004 (included as exhibit 10.15 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.16 Series B Convertible Preferred Stock Purchase Agreement with Kambiz Mahdi dated December 31, 2004 (included as exhibit 10.16 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.17 Agreement to Cancel and Return shares of common stock between Probe and eFund Capital Partners, LLC, Ashford Capital, LLC, Reza Zarif, Kambiz Mahdi, dated December 31, 2004 (included as exhibit 10.17 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.18 Promissory note with eFund Capital Partners, LLC dated October 12, 2004 (included as exhibit 10.18 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.19 Promissory note with Rufina V. Paniego dated July 1, 2004 (included as exhibit 10.19 to the Form SB-2/A filed on June 10, 2005 and incorporated herein by reference).

10.20 Sample purchase order agreement with Celerity, Inc (included as exhibit 10.20 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

10.21 Sample purchase order agreement with Newport Corporation (included as exhibit 10.21 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

10.22 Sample purchase order agreement with Asymtek Corporation (included as exhibit 10.22 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

10.23 Sample purchase order agreement with Jetline Engineering Corporation (included as exhibit 10.23 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

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10.24 Sample purchase order agreement with our supplier Future Active, Inc (included as exhibit 10.24 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

10.25 Sample purchase order agreement with our supplier Arrow Electronics, Inc. (included as exhibit 10.25 to the Form SB-2/A filed on September 26, 2005 and incorporated herein by reference).

10.26 Lease Agreement between Probe Manufacturing, Inc. and Mitchell Fitch, LLC, dated November 15, 2005 (included as exhibit 10.26 to the Form 10-KSB on April 5, 2007 and incorporated herein by reference).

10.27 Employment Agreement with Reza Zarif, Chief Executive Officer of Probe Manufacturing, Inc. (included as exhibit 10.1 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).

10.27 Series C Convertible Preferred Exchange Agreement with eFund Capital Partners, LLC (included as exhibit 10.2 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).

10.28 Series C Convertible Preferred Exchange Agreement with Reza Zarif (included as exhibit 10.3 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).

10.29 Series C Convertible Preferred Exchange Agreement with Kambiz Mahdi (included as exhibit 10.4 to Form 8-K filed on June 14, 2006 and incorporated herein by reference).

10.30 Amended Series C Convertible Preferred Exchange Agreement with eFund Capital Partners, LLC (included as exhibit 10.1 to Form 8-K filed on August 14, 2006 and incorporated herein by reference).

10.31 Amended Series C Convertible Preferred Exchange Agreement with Reza Zarif (included as exhibit 10.2 to Form 8-K filed on August 14, 2006 and incorporated herein by reference).

10.32 Amended Series C Convertible Preferred Exchange Agreement with Kambiz Mahdi (included as exhibit 10.3 to Form 8-K filed on August 14, 2006 and incorporated herein by reference).

10.33 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Kambiz Mahdi dated August 10, 2006 (included as exhibit 10.1 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.34 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Reza Zarif dated August 10, 2006 (included as exhibit 10.2 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.35 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Frank Kavanaugh dated August 10, 2006 (included as exhibit 10.3 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.36 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Kambiz Mahdi dated August 10, 2006 (included as exhibit 10.4 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.37 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Reza Zarif dated August 10, 2006 (included as exhibit 10.5 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.38 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Rufina Paniego dated August 10, 2006 (included as exhibit 10.6 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.39 Amended Line of Credit agreement between Probe Manufacturing, Inc. and eFund Capital Partners, LLC dated August 10, 2006 (included as exhibit 10.7 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.40 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Benner Exemption Trust dated August 10, 2006 (included as exhibit 10.8 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.41 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Ed Lassiter dated August 10, 2006 (included as exhibit 10.9 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

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10.42 Amended Line of Credit agreement between Probe Manufacturing, Inc. and William Duncan dated August 10, 2006 (included as exhibit 10.10 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.43 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Hoa Mai dated August 10, 2006 (included as exhibit 10.11 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.44 Amended Line of Credit agreement between Probe Manufacturing, Inc. and Ashford Transition Fund dated August 10, 2006 (included as exhibit 10.12 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.45 Employee Profit Sharing Plan (included as exhibit 10.13 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.46 Probe Manufacturing 2006 Employee Incentive Stock Option Plan (included as exhibit 10.14 to the Form 8-K filed on August 23, 2006 and incorporated herein by reference).

10.47 Employment offer to John Bennett, the Company’s Chief Financial Officer (included as exhibit 10.1 to Form 8-K filed March 26, 2008).

10.48 Letter of intent to acquire the assets of Solar Master Company (Included as exhibit 10.1 to Form 8-K filed July 28, 2008).

10.49 Amended Letter of intent to acquire the assets of Solar Master Company (included as exhibit 10.1 to form 10-Q/A filed November 18, 2008 and incorporated herein by reference).

10.50 Purchase and Sale of Assets Agreement between Solar Masters, LLC and Probe (filed as exhibit 10.1 to Form 8-K dated August 21, 2008 and incorporated herein by reference).

10.51 Lease Agreement for Solar Masters, Inc., our subsidiary (included as exhibit 10.1 to form 10-Q/A filed November 18, 2008 and incorporated herein by reference).

1052. Executive Consulting Agreement with Barrett Evans ((included as exhibit 10.1 to form 8-K filed September 12, 2008 and incorporated herein by reference).

14.1 Code of Ethics (included as exhibit 14.1 to the Form 10-KSB on April 5, 2007 and incorporated herein by reference).

21.1 List of Subsidiaries (included as Exhibit 21.1 to the Form 10-KSB filed herewith).

23.1 Consent of Jaspers + Hall, PC - Independent Auditors to the Form 10-K filed March 25, 2007, and filed herewith.

31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification of Officers 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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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Lake Forest, State of California on the 14th day of April 2009.

PROBE MANUFACTURING, INC.

______________________________

REGISTRANT

/s/ Kambiz Mahdi

___________________

By: Kambiz Mahdi

Director and Chief Executive Officer

/s/ John Bennett

___________________

By:

John Bennett

Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

Signature

Title

Date

/s/ Kambiz Mahdi

Chief Executive Officer and Director

April 14, 2009

_______________________

Kambiz Mahdi

/s/ John Bennett

Chief Financial Officer

April 14, 2009

_______________________

John Bennett

/s/ Kambiz Mahdi

Director

April 14, 2009

_______________________

Kambiz Mahdi

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