10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(Mark One)
þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended April 3, 2005
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from           to

Commission file number 000-26911

THERMA-WAVE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	94-3000561
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)
1250 Reliance Way Fremont, California (Address of Principal Executive Offices)	94539 (Zip Code)

(Registrant’s Telephone Number, Including Area Code)

(510) 668-2200

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

None

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

Common Stock, par value $0.01 per share

(Title of Class)

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

      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 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.     o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the common equity held by non-affiliates of the registrant, based upon the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter (September 26, 2004) as reported by the Nasdaq National Market, was approximately $119 million.

      As of June 17, 2005, the registrant had 36,341,178 shares of common stock outstanding.

      Portions of the Proxy Statement for the 2005 annual stockholders meeting are incorporated by reference into Part III.

THERMA-WAVE, INC.

FORM 10-K

TABLE OF CONTENTS

		Page
PART I.
Item 1.	Business		3
Item 2.	Properties		12
Item 3.	Legal Proceedings		13
Item 4.	Submission of Matters to a Vote of Security Holders		13
PART II.
Item 5.	Market for the Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities		13
Item 6.	Selected Financial Data		15
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 7A.	Quantitative and Qualitative Disclosures About Market Risks		48
Item 8.	Financial Statements and Supplemental Data		50
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		85
Item 9A.	Controls and Procedures		85
Item 9B.	Other Information		88
PART III.
Item 10.	Directors and Executive Officers of the Registrant		89
Item 11.	Executive Compensation		89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		89
Item 13.	Certain Relationships and Related Transactions		89
Item 14.	Principal Accountant Fees and Services		89
PART IV.
Item 15.	Exhibits and Consolidated Financial Statement Schedules		91
Signatures			94
EXHIBIT 10.4
EXHIBIT 10.8
EXHIBIT 10.12
EXHIBIT 10.21
EXHIBIT 10.36
EXHIBIT 10.37
EXHIBIT 10.38
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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PART I

Item 1. Business

      This annual report on Form 10-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they do not fully materialize or prove incorrect, could cause our business and results of operations to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include, without limitation, any statements concerning the conditions in the semiconductor and semiconductor capital equipment industries, our operations, economic performance and financial condition, including in particular statements relating to our business, growth strategy, improved gross margins and product development efforts, statements related to benefits to be derived from our agreement with Hermes-Epitek Corporation, statements related to ongoing and future restructurings aimed at reducing the company’s overall cost structure, statements related to returning the company to profitability and statements of belief and statements of assumptions underlying any of the foregoing. The words “will,” “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,” “continue,” or the negative of such terms, or other comparable terminology generally identify forward-looking statements.

      These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including, without limitation, those identified under the section titled “Risk Factors,” and elsewhere in this annual report and other risks and uncertainties indicated from time to time in our filings with the SEC. Actual results could differ materially from these forward-looking statements. All forward-looking statements included in this annual report are based on information available to us as of the date hereof, and we assume no obligation to update these forward-looking statements.

Overview

      Therma-Wave develops, manufacturers, markets and services process control metrology systems used in the manufacture of semiconductors. Process control metrology is used to monitor process parameters to enable semiconductor manufacturers to maintain high overall manufacturing yield, increase their equipment productivity and reduce the size of the circuit features imprinted on the semiconductor to thereby improve the performance of the semiconductor device. Our current product families, Therma-Probe®, Opti-Probe®, Opti-Probe CD^tm and RT/ CD®, and Integra® integrated metrology products, use proprietary and patented technology to provide precise, non-contact, non-destructive measurement for the basic building blocks, or process modules, used in the manufacture of integrated circuits (ICs):

•  Ion Implantation — implanting ions, usually boron, phosphorus or arsenic, into selected areas of the silicon wafer to alter its electrical properties. Ion implantation may be performed typically ten to 24 times in the manufacture of ICs. For example, ion implantation creates the positively- and negatively-doped regions used to create each of the millions of transistors on each integrated circuit. It is also used to adjust the voltage (threshold voltage) at which the transistors will “turn on”. Our Therma-Probe product is a standard metrology tool for these ion implantation processes.

•  Dielectric Film Deposition and Etching — depositing and selectively removing layers of dielectric films on the silicon wafer to provide electrical insulation for each layer of the semiconductor IC. Film deposition is typically done by Chemical Vapor Deposition (CVD), and film removal is typically done by plasma etching. Our Opti- Probe product is typically used as a standard, in-line metrology tool for film thickness measurement in these processes. Our Opti-Probe CD and RT/ CD, or Real-Time Critical Dimensions, and Integra integrated metrology products, provide rapid, non-destructive wafer-state information for control of the Critical Dimensions (CDs) of the etch processes.

•  Conductor Film Deposition and Etching — depositing and selectively removing layers of metal, polysilicon, and metal barrier films used to interconnect the transistors within a semiconductor device. Film deposition is typically done by Physical Vapor Deposition (PVD) electrochemical deposition (ECG), or CVD. Film removal is typically done by plasma etching or chemical mechanical planarization. Our Opti-Probe is a standard metrology tool for non-opaque conductor films. Our Opti-

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	Probe CD and RT/ CD, and Integra integrated metrology products provide rapid, non-destructive wafer-state information for control of the CDs of the etch processes.
•	Chemical Mechanical Planarization, or CMP — “leveling” the top surface of the wafer after each layer of device features is added. The leveling is done by mechanical polishing in a chemical solution, and is required to maintain flatness of the wafer throughout the sequence of hundreds of process steps. Our Opti-Probe is a standard, in-line metrology tool for film thickness measurement in these processes.
•	Wafer Patterning — using photolithographic techniques to create the fine (sub-micron) structures that define the integrated circuit. The wafer patterning is typically done by “stepper” exposure systems and the photoresist developing and removal is done by coater/developer “track” systems and “asher/strip” systems. Our Opti-Probe is typically used as a standard, in-line metrology tool for film thickness and reflectivity measurements in these processes. Our Opti-Probe CD and RT/ CD, and Integra integrated metrology products provide rapid, non-destructive wafer-state information for control of the CDs during the wafer patterning process.

      Our services include selling parts, billable service calls, and maintenance contracts related to our metrology products. Service and parts revenues are derived either from the performance of billable service calls, direct sales of parts, or service maintenance contracts, which are normally of one-year duration. We do not service any products other than those sold by us.

Industry Background

      The demand for semiconductors has increased as the use of semiconductors has expanded beyond personal computers and computer systems to a wide array of additional applications, including telecommunication and data communication systems, automotive systems, consumer electronics, medical products and household appliances. Additionally, the Internet has stimulated the need for more high performance semiconductor devices. As a result, semiconductors have become more complex, requiring:

•  successive decreases in feature line width, for example, from 150 nanometers (nm) to 130 nm, from 130 nm to 110 nm, and from 110 nm to 90 nm;

•  as many as 500 process steps; and

•  an increase in the number of metal or “interconnect” layers.

      Additionally, the life cycle for these semiconductor device processes has been compressed from four years in the early 1990s to approximately two years today. The increase in device complexity and reduction in product life cycles have led to a more costly and complex manufacturing process. At the same time, semiconductor manufacturers have continued to face significant price pressure due to competition in the industry. These factors have led semiconductor manufacturers to intensify efforts to improve fab productivity, including the increased use of process control metrology.

      Process control metrology is used to monitor process parameters so as to enable semiconductor manufacturers to reduce costs and improve device performance. Historically, semiconductor manufacturers have achieved annual reduction in cost per chip function through productivity improvements including reduced feature size, increased wafer size and increased equipment productivity. Although increasing wafer size and yield (percentage of “good” ICs per wafer) will continue to be sources of productivity gains by semiconductor manufacturers, increasingly, we believe, gains will come predominately from reduced feature size and non-yield-derived manufacturing productivity enhancements. This important last category includes increased equipment uptime, reduced manufacturing space requirements, reduced use of wafers for testing purposes, and lower tool maintenance costs.

Therma-Wave Metrology Solutions

      Our family of metrology products currently consists of Therma-Probe, Opti-Probe, including Opti-Probe CD, and Integra product lines.

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      The following table lists the percentage of net revenues by product family for the years ended March 31, 2005, 2004 and 2003.

			Percentage of Net
			Revenues
			Fiscal Years Ended
			March 31,
			2005			2004			2003
Net Revenues by Product Family
	Opti-Probe, including Opti-Probe CD			47	%		44	%		41	%
	Therma-Probe			22	%		8	%		11	%
	Integra and Other			6	%		13	%		6	%
	Service and parts			25	%		28	%		42	%
	License			—	%		7	%		—	%
		Total		100	%		100	%		100	%

Therma-Probe Product Family

      The Therma-Probe systems employ proprietary thermal wave technology that uses highly focused, but low power laser beams to generate and detect thermal and plasma wave signals in the silicon wafer. Proprietary software correlates the signals to the ion implant dose. Unlike previous ion implant metrology systems, the Therma-Probe systems utilize a non-contact, non-damaging technology and thus can be used to monitor product wafers immediately after the ion implantation process. These features have been integrated into an easy-to-use and reliable package with automated wafer handling and statistical data processing.

Ion Implant Metrology

      A key process step in the fabrication of semiconductor devices is the implantation of ions of boron, phosphorous, arsenic, antimony, and indium into selective areas of silicon wafer to alter its electrical properties. Control of the accuracy and uniformity of the ion implant dose is critical to device performance and yield. Ion implantation is generally performed several (typically ten to 24) times during the early phases of the fabrication cycle. As a result, there is typically a time lag of several weeks between these implant steps and the first electrical measurements that indicate whether the ion implantation process was properly executed. Failure to identify improper ion implantation can be extremely costly to a semiconductor manufacturer if the wafer production is permitted to continue in error. To test on a more timely basis whether the ion implantation was properly executed, semiconductor manufacturers historically used a four-point probe, which required physical contact between the probe and the silicon wafer surface. Because the physical contact with the wafer surface produces silicon particles (defects), which can kill IC yield, the four-point probe method can only be used on monitor wafers (non-production blank wafers that have no IC devices on them). In contrast to that method, Therma-Probe’s ability to measure nondestructively on actual production IC wafers decreases manufacturing costs by reducing the need for test wafers. In addition, Therma-Probe systems detect implant processing problems that only affect the product wafers and which cannot be revealed by utilizing test wafer monitoring alone.

Ultra-Shallow Junction Metrology

      As semiconductor devices decrease in size, demands for the formation of Ultra-Shallow-Junctions, or USJs, for source/drain formation are increasing. One of the main challenges in the scaling of complementary metal oxide semiconductor (CMOS) devices is the formation, control and monitoring of these USJs. The Therma-Probe system performs nondestructive evaluation of USJs for junction depth and junction abruptness simultaneously. These measurements are enabled by our proprietary USJ software. This Therma-Probe capability allows engineers to monitor and control the formation of USJs in CMOS device fabrication.

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Opti-Probe Product Family

      Opti-Probe systems significantly improve upon existing thin-film metrology systems with the successful integration of up to five distinct film measurement technologies, three of which are patented by our company. By combining the measured data from these multiple technologies, Opti-Probe systems provide increased measurement capability leading to higher yields, less misprocessing, less rework, faster production ramp-up and increased productivity on both test and product wafers.

Thin-Film Metrology

      The majority of the 100 to 500 process steps required to fabricate semiconductors on a silicon wafer involve the deposition and selective removal of a variety of insulating and conducting thin-films. Thin-film metrology systems measure the thickness and material properties of these thin-films and, because they are used to measure a large number of process steps, are one of the most important and pervasive metrology systems utilized at semiconductor fabrication facilities. The most widely used technologies to measure the thickness and properties of thin-films have historically been reflection spectrometry and ellipsometry. Reflection spectrometers obtain an optical spectrum as a function of the wavelength of light reflected from the surface of a wafer. This spectrum is then analyzed with appropriate physics-based algorithms to obtain film thickness and, in some cases, other properties of the film. In ellipsometry, the change of polarization of the reflected light is measured. The polarization change is likewise analyzed with appropriate algorithms to obtain film thickness and, in some cases, other properties of the film.

      Increasingly, traditional, single-technology film metrology systems have been unable to meet the process control metrology demands of the semiconductor industry. The continued demand for improved precision and repeatability require the ability to measure thicknesses that range from extremely thin films (generally measure below 20 angstroms) to films that are hundreds of thousands times thicker. Reflection spectrometers are most suitable for measuring thicker films, whereas ellipsometers are most suitable for measuring very thin films. Furthermore, the industry is now using film stacks composed of several layers of different films and the optical properties of many films are functions of the actual deposition conditions. Generally spectrometers or ellipsometers alone generate insufficient data to simultaneously determine the thicknesses and properties of these film stacks and new films with the precision that semiconductor manufacturers require. Reflection spectrometers and most ellipsometers have limited capabilities for the simultaneous measurement of both thickness and optical parameters when used as independent standalone measurement technologies.

      In 1992, we introduced the first Opti-Probe system based on our patented BPR measurement technology to meet the film measurement needs for the 250 nm technology node. Over the years the Opti-Probe products have evolved to keep pace with the need for increasing film measurement precision, repeatability and matching requirements driven by technology advances. In 2002, we introduced our latest generation of film thickness metrology product, the Opti-Probe Series 7. Integrating all five measurement technologies, the Opti-Probe Series 7 addresses the wide range of film measurements needed for 90 nm production as well as supporting films process development of 65 nm and below technology nodes.

Opti-Probe CD and RT/ CD Products

New Market Requirements

      In January 2002, we introduced Opti-Probe CD with Real Time CD processing (RT/ CD), a product designed to measure the lateral Critical Dimensions and cross-sectional shape, or profile, of fine IC features. As semiconductor device manufacturers continue to shrink feature sizes to the 90 nm technology node and smaller, traditional CD metrology techniques such as critical dimension scanning electron microscopy, or CD-SEM, lack the resolution and stability required to provide accurate data about feature critical dimensions and profiles. A significant limitation is that these methods provide only a top-down view of features and provide little or no data about characteristics of the sides or bottom of a structure.

      Semiconductor manufacturers are often confronted with problems involving variations in profile and sidewall angle. Detailed knowledge of profile shape is of high importance. In shallow trench isolation (STI),

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or damascene integration schemes, etched trenches to be filled by downstream process steps may have problematic re-entrant angles, notching, t-topping or other feature artifacts. These feature artifacts can lead to yield-killing conditions such as voiding and cracking of deposited films in later deposition fill process steps.

      For the critical gate patterning process, tight control of the gate CD correlates with improved device performance and better bin sort yields (and average revenue per chip). Furthermore, shape anomalies such as undercut, microtrenching or notching, can have a detrimental effect on device speed and reliability. In these and other applications, precise shape profiling is crucial.

      Our Opti-Probe RT/ CD is the first optical CD scatterometry system that combines high-information content SE, optical measurement with ultra-fast calculation (“real-time regression”) to analyze and display results without the use of off-line modeling and solution libraries. Complex CD profiles can be calculated in seconds with precision and repeatability and with structural information not available with standard CD-SEM technologies.

      The Opti-Probe CD system leverages our established Opti-Probe thin-film metrology platform for optical data acquisition. The Opti-Probe’s patented RCSE provides rich spectral data, ensuring detail and accuracy in the results. This non-destructive CD measurement technology is beneficial for the current prevalent microelectronics technology node (130nm), and is extendible to the 65 nm technology node and even beyond for a wide range of process applications.

Integrated Metrology Products

Market Requirements

      We have both spectrometer and spectroscopic ellipsometer based IM units available in the marketplace. These are compact metrology units that contain a single measurement technology matched to the specific metrology need of a particular semiconductor process tool (etcher, coater/developer, CVD, CMP, stepper, etc.) Each IM unit is installed directly on to a semiconductor process tool, and can measure each wafer immediately after processing. In this manner, processing variations can be detected at the earliest possible moment, as opposed to the conventional procedure in which a 25-wafer lot is typically completed before metrology is first done, thereby leaving the entire lot at risk of becoming scrap. With 300 mm wafers, this economic loss becomes increasingly large due to the additional product value of each processed wafer.

Benefits of Integrated Metrology & Advanced Process Control

      IM is becoming increasingly accepted as a means of achieving reach greater productivity. Advanced semiconductor manufacturing today is under great pressure to deliver ever greater levels of process performance, production availability and process repeatability in order to minimize the risk of product loss and improve manufacturing efficiencies and device yields. The transition towards 300mm wafers, continuing device shrinks and mixed foundry manufacturing models are key contributors to these trends. To successfully meet these challenges, device manufacturers and process tool equipment manufacturers are actively engaged in developing technologies for Advanced Process Control (APC). We believe that APC implementation requires the integration of metrology capabilities directly onboard the process tool.

      Device manufacturers can derive a wide range of benefits by implementing integrated metrology and APC strategies in their fabs. By integrating the measurement directly onto the process tool, they can greatly increase the rate of sampling and simultaneously decrease the delay between the process step and measurement. Increasing the measurement frequency to every single wafer allows for rapid fault detection and correction. This reduces the potential for scrap due to excursions in the process tool. In addition, the data collected can be input into real time process control models to correct minor drifts in processing conditions.

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Integra Product Family

      All of our integrated metrology products are grouped into a family of products bearing the Integra name. These include:

•  Integra CCD-i — a second-generation reflectometer unit for high throughput thin-film, and

•  CMP and OCD applications based on the CD-i product.

      During fiscal years 2004 and 2005, a major coater/developer equipment supplier to the semiconductor industry installed multiple Integra CCD-i units at key development and pilot production fabs in Europe, North America, Taiwan and Japan. Additional end-user installations for advanced technology development and production lines are planned during fiscal 2006.

Employees

      As of March 31, 2005, we employed 382 persons, including 79 in engineering, research and development, 56 in manufacturing, 146 in customer support, 47 in sales and marketing and 54 in executive and administrative functions. None of our employees are represented by a labor union or covered by a collective bargaining agreement. We consider our employee relations to be good.

Sales and Marketing

      We maintain sales offices and regional sales representatives throughout the world. In the United States, we maintain a sales office in California. We also utilize manufacturers’ sales representatives to cover certain regions of the United States. In Asia, we maintain sales offices in Japan, China, Korea, Singapore and Taiwan. The Japan and Singapore offices work with distributors or manufacturers’ sales representatives to sell our products to customers in Japan, Singapore and Malaysia, while the China, Taiwan and Korean offices sell to customers directly. We also have sales representatives in the United Kingdom working with manufacturers’ sales representatives throughout the rest of Europe.

      Effective April 19, 2005, Therma-Wave entered into an exclusive representative agreement with Hermes-Epitek Corporation, under which Hermes-Epitek became an exclusive representative in certain countries to sell and service our Therma-Probe and Opti-Probe families of metrology products.

      Pursuant to the terms of this agreement, Hermes-Epitek will serve as the exclusive representative for our Therma-Probe and Opti-Probe metrology product lines for China, Malaysia, Singapore and Taiwan. Therma-Wave will pay Hermes-Epitek a commission on the sale of these products when the products are installed within one of the enumerated territories and where the sales process or purchasing decision was directly influenced by Hermes-Epitek. Additionally, Hermes-Epitek will provide our customers with technical support services for the products, including, among other things, installation services and qualification testing. The term of this agreement is twenty-four months, with a provision for automatic renewal for additional twelve-month terms.

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      Sales to Taiwan Semiconductor Manufacturing Company, Intel Corporation and Samsung each accounted for more than 10% of net revenues in fiscal 2005. The following chart indicates the percentage of net revenues to customers representing 10% or more of net revenues for fiscal years 2005, 2004 and 2003, respectively.

			Percentage of Net
			Revenues
			Fiscal Years Ended
			March 31,
			2005			2004			2003
Customers Over Ten Percent of Net Revenues
	Taiwan Semiconductor Manufacturing Company			15	%		16	%		—	%
	Intel Corporation			12	%		14	%		13	%
	Samsung			10	%		—	%		—	%
	Tokyo Electron, Ltd.			—	%		12	%		—	%
	Raytec Corp.(1)			—	%		10	%		—	%
		Total		37	%		52	%		13	%

(1)  Raytec Corp. was formally a subsidiary of Seki Technotron, our distributor for Japan.

      International revenues in fiscal 2005, 2004 and 2003 accounted for approximately 71%, 72% and 72% of net revenues in each of these periods, respectively. We anticipate that international sales will continue to account for a significant portion of our net revenues in the foreseeable future. The following table summarizes the percentage of our total net revenues by geography for the fiscal years ended March 31, 2005 and 2004, respectively:

			Fiscal Year Ended
			March 31,
			2005			2004
Revenues by Country
	United States			29	%		28	%
	Taiwan			21	%		23	%
	Korea			14	%		5	%
	Japan			13	%		22	%
	Europe			11	%		14	%
	China			6	%		5	%
	Singapore			6	%		3	%
		Total		100	%		100	%

      In addition, we provide direct customer support to all of our customers worldwide, including warranty support and post warranty maintenance and repair and application support. In some locations, field service is still provided by the same manufacturers’ sales representative that handles the sales function, but application support is provided by our employees in that territory or from our Fremont, California location. In the United States, we have field service and applications engineers located in Arizona, California, Colorado, Florida, Idaho, Massachusetts, New Mexico, Oregon, Tennessee, Texas, Virginia and Washington. Customers contract for dedicated site-specific field service and applications engineers. In Asia, we have provided customer support in Japan, China, Taiwan, Korea and Singapore. However, as discussed above, we are currently in the process of transitioning all sales, service and support for China, Taiwan, Singapore, and Malaysia, to a new sales representative. In Europe and the Middle East, our service and applications personnel, located in France, the United Kingdom, Italy, Ireland and Israel, provide direct customer support to our customers in Europe and the Middle East and to our European manufacturers’ sales representatives. We provide our customers with comprehensive support before, during and after delivery of our products. Prior

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to shipment, our support personnel typically assist the customer in site preparation and inspection, and provide customers with training at our facilities and also at the customer’s location. Our customer training programs include instructions in the maintenance of our systems and in system hardware and software tools for optimizing the performance of our systems. Our field support personnel work with the customers’ employees to install the equipment and demonstrate equipment readiness as well as new procedures and capabilities. In addition, we maintain a group of highly skilled applications scientists in order to respond to customers’ process needs worldwide when a higher level of technical expertise is required.

      We generally warrant our products for a period of 12 months from system acceptance, although this can, at times, be extended according to the terms of a particular contract. Installation and initial training are customarily included in the price of a system. After the expiration of the warranty period, customers may enter into support agreements covering both field service and field applications support. Our field service engineers may also provide customers with repair and maintenance services on a fee basis. Our applications engineers and scientists are also available to work with the customers on recipe development. Additionally, for a fee, we train customers to perform routine maintenance on their purchased tools. We also provide a 24-hour telephone help-line.

Research and Development and Engineering

      The process control metrology market is characterized by continuous technological development and product innovations. We believe that continued and timely development of new products and enhancements to our existing products is necessary to maintain our competitive position. Accordingly, we devote a significant portion of our personnel and financial resources to engineering and research and development programs. As of March 31, 2005, our research, development and engineering staff comprised 79 people. Additionally, we seek to maintain close relationships with all our customers so as to continuously make improvements in our products that respond to customers’ needs. Our ongoing engineering and research and development efforts can be classified into three categories: new products; feature enhancements, such as features to improve precision, speed and automation; and customer-driven product enhancements, such as new measurement recipes or algorithms. We have research and development and engineering staffs working both on developing new products and features and also on responding to the particular needs of customers.

      Engineering and research and development expense, including the effects of stock-based compensation, were $17.3 million, $19.4 million and $30.2 million, in fiscal 2005, 2004 and 2003, respectively, or 21%, 30% and 61% of net revenues for those periods, respectively. We expect that engineering and research and development expenditures will continue to represent a substantial percentage of our net revenues for the foreseeable future. The decrease in the percentage of research and development expense to net revenues for fiscal year 2005 compared to 2004 reflects increased net revenues and decreased spending in 2005. The semiconductor industry is highly volatile, often causing revenues to fluctuate significantly year-to-year while R&D spending tends to be more consistent and reflect the costs of longer-term product development goals. The decrease in expenses in fiscal 2005 from 2004 is explained by lower charges for variable accounting for stock options by $0.9 million and lower project spending. In the near term, at least through fiscal year 2006, we expect engineering and research and development project spending to remain relatively flat and possibly, to be reduced if industry conditions remain unchanged.

      Our backlog consists of orders not yet shipped, deferred revenues for products that have been shipped and invoiced but have not yet been recognized as revenue in accordance with SAB 104, recurring fees payable under support contracts with our customers and orders for spare parts and billable services, such as non-recurring engineering services. Orders that are scheduled for shipment beyond twelve-months are not included in backlog until they fall within the twelve-month window. Orders are subject to rescheduling or cancellation by the customer, usually without penalty. Because of possible changes in product delivery schedules and cancellation of product orders and because our sales will sometimes reflect orders shipped in the same quarter in which they are received, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. At March 31, 2005, our backlog was approximately $31.8 million, compared to approximately $27.5 million on March 31, 2004.

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Manufacturing

      Our manufacturing strategy is to produce technologically advanced and high quality metrology systems. In order to lower production costs, we perform, in-house, only those manufacturing activities that add significant value or that require unique technology or specialized knowledge. As a result, we rely on subcontractors and turnkey suppliers to build assemblies and perform other activities in a cost effective manner.

      Our principal manufacturing activities include high value added assembly and test work, both of which are conducted at our facility in Fremont, California. Assembly activities include inspection, subassembly and final assembly. Test activities include modular testing, optical system alignments, system integration and final testing. Components and subassemblies, such as lasers, robots and stages, are acquired from third party vendors and integrated into our finished systems. These components and subassemblies are obtained from a limited group of suppliers, and occasionally from a single source supplier. While we use standard components and subassemblies wherever possible, most mechanical parts, metal fabrications and critical components are engineered and manufactured to our unique specifications. We have not entered into any formal agreements with limited source suppliers, other than long-term purchase orders and, in some cases, volume pricing agreements. Those parts coming from a limited group of suppliers are monitored to ensure that adequate supplies are available to maintain manufacturing schedules and to reduce our dependence on these suppliers should supply lines become interrupted. In selected cases, a small amount of safety stock is also maintained to minimize any potential disruption from a key supplier.

      We schedule production based upon firm customer commitments and anticipated orders. We have structured our production process and facility to be driven by both orders and forecasts and have adopted a modular system architecture to increase assembly efficiency and test flexibility. Cycle times for our products vary significantly. We believe these cycle times have improved and will continue to improve as we continue to emphasize manufacturability in our new product designs.

      We conduct the assembly of our optical components and final testing of our systems in clean-room environments. This procedure is intended to reduce the amount of particulates and other contaminants in the final assembled system, and to permit the testing of our products against our own as well as the customers’ acceptance criteria prior to shipment. Following the final test, the completed system is packaged within triple vacuum-sealed bags to maintain a high level of cleanliness during shipment and installation.

Competition

      The market for semiconductor capital equipment is highly competitive, and we face substantial competition in each of the markets that we serve from both larger and smaller companies. Some of our competitors have greater financial, engineering, manufacturing and marketing resources and broader product offerings than we have. Significant competitive factors in the market for metrology systems include system performance, ease of use, reliability, cost of ownership to the customer, technical support and customer relationships. However, we believe we compete favorably on the basis of these factors in each of our served markets.

      Our Therma-Probe systems compete primarily with other metrology systems designed to measure ion implant dose, some of which measure in an alternative fashion, such as contact and destructive four-point probe measurement systems, and include products manufactured by KLA-Tencor Corporation, Applied Materials, Inc. and others. Our Therma-Probe systems are non-contact, nondestructive ion implant metrology systems for product wafers. Several years ago, Jenoptik GmbH introduced a competitive product to our Therma-Probe systems, which utilized thermal wave technology. In November 1997, a jury found that Jenoptik’s product infringed on a number of our United States patents. As a result of the settlement of this litigation, Jenoptik has agreed not to sell any of its metrology products in the United States until the patents expire and to pay us a royalty fee for systems sold in Japan. To date, the sale of these products by Jenoptik (or TePla AG, who has purchased these rights from Jenoptik) has not had a material impact on our market position.

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      Our Opti-Probe film thickness metrology systems primarily compete with systems manufactured by KLA-Tencor Corporation, Rudolph Technologies, Inc., Nanometrics, Inc. and Dai Nippon Screen, Mfg. Co., Ltd. Our Opti-Probe CD and RT/ CD systems participate in a newly developing market of optical CD metrology. We expect competition primarily from several of the same companies that compete with the Opti-Probe for film thickness metrology business. In addition, Accent Optical Technologies is an early participant in this market. For further information, see Note 6 of Notes to Consolidated Financial Statements entitled “Commitments and Contingencies”.

      Suppliers of integrated metrology with whom we compete include most of the companies listed above regarding the Opti-Probe, in addition to Nova Instruments.

Patents and Proprietary Rights

      The success of our business depends, at least in part, on our ability to obtain and maintain patents and proprietary rights, which protect our technology.

      We have a policy of seeking patents where appropriate on inventions concerning new products and improvements as part of our ongoing engineering and research and development activities. We have acquired a number of patents relating to our Therma-Probe, Opti-Probe and Integra systems. As of April 3, 2005, we owned 133 patents. Of these, 122 U.S. patents had expiration dates ranging from 2005 to 2022 and we had filed applications for 93 additional U.S. patents. We also owned 11 foreign patents with expiration dates ranging from 2005 to 2019 and had filed applications for 35 additional foreign patents. We believe that all of our revenue generating Therma-Probe, Opti-Probe and Integra products are protected by patents.

      As of April 3, 2005, we are licensed under 10 issued US patents applicable to our CD technology (scatterometry). Of these, we own 8 patents, and we filed applications for 12 additional US patents covering our CD technology.

      In addition to patent protection, we rely upon trade secret protection for our confidential and proprietary information and technology. We routinely enter into confidentiality agreements with our employees. However, there can be no assurance that these agreements will not be breached, that we will have adequate remedies for any breach and/or that our confidential and proprietary information and technology will not be independently developed by, or become otherwise known, to third parties.

      As of April 3, 2005, we owned 21 registered trademarks in the U.S. and 2 in Japan and had filed 4 trademark applications in the U.S.

Available Information

      Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports filed with the U.S. Securities and Exchange Commission, are available for review free of charge on the SEC’s website which you can access through our website at www.thermawave.com as soon as reasonably practicable after such material is electronically filed or furnished to the SEC. In addition, you may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements and other information that we file with the SEC.

Item 2. Properties

      Our executive and manufacturing, engineering, marketing, research and development operations are located in a 102,000 square foot building at 1250 Reliance Way in Fremont, California. The facility has approximately 800 square feet of Class 10 clean rooms for customer demonstrations and approximately 20,000 square feet of Class 1000 clean rooms for manufacturing. This facility is occupied under a lease expiring in 2011 at an aggregate annual rental expense of approximately $0.8 million in 2006, increasing to $1.0 million in 2007, and to $1.1 million in 2009. We own substantially all of the equipment used in our

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facilities. We also lease a building of approximately 28,000 square feet on Kato Road in Fremont, California, and one building of approximately 13,000 square feet in Santa Clara, California. During March 2003, we completely moved all our employees out of the Kato Road and Santa Clara facilities and into our Reliance Way facility. We currently use the Kato Road facility for storage, but are attempting to sublet both these facilities to reduce our costs. We believe that our existing facilities, capital equipment and anticipated capital expenditures will be adequate to meet our requirements for at least the next two years and that suitable additional or substitute space will be readily available if needed.

      We also lease sales and customer support offices in Japan, China, Korea, Taiwan and Singapore.

Item 3. Legal Proceedings

      There are currently no material legal proceedings pending against us. We may be required to initiate additional litigation in order to enforce any patents issued to or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights. In addition, we may be subject to additional lawsuits by third parties seeking to enforce their own intellectual property rights. Any such litigation, regardless of outcome, could be expensive and time consuming and, as discussed above, could subject us to significant liabilities or require us to cease using proprietary third party technology and, consequently, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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

      No matters were submitted to a vote of security holders during the quarter ended March 31, 2005.

PART II

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

      Our common stock is traded on The NASDAQ National Market. As of June 17, 2005, there were 175 holders of record of our common stock. The following table sets forth, for the periods indicated, the high and low closing prices per share of our common stock as reported on The NASDAQ National Market.

			High		Low
Common Stock Price Ranges:
	Fiscal Year 2004
		First Fiscal Quarter	$	2.59	$	0.43
		Second Fiscal Quarter	$	3.73	$	1.59
		Third Fiscal Quarter	$	6.78	$	3.36
		Fourth Fiscal Quarter	$	6.26	$	3.45
	Fiscal Year 2005
		First Fiscal Quarter	$	4.78	$	3.05
		Second Fiscal Quarter	$	4.93	$	3.06
		Third Fiscal Quarter	$	3.75	$	2.99
		Fourth Fiscal Quarter	$	3.48	$	1.67

      To date, we have not declared or paid cash dividends to our stockholders. We have no plans to declare or pay cash dividends in the near future. Any future determination to pay dividends will be at the discretion of the Board of Directors and will depend upon, among other factors, our results of operations, financial conditions, capital requirements and contractual restrictions.

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Shares Authorized for Issuance Under Equity Compensation Plans

      The following table summarizes the total shares of our common stock that may be received by holders upon the exercise of currently outstanding options, the weighted average exercise price of those outstanding options, and the number of shares of our common stock that are still available for future issuance under our equity compensation plans after considering the stock options currently outstanding as of March 31, 2005. All of the options described below have been or can be issued pursuant to our 1997 Stock Purchase and Option Plan, our 1997 Employee Stock Purchase and Option Plan, our 1997 Special Employee Stock Purchase and Option Plan, our 2000 Equity Incentive Plan and our 2000 Employee Stock Purchase Plan as of March 31, 2005. All of these plans have been approved by our stockholders.

				Number of Shares		Weighted
				to be Issued		Average Exercise		Number of Shares
				Upon Exercise of		Price of		Remaining
				Outstanding		Outstanding		Available for
				Stock Options(1)		Stock Options(1)		Future Issuance
Plan Category
	Equity compensation plans approved by stockholders
		Stock option plans			6,171,596	$	3.66		1,847,788	(2)
		Employee Stock Purchase Plan(1)							429,852
			Total						2,277,640

(1)	The number of securities to be issued upon the exercise of outstanding options and the weighted average exercise price of outstanding options under our 2000 Employee Stock Purchase Plan cannot be determined prior to the actual purchase dates under the plan.
(2)	The number of shares available for issuance under our 2000 Equity Incentive Plan increases each year by one percent of the total shares of our outstanding common stock pursuant to the terms of the plan.

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Item 6. Selected Financial Data

      The selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and accompanying notes thereto included elsewhere in this annual report on Form 10-K.

				Fiscal Years Ended March 31,
				2005			2004			2003(2)			2002(2)			2001(1)
				(In thousands, except per share data)
Statement of Operations Data:
	Net revenues			$	81,261		$	65,309		$	49,220		$	81,937		$	198,199
	Cost of revenues				44,620			38,500			55,061			65,414			101,421
	Gross profit (loss)				36,641			26,809			(5,841	)		16,523			96,778
	Operating expenses:
		Research and development			17,559			18,710			29,230			29,122			33,881
		Selling, general and administrative			25,450			22,958			26,071			21,713			28,239
		In-process research and development			—			—			—			16,340			—
		Impairment of goodwill and other intangible assets(3)			—			—			67,408			—			—
		Restructuring, severance and other			347			1,938			4,293			1,470			1,700
		Stock-based compensation expense (benefit)			(179	)		1,150			1,684			536			—
			Total operating expenses		43,177			44,756			128,686			69,181			63,820
	Operating income (loss)				(6,536	)		(17,947	)		(134,527	)		(52,658	)		32,958
	Other income (expense), net				177			(146	)		923			2,342			1,196
	Income (loss) before provision (benefit) of income taxes				(6,359	)		(18,093	)		(133,604	)		(50,316	)		34,154
	Provision (benefit) for income taxes				462			—			—			(1,120	)		2,025
	Income (loss) before cumulative effect of change in accounting principle				(6,821	)		(18,093	)		(133,604	)		(49,196	)		32,129
	Cumulative effect of change in accounting principle, net of income taxes(1)				—			—			—			—			(6,287	)
	Net income (loss)				(6,821	)		(18,093	)		(133,604	)		(49,196	)		25,842
	Net income (loss) available to common stockholders			$	(6,821	)	$	(18,093	)	$	(133,604	)	$	(49,196	)	$	25,842
	Basic net income (loss) per share:
		Income (loss) before cumulative effect of change in accounting principle		$	(0.19	)	$	(0.56	)	$	(4.69	)	$	(1.98	)	$	1.37
		Cumulative effect of change in accounting principle, net of income taxes(1)			—			—			—			—			(0.27	)
	Basic net income (loss) per share			$	(0.19	)	$	(0.56	)	$	(4.69	)	$	(1.98	)	$	1.10
	Diluted net income (loss) per share:
		Income (loss) before cumulative effect of change in accounting principle		$	(0.19	)	$	(0.56	)	$	(4.69	)	$	(1.98	)	$	1.27
		Cumulative effect of change in accounting principle, net of income taxes(1)			—			—			—			—			(0.25	)
	Diluted net income (loss) per share			$	(0.19	)	$	(0.56	)	$	(4.69	)	$	(1.98	)	$	1.02
	Weighted average common shares outstanding:
		Basic			35,912			32,387			28,500			24,894			23,444
		Diluted			35,912			32,387			28,500			24,894			25,277

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		Fiscal Years Ended March 31,
		2005			2004			2003(2)			2002(2)			2001(1)
Other Financial Data:
	Cash provided by (used in) operating activities	$	(9,694	)	$	(2,884	)	$	(42,550	)	$	(17,289	)	$	9,600
	Cash provided by (used in) investing activities		(1,605	)		(677	)		10,165			4,039			(32,316	)
	Cash provided by (used in) financing activities and effect of exchange rate on cash		819			13,765			(404	)		4,009			3,241
	Capital expenditures, included in cash used in investing activities		1,106			254			1,464			4,364			11,988

		March 31,
		2005		2004		2003(2)		2002(2)		2001(1)
Balance Sheet Data:
	Cash and cash equivalents	$	13,419	$	23,899	$	13,695	$	59,059	$	75,575
	Working capital		22,832		28,785		24,452		82,036		110,872
	Total assets		67,573		64,282		66,760		200,623		190,168
	Long-term debt		—		—		—		16		16
	Stockholders’ equity		25,963		32,264		36,338		167,499		129,082

(1)	Effective April 1, 2000, we changed our method of accounting for revenue recognition in accordance with Securities and Exchange Staff Accounting Bulletin Number 101 (SAB 101). In December 2003, the Securities Exchange Commission issued Staff Accounting Bulletin Number 104 (SAB 104), which supercedes SAB 101. We are in compliance with SAB 104.
(2)	The consolidated financial statements for the years ended March 31, 2003 and 2002 were restated as a result of an investigation and revenue recognition review conducted by our Audit Committee with the assistance of outside legal counsel and independent forensic accountants.
(3)	During fiscal year ended March 31, 2003, we conducted impairment reviews of goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” (SFAS 142) and Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” (SFAS 144). As a result of the reviews, we wrote off $65.9 million for goodwill, $0.6 million for developed technology, $0.2 million for a development contract and $0.8 million for trade name intangible assets.

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

General

      We develop, market, manufacture and service process control metrology systems for use in the manufacture of semiconductors. Process control metrology is used to monitor process parameters in order to enable semiconductor manufacturers to maintain high yields on their production lines, reduce feature size, increase wafer size, increase equipment productivity and improve device performance. Our metrology systems are used in all sections of the semiconductor fabrication plant, or “fab”, to control the wafer fabrication processes. Examples of wafer fab processes, in which our metrology systems supply information, are photoresist processing to support lithography, deposition of insulator and conductor films, patterned removal, or “etching”, of insulator and conductor films, ion implantation and chemical mechanical planarization. We currently sell four product families of process control metrology systems: Therma-Probe, Opti-Probe, including Opti-Probe CD, and Integra integrated metrology systems.

      Therma-Wave develops, markets, manufactures and services process control metrology systems for use in the manufacture of semiconductors. Our customers must have metrology equipment to improve their yields,

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an essential element to improving their profits. A significant number or our customers are now expanding their wafer production capacity while simultaneously moving from 200 millimeter to new 300 millimeter technology. The industry is also advancing to smaller geometries for semiconductor device production, currently at a 130 nm technology node and in the future advancing to 90 nm and 65 nm technology nodes. We believe these technology advances will significantly increase the requirement to improve yields.

      Our core products include the latest generations of our Therma-Probe and Opti-Probe metrology systems. Our core markets remain the thin film and ion implant measurement markets. Our latest generation products include our optical RT/ CD product family and our integrated product line, Integra. All of our latest generation products, which taken together accounted for approximately 77% of our total systems new order bookings in fiscal year 2005, are in keeping with our objective to stay at the forefront of technology leadership in metrology for the semiconductor industry. Our products and technologies for critical dimension and integrated metrology substantially expand our target markets going forward.

      Therma-Probe Product Family. Therma-Probe systems are non-destructive process control metrology systems used to measure the critical ion implantation process on product wafers in the fabrication of semiconductors and utilize our thermal wave technology.

      Opti-Probe Product Family. Opti-Probe Film Metrology systems provide one of the industry’s most powerful capabilities to control and diagnose non-opaque films for semiconductor production. This metrology capability is achieved by successfully integrating different measurement technologies, including optical technologies that are proprietary to our company, into each Opti-Probe system.

      Opti-Probe CD Product Family. Opti-Probe CD systems measure the critical dimensions (CD), representing the device structures, using a revolutionary, nondestructive technique based on spectroscopic ellipsometry. These systems are capable of providing CD metrology for the smallest features of the next several generations of ICs.

      Integra Product Family. The Integra line of integrated metrology products is a broad-based family of compact metrology “modules” which are installed on, and function in conjunction with, an IC process system, such as an etching or CVD deposition system, to provide metrology on each wafer before it exits the process tool.

      Therma-Wave has shipped more than 1,800 systems since the company introduced its first product in 1985, having shipped to nearly every major semiconductor manufacturer in the world. Our strength has been technology from the beginning of the company. We have protected our technology with 133 U.S. and foreign patents at the end of fiscal 2005. We have a broad range of applications, with products that are reliable and have a low cost of ownership due to their capabilities, not necessarily due to their price.

      We have a worldwide customer support organization of approximately 150 people located close to all our major customers. We have subsidiaries in Japan, the UK and China and branch locations or offices in Taiwan, Hong Kong, Israel, and Ireland, as well as several locations in the US. We also have representatives or distributors in Germany, France, Italy, Singapore and Japan. During April 2005, we signed an agreement establishing a new exclusive representative, Hermes-Epitek Corporation, for our Therma-Probe and Opti-Probe products in Taiwan, China, Singapore, and Malaysia. Following a transition period of about two to three months, we plan to close our branch offices in Taiwan and our subsidiary in China. Hermes-Epitek is a prominent, well-established company in our industry in Asia, and we expect to improve our position in this region through this association.

      Therma-Wave introduced its Opti-Probe Real Time Critical Dimension system, Opti-Probe RT/ CD, in 2002. This product combines a powerful computer and Therma-Wave proprietary software with our standard 5300 or 7000 series Opti-Probe and has moved Therma-Wave into a market not previously served by the company. Opti-Probe RT/ CD has positioned us to compete for business previously served by manufacturers of scanning electronic microscopes, known as CD SEM. CD SEM is becoming non-competitive in certain advanced technologies of 90 nm and smaller nodes. We believe that our Opti-Probe RT/ CD product can address some customer CD requirements faster, better and at a lower cost of ownership. Where CD SEM is an expensive, low throughput technology, Opti-Probe RT/ CD can perform the same measurements faster and

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with better precision. We believe the superiority of Opti-Probe RT/ CD will become even greater as fabs move to 90 nm and then to 65 nm nodes, increasing the demand for optics based critical dimension products. To be competitive, our products must be extendable, provide low cost of ownership and help our customers to continuously meet the ever-advancing technology nodes challenge. Some of our customers are currently moving or planning to move from 130 nm to 90 nm and will begin moving to 65 nm as the next step. They will not purchase products from a supplier who they believe cannot continue to enable that advance and meet those technology changes. Our products have demonstrated the capability to be extendable and meet those challenges in the past, and we believe our products are well positioned to meet those requirements in the future.

      Also in 2002, we introduced our first integrated critical dimension metrology product, Integra, which we sell primarily to Tokyo Electron Ltd., an original equipment manufacturer of integrated circuit process systems. This product line is a family of compact metrology modules that are installed, on and function in conjunction with, the IC process system. We are rated as their Class 1 supplier for integrated CD metrology on Tokyo Electron’s market leading photoresist track system.

Our Market

      Based on calendar 2004 survey information from a report from a widely recognized industry research group, the total process control market will grow to approximately $4.6 billion in calendar year 2005. Of that, approximately $1.9 billion is expected to be the metrology segment. We are targeting the transparent thin film, and critical dimension segments of this market, which is estimated to be at approximately $1.0 billion by the end of calendar year 2005. This $1.0 billion market includes $0.7 billion for critical dimension measurement, of which a portion estimated at $31 million and rapidly growing, is served by our Opti-Probe critical dimension product. Our goal is to capture at least 20% of this total portion of the metrology market that we serve, plus a significant share of the ion implant process measurement market, and plus normal upgrades and service and support. The ion implant market is actually included as a small part of the opaque film market by the industry source, and we believe this market will be between $25 million and $30 million in calendar year 2005, most of which we expect to capture.

Overview

      The semiconductor industry struggled for recovery in fiscal 2005, gaining momentum in our fiscal first and second quarters, but slowing in our fiscal third and fourth quarters. In our fiscal first quarter, we reported an approximately 50% increase in orders from the previous quarter, and in our fiscal second quarter, we reported a sequential increase of approximately 25% over the fiscal first quarter of 2005. Our order rate for our fiscal third quarter dropped off sharply, down 46% from the previous quarter, then recovered modestly, up 17% in the fiscal fourth quarter. We expect this soft market to continue at least through the first two quarters of our fiscal year 2006.

      In total, our orders increased by 24% in fiscal 2005 over fiscal 2004 to $85.8 million. In addition to the overall growth in orders it is important to note that our new leading edge products grew as a percentage of our product mix. The advanced Therma-Probe system grew from 16% or $8.0 million of total system orders in fiscal 2004 to 20% or $12.5 million total system orders in fiscal 2005. Our advanced Opti-Probe grew from 28% or $15.2 million to 54% or $30 million of total system orders (includes both OP and OP-CD). Also, 77% of total systems booked during the year were for 300 millimeter business. We believe this is very significant because it demonstrates that customers are accepting our more advanced products.

      Geographically, in fiscal 2005, our European business strengthened significantly during our first and second quarters, and we received a large order for our Integra integrated metrology (IM) product from our customer in Japan in the fiscal third quarter.

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      The following table lists the percentage of system orders by region for the years ended March 31, 2005, 2004 and 2003.

		Percentage of System
		Orders
		Fiscal Years Ended
		March 31,
		2005			2004			2003
Markets
	Asia, excluding Japan		39	%		56	%		54	%
	Japan (inclusive of the IM orders)		19	%		19	%		12	%
	Europe		25	%		12	%		4	%
	United States		17	%		13	%		30	%
Total orders			100	%		100	%		100	%

Net Revenues

      For fiscal year 2005 net revenues were $81.3 million, a $16 million increase over fiscal 2004 net revenues of $65.3 million. During fiscal 2005, quarterly net revenues peaked in the second quarter at $22.6 million, followed by a $1.1 million decline in the third quarter to $21.5 million, and an additional $5.5 million decline in the fourth quarter to $16.0 million. This pattern reflects the industry-wide slowdown in purchases of semiconductor metrology capital equipment that began during our fiscal 2005. However, it is important to note that we shipped systems billed at approximately $3.1 million in our fiscal third quarter and at more than $7.0 million in our fiscal fourth quarter that were recorded as deferred revenue due to a non-standard right of return clause in the sales agreements. We expect those revenues to be recognized during the first two quarters of our fiscal year 2006.

Gross Margins

      Gross margins improved for fiscal year 2005 to 45% compared to 41% in fiscal 2004. The improvement was primarily in the first two quarters, which benefited from the higher sales and manufacturing volumes, sales of inventory previously written down or written-off, from cost reduction efforts and a stronger industry economic environment early in the year which helped to strengthen pricing. Gross margins were negatively impacted by the lower sales volumes in the final two fiscal quarters. Both fiscal years 2005 and 2004 benefited from sales of inventory previously written down or written-off, which was primarily parts for 200 mm products that were written-off as excess during the downturn years of fiscal 2002 and 2003. Our 2005 gross margins were strongest at 51% in our fiscal first quarter, decreasing to 48% in the second quarter, 42% in our third quarter and to 38% in the fiscal fourth quarter. The first two quarters benefited by $1.8 million and $0.9 million, respectively, form the net of sale of inventory previously written down or written-off in excess of new write downs of inventory, while that net benefit in the third quarter decreased to $0.3 million and became negative $0.9 million in the fourth quarter, when the benefit was exceeded by the new write offs. Our fiscal first and second quarter gross margins benefited from the sale of $2.8 million, or 13% of revenues, and $1.8 million, or 8% of revenues respectively of inventory that had previously been written-off, and were reduced by new inventory charges of $1.0 million, or 5% of revenues, and $0.9 million, or 4% of revenues, respectively. Our fiscal third quarter gross margin benefited from the sale of $1.8 million, or 8% of revenues, of inventory that had previously been written-off, and was reduced by new inventory charges of $1.5 million, or 7% of revenues. Our fiscal fourth quarter gross margin includes the benefit of $0.8 million, or 5% of revenues, from the sale of previously written-off inventory and the reduction of $1.7 million, or 10% of revenues, due to new charges to inventory.

      Fiscal year 2004 gross margins included a benefit of $10.6 million arising from the sale of inventory that had previously been written down or written-off and reduced by inventory provision of $5.2 million. Full fiscal year 2005 improvement to 45% included a lower benefit from $7.2 million from the sale of inventory previously written down or written-off and the reduction due to inventory provision of $5.1 million. Fiscal year

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2004 gross margins also benefited from $3.7 million of margin from the conclusion of a customer funded development program that allowed recognition of $4.7 million of deferred revenue accumulated over several prior years.

      During our fiscal fourth quarter 2004, we fully absorbed our factory overhead for the first time in more than two years due to higher production volumes. This improved absorption level continued on throughout fiscal year 2005 and is important because it means that any additional volume growth begins to reduce the average overhead cost per tool produced, thereby reducing the average total cost per tool. However, our margins continued to be unfavorably impacted by lower than optimum production levels, which are expected to decrease further in our fiscal first quarter 2006.

      The expense of the company’s customer service and support organization is allocated between cost of revenue and selling, general and administrative expense based on the 29 percent average time spent by field personnel on marketing activities. For fiscal years 2005 and 2004, $14.4 million and $12.3 million, respectively was charged to cost of revenue and $5.9 million and $5.0 million respectively was charged to selling, general and administrative expense.

Operating Expenses

      During fiscal 2005, we continued to direct substantial efforts toward managing our operating expenses to be in line with business conditions. Fiscal 2005 operating expenses were $43.2 million, down $1.6 million from $44.8 million in fiscal 2004. Fiscal 2005 operating expenses included charges of $1.9 million for compliance work related to implementation of Sarbanes-Oxley Act of 2002 Section 404. Total operating expenses were reduced to $10.9 million in each of the last two fiscal quarters of 2005. However, operating expenses increased by approximately $0.8 million, or 8%, in the fiscal fourth quarter offset by a non-cash credit for the variable accounting treatment for stock options of approximately $0.8 million in the fiscal fourth quarter. The credit occurred because our stock price decreased from quarter to quarter. Operating expenses for all costs other than the variable accounting treatment for stock options increased due in part to increased spending for Sarbanes-Oxley Section 404 compliance, and due to incurring expenses for a 14-week quarter compared to our normal 13 week quarters.

      The reduction in operating expense in fiscal 2005 compared to 2004, other than $1.9 million increase for compliance work associated with the Sarbanes-Oxley Act, was due primarily to lower restructuring charges by $1.6 million and lower stock compensation charges by $1.3 million. In fiscal 2006, we expect to manage operating expenses in line with revenues, increasing over time as the business grows, but declining as a percentage of revenues.

Balance Sheet

      Cash and cash equivalents totaled $13.4 million at March 31, 2005, a decrease of $0.3 million from the $13.7 million reported as of December 31, 2004 and down from $23.9 million reported as of March 31, 2004. Cash was used in fiscal 2005 primarily to fund operating activities of $9.7 million. Net inventory increased by $13.7 million due to the increase in mix of 300 millimeter products, and net accounts receivable was up $0.9 million. Our receivables days sales outstanding (DSO) ended the fiscal fourth quarter of 2004 at 69 days and was increased to 75 days for fiscal fourth quarter 2005, calculated on a look-back basis. This increase was due primarily to late payments from two Asian customers, most of which were paid within the first 60 days following the end of our fiscal fourth quarter.

      Investing activities used cash of $1.6 million, comprising of $1.1 million for purchases of property and equipment and $0.5 million for cost of patents. We expect such expenditures to remain at similar or lower levels in our fiscal year 2006.

      Total liabilities increased by $9.6 million, with current liabilities up $10.7 million. Deferred revenues increased by $8.5 million and accounts payable by $0.8 million. The increase in deferred revenue was due primarily to shipments to a European customer during the last two quarters of the fiscal year that were recorded as deferred revenue due to a non-standard right of return clause in the sales agreement.

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Approximately $10 million of the order was shipped and billed during the December through March time frame and approximately $9 million of that amount was paid before the end of our fiscal fourth quarter, but revenue will not be recognized until the final acceptance process is completed at the customer.

      As of March 31, 2005, we have no long-term debt, and we have access to a $15 million in credit facilities that are unused other than $3.2 million for supporting standby letters of credit. The amount available under our credit facilities is determined using a borrowing base formula, which considers amounts in our trade accounts receivable and inventory, excluding certain aged and past due accounts receivable and inventory at locations outside of the United States, and there can be no assurance that any amount will be available for borrowing under this facility. This facility also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in the Company’s business, operations, or financial or other condition of the Company, or a material impairment of the prospect of repayment of any portion of outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral.

Summary

      We believe that Therma-Wave has made significant progress during its fiscal year 2005. For our full fiscal year 2005 compared to fiscal 2004:

•  Total new orders increased by 24% to $85.8 million,

•  Total net revenue increased by 24% to $81.3 million,

•  Total deferred revenue increased 98% to $17.2 million,

•  Gross margin improved to 45% compared to 41% in fiscal 2004,

•  Operating expenses decreased by 4% year-over-year, and

•  Net loss was reduced by 62% to $6.8 million, or ($0.19) per diluted share, compared to a net loss of $18.1 million, or ($0.56) per diluted share, in fiscal 2004,

•  See also page 34 for discussion of liquidity and going concern.

      We believe it is very important that the sale of our advanced products has continued to increase as a percentage of total new orders received. Advanced products accounted for approximately 77 percent of new orders received for systems in our full fiscal year 2005, up from approximately 60 percent in fiscal 2004. During our fiscal fourth quarter 2005, our advanced products accounted for approximately 88 percent of new orders received for systems, most of which were for our 300 mm products. We expect the sale of our advanced products to remain at that level during fiscal year 2006.

Outlook

      While we believe we made progress on many fronts in fiscal 2005, the semiconductor capital equipment industry remains a cyclical and dynamic environment, and as such forward looking visibility remains limited. Currently, the industry is again in a downturn, which some industry analysts are projecting to last at least until late in calendar year 2005. To help strengthen our position in this challenging environment, we are proactively taking steps to enhance our competitive and financial positioning.

      Subsequent to our year-end, we took two significant actions related to operating expenses. First, on April 8, 2005, we reduced the number of separate functional groups reporting directly to our CEO from eleven to six, through a combination of consolidation and reduction of our North American workforce by just over 8 percent. Our intentions were to reduce our operating expenses while streamlining our corporate structure in order to increase operating efficiency and reduce our fixed cost structure. As a direct result of this initiative, we expect to realize annualized salary and related cost savings of more than $3.0 million. Second, on April 19, 2005, we adopted a plan to restructure our Asian operations. We signed an exclusive representation agreement with Hermes-Epitek Corporation, a well-known and well-positioned representative for semiconductor equip-

21

ment firms in Asia. Hermes-Epitek has existing, well-established relationships with many of our customers in the region.

      By making this change, we are transitioning from a direct sales and service model to an exclusive representative model for the distribution and servicing of our Therma-Probe and Opti-Probe families of metrology products in Taiwan, China, Singapore and Malaysia. We expect a transition period of approximately two to three months, following which Hermes-Epitek will be undertaking essentially all sales and service efforts for our metrology products in their territory. This new model should be in place by the middle of the second quarter of fiscal year 2006. This change is consistent with our strategy to improve the flexibility and cost effectiveness of our operating expense structure, because payments are directly related to the amount of sales volume instead of being essentially fixed. Also, we believe that due to their larger presence in the region and depth of personnel, Hermes-Epitek will be better able to maintain the highly trained technical personnel necessary to provide the highest quality of service and support to our customers in that region.

      Overall, we believe the above-mentioned initiatives will result in continued progress. As we look forward, we expect to continue to build on these actions, and we also plan to take additional steps focused on implementing the most cost efficient operating structure, delivering the highest possible level of customer satisfaction, improving our cash position and focusing our resources on developing the most innovative metrology solutions available worldwide, all directed toward achieving our ultimate goal of returning Therma-Wave to profitability.

Critical Accounting Policies and Estimates

      Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The methods, estimates and judgments we use in applying our accounting policies has a significant impact on the results we report in our consolidated financial statements. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition, inventory, allowance for doubtful accounts receivable and returns, valuation of long-lived and intangible assets, income taxes and warranty. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

      An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the financial statements. Management believes the following critical accounting policies affect its significant judgments and estimates used in the preparation of its consolidated financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this report.

Revenue Recognition

      Effective April 1, 2000, we changed our method of accounting for revenue recognition in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” In December 2003, the Securities Exchange Commission issued Staff Accounting Bulletin No. 104, or SAB 104, “Revenue Recognition”, which superceded SAB 101. SAB 104 is a codification of other revenue recognition pronouncements and in substance does not change SAB 101. Revenues are recognized when our contractual obligations have been performed, title and risk of loss have passed to the customer, collectibility of the sales price has been reasonably assured, sales price is fixed or determinable and customer final acceptance has been obtained, if applicable. Freight terms of sales are normally ExWorks or FOB shipping point unless otherwise negotiated and agreed in written form between our customers and us.

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Shipments typically are made in compliance with shipment requirements specified in our customer’s purchase order.

      System Revenues. Equipment sales are accounted for as multiple-element arrangement sales that require the deferral of a significant portion of revenues in the amount of the greater of fair market value of installation or the percentage of payment subject to final acceptance. Systems revenues are allocated to each component of the multiple-element arrangement. Revenues on each element are recognized when the contractual obligations have been performed, title and risk of loss have passed to the customer, collectability of the sales price has been reasonably assured and customer final acceptance has been obtained, if applicable. Estimated contractual warranty obligations are recorded when related systems sales are recognized. Revenue related to extended warranty is recognized over the period earned.

      Systems revenues on newly introduced products are deferred at shipment and recognized upon customer final acceptance. Our standard terms and conditions of sale do not contain a right of return, except for spare parts. Returns of unused purchased spare parts for credit are allowed only within 30 days of shipment and are subject to a 20% restocking fee. In the past, we have, in unusual circumstances, agreed to accept specific rights to return until completion of the customer final acceptance process. We may accept such rights again in future orders. In such cases, the nature of the specific right of return is evaluated under SAB 104 Topic 13 A3 (b) “Customer Acceptance”, and if appropriate, revenues are deferred until such right of return expires in accordance with FAS 48.

      In accordance with SAB 101, we evaluate our system sales to determine the appropriate timing for revenue recognition for each of the multiple elements involved in each sale. This sometimes results in deferrals of revenues to periods subsequent to the period in which the tool is shipped.

      Service and Parts Revenues. We derive service and parts revenues from three primary sources: sale of spare parts, service contracts and service labor relating to our products. Revenues on the sale of spare parts are recognized when title and risk of ownership have transferred to the customer and collectability of the sales price has been reasonably assured. Revenues on service contracts are deferred and recognized on a straight-line basis over the period of the contract. Revenues on time and material services performed are recognized when the services are completed, collectability of the sales price has been reasonably assured and, if applicable customer final acceptance has been obtained.

Inventory

      We value our inventory at the lower of standard cost, approximating average cost, (first-in, first-out method) or market. Due to changing market conditions, estimated future requirements, age of the inventories on hand and our production of new products, we regularly review inventory quantities on hand and record a provision to write down excess and obsolete inventory to its estimated net realizable value. A significant increase in the demand for our product could result in a short-term increase of inventory purchases while a significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand. In addition, our industry is subject to technological change, new product development, and product technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and reported operating results. When we record provision for excess and obsolete inventory, we create a new cost basis for the inventory. Inventory provisions in fiscal years 2005, 2004 and 2003 were $5.1 million, $5.2 million and $9.6 million, respectively. Fiscal 2005, 2004 and 2003 gross margins included benefits from the sale of inventory previously written down of $7.2 million, $10.6 million and $1.0 million, respectively.

Allowances for Doubtful Accounts Receivable and Returns

      We utilize estimates in determining our allowance for doubtful accounts receivable and reserve for potential returns for credit. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience, any specific customer collection issues that we have identified, and the aging of the accounts receivable. While such credit losses

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have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our customers could have a material adverse impact on both the collectability of our accounts receivable and our future operating results.

Valuation of Long-Lived and Intangible Assets

      We have adopted Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review of such assets include the following:

•  significant under-performance relative to expected historical or projected future operating results;

•  significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and

•  significant negative industry or economic trends.

      When we determine that the carrying value of intangibles and long-lived assets may not be recoverable based upon the existence of one or more of the above indicators of impairment, we measure the impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our business model. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations.

      As of March 31, 2005, due to decline in the Company’s stock price, we performed SFAS No. 144 impairment analysis of the long-lived assets and concluded that no write-offs are necessary.

      During the quarter ended September 30, 2002, we recognized that a downturn in the semiconductor industry had negatively impacted our projected future cash flows and our market capitalization. Our stock price declined from $11.39 on June 28, 2002 to $0.79 on September 30, 2002. As a result, we performed a transitional impairment analysis, which considered current operating losses, a decrease in market capitalization below tangible book value, the absence of positive cash flows, and uncertainties resulting from the duration and severity of the industry downturn, and recognized a goodwill impairment loss of $65.9 million in the quarter ended September 30, 2002, which effectively reduced the goodwill balance related to our acquisition of Sensys Instruments Corporation to zero. We also recorded impairment charges in fiscal 2003 of $0.6 million for developed technology, $0.2 million for a development contract, and $0.8 million for trade name intangible assets.

Income Taxes

      We account for income taxes using the asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements, but have not been reflected in our taxable income. A valuation allowance is established to reduce deferred tax assets to their estimated realizable value. We provide a valuation allowance to the extent we cannot conclude, based on available objective evidence, that it is more likely than not we will generate sufficient taxable income in future periods to realize the benefit of our deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment. As of March 31, 2005 and 2004, we concluded that it is more likely than not that our net deferred tax assets would not be realized through generation of future taxable income. Accordingly, we provided a net valuation allowances for all periods presented.

Warranty

      We provide warranty coverage for a predetermined amount of time, normally one year from system final acceptance, on systems and parts for material and labor to repair and maintain the equipment. We record the

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estimated cost of systems and parts warranty upon shipment of the tools, based on the average historical warranty expense for a specific tool. Should actual costs or material usage differ from our estimates, revisions to the estimated warranty liability may be required.

Results of Operations

      The following table summarizes our historical results of operations as a percentage of net revenues for the periods indicated.

			Fiscal Year
			2005			2004			2003
Results of Operations
Net revenues				100.0	%		100.0	%		100.0	%
Cost of revenues				54.9			59.0			111.9
Gross profit (loss)				45.1			41.0			(11.9	)
Operating expenses:
	Research and development			21.6			28.5			59.4
	Selling, general and administrative			31.3			35.2			53.0
	Impairment of goodwill and other intangible assets						—			136.9
	Restructuring, severance and other			0.4			3.0			8.7
	Stock-based compensation expense (benefit)			(0.2	)		1.8			3.4
		Total operating expenses		53.1			68.5			261.4
Operating loss:				(8.0	)		(27.5	)		(273.3	)
Other income (expense), net:
	Interest expense			—			(0.1	)		(0.3	)
	Interest income			0.2			0.2			1.9
	Other income (expense), net			—			(0.3	)		0.3
		Total other income (expense), net		0.2			(0.2	)		1.9
Loss before provision for income taxes				(7.8	)		(27.7	)		(271.4	)
Provision for income taxes				(0.6	)		—			—
Net loss				(8.4	)%		(27.7	)%		(271.4	)%

      Cost of net revenues decreased as a percentage of net revenues due primarily to the 24% increase in net revenues in fiscal 2005 compared to fiscal 2004, product cost reduction programs and improved industry conditions, particularly early in 2005, strengthening pricing. Operating expenses decreased approximately 4 percent in dollars while revenues increased, thereby reducing as a percentage of net revenues. These elements resulted in also reducing the net loss as a percentage of revenues. Included in the changes from fiscal 2005 compared to fiscal 2004 are:

		Net		% of Net		Gross		Net		% of Net
		Revenues		Revenues		Profit		Loss		Revenues
Major Changes Fiscal 2005 Compared to Fiscal 2004 (in millions)
	Decrease in the sale of inventory that had been previously written-off		—		—	$	3.4	$	3.4		4	%
	Decrease in stock-based compensation		—		—		0.3		1.6		2	%

      Net revenues increased by 33 percent in fiscal 2004 compared to fiscal 2003, and this increase was the primary reason for cost of net revenues and operating expenses decreasing as a percentage of net revenues, and

25

a resulting reduction of the net loss as a percentage of net revenues. Included in the changes from fiscal 2004 compared to fiscal 2003, among other changes, are:

		Net		% of Net			Gross		Net		% of Net
		Revenues		Revenues			Profit		Loss		Revenues
Major Changes Fiscal 2004 Compared to Fiscal 2003 (in millions)
	The conclusion of a development contract	$	4.7		7	%	$	3.7	$	3.7		6	%
	Lower operating expenses due to the fiscal 2003 impairment of goodwill and other intangibles		—		—			67.4		67.4		137	%
	Increase in the sale of inventory that had been previously written-off		—		—			9.6		9.6		15	%
	Increase in provision for excess and obsolescence		—		—			4.4		4.4		7	%

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

      Net Revenues. Net revenues for the fiscal year ended March 31, 2005 and 2004 were $81.3 million and $65.3 million, respectively. Compared to fiscal 2004, net revenues in fiscal 2005 increased by $16.0 million or 24.4% primarily as a result of capital spending increases in the semiconductor industry during the first two quarters of fiscal 2005. We sold 24% more units of our Therma-Probe and Opti-Probe products in fiscal 2005 and the average selling price increased 25% in fiscal 2005 due primarily to a shift in business towards our newer, more expensive models. We experienced strong price competition during both fiscal 2005 and fiscal 2004, however we believe that the increases in industry spending, particularly during the first half of fiscal 2005 did strengthen pricing modestly during that period. We began to be impacted by an industry slowdown during December 2004 and for the remainder of our fiscal year 2005.

      The following table summarizes our product and service revenues as a percentage of total net revenues for the periods indicated.

			Fiscal Year Ended
			March 31,
			2005			2004			2003
Net Revenues
	Products (Systems)			75	%		72	%		58	%
	Services and parts			25	%		28	%		42	%
		Total net revenues		100	%		100	%		100	%

      The fluctuations in these percentages are related primarily to the changes in the amount of metrology capital equipment being purchased by the semiconductor industry from one year to the next. Sales of services and parts tend to reflect the installed base of products sold one and a half to two years previously and coming out of warranty rather than current product sales. As a result, the dollars of such sales do not fluctuate as widely as product sales, and therefore represent a higher percentage of total revenues when product sales are lower.

      Net revenues attributable to international sales for the fiscal years ended March 31, 2005 and 2004 accounted for 71% and 72%, respectively, of our total revenues for each of these two periods. We anticipate that international sales will continue to account for a significant portion of our revenues in the foreseeable future, because of the concentration of large customers in Asia. A substantial portion of our international sales is denominated in U.S. dollars. As a result, changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products more expensive; however, our major competitors are also mostly U.S. companies and would incur essentially the same pricing impact. Although we have not been negatively impacted in the past by foreign currency changes in Japan, Korea, China, Taiwan, Singapore, Israel and Europe, such conditions could negatively impact our international sales in future periods.

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      Demand for semiconductors and semiconductor equipment increased during the first two quarters of our fiscal year 2005, resulting in higher new order booking rates than in the previous fiscal year. The increased orders resulted in higher revenues for system shipments. The increased revenues contributed substantially to a reduction of operating losses in fiscal 2005 compared to the previous year.

      Gross Profit. Gross profit increased to $36.6 million in fiscal 2005 from $26.8 million in fiscal 2004, an increase of $9.8 million. As a percentage of net revenues, gross profit increased from 41% in fiscal 2004 to 45% in fiscal 2005. Key contributors to this improvement in gross profits can be summarized as follows:

			Gross Profit
			Improvement
Key contributors to gross profit improvement ($000’s):
	Increased systems revenues		$	11,475
	Decreased service and parts revenues			1,369
	Decreased sales of inventory previously written-off			(3,400	)
	Decreased stock-based compensation expense			288
	Other			100
		Total	$	9,832

      Systems revenues grew by 30% in fiscal 2005 compared to fiscal 2004, contributing to relativity higher gross margins. Service and parts revenues grew by 11%. Decreased stock-based compensation expense resulted from a decrease in the year-end stock price and contributed $0.3 million to the increase in gross margins, partially offsetting a decrease from reduced sale of inventory previously written-off of $3.4 million.

      Included in our gross profit are:

	Fiscal Years Ended
	March 31,
	2005		2004
	(In thousands)
Inventory provision for excess and obsolescence	$	5,089	$	5,200
Benefit from the sales of inventory that had been previously written-off and obsolescence		7,183		10,563

      During fiscal 2005 and 2004, as a result of increasing demand for semiconductor products, our gross profits benefited from the sale of inventory that had been previously written-off. Inventory charges recorded in fiscal 2004 and prior periods had substantially lowered the net value of our 200mm inventory on hand and the ability to sell this inventory in fiscal 2005 and fiscal 2004 had a significant positive impact on our gross margin. The majority of the potential benefit has now been realized by the end of fiscal 2005.

      We have implemented or are in the process of implementing a number of cost reduction measures to improve our overall financial performance. These cost reduction measures include, but are not limited to, sourcing and design initiatives to lower cost and improve product performance, tight controls on discretionary overhead spending and renegotiation of equipment maintenance contracts with vendors. We expect these cost reduction measures will continue to contribute to gross margin improvements in fiscal 2006.

      Research and Development, or R&D, Expense. R&D expenses were $17.6 million and $18.7 million for fiscal years 2005 and 2004, respectively, a reduction of $1.1 million, or 6%. R&D expenses as a percentage of net revenues for fiscal 2005 decreased to 22% from 29% for fiscal 2004 due to both lower R&D project spending and the increase of net revenues in fiscal 2005. We also reduced the use of outside services by $0.4 million, or 44%. Other discretionary spending and allocations for facilities and information systems support were lower by $1.3 million, or 39%. We maintained the resources for our critical programs such as our real-time critical dimension product (RT/ CD). We believe that technological leadership is essential to strengthen our market position in the next economic upturn and expect to continue to commit significant

27

resources to the development of new products and the continuous improvement of existing products. Therefore, we expect to continue to invest in R&D during fiscal 2006 at levels similar to fiscal 2005.

      Selling, General and Administrative, or SG&A, Expense. SG&A expenses were $25.4 million and $23.0 million for fiscal years 2005 and 2004, respectively. Compared to fiscal 2004, SG&A expenses in fiscal 2005 increased $2.4 million, or 11%. The increase in fiscal 2005 SG&A expenses reflect fiscal 2005 charges of $1.9 million related to compliance with the Sarbanes-Oxley Act of 2002. SG&A expenses as a percentage of net revenues decreased to 31% in fiscal 2005 from 35% in fiscal 2004 primarily due to significantly higher net revenues in fiscal 2005. Additionally, commissions decreased $0.2 million, or 19%, and other discretionary spending, such as allocations for facilities and information systems support, decreased by $1.3 million, or 24%. We expect SG&A expenses will be flat to down modestly in fiscal 2006 primarily due to lower spending on implementation of the Sarbanes-Oxley Act of 2002, Section 404 and tight expense controls, and audit.

      Impairment of Goodwill and Other Intangible Assets. During the quarter ended December 31, 2003, due to the termination of a development agreement, we accelerated the amortization of $1.5 million of related development contract intangible assets.

      Restructuring, Severance and Other. The following table summarizes the changes in restructuring, severance and other costs during the twelve months ended March 31, 2005:

		Liability as							Liability as
		of March 31,							of March 31,
		2004		Provision		Payment			2005
Restructuring, severance and other ($000s):
	Consolidation of facilities	$	220	$	347	$	(389	)	$	178

      During fiscal 2005, we recorded $0.3 million in charges related to restructuring, severance and other costs. The additional $0.3 million was recorded as leased facility charges during the first quarter of fiscal 2005 when we changed our estimates of potential sublease income and the sublease date on a previously vacated facility in Santa Clara, California. The $0.3 million charge reflects the difference between the estimated sublease income and the actual sublease income for this facility. The lease on this facility will expire on March 31, 2006. If facilities rental rates continue to decrease in this market or if it takes longer than expected to sublease these facilities, the maximum amount by which the actual loss could exceed the liability as of March 31, 2005 is $0.1 million.

      During fiscal 2004, we recorded $1.9 million of charges related to restructuring, severance and other costs. Of this amount, $1.8 million relates to reductions in workforce in April and October 2003 of approximately 39 and 22 employees, respectively. An additional $0.1 million was recorded as leased facility charges during the second quarter of 2004 when we entered into a sublease on a previously vacated facility. The $0.1 million charge reflects the difference between the estimated sublease income and the actual sublease income for this facility. As of the end of fiscal 2004, liabilities that we had accrued for severance and other costs had been paid out in full.

      On April 8 and April 14, 2005, we took actions in a restructuring aimed at increasing the Company’s operating efficiency and reducing corporate expenses. We reduced the number of separate internal functional groups reporting to the CEO from 11 to 6 by streamlining our corporate structure through a combination of consolidation and reductions in force. We reduced our North American workforce by approximately 6 percent. The charge in connection with this restructuring is expected to be approximately $0.6 million, for severance and related costs, and is anticipated to be recorded during our fiscal first quarter of 2006, ending July 3, 2005. We expect that the restructuring action will result in cash expenditures of approximately $0.6 million in the fiscal first quarter of 2006.

      On April 19, 2005, we adopted a plan to restructure our Asian operations in Taiwan, China, Singapore and Malaysia by converting from a direct sales and service organization to one using an exclusive representative. In connection with this restructuring plan, we will incur severance and other charges relating to termination of 50 or more employees and the closing of leased facilities in Taiwan and China, including the cancellation of leases and write-offs for certain fixed assets. The charges in connection with the restructuring

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plan are expected to be in the range of $0.5 million to $1.0 million and will be recorded during our fiscal first and second quarters of 2006. We expect the restructuring will result in cash expenditures of approximately $0.5 million to $0.85 million in our fiscal first and second quarters of 2006.

      Stock-Based Compensation. In fiscal 2005, we recognized an employee stock-based compensation net benefit of $0.3 million which included a benefit of $0.5 million related to variable accounting offset by amortization expense of $0.2 million related to the Sensys acquisition. In fiscal 2004, employee stock-based compensation expense of $1.3 million included expense of $0.7 million related to variable accounting and amortization expense of $0.6 million related to the Sensys acquisition.

      Stock-based compensation reflect charges for options assumed as part of the acquisition of Sensys Instruments Corporation in January 2002 and charges for options issued September 10, 2003 in an employee stock option exchange.

      As part of the Sensys acquisition, we assumed $3.5 million of stock-based compensation to be amortized over the vesting period of the options. The amortization expense was $0.2 million or 0.2% of net revenues in fiscal 2005, and $0.6 million or 1.0% of net revenues in fiscal 2004, of which $2,000 and $168,000, respectively, was included in cost of revenues. We expect that the stock-based compensation for options assumed in the Sensys acquisition will, in fiscal 2006, be lower than that of fiscal 2005 due to the forfeitures of options held by the Sensys employees who left the company in fiscal 2005 and due to the complete vesting of the remaining employees.

      During the second quarter of fiscal 2004, we commenced and completed an employee stock option exchange program. The voluntary program allowed our employees, excluding officers and directors, to return to us existing options issued before July 1, 2002 with an exercise price greater than $2.00 per share and exchange them for new options that were granted on September 10, 2003. The number of new options granted in the employee stock option exchange program was equal to 75% of the number of options canceled in the exchange. The new option grants have a different vesting schedule from the original option grants and have an exercise price equal to $2.38, the fair market value of our common stock on September 10, 2003. Of the 1,366,570 options eligible for exchange, 1,352,108 options, or 99%, were exchanged for 1,014,144 new options with an exercise price of $2.38. The replacement options vested 50% on June 11, 2004, with the remaining 50% vesting on April 11, 2005 or according to the specific performance vesting schedules of particular stock option grants.

      As a result of the modification to the exercise price of the stock options, the replacement options are accounted for as variable from the date of modification until the option is either exercised, forfeited, canceled or expired. As of March 31, 2005 and 2004, we have recorded approximately $0.2 million and $0.7 million, respectively, in deferred compensation expense related to the employee option exchange program. This charge reflects three groups of options:

•  the new options issued in the exchange which were outstanding since September 10, 2003;

•  options eligible for exchange that were not exchanged (about 1% of eligible options); and

•  options issued to eligible participants within the six months prior to or following September 10, 2003.

      Due to the options requiring variable accounting treatment, the expense is being recorded for the vesting of these options over time based on increases in the stock price over and above the exercise price of the new options. In future quarters, the expense could increase as the vesting over time of these options increases and if the stock price increases. Reductions to expense may also be recorded if the stock price decreases, but such reductions will be limited to the net expense previously reported.

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      During fiscal 2005, the benefit related to the variable accounting treatment of options was $0.5 million compared to charges of $0.7 million in fiscal 2004. However, on a quarterly basis these costs varied based on the amount of time the options were outstanding and on the quarter-end closing stock price, as follows:

		Fiscal Year 2005
		Q1		Q2			Q3			Q4			Full Year
Variable accounting charge (benefit) by fiscal quarter ($000’s)
	Days outstanding		91		91			91			98			371
	Ending stock price	$	4.78	$	3.33		$	3.24		$	1.67		$	1.67
	Variable accounting charge (benefit)	$	1,475	$	(1,174	)	$	(22	)	$	(821	)	$	(542	)

		Fiscal Year 2004
		Q1		Q2		Q3		Q4			Full Year
Variable accounting charge (benefit) by fiscal quarter ($000’s)
	Days outstanding		—		18		90		90			198
	Ending stock price	$	2.20	$	3.48	$	5.37	$	3.67		$	3.67
	Variable accounting charge (benefit)	$	—	$	61	$	889	$	(213	)	$	737

      We anticipate that expense amounts relating to the employee stock option exchange program will continue to vary from quarter to quarter reflecting both the vesting schedules of the options and the fluctuation in the quarter-ending stock price of our outstanding options subject to variable accounting. Our time vesting percentage calculations reflect the vesting schedules of the newly issued replacement options, which vested 50% on June 11, 2004, with the remaining 50% vesting on April 11, 2005 or according to the specific performance vesting schedules of particular stock option grants.

      Other Income (Expense). Other income (expense) includes interest expense, interest income, and other non-operating income, net. Total other income (expense) for fiscal 2005 was $0.2 million, compared to $(0.1) million in fiscal 2004. The decrease in fiscal 2005 compared to fiscal 2004 was attributable to a lower average balance in the company’s investment accounts. Other expense recorded in fiscal 2004 includes a loss on the sale of an investment in the first quarter of fiscal 2004 in the amount of $0.1 million.

      Net Loss. The combination of all the factors discussed above contributed to a net loss of $6.8 million for fiscal 2005 compared with a net loss of $18.1 million in fiscal 2004. We expect that with our cost reduction programs in place and with expected revenue increases in the final two quarter of fiscal 2006, we will continue to reduce our net loss amounts in the full fiscal year 2006. This forward-looking statement excludes the impact of amounts relating to the variable accounting treatment of the employee stock option exchange program, which we cannot predict, because it is dependant upon the value of our stock, and which may increase our net loss if our stock price increases.

Fiscal Year Ended March 31, 2004 Compared to Fiscal Year Ended March 31, 2003

      Net Revenues. Net revenues for the fiscal years ended March 31, 2004 and 2003 were $65.3 million and $49.2 million, respectively. Compared to fiscal 2003, net revenues in fiscal 2004 increased $16.1 million, or 32.7%, primarily as a result of capital spending increases in the semiconductor industry. We sold 40% more units of our Therma-Probe and Opti-Probe products in fiscal 2004 and the average selling price increased 55% in fiscal 2004 due to a shift in business towards newer, more expensive models. We experienced strong price competition during both fiscal 2004 and fiscal 2003.

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      The following table summarizes our product and service revenues in different categories as a percentage of total net revenues for the periods indicated.

			Fiscal Year Ended
			March 31,
			2005			2004			2003
Net Revenues
	Products			75	%		72	%		58	%
	Service and parts			25	%		28	%		42	%
		Total net revenues		100	%		100	%		100	%

      The fluctuations in these percentages are related primarily to the changes in the amount of metrology capital equipment being purchased by the semiconductor industry from one year to the next. Sales of service contracts and parts tend to reflect the installed base of systems previously sold rather than current system sales. As a result, the dollars of such sales do not fluctuate as widely as systems sales, and therefore represent a higher percentage of net revenues when product sales are lower.

      Net revenues attributable to international sales for the fiscal years ended March 31, 2004 and 2003 accounted for 72% of our total revenues for each of these two periods.

      Demand for semiconductors and semiconductor equipment increased during fiscal year 2004. As a result, we increased the number of our customers and experienced higher order booking rates than in the previous fiscal year. The increased orders resulted in higher revenues for system shipments. The increased revenues materially improved our financial position and results of operations in fiscal 2004 compared to the previous year.

      Gross Profit (Loss). Gross profit increased to $26.8 million in fiscal 2004 from a $5.8 million gross loss in fiscal 2003, a change of $32.6 million. As a percentage of net revenues, gross profit increased from (12)% in fiscal 2003 to 41% in fiscal 2004. The improvement in gross profit was primarily because of increased systems revenues in fiscal 2004. Key contributors to this improvement in gross profits can be summarized as follows:

			Gross Profit
			Improvement
Key contributors to gross profit improvement ($000’s):
	Increased systems revenues		$	7,647
	Increased sale of inventory previously written-off			9,563
	Decrease in new inventory provision			4,400
	Overhead spending reductions			6,118
	Termination of a development contract			3,675
	Favorable resolution of accrued tax exposure			1,247
		Total	$	32,650

      Roughly one quarter of the improvement in gross profit reflects systems revenue increases. Systems revenues, which contribute relatively higher gross margins, grew by 39% in fiscal 2004 compared to fiscal 2003, while service and parts revenues, which contribute relatively lower gross margins, declined by 13% in fiscal 2004 compared to fiscal 2003. Increased demand for systems improved the margins in several other ways, specifically by enabling the sale of inventory that had been previously written off, resulting in a benefit of $10.6 million, facilitating sales of systems that had been used internally for demonstration and testing purposes, which generally have a lower cost basis than new systems, $2.5 million, and improving overhead absorption of fixed costs, $0.8 million.

      Overhead spending was reduced by over $6.1 million, due to reductions in labor and discretionary spending in fiscal 2004 compared to fiscal 2003. These spending reductions contributed approximately 19% to the improvement in gross profit. Approximately 11% of the gross margin improvement is due to the

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termination of a development agreement in the third fiscal quarter of 2004, in which we recognized $4.7 million of previously deferred revenues and gross profit of $3.7 million. Approximately 4% of the improvement is due to the favorable resolution in the third fiscal quarter of 2004 of a potential tax exposure in Korea that we accrued in fiscal 2003.

      As a result of favorable economic conditions and increasing demand for semiconductor products, our gross profits included $10.6 million for sales of previously reserved inventory and charges of $5.2 million in new inventory reserves. We also scrapped $3.1 million of previously reserved inventory. This compares to our gross loss in fiscal year 2003 in which we experienced a decline in sales and recorded an inventory provision of $9.6 million related to excess and obsolete inventories, partially offset by the sale of $1.0 million of inventory previously written-off. Inventory charges recorded in fiscal 2003 had substantially lowered the net value of our 200 mm inventory on hand and we received some benefit the sale of our excess 200mm inventory in fiscal 2004.

      Research and Development, or R&D, Expense. R&D expenses were $18.7 million and $29.2 million for fiscal years 2004 and 2003, respectively, a reduction of $10.5 million, or 36%. R&D expenses as a percentage of net revenues for fiscal 2004 decreased to 29% from 59% for fiscal 2003 due to both lower R&D spending and the increase of net revenues in fiscal 2004. During fiscal year 2004, in part due to reductions in force, labor and benefits costs were lower by $3.9 million, or 27%. We also reduced the use of outside services by $3.9 million, or 73%. Spending on project materials declined by $1.4 million, or 54%. Other discretionary spending and allocations for facilities and information systems support declined by $1.3 million, or 18%. We maintained the resources for our critical programs such as our real-time critical dimension product, or RT/CD.

      Selling, General and Administrative, or SG&A, Expense. SG&A expenses were $23.0 million and $26.1 million for fiscal years 2004 and 2003, respectively. Compared to fiscal 2003, SG&A expenses in fiscal 2004 decreased $3.1 million, or 12%. The decrease in fiscal 2004 SG&A expenses reflects lower headcount, partially due to reductions in force, resulting in savings of $1.3 million, or 9%. Spending on outside services declined by $1.9 million, or 22%. Commissions, however, increased by $0.5 million in 2004 compared to 2003 reflecting increased orders and revenues. Other discretionary spending, such as travel and entertainment and allocations for facilities and information systems support declined by $0.4 million, or 14%. SG&A expenses as a percentage of net revenues decreased to 35% in fiscal 2004 from 53% in fiscal 2003 primarily due to significantly higher net revenues in fiscal 2004.

      Impairment of Goodwill and Other Intangible Assets. During the quarter ended September 30, 2002, we recognized that a downturn in the semiconductor industry had negatively impacted our projected future cash flows and our market capitalization. Our stock price declined from $11.39 on June 28, 2002 to $0.79 on September 30, 2002. As a result, we performed a transitional impairment analysis, which considered current operating losses, a decrease in market capitalization below tangible book value, the absence of positive cash flows, and uncertainties resulting from the duration and severity of the industry downturn, and recognized a goodwill impairment loss of $65.9 million in the quarter ended September 30, 2002, which effectively reduced the goodwill balance related to our Sensys acquisition to zero.

      The initial fair value of the Sensys reporting unit had been established at the date of acquisition, January 16, 2002, based on the purchase price at the time of acquisition, $88.3 million. The value of the specific assets acquired through the Sensys acquisition were established in accordance with Statement of Financial Accounting Standards No. 141 (SFAS No. 141), “Business Combinations”, in which the cost of an acquired company is assigned to the tangible and intangible assets acquired on the basis of their fair value at the date of the acquisition. Any purchase price over the fair value of the net assets acquired is recorded as goodwill. SFAS No. 141 sets forth detailed guidelines for determining the fair value of individual assets acquired, stating that an intangible asset acquired in a business combination shall be recognized as an asset apart from goodwill if the asset meets one of the following criteria: 1) it arises from contractual or other legal rights; or 2) it is capable of being separated or divided from the acquired enterprise and sold, transferred, licensed, rented or exchanged.

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      During the quarter ended December 31, 2003, due to the termination of a development agreement, we accelerated the amortization of $1.5 million of the related development contract intangible assets.

      Restructuring, Severance and Other. The following table summarizes the changes in restructuring, severance and other costs during the twelve months ended March 31, 2004 (in thousands):

			Liability as							Liability as
			of March 31,							of March 31,
			2003		Provision		Payments			2004
Restructuring, severance and other ($000s):
	Severance and workforce reduction		$	558	$	1,772	$	(2,330	)	$	—
	Consolidation of facilities			662		82		(524	)		220
	Other costs			134		84		(218	)		—
		Total	$	1,354	$	1,938	$	(3,072	)	$	220

      During fiscal 2004, we recorded $1.9 million in charges related to restructuring, severance and other costs. Of this amount, $1.8 million relates to reductions in force in April 2003 and October 2003 of approximately 39 and 22 employees, respectively. An additional $0.1 million was recorded as leased facility charges during the second quarter of 2004 when we entered into a sublease on a previously vacated facility. The $0.1 million charge reflects the difference between the estimated sublease income and the actual sublease income for this facility. As of the end of fiscal 2004, liabilities that we had accrued for severance and other costs had been paid out in full. During fiscal 2003, we recorded $4.3 million in charges related to restructuring, severance and other costs. We closed down two facilities in Santa Clara, California to reduce operating expenses and recorded a $1.2 million charge associated with the abandonment of leased facilities and write-off of fixed assets. We also implemented two reduction-in-force programs affecting approximately 190 people and recorded $2.9 million of severance and workforce reduction and $0.2 million of other severance-related costs.

      Stock-Based Compensation. In fiscal 2004, employee stock-based compensation expense of $1.3 million included expense of $0.7 million related to variable accounting and amortization expense of $0.6 million related to the Sensys acquisition. In fiscal 2003, employee stock-based compensation expense of $1.7 million represented amortization expense related to the Sensys acquisition.

      Stock-based compensation reflect charges for options assumed as part of the Sensys acquisition in January 2002 and charges for options issued September 10, 2003 in the employee stock option exchange offer.

      As part of the Sensys acquisition, we assumed $3.5 million of stock-based compensation to be amortized over the vesting period of the options. The amortization expense was $0.6 million, or 1% of net revenues in fiscal 2004, and $1.7 million, or 3% of net revenues in fiscal 2003, of which $168,000 and $33,000, respectively, was included in cost of revenues.

      During the second quarter of fiscal 2004, we commenced and completed an employee stock option exchange program. The voluntary program allowed Therma-Wave employees, excluding officers and directors, to return to us existing options issued before July 1, 2002 with an exercise price greater than $2.00 per share and exchange them for new options that were granted on September 10, 2003. The number of new options granted in the employee stock option exchange program was equal to 75% of the number of options canceled in the exchange. The new option grants have a different vesting schedule from the original option grants and have an exercise price equal to $2.38, the fair market value of our common stock on September 10, 2003. Of the 1,366,570 options eligible for exchange, 1,352,108 options, or 99%, were exchanged for 1,014,144 new options with an exercise price of $2.38. None of these replacement options vests before June 11, 2004.

      As a result of the modification to the exercise price of the stock options, the replacement options are accounted for as variable from the date of modification until the option is either exercised, canceled or

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expired. As of March 31, 2004, we have recorded approximately $0.7 million in deferred compensation expense related to the employee option exchange program. This charge reflects three groups of options:

•  the new options issued in the exchange which were outstanding since September 10, 2003

•  options eligible for exchange that were not exchanged (about 1% of eligible options)

•  options issued to eligible participants within the six months prior to or following September 10, 2003.

      Due to the options requiring variable accounting treatment, the expense is being recorded for the vesting of these options over time based on increases in the stock price over and above the exercise price of the new options. In future quarters, the expense could increase as the vesting over time of these options increases and if the stock price increases. Reductions to expense may also be recorded if the stock price decreases, but such reductions will be limited to the net expense previously reported.

      During fiscal 2004, charges related to the variable accounting treatment of options were $0.7 million. However, on a quarterly basis these costs varied based on the amount of time the options were outstanding and on the quarter-end closing stock price as follows:

		Fiscal Year 2004
		Q1		Q2		Q3		Q4			Full Year
Variable accounting charge (benefit) by fiscal quarter ($000’s)
	Days outstanding		—		18		90		90			198
	Ending stock price	$	2.20	$	3.48	$	5.37	$	3.67		$	3.67
	Variable accounting charge (benefit)	$	—	$	61	$	889	$	(213	)	$	737

      Our time vesting percentage calculations reflect the vesting schedules of the newly issued replacement options, which vested 50% on June 11, 2004, with the remaining 50% vesting on April 11, 2005 or according to the specific performance vesting schedules of particular stock option grants.

      Other Income (Expense). Other income (expense) includes interest expense, interest income, and other non-operating income, net. Total other income (expense) for fiscal 2004 was $(0.1) million, compared to $0.9 million in fiscal 2003. The decrease in fiscal 2004 compared to fiscal 2003 was attributable to lower interest income of $0.8 million resulting from lower average interest rates as well as lower average investment balances that declined approximately $17.6 million from fiscal 2003 to fiscal 2004, offset by $0.3 million in interest refunded from the Internal Revenue Service in fiscal 2003. Other expense recorded in fiscal 2004 includes a loss on the sale of an investment in the first quarter of fiscal 2004 in the amount of $0.1 million.

      Net Loss. The combination of all the factors discussed above contributed to a net loss of $18.1 million for fiscal 2004 compared with a net loss of $133.6 million in the prior fiscal year.

Liquidity and Capital Resources

      The consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. We reported net losses of $6.8 million, $18.1 million and $133.6 million in fiscal years ended March 31, 2005, 2004 and 2003, respectively, and cash used in operations of $9.7 million, $2.9 million and $42.6 million in those respective years. Due to the continued instability in the semiconductor industry and the related instability in the semiconductor capital equipment industry, uncertain economic conditions worldwide, and other factors, we cannot predict how long we will incur further losses or whether we will become profitable again. Moreover, in part due to these downturns, for the year ended March 31, 2003, we recorded $81.3 million for the write off of goodwill and other intangible assets, inventory provision, restructuring, severance and other costs related to reductions in work force. We cannot assure you that our business will not continue to decline or when or if performance will improve. These factors raise substantial doubt as to our ability to continue as a going concern, and our independent registered public accounting firm has expressed substantial doubt about the company’s ability to continue as a going concern in their report included in Item 8 of this Form 10-K.

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      Our principal sources of funds have been and are anticipated to be cash on hand ($13.4 million unrestricted as of March 31, 2005), cash flows from operating activities (if any), borrowings under our bank credit facilities (if available, see discussion of Material Adverse Change clause below) and the sales of common stock, preferred stock or other securities. If additional funds are raised through the issuance of preferred stock or debt, these securities could have rights, privileges or preferences senior to those of our common stock, and debt covenants could impose restrictions on our operations. The sale of equity or debt could result in additional dilution to current stockholders, and such financing may not be available to us on acceptable terms, if at all.

      Failure to raise additional funds may adversely affect the company’s ability to achieve its intended business objectives. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amount or classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.

      Subsequent to the end of fiscal year 2005, we implemented a restructuring and reduced our North American headcount by approximately 6 percent to bring operating expenses closer in line with our revenue projections. We also signed an exclusive representation agreement with Hermes-Epitek Corporation to serve as an exclusive representative in Taiwan, China, Singapore and Malaysia to sell and service our Therma-Probe and Opti-Probe family of metrology products. We believe that this agreement will give us a more flexible cost structure for the Asia-Pacific region. We intend to take other actions, yet to be fully defined, to further reduce our operating expense structure and to provide additional cash to meet our operating needs. No assurance can be given, however, that this will be the case. We may require additional equity or debt financing to meet our working capital requirements or to fund our research and development activities. There can be no assurance that additional financing will be available to us or that such financing will be on terms satisfactory to us.

      On June 10, 2005, the Company and Silicon Valley Bank entered into (i) an Amended and Restated Loan and Security Agreement, and (ii) a Streamline Facility Agreement, that renewed a $15.0 million revolving line of credit to the Company. The revolving line of credit can be used to (i) borrow funds for working capital and general corporate purposes, (ii) issue letters of credit, (iii) enter into foreign exchange forward contracts, and (iv) support certain cash management services. The Loan and Security Agreement also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in the Company’s business, operations, or financial or other condition of the Company, or a material impairment of the prospect of repayment of any portion of outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral. On June 11, 2007, the revolving line of credit matures and Silicon Valley Bank’s commitment to extend revolving loans these agreements terminates.

      Our principal liquidity requirements are for working capital and general corporate purposes. Our cash and cash equivalent balances decreased by $10.5 million during fiscal year 2005 to $13.4 million as of March 31, 2005. This compares to an increase of $9.1 million during fiscal year 2004 to $23.9 million as of March 31, 2004 from $14.8 million as of March 31, 2003. The March 31, 2003 figure also included restricted cash of $1.1 million. The increase in fiscal 2004 was primarily attributable to $11.7 million in net proceeds from sale of 5.8 million shares of the company’s common stock in a private placement in September 2003. In the private placement, we raised $12.7 million of gross proceeds and incurred $1.0 million of issuance costs, $0.9 million of which were payable to Needham & Company who acted as placement agent.

      Working capital requirements in fiscal year 2005 included an increase in inventories, of $18.8 million, excluding $5.1 million of non-cash inventory provision, and an increase in accounts receivable of $0.7 million. This increase in inventories of $18.8 million resulted from a movement to more expensive 300 millimeter technology in anticipation of increased demand for our 300 millimeter product. Our customers must have metrology equipment to improve their yields, an essential element to improving their profits. A significant number or our customers are now expanding their wafer production capacity while simultaneously moving from 200 millimeter to new 300 millimeter technology. We believe these technology advances will significantly increase the requirement to improve yields.

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      During fiscal 2004, $2.0 million in cash was generated by changes in operating assets and liabilities. Accounts receivable increased by only $0.3 million, even though net revenues increased 33 percent, in fiscal 2004 compared to fiscal 2003. Changes in inventories, excluding a $5.2 million inventory provision, were an increase of $0.2 million. Inventory receipts were approximately equal to inventory reductions due to the sale, scrap and internal use of inventory. Benefit from the sale of inventory that had been previously written down was $10.6 million. We also scrapped inventories that had originally cost $3.1 million but that had been previously fully written-off. Accounts payable increased $5.3 million in fiscal year 2004. Accounts payable increases reflected the fact that our purchase of new parts increased due to increased net revenue and a growing requirement to provide parts for our more advanced products. Deferred revenues decreased by $2.4 million reflecting the termination of a development contract for which $4.7 million in deferred revenues were recognized. Reduction in other assets contributed $0.9 million in cash, and decreases in accrued and other liabilities used $1.3 million in cash.

      During the fiscal year ended March 31, 2005, net cash used by investment activities was $1.6 million. Cash used in investing activities includes investments in property and equipment and investments in our patent portfolio. Investments in property and equipment amounted to $1.1 million and $0.3 million for the fiscal years ended March 31, 2005 and 2004, respectively. Investments in our patent portfolio were $0.5 million and $0.8 million for the fiscal years ended March 31, 2005 and 2004, respectively, reflecting our ongoing commitment to technology inventions and patent protection.

      During the fiscal year ended March 31, 2004, net cash used by investing activities for purchase of patents and property and equipment was $0.8 million and $0.3 million, respectively, partially offset by proceeds from sale of an investment of $0.4 million.

      We expect investments in property and equipment in fiscal year 2006, which will consist primarily of computer and test equipment, along with investments in patents, to continue at the relatively low levels of recent years.

      Cash provided by financing activities was $0.7 million and $13.2 million during the fiscal years ended March 31, 2005 and 2004, respectively. The decrease in fiscal 2005 was primarily due to the $11.7 million, net of $1.0 million of issuance costs, raised in the sale of 5.8 million shares of the company’s common stock in a private placement in fiscal 2004. In fiscal 2005 and fiscal 2004 cash totaling $0.7 million and $0.4 million, respectively, was raised through the issuance of common stock, including the sale of shares under our 2000 Employee Stock Purchase Plan and 2000 Equity Incentive Plan. In fiscal 2005 and 2004, we did not repurchase stock pursuant to the stock repurchase program discussed in Note 9 of Notes to Consolidated Financial Statements entitled “Stock Repurchases.”

Factors Affecting Future Results

      The following factors should be carefully considered in addition to the other information set forth in this annual report in analyzing an investment in our common stock. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties that we do not presently know about or that we currently believe are immaterial may also adversely impact our business operations. If any of the following risks actually occur, our business, financial condition or results of operations would likely suffer. In such case, the trading price of our common stock could fall, and you may lose all or part of the money you paid to buy our common stock. This annual report contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below as well as those discussed elsewhere in this annual report.

WE HAVE INCURRED NET LOSSES IN THE LAST THREE FISCAL YEARS AND MAY INCUR FURTHER LOSSES IN THE FUTURE. OUR PLANS TO MAINTAIN AND INCREASE LIQUIDITY MAY NOT BE SUCCESSFUL; THE REPORT OF OUR INDEPENDENT REGISTERED

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PUBLIC ACCOUNTING FIRM INCLUDES A GOING CONCERN UNCERTAINTY EXPLANATORY PARAGRAPH.

      We reported net losses of $6.8 million, $18.1 million and $133.6 million in fiscal 2005, 2004 and 2003, respectively, and cash used in operations of $9.7 million, $2.9 million and $42.6 million in these respective years. Due to the continued instability in the semiconductor industry and the related instability in the semiconductor capital equipment industry, uncertain economic conditions worldwide, and other factors, we cannot predict how long we will incur further losses or whether we will become profitable again. Moreover, in part due to these downturns, for the year ended March 31, 2003, we recorded $81.3 million for the write off of goodwill and other intangible assets, inventory charge, restructuring, severance and other costs related to reductions in work force. We cannot assure you that our business will not continue to decline or that our performance will improve. These factors raise substantial doubt as to our ability to continue as a going concern, and our independent registered public accounting firm has included a going concern uncertainty explanatory paragraph in its report, which is included elsewhere in this Form 10-K.

WE NEED TO HAVE SUFFICIENT CASH TO OPERATE IF OUR BUSINESS IS TO SUCCEED.

      Our principal sources of funds have been and are anticipated to be cash on hand ($13.4 million unrestricted as of March 31, 2005), cash flows from operating activities (if any), borrowings under our bank credit facilities (if available see discussion of Material Adverse Change clause below) and the sales of common stock, preferred stock or other securities. If additional funds are raised through the issuance of preferred stock or debt, these securities could have rights, privileges or preferences senior to those of our common stock, and debt covenants could impose restrictions on our operations. The sale of equity or debt could result in additional dilution to current stockholders, and such financing may not be available to us on acceptable terms, if at all.

      Subsequent to the end of fiscal year 2005, we implemented a restructuring and reduced our North American headcount by approximately 6 percent to bring operating expenses closer in line with our revenue projections. We also signed an exclusive representation agreement with Hermes-Epitek Corporation to serve as an exclusive representative in Taiwan, China, Singapore and Malaysia to sell and service our Therma-Probe and Opti-Probe family of metrology products. We believe that this agreement will give us a more flexible cost structure for the Asia-Pacific region. We intend to take other actions, yet to be fully defined, to further reduce our operating expense structure and to provide additional cash to meet our operating needs. No assurance can be given, however, that this will be the case. We may require additional equity or debt financing to meet our working capital requirements or to fund our research and development activities. There can be no assurance that additional financing will be available to us or that such financing will be on terms satisfactory to us. Failure to raise additional funds may adversely affect the company’s ability to achieve its intended business objectives.

      We have implemented various cost reduction programs during the past few years to bring operating expenses in line with revenue projections. As discussed above in this Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, of this report on Form 10-K, on April 8 and April 14, 2005, we took actions that included reducing our North American workforce by approximately 6 percent, which we expect to result in cash expenditures of approximately $0.6 million in the fiscal first quarter of 2006, and then to result in annualized salary and related cost savings of more than $3.0 million. Also, on April 19, 2005, we adopted a plan to restructure our Asian operations in Taiwan, China, Singapore and Malaysia by converting from a direct sales and service organization to one using an exclusive representative, which will result in termination of 50 or more employees and the closing of leased facilities in Taiwan and China, which we expect to result in cash expenditures of approximately $0.5 million to $0.85 million in our fiscal first and second quarters of 2006, but to improve the flexibility and cost effectiveness of our operating expense structure, because payments are directly related to the amount of sales volume instead of being essentially fixed. We intend to take other actions, yet to be fully defined, to further reduce our operating expense structure and to provide additional cash to meet our operating needs. We believe that with these cost reduction actions designed to improve our profitability, along with access to borrowings, if needed and available, under our bank credit facilities and potentially the sale of common stock, preferred stock

37

or other securities through one or more private placements, and other potential funds raising actions, we will have adequate liquidity and capital resources to meet our current and future financial obligations for at least the next twelve months. No assurance can be given, however, that this will be the case. We may require additional equity or debt financing to meet our working capital requirements or to fund our research and development activities. There can be no assurance that additional financing will be available, if required or, if available, will be on terms satisfactory to us.

WE MAY INCUR INDEBTEDNESS IN THE FUTURE UNDER OUR BANK CREDIT FACILITIES, WHICH COULD REQUIRE THE USE OF A PORTION OF OUR CASH FLOW AND MAY LIMIT OUR ACCESS TO ADDITIONAL CAPITAL.

      As of March 31, 2005, we had $3.2 million in outstanding letters of credit under our credit facility with Silicon Valley Bank. We may incur further indebtedness to finance acquisitions, capital expenditures and working capital or for other purposes.

      The level of our indebtedness could have important consequences for us such as the following:

•  a substantial portion of our cash flow from operations, if any, would be required to be dedicated to the repayment of indebtedness and would not be available for other purposes;

•  our future ability to obtain additional debt financing for working capital, capital expenditures, acquisitions or other purposes may be limited; and

•  our level of indebtedness has in the past, and could in the future, limit our flexibility in reacting to changes in the industry, general economic conditions and our ability to withstand a prolonged downturn in the semiconductor and/or semiconductor capital equipment industries.

OUR BANK CREDIT FACILITY IS SUBJECT TO A BORROWING BASE CALCULATION AND CONTAINS A MATERIAL ADVERSE CHANGE CLAUSE.

      The Company has access to $15 million in credit facilities that are unused other than for supporting standby letters of credit. However, the amount available under our credit facilities is determined using a borrowing base formula, which considers amounts in our trade accounts receivable and inventory, excluding certain aged and past due accounts receivable and inventory at locations outside of the United States, and there can be no assurance that any amount will be available for borrowing under this facility. This facility also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in the Company’s business, operations, or financial or other condition of the Company, or a material impairment of the prospect of repayment of any portion of outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral.

OUR PERFORMANCE IS AFFECTED BY THE CYCLICALITY OF THE SEMICONDUCTOR DEVICE INDUSTRY, WHICH MAY, FROM TIME TO TIME, LEAD TO DECREASED DEMAND FOR OUR PRODUCTS.

      The semiconductor industry is cyclical and has historically experienced periodic downturns, which have often resulted in a decrease in the semiconductor industry’s demand for capital equipment, including process control metrology systems. Our business depends upon the capital expenditures of semiconductor manufacturers, which, in turn, depend upon the current and anticipated market demand for semiconductors and products utilizing semiconductors. We are currently experiencing a period of low demand for process control metrology systems, and we cannot be sure that this favorable trend will continue, or if it does not continue then:

•  when the semiconductor industry will recover; or

•  whether the recovery will result in increased demand for our capital equipment by the semiconductor industry.

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OUR QUARTERLY OPERATING RESULTS HAVE HISTORICALLY AND MAY, IN THE FUTURE, VARY SIGNIFICANTLY. THIS MAY RESULT IN VOLATILITY IN THE MARKET PRICE FOR OUR SHARES.

      Our quarterly operating results have historically and may, in the future, vary significantly. Some of the factors that may influence our operating results and that could cause trading in our shares to be subject to extreme price and volume fluctuations in a given quarter include:

•  customer demand, which is influenced by economic conditions in the semiconductor industry, demand for products that use semiconductors, market acceptance of our products and those of our customers, seasonality, changes in product mix, and the timing, cancellation or delay of customer orders and shipments;

•  competition, such as competitive pressures on prices of our products, the introduction or announcement of new products by us or our competitors and discounts that may be granted to customers;

•  fluctuations in the availability and cost of components, subassemblies and production capacity;

•  expenses incurred in connection with litigation;

•  product development costs, such as increased research, development, engineering and marketing expenses associated with new products or product enhancements, and the effect of transitioning to new or enhanced products; and

•  levels of fixed expenses relative to revenue levels, including research and development costs associated with product development.

      During a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems. Accordingly, a small change in the number of systems actually shipped may cause significant changes in operating results. In addition, because of the significantly different gross margins attributable to our different product lines, changes in product mix may cause fluctuations in operating results.

LACK OF EFFECTIVE INTERNAL CONTROLS OVER FINANCIAL REPORTING COULD RESULT IN AN INABILITY TO ACCURATELY REPORT OUR FINANCIAL RESULTS THAT COULD LEAD TO A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

      Effective internal control over financial reporting is essential for us to produce reliable financial reports. If we cannot provide reliable financial information or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal control over financial reporting. In connection with our management’s evaluation of our internal control over financial reporting as of April 3, 2005, management identified the following two control deficiencies that constitute material weaknesses:

      1. As of April 3, 2005, the Company did not maintain effective controls over intercompany accounts. Specifically, the Company did not have effective controls to ensure that intercompany account balances were reconciled timely and properly eliminated in consolidation in accordance with generally accepted accounting principles. This control deficiency did not result in an adjustment to the consolidated financial statements. However, this control deficiency could result in a misstatement of accounts and disclosures that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

      2. As of April 3, 2005, the Company did not maintain effective controls over the documentation, review and approval of journal entries to allocate certain customer service and support costs between cost of revenues and selling, general and administrative expense. This control deficiency did not result in an adjustment to the consolidated financial statements. However, this control deficiency could result in a misstatement of the previously noted statement of operations’ accounts, that would result in a material

39

misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

      Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of April 3, 2005, based on the criteria established in “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Trading Commission.

      A failure to implement and maintain effective internal control over financial reporting, including a failure to implement corrective actions to address the control deficiencies identified above, could result in a material misstatement of our financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

OUR LARGEST CUSTOMERS HAVE HISTORICALLY ACCOUNTED FOR A SIGNIFICANT PORTION OF OUR REVENUES. ACCORDINGLY, OUR BUSINESS MAY BE ADVERSELY AFFECTED BY THE LOSS OF, OR REDUCED PURCHASES BY, ONE OR MORE OF OUR LARGE CUSTOMERS.

      If, for any reason, any of our key customers were to purchase significantly less of our products in the future, such decreased level of purchases could have a material adverse effect on our business, financial condition and results of operations. During the year ended March 31, 2005, three customers represented approximately 15%, 12% and 10% of our net revenues. During the year ended March 31, 2004, four customers represented approximately 16%, 14%, 12% and 10% of our net revenues. During the year ended March 31, 2003, one customer represented 13% of our net revenues. As customers seek to establish closer relationships with their suppliers, we expect that our customer base will continue to become more concentrated with a limited number of customers accounting for a significant portion of our revenues.

OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR IF WE INFRINGE ON THE PROPRIETARY TECHNOLOGY OF OTHERS.

      Our future success and competitive position depend in part upon our ability to obtain and maintain proprietary technology used in our principal product families, and we rely, in part, on patent, trade secret and trademark law to protect that technology. We have obtained a number of patents relating to each of our products and have filed applications for additional patents. There can be no assurance that any of our pending patent applications will be approved, that we will develop additional proprietary technology that is patentable, that any patents owned by or issued to us will provide us with competitive advantages or that these patents will not be challenged by any third parties. Furthermore, there can be no assurance that third parties will not design around our patents. Any of the foregoing results could have a material adverse effect on our business, financial condition, results of operations or cash flows.

IN ADDITION TO PATENT PROTECTION, WE RELY UPON TRADE SECRET PROTECTION FOR OUR CONFIDENTIAL AND PROPRIETARY INFORMATION AND TECHNOLOGY. WE ROUTINELY ENTER INTO CONFIDENTIALITY AGREEMENTS WITH OUR EMPLOYEES. HOWEVER, THERE CAN BE NO ASSURANCE THAT THESE AGREEMENTS WILL NOT BE BREACHED, THAT WE WILL HAVE ADEQUATE REMEDIES FOR ANY BREACH OR THAT OUR CONFIDENTIAL AND PROPRIETARY INFORMATION AND TECHNOLOGY WILL NOT BE INDEPENDENTLY DEVELOPED BY OR BECOME OTHERWISE KNOWN TO THIRD PARTIES.

      We license and will continue to license certain technology used in our products from third parties. Our inability to acquire any third-party licenses, or integrate the related third-party technologies into our products, could result in delays in our product developments and enhancements until equivalent technologies can be identified, licensed or integrated. We may also require new licenses in the future as our business grows and technology evolves. We cannot assure you that these licenses will be available to us on commercially reasonable terms, if at all.

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      Our commercial success will also depend, in part, on our ability to avoid infringing or misappropriating any patents or other proprietary rights owned by third parties. If we are found to infringe or misappropriate a third party’s patent or other proprietary rights, we could be required to pay damages to such third party, alter our products or processes, obtain a license from the third party or cease activities utilizing such proprietary rights, including making or selling products utilizing such proprietary rights. If we are required to do any of the foregoing, there can be no assurance that we will be able to do so on commercially favorable terms, if at all. Our inability to do any of the foregoing on commercially favorable terms could have a material adverse impact on our business, financial condition, results of operations or cash flows.

PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS, OR THIRD PARTIES SEEKING TO ENFORCE THEIR OWN INTELLECTUAL PROPERTY RIGHTS AGAINST US, MAY RESULT IN LITIGATION, THE COST OF WHICH COULD BE SUBSTANTIAL.

      There are currently no material legal proceedings pending against us. We may be required to initiate additional litigation in order to enforce any patents issued to or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights. From time to time, the Company receives letters from third parties threatening to file lawsuits to enforce such third parties’ intellectual property rights. We may be subject to additional lawsuits by third parties seeking to enforce their own intellectual property rights. Any such litigation, regardless of outcome, could be expensive and time consuming and, as discussed above in the prior risk factor, could subject us to significant liabilities or require us to cease using proprietary third party technology and, consequently, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

WE OPERATE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR CAPITAL EQUIPMENT INDUSTRY AND COMPETE AGAINST LARGER COMPANIES.

      We operate in the highly competitive semiconductor capital equipment industry and face competition from a number of competitors, some of which have greater financial, engineering, manufacturing and marketing resources and broader product offerings than Therma-Wave. We cannot assure you that our products will be able to compete successfully with the products of our competitors. Many of our competitors are investing heavily in the development of new products aimed at applications we currently serve. Our competitors in each product area can be expected to continue to improve the design and performance of their products and to introduce new products with competitive prices and performance characteristics. In addition, we believe that our competitors sometimes provide demonstration systems to semiconductor manufacturers at no cost. We are required to employ similar promotions in order to remain competitive and this practice may become more pervasive in the industry.

COMPETITIVE CONDITIONS IN OUR INDUSTRY MAY REQUIRE US TO REDUCE OUR PRICES.

      Due to competitive conditions in our industry, we have at times selectively reduced prices on our products in order to maintain our market share. These reductions are not necessarily permanent nor do they affect all of our products. There can be no assurance that competitive pressures will not necessitate further price reductions. Maintaining technological advantages to mitigate the adverse effect of pricing pressures will require a continued high level of investment by us in research and development and sales and marketing. There can be no assurance that we will have sufficient resources to continue to make such investments or that we will be able to make the technological advances necessary to maintain such competitive advantages. To the extent our products do not provide technological advantages over products offered by our competitors, we are likely to experience increased price competition or loss of market share with respect to such products.

WE ENCOUNTER DIFFICULTIES IN SOLICITING CUSTOMERS OF OUR COMPETITORS BECAUSE OF HIGH SWITCHING COSTS IN THE MARKETS IN WHICH WE OPERATE.

      We believe that once a device manufacturer has selected a particular vendor’s capital equipment, that manufacturer generally relies upon that vendor’s equipment for that specific production line application and, to the extent possible, subsequent generations of that vendor’s systems. Accordingly, it may be difficult to

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achieve significant sales to a particular customer once another vendor’s capital equipment has been selected by that customer unless there are compelling reasons to do so, such as significant performance or cost advantages.

OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS FOR THE SEMICONDUCTOR INDUSTRY. WE CANNOT ASSURE YOU THAT WE WILL BE SUCCESSFUL IN OUR PRODUCT DEVELOPMENT EFFORTS OR THAT OUR NEW PRODUCTS WILL GAIN GENERAL MARKET ACCEPTANCE.

      Our future growth will depend, in part, on our ability to design, develop, manufacture, assemble, test, market and support new products and enhancements on a timely and cost-effective basis. Our failure to successfully identify new product opportunities or to develop, manufacture, assemble or introduce new products could have a material adverse effect on our growth prospects. For example, we expect our product development efforts to include continuing to combine separate metrology systems into one tool, implementing integrated systems and networking these systems together. Integrated systems allow us to measure product wafers and monitor process equipment during the semiconductor fabrication process. We cannot assure you that we will not experience difficulties or delays in our development efforts with respect to these products or that we will be successful in developing these products. In addition, we cannot assure you that these products will gain market acceptance or that we will not experience reliability or quality problems.

OUR OPERATIONS ARE CHARACTERIZED BY THE NEED FOR CONTINUED INVESTMENT IN RESEARCH AND DEVELOPMENT AND, AS A RESULT, OUR ABILITY TO REDUCE COSTS IS LIMITED.

      Our operations are characterized by the need for continued investment in research and development and extensive ongoing customer service and support capability. As a result, our operating results could be materially adversely affected if our level of revenues is below expectations. In addition, because of our emphasis on research and development and technological innovation, there can be no assurance that our operating costs will not increase in the future.

RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY WILL REQUIRE US TO CONTINUALLY DEVELOP NEW AND ENHANCED PRODUCTS.

      Any failure by us to anticipate or respond adequately to technological developments and customer requirements, or any significant delays in product development or introduction could result in a loss of competitiveness and could materially adversely affect our operating results. There can be no assurance that we will successfully develop and bring new products to market in a timely and cost-effective manner, that any product enhancement or new product developed by us will gain market acceptance, or that products or technologies developed by others will not render our products or technologies obsolete or noncompetitive. A fundamental shift in technology in our product markets could have a material adverse effect on us, particularly in light of the fact that we currently derive a major portion of our revenues from sales of our two major product families, the Opti-Probe (including Opti-Probe CD) and Therma-Probe.

WE WILL NEED TO BE ABLE TO ATTRACT AND RETAIN KEY PERSONNEL WITH KNOWLEDGE OF INSTRUMENTS USED IN SEMICONDUCTOR MANUFACTURING PROCESSES TO HELP SUPPORT OUR FUTURE GROWTH. COMPETITION FOR SUCH PERSONNEL IN OUR INDUSTRY IS HIGH.

      Our success depends to a significant degree upon the continued contributions of key management, engineering, sales and marketing, customer support, finance and manufacturing personnel. The loss of the services of key personnel, who would be extremely difficult to replace, could have a material adverse effect on us. There can be no assurance that the services of such personnel will continue to be available to us. We have employment agreements with some key members of our senior management team, including Messrs. Lipkin, Christie, Passarello and Opsal. To support our future growth, we will need to attract and retain additional qualified employees. Competition for such personnel in our industry and in the Silicon Valley is high, and we cannot assure you that we will be successful in attracting and retaining such personnel.

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WE OBTAIN SOME OF THE COMPONENTS AND SUBASSEMBLIES INCLUDED IN OUR SYSTEMS FROM A SINGLE SOURCE OR LIMITED GROUP OF SUPPLIERS, THE PARTIAL OR COMPLETE LOSS OF WHICH COULD HAVE AT LEAST A TEMPORARY ADVERSE EFFECT ON OUR OPERATIONS.

      Some of the components and subassemblies included in our systems are obtained from a single source or a limited group of suppliers. From time to time, we have experienced temporary difficulties in receiving orders from some of these suppliers. Although we seek to reduce dependence on these sole and limited source suppliers, the partial or complete loss of these sources could have at least a temporary adverse effect on our results of operations and damage customer relationships. Further, a significant increase in the price of one or more of these components or subassemblies could materially adversely affect our results of operations.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH MANUFACTURING ALL OF OUR PRODUCTS AT A SINGLE FACILITY. ANY PROLONGED DISRUPTION IN THE OPERATIONS OF THAT FACILITY COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

      We produce all of our products in our manufacturing facility located in Fremont, California. Our manufacturing processes are highly complex, requiring sophisticated and costly equipment and a specially designed facility. As a result, any prolonged disruption in the operations of our manufacturing facility, whether due to technical or labor difficulties, destruction of or damage to this facility as a result of an earthquake, fire or any other reason, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

WE RELY UPON MANUFACTURERS’ SALES REPRESENTATIVES FOR A SIGNIFICANT PORTION OF OUR SALES. A DISRUPTION IN OUR RELATIONSHIP WITH ANY SALES REPRESENTATIVE COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.

      A significant portion of our sales have historically been made through manufacturers’ sales representatives, and we expect this percentage to increase since we are in the process of establishing Hermes-Epitek Corporation as our exclusive representative in Taiwan, China, Singapore and Malaysia. The activities of these representatives are not within our control, and they may sell products manufactured by other manufacturers. In addition, in some locations our manufacturing sales representatives also provide field service and support to our customers. A reduction in the sales efforts or financial viability of such manufacturers’ sales representatives, or a termination of our relationship with such representatives, could have a material adverse effect on our sales, financial results and ability to support our customers. Although we believe that we maintain good relations with our sales representatives, there can be no assurance that such relationships will continue.

OUR NET SALES AND RESULTS OF OPERATIONS CAN BE ADVERSELY AFFECTED BY THE INSTABILITY OF ASIAN ECONOMIES, FROM WHICH WE DERIVE A SIGNIFICANT PORTION OF OUR REVENUES.

      Our sales to customers in Asian markets represented approximately 60%, 59% and 58% of total net revenues for fiscal 2005, 2004 and 2003, respectively. Companies in the Asia Pacific region, including Japan and Taiwan, each of which accounts for a significant portion of our business in that region, are currently experiencing uncertainties in their currency, banking and equity markets. These instabilities may adversely affect our sales to semiconductor device and capital equipment manufacturers located in these regions in the coming quarters.

WE HAVE RECENTLY BEGAN CHANGING THE WAY WE MARKET AND SELL OUR PRODUCTS IN CERTAIN COUNTRIES IN ASIA, ONE OF OUR LARGEST MARKETS. AS A RESULT, WE CANNOT ASSURE YOU THAT OUR SALES IN THAT REGION WILL BE IN LINE WITH HISTORICAL TRENDS.

      Our new relationship with Hermes-Epitek changes the way we sell our products in Taiwan, China, Singapore and Malaysia. Previously, we had sales facilities and staff in Taiwan, China and Singapore who covered these countries for us. We have now closed our own facilities in these locations and intend to use

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Hermes-Epitek exclusively to market our products there. We expect that our relationship with Hermes-Epitek will improve our sales and service while simultaneously adding flexibility to our cost structure and decreasing difficulties in managing staffing and other elements of foreign subsidiary and branch operations, but there is no guarantee that this will occur. Since sales to customers in these countries represent such a large percentage of net revenues for the last three years, any reduction in our sales in these countries as a result of the new arrangement with Hermes-Epitek could have a significant impact on our financial condition, results of operations or cash flows.

WE ARE SUBJECT TO OPERATIONAL, FINANCIAL, POLITICAL AND FOREIGN EXCHANGE RISKS DUE TO OUR SIGNIFICANT LEVEL OF INTERNATIONAL SALES.

      International sales accounted for approximately 71%, 72% and 72% of our total revenues for fiscal 2005, 2004 and 2003, respectively. We anticipate that international sales will continue to account for a significant portion of our revenues in the foreseeable future. Due to the significant level of our international sales, we are subject to material risks, which include:

•  unexpected changes in regulatory requirements;

•  tariffs and other market barriers;

•  political and economic instability;

•  potentially adverse tax consequences;

•  outbreaks of hostilities;

•  difficulties in accounts receivable collection;

•  extended payment terms;

•  difficulties in managing foreign sales representatives; and

•  difficulties in managing staffing and other elements of foreign subsidiary and branch operations.

      In addition, the laws of countries in which our products are or may be sold may not provide our products and intellectual property rights with the same degree of protection as the laws of the United States.

      A substantial portion of our international sales is denominated in U.S. dollars. As a result, changes in the values of foreign currencies relative to the value of the U.S. dollar can render our products comparatively more expensive. Such conditions could negatively impact our international sales.

ACQUISITIONS COULD RESULT IN DILUTION, OPERATING DIFFICULTIES AND OTHER HARMFUL CONSEQUENCES.

      From time to time, we may acquire or make significant investments in complementary companies, products and technologies. The following risks are common to the integration of two companies, and may be associated with recent or future acquisitions:

•  the difficulty of incorporating new operations, technology and personnel into one company;

•  the potential disruption of our ongoing business;

•  the additional expense associated with amortization of acquired intangible assets;

•  the maintenance of uniform standards, controls, procedures and policies; and

•  the impairment of relationships with employees and customers.

      Other than our acquisition of Sensys in January 2002, we have no experience in managing this integration process. Moreover, the anticipated benefits of any future acquisitions or mergers may not be realized. Future acquisitions or mergers could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses related to goodwill and other tangible assets, any of which could be harmful to our business. Future acquisitions or mergers may require us to obtain additional equity or debt

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financing, which may not be on favorable terms or at all. Even if available, this financing may be dilutive. We cannot assure you that we will successfully overcome these risks or any other problem that we encounter in connection with any future acquisitions.

PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD DISCOURAGE POTENTIAL ACQUISITION PROPOSALS AND COULD DELAY, DETER OR PREVENT A CHANGE IN CONTROL.

      Provisions of our certificate of incorporation and by-laws may inhibit changes in control of Therma-Wave not approved by our board of directors and could limit the circumstances in which a premium may be paid for the common stock in proposed transactions, or a proxy contest for control of the board may be initiated. These provisions provide for:

•  a classified board of directors;

•  a prohibition on stockholder action through written consents;

•  a requirement that special meetings of stockholders be called only by our chief executive officer or the board of directors;

•  advance notice requirements for stockholder proposals and nominations;

•  limitations on the ability of stockholders to amend, alter or repeal the by-laws; and

•  the authority of the board to issue, without stockholder approval, preferred stock with such terms as the board may determine.

      We will also be afforded the protections of Section 203 of the Delaware General Corporation Law, which could have similar effects.

Recently Issued Accounting Pronouncements

      In October 2004, the FASB approved EITF Issue 04-10 “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” which addresses an issue in the application of paragraph 19 of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. In November 2004, the FASB delayed until further notice the effective date of this issue. We do not expect any material impact of the disclosure requirements of EITF Issue 04-10 on our consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”. The amendments made by SFAS No. 151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred beginning after June 15, 2005. We do not expect that the adoption of SFAS No. 151 to have a material impact on our consolidated financial statements.

      In December 2004, the FASB issued SFAS 123R (revised 2004), “Share Based Payment.” SFAS 123R is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for good or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the period during which an employee is required to provide service for the award. The grant-date fair value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available. In addition, SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value and that the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date

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of SFAS 123R for the company is for the first annual period beginning after June 15, 2005, i.e. our fiscal year ended March 31, 2007. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statement of operations.

      On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R, and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We are currently evaluating the impact that SAB 107 will have on our results of operations and financial position when we adopt it in fiscal 2007.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and is effective for fiscal years beginning after December 15, 2005. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We do not expect the adoption of SFAS No. 154 to have a material impact on our consolidated financial statements.

Off-Balance Sheet Commitments

      Our off-balance sheet commitments are limited to equipment operating leases, leases on office and manufacturing space and certain software license agreements, and commitments to vendors related to non-cancelable purchase orders. Future payments due under these obligations as of March 31, 2005 are as follows:

			Payments Due by Period
					Less Than		1-3		3-5		More than
			Total		1 Year		Years		Years		5 Years
Contractual obligations (000’s)
	Operating lease obligations		$	9,358	$	2,089	$	3,760	$	2,497	$	1,012
	Purchase obligations			7,008		6,407		601		—		—
	Minimum royalty payments			80		40		40		—		—
	Cancellation fees			102		102		—		—		—
		Total	$	16,548	$	8,638	$	4,401	$	2,497	$	1,012

      Operating Leases. Operating lease obligations are primarily related to administrative, R&D and manufacturing facilities necessary to conduct the company’s business. These leases are non-cancelable and expire at various dates through 2011. Certain of our facility leases include a provision to extend the lease term, including the lease for our primary headquarters and manufacturing facility in Fremont, California, which includes options to extend to February 2021. Our facility leases provide for periodic rent increases based upon previously negotiated or consumer price indexed adjustments, or in the case of extensions, generally market adjusted rates.

      Purchase Commitment and Cancellation Fees. In order to maintain a supply of inventory components based upon our expected product shipments, we regularly enter into purchase commitments for inventory,

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supplies and services with third party vendors. Generally the purchase commitments are non cancelable and we may not be able to renegotiate the delivery dates or total commitment. In certain instances we may pay a cancellation fee to cancel the purchase commitment. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We have made adequate provisions for any potential exposure related to inventory on order that may go unused based upon our current expectations.

      Minimum Royalty Payments. Minimum royalty payments represent the payment obligations for use of third party intellectual property, which will be due irrespective of product shipment volumes.

      We indemnify some of our suppliers and customers for specified intellectual property rights pursuant to certain parameters and restrictions. The scope of these indemnities varies, but in some instances includes indemnification for damages and expenses (including reasonable attorney fees) related to any misuse by us of the third party intellectual property. No amounts have been accrued in respect of the indemnification provisions as of March 31, 2005.

      Effective April 19, 2005, Therma-Wave entered into an exclusive representative agreement with Hermes-Epitek Corporation, under which Hermes-Epitek became an exclusive representative within certain countries to sell and service our Therma-Probe and Opti-Probe families of metrology products.

      Pursuant to the terms of this agreement, Hermes-Epitek will serve as the exclusive representative for our Therma-Probe and Opti-Probe metrology product lines for China, Malaysia, Singapore and Taiwan. Therma-Wave will pay Hermes-Epitek a commission on the sale of these products when the products are installed within one of the enumerated territories and where the sales process or purchasing decision was directly influenced by Hermes-Epitek. Additionally, Hermes-Epitek will provide our customers with technical support services for the products, including, among other things, installation services and qualification testing. The term of this agreement with Hermes-Epitek is twenty-four months, with a provision for automatic renewal for additional twelve-month terms.

Credit Facilities

      In June 2003, we entered into a loan and security agreement with Silicon Valley Bank, or SVB. The agreement includes a $5.0 million domestic line of credit, including a sub-limit of $5.0 million for letters of credit, and a $10.0 million Export-Import Bank of the United States, or EXIM, guaranteed revolving line of credit. The bank credit facility allows us to borrow money under the domestic line bearing a floating interest rate equal to the SVB prime rate plus 1.50% (7.25% as of March 31, 2005). The EXIM revolving line allows us to borrow money at a floating interest rate equal to the SVB prime rate plus 1.75% (7.50% as of March 31, 2005). We may request advances in an aggregate outstanding amount not to exceed the lesser of $15.0 million total under the two lines or the borrowing base, in each case minus the aggregate face amount of outstanding letters of credit, including any drawn but un-reimbursed letters of credit. Our borrowings under the SVB and EXIM guaranteed credit facilities are secured by substantially all of our assets. As of March 31, 2005, and 2004, we had $3.2 and $4.6 million, respectively, in outstanding letters of credit under this agreement. The credit facilities were to mature on June 11, 2005, but were renegotiated in June 2005 and extended for a period of two years.

      The SVB credit facility contains certain restrictive covenants, which among other requirements impose limitations with respect to the change of business location and ownership, incurrence of indebtedness, the payment of dividends, investments, mergers, acquisitions, consolidations and sales of assets. The Company is also required to satisfy certain financial tests under the credit facility including tests related to the Company’s quick ratio and profitability. As of March 31, 2005, the Company was in violation of the covenants of the credit facility agreement by delivering borrowing base certificates and reports on Forms 8-K filed with the Securities and Exchange Commission outside of the required reporting periods. The Company was also in violation of the profitability covenant as defined. All violated covenants were waived by SVB in June 2005.

      On June 10, 2005, the Company and Silicon Valley Bank entered into (i) an Amended and Restated Loan and Security Agreement, and (ii) a Streamline Facility Agreement, that renewed a $15.0 million

47

revolving line of credit to the Company. The revolving line of credit can be used to (i) borrow funds for working capital and general corporate purposes, (ii) issue letters of credit, (iii) enter into foreign exchange forward contracts, and (iv) support certain cash management services. The Loan and Security Agreement also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in the Company’s business, operations, or financial or other condition of the Company, or a material impairment of the prospect of repayment of any portion of outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral. On June 11, 2007, the revolving line of credit matures and Silicon Valley Bank’s commitment to extend revolving loans these agreements terminates.

Inflation

      The impact of inflation on our business has not been material for the fiscal years ended March 31, 2005, 2004 and 2003.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      The following discussion about market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements. See also the discussion of forward-looking statements above.

Market Risk Related to Interest Rates and Foreign Currency

      We are exposed to market risks related to changes in interest rates and foreign currency exchange rates, however, we believe those risks to be not material in relation to our operations. We do not have any derivative financial instruments.

Interest Rate Risk

      Our exposure to market risk from changes in interest rates relates to our cash investment portfolio. We do not use derivative financial instruments in our investment portfolio, which consists of only marketable securities with active secondary or resale markets to ensure portfolio liquidity. We have minimal cash flow exposure due to rate changes for cash and cash equivalents because interest income earned on our cash investments is considered immaterial. Our cash investment portfolio is invested at market interest rates.

      As of March 31, 2005, our cash and cash equivalents included money market securities and investment grade commercial paper. Due to the short-term duration of our investment portfolio, an immediate 10% change in interest rates would not have a material effect on the fair market value of the portfolio. Therefore, we would not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

Foreign Currency Exchange Risks

      We are primarily a U.S. dollar functional currency entity. A substantial portion of our international sales are denominated in U.S. dollars and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to sales. We have determined that the functional currency of our foreign operations is the local currency as our international operations incur most of their expenses in the local currency. Transactions denominated in currencies other than our functional currencies create gains and losses that are reflected in our consolidated statements of operations. Foreign currency transaction gains (losses) are included in other income (expense), net in our consolidated statements of operations and were not material for all periods presented.

      We convert the financial statements of our foreign subsidiaries into U.S. dollars. When there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars leads to a translation gain or loss. The accumulated effects of foreign translation rate changes related to net assets located outside the U.S. are included as a component of stockholders’ equity. As of

48

March 31, 2005 and 2004 accumulated other comprehensive losses of $0.7 million consist of foreign currency translation adjustments, net of tax.

      We do not use forward exchange contracts to hedge exposures denominated in foreign currencies or any other derivative financial instruments for trading or speculative purposes. The effect of an immediate 10% change in exchange rates would not have a material impact on our future operating results or cash flows.

      The following table illustrates net assets and costs and expenses for fiscal 2005 exposed to foreign currency risk:

								Other
								Foreign
		Japan			UK			Locations			Total
Assets, costs and expenses subject to foreign currency Risk as of March 31, 2005 ($000’s)
	Net assets	$	3,976		$	667		$	(121	)	$	4,522
	Costs and expenses		3,875			2,514			6,865			13,254
	Percentage of total costs and expenses		4	%		3	%		8	%		15	%

49

Item 8. Financial Statements and Supplemental Data

	Page
Report of Independent Registered Public Accounting Firm		51
Consolidated Balance Sheets as of March 31, 2005 and 2004		53
Consolidated Statements of Operations for the years ended March 31, 2005, 2004 and 2003		54
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2005, 2004 and 2003		55
Consolidated Statements of Cash Flows for the years ended March 31, 2005, 2004 and 2003		57
Notes to Consolidated Financial Statements		58

50

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Therma-Wave, Inc.:

      We have completed an integrated audit of Therma-Wave, Inc.’s (the “Company”) 2005 consolidated financial statements and of its internal control over financial reporting as of April 3, 2005 and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Therma-Wave, Inc. and its subsidiaries at April 3, 2005 and March 28, 2004, and the results of their operations and their cash flows for each of the three years in the period ended April 3, 2005 in conformity with accounting principles generally accepted in the United States of America. 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 audits. We conducted our audits of these statements 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. An audit of financial statements 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, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring net losses and negative cash flows from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Internal control over financial reporting

      Also, we have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, that Therma-Wave, Inc. did not maintain effective internal control over financial reporting as of April 3, 2005, because the Company did not maintain effective controls over intercompany accounts and over the review and approval of journal entries based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit.

      We conducted our audit of internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

      A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control

51

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

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

      A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment.

      1. As of April 3, 2005, the Company did not maintain effective controls over intercompany accounts. Specifically, the Company did not have effective controls to ensure that intercompany account balances were reconciled timely and properly eliminated in consolidation in accordance with generally accepted accounting principles. This control deficiency did not result in an adjustment to the consolidated financial statements. However, this control deficiency could result in a misstatement of accounts and disclosures that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

      2. As of April 3, 2005, the Company did not maintain effective controls over the documentation, review and approval of journal entries to allocate certain customer service and support costs between cost of revenues and selling, general and administrative expense. This control deficiency did not result in an adjustment to the consolidated financial statements. However, this control deficiency could result in a misstatement of the previously noted statement of operations’ accounts, that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

      These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2005 consolidated financial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on those consolidated financial statements.

      In our opinion, management’s assessment that Therma-Wave Inc did not maintain effective internal control over financial reporting as of April 3, 2005, is fairly stated, in all material respects, based on criteria established in Internal Control — Integrated Framework issued by the COSO. Also, in our opinion, because of the effect of the material weaknesses described above on the achievement of the objectives of the control criteria, Therma-Wave Inc. has not maintained effective internal control over financial reporting as of April 3, 2005, based on criteria established in Internal Control — Integrated Framework issued by the COSO.

PricewaterhouseCoopers LLP

San Jose, California

June 27, 2005

52

THERMA-WAVE, INC.

CONSOLIDATED BALANCE SHEETS

			March 31,
			2005			2004
			(In thousands, except share
			and per share data)
ASSETS
Current assets:
	Cash and cash equivalents		$	13,419		$	23,899
	Accounts receivable, net of allowances for doubtful accounts and returns of $715 and $907 at March 31, 2005 and 2004, respectively			15,678			14,772
	Inventories			30,870			17,169
	Other current assets			2,680			2,075
		Total current assets		62,647			57,915
Property and equipment, net				2,976			4,564
Intangibles and other assets, net				1,950			1,803
		Total assets	$	67,573		$	64,282
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	8,227		$	7,420
	Accrued liabilities			15,784			14,823
	Deferred revenues			15,804			6,887
		Total current liabilities		39,815			29,130
Non-current deferred revenues				1,425			1,815
Other long-term liabilities				370			1,073
		Total liabilities		41,610			32,018
Commitments and contingencies (Note 6)
Stockholders’ equity:
	Common stock, $0.01 par value; 75,000,000 shares authorized; 36,318,565 shares issued and outstanding at March 31, 2005; 35,498,025 shares issued and outstanding at March 31, 2004			363			355
	Additional paid-in capital			334,352			335,012
	Notes receivable from stockholders			(174	)		(174	)
	Accumulated other comprehensive loss			(659	)		(735	)
	Deferred stock-based compensation			(76	)		(1,172	)
	Accumulated deficit			(307,843	)		(301,022	)
		Total stockholders’ equity		25,963			32,264
		Total liabilities and stockholders’ equity	$	67,573		$	64,282

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

53

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

			Fiscal Years Ended March 31,
			2005			2004			2003
			(In thousands, except per share data)
Net revenues
	Product		$	60,930		$	46,938		$	28,515
	Service and parts			20,331			18,371			20,705
		Total net revenues		81,261			65,309			49,220
Cost of revenues (including stock-based compensation expense (benefit) of $(120), $168 and $33)
	Product			30,174			24,645			36,084
	Service and parts			14,446			13,855			18,977
		Total cost of revenues		44,620			38,500			55,061
Gross profit (loss)				36,641			26,809			(5,841	)
Operating expenses:
	Research and development (excluding stock-based compensation expense (benefit) of $(233), $706 and $967)			17,559			18,710			29,230
	Selling, general and administrative (excluding stock-based compensation expense of $54, $444 and $717)			25,450			22,958			26,071
	Impairment of goodwill and other intangible assets			—			—			67,408
	Restructuring, severance and other			347			1,938			4,293
	Stock-based compensation expense (benefit)			(179	)		1,150			1,684
		Total operating expenses		43,177			44,756			128,686
Operating loss				(6,536	)		(17,947	)		(134,527	)
Other income (expense):
	Interest expense			(28	)		(76	)		(161	)
	Interest income			205			160			946
	Other, net			—			(230	)		138
		Total other income (expense), net		177			(146	)		923
Loss before provision for income taxes				(6,359	)		(18,093	)		(133,604	)
Provision for income taxes				462			—			—
Net loss			$	(6,821	)	$	(18,093	)	$	(133,604	)
Net loss per share:
	Basic and Diluted		$	(0.19	)	$	(0.56	)	$	(4.69	)
Weighted average common shares outstanding:
	Basic and Diluted			35,912			32,387			28,500

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

54

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

														Notes			Accumulated
	Common Stock				Additional			Treasury Stock						Receivable			Other			Deferred
					Paid-In									from			Comprehensive			Stock			Accumulated						Comprehensive
	Shares		Amount		Capital			Shares			Amount			Stockholders			Loss			Compensation			Deficit			Total			(Loss)
	(In thousands, except per share data)
Balance at March 31, 2002		29,090,118	$	291	$	321,466			—		$	—		$	(200	)	$	(1,790	)	$	(2,943	)	$	(149,325	)	$	167,499
Net loss		—		—		—			—			—			—			—			—			(133,604	)		(133,604	)	$	(133,604	)
Currency translation adjustments, net of tax		—		—		—			—			—			—			456			—			—			456			456
Comprehensive loss		—		—		—			—			—			—			—			—			—			—		$	(133,148	)
Receipts from stockholders		—		—		—			—			—			4			—			—			—			4
Repurchase of common stock		—		—		—			(447,500	)		(938	)		—			—			—			—			(938	)
Issuance of common stock under ESPP		205,706		2		455			147,314			411			—			—			—			—			868
Issuance of common stock under stock option plans		24,246		—		136			—			—			—			—			—			—			136
Issuance of treasury stock for payment of consulting services		—		—		(40	)		30,675			90			—			—			—			—			50
Issuance of common stock for the exercise of warrants		39,956		—		150			—			—			—			—			—			—			150
Adjustment to deferred stock-based compensation due to reduction in work force		—		—		(119	)		—			—			—			—			119			—			—
Amortization of deferred stock-based compensation		—		—		—			—			—			—			—			1,717			—			1,717
Balance at March 31, 2003		29,360,026	$	293	$	322,048			(269,511	)	$	(437	)	$	(196	)	$	(1,334	)	$	(1,107	)	$	(282,929	)	$	36,338
Net loss		—		—		—			—			—			—			—			—			(18,093	)		(18,093	)	$	(18,093	)
Currency translation adjustments, net of tax		—		—		—			—			—			—			599			—			—			599			599
Comprehensive loss		—		—		—			—			—			—			—			—			—			—		$	(17,494	)
Receipts from stockholders		—		—		—			—			—			22			—			—			—			22
Issuance of common stock under private offering		5,800,000		58		11,670			—			—			—			—			—			—			11,728
Issuance of common stock under ESPP		244,098		3		(223	)		266,854			434			—			—			—			—			214
Issuance of common stock under stock option plans		93,901		1		134			2,657			3			—			—			—			—			138
Issuance of common stock for the exercise of warrants		—		—		—			—			—			—			—			—			—			—
Adjustment to deferred stock-based compensation due to reduction in work force		—		—		(260	)		—			—			—			—			260			—			—
Deferred stock- based compensation expense resulting from the variable accounting treatment for stock options		—		—		1,643			—			—			—			—			(1,643	)		—			—
Amortization of deferred stock-based compensation related to the variable accounting treatment for stock options		—		—		—			—			—			—			—			737			—			737
Amortization of deferred stock-based compensation related to Sensys acquisition		—		—		—			—			—			—			—			581			—			581
Balance at March 31, 2004		35,498,025	$	355	$	335,012			—		$	—		$	(174	)	$	(735	)	$	(1,172	)	$	(301,022	)	$	32,264

55

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)

												Notes			Accumulated
	Common Stock				Additional			Treasury Stock				Receivable			Other			Deferred
					Paid-In							from			Comprehensive			Stock			Accumulated						Comprehensive
	Shares		Amount		Capital			Shares		Amount		Stockholders			Loss			Compensation			Deficit			Total			(Loss)
	(In thousands, except per share data)
Net loss		—		—		—			—		—		—			—			—			(6,821	)		(6,821	)	$	(6,821	)
Currency translation adjustments, net of tax		—		—		—			—		—		—			76			—			—			76			76
Comprehensive loss		—		—		—			—		—		—			—			—			—			—		$	(6,745	)
Issuance of common stock under private offering		—		—		(6	)		—		—		—			—			—			—			(6	)
Issuance of common stock under ESPP		640,764		6		506			—		—		—			—			—			—			512
Issuance of common stock under stock option plans		176,437		2		223			—		—		—			—			—			—			225
Issuance of common stock for the exercise of warrants		3,339		—		12			—		—		—			—			—			—			12
Adjustment to deferred stock-based compensation due to reduction in work force		—		—		(1,412	)		—		—		—			—			1,412			—			—
Deferred stock- based compensation expense resulting from the variable accounting treatment for stock options		—		—		185			—		—		—			—			(185	)		—			—
Amortization of deferred stock-based compensation related to the variable accounting treatment for stock options		—		—		—			—		—		—			—			(542	)		—			(542	)
Amortization of deferred stock-based compensation related to Sensys acquisition		—		—		(168	)		—		—		—			—			411			—			243
Balance at March 31, 2005		36,318,565	$	363	$	334,352			—	$	—	$	(174	)	$	(659	)	$	(76	)	$	(307,843	)	$	25,963

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

56

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

			Fiscal Years Ended March 31,
			2005			2004			2003
			(In thousands)
Operating activities:
Net loss			$	(6,821	)	$	(18,093	)	$	(133,604	)
Adjustments to reconcile net loss to net cash used in operating activities:
	Depreciation and amortization of property and equipment			2,679			4,221			5,913
	Amortization of intangible assets			758			2,548			1,497
	Stock-based compensation expense (benefit)			(299	)		1,318			1,717
	Impairment of goodwill and other intangible assets			—			—			67,409
	Provision (credit) for doubtful accounts receivable and returns			(192	)		(646	)		(471	)
	Provision for excess and obsolete inventories			5,089			5,200			9,605
	Loss on disposal of property and equipment			15			473			588
	Loss on abandonment of leased facilities			—			—			651
	Loss on sale of an investment			—			125			—
	Issuance of treasury stock in connection with payment of consulting services			—			—			50
Changes in operating assets and liabilities:
	Accounts receivable			(714	)		(304	)		2,284
	Inventories			(18,790	)		(223	)		2,926
	Other assets			(1,011	)		901			2,222
	Accounts payable			807			5,272			(4,149	)
	Accrued and other liabilities			258			(1,240	)		(833	)
	Deferred revenues			8,527			(2,436	)		1,645
		Net cash used in operating activities		(9,694	)		(2,884	)		(42,550	)
Investing activities:
	Purchases of property and equipment			(1,106	)		(254	)		(1,464	)
	Sales of short-term investments			—			—			12,575
	Proceeds from sale of an investment			—			375			—
	Purchase of patents			(499	)		(798	)		(946	)
		Net cash provided by (used in) investing activities		(1,605	)		(677	)		10,165
Financing activities:
	Restricted cash			—			1,064			(1,064	)
	Proceeds from issuance of common stock			743			12,080			1,154
	Proceeds from note receivable from stockholders			—			22			4
	Purchase of treasury stock			—			—			(938	)
	Repayment of long-term debt			—			—			(16	)
		Net cash provided by (used in) financing activities		743			13,166			(860	)
Effect of exchange rates on cash				76			599			456
Net increase (decrease) in cash and cash equivalents				(10,480	)		10,204			(32,789	)
Cash and cash equivalents at beginning of year				23,899			13,695			46,484
Cash and cash equivalents at end of year			$	13,419		$	23,899		$	13,695
Supplementary disclosures:
Cash paid for interest			$	10		$	4		$	75
Cash paid for income taxes			$	360		$	9		$	124

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

57

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Description of Business

      Therma-Wave, Inc. (the “Company”), a Delaware corporation, develops, markets, manufactures and services process control metrology systems for use in the manufacture of semiconductors. These systems are based on our proprietary thermal wave and optical technologies. The Company markets and sells its products worldwide to major semiconductor manufacturers.

      Our primary products are metrology tools used in the semiconductor manufacturing process. While such products include operating software, the software is incidental to the product’s functionality. Therma-Wave does not market or otherwise sell software separately.

Basis of Presentation

      The consolidated financial statements include the accounts of Therma-Wave, Inc. and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Our fiscal year is a 52 to 53-week year ending on the Sunday closest to March 31 of each year. Fiscal years 2005, 2004 and 2003 ended on April 3, 2005, March 28, 2004 and March 30, 2003, respectively. For convenience, the accompanying financial statements have been captioned as March 31 of each fiscal year.

Revenue Recognition

      Effective April 1, 2000, we changed our method of accounting for revenue recognition in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” In December 2003, the SEC issued Staff Accounting Bulletin No. 104, or SAB 104, “Revenue Recognition”, which superceded SAB 101. SAB 104 is a codification of other revenue recognition pronouncements and in substance does not change SAB 101. The adoption of SAB 104 did not have a material effect on our revenue recognition policy. Revenues are recognized when the contractual obligations have been performed, title and risk of loss have passed to the customer, collectability of the sales price has been reasonably assured, the sales price is fixed or determinable and, if applicable, customer final acceptance has been obtained.

      Freight terms of sales are normally ExWorks or FOB shipping point unless otherwise negotiated and agreed in written form between our customers and us. Shipments typically are made in compliance with shipment requirements specified in our customer’s purchase order.

      We sell systems and services (parts, billable service calls, maintenance contracts) related to our metrology products. Some of our sales contracts include multiple revenue-generating activities. Accordingly, we apply EITF 00-21 to determine the separate units of accounting at the inception of revenue arrangements that contain multiple revenue-generating activities and also as each item in the arrangement is delivered. Thereafter, depending on the nature of the deliverable(s) composing a unit of accounting, and the corresponding revenue recognition conventions, we recognize revenues when realized and earned for each unit of accounting when all of the following general revenue recognition criteria are satisfied:

•  Persuasive evidence of an arrangement exists,

•  Delivery has occurred or services have been rendered,

•  Our price to the buyer is fixed or determinable, and

•  Collectability is reasonably assured.

      Specifically, systems sales are accounted for as multiple-element arrangement sales consisting of the sale of the system and provision of post-shipment services to install the system such that it meets the customer-

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specified objective criteria. Per EITF 00-21, revenues related to the system sale are recognized separately from revenues related to the post-shipment installation services. In order to evidence that customer-specific acceptance provisions have been met following completion of post-shipment services, we obtain a Final Acceptance Certificate signed by both the customer and us.

      Pursuant to EITF 00-21, we allocate the system sales contract value between the sale of the system and the post-shipment services sale. The total arrangement consideration is fixed and determinable.

      Payment terms for the sales contract value vary and are occasionally 100% payable upon shipment, but most often are bifurcated such that a significant percentage (usually 80% or more) of the sales contract value is payable upon shipment and the remainder is payable upon the completion and acceptance of post-shipment services as evidenced by the Final Acceptance Certificate. The amount payable upon the completion of the post-shipment services is contingent on delivery of those services.

      We apply the general revenue recognition criteria of SAB 104 (persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed and determinable, collectability is reasonably assured) as discussed further below, including specifically the customer acceptance determinations described in SAB 104 Topic 13 A3 (b), to determine when its revenues are realized and earned.

      Persuasive evidence of an arrangement exists: Our normal and customary business practice is to require a signed customer purchase order, or to enter into a written sales agreement that requires the signatures of our authorized representative and an authorized representative of our customer to be binding. The agreement must be signed by both parties prior to the end of a fiscal period for revenues to be recognized in that fiscal period.

      Delivery has occurred or services have been rendered: We ensure that there is objective evidence that delivery has occurred, such as freight documentation for systems and spare parts shipped, prior to recognizing revenues. The Final Acceptance Certificate evidences delivery of post-shipment services. Service contract revenues are recognized ratably over the time period covered by the service contract. Receipt of services on a time and materials basis are evidenced by the customer’s signature on a report of the services received.

      The seller’s price to the buyer is fixed or determinable: We do not recognize revenues unless the sales price is fixed or determinable. If the sales contract includes a customer-specific right of return for cash, credit or refund (which is not part of our standard terms and conditions of sale, except for spare parts, and happens very infrequently), that right of return is evaluated in light of SAB 104 Topic 13 A3 (b) to determine if revenues at shipment should be deferred until the right of return has expired. Based on the outcome of that determination, revenues may not be recognized until the right of return for cash, credit or refund has expired, such that the seller’s price to the buyer is fixed or determinable.

      Collectability is reasonably assured: We recognize revenues only if we have reasonable assurance that the revenues are collectible.

      Significant terms of our arrangements with our customers, resellers and distributors usually include:

      a. Systems are also sold through resellers. We account separately for the services provided by the resellers, including sales services and any post-shipment services that the resellers may be contractually obligated to provide per the terms of the specific sales contract.

      b. We offer a standard product warranty of one year, normally, beginning on the date of customer final acceptance. Additional periods of warranty are sometimes included in the price of the system sale or sold separately. When service coverage outside the one-year warranty is included in the price of the system sale, we defer the fair market value of that service coverage as a liability for deferred service contract revenues, and recognize those revenues ratably over the service delivery time periods applicable to the contract.

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      c. Revenues are not recognized for shipments of systems under trial and evaluation agreements.

      d. Payment terms usually are net 30 to net 60 days. In rare circumstances, we agree to extended payments terms greater than 60 days. In those instances, generally involving foreign sales, revenue recognition is deferred until payment is received.

      When post-shipment service revenues are deferred, we defer the cost of these services and recognize them as expenses at the time the related revenues are recognized. In general, costs of undelivered elements related to post-shipment installation services consist primarily of labor and overhead. At the time of installation, which generally occurs within the first two to four weeks following shipment, installation labor and overhead is incurred and charged to cost of sales. Since these costs relate to the post-shipment service revenues that are deferred at shipment, an estimate of these costs is credited to cost of sales at shipment and deferred as deferred installation costs. These costs are recognized as cost of revenues at the time when the related post-shipment service revenues are recognized.

      Systems revenues on newly introduced products are deferred at shipment and recognized only upon customer acceptance assuming all other revenue recognition criteria have been met. Systems revenues are also deferred when the customer has the right to return the product for credit. In such cases, systems revenues are not recognized until all of the following conditions have been evidenced after the customer’s purchase order has been fulfilled: the right of return has expired and any potential returns would require authorization by our company under warranty provisions; the price of the sales is fixed or determinable; the payment terms are fixed and enforceable; and collectability is reasonably assured.

      Service and Parts Revenues. We derive service and parts revenues from three primary sources — sale of spare parts, service contracts and service labor. Revenues on the sale of spare parts are recognized when title and risk of loss have transferred to the customer and collectability of the sales price has been reasonably assured. Revenues on service contracts are deferred and recognized on a straight-line basis over the period of the contract. Revenues on time and material services performed are recognized when the services are completed, collectability of the sales price has been reasonably assured and, if applicable, customer final acceptance has been obtained.

      Therma-Wave’s service and parts revenues are derived from the maintenance and repair of our metrology products. These revenues are derived either from performance of maintenance service, direct sales of parts, or service contracts, which are normally one year in duration. Revenues for parts sales are recognized upon shipment assuming that all of the four general revenue recognition criteria described in SAB 104 Topic 13 A1 are met. Revenues are recognized on billable service calls based on the completion of services. Revenues related to time-based service contracts are recognized on a pro-rata basis over the life of the service contracts.

Allowances for Doubtful Accounts Receivable and Returns

      We utilize estimates when evaluating our allowance for doubtful accounts receivable and potential returns for credit. We continuously monitor collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience, any specific customer collection issues that we have identified, and the aging of the accounts receivable. While such credit losses have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results.

Liquidity

      The consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. We reported net losses of $6.8 million, $18.1 million and

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$133.6 million in fiscal years ended March 31, 2005, 2004 and 2003, respectively, and cash used in operations of $9.7 million, $2.9 million and $42.6 million in those respective years. Due to the continued instability in the semiconductor industry and the related instability in the semiconductor capital equipment industry, uncertain economic conditions worldwide, and other factors, we cannot predict how long we will incur further losses or whether we will become profitable again. Moreover, in part due to these downturns, for the year ended March 31, 2003, we recorded $81.3 million for the write off of goodwill and other intangible assets, inventory provision, restructuring, severance and other costs related to reductions in work force. We cannot assure you that our business will not continue to decline or when or if performance will improve. These factors raise substantial doubt as to our ability to continue as a going concern.

      Our principal sources of funds have been and are anticipated to be cash on hand ($13.4 million unrestricted as of March 31, 2005), cash flows from operating activities (if any), borrowings under our bank credit facilities (if available; see discussion of Material Adverse Change Clause in Note 4) and the sales of common stock, preferred stock or other securities. If additional funds are raised through the issuance of preferred stock or debt, these securities could have rights, privileges or preferences senior to those of our common stock, and debt covenants could impose restrictions on our operations. The sale of equity or debt could result in additional dilution to current stockholders, and such financing may not be available to us on acceptable terms, if at all.

      Failure to raise additional funds may adversely affect the company’s ability to achieve its intended business objectives. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or the amount or classification of liabilities or any other adjustments that might be necessary should we be unable to continue as a going concern.

      Subsequent to the end of fiscal year 2005, we implemented a restructuring and reduced our North American headcount by approximately 6 percent to bring operating expenses closer in line with our revenue projections. We also signed an exclusive representation agreement with Hermes-Epitek Corporation to serve as an exclusive representative in Taiwan, China, Singapore and Malaysia to sell and service our Therma-Probe and Opti-Probe family of metrology products. We believe that this agreement will give us a more flexible cost structure for the Asia-Pacific region. We intend to take other actions, yet to be fully defined, to further reduce our operating expense structure and to provide additional cash to meet our operating needs. No assurance can be given, however, that this will be the case. We may require additional equity or debt financing to meet our working capital requirements or to fund our research and development activities. There can be no assurance that additional financing will be available to us or that such financing will be on terms satisfactory to us.

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Concentration of Credit Risk/ Major Customers

      We sell our products to major semiconductor manufacturing companies throughout the world. We perform continuing credit evaluations of our customers and, generally, do not require collateral. Letters of credit may be required from our customers in certain circumstances. Sales to customers representing 10% or more of net revenues were as follows:

			Percentage of
			Net Revenues
			Fiscal Years Ended
			March 31,
			2005			2004			2003
Customers Over Ten Percent of Net Revenues
	Taiwan Semiconductor Manufacturing Company			15	%		16	%		—	%
	Intel Corporation			12	%		14	%		13	%
	Samsung			10	%		—	%		—	%
	Tokyo Electron, Ltd.			—	%		12	%		—	%
	Raytec Corp.(1)			—	%		10	%		—	%
		Total		37	%		52	%		13	%

(1)  Raytec Corp. was formally a subsidiary of Seki Technotron, our distributor for Japan.

      Accounts receivable from two customers accounted for approximately 19% and 10%, respectively, of total accounts receivable at March 31, 2005. Accounts receivable from two customers accounted for approximately 35% and 15%, respectively, of total accounts receivable at March 31, 2004.

      Certain of the components and subassemblies included in our systems are obtained from a single source or a limited group of suppliers. Although we seek to reduce dependence on those sole and limited source suppliers, the partial or complete loss of certain of these sources could have at least a temporary adverse effect on our results of operations and damage customer relationships. Further, a significant increase in the price of one or more of these components could adversely affect our results of operations.

Use of Estimates

      The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

Foreign Currency Translations and Transactions

      We are primarily a U.S. dollar functional currency entity. A substantial portion of our international sales are denominated in U.S. dollars and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to sales. We have determined that the functional currency of our foreign operations is the local currency as our international operations incur most of their expenses in the local currency. Transactions denominated in currencies other than our functional currencies create gains and losses that are reflected in our consolidated statements of operations. Foreign currency transaction gains (losses) are included in other income (expense), net in our consolidated statements of operations and were not material for all periods presented.

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      We convert the financial statements of our foreign subsidiaries into U.S. dollars. When there is a change in foreign currency exchange rates, the conversion of the foreign subsidiaries’ financial statements into U.S. dollars leads to a translation gain or loss. The accumulated effects of foreign translation rate changes related to net assets located outside the U.S. are included as a component of stockholders’ equity. As of March 31, 2005 and 2004 accumulated other comprehensive losses of $0.7 million consist of foreign currency translation adjustments, net of tax.

Cash and Cash Equivalents

      We maintain our cash in depository accounts, money market accounts and commercial paper through Silicon Valley Bank, our primary financial institution. We consider all highly liquid investments purchased with original maturities of three months or less to be cash equivalents.

Inventories

      Inventories are stated at the lower of standard cost, approximating actual cost, or market. Cost is determined by the first-in, first-out method. During the fiscal years ended March 31, 2005, 2004 and 2003, respectively, we recorded charges of $5.1 million, $5.2 million and $9.6 million, respectively, to write off the value of obsolete and excess inventory. These charges were included in cost of revenues. In the fiscal years ended March 31, 2005, 2004 and 2003 we recognized benefits of $7.2 million, $10.6 million and $1.0 million related to inventory that had been previously written-off.

Property and Equipment

      Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation and amortization are provided on a straight-line basis over the estimated useful lives of the respective assets, generally three to five years. The Company’s policy is to depreciate machinery, laboratory and test equipment over three years, and to depreciate office furniture and fixtures and capitalized software over five years. Leasehold improvements and assets recorded under capital leases are amortized on a straight-line basis over the shorter of the assets’ useful lives or lease terms. Depreciation and amortization expense on property and equipment for fiscal years 2005, 2004 and 2003 was $2.7 million, $4.2 million and $5.9 million, respectively.

Goodwill, Intangibles and Other Assets, Net

      Included in other assets is the value of our patent portfolio, stated at cost, net of accumulated amortization. Amortization is provided on a straight-line basis over the estimated useful lives of the patents, generally five years. Amortization on our patent portfolio for fiscal years, 2005, 2004 and 2003 was $0.8 million, $0.7 million and $0.6 million respectively.

      We obtained certain intangible assets in the acquisition of Sensys Instruments Corporation, or Sensys. These intangible assets included developed technology, a development contract and a trade name and were being amortized on a straight-line basis over the estimated useful lives of two to five years. We have adopted Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets.” We conducted impairment reviews of goodwill and other intangible assets in fiscal 2004 and in fiscal 2003. For fiscal years 2004 and 2003, we recorded intangible asset amortization expense (excluding patents) of $1.8 million and $0.9 million, respectively.

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Long-Lived Assets

      We performed a review for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. As of March 31, 2005, due to decline in the Company’s stock price, we performed SFAS No. 144 impairment analysis of the long-lived assets and concluded that no write-offs are necessary. As part of the cost reduction efforts in fiscal 2003, the Company abandoned two of its leased facilities. Leasehold improvements for the abandoned facilities and fixed assets disposed along with the restructuring totaling $0.5 million were written-off in the fourth quarter of fiscal 2003 as it was determined that the carrying amount of these assets exceeded the estimated future cash flows from the use of these assets.

Deferred Executive Compensation Plan

      In fiscal 2000, we established a deferred executive compensation plan. The Company had recognized the amounts payable to participants as non-current liabilities. As of March 31, 2005 the Company had terminated its deferred executive compensation plan and distributed all assets to the participants. As of March 31, 2004, 17 participants held $0.5 million in our deferred executive compensation plan, which was distributed in December 2004.

Research and Development Expenses

      Expenditures for research and development are expensed as incurred. Research and development expenses include employee compensation costs, project materials, consulting, equipment costs, including charges for the use of the Company’s own products for design verification and test purposes, patent defense expenses and the amortization of capitalized patents, facilities and information systems allocations, and other spending such as travel and office supplies.

Reclassifications

      Certain prior year amounts in the consolidated financial statements have been changed to conform to current period classifications. Such reclassifications had no impact on reported net loss for any of the periods presented.

Stock-Based Compensation

      In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, “Accounting for Stock-Based Compensation.” As allowed by the provisions of SFAS No. 123, the Company has continued to apply Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and, accordingly, does not recognize compensation cost because the exercise price of stock options equals the market price of the underlying stock at the date of option grant. The Company adopted the disclosure provisions of SFAS No. 123. In April 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, or FIN 44, “Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB No. 25.” The Company has adopted the provisions of FIN 44, and such adoption did not materially impact the Company’s results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” The statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of SFAS No. 148.

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      Had compensation costs been determined based upon the fair value at the grant date for awards under the stock option plans and employee stock purchase plan, consistent with the methodology prescribed under SFAS No. 123, our pro forma net loss and pro forma net loss per share under SFAS No. 123 would have been:

		Fiscal Years Ended March 31,
		2005			2004			2003
		(In thousands, except per share data)
Pro forma Net Loss Under SFAS No. 123
Net loss (in thousands)
	As reported	$	(6,821	)	$	(18,093	)	$	(133,604	)
	Add: Stock-based employee compensation expense (benefit) included in the determination of net loss, net of tax, as reported		(299	)		1,318			1,717
	Deduct: Stock-based employee compensation expense as determined using the fair value method		(4,009	)		(4,459	)		(6,233	)
	Pro forma net loss	$	(11,129	)	$	(21,234	)	$	(138,120	)
Basic and diluted loss per share
	As reported	$	(0.19	)	$	(0.56	)	$	(4.69	)
	Pro forma	$	(0.31	)	$	(0.66	)	$	(4.85	)

Income Taxes

      We account for income taxes under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized.

Advertising Costs

      We expense advertising and promotional costs as they are incurred.

Recently Issued Accounting Standards

      In October 2004, the FASB approved EITF Issue 04-10 “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” which addresses an issue in the application of paragraph 19 of SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. In November 2004, the FASB delayed until further notice the effective date of this issue. We do not expect any material impact of the disclosure requirements of EITF Issue 04-10 on our consolidated financial statements.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an Amendment of ARB No. 43, Chapter 4”. The amendments made by SFAS No. 151 are intended to improve financial reporting by clarifying that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and by requiring the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred beginning after June 15, 2005. We do not expect that the adoption of SFAS No. 151 to have a material impact on our consolidated financial statements.

      In December 2004, the FASB issued SFAS 123R (revised 2004), “Share Based Payment.” SFAS 123R is a revision of FASB 123 and supersedes APB No. 25. SFAS 123R establishes standards for the accounting

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for transactions in which an entity exchanges its equity instruments for good or services or incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments. SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award over the period during which an employee is required to provide service for the award. The grant-date fair value of employee share options and similar instruments must be estimated using option-pricing models adjusted for the unique characteristics of those instruments unless observable market prices for the same or similar instruments are available. In addition, SFAS 123R requires a public entity to measure the cost of employee services received in exchange for an award of liability instruments based on its current fair value and that the fair value of that award will be remeasured subsequently at each reporting date through the settlement date. The effective date of SFAS 123R for the Company is for the first annual period beginning after June 15, 2005, i.e. our fiscal year ended March 31, 2007. Although we have not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, we are evaluating the requirements under SFAS 123R and expect the adoption to have a significant adverse impact on our consolidated statement of operations.

      On March 29, 2005, the SEC issued Staff Accounting Bulletin (SAB) 107 which expresses the views of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides the SEC’s views regarding the valuation of share-based payment arrangements for public companies. In particular, SAB 107 provides guidance related to share-based payment transactions with nonemployees, the transition from nonpublic to public entity status, valuation methods (including assumptions such as expected volatility and expected term), the accounting for certain redeemable financial instrument issues under share-based payment arrangements, the classification of compensation expense, non-GAAP financial measures, first-time adoption of SFAS No. 123R in an interim period, capitalization of compensation costs related to share-based payment arrangements, the accounting for income tax effects of share-based payments arrangements upon adoption of SFAS No. 123R, the modification of employee share options prior to adoption of SFAS No. 123R, and disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations subsequent to adoption of SFAS No. 123R. We are currently evaluating the impact that SAB 107 will have on our results of operations and financial position when we adopt it in fiscal 2007.

      In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS No. 154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements” and is effective for fiscal years beginning after December 15, 2005. SFAS No. 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. We do not expect the adoption of SFAS No. 154 to have a material impact on our consolidated financial statements.

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2. Balance Sheet Components

			March 31,
			2005		2004
			(In thousands)
Inventories:
	Purchased materials		$	11,339	$	6,066
	Systems in process			9,700		8,158
	Finished systems			4,537		1,981
	Inventory at customer locations			5,294		964
		Total inventories	$	30,870	$	17,169

				March 31,
				2005			2004
				(In thousands)
Property and equipment:
	Laboratory and test equipment			$	4,659		$	6,014
	Office furniture and equipment				10,802			10,100
	Machinery and equipment				709			819
	Leasehold improvements				8,649			8,612
		Total property and equipment			24,819			25,545
		Accumulated depreciation and amortization			(21,843	)		(20,981	)
			Total property and equipment, net	$	2,976		$	4,564

      During the fiscal year ended March 31, 2005, the Company disposed of equipment having a gross value of $1.8 million and accumulated depreciation of $1.8 million.

			March 31,
			2005		2004
			(In thousands)
Accrued liabilities:
	Accrued compensation and related expenses		$	3,352	$	2,368
	Accrued warranty costs			1,656		1,731
	Commissions payable			1,830		893
	Income taxes payable			4,972		4,870
	Restructuring liabilities			178		220
	Other accrued liabilities			3,796		4,741
		Total accrued liabilities	$	15,784	$	14,823

3. Net Loss Per Share

      We have adopted the provisions of Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”). SFAS No. 128 requires us to report both basic net income (loss) per share, which is based on the weighted-average number of common shares outstanding excluding contingently assumable or returnable shares such as unvested common stock or shares that contingently convert into common stock upon certain events, and diluted net income (loss) per share, which is based on the weighted average number of common shares outstanding and dilutive potential common shares outstanding.

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      The following tables set forth the computation of net loss per share of common stock:

		Fiscal Years Ended March 31,
		2005			2004			2003
		(In thousands)
Numerator:
	Net loss	$	(6,821	)	$	(18,093	)	$	(133,604	)
Denominator:
Weighted shares outstanding used for basic and diluted loss per share			35,912			32,387			28,500

      The following table summarizes securities outstanding, in absolute number, as of each period end which were not included in the calculation of diluted net loss per share since their inclusion would be anti-dilutive.

	March 31,
	2005		2004		2003
	(In thousands)
Common stock held in escrow		—		—		541
Stock options		6,172		5,532		5,756
Warrants		47		79		79

      The stock options outstanding at March 31, 2005, 2004 and 2003 that we excluded from the above calculation, had a weighted average exercise price of $3.66, $3.81 and $8.27, respectively. The warrants outstanding at March 31, 2005, 2004 and 2003 that we excluded from the above calculation, had a weighted average exercise price of $3.82, $3.68 and $3.68, respectively.

4. Financing Arrangements

      In June 2003, we entered into a loan and security agreement with Silicon Valley Bank, (SVB). The agreement includes a $5.0 million domestic line of credit, including a sub-limit of $5.0 million for letters of credit, and a $10.0 million Export-Import Bank of the United States, or EXIM, guaranteed revolving line of credit. The bank credit facility allows us to borrow money under the domestic line bearing a floating interest rate equal to the SVB prime rate plus 1.50% (7.25% as of March 31, 2005). The EXIM revolving line allows us to borrow money at a floating interest rate equal to the SVB prime rate plus 1.75% (7.50% as of March 31, 2005). We may request advances in an aggregate outstanding amount not to exceed the lesser of $15.0 million total under the two lines or the borrowing base, in each case minus the aggregate face amount of outstanding letters of credit, including any drawn but un-reimbursed letters of credit. Our borrowings under the SVB and EXIM guaranteed credit facilities are secured by substantially all of our assets. As of March 31, 2005 and 2004, we had $3.2 and $4.6 million, respectively, in outstanding letters of credit under this agreement. The credit facilities were to mature on June 11, 2005, but were renegotiated in June 2005 and extended for a period of two years.

      The SVB credit facility contains certain restrictive covenants, which among other requirements impose limitations with respect to the change of business location and ownership, incurrence of indebtedness, the payment of dividends, investments, mergers, acquisitions, consolidations and sales of assets. The Company is also required to satisfy certain financial tests under the credit facility including tests related to the Company’s quick ratio and profitability. As of March 31, 2005, the Company was in violation of the covenants of the credit facility agreement by delivering borrowing base certificates and reports on Forms 8-K filed with the Securities and Exchange Commission outside of the required reporting periods. The Company was also in violation of the profitability covenant, as defined. All violated covenants were waived by SVB in June 2005.

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      On June 10, 2005, the Company and Silicon Valley Bank entered into (i) an Amended and Restated Loan and Security Agreement, and (ii) a Streamline Facility Agreement, that renewed a $15.0 million revolving line of credit to the Company. The revolving line of credit can be used to (i) borrow funds for working capital and general corporate purposes, (ii) issue letters of credit, (iii) enter into foreign exchange forward contracts, and (iv) support certain cash management services. The Loan and Security Agreement also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in the Company’s business, operations, or financial or other condition of the Company, or a material impairment of the prospect of repayment of any portion of outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral. On June 11, 2007, the revolving line of credit matures and Silicon Valley Bank’s commitment to extend revolving loans these agreements terminates.

5. Income Taxes

      The domestic and foreign components of income (loss) before provision for income taxes are as follows:

			Fiscal Years Ended March 31,
			2005			2004			2003
			(In thousands)
Domestic and foreign components of income (loss) before provision for income taxes:
	Domestic		$	(6,474	)	$	(16,999	)	$	(133,142	)
	Foreign			115			(1,094	)		(462	)
		Total	$	(6,359	)	$	(18,093	)	$	(133,604	)

      The components of the provision for income taxes are as follows:

				Fiscal Years Ended March 31,
				2005		2004		2003
				(In thousands)
Components of the provision for income taxes:
	Current:
		Federal		$	—	$	—	$	—
		State			11		—		—
		Foreign			451		—		—
			Total current	$	462	$	—	$	—

      A reconciliation between the U.S. federal statutory rate and the effective tax rate reflected in the statements of operations is as follows:

			Fiscal Years Ended March 31,
			2005			2004			2003
Reconciliation of US federal statutory rate to the effective tax rate:
	Provision at federal statutory rate			35	%		35.0	%		35.0	%
	State taxes, net of Federal benefit			2.8			2.8			2.8
	Change in valuation allowance			(40.2	)		(30.7	)		(19.5	)
	Non-deductible expenses			(1.0	)		(3.0	)		(18.1	)
	Other			(3.9	)		(4.1	)		(0.2	)
		Total		(7.3	)%		—	%		—	%

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      The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below:

				Fiscal Years Ended March 31,
				2005			2004
				(In thousands)
Tax effects of temporary differences:
	Deferred tax assets:
		Accrued costs and expenses		$	14,681		$	14,875
		Depreciation and amortization			2,810			2,337
		Other			1,042			743
		Net operating loss and tax credit carryforwards			36,197			34,653
			Total gross deferred tax assets		54,730			52,607
		Less: valuation allowance			(54,730	)		(52,607	)
			Total deferred tax assets	$	—		$	—

      As of March 31, 2005 and 2004, the Company concluded that it is more likely that its net deferred tax assets would not be realized through generation of future taxable income. Accordingly, the Company provided a full valuation allowance for all periods presented. The net changes in the total valuation allowance for the years ended March 31, 2005 and 2004 were $2.1 and $5.5 million, respectively.

      At March 31, 2005, we had federal and state net operating losses of $95.1 million and $20.1 million, respectively. The federal and state net operating losses will begin to expire at various dates through 2025 and 2015, respectively.

      Under the Internal Revenue Code Section 382, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances. Events which cause limitations in the amount of net operating losses that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined, over a three year period.

      At March 31, 2005, we had federal and state research and development tax credits of $558,000 and $800,000, respectively. The federal research and development tax credits will expire at various dates through 2024, while the state research tax credits may be carried forward indefinitely.

6. Commitments and Contingencies

      We lease our facilities under non-cancelable operating leases that require us to pay maintenance and operating expenses, such as taxes, insurance and utilities. We are required pursuant to the terms of facility leases to maintain two standby letters of credit in amounts of $1.25 million on the primary headquarters and manufacturing facility at 1250 Reliance Way, Fremont, California and $0.1 million on a facility on Kato Road, also in Fremont. The letter of credit on the Reliance Way facility will be reduced to $0.5 million in February 2006.

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      Rent expense was approximately $2.2 million, $2.2 million, and $2.7 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. At March 31, 2005, future minimum lease payments under non-cancelable operating leases (facilities and equipment leases) are as follows, net of subleases:

		2006		2007		2008		2009		2010		Thereafter		Total
		(In thousands)
Contractual obligations
	By Fiscal Year March 31:
	Operating lease obligations	$	2,089	$	1,986	$	1,774	$	1,297	$	1,200	$	1,012	$	9,358

      Operating Leases. Operating lease obligations are primarily related to administrative, R&D and manufacturing facilities necessary to conduct the Company’s business. These leases are non-cancelable and expire at various dates through 2011. Certain of our facility leases include a provision to extend the lease term, including the lease for our primary headquarters and manufacturing facility in Fremont, California, which includes options to extend to February 2021. Our facility leases provide for periodic rent increases based upon previously negotiated or consumer price indexed adjustments, or in the case of extensions, generally market adjusted rates.

      On August 12, 2004, we entered into an agreement with a third party involving a mutual exchange of intellectual property rights, effective July 1, 2004. The mutual exchange of intellectual property rights was the settlement of potential patent litigation between the two parties to the agreement. During the term of the agreement, until either the patents involved expire or the Company stops using that technology, Therma-Wave agreed to pay a royalty of $50,000 for each stand-alone tool shipped by Therma-Wave that uses scatterometry to perform CD measurements and $12,500 for each integrated tool on behalf of a scatterometry product sold. These royalties are adjustable annually for increases in the consumer price index. Amounts due under the agreement have been paid or accrued as liabilities and charged to cost of sales or pre-paid royalties included in other current assets, as appropriate, as of March 31, 2005.

      Effective April 19, 2005, Therma-Wave entered into an exclusive representative agreement with Hermes-Epitek Corporation, under which Hermes-Epitek became an exclusive representative in certain countries to sell and service our Therma-Probe and Opti-Probe families of metrology products.

      Pursuant to the terms of this agreement, Hermes-Epitek will serve as the exclusive representative for our Therma-Probe and Opti-Probe metrology product lines for China, Malaysia, Singapore and Taiwan. Therma-Wave will pay Hermes-Epitek a commission on the sale of these products when the products are installed within one of the enumerated territories and where the sales process or purchasing decision was directly influenced by Hermes-Epitek. Additionally, Hermes-Epitek will provide our customers with technical support services for the products, including, among other things, installation services and qualification testing. The term of this agreement is twenty-four months, with a provision for automatic renewal for additional twelve-month terms.

Indemnification

      We indemnify some of our suppliers and customers for specified intellectual property rights pursuant to certain parameters and restrictions. The scope of these indemnities varies, but in some instances includes indemnification for damages and expenses (including reasonable attorney fees) related to any misuse by us of the intellectual property of a third party. No amounts have been accrued in respect of the indemnification provisions at March 31, 2005, nor have we incurred any losses under such indemnification during the periods covered in this report.

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Legal Proceedings

      There are currently no material legal proceedings pending against us. We may be required to initiate additional litigation in order to enforce any patents issued to or licensed to us or to determine the scope and/or validity of a third party’s patent or other proprietary rights. In addition, we may be subject to additional lawsuits by third parties seeking to enforce their intellectual property rights. Any such litigation, regardless of outcome, could be expensive and time consuming and, as discussed above in the prior risk factor, could subject us to significant liabilities or require us to cease using third party technology and, consequently, could have a material adverse effect on our business, financial condition, results of operations or cash flows.

7. Restructuring, Severance and Other Costs

      The following table summarizes the changes in restructuring, severance and other costs during fiscal 2005 and 2004:

		Liability as							Liability as
		of March 31,							of March 31,
		2004		Provision		Payments			2005
		(In thousands)
Restructuring severance and other costs incurred
	Consolidation of facilities	$	220	$	347	$	(389	)	$	178

			Liability as							Liability as
			of March 31,							of March 31,
			2003		Provision		Payments			2004
			(In thousands)
Restructuring severance and other costs incurred
	Severance and workforce reduction		$	558	$	1,772	$	(2,330	)	$	—
	Consolidation of facilities			662		82		(524	)		220
	Other costs			134		84		(218	)		—
		Total	$	1,354	$	1,938	$	(3,072	)	$	220

      During fiscal 2005, we recorded $0.3 million in charges related to restructuring, severance and other costs. The additional $0.3 million was recorded as leased facility charges during the first quarter of fiscal 2005 when we changed our estimates of potential sublease income and the sublease date on a previously vacated facility in Santa Clara. The $0.3 million charge reflects the difference between the estimated sublease income and the actual sublease income for this facility. The lease on this facility will expire on March 31, 2006. If facilities rental rates continue to decrease in this market or if it takes longer than expected to sublease these facilities, the maximum amount by which the actual loss could exceed the liability as of March 31, 2005 is $0.1 million. During fiscal 2004, we recorded $1.9 million in charges related to restructuring, severance and other costs. Of this amount, $1.8 million relates to reductions in force in April and October 2003 of approximately 39 and 22 employees, respectively. An additional $0.1 million was recorded as leased facility charges during the second quarter of 2004 when we entered into a sublease on a previously vacated facility. The $0.1 million charge reflects the difference between the estimated sublease income and the actual sublease income for this facility. As of the end of fiscal 2004, liabilities that we had accrued for severance and other costs had been paid out in full.

      On April 8, 2005, the Company adopted a restructuring plan aimed at increasing the Company’s operating efficiency and reducing corporate expenses. The Company reduced the number of separate internal operating groups from 11 to 6 through a streamlining of its corporate structure. The Company eliminated

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approximately 6 percent of its North American workforce. The charge in connection with the restructuring plan is expected to be approximately $0.6 million, related to severance and related costs, and is anticipated to be recorded during the Company’s first quarter of fiscal 2006, ending July 3, 2005. We expect that the restructuring plan will result in cash expenditures of approximately $0.6 million in the Company’s first quarter of fiscal 2006.

      On April 19, 2005, the Company adopted a plan to restructure its Asian operations. In connection with such restructuring plan, the Company will incur severance and related charges, charges in connection with the cancellation of leases and write-offs for certain fixed assets. The charges in connection with the restructuring plan are expected to be in the range of $0.5 million to $1.0 million and will be recorded during the Company’s fiscal first and second quarters of 2006. We expect the restructuring plan will result in cash expenditures of approximately $0.5 million to $0.85 million in the Company’s fiscal first and second quarters of 2006.

Severance and Workforce Reduction

      In April and October 2003, the Company reduced its workforce by approximately 39 and 22 employees, respectively, across all functional areas. Severance and related employee benefit costs related to the reduction in force amounted to $1.8 million, including severance paid to employees at the time of their separation, related taxes and benefits, and third party outplacement costs. The Company had paid out all funds due under its workforce reduction program as of the end of the fiscal year 2004.

Consolidation of Excess Facilities

      The Company incurred a $0.7 million restructuring charge in fiscal 2003 for two excess facilities leased by Sensys in Santa Clara, California. The lease obligations on one of these facilities ended in fiscal year 2005. The Company also vacated a third facility on Kato Road for which it did not incur a restructuring charge due to ongoing use of the facility for storage purposes. The remaining lease obligation on the remaining vacated facility in Santa Clara that is non-cancelable, net of the estimated income from subleasing the facility, is estimated to be approximately $0.2 million. The income from subleasing these facilities is estimated based upon current comparable rates for leases in the applicable market. If facilities rental rates decrease in the market, or if it takes longer than expected to sublease the facility, the actual loss could exceed the liability as of March 31, 2005 by $0.1 million. During fiscal 2004, $0.1 million was recorded as additional leased facility charges when we entered into a sublease on one of the original two excess facilities. The $0.1 million charge reflects the difference between the estimated sublease income and the actual sublease income for this facility.

Other costs

      At March 31, 2003, other costs of $0.1 million related to reduction in force programs such as security service, counseling services and COBRA were included in the restructuring, severance and other costs accrued balance. As of the end of fiscal 2004, all accrued liabilities related to other costs of workforce reduction had been paid.

8. Warranty Accrual

      Under its warranty obligations, the Company is required to repair or replace defective products or parts, generally at a customer’s site, during the warranty period at no cost to the customer. The warranty period is normally one year from system final acceptance. At the time of systems shipment, we provide an accrual for estimated costs to be incurred pursuant to our warranty obligation. Our estimate is based primarily on historical experience. The actual warranty costs may differ from historical experience, and in those cases, the

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Company adjusts its warranty accrual accordingly. Changes in the warranty accrual during fiscal 2005 and 2004 are summarized as follows:

				Provisions for
				Warranties		Settlements of
		Beginning		Issued During		Pre-Existing			Ending
		Balance		the Period		Warranties			Balance
		(In thousands)
Warranty Accrual
	Fiscal year as of and for the year ended March 31, 2005	$	1,731	$	1,629	$	(1,704	)	$	1,656
	Fiscal year as of and for the year ended March 31, 2004	$	983	$	2,417	$	(1,669	)	$	1,731

9. Stock Repurchases

      On August 1, 2002, the Company’s Board of Directors announced a stock repurchase program for the repurchase of up to one million shares of Therma-Wave’s common stock. As of March 31, 2004, the Company repurchased 447,500 shares of common stock at an average price of $2.10 per share, of which 414,168 shares were reissued under our Employee Stock Purchase Plan, 30,675 shares were reissued to pay for consulting services and 2,657 shares were reissued upon exercise of stock options. The repurchase program is currently suspended but at any time may be reactivated without prior notice.

10. Goodwill and Other Intangible Assets

      In connection with our acquisition of Sensys Instruments Corporation, effective January 16, 2002, the Company recorded $65.9 million of goodwill and $4.5 million of intangible assets, consisting of developed technology, a development contract and a trade name. The assets were being amortized on a straight-line basis over the original estimated lives of two to five years.

      The following table summarizes the components of goodwill, other intangible assets and the related accumulated amortization balances:

			March 31, 2004							March 31, 2003
			Gross					Net		Gross					Net
			Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
			Amount		Amortization			Amount		Amount		Amortization			Amount
			(In thousands)							(In thousands)
Intangible assets components
	Developed technology		$	314	$	(314	)	$	—	$	314	$	(314	)	$	—
	Development contract			2,415		(2,415	)		—		2,415		(604	)		1,811
	Trade name			197		(197	)		—		197		(197	)		—
		Intangible assets, net	$	2,926	$	(2,926	)	$	—	$	2,926	$	(1,115	)	$	1,811

      During the quarter ended September 30, 2002, we recognized that a downturn in the semiconductor industry had negatively impacted our projected future cash flows and our market capitalization. Our stock price declined from $11.39 on June 28, 2002 to $0.79 on September 30, 2002. As a result, we performed a transitional impairment analysis, which considered current operating losses, a decrease in market capitalization below tangible book value, the absence of positive cash flows, and uncertainties resulting from the duration and severity of the industry downturn, and recognized a goodwill impairment loss of $65.9 million in

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the quarter ended September 30, 2002, which effectively reduced the goodwill balance related to our Sensys acquisition to zero.

      The initial fair value of the Sensys reporting unit had been established at the date of acquisition, January 16, 2002, based on the purchase price at the time of acquisition, $88.3 million. The value of the specific assets acquired through the Sensys acquisition were established in accordance with Statement of Financial Accounting Standards No. 141 (SFAS No. 141), “Business Combinations”, in which the cost of an acquired company is assigned to the tangible and intangible assets acquired on the basis of their fair value at the date of the acquisition. Any purchase price over the fair value of the net assets acquired is recorded as goodwill. SFAS No. 141 sets forth detailed guidelines for determining the fair value of individual assets acquired, stating that an intangible asset acquired in a business combination shall be recognized as an asset apart from goodwill if the asset meets one of the following criteria: 1) it arises from contractual or other legal rights; or 2) it is capable of being separated or divided from the acquired enterprise and sold, transferred, licensed, rented or exchanged.

      As a result of the fiscal 2003 reviews, we wrote off $65.9 million for goodwill, $0.6 million for developed technology, $0.2 million for a development contract and $0.8 million for trade name intangible assets in fiscal 2003.

      During the quarter ended December 31, 2003, due to the termination of a development agreement, we accelerated the amortization on $1.5 million of the related development contract intangible assets.

      Amortization of these acquisition-related intangible assets was $0, $1.8 million and $0.9 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively.

      Capitalized patent acquisition costs are included in non-current other assets, net. Capitalized patent acquisition costs are amortized over the estimated useful life of the patent, generally five years. Amortization of patent assets was $0.8 million, $0.7 million and $0.6 million for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. The remaining unamortized balance was $1.1 million, $1.3 million and $1.3 million as of March 31, 2005, 2004, and 2003, respectively. Amortization of patents for fiscal years 2006 and 2007 is estimated at $0.7 million and $0.4 million, respectively.

11. Stock Options, Common Stock and Warrants

Stock-Based Compensation

      Stock Options. During fiscal year 1998, we adopted several stock option plans (the “1997 Plans”) whereby the Board of Directors may have granted incentive stock options and non-statutory stock options to employees, directors or consultants.

      In February 2000, in connection with our initial public offering, we adopted the 2000 Equity Incentive Plan, whereby the Board of Directors may grant incentive stock options and non-statutory stock options to employees, directors or consultants. No future grants became available under the 1997 Plans upon the effectiveness of the 2000 Equity Incentive Plan. We have reserved (1) 3,300,000 shares of common stock (2) any shares returned to the 1997 Plans as a result of termination of options and (3) annual increases to be added on the date of each annual meeting of stockholders commencing in 2000 equal to 1.0% of the outstanding shares of common stock, or such lesser amount as may be determined by the Board of Directors, for issuance under the 2000 Equity Incentive Plan.

      Vesting provisions for stock options granted under our stock option plans are determined by the Board of Directors. Generally, unless the Board of Directors specifically determines otherwise at the time of the grant, the option shall vest 25% on the first anniversary of the grant and then vest monthly thereafter for the remaining thirty-six months, i.e., one forty-eighth (2.083%) per month from the date of grant, beginning with stock options granted on April 30, 2002. Prior to April 30, 2002, options vested 25% on each of the first four

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anniversaries from the date of grant. Stock options expire ten years from the date of grant, except for stock options issued on September 10, 2003 in the employee stock option exchange program, which expire four years from the date of grant.

      A summary of our stock option activity, and related information for the years ended March 31, 2005, 2004 and 2003 are as follows:

			Stock Options
			Options						Weighted
			Available for			Number of			Average
			Future			Options			Exercise Price
			Issuance			Outstanding			per Option
Stock Option Activity
	Balance at March 31, 2002			1,356,416			5,016,093		$	11.46
		Authorization		292,107			—			—
		Granted		(1,790,828	)		1,790,828			1.39
		Exercised		—			(24,246	)		5.42
		Cancelled		1,026,318			(1,026,318	)		11.82
	Balance at March 31, 2003			884,013			5,756,357		$	8.27
		Authorization		1,293,755			—			—
		Granted		(3,174,844	)		3,174,844			2.45
		Exercised		—			(96,558	)		1.44
		Cancelled		3,302,576			(3,302,576	)		10.35
	Balance at March 31, 2004			2,305,500			5,532,067		$	3.81
		Authorization		358,254			—			—
		Granted		(1,513,870	)		1,513,870			3.55
		Exercised		—			(176,437	)		1.27
		Cancelled		697,904			(697,904	)		5.24
	Balance at March 31, 2005			1,847,788			6,171,596		$	3.66

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      The following table summarizes information about stock options outstanding as of March 31, 2005:

									Total Exercisable
			Total Stock Options Outstanding						Stock Options
			Weighted				Weighted				Weighted
			Average				Average				Average
			Remaining				Exercise				Exercise
			Contractual		Stock Options		Price per		Number of		Price per
			Life (Years)		Outstanding		Option		Options		Option
Summary of Outstanding Options as of March 31, 2005
Range of exercise prices:
	$ 0.42 - $ 0.42			7.94		400,000	$	0.42		200,000	$	0.42
	$ 0.47 - $ 0.47			8.05		636,913		0.47		326,350		0.47
	$ 0.60 - $ 0.66			7.82		541,709		0.66		271,591		0.66
	$ 0.82 - $ 1.37			3.12		88,089		1.17		88,089		1.17
	$ 1.64 - $ 2.35			7.66		423,886		2.05		234,355		1.94
	$ 2.38 - $ 2.38			2.44		860,850		2.38		860,850		2.38
	$ 2.48 - $ 3.51			8.85		855,462		3.02		200,758		2.67
	$ 3.66 - $ 3.90			9.32		926,520		3.73		—		—
	$ 4.00 - $ 4.70			7.78		498,466		4.19		229,232		4.16
	$ 6.37 - $ 8.93			5.39		362,629		7.61		252,071		8.14
	$10.68 -  15.89			3.25		510,757		12.36		476,076		12.34
	$18.25 - $27.50			5.23		66,315		23.21		66,315		23.21
		Total		6.84		6,171,596	$	3.66		3,205,687	$	4.36

      For the years ended March 31, 2005, 2004 and 2003, the following weighted average grant-date fair value of our stock options granted under our stock option plans was $2.33, $1.86 and $1.11, respectively. These values were estimated using the Black-Scholes price model with the following assumptions:

		Fiscal Years Ended
		March 31,
		2005			2004			2003
Assumptions for Estimating Fair Value of Option Grants
	Risk-free interest rate		3.1	%		4.0	%		3.6	%
	Expected dividend yield		—			—			—
	Expected volatility		86	%		118	%		116	%
	Expected life in years		4.5			3.9			4.5

      Material grants of equity instruments, including options, issued to non-employees are accounted for under FAS 123 and EITF 96-18. The Company has issued fewer than 50,000 such options in its history.

      Employee Stock Purchase Plan. In connection with the initial public offering, we also adopted the 2000 Employee Stock Purchase Plan, whereby employees may purchase shares of common stock, at a discounted price through payroll deductions or lump sum cash payments. We have reserved 2,500,000 shares of common stock for issuance under the 2000 Employee Stock Purchase Plan. A total of 640,764, 510,952 and 353,020 shares of common stock have been issued under the 2000 Employee Stock Purchase Plan for the years ended March 31, 2005, 2004 and 2003, respectively.

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      For the years ended March 31, 2005, 2004 and 2003, the following weighted average grant-date fair value of our stock purchase rights granted under our employee stock purchase plans was $0.52, $0.24 and $0.27, respectively. These values were estimated using the Black-Scholes price model with the following assumptions:

		Fiscal Years Ended
		March 31,
		2005			2004			2003
Assumptions for Estimating Fair Value of ESPP Purchase Rights
	Risk-free interest rate		1.7	%		0.9	%		1.8	%
	Expected dividend yield		—			—			—
	Expected volatility		63	%		125	%		136	%
	Expected life in years		1.2			1.3			1.0

      Stock-Based Compensation. In fiscal 2005, we recognized an employee stock-based compensation net benefit of $0.3 million which included a benefit of $0.5 million related to variable accounting offset by amortization expense of $0.2 million related to the Sensys acquisition. In fiscal 2004, employee stock-based compensation expense of $1.3 million included expense of $0.7 million related to variable accounting and amortization expense of $0.6 million related to the Sensys acquisition. In fiscal 2003, employee stock-based compensation expense of $1.7 million represented amortization expense related to the Sensys acquisition.

      In connection with the Sensys acquisition, we recognized unearned compensation of $3.5 million for stock options granted. Deferred stock-based compensation is amortized to expense over the vesting period using an accelerated method, and may decrease if an employee terminates employment prior to vesting. We recognized stock-based compensation of $0.2 million, $0.6 million and $1.7 million in fiscal 2005, 2004 and 2003, respectively relating to stock-based compensation with respect to the Sensys acquisition.

      During the second quarter of fiscal 2004, we commenced and completed an employee stock option exchange program. The voluntary program allowed Therma-Wave employees, excluding officers and directors, to return to the Company existing options issued before July 1, 2002 with an exercise price greater than $2.00 per share and exchange them for new options that were granted on September 10, 2003. The number of new options granted in the employee stock option exchange program was equal to 75% of the number of options canceled in the exchange. The new option grants have a different vesting schedule from the original option grants and have an exercise price equal to $2.38, the fair market value of our common stock on September 10, 2003. Of the 1,366,570 options eligible for exchange, 1,352,108 options, or 99%, were exchanged for 1,014,144 new options with an exercise price of $2.38. These replacement options vested 50% on June 11, 2004, and the remaining 50% will vest on April 11, 2005 or according to the performance vesting schedules of specific option grants.

      As a result of the modification to the exercise price of the stock options, the replacement options are accounted for as variable from the date of modification until the option is either exercised, forfeited, canceled or expired. As of March 31, 2005, the Company has recorded approximately $0.2 million in deferred compensation expense. This charge reflects the new options eligible for exchange, which were outstanding since September 10, 2003, and reflects options issued to eligible participants within the six months prior to or following September 10, 2003. Due to the options requiring variable accounting treatment, expense is being recorded for pro-rata vesting over time of these options based on increases in the stock price over and above the exercise price of the new options. In future quarters, the expense could increase as the pro-rata vesting over time for these shares increases and if the stock price increases. Reductions to expense may also be recorded if the stock price decreases, but such reductions will be limited to the net expense previously reported.

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Warrants. In connection with the Sensys acquisition in January 2002, we assumed warrants to purchase 329,490 shares of our common stock. These warrants were fully exercisable in January 2003. Of the 329,490 warrants, 47,006 and 78,516 warrants were still outstanding as of March 31, 2005 and March 31, 2004, respectively. The 47,006 warrants outstanding as of March 31, 2005 are exercisable at a weighted average exercise price of $3.82 per share for an aggregate purchase value of $0.2 million.

      Director Stock Option Agreement. On November 24, 2004, the Company adopted a Director Stock Option Agreement and an Officer and Other Key Employee Stock Option Agreement, which provide accelerated vesting of options granted to the Company’s directors, officers and certain other key high-level employees, upon a change in control of the Company.

12. Related Party Transactions

      Ms. Talat Hasan, a former member of our Board of Directors and former Senior Vice President of Therma-Wave and President and Chief Executive Officer of Sensys Instruments Corporation, which was acquired as a wholly owned subsidiary of Therma-Wave in January 2002, is a general partner of Hitek Venture Partners Limited Partnership, or Hitek. Until October 2004, the Company leased from Hitek certain facilities formerly occupied by Sensys in Santa Clara, California. Hitek received $0.1 million, $0.3 million and $0.3 million from the lease of such facilities during fiscal 2005, 2004 and 2003, respectively. Ms. Hasan resigned from Therma-Wave during fiscal year 2003 and later resigned from the Therma-Wave board of directors in March 2003. Sensys Instruments Corporation was officially dissolved as a California corporation in March 2005.

      Mr. David Aspnes, a member of our Board of Directors, is also owner and director of Aspnes Associates, Inc. We use Aspnes Associates, Inc. for consulting service on various engineering projects and have paid $6,300, $5,000 and $59,000 to Aspnes Associates, Inc. during fiscal 2005, 2004 and 2003, respectively. Accounts payable to Aspnes Associates, Inc. were $0, $3,000 and $6,000 as of March 31, 2005, 2004 and 2003, respectively.

      John D’Errico, a member of our Board of Directors, is also Executive Vice President, Storage Components of LSI Logic Corporation. Our revenues from sales to LSI Logic Corporation in fiscal 2005, 2004 and 2003 were $433,000, $1,163,000 and $252,000 respectively. As of March 31, 2005, 2004 and 2003, the accounts receivable from LSI Logic were $8,000, $98,000 and $12,000, respectively.

      Peter Hanley, a member of our Board of Directors, is also the former President of Novellus Systems, Inc. and is currently advisor to the chairman of the board and chief executive officer of Novellus. Our revenues from sales to Novellus Systems, Inc. in fiscal 2005, 2004 and 2003 were $524,000, $56,000 and $109,000 respectively. As of March 31, 2005, 2004 and 2003, the accounts receivable from Novellus Systems, Inc. were $563,000, $5,000 and $46,000, respectively.

      As of March 31, 2005, 2004 and 2003, we had an aggregate $1.1 million in outstanding loans to former members of management. No loan repayments were made during fiscal 2005. During fiscal 2004, one former executive repaid in full two loans worth $58,000 combined. As of March 31, 2005 loans of approximately $0.2 million that were used by two former executives to acquire our common stock are reported in stockholders’ equity as notes receivable from stockholders. Loans of approximately $0.9 million were used to pay certain tax liabilities incurred by former executives and are included in non-current other assets. The $0.2 million loans used to acquire our common stock bear interest at the applicable federal rate in effect at the time. The $0.9 million loans used to pay certain tax liabilities do not bear interest. These loans were made to the former executives during May and June of 1997. The individuals who owe us $0.9 million have pledged their Therma-Wave restricted common stock as security for these amounts. We have $0.9 million in allowances against the realizable value of the $0.9 million in loans used to pay certain tax liabilities, and expire

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

August 31, 2005. The loans to former members of management have been netted in statement of stockholders’ equity and comprehensive loss.

13. Retirement Plans

      We have a retirement plan under Section 401(k) of the Internal Revenue Code covering substantially all employees. Discretionary company contributions accrued, which are based on achieving certain operating profit goals, were $0 in each of fiscal 2005, 2004 and 2003, respectively.

      Previously, we allowed our U.S.-based officers and director-level employees to defer a portion of their compensation under the Deferred Executive Compensation Plan. Plan participants self-directed their investments deferred under the plan. In the event the Company had become insolvent, plan assets would have been subject to the claims of the general creditors. During the life of the plan, we had not made any matching or discretionary contributions to the plan. There were no plan provisions that provided for any guarantees or minimum return on investments. As of March 31, 2005, the plan had been terminated and all plan assets were distributed to the participants. At March 31, 2004, there were approximately 17 participants in the plan and plan assets were approximately $0.5 million. During the life of the plan investment returns of the participants increased or decreased the Company’s liability to the participants, and thereby impacted our results of operations.

14. Segment Information

      We operate in one segment as we market, manufacture and service process control metrology systems within the semiconductor equipment market. This determination was reached through application of the management approach in which we reviewed the structure of our internal organization, the financial information that our chief operating decision maker uses to make decisions about operating matters such as resource allocations and to assess performance and the structure of discrete financial information available.

      Within our one operating segment, we have identified two revenue-generating activities for purposes of external reporting: systems and services. Both systems and services share a similar customer base and economic environment, and share internal operating resources and assets. We do not internally report profitability for each of these revenue-generating activities. Decisions are made on the basis of the impact of the decision on the combined results of systems and services. Therefore, while we have been reporting revenues for the systems and services separately, and report cost of sales for each of these two revenue generating activities separately, we do not consider these revenue generating activities to constitute operating segments.

      In terms of systems revenues, we sell the Therma-Probe, Opti-Probe and Integra families of products. These product lines are manufactured in the same facility, by the same people and share the same economic environments. Specifically, they have in common the nature of the product, the nature of the production processes, the type or class of customer, the methods used to distribute them, and the nature of the regulatory environment. Our systems are all metrology tools used in the semiconductor manufacturing processes, therefore, we consider them to be similar products and believe that their revenues and cost of sales are best presented to investors combined into one financial statement line item, systems, in order for the users of the financial statements to understand our performance, assess our prospects for future net cash flows, and make more informed judgments about the enterprise as a whole.

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table lists the percentage of net revenues by product family for the years ended March 31, 2005, 2004 and 2003.

			Percentage of
			Net Revenues
			Fiscal Years Ended
			March 31,
			2005			2004			2003
Net Revenues by Product Family
	Opti-Probe, including Opti-Probe CD			47	%		44	%		41	%
	Therma-Probe			22	%		8	%		11	%
	Integra and Other			6	%		13	%		6	%
	Service and parts			25	%		28	%		42	%
	License			—	%		7	%		—	%
		Total		100	%		100	%		100	%

      All products and services are marketed in each geographic region in which we operate. Our current product offerings qualify for aggregation under SFAS No. 131 as our products are manufactured and distributed in the same manner, have similar long-term gross margins and are sold to the same customer base.

      Net revenues from external customers are attributed to individual countries based on the location to which the products or services are being delivered. Revenues from Europe are the sum of net revenues generated in the United Kingdom, Germany, France, Italy, Israel and Ireland, among others, none of which represents greater than 10% of total net revenues. The following table summarizes the percentage of our total net revenues by geography for the fiscal years ended March 31, 2005 and 2004, respectively:

			Fiscal Year Ended
			March 31,
			2005			2004
Revenues by Country
	United States			29	%		28	%
	Taiwan			21	%		23	%
	Korea			14	%		5	%
	Japan			13	%		22	%
	Europe			11	%		14	%
	China			6	%		5	%
	Singapore			6	%		3	%
		Total		100	%		100	%

      Net revenues in each geographic area are recognized according to our revenue recognition policy as described in Note 1 of these Notes to Consolidated Financial Statements. Transfers and commission arrangements between geographic areas are at prices sufficient to recover a reasonable profit. Export sales to customers outside of the United States were $58.0 million, $47.2 million and $35.4 million in fiscal 2005, 2004 and 2003, respectively.

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Sales to Taiwan Semiconductor Manufacturing Company, Intel Corporation and Samsung each accounted for more than 10% of net revenues in fiscal 2005. The following chart indicates the percentage of net revenues to customers representing 10% or more of net revenues for fiscal years 2005, 2004 and 2003, respectively.

			Percentage of Net
			Revenues
			Fiscal Years Ended
			March 31,
			2005			2004			2003
Customers Over Ten Percent of Net Revenues
	Taiwan Semiconductor Manufacturing Company			15	%		16	%		—	%
	Intel Corporation			12	%		14	%		13	%
	Samsung			10	%		—	%		—	%
	Tokyo Electron, Ltd.			—	%		12	%		—	%
	Raytec Corp.(1)			—	%		10	%		—	%
		Total		37	%		52	%		13	%

(1)  Raytec Corp. was formally a subsidiary of Seki Technotron, our distributor for Japan.

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following is a summary of operations in geographic areas. Other foreign areas include China, Taiwan, Israel and Korea, each of which is individually not material for separate disclosure.

													Other
													Foreign
				U.S.			Japan			UK			Locations			Eliminations			Consolidated
Segment Information (in thousands)
	Fiscal Year Ended March 31, 2003
		Sales to unaffiliated customers		$	41,039		$	2,181		$	2,220		$	3,780		$	—		$	49,220
		Transfers between geographic regions			(1,460	)		986			800			1,588			(1,914	)		—
			Total net revenues	$	39,579		$	3,167		$	3,020		$	5,368		$	(1,914	)	$	49,220
		Operating income (loss)		$	(134,042	)	$	(116	)	$	(955	)	$	(21	)	$	607		$	(134,527	)
		Long-lived assets		$	8,585		$	66		$	44		$	2,748		$	(17	)	$	11,426
		All other identifiable assets			72,948			2,570			1,430			519			(21,190	)		56,277
			Total assets	$	81,533		$	2,636		$	1,474		$	3,267		$	(21,207	)	$	67,703
	Fiscal Year Ended March 31, 2004
		Sales to unaffiliated customers		$	57,778		$	2,355		$	1,787		$	3,389		$	—		$	65,309
		Transfers between geographic regions			(574	)		556			655			1,585			(2,222	)		—
			Total net revenues	$	57,204		$	2,911		$	2,442		$	4,974		$	(2,222	)	$	65,309
		Operating income (loss)		$	(16,776	)	$	(218	)	$	381		$	(388	)	$	(946	)	$	(17,947	)
		Long-lived assets		$	4,296		$	61		$	—		$	229		$	(22	)	$	4,564
		All other identifiable assets			62,693			2,555			629			2,884			(9,043	)		59,718
			Total assets	$	66,989		$	2,616		$	629		$	3,113		$	(9,065	)	$	64,282
	Fiscal Year Ended March 31, 2005
		Sales to unaffiliated customers		$	71,401		$	3,250		$	2,012		$	4,598		$	—		$	81,261
		Transfers between geographic regions			(858	)		256			354			1,710			(1,462	)		—
			Total net revenues	$	70,543		$	3,506		$	2,366		$	6,308		$	(1,462	)	$	81,261
		Operating income (loss)		$	(6,631	)	$	(361	)	$	(16	)	$	(22	)	$	494		$	(6,536	)
		Long-lived assets		$	2,692		$	103		$	27		$	171		$	(17	)	$	2,976
		All other identifiable assets			67,386			3,037			983			3,369			(10,178	)		64,597
			Total assets	$	70,078		$	3,140		$	1,010		$	3,540		$	(10,195	)	$	67,573

      At March 31, 2005, 2004 and 2003 elimination of all other identifiable assets of $10.2 million, $9.0 million, and $21.2 million, respectively, included elimination of cash advances to subsidiaries of $6.9 million, $6.9 million, and $6.9 million, respectively, elimination of intercompany receivables of $1.0 million, $0, and $11.8 million, respectively, and elimination of intercompany inventories of $2.3 million, $2.1 million, and $2.5 million, respectively. At March 31, 2005, 2004 and 2003 elimination of long-lived assets of $17,000, $22,000, and $17,000, respectively, represent elimination of intercompany property and equipment.

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THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

15. Accounts Receivable Valuation and Qualifying Accounts

			Balance at				Deductions
			Beginning				Including		Balance at
Description			of Period		Additions		Write-Off’s		End of Period
			(In thousands)
Year ended March 31, 2005:
	Reserves and allowances deducted from asset accounts
		Allowances for doubtful accounts receivable and returns	$	907	$	509	$	701	$	715
Year ended March 31, 2004:
	Reserves and allowances deducted from asset accounts
		Allowances for doubtful accounts receivable and returns	$	1,553	$	658	$	1,304	$	907
Year ended March 31, 2003:
	Reserves and allowances deducted from asset accounts
		Allowances for doubtful accounts receivable and returns	$	2,024	$	222	$	693	$	1,553

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Supplementary Data: Selected Consolidated Quarterly Data

      The following table presents our unaudited consolidated statements of operations data for each of the eight quarters in the period ended April 3, 2005. In our opinion, this information has been presented on the same basis as the audited consolidated financial statements included in a separate section of this report, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts below to present fairly the unaudited quarterly results when read in conjunction with the audited consolidated financial statements and related notes. The operating results for any quarter should not be relied upon as necessarily indicative of results for any future period. We expect our quarterly operating results to fluctuate in future periods due to a variety of reasons, including those discussed in “Factors Affecting Future Results.”

THERMA-WAVE, INC.

QUARTERLY FINANCIAL DATA (UNAUDITED)

		Fiscal Year 2005														Fiscal Year 2004
		Q1			Q2		Q3			Q4			Year			Q1			Q2			Q3			Q4			Year
		(In thousands except per share data)
Net revenues		$	21,151		$	22,602	$	21,470		$	16,038		$	81,261		$	11,903		$	14,066		$	19,866		$	19,474		$	65,309
Gross profit (loss)		$	10,720		$	10,772	$	9,102		$	6,047		$	36,641		$	2,832		$	5,567		$	9,962		$	8,448		$	26,809
Operating profit (loss)		$	(1,221	)	$	1,293	$	(1,754	)	$	(4,854	)	$	(6,536	)	$	(9,339	)	$	(5,782	)	$	(1,027	)	$	(1,799	)	$	(17,947	)
Net income (loss)		$	(1,169	)	$	1,317	$	(1,911	)	$	(5,058	)	$	(6,821	)	$	(9,534	)	$	(5,728	)	$	(1,031	)	$	(1,800	)	$	(18,093	)
Net income (loss) per share:
	Basic	$	(0.03	)	$	0.04	$	(0.05	)	$	(0.14	)	$	(0.19	)	$	(0.33	)	$	(0.19	)	$	(0.03	)	$	(0.05	)	$	(0.56	)
	Diluted	$	(0.03	)	$	0.03	$	(0.05	)	$	(0.14	)	$	(0.19	)	$	(0.33	)	$	(0.19	)	$	(0.03	)	$	(0.05	)	$	(0.56	)

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

      Not applicable.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

      We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures are also designed to ensure 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. Disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the disclosure control and procedures objectives will be met.

      Our management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in the Exchange Act Rules 13a-15(e) and 15d-15(e)) as of April 3, 2005. Based upon the evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that due to the material weaknesses described below, our disclosure controls and procedures were not effective at the reasonable assurance level as of April 3, 2005. In light of the material weaknesses described below, the Company performed additional analysis and other post-closing procedures to ensure the consolidated financial statements were prepared in accordance with generally

85

accepted accounting principles. Accordingly, management believes the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.

Management’s Report on Internal Control over Financial Reporting

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

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

      Our management has assessed the effectiveness of our internal control over financial reporting as of April 3, 2005. In making its assessment of internal control over financial reporting, our management used the criteria described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

      A material weakness is a control deficiency or combination of control deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following material weaknesses.

      1. As of April 3, 2005, the Company did not maintain effective controls over intercompany accounts. Specifically, the Company did not have effective controls to ensure that intercompany account balances were reconciled timely and properly eliminated in consolidation in accordance with generally accepted accounting principles. This control deficiency did not result in an adjustment to the consolidated financial statements. However, this control deficiency could result in a misstatement of accounts and disclosures that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

      2. As of April 3, 2005, the Company did not maintain effective controls over the documentation, review and approval of journal entries to allocate certain customer service and support costs between cost of revenues and selling, general and administrative expense. This control deficiency did not result in an adjustment to the consolidated financial statements. However, this control deficiency could result in a misstatement of the previously noted statement of operations’ accounts, that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management has determined that this control deficiency constitutes a material weakness.

      Because of these material weaknesses, management has concluded that the Company did not maintain effective internal control over financial reporting as of April 3, 2005, based on the criteria established in “Internal Control — Integrated Framework” issued by the COSO.

      Management’s assessment of the effectiveness of the Company’s internal control over financial reporting as of April 3, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

86

Remediation of Material Weaknesses

Corrective Actions for Material Weaknesses Identified During the Fourth Quarter of 2005

      In response to the material weaknesses described above, the Company initiated a number of corrective actions to ensure that the financial information and other disclosures included in this report were complete, timely and accurate in all material respects. Those actions included the following:

•  Implementing additional monitoring controls used in conjunction with the performance of intercompany account reconciliations and independent internal reviews of all key account reconciliations, including inventory transactions with consolidated entities and support for allocations of customer service and support costs between cost of revenue and selling general and administrative expense;

•  Hiring new senior accounting personnel and recruiting additional experienced accounting and finance staff, including an experienced corporate controller;

•  Enhancing our training programs for accounting staff as well as our overall supervision of finance personnel; and

•  Implementing procedures to ensure all intercompany accounts are reconciled on a quarterly basis and to ensure that sufficient support is maintained on a timely basis for all accounting entries.

      The Company believes that these efforts will address the material weaknesses that affected or could have affected our internal control over financial reporting as of April 3, 2005.

Corrective Actions for Material Weakness Identified During the Third Quarter of 2005

      In the fourth quarter of 2005, we enhanced our internal controls in response to a material weakness over revenue recognition related to:

•  Insufficient documentation to support revenue recognition decisions including timely receipt of final acceptances, support for customer change orders and receipt of final signed contracts and;

•  Lack of timely communication between business unit and finance personnel related to sales order status and the impact of changes in key contract terms on revenue recognition.

      Specifically, we have established processes covering all revenue transactions, including the following new procedures:

•  Hired an experienced contracts manager with responsibility to oversee sales contract documentation;

•  Established an executive revenue recognition review team with responsibility for ensuring that communication and documentation requirements in support of revenue recognition determinations are met;

•  Established a revenue review team within the finance department that documents the basis for revenue recognition decisions and including timely review of all supporting documentation;

•  Established a process that verifies completeness of receipt of all signed Final Acceptance Certificates; and

•  Trained our sales and service staff regarding their role in ensuring the revenue recognition criteria of SAB 104 have been met for our transactions.

      We believe that these corrective actions, taken as a whole, have addressed the control deficiencies identified and we will continue to monitor the effectiveness of these actions and make any changes that management determines are necessary or appropriate.

87

Changes in Internal Control over Financial Reporting

      Except as described above, during our fourth quarter ended April 3, 2005, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

      The following information is included herewith in satisfaction of our obligation to file such information with the SEC in a current report on Form 8-K.

      On January 31, 2005, Therma-Wave and Silicon Valley Bank agreed to modify certain terms of the credit facilities. The purpose of the amendment was to renegotiate the definitions of quick ratio and quick ratio formula so that the company would be in compliance with all of the covenants of the credit facilities. A copy of the amendment is filed as Exhibit 10.4 to this Annual Report on Form 10-K.

      On May 26, 2005, Randy Singh, for personal reasons, resigned from the position of Corporate Controller of the Company. The Company is actively looking for a new Corporate Controller at this time.

      On June 10, 2005, the Company and Silicon Valley Bank entered into (i) an Amended and Restated Loan and Security Agreement, and (ii) a Streamline Facility Agreement, that renewed a $15.0 million revolving line of credit to the Company. The revolving line of credit can be used to (i) borrow funds for working capital and general corporate purposes, (ii) issue letters of credit, (iii) enter into foreign exchange forward contracts, and (iv) support certain cash management services. The Loan and Security Agreement also includes a Material Adverse Change clause, which allows the bank to terminate the facility or to demand the immediate payment of all outstanding balances upon the determination of a deemed material adverse change in the Company’s business, operations, or financial or other condition of the Company, or a material impairment of the prospect of repayment of any portion of outstanding obligations; or a material impairment of the value or priority of the bank’s security interests in the collateral. On June 11, 2007, the revolving line of credit matures and Silicon Valley Bank’s commitment to extend revolving loans these agreements terminates.

      On June 27, 2005, Therma-Wave entered into revised indemnification agreements with each of its executive officers and directors. A form of the revised indemnification agreement is attached hereto as Exhibit 10.11.

88

PART III

Item 10. Directors and Executive Officers of the Registrant

      Information concerning directors and executive officers of Therma-Wave, Inc. will appear in the proxy statement for our 2005 annual stockholders meeting, under the “Election of Directors”, “Corporate Governance Principles and Board Matters”, and “Management” sections. These portions of the proxy statement are incorporated herein by reference.

      We have adopted a Code of Ethics that applies to all of our officers, directors and employees. The Code of Ethics is incorporated by reference as an exhibit to this annual report on Form 10-K and is also available on our website at www.thermawave.com.

      Each of our executive officers and directors entered into a revised indemnification agreement with Therma-Wave on June 27, 2005, as discussed under Item 9B above.

Item 11. Executive Compensation

      Information concerning compensation of executive officers of Therma-Wave, Inc. will appear in the proxy statement for our 2005 annual stockholders meeting, under the “Management”, “Compensation Committee Report on Executive Compensation” and “Performance Graph” sections. These portions of the proxy statement are incorporated herein by reference.

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

      Information concerning the security ownership of certain beneficial owners and management will appear in Therma-Wave’s proxy statement for our 2005 annual stockholders meeting, under the “Principle Stockholders” section. This portion of the proxy statement is incorporated herein by reference.

Item 13. Certain Relationships and Related Transactions

      Information concerning certain relationships and related transactions will appear in the proxy statement for our 2005 annual stockholders meeting, under the “Related Party Transactions” section. This portion of the proxy statement is incorporated herein by reference.

Item 14. Principal Accountant Fees and Services

      PricewaterhouseCoopers LLP, who have been our independent registered public accounting firm for the past fiscal year, have again been selected by the audit committee to be Therma-Wave’s independent registered public accounting firm for fiscal year 2006.

      The following table sets forth the aggregate fees billed or to be billed by PricewaterhouseCoopers for the following services during fiscal years 2005 and 2004. Under the SEC’s new rule on auditor independence, which is effective for the first fiscal year ending after December 15, 2003 and was adopted as a result of implementing the Sarbanes-Oxley Act of 2002, the fees are categorized as follows:

			2005		2004
Category of Fees Billed or to be Billed by the Company’s Principal Accountant
	Audit fees		$	919,039	$	440,034
	Audit-related fees			—		365,000
	Tax fees			—		7,391
	All other fees			—		—
		Total	$	919,039	$	812,425

89

      Audit fees. Aggregate fees for the fiscal years ended March 31, 2005 and March 31, 2004, respectively, were for professional services rendered for the audits of our consolidated financial statements and limited reviews of our unaudited condensed consolidated interim financial statements, issuance of consents and assistance with review of documents filed with the SEC, including fillings related to the private placement of common stock that we completed in September 2003. Audit fees for fiscal 2005 also included the audit of management’s report on the effectiveness of our internal control over financial reporting and the effectiveness of internal control, as required by Section 404 of the Sarbanes-Oxley Act of 2002.

      Audit-related fees. Aggregate fees for the fiscal year ended March 31, 2004 included services related to our quarterly reports for fiscal year 2004 and advisory work for Section 404 of the Sarbanes-Oxley Act of 2002.

      Tax fees. Aggregate fees for the fiscal year ended March 31, 2004 were for services related to tax compliance, including assistance with tax audits, assistance ex-patriot tax return calculations for employee compensation purposes.

      Our audit committee has considered the role of PricewaterhouseCoopers LLP in providing certain non-audit services to Therma-Wave and has concluded that such services are compatible with PricewaterhouseCoopers LLP’s independence as our independent registered public accounting firm.

      Our audit committee must now pre-approve all non-audit services provided to us by our independent registered public accounting firm. According to our revised audit committee charter, a copy of which will be filed as an appendix to our proxy statement for the 2005 annual stockholders meeting, this pre-approval authority may be delegated to a single member of the audit committee and then reviewed by the entire audit committee at the committee’s next meeting. Approvals of non-audit services will be publicly disclosed in our periodic reports filed with the SEC. For the fiscal year 2004, all non-audit services were pre-approved by the audit committee.

90

PART IV

Item 15. Exhibits and Consolidated Financial Statement Schedules

      The following documents are filed as part of this report:

      1. Consolidated Financial Statements — See “Item 8. Financial Statements and Supplementary Data”

      2. Exhibits:

Exhibit
Number			Description
	3	.1	Restated Certificate of Incorporation of Therma-Wave, Inc. (Incorporated herein by reference to the Exhibit 3.1 to Therma-Wave’s annual report on Form 10-K for the period ended April 2, 2000.)
	3	.2	Certificate of Amendment to Restated Certificate of Incorporation of Therma-Wave, Inc. (Incorporated herein by reference to Exhibit 3.1 in Therma-Wave’s quarterly report on Form 10-Q for the period ended September 29, 2002.)
	3	.3	Amended and Restated By-Laws of Therma-Wave. (Incorporated herein by reference to Exhibit 3.2 in Therma-Wave’s annual report on Form 10-K for the period ended April 1, 2001.)
	4	.1	Form of certificate representing shares of Common Stock. (Incorporated herein by reference to Exhibit 4.6 to Therma-Wave’s Registration Statement on Form S-1 (Registration No 333-76019).)
	4	.2	Registration Rights Agreement, dated as of September 15, 2003, by and among Therma-Wave, Inc. and the holders named therein. (Incorporated herein by reference to Exhibit 4.6 to Therma-Wave’s Registration Statement on Form S-1 (Registration No. 333-110162).)
	10	.1	Loan and Security Agreement, dated June 13, 2003, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.2 in Therma-Wave’s annual report for the year ended March 30, 2003.)
	10	.2	Loan Modification Agreement, dated as of July 24, 2003 by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.38 to Therma-Wave’s quarterly report for the period ended June 29, 2003.)
	10	.3	Loan Modification Agreement, dated as of May 4, 2004, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.16 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	10	.4	Loan Modification Agreement, dated as of January 31, 2005, by and between Therma-Wave, Inc. and Silicon Valley Bank.
	10	.5	Amended and Restated Loan and Security Agreement, dated June 10, 2005, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s current report on Form 8-K dated June 16, 2005.)
	10	.6	Streamline Facility Agreement, dated June 10, 2005, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s current report on Form 8-K dated June 16, 2005.)
	10	.7	Borrower Agreement, dated as of June 4, 2004, by and between Therma-Wave, Inc. and the Export-Import Bank of the United States. (Incorporated herein by reference to Exhibit 10.31 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	10	.8*	Exclusive Representation Agreement, dated as of April 19, 2005, by and between Therma-Wave, Inc. and Hermes-Epitek Corporation.
	10	.9	Lease Agreement, dated as of May 26, 1995, by and between Therma-Wave and Sobrato Interests. (Incorporated herein by reference to Exhibit 10.14 to Therma-Wave’s Registration Statement on Form S-4 (Registration No. 0333-29871)
	10	.10	Lease between Minos Management, Inc. as Landlord, and Therma-Wave as Tenant, dated May 31, 2000. (Incorporated herein by reference to Exhibit 10.32 to Therma-Wave’s annual report on Form 10-K for the period ended April 2, 2000.)

91

Exhibit
Number			Description
	10	.11	Agreement between Therma-Wave, Inc. and KLA-Tencor Corporation effective as of July 1, 2004. (Incorporated by reference to Form 8-K filed August 27, 2004.)
	10	.12#	Form of Indemnification Agreement with directors and executive officers.
	10	.13#	Therma-Wave Executive Deferred Compensation Plan, effective January 1, 2000. (Incorporated herein by reference to Exhibit 10.31 to Therma-Wave’s annual report on Form 10-K for the period ended April 2, 2000.)
	10	.14#	1997 Stock Purchase and Option Plan. (Incorporated herein by reference to Exhibit 10.20 to Therma-Wave’s Registration Statement on Form S-4 (Registration No. 333-29871).)
	10	.15#	1997 Employee Stock Purchase and Option Plan. (Incorporated herein by reference to Exhibit 10.30 to Therma-Wave’s Registration Statement on Form S-1 (Registration No 333-76019).)
	10	.16#	1997 Special Employee Stock Purchase and Option Plan. (Incorporated herein by reference to Exhibit 10.31 to Therma-Wave’s Registration Statement on Form S-1 (Registration No. 333-76019).)
	10	.17#	2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.22 to Therma-Wave’s annual report on Form 10-K for the period ended March 31, 2000.)
	10	.18#	Amendment No. 1 to Therma-Wave, Inc. 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.2 in Therma-Wave’s Registration Statement on Form S-8 (Registration No. 333-83282).)
	10	.19#	Amendment No. 2 to Therma-Wave, Inc. 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.1 in Therma-Wave’s current report on Form 8-K filed August 27, 2004.)
	10	.20#	Amendment No. 3 to Therma-Wave, Inc. 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.2 in Therma-Wave’s Registration Statement on Form S-8 (Registration No. 333-83282).)
	10	.21#	Amendment No. 4 to Therma-Wave, Inc. 2000 Equity Incentive Plan.
	10	.22#	Form of Stock Option Agreement under the 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s current report on Form 8-K filed May 11, 2005.)
	10	.23#	Form of Amendment No. 1 to Stock Option Agreement for directors under the 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.3 in Therma-Wave’s current report on Form 8-K filed August 27, 2004.)
	10	.24#	Form of Director Stock Option Agreement adopted November 24, 2004. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s quarterly report for the quarter ended December 26, 2004.)
	10	.25#	Amended and Restated 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.26 in Therma-Wave’s annual report on Form 10-K for the period ended March 31, 2000.)
	10	.26#	Amendment No. 1 to the 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.26.1 to Therma-Wave’s quarterly report on Form 10-Q for the period ended July 1, 2001.)
	10	.27#	Amendment No. 2 to the 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.26.2 to Therma-Wave’s amended quarterly report on Form 10-Q/ A for the period ended September 29, 2002.)
	10	.28#	Amendment No. 3 to the 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.29 in Therma-Wave’s annual report for the year ended March 30, 2003.)
	10	.29#	Offer Letter, Board Services, dated as of March 12, 2003, from Therma-Wave, Inc. to Papken S. Der Torossian. (Incorporated herein by reference to Exhibit 10.45 in Therma-Wave’s quarterly report on Form 10-Q for the period ended December 29, 2002.)
	10	.30#	Employment Agreement dated as of February 5, 2003, by and between Therma-Wave, Inc. and Boris Lipkin. (Incorporated herein by reference to Exhibit 10.43 in Therma-Wave’s quarterly report on Form 10-Q for the period ended December 29, 2002.)

92

Exhibit
Number			Description
	10	.31#	Amendment No. 1 to Employment Agreement, dated as of August 21, 2003, between Boris Lipkin and Therma-Wave, Inc. (Incorporated herein by reference to Exhibit 10.39 to Therma-Wave’s quarterly report for the period ended September 28, 2003.)
	10	.32#	Amendment No. 2, dated as of March 25, 2004 to the Employment Agreement by and between Therma-Wave and Boris Lipkin. (Incorporated herein by reference to Exhibit 10.9 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	10	.33#	Employment Agreement, dated as of August 10, 1998, by and between Therma-Wave and L. Ray Christie. (Incorporated herein by reference to Exhibit 10.27 to Therma-Wave’s Registration Statement on Form S-1 (Registration No. 333-76019).)
	10	.34#	Amendment No. 1 to Employment Agreement, dated as of August 21, 2003, between L. Ray Christie and Therma-Wave, Inc. (Incorporated herein by reference to Exhibit 10.40 to Therma-Wave’s quarterly report for the period ended September 28, 2003.)
	10	.35#	Executive Stock Agreement, dated as of May 16, 1997, by and between Therma-Wave, Inc. and Jon L. Opsal. (Incorporated herein by reference to Exhibit 10.9 to Therma-Wave’s registration statement on Form S-4 (Registration No. 333-29871).)
	10	.36#	Summary of Compensation for Outside Directors
	10	.37#	Summary of Compensation Arrangements with Certain Executives
	10	.38#	Employment Agreement with Joseph Passarello dated April 8, 2005.
	14	.1	Code of Ethics applicable to all employees. (Incorporated herein by reference to Exhibit 14.1 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	21	.1	Subsidiaries of Therma-Wave. (Incorporated herein by reference to Exhibit 21.1 to Therma-Wave’s annual report on Form 10-K for the period ended March 30, 2003.)
	23	.1	Consent of Independent Registered Public Accounting Firm.
	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 the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Confidential treatment has been requested for certain portions of this exhibit.
#	Denotes management contract or compensatory plan.

93

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.

Therma-Wave, Inc.

By:  /s/ Boris Lipkin

Boris Lipkin

President, Chief Executive Officer and Director

Dated: June 27, 2005

POWER OF ATTORNEY

      KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Boris Lipkin, L. Ray Christie, and Joseph J. Passarello, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this annual report on Form 10-K under the Securities Exchange Act of 1934, as amended, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/ Papken S. Der Torossian Papken S. Der Torossian	Chairman of the Board	June 27, 2005
/s/ Boris Lipkin Boris Lipkin	President, Chief Executive Officer and Director (Principal Executive Officer)	June 27, 2005
/s/ L. Ray Christie L. Ray Christie	Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	June 27, 2005
/s/ David Aspnes David Aspnes	Director	June 27, 2005
/s/ G. Leonard Baker G. Leonard Baker	Director	June 27, 2005
/s/ John D’Errico John D’Errico	Director	June 27, 2005

94

Signature	Title	Date
/s/ Peter R. Hanley Peter R. Hanley	Director	June 27, 2005
/s/ Nam Pyo Suh Nam Pyo Suh	Director	June 27, 2005
/s/ Lawrence Tomlinson Lawrence Tomlinson	Director	June 27, 2005

95

EXHIBIT INDEX

Exhibit
Number			Description
	3	.1	Restated Certificate of Incorporation of Therma-Wave, Inc. (Incorporated herein by reference to the Exhibit 3.1 to Therma-Wave’s annual report on Form 10-K for the period ended April 2, 2000.)
	3	.2	Certificate of Amendment to Restated Certificate of Incorporation of Therma-Wave, Inc. (Incorporated herein by reference to Exhibit 3.1 in Therma-Wave’s quarterly report on Form 10-Q for the period ended September 29, 2002.)
	3	.3	Amended and Restated By-Laws of Therma-Wave. (Incorporated herein by reference to Exhibit 3.2 in Therma-Wave’s annual report on Form 10-K for the period ended April 1, 2001.)
	4	.1	Form of certificate representing shares of Common Stock. (Incorporated herein by reference to Exhibit 4.6 to Therma-Wave’s Registration Statement on Form S-1 (Registration No 333-76019).)
	4	.2	Registration Rights Agreement, dated as of September 15, 2003, by and among Therma-Wave, Inc. and the holders named therein. (Incorporated herein by reference to Exhibit 4.6 to Therma-Wave’s Registration Statement on Form S-1 (Registration No. 333-110162).)
	10	.1	Loan and Security Agreement, dated June 13, 2003, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.2 in Therma-Wave’s annual report for the year ended March 30, 2003.)
	10	.2	Loan Modification Agreement, dated as of July 24, 2003 by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.38 to Therma-Wave’s quarterly report for the period ended June 29, 2003.)
	10	.3	Loan Modification Agreement, dated as of May 4, 2004, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.16 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	10	.4	Loan Modification Agreement, dated as of January 31, 2005, by and between Therma-Wave, Inc. and Silicon Valley Bank.
	10	.5	Amended and Restated Loan and Security Agreement, dated June 10, 2005, by and between Therma-Wave, Inc. and Silicon Valley Bank (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s current report on Form 8-K dated June 16, 2005.)
	10	.6	Streamline Facility Agreement, dated June 10, 2005, by and between Therma-Wave, Inc. and Silicon Valley Bank. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s current report on Form 8-K dated June 16, 2005.)
	10	.7	Borrower Agreement, dated as of June 4, 2004, by and between Therma-Wave, Inc. and the Export-Import Bank of the United States. (Incorporated herein by reference to Exhibit 10.31 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	10	.8*	Exclusive Representation Agreement, dated as of April 19, 2005, by and between Therma-Wave, Inc. and Hermes-Epitek Corporation.
	10	.9	Lease Agreement, dated as of May 26, 1995, by and between Therma-Wave and Sobrato Interests. (Incorporated herein by reference to Exhibit 10.14 to Therma-Wave’s Registration Statement on Form S-4 (Registration No. 0333-29871)
	10	.10	Lease between Minos Management, Inc. as Landlord, and Therma-Wave as Tenant, dated May 31, 2000. (Incorporated herein by reference to Exhibit 10.32 to Therma-Wave’s annual report on Form 10-K for the period ended April 2, 2000.)
	10	.11	Agreement between Therma-Wave, Inc. and KLA-Tencor Corporation effective as of July 1, 2004. (Incorporated by reference to Form 8-K filed August 27, 2004.)
	10	.12#	Form of Indemnification Agreement with directors and executive officers.
	10	.13#	Therma-Wave Executive Deferred Compensation Plan, effective January 1, 2000. (Incorporated herein by reference to Exhibit 10.31 to Therma-Wave’s annual report on Form 10-K for the period ended April 2, 2000.)
	10	.14#	1997 Stock Purchase and Option Plan. (Incorporated herein by reference to Exhibit 10.20 to Therma-Wave’s Registration Statement on Form S-4 (Registration No. 333-29871).)

96

Exhibit
Number			Description
	10	.15#	1997 Employee Stock Purchase and Option Plan. (Incorporated herein by reference to Exhibit 10.30 to Therma-Wave’s Registration Statement on Form S-1 (Registration No 333-76019).)
	10	.16#	1997 Special Employee Stock Purchase and Option Plan. (Incorporated herein by reference to Exhibit 10.31 to Therma-Wave’s Registration Statement on Form S-1 (Registration No. 333-76019).)
	10	.17#	2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.22 to Therma-Wave’s annual report on Form 10-K for the period ended March 31, 2000.)
	10	.18#	Amendment No. 1 to Therma-Wave, Inc. 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.2 in Therma-Wave’s Registration Statement on Form S-8 (Registration No. 333-83282).)
	10	.19#	Amendment No. 2 to Therma-Wave, Inc. 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.1 in Therma-Wave’s current report on Form 8-K filed August 27, 2004.)
	10	.20#	Amendment No. 3 to Therma-Wave, Inc. 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.2 in Therma-Wave’s Registration Statement on Form S-8 (Registration No. 333-83282).)
	10	.21#	Amendment No. 4 to Therma-Wave, Inc. 2000 Equity Incentive Plan.
	10	.22#	Form of Stock Option Agreement under the 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s current report on Form 8-K filed May 11, 2005.)
	10	.23#	Form of Amendment No. 1 to Stock Option Agreement for directors under the 2000 Equity Incentive Plan. (Incorporated herein by reference to Exhibit 99.3 in Therma-Wave’s current report on Form 8-K filed August 27, 2004.)
	10	.24#	Form of Director Stock Option Agreement adopted November 24, 2004. (Incorporated herein by reference to Exhibit 10.1 to Therma-Wave’s quarterly report for the quarter ended December 26, 2004.)
	10	.25#	Amended and Restated 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.26 in Therma-Wave’s annual report on Form 10-K for the period ended March 31, 2000.)
	10	.26#	Amendment No. 1 to the 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.26.1 to Therma-Wave’s quarterly report on Form 10-Q for the period ended July 1, 2001.)
	10	.27#	Amendment No. 2 to the 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.26.2 to Therma-Wave’s amended quarterly report on Form 10-Q/ A for the period ended September 29, 2002.)
	10	.28#	Amendment No. 3 to the 2000 Employee Stock Purchase Plan. (Incorporated herein by reference to Exhibit 10.29 in Therma-Wave’s annual report for the year ended March 30, 2003.)
	10	.29#	Offer Letter, Board Services, dated as of March 12, 2003, from Therma-Wave, Inc. to Papken S. Der Torossian. (Incorporated herein by reference to Exhibit 10.45 in Therma-Wave’s quarterly report on Form 10-Q for the period ended December 29, 2002.)
	10	.30#	Employment Agreement dated as of February 5, 2003, by and between Therma-Wave, Inc. and Boris Lipkin. (Incorporated herein by reference to Exhibit 10.43 in Therma-Wave’s quarterly report on Form 10-Q for the period ended December 29, 2002.)
	10	.31#	Amendment No. 1 to Employment Agreement, dated as of August 21, 2003, between Boris Lipkin and Therma-Wave, Inc. (Incorporated herein by reference to Exhibit 10.39 to Therma-Wave’s quarterly report for the period ended September 28, 2003.)
	10	.32#	Amendment No. 2, dated as of March 25, 2004 to the Employment Agreement by and between Therma-Wave and Boris Lipkin. (Incorporated herein by reference to Exhibit 10.9 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	10	.33#	Employment Agreement, dated as of August 10, 1998, by and between Therma-Wave and L. Ray Christie. (Incorporated herein by reference to Exhibit 10.27 to Therma-Wave’s Registration Statement on Form S-1 (Registration No. 333-76019).)

97

Exhibit
Number			Description
	10	.34#	Amendment No. 1 to Employment Agreement, dated as of August 21, 2003, between L. Ray Christie and Therma-Wave, Inc. (Incorporated herein by reference to Exhibit 10.40 to Therma-Wave’s quarterly report for the period ended September 28, 2003.)
	10	.35#	Executive Stock Agreement, dated as of May 16, 1997, by and between Therma-Wave, Inc. and Jon L. Opsal. (Incorporated herein by reference to Exhibit 10.9 to Therma-Wave’s registration statement on Form S-4 (Registration No. 333-29871).)
	10	.36#	Summary of Compensation for Outside Directors
	10	.37#	Summary of Compensation Arrangements with Certain Executives
	10	.38#	Employment Agreement with Joseph Passarello dated April 8, 2005.
	14	.1	Code of Ethics applicable to all employees. (Incorporated herein by reference to Exhibit 14.1 to Therma-Wave’s annual report on Form 10-K for the period ended March 28, 2004.)
	21	.1	Subsidiaries of Therma-Wave. (Incorporated herein by reference to Exhibit 21.1 to Therma-Wave’s annual report on Form 10-K for the period ended March 30, 2003.)
	23	.1	Consent of Independent Registered Public Accounting Firm.
	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 the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	32	.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Confidential treatment has been requested for certain portions of this exhibit.
#	Denotes management contract or compensatory plan.

98 EX-10.4 2 f09456exv10w4.htm EXHIBIT 10.4

Exhibit 10.4

LOAN MODIFICATION AGREEMENT

     This Loan Modification Agreement is entered into as of January 31, 2005, by and between THERMA-WAVE, INC., a Delaware corporation (the “Borrower”) and SILICON VALLEY BANK (“Silicon”).

1. DESCRIPTION OF EXISTING INDEBTEDNESS. Among other indebtedness which may be owing by Borrower to Silicon, Borrower is indebted to Silicon pursuant to, among other documents, a Loan and Security Agreement, dated as of June 13, 2003 (as may be amended, restated, supplemented or otherwise modified from time to time, the “Loan Agreement”). Defined terms used but not otherwise defined herein shall have the same meanings assigned in the Loan Agreement.

Hereinafter, all indebtedness owing by Borrower to Silicon shall be referred to as the “Indebtedness.”

2. DESCRIPTION OF COLLATERAL AND GUARANTIES. Repayment of the Indebtedness is secured by the Collateral as described in the Loan Agreement. Hereinafter, all other documents securing repayment of the Indebtedness shall be referred to as the “Security Documents”. Hereinafter, the Security Documents, together with all other documents evidencing the Indebtedness shall be referred to as the “Existing Loan Documents”.

3. DESCRIPTION OF CHANGE IN TERMS OF EXISTING LOAN DOCUMENTS.

3.1 Financial Covenants.

     (a) Sub-section (i) of Section 6.7 of the Loan Agreement is hereby amended and restated in its entirety to read as follows:

“(i) Quick Ratio (Adjusted). As of the last day of each month beginning with the month ending December 31, 2004, a ratio of Quick Assets to Current Liabilities plus all outstanding obligations of Borrower to Bank minus any stand-by letters of credit issued to secure pre-paid customer deposit subsequently accounted for under the definition of “Current Liabilities” minus current portions of Deferred Revenue minus current portions of foreign tax accruals of at least 1.35 to 1.00. For the purposes of calculation of this ratio for the last day of each month which is also the last day of a fiscal quarter, Quick Assets shall not include cash in the amount of any funded debt which constitutes Obligations on the date of calculation, and Current Liabilities shall not include liabilities in the amount of any funded debt which constitutes Obligations on the date of calculation.”

     (b) Sub-section (ii)(d) of Section 6.7 of the Loan Agreement is hereby amended and restated in its entirety to read as follows:

“(d) <$2,000,000> for the fiscal quarter ending on March 31, 2005; and”

     (c) A new sub-section (e) is added to Section 6.7(ii) to read as follows:

“(e) <$1,000,000> for every fiscal quarter ending after March 31, 2005.”

4. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above.

5. WAIVERS.

5.1

Bank hereby waives the following (collectively, the “Waived Defaults”): solely with respect to the period beginning July 1, 2004 through November 20, 2004, the Event of Default under Section 8.2 arising out of Borrower’s violation of Section 6.7(i).

5.2

The waiver is this Section 5 shall become effective only in accordance with Section 9 hereof and then only in this specific instance and for the specific purposes set forth herein. Such waiver does not allow for any other or further departure from the terms and conditions of the Loan Agreement, as amended hereby, or any of the other Existing Loan Documents, which terms and conditions shall remain in full force and effect.

6. PAYMENT OF LOAN MODIFICATION EXPENSES. Borrower shall pay Bank its reasonable out-of-pocket expenses incurred for preparation of this Loan Modification Agreement.

7. NO DEFENSES OF BORROWER. Borrower agrees that, as of the date hereof, it has no defenses against its obligations to pay all of the Indebtedness.

8. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the Existing Loan Documents, Silicon is relying upon Borrower’s representations, warranties, and agreements, as set forth in the Existing Loan Documents and as of the date of such Existing Loan Documents. Except as expressly modified pursuant to this Modification, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Silicon’s agreement to modifications to the Existing Loan Documents pursuant to this Modification in no way shall obligate Silicon to make any future modifications to the Existing Loan Documents. Nothing in this Modification shall constitute a satisfaction of the Indebtedness. It is the intention of Silicon and Borrower to retain as liable parties all makers and endorsers of Existing Loan Documents, unless the party is expressly released by Silicon in writing, and no maker, endorser, or guarantor will be released by virtue of this Modification.

9. CONDITIONS. The effectiveness of this Modification is conditioned upon (i) payment by Borrower of all reasonable Bank Expenses relating to this Modification, and (ii) execution and delivery to Silicon of a fully executed copy of this Modification.

[ Remainder of Page Intentionally Left Blank ]

     IN WITNESS WHEREOF, each of the parties hereto has caused this Modification to be executed and delivered by its duly authorized representative as of the date first written above.

BORROWER:		SILICON:
THERMA-WAVE, INC.,		SILICON VALLEY BANK,
a Delaware corporation		a California-chartered bank
By:	/s/ L. Ray Christie	By:	/s/ Quentin Falconer
Name: L. Ray Christie		Name: Quentin Falconer
Title: Senior V.P., Chief Financial Officer		Title: Senior V.P.
and Secretary

EX-10.4

exv10w4

EX-10.8

Exhibit 10.8

EXCLUSIVE REPRESENTATIVE AGREEMENT

   This Representative Agreement (“Agreement”) is made by and between Therma-Wave, Inc., with its principle place of business at 1250 Reliance Way, Sunnyvale California 94539 USA, a Delaware corporation, (“Supplier”) and Hermes-Epitek Corporation, with its principle place of business at No. 18, Creation Road 1, Science Park Hsin-Chu, 300 Taiwan, R.O.C. a corporation of the Republic of China (“Representative“) with an effective date as of April 19, 2005 (“Effective Date”).

RECITALS

     WHEREAS, Supplier manufactures and sells or licenses certain hardware and software products primarily for use by the semiconductor industry; and

     WHEREAS, Representative markets products to the semiconductor industry; and

     WHEREAS, Representative now desires to have the exclusive right to market and support as applicable the Products, as defined below, on the terms and subject to the conditions set forth in this Agreement;

     NOW, THEREFORE, in consideration of the mutual promises contained herein, the Parties hereto agree as follows:

DEFINITIONS

“Customer” shall mean a party solicited by Representative who places an order for, and is a buyer of, the Products, other than Representative, physically located within the Territory as hereinafter defined.

“Order Acknowledgement Form” shall mean a document provided and signed by Supplier evidencing a binding order for the goods or services described therein.

“Net Invoice Amount” shall mean the amount paid by Customer to Supplier for Products, net of any freight, sales tax, value added tax, duties or like charges and any discounts, rebates, allowances, adjustments, or cancellations,

“Products” shall mean the subset of Supplier’s product line in respect of which Representative is authorized to serve as a marketing representative. A current list of Products is attached hereto as Attachment 1. The list is subject to revision in the sole discretion of Supplier.

“SLA” shall mean Supplier’s then current applicable software license agreement. A copy of Representative’s current SLA is attached hereto as Attachment 2.

“Territory” shall mean the country or region as set forth in Attachment 3.

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TERMS AND CONDITIONS

1. APPOINTMENT OF EXCLUSIVE REPRESENTATIVE; TERRITORY

Subject to the terms of this Agreement, Supplier hereby appoints and Representative hereby accepts appointment as an exclusive Representative of the Products and, where applicable, related support services within the Territory to the Customers.

2. RESPONSIBILITIES OF REPRESENTATIVE

RESPONSIBILITIES APPLY TO ALL ACTIVITIES: The responsibilities in this Section 2 shall apply to all of Representative’s activities with respect to the Products.

DEGREE OF CARE - Representative shall represent Supplier’s interests with the same degree of care with which it handles its own interests and use its best efforts to market and support the Products within the Territory.

PROMOTION - Representative shall promote the Products within the Territory to the best of its abilities, making suitable use of sales literature, catalogues and related materials as provided by Supplier. Notwithstanding the above, Representative shall not issue any press releases without the written prior authorization of Supplier.

EXPENSES - All expenses and costs incurred by Representative in connection with the marketing or support of the Products including local public relations, advertising and similar costs, shall be borne by Representative.

ADEQUATE FACILITIES - Representative shall maintain properly equipped, professional office space in the Territory to market and support the Products. Representative shall employ, qualified personnel in order to ensure an effective sales effort and the ability to fulfill Representative’s obligations under this Agreement.

TRAINING/DEMONSTRATION UNITS - At Supplier’s discretion, Representative will be provided demonstration Product(s) for no additional fee and Supplier shall retain title and ownership of such Products. Representative may use such demonstration Products solely for Representative’s employee Product support training and for Customer demonstrations. Furthermore, Representative agrees to maintain such systems in the Representative’s clean room environment (exceeding the requirements of Clean 100) and shall add Supplier as an additional named insured only to the extent of liability for loss or damage to demonstration Product(s).

NO REPRESENTATIONS - Representative will not make any promises, warranties or guarantees concerning the Products but rather will at all times refer Customers to the product documentation, specifications and marketing materials provided by Supplier.

ORDERS - Supplier shall have no obligation to enter into a contract with any Customer that does not agree to terms and conditions acceptable to Supplier.

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INTERNET ACCESS - Representative will maintain a high-speed internet connection at its own expense to facilitate communication with Customers and Supplier.

ACTIVITIES OUTSIDE TERRITORY - Representative agrees that it will not directly or indirectly advertise or market or otherwise actively solicit orders for Products from prospective customers located outside the Territory. No commissions will be paid on sales to customers located outside the Territory.

REPORTS - Representative shall use its best efforts to provide Supplier with regular reports of its marketing and promotion activities with respect to the Products. Such reports shall be submitted to Supplier at least quarterly and shall address, among other issues: a) current status of market and competition; b) business standing of major Customers including point of sales information by Product type; c) sales forecasts; d) effectiveness and results of promotional activities and attendance at trade fairs and exhibitions; and e) accounts update, (including sales objectives, strategic plan and tactical implementation).

PROVISION OF SUPPORT SERVICES - - Representative hereby agrees to provide Customers with technical support services as necessary for efficient initial installation and for First Line Support of the Products as more fully set out in Attachment 4.

NO CONFLICTING OBLIGATIONS – Representative represents and warrants to Supplier that Representative is free to enter into this Agreement and is not under any contractual or other obligation, whether written or otherwise, to any other Party that would be breached by or otherwise prevent Representative’s performance of its obligations under, or compliance with, any or all of the terms and conditions of this Agreement.

BUSINESS STANDARDS - As a representative of Supplier, Representative shall conduct its business to the highest ethical and business standards and shall not, by word or deed, imply or express any false, misleading or disparaging statements about Supplier or its Products. It is understood that any such actions shall be cause for immediate termination of this Agreement.

CUSTOMER CREDIT - When requested, Representative shall use all reasonable efforts to secure for Supplier information pertaining to the financial or credit responsibility of a Customer, and shall aid in the collection of accounts and in the adjustment of any claims that may arise for damages or defects in connection with Products sold in the Territory.

3. RESPONSIBILITIES OF SUPPLIER

MARKETING MATERIALS - Supplier shall provide Representative with a reasonable amount of literature required for the conduct of its business (sales literature, price lists, business terms, etc.) Translations of marketing materials will be made by Supplier on terms to be agreed, taking into account the effort required for translation and the likely benefits to be gained thereby.

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SPECIFICATIONS - Supplier shall provide Representative with specifications, price lists and similar information concerning the Products to assist Representative in fulfilling its obligations under this Agreement. Supplier may change such specifications at any time.

TRAINING – Supplier shall provide Representative with opportunities to attend training and qualification sessions held by Supplier. Representative shall be responsible for the cost of any travel and lodging. The cost of the training itself shall be borne by Supplier in those instances where Representative attends regularly scheduled courses, but shall otherwise be borne by Representative. Such training must be completed prior to the providing of any Support Services by Representative to Customers.

4. SALES BETWEEN SUPPLIER AND CUSTOMER

CUSTOMER SALES - Supplier will pay Representative a commission on the sale of Products to Customers in the Territory made pursuant to this Agreement. Such commission shall be payable on the Net Invoice Amount of a sale to the Customer provided that: (i) the Products are to be installed in the Territory; and (ii) the sales process or purchase decision was directly influenced by Representative and evidenced by the Customer executing an Acceptance Certificate (Attachment 6). Representative shall be paid commissions in accordance with the commission schedule in effect at the time of shipment of Products. A table of the current commission schedule is set forth in Attachment 1.

PRICE AND CUSTOMER PAYMENT TERMS – The Customer shall issue a purchase order The purchase order shall be issued directly to Supplier at Supplier’s then applicable list price, or at some negotiated price as determined by Supplier. Supplier will determine final price and method of payment.

PAYMENT OF COMMISSIONS: Supplier will pay commissions owed to Representative in two installments: 1) upon shipment to the Customer; and 2) upon receipt of a fully executed Final Acceptance Certificate (Attachment 6). Such installments will be proportional to the percentage of payment received by Suppler from the Customer. In any event, payment shall be made to Representative no later than [***] after [***] from a Customer. The commissions defined herein shall be Representative’s total and complete compensation in connection with a Customer purchase. Commissions shall not be paid on any taxes, packing, shipping, interest or other invoice charges other than the Net Invoice Amount for Products as established by Supplier. No Commission will be earned on orders for Product rejected or returned by Customers, or for delivery outside of the Territory. All payments shall be in U.S. Dollars. In the event the negotiated Customer price is below the Supplier’s target list price for the Territory, the commission will be adjusted as set forth in Attachment 1 .

TERMS AND CONDITIONS - All Customer purchases shall be subject to the terms and conditions stated herein, in Supplier’s then current Sales Order Acknowledgement form and in Supplier’s then current SLA. Shipping terms are Ex-Works, Fremont, California (IncoTerms 2001), Supplier’s manufacturing facility. Customer shall have the right to select the carrier of its choice and will be the principle party in interest.

     [***] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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5. TERM AND TERMINATION OF CONTRACT

TERM -This contract becomes effective as of the Effective Date and shall remain in force for an initial term of twenty-four (24) months. Unless otherwise terminated in accordance with this Section 5 with [***] notice by either Party at the end of the initial or any subsequent term, this agreement shall automatically renew on the second anniversary of the Effective Date and annually thereafter for successive [***] terms. This contract may also be cancelled: (i) by either Party if the other Party materially or repeatedly breaches its obligations, provided that the breaching Party is given written notice detailing the nature of such breach and such breach is not cured within thirty (30) days following such notice; (ii) by either Party, if the other Party is insolvent or is the subject of bankruptcy or similar proceedings.

COMMISSIONS AFTER TERMINATION - Commissions due on sales generated by Representative and evidenced by the Customer executed Acceptance Certificate (Attachment 5) prior to the effective termination date, or within [***] after notice of termination or non-renewal, shall be paid in accordance with Section 4 of this Agreement (PAYMENT OF COMMISSIONS) provided that termination is not for Representative’s breach. The final commission statement and payment to Representative shall be withheld for a period of [***] from the effective date of termination to offset commissions already paid on returned goods and credit memoranda. Any unused balance shall be paid to Representative at the end of the [***] period. Following the above stated [***] period, no commission shall be due and payable to Representative.

RETURN OF MATERIALS - Upon termination of this Agreement, Representative shall return to Supplier all material such as sales literature documents, pricelists, catalogues, etc. as well as any technical and service documentation provided to it by Supplier. Representative shall cease to use the name and trade marks of Supplier and discontinue any promotion of the Products upon termination of this contract.

NO LIABILITY FOR TERMINATION - Except as expressly provided above under the paragraph entitled “Commissions After Termination,” termination of this Agreement in accordance with its terms shall provide no legal basis for any claim to compensation. To the greatest extent possible, Representative waives any right to damages or to severance, termination or similar benefits that may be provided by local law in connection with the termination of this agreement. To the extent local law invalidates such waiver, Representative agrees that the amount of [***] paid by Supplier to Representative shall serve as complete and adequate compensation in connection with the termination of this agreement for any reason.

6. COMPETITIVE PRODUCTS – Representative represents that, as of the Effective Date, Representative does not market, distribute, sell or act as a sales or marketing representative for any products within the Territory that compete with any Product, and Representative agrees that during the Term of this Agreement, including any extension or renewal thereof, Representative shall not market, distribute, sell or act as a sales or marketing representative for any products

     [***] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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within the Territory that compete with any Product without the express prior written consent of Supplier.

7. LIMITATION OF LIABILITY

IN NO EVENT SHALL SUPPLIER BE LIABLE TO REPRESENTATIVE FOR ANY SPECIAL, INDIRECT, CONSEQUENTIAL, INCIDENTAL OR PUNITIVE DAMAGES IN CONNECTION WITH THIS AGREEMENT.

THE TOTAL LIABILITY OF EITHER SUPPLIER OR REPRESENTATIVE ARISING OUT OF, OR IN CONNECTION WITH, THIS AGREEMENT WHETHER BASED UPON WARRANTY, CONTRACT, TORT OR OTHERWISE, SHALL NOT EXCEED [***].

8. INDEMNITY

Subject to the Limitations in Section 7, Supplier and Representative (either a “Party”) each agrees to protect, defend, indemnify and hold the other harmless from and against any and all third party claims, liabilities, demands, penalties, forfeitures, suits, judgments and any associated costs and expenses (including reasonable attorney’s fees), which the indemnified Party may hereafter incur, become responsible for or pay out as a result of the other Party’s breach of any term or provision of this Agreement, or any negligent or willful acts, and any errors or omissions by its employees, officers, agents, representatives or sub-contractors.

9. ADDITIONAL RESPONSIBILITIES

COOPERATION WITH SUPPLIER’S SALES PERSONNEL: Representative will work in cooperation with Supplier’s Sales personnel responsible for the Territory and/or a specific Customer. Representative will regularly update the appropriate Supplier Sales Manager concerning its Customer visits, general status of the Customers, and any other issues related to the sale of Products.

USE OF TRADEMARKS: In connection with the marketing and advertising of the Products, Representative may use or make reference to trademarks, trade names and service marks owned by Supplier (the “Marks”) only as directed by Supplier. Representative shall be permitted to use its own trademarks, trade names and services marks (the “Representative Marks”); provided that Representative Marks shall not appear larger or more prominently on advertisements or promotions for the Products than the Marks. Representative shall not alter or remove the Marks from the Products. Representative’s use of the Marks hereunder shall be subject to such additional requirements as Supplier believes are appropriate to protect the Marks and Supplier’s’ ownership rights therein. Representative agrees that the use of the Marks on packages, literature, advertising and other marketing materials will be of high quality and that Supplier shall have the right to monitor and control such use. Representative will furnish Supplier with all materials on which Representative plans to use the Marks prior to such use, and Supplier will have the right to refuse any use of the Marks by Representative. Representative shall take all steps reasonably requested by Supplier to secure for Supplier any proprietary rights in connection with the Products or the Marks, and to cooperate with Supplier to protect and defend Supplier’ rights therein. Representative hereby does and shall at all times acknowledge Supplier’s exclusive right, title and interest in and to the Marks and

     [***] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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shall not in any manner represent that it has any ownership interest therein nor will it adopt or use any trademarks, trade names or service marks confusingly similar thereto. Representative shall not at any time do or permit any act to be done which may in any way impair the rights of Supplier in the Marks. Representative shall not use any of the Marks on or in connection with any goods or services other than the Products

INTERNET: Representative shall follow Supplier’s instructions with respect to each of the following: (i) use of any information about Supplier or the Products available on the Internet; (ii) linking of any site on the Internet to any site on the Internet established, operated or sponsored by Supplier; and (iii) use of any of the Marks on any site on the Internet. Representative acknowledges that it shall cease the activities described in (i), (ii) and/or (iii) above, if so instructed by Supplier. In no event shall Representative establish, operate, sponsor or contribute content to any site on the Internet that incorporates the word “Therma-Wave”, or any word confusingly similar thereto, as its URL address or any part of such address.

10. PROPRIETARY INFORMATION; NON-DISCLOSURE

Representative and Supplier will execute a Non Disclosure Agreement (NDA) in the form attached hereto as Attachment 5, the terms of which NDA shall be deemed incorporated herein by this reference.

11. GENERAL CLAUSES

ASSIGNMENT: Neither this Agreement nor any rights or obligations may be assigned or transferred by Representative without the express prior written consent of Supplier. This Agreement and any of Supplier’s rights and obligations hereunder may be assigned by Supplier, upon written notice to Representative.

NO POACHING CLAUSE: Supplier and Representative agree with each other that they will not at any time during the course of this Agreement or in the [***] following the termination of the Agreement whether for cause or otherwise, employ, directly or indirectly, any person who is a director or employee of the other Party without the prior written approval of said other Party. This provision shall not restrict the right of either party to solicit or recruit generally in the media, and shall not prohibit either party from hiring an employee of the other who answers any advertisement or who otherwise voluntarily applies for hire without having been initially personally solicited or recruited by the hiring party.

RELATIONSHIP OF PARTIES: Supplier and Representative agree that Representative shall operate as an independent contractor and is not an agent, employee or franchisee of Supplier. Representative has no express or implied authorization to incur any obligation, or in any manner otherwise make any commitments, on behalf of Supplier. Representative shall employ its own personnel and shall be responsible for them and for their acts and in no way shall Supplier be liable to Representative, its employees or third parties for any losses, injuries, damages or the like occasioned by reason of Representative’s activities in connection with this Agreement, except as expressly provided herein.

     [***] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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GOVERNING LAW: This Agreement shall be governed in accordance with the laws of the State of California; excluding: (i) its conflicts of laws principles; (ii) the United Nations Convention on Contracts for the International Sale of Goods; (iii) the 1974 Convention on the Limitation Period in the International Sale of Goods (the “1974 Convention”); and (iv) the Protocol amending the 1974 Convention, done at Vienna April 11, 1980. Representative undertakes to comply with all applicable US laws and regulations, including without limiting the generality of the foregoing, the Foreign Corrupt Practices Act, as amended.

GOVERNMENT APPROVALS: It is the responsibility of the Representative to obtain, at its own expense, any government consents, authorizations, approvals, filings, permits or licenses required for it or Supplier to exercise its rights and to discharge its obligations under this Agreement.

EXPORT CONTROLS: Representative hereby acknowledges that the Products and the technology applicable thereto or direct products thereof (“Products and Technology”), supplied by Supplier under this Agreement are subject to export controls under the laws and regulations of the United States (U.S.). Representative shall comply with such laws and regulations governing use, export, re-export, and transfer of Supplier Products and will obtain all required U.S. and local authorizations, permits or licenses. Supplier and Representative each agree to provide to the other such information and assistance as may reasonably be required by the other in connection with securing such authorizations or licenses, and to take timely action to obtain all required support documentation.

LOCAL LAWS: Representative shall comply with all local laws and regulations and will notify Supplier of any alleged violation of competition laws or regulations relating to Supplier or any infringement of Supplier’s intellectual property rights that come to its knowledge. Representative shall assist Supplier in terminating such infringement within the Territory.

NOTICES: All notices, requests, demands, and other communications under this Agreement shall be in writing and shall be delivered in person or sent for overnight delivery by a private, reputable international courier (such as FedEx, DHL, or UPS) with tracking capability. Notices sent by such courier shall be deemed received two business days after they have been sent unless the courier’s tracking capability demonstrates otherwise. Notices shall be sent to the addresses below:

If to Supplier: Therma-Wave, Inc. 1250 Reliance Way, Fremont, CA. 94539 USA

If to Representative:Hermes-Epitek Corporation No. 18, Creation Road, 1, Science Park, Hsin-Chu, 300, Taiwan, R.O.C.

ENTIRE AGREEMENT: This Agreement together with Attachments 1 through 6 constitutes the sole and entire agreement between the parties relating to the subject matter herein and supersedes any and all prior agreements and understandings between the parties relating to the subject matter hereof.

ORDER OF PRECEDENCE: In the event of a conflict or inconsistency between the terms and conditions of this Agreement and the provisions of the Supplier’s SLA or Sales Order Acknowledgment Form, the following order of precedence shall govern: (a) the terms of the Sales Order Acknowledgement Form as accepted by Supplier; (b) the terms of the relevant

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SLA; (c) the terms in the body of this Agreement; (d) the terms of any Attachment to this Agreement.

AMENDMENTS: No change in, addition to, or waiver of, any of the terms and provisions hereof shall be binding upon either Party unless approved by said Party in writing.

NO WAIVER: The failure by a Party to exercise or enforce any of the terms and conditions of this Agreement shall not constitute or be deemed a waiver of that Party’s rights thereafter to enforce each and every term and condition of this Agreement.

SEVERABILITY: Should any one or more of the provisions of this Agreement be held invalid, illegal or unenforceable, no other provision of this Agreement shall be affected thereby.

ARBITRATION: All disputes arising out of or relating to this Agreement shall be finally resolved by arbitration conducted in the English language in San Francisco, California, U.S.A. under the commercial arbitration rules of the American Arbitration Association. Each Party shall appoint an arbitrator and the two arbitrators so appointed shall jointly appoint a third arbitrator within 30 days; provided, however, that if they cannot agree (or if one Party refuses to appoint an arbitrator), then this third arbitrator shall be appointed by the President of the American Arbitration Association. Both parties shall bear equally the cost of the arbitration. All decisions of the arbitrator(s) shall be final and binding on both parties and enforceable in any court of competent jurisdiction. Notwithstanding this, application may be made to any court for a judicial acceptance of the award or order of enforcement. Notwithstanding anything contained in this Section to the contrary, Supplier shall have the right to institute judicial proceedings against Representative or anyone acting by, through or under Representative, in order to enforce Supplier’s rights hereunder through reformation of contract, specific performance, injunction or similar equitable relief.

COUNTERPARTS: This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

HEADINGS: Headings in this Agreement are for reference purposes only, and shall not be used to interpret or construe this Agreement.

LANGUAGE OF THE AGREEMENT – The Parties agree that the language of this Agreement shall be English and hereby waive and agree that this Agreement shall be valid and enforceable notwithstanding any requirement that it be written in or translated into any language other than English.

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IN WITNESS WHEREOF, each of the parties signed this Agreement on the date first set fourth above.

Therma-Wave, Inc.		Hermes-Epitek Corporation
By:	/s/ Boris Lipkin	By:	/s/ Chin-yung Shu
Name:	Boris Lipkin	Name:	Chin-yung Shu
Title:	President & CEO	Title:	President & COO
Date:	April 19, 2005	Date:	April 19, 2005

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Attachment 1
Supplier Product List

The following TWI products intended for use by semiconductor manufacturers and semiconductor equipment manufacturers:

Therma-Probe product line: models TP-500XP, TP-500iXP, TP-630XP, TP-XP upgrades and other Therma-Probe systems, which are added in the future.

Opti-Probe product line: models OP-3290, OP-3290i, OP-3290DUV, OP-3290DUVi, OP-52xx, OP-52xxi, OP-7341c, OP-7341i, OP-7341p, XP versions of those products and XP Upgrades and other Opti-Probe systems and models and features such as desorber, WBWS, which are added in the future.

Opti-Probe Critical Dimension product line: on models OP-7341c, OP-7341i, OP-7341p and CD upgrades.

**Commission Schedule

[***]

     [***] Confidential treatment has been requested for the bracketed portions. The confidential redacted portion has been omitted and filed separately with the Securities and Exchange Commission.

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Attachment 2
Supplier Software License Agreement
THERMA-WAVE, INC.

OPTI-PROBE RT/CD SOFTWARE LICENSE AGREEMENT

THIS SOFTWARE LICENSE AGREEMENT (“Agreement”) is made and entered into as of this 19th day of April, 2005 (“Effective Date”) by and between Therma-Wave, Inc., a Delaware corporation with its principal place of business at 1250 Reliance Way, Fremont, California 94539 USA (“Therma-Wave”), and and Hermes-Epitek Corporation, a corporation of the Republic of China with its principle place of business at No. 18, Creation Road 1, Science Park Hsin-Chu, 300 Taiwan, R.O.C. (“Licensee”).

RECITALS

          WHEREAS, Licensee has purchased from Therma-Wave the Therma-Wave Equipment; and

          WHEREAS, Licensee desires to acquire from Therma-Wave, and Therma-Wave is willing to grant to Licensee, the right to use the Licensed Software (as defined below) in connection with such Equipment on the terms set forth herein.

          NOW, THEREFORE, in consideration of, and conditioned on, the covenants stated herein, and for other good and valuable consideration, the receipt and sufficiency of which Therma-Wave and Licensee hereby acknowledge, Therma-Wave and Licensee hereby agree as follows:
AGREEMENT

Definitions. As used in this Agreement, the following capitalized terms will have the following meanings:

“Authorized Location” means any of Licensee’s facilities at which the Therma-Wave Equipment is located.

“Confidential Information” means all non-public information that Therma-Wave designates at the time of disclosure as being confidential, or if disclosed orally or visually is identified as such prior to disclosure and summarized, in writing, by Therma-Wave to Licensee within thirty (30) days, or which, under the circumstances surrounding disclosure, Licensee knows or has reason to know should be treated as confidential without the need to be marked as “confidential”, including, without limitation, the terms and conditions of this Agreement, the Licensed Software and the Documentation.

“Documentation” means any and all user manuals and documentation of the Licensed Software in hard copy and electronic format, including without limitation, training manuals, as amended from time to time by Therma-Wave.

“Intellectual Property Rights” means copyright rights (including, without limitation, the right to use, reproduce, modify, distribute, publicly display and publicly perform the copyrighted work), patent rights (including, without limitation, the right to exclude others from making, using and selling), trade secrets, moral rights, rights of publicity, authors’ rights, contract and licensing rights, goodwill and all other intellectual property rights as may exist now and/or hereafter come into existence and all renewals and extensions thereof, regardless of whether such rights arise under the laws of the United States or any other state, country or jurisdiction.

“Licensed Software” means Therma-Wave’s proprietary real-time optical critical dimension software embedded in and/or bundled with the Therma-Wave Equipment.

“Therma-Wave Equipment” means the Therma-Wave equipment purchased by Licensee.

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License Grants.

Software License Grant. Subject to the terms and conditions of this Agreement, Therma-Wave hereby grants to Licensee a royalty-free, personal, nonexclusive and nontransferable license under Therma-Wave’s Intellectual Property Rights in the Licensed Software to use the object code version of the Licensed Software solely as embedded in and/or bundled with the Therma-Wave Equipment and solely as installed at an Authorized Location for Licensee’s internal business purposes.

Documentation, License Grant. Subject to the terms and conditions of this Agreement, Therma-Wave hereby grants to Licensee a personal, non-exclusive and non-transferable license to use the Documentation solely internally in connection with Licensee’s authorized use of the Licensed Software. Internal use shall be deemed to include repair and or service of the Therma-Wave Equipment by an authorized representative of Therma-Wave, Inc.

License Restrictions. Licensee agrees not to attempt to modify, reverse assemble, create derivative versions of, copy, reproduce, reverse engineer, reverse compile, translate or otherwise attempt to discover or disclose the source code of the Licensed Software or the Documentation, or any complete or partial copy thereof. Licensee may not rent, lease, grant sublicenses or otherwise transfer the Licensed Software and/or the Documentation or any other rights therein, without Therma-Wave’s prior written consent. Licensee shall not remove any proprietary notices, labels or marks which may be incorporated in, marked on or affixed to the Licensed Software and/or the Documentation. In no event shall Licensee market or distribute the Licensed Software as a stand alone Product.

Delivery and Acceptance.

Delivery. Concurrently with or promptly following delivery of the Therma-Wave Equipment to Licensee, Therma-Wave shall deliver to Licensee the object code version of the Licensed Software, as embedded in and/or bundled with such Therma-Wave Equipment, and one copy of the Documentation.

Ownership. The Licensed Software and the Documentation are licensed, not sold, to Licensee under this Agreement. As between Therma-Wave and Licensee, Therma-Wave shall retain all right, title and interest in and to the Licensed Software and the Documentation, and all Intellectual Property Rights therein, except as expressly licensed to Licensee in this Agreement.

Confidentiality.

Confidentiality Obligations. Licensee shall, at all times, both during the term of this Agreement and at all times thereafter, keep in confidence and trust all of the Confidential Information received by it. Licensee shall not use the Confidential Information other than as necessary to perform its obligations or exercise its rights under this Agreement. Licensee shall take all reasonable steps to prevent unauthorized disclosure or use of the Confidential Information and to prevent it from falling into the public domain or into the possession of unauthorized persons. Licensee shall not disclose the Confidential Information to any person or entity other than its officers, employees and consultants who need access to such Confidential Information in order to effect the intent of this Agreement and who have entered into written confidentiality agreements with Licensee which protects the Confidential Information with terms and conditions at least as protective of Therma-Wave as the terms and conditions of this Agreement.

Exceptions. The obligations set forth above shall not apply to the extent that Confidential Information includes information which: (i) is or, through no act or failure to act of Licensee, becomes publicly known; or (ii) is approved for release by prior written authorization of

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Therma-Wave. A disclosure of Confidential Information: (i) in response to a valid order by a court or other governmental body; or (ii) as otherwise required by law, shall not be considered to be a breach of this Agreement or a waiver of confidentiality for other purposes; provided, however, that Licensee shall provide prompt written notice thereof to Therma-Wave to enable Therma-Wave to seek a protective order or otherwise prevent such disclosure.

Warranty and Disclaimer.

Limited Warranty. Therma-Wave warrants that the Licensed Software will substantially conform to the Documentation during the twelve (12) month period following the date of shipment (“Warranty Period”). Therma-Wave’s sole and exclusive obligation under this warranty shall be, at Therma-Wave’s option, to: (i) use commercially reasonable efforts to supply Licensee with a workaround for such error; or (ii) use commercially reasonable efforts to correct such error and integrate such correction into Therma-Wave’s next generally available release of the Licensed Software. To be covered by this limited warranty, such errors must be: (i) reported by Licensee during the Warranty Period; and (ii) reproducible by Therma-Wave. Therma-Wave does not warrant that: (1) operation of the Licensed Software shall be uninterrupted or error-free; or (2) the functions contained in the Licensed Software shall meet Licensee’s requirements. Therma-Wave shall not be obligated hereunder to provide any upgrades, updates or new versions of the Licensed Software except as expressly set forth in above or this Section.

Warranty Exceptions. The warranty set forth above shall not apply to any defects or problems caused in whole or in part by: (i) any defect in any portion of any Licensee or third party hardware or equipment; (ii) the failure of any portion of any Licensee or third party hardware or equipment to function in accordance with applicable manufacturer’s specifications; (iii) any modification or enhancement made to the Licensed Software by Licensee or any third person or entity other than Therma-Wave; (iv) any software program, hardware (other than the Therma-Wave Equipment), firmware, peripheral or communications device used in connection with the Licensed Software; (v) the failure of Licensee or any third person or entity to follow the most current instructions provided by Therma-Wave from time to time with respect to proper use of the Licensed Software; or (vi) the negligence of Licensee or any other third party or entity. If Therma-Wave determines that any warranty claim reported by Licensee falls within any of the foregoing exceptions, Licensee shall pay Therma-Wave for efforts expended at the hourly rates then in effect.

Disclaimer. EXCEPT AT EXPRESSLY SET FORTH IN THIS AGREEMENT, THERMA-WAVE HEREBY DISCLAIMS AND EXCLUDES ALL WARRANTIES TO LICENSEE, EITHER STATUTORY, EXPRESS OR IMPLIED, INCLUDING THE IMPLIED WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT OF THIRD PARTY RIGHTS AND FITNESS FOR A PARTICULAR PURPOSE.

Therma-Wave Indemnification.

Indemnification. Subject to the terms and conditions of this Agreement, Therma-Wave shall indemnify, defend and hold harmless Licensee against any third party claim alleging that the Licensed Software infringes any U.S. patent issued as of the Effective Date. Therma-Wave’s obligations are contingent upon: (i) Licensee giving prompt written notice to Therma-Wave of any such claim; (ii) Licensee allowing Therma-Wave to control the defense and related settlement negotiations of such claim; and (iii) Licensee fully assisting, at Therma-Wave’s expense, in the defense and settlement of such claim. To fulfill its obligations hereunder, Therma-Wave may alternatively, at its option: (i) replace or modify the Licensed Software with software which is functionally equivalent and non-infringing; (ii) obtain a license for Licensee to continue the use and distribution of the Licensed Software; or (iii) accept the return of the

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Licensed Software held by Licensee and return the fee paid by Licensee for the Licensed Software. THE FOREGOING REMEDIES ARE LICENSEE’S SOLE AND EXCLUSIVE REMEDIES FOR ANY CLAIMS OF INFRINGEMENT OF THIRD PARTY RIGHTS BY LICENSEE’S USE OF THE LICENSED SOFTWARE.

Limitations. Therma-Wave shall have no obligation for any claims which result from: (i) Licensee’s use of the Licensed Software in a combination which violates the rights of third parties or in a combination with materials or products not supplied by Therma-Wave; or (ii) the modification or attempted modification of the Licensed Software by parties other than Therma-Wave or the use or distribution of such modified Licensed Software.

Limitation of Liability.

Indirect and Consequential Damages. NEITHER PARTY SHALL HAVE ANY LIABILITY TO THE OTHER OR TO ANY OTHER THIRD PARTY FOR ANY LOST PROFITS, LOST DATA, LOSS OF USE OR COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING IN ANY WAY OUT OF THIS AGREEMENT OR THE USE OF THE LICENSED SOFTWARE, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY, AND IRRESPECTIVE OF WHETHER SUCH PARTY HAD ADVANCE NOTICE OF THE POSSIBILITY OF SUCH DAMAGES.

Direct Damages. IN NO EVENT WILL EITHER PARTY’S TOTAL LIABILITY FOR ANY CLAIMS OR CAUSES OF ACTION ARISING OUT OF THIS AGREEMENT OR THE USE OF THE LICENSED SOFTWARE, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY, EXCEED FIFTY THOUSAND US DOLLARS ($50,000 US).

Failure of Essential Purpose. THE LIMITATIONS SET FORTH ABOVE SHALL APPLY NOTWITHSTANDING THE FAILURE OF THE ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.

Assignability. This Agreement and the rights to use the Licensed Software granted hereby are not assignable or transferable, in whole or in part, by Licensee, whether voluntarily, involuntarily, by merger, operation of law or otherwise, without Therma-Wave’s prior written consent. The parties agree that any permitted assignment shall be subject to Licensee and the third party assignee executing a written agreement obligating such third party assignee to assume all rights and obligations of Licensee under this Agreement.

Term and Termination.

Term. Unless terminated was expressly providedherein, this Agreement shall be in effect for the term of Therma-Wave’s copyright in the Licensed Software, so long as Licensee, or one of its divisions, rightfully retains possession of the Licensed Software as delivered by Therma-Wave.

Termination for Breach. Therma-Wave shall be entitled to terminate this Agreement if Licensee materially breaches any of the provisions of this Agreement and (in the case of any material breach which is capable of remedy) fails to remedy the breach within thirty (30) days of receipt of written notice requiring Licensee to do so. Notwithstanding the foregoing, Therma-Wave shall be entitled to terminate this Agreement immediately upon providing written notice to Licensee if Licensee has materially breached any provision of this Agreement.

Effects of Termination. Upon any termination of this Agreement: (i) Licensee shall immediately cease the use of all of the Licensed Software and the Documentation; and (ii) Licensee shall return or destroy all copies of the Confidential Information in its possession

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and/or control within thirty (30) days after the effective date of such termination and certify in writing that it has complied with its obligations hereunder.

Survival. Licensee’s obligations hereunder shall survive any termination of this Agreement. Under no circumstances shall Therma-Wave be obligated to return any License Fees to Licensee upon termination of this Agreement.

Governing Law; Choice of Venue. This Agreement shall be governed by, and construed in accordance with the laws of the State of California, excluding its conflict of laws provisions. This Agreement is deemed made and entered into in Fremont, California. The parties hereby submit to the exclusive jurisdiction of the federal and state courts located in Alameda County, California.

Export Compliance. Licensee agrees to comply with all import, export and re-export laws, restrictions and regulations imposed by any country with respect to the Licensed Software.

General.

Independent Contractors. Each of the parties shall at all times during the term of this Agreement act as, and shall represent itself to be, an independent contractor, and not an agent or employee of the other.

Amendments. Amendments or revisions to this Agreement must be in writing, signed by both Therma-Wave’s and Licensee’s duly authorized representatives, traced by revision numbers and attached to this original Agreement. The master copy of this Agreement and any revisions shall be maintained by Therma-Wave.

No Waiver. A waiver of any default hereunder or of any of the terms and conditions of this Agreement shall not be deemed to be a continuing waiver or a waiver of any other default or of any other term or condition, but shall apply solely to the instance to which such waiver is directed. The exercise of any right or remedy provided in this Agreement shall be without prejudice to the right to exercise any other right or remedy provided by law or in equity, except as expressly limited by this Agreement.

Captions. Captions in this Agreement are for the convenience of the parties only and shall not affect the interpretation or construction of this Agreement.

Severability. In the event any provision of this Agreement is held to be invalid or unenforceable, such provision shall be severed from the remainder of this Agreement, and such remainder will remain in force and effect.

Notices. Any notice provided for or permitted under this Agreement will be in writing and will be treated as having been given: (i) when delivered personally; (ii) when sent by confirmed facsimile or telecopy; (iii) one (1) business day after being sent by nationally recognized overnight courier with written verification of receipt; or (iv) three (3) business days after being mailed postage prepaid, by certified or registered mail, return receipt requested, to the party to be notified, at the address first set forth above, or at such other place of which the other party has been notified.

Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but both of which together shall constitute one and the same instrument. The parties agree that facsimile signatures of the parties shall be binding.

Entire Agreement. This Agreement constitutes the entire agreement between the parties relating to this subject matter and supersedes all prior and/or simultaneous representations, discussions, negotiations and agreements, whether written or oral.

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IN WITNESS WHEREOF, the duly authorized representatives of the parties have executed this Agreement.

“Therma-Wave”: Therma-Wave, Inc.		“Licensee”: Hermes-Epitek, Corporation
By:	/s/ Boris Lipkin	By:	/s/ Chin-yung Shu
Name:	Boris Lipkin	Name:	Chin-yung Shu
Title:	President & CEO	Title:	President & COO
Date:	April 19, 2005	Date:	April 19, 2005

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Attachment 3
Territory

The Territory shall consist of: China, Taiwan, Malaysia, and Singapore.

For the avoidance of doubt, the following are specifically excluded: Korea and Japan.

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Attachment 4
Representative First Line Support for Products

Customer site Audits

Shipment coordination (Representative’s orders for Demonstration and Training purposes)

Installation Services at Customer sites

Products start-up at Customer sites

Qualification testing, sign-off, and Customer acceptance certifications

Warranty Support Services

Post Warranty Support Services

Depot part supply with minimum safety stock (amount to be mutually agreed upon between Representative and Supplier)

Logistical support for depot supply

The above services shall be performed by Representative in accordance with all applicable sales, service and support contracts with the Customer and in accordance with TWI’s standard practices.

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Attachment 5
Non-Disclosure Agreement

• 1250 Reliance Way • Fremont California 94539 • Phone (510) 490-3663 • Fax (510) 656-3852

Mutual Non-Disclosure/Confidentiality Agreement

This Agreement is entered into as of April 19, 2005 (Effective Date) by and between THERMA-WAVE (the “Company”) and Hermes-Epitek, Corporation (the “Representative”).

     1 Purpose

The above named Representative has access, either directly or indirectly to material that the Company considers confidential and/or proprietary to its continued operation and future success. This Agreement defines the terms and conditions the Representative agrees to be bound by prior to receiving this information.

     2 Definitions

A)

“Confidential Information” means any information, technical data, or know-how including, but not limited to information regarding the Company’s research, products, software, services, development, inventions, processes, results, designs, drawings, engineering, marketing, finances customers, Representatives, suppliers or personnel. This information may be disclosed by the Company to the Representative either directly or indirectly in writing (including drawings and specifications), orally, electronically, or inspections of the Company’s products and facilities. Any information that can be proved to be in the Representative’s possession or in the public domain prior to disclosure by the Company is not included in this Agreement.

B)

“Materials” means any item that can be used to convey or communicate Confidential Information, including, but not limited to documents, data, programs, drawings, sketches, designs, notes, software, firmware, samples, work or assembly instructions, tooling, models and electronic files.

     3 Non-Use of Confidential Information

A)	Representative will not use Confidential Information or allow it to be used by anyone under any circumstances to modify, design, manufacture or market any product.
B)	Representative agrees to neither use nor circulate Confidential Information within its organization except as required for product or business development relating to a specific request made by the Company.

     4 Non-Disclosure of Confidential Information

A)   Representative will not allow Confidential Information to be published, copied or disclosed in any manner to any third party without prior written authorization from the Company. Such written authorization must include the specific Information to be disclosed, to whom it is to be disclosed and the purpose for which the Information is to be used. The Company reserves the right to execute a Non-Disclosure/Confidentiality Agreement with the third party prior to disclosure.

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B)	Representative will not disclose any Confidential Information to any of its employees who do not have a valid need to know the Information. Any employee who receives Confidential Information under this Agreement must be contractually bound by the Representative to keep such Information Confidential.
C)	Representative will notify the Company immediately in writing of any suspected or actual misappropriation or misuse by any person or entity of any Confidential Information.

     5 Termination

Representative’s obligations under this Agreement will terminate on a date 5 years after the latter of (i) disclosure of Confidential Information by the Company to the Representative, or (ii) the completion of any business arrangement, contract or agreement that involves the Confidential Information. One (1) year after the Effective Date of this NDA Agreement, Representative may procure competitive products for its business purposes. Such procurement will not be deemed a violation of this Agreement. Should any Confidential Information enter the public domain through no fault of Representative during the term of this Agreement, Representative will not be liable for any disclosure or use of such portion that occurs subsequent to the time such portion entered the public domain. Notwithstanding the foregoing, no license to use or disclose any trade secret, and no license to use any patent, copyright or trademark, is granted to Representative herein.

     6 Return of Materials

All Materials furnished to the Representative will remain the property of the Company. All such Materials and any copies made by the Representative must be returned to the Company promptly upon request. All Materials must be returned promptly in the event of the termination of the relationship between the Company and Representative. Prior written consent is necessary prior to the Representative either removing Materials from the Company’s premises, or reproducing any Material.

     7 Term

This Agreement will govern disclosures made by the Company to Representative during the period of 5 years after the date of this Agreement. Representative’s obligations under Paragraphs 3 and 4 will continue until terminated as outlined in Paragraph 5. If a contract between the Representative and the Company is in effect at the time this Agreement becomes effective, or a contract is entered any time this Agreement is in force, this Agreement shall be considered an addition to all such contracts. This Agreement takes precedence over any conflicting preprinted or standard form or condition set forth in the parties’ purchase orders, invoices, order acknowledgements and other business forms but will not take precedence over those actually negotiated and mutually agreed upon by the parties hereto.

     8 Remedies

Representative understands that, in the event Representative fails to comply with the terms of this Agreement, the Company may suffer irreparable harm, which may not be adequately compensated by monetary damages. Accordingly, Representative agrees that in the event of Representatives breach, or threatened breach of this Agreement, the Company shall be entitled to seek injunctive or other preliminary or equitable relief, in addition to such other remedies as may be available to the Company at law, in equity or otherwise without having to prove actual damage In the event of any action at law or in equity to enforce the provisions of this Agreement, the unsuccessful party shall pay to the other all costs and expenses incurred by the prevailing party in connection with such action, including, but not limited to, reasonable attorney’s fees and expenses.

     9 Publicity

Representative will not advertise or otherwise publish any account of contracts, orders, future business potential or any other aspect of the business relationship between the parties without prior written permission of the Company.

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     10 General

A)	This Agreement contains the entire understanding of the parties with respect to the subject matter hereof and supersedes all prior agreements relating thereto, written or oral, between the parties. This Agreement may be modified only by writings duly signed by authorized representatives of both parties.
B)	This Agreement shall be governed by and construed in accordance with the laws of the State of California.
C)	Failure to enforce any provision of this Agreement shall not constitute a waiver of any term hereof.
D)	By signing this Agreement, Seller’s representative states that he/she has been duly authorized by Seller to bind Seller to this Agreement.

Understood and Agreed:
THERMA-WAVE, INC.	HERMES-EPITEK CORPORATION
Boris Lipkin	Chin-yung Shu
Name (Print):	Name (Print):
/s/ Boris Lipkin	/s/ Chin-yung Shu
Signature	Signature
April 19, 2005	April 19, 2005
Date	Date

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Attachment 6
Final Acceptance Certificate

See Attached

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Customer/Fab/Module: Shipment Date:

P. O. Number: Serial Number: System Model:

Installation Completion:

This is to certify that the equipment meets installation completion criteria as per purchase specification.

Installation Completion Date:
	(Month/Day/Year)

Customer:
	Printed Name	Authorized Signature	Date Signed
Therma-Wave Representative
	Printed Name	Authorized Signature	Date Signed

Warranty Start:

This is to certify that the equipment meets warranty start criteria as per purchase specification.

Warranty Start Date:
	(Month/Day/Year)

Customer:
	Printed Name	Authorized Signature	Date Signed
Therma-Wave Representative
	Printed Name	Authorized Signature	Date Signed

Customer Final Acceptance:

This is to certify that the equipment meets the final acceptance criteria as per purchase specification. Final acceptance payments are defined in the purchase agreement.

Final Acceptance Date:
	(Month/Day/Year)

Customer:
	Printed Name	Authorized Signature	Date Signed
Therma-Wave Representative
	Printed Name	Authorized Signature	Date Signed

For Therma-Wave Use Only:

Sales Order Number: Site Code: Receipt Date:

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EX-10.12

Exhibit 10.12

THERMA-WAVE, INC.

FORM OF INDEMNIFICATION AGREEMENT

     THIS AGREEMENT is entered into, effective as of by and between Therma-Wave, Inc., a Delaware corporation (the “Company”), and (“Indemnitee”).

     WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available;

     WHEREAS, Indemnitee is a director and/or officer of the Company;

     WHEREAS, both the Company and Indemnitee recognize the increased risk of litigation and other claims currently being asserted against directors and officers of corporations;

     WHEREAS, the Certificate of Incorporation permits and Bylaws of the Company require or permit, as the case may be, the Company to indemnify and advance expenses to its directors and officers to the fullest extent permitted under Delaware law, and the Indemnitee has been serving and continues to serve as a director and/or officer of the Company in part in reliance on the Company’s Certificate of Incorporation and Bylaws; and

     WHEREAS, in recognition of Indemnitee’s need for (i) substantial protection against personal liability based on Indemnitee’s reliance on the aforesaid Certificate of Incorporation and Bylaws, (ii) specific contractual assurance that the protection promised by the Certificate of Incorporation and Bylaws will be available to Indemnitee (regardless of, among other things, any amendment to or revocation of the Certificate of Incorporation and Bylaws or any change in the composition of the Company’s Board of Directors or acquisition transaction relating to the Company), and (iii) an inducement to provide effective services to the Company as a director and/or officer, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted under Delaware law and as set forth in this Agreement, and, to the extent insurance is maintained, to provide for the continued coverage of Indemnitee under the Company’s directors’ and officers’ liability insurance policies.

     NOW, THEREFORE, in consideration of the above premises and of Indemnitee continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties agree as follows:

     1. Certain Definitions:

          (a) Board: the Board of Directors of the Company.

          (b) Affiliate: any corporation or other person or entity that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

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          (c) Change in Control: shall be deemed to have occurred if (i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company’s then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other entity, other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 80% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company’s assets.

          (d) Expenses: any expense, liability, or loss, including attorneys’ fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, any federal, state, local, or foreign taxes imposed as a result of the actual or deemed receipt of any payments under this Agreement, and all other costs and obligations, paid or incurred in connection with investigating, defending, being a witness in, participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding relating to any Indemnifiable Event.

          (e) Indemnifiable Event: any event or occurrence that takes place either prior to or after the execution of this Agreement, related to the fact that Indemnitee is or was a director or officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by Indemnitee in any such capacity, whether or not the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent of the Company, as described above.

          (f) Independent Counsel: the person or body appointed in connection with Section 3.

          (g) Proceeding: any threatened, pending, or completed action, suit, or

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proceeding or any alternative dispute resolution mechanism (including an action by or in the right of the Company), or any inquiry, hearing, or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other.

          (h) Reviewing Party: the person or body appointed in accordance with Section 3.

          (i) Voting Securities: any securities of the Company that vote generally in the election of directors.

     2. Agreement to Indemnify.

          (a) General Agreement. In the event Indemnitee was, is, or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were permitted prior thereto). The parties hereto intend that this Agreement shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Company’s Certificate of Incorporation, its Bylaws, vote of its stockholders or disinterested directors, or applicable law.

          (b) Initiation of Proceeding. Notwithstanding anything in this Agreement to the contrary, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding; (ii) the Proceeding is one to enforce indemnification rights under Section 5; or (iii) the Proceeding is instituted after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) and Independent Counsel has approved its initiation.

          (c) Expense Advances. If so requested by Indemnitee, the Company shall advance (within ten business days of such request) any and all Expenses incurred by Indemnitee (an “Expense Advance”). The Indemnitee shall qualify for such Expense Advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that the Indemnitee undertakes to repay such Expense Advances if and to the extent that it is ultimately determined by a court of competent jurisdiction in a final judgment, not subject to appeal, that Indemnitee is not entitled to be indemnified by the Company. Until it is so finally determined by the court that Indemnitee is not entitled indemnification, Indemnitee shall not be required to repay such Expense Advances to the Company and Indemnitee shall continue to receive Expense Advances pursuant to this section 2(c). Indemnitee’s obligation to reimburse the Company

3

for Expense Advances shall be unsecured and no interest shall be charged thereon. To the extent permissible under third party policies, the Company agrees that invoices for Expense Advances shall be billed in the name of and be payable directly by the Company.

          (d) Mandatory Indemnification. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise in defense of any Proceeding relating in whole or in part to an Indemnifiable Event or in defense of any issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith.

          (e) Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. Attorneys’ fees and expenses shall not be prorated but shall be deemed to apply to the portion of indemnification to which Indemnitee is entitled.

          (f) Prohibited Indemnification. No indemnification pursuant to this Agreement shall be paid by the Company on account of any Proceeding in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Exchange Act, or similar provisions of any federal, state, or local laws; provided, however, that notwithstanding any limitation set forth in this Section 2(f) regarding the Company’s obligation to provide indemnification, Indemnitee shall be entitled under Section 2(c) to receive Expense Advances hereunder with respect to any such Proceeding unless and until a court having jurisdiction over the Proceeding shall have made a final judicial determination (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee has violated said statute.

     3. Reviewing Party. Prior to any Change in Control, the Reviewing Party shall be any appropriate person or body consisting of a member or members of the Board or any other person or body appointed by the Board who is not a party to the particular Proceeding with respect to which Indemnitee is seeking indemnification. With respect to all matters arising after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) concerning the rights of Indemnitee to indemnity payments under this Agreement or any other agreement or under applicable law or the Company’s Certificate of Incorporation or Bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, the Reviewing Party, if desired by Indemnitee, shall be Independent Counsel selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld), and who has not otherwise performed services for the Company or the Indemnitee (other than in connection with indemnification matters) within the last three years. The Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s rights under this Agreement. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee should be

4

permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Counsel and to indemnify fully such counsel against any and all expenses (including attorneys’ fees), claims, liabilities, loss, and damages arising out of or relating to this Agreement or the engagement of Independent Counsel pursuant hereto.

     4. Indemnification Process and Appeal.

          (a) Indemnification Payment. Indemnitee shall be entitled to indemnification of Expenses, and shall receive payment thereof, from the Company in accordance with this Agreement as soon as practicable after Indemnitee has made written demand on the Company for indemnification, unless the Reviewing Party has given a written opinion to the Company that Indemnitee is not entitled to indemnification under Section 145 of the Delaware General Corporation Law.

          (b) Suit to Enforce Rights. Regardless of any action by the Reviewing Party, if Indemnitee has not received full indemnification within thirty days after making a demand in accordance with Section 4(a), Indemnitee shall have the right to enforce its indemnification rights under this Agreement by commencing litigation in the Court of Chancery of the State of Delaware seeking an initial determination by the court or challenging any determination by the Reviewing Party or any aspect thereof. The Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party not challenged by the Indemnitee shall be binding on the Company and Indemnitee. The remedy provided for in this Section 4 shall be in addition to any other remedies available to Indemnitee at law or in equity.

          (c) Defense to Indemnification, Burden of Proof, and Presumptions. It shall be a defense to any action brought by Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for Expenses incurred in defending a Proceeding in advance of its final disposition) that it is not permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proving such a defense or determination shall be on the Company to establish by clear and convincing evidence that Indemnitee is not so entitled to indemnification. It is the parties’ intention that if Indemnitee commences legal proceedings to secure a judicial determination that Indemnitee should be indemnified under this Agreement or applicable law, the question of Indemnitee’s right to indemnification shall be for the court to decide, and neither the failure of the Reviewing Party or the Company (including its Board, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action by Indemnitee that indemnification of the claimant is proper under the circumstances because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or Company (including its Board, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval), conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has

5

determined that indemnification is not permitted by applicable law.

     5. Indemnification for Expenses Incurred in Enforcing Rights. The Company shall indemnify Indemnitee against any and all Expenses that are incurred by Indemnitee in connection with any action brought by Indemnitee for

          (a) indemnification or advance payment of Expenses by the Company under this Agreement or any other agreement or under applicable law or the Company’s Certificate of Incorporation or Bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, and/or

          (b) recovery under directors’ and officers’ liability insurance policies maintained by the Company, but only in the event that Indemnitee ultimately is determined to be entitled to such indemnification or insurance recovery, as the case may be.

          (c) In addition, the Company shall, if so requested by Indemnitee, advance the foregoing Expenses to Indemnitee, subject to and in accordance with Section 2(c).

     6. Notification and Defense of Proceeding.

          (a) Notice. Promptly after receipt by Indemnitee of notice of the commencement of any Proceeding, Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof; but the omission so to notify the Company will not relieve the Company from any liability that it may have to Indemnitee, except as provided in Section 6(c).

          (b) Defense. With respect to any Proceeding as to which Indemnitee notifies the Company of the commencement thereof, the Company will be entitled to participate in the Proceeding at its own expense and except as otherwise provided below, to the extent the Company so wishes, it may assume the defense thereof with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense of any Proceeding, the Company shall not be liable to Indemnitee under this Agreement or otherwise for any Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation, transition costs associated with the Company’s assumption of the defense, or as otherwise provided below. Indemnitee shall have the right to employ legal counsel in such Proceeding, but all Expenses related thereto incurred after notice from the Company of its assumption of the defense shall be at Indemnitee’s expense unless: (i) the employment of legal counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the defense of the Proceeding, (iii) after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control), the employment of counsel by Indemnitee has been approved by the Independent Counsel, or (iv) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which cases all Expenses of the Proceeding shall be borne by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the determination provided for in (ii), (iii)

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and (iv) above.

          (c) Settlement of Claims. The Company shall not be liable to indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without the Company’s written consent, such consent not to be unreasonably withheld; provided, however, that if a Change in Control has occurred (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control), the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. The Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee’s written consent. The Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action; the Company’s liability hereunder shall not be excused if participation in the Proceeding by the Company was barred by this Agreement.

     7. Establishment of Trust. In the event of a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) the Company shall, upon written request by Indemnitee, create a Trust for the benefit of the Indemnitee and from time to time upon written request of Indemnitee shall fund the Trust in an amount sufficient to satisfy any and all Expenses reasonably anticipated at the time of each such request to be incurred in connection with investigating, preparing for, participating in, and/or defending any Proceeding relating to an Indemnifiable Event. The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by the Independent Counsel. The terms of the Trust shall provide that (i) the Trust shall not be revoked or the principal thereof invaded without the written consent of the Indemnitee, (ii) the Trustee shall advance, within ten business days of a request by the Indemnitee, any and all Expenses to the Indemnitee (and the Indemnitee hereby agrees to reimburse the Trust under the same circumstances for which the Indemnitee would be required to reimburse the Company under Section 2(c) of this Agreement), (iii) the Trust shall continue to be funded by the Company in accordance with the funding obligation set forth above, (iv) the Trustee shall promptly pay to the Indemnitee all amounts for which the Indemnitee shall be entitled to indemnification pursuant to this Agreement or otherwise, and (v) all unexpended funds in the Trust shall revert to the Company upon a final determination by the Independent Counsel or a court of competent jurisdiction, as the case may be, that the Indemnitee has been fully indemnified under the terms of this Agreement. The Trustee shall be chosen by the Indemnitee. Nothing in this Section 7 shall relieve the Company of any of its obligations under this Agreement. All income earned on the assets held in the Trust shall be reported as income by the Company for federal, state, local, and foreign tax purposes. The Company shall pay all costs of establishing and maintaining the Trust and shall indemnify the Trustee against any and all expenses (including attorneys’ fees), claims, liabilities, loss, and damages arising out of or relating to this Agreement or the establishment and maintenance of the Trust.

     8. Non-Exclusivity. The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company’s Certificate of Incorporation, Bylaws, applicable law, or otherwise; provided, however, that this Agreement shall supersede any prior indemnification agreement between the Company and the Indemnitee. To the extent that a

7

change in applicable law (whether by statute or judicial decision) permits greater indemnification than would be afforded currently under the Company’s Certificate of Incorporation, Bylaws, applicable law, or this Agreement, it is the intent of the parties that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change without any further action by the Parties.

     9. Liability Insurance. To the extent the Company maintains an insurance policy or policies providing general and/or directors’ and officers’ liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer.

     10. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or on behalf of the Company or any Affiliate of the Company against Indemnitee, Indemnitee’s spouse, heirs, executors, or personal or legal representatives after the expiration of two years from the date of accrual of such cause of action, or such longer period as may be required by state law under the circumstances. Any claim or cause of action of the Company or its Affiliate shall be extinguished and deemed released unless asserted by the timely filing and notice of a legal action within such period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, the shorter period shall govern.

     11. Amendment of this Agreement. No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall be binding unless in the form of a writing signed by the party against whom enforcement of the waiver is sought, and no such waiver shall operate as a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof.

     12. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights.

     13. No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, Bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder.

     14. Binding Effect. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation, or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by

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written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity pertaining to an Indemnifiable Event even though he may have ceased to serve in such capacity at the time of any Proceeding.

     15. Severability. If any provision (or portion thereof) of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void, or otherwise unenforceable, that is not itself invalid, void, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, void, or unenforceable.

     16. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such State without giving effect to its principles of conflicts of laws.

     17. Notices. All notices, demands, and other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand, against receipt, or mailed, postage prepaid, certified or registered mail, return receipt requested, and addressed to the Company at:

Therma-Wave, Inc.
1250 Reliance Way
Fremont, CA 94539
Attention: Chief Executive Officer

and to Indemnitee at:

[insert address of Indemnitee]

Notice of change of address shall be effective only when given in accordance with this Section. All notices complying with this Section shall be deemed to have been received on the date of hand delivery or on the third business day after mailing.

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     18. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

     IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Agreement as of the day specified above.

THERMA-WAVE, INC.,
a Delaware corporation
By:
	Boris Lipkin, President and Chief Executive Officer
INDEMNITEE
[Name of Indemnitee]

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EX-10.21

Exhibit 10.21

Amendment No. 4 to the 2000 Employee Stock Purchase Plan

       It is proposed that Section 13(a) of the 2000 Employee Stock Purchase Plan shall be restated in its entirety as follows:

13. STOCK

(a) Subject to adjustment as provided in Section 19, the maximum number of Shares which shall be made available for sale under the Plan shall be 2,500,000 Shares or such lesser number of Shares as is determined by the Board. If the Board determines that, on a given Purchase Date, the number of shares with respect to which options are to be exercised may exceed (i) the number of shares of Common Stock that were available for sale under the Plan on the Offering Date of the applicable Offering Period, or (ii) the number of shares available for sale under the Plan on such Purchase Date, the Board may in its sole discretion provide (x) that the company shall make a pro rata allocation of the Shares of Common Stock available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and continue all Offering Periods then in effect, or (y) that the company shall make a pro rata allocation of the shares available for purchase on such Offering Date or Purchase Date, as applicable, in as uniform a manner as shall be practicable and as it shall determine in its sole discretion to be equitable among all participants exercising options to purchase Common Stock on such Purchase Date, and terminate any or all Offering Periods then in effect pursuant to Section 20 below. The company may make pro rata allocation of the Shares available on the Offering Date of any applicable Offering Period pursuant to the preceding sentence, notwithstanding any authorization of additional Shares for issuance under the Plan by the company’s stockholders subsequent to such Offering Date.

       Capitalized terms not defined herein have the meaning set forth in the 2000 Employee Stock Purchase Plan.

       To record the due adoption of the foregoing amendment, Therma-Wave, Inc. has caused the execution hereof by its duly authorized officer.

Therma-Wave, Inc.

/s/ L. Ray Christie
By: L. Ray Christie
Title: Senior Vice President, Chief Financial Officer and Secretary

EX-10.36

Exhibit 10.36

COMPENSATION FOR OUTSIDE BOARD MEMBERS
(As approved by the Compensation Committee & Board 3/25/04)

Proposed

			Attend in		Attend by
	Now		Person		Phone
Annual Retainer (Base)	$	15,000	$	15,000
Committee Chairman (extra)				2,500
Committee Secretary (extra)				2,500
Regular Meeting Fee	$	1,000		2,500	$	1,500
Spec. Committee or Board mtg
(if separate from regular BOD mtg)				1,500		500

Options Granted Upon Joining BOD	20,000
Option Grants yearly thereafter	10,000

Total likely Board Compensation (calculated)

	Min		Max
Base Retainer	$	15,000	$	15,000
Committee Chairman or Secretary (extra)		0		2,500
Meeting fees (4 to 6 x $2,500)		10,000		15,000
Committee meetings (1 to 4 x $1,500)		1,500		6,000
Special BOD or Committee Meetings (2)		1,000		3,000
	$	27,500	$	41,500

EX-10.37

Exhibit 10.37

Employment Arrangements of Named Executive Officers

     We have no current employment agreements with Messrs. Opsal, Renner or Shiau, three of our named executive officers for fiscal year 2005. Mr. Shiau’s employment with the company ended in April 2005.

     Under their respective employment arrangements, the named executive officers currently receive:

• An annual base salary subject to review by the board and our president or chief executive officer. Their base salaries as of May 1, 2005 were as follows:

Name	Base Salary
Jon Opsal	$	254,592
Brian Renner	$	190,000

• An annual bonus based upon our achievement of operating targets and the attainment of individual goals by each named executive, each to be determined by the board and our president or chief executive officer on an annual basis;

• Customary fringe benefits including automobile allowances, life insurance and a cafeteria benefits plan; and

• Stock options as determined from time to time by our board of directors.

Due to a restructuring of our management in April 2005, Mr. Renner is no longer an executive officers of the company although he continues to be an employee.

     Certain of the stock option agreements with our named executive officers provide that in the event of a change of control, the executive may be entitled to immediate vesting of his otherwise unvested stock options.

Employment Arrangement of Papken Der Torossian

     Papken Der Torossian is an employee of the company and receives $200,000 a year for his services as Chairman of the Board. In lieu of providing Mr. Der Torossian medical insurance benefits, the company reimburses him for the medical insurance premiums he pays. This amount totaled $10,160 for the 2005 fiscal year.

     Our non-employee directors generally receive an initial stock option grant of 20,000 shares and yearly grants of 10,000 shares, but Mr. Der Torossian received an initial stock option grant in 2003 of 400,000 shares and a stock option grant in fiscal year 2005 of 100,000 shares.

EX-10.38

Exhibit 10.38

Therma-Wave, Inc.

JOSEPH PASSARELLO EMPLOYMENT AGREEMENT

     This Agreement is entered into as of April l1, 2005, (the “Effective Date”) by and between Therma-Wave, Inc. (the “Company”), and Joseph Passarello (“Executive”).

     1. Duties and Scope of Employment.

          (a) Position and Duties. As of the Effective Date, Executive will serve as Senior Vice President and Chief Financial Officer of the Company. Executive will render such business and professional services in the performance of his duties, consistent with Executive’s position within the Company, as shall reasonably be assigned to him by the President and CEO and/or as are contemplated by the Company’s bylaws. The period of Executive’s employment under this Agreement is referred to herein as the “Employment Term.”

          (b) Obligations. During the Employment Term, Executive will perform his duties faithfully and to the best of his ability and will devote his full business efforts and time to the Company. For the duration of the Employment Term, Executive agrees not to actively engage in any other employment, occupation or consulting activity for any direct or indirect remuneration without the prior approval of the Board.

     2. At-Will Employment. The parties agree that Executive’s employment with the Company will be “at-will” employment and may be terminated at any time with or without cause or notice, subject to the provisions of paragraph 9 of this Agreement below. Executive understands and agrees that neither his job performance nor promotions, commendations, bonuses or the like from the Company give rise to or in any way serve as the basis for modification, amendment, or extension, by implication or otherwise, of his employment with the Company.

     3. Place of Employment. The Executive’s services shall be performed at the Company’s principal executive offices in Fremont, California. The parties acknowledge, however, that the Executive may be required to travel in connection with the performance of his duties hereunder.

     4. Compensation.

          (a) Base Salary. For all services to be rendered by the Executive pursuant to this Agreement, the Company agrees to pay the Executive during the Employment Period a base salary (the “Base Salary”) at a rate of $4,517.00 per week. The Base Salary shall be paid in periodic installments in accordance with the Company’s regular payroll practices. The Company agrees to review the Executives job performance and Base Salary ninety (90) days after the effective date of this Agreement. Thereafter, the Company agrees to review the Executive’s job performance and Base Salary at least annually as of the payroll payment date nearest each anniversary of the Effective

Date (beginning in 2006) and to make such changes therein as deemed appropriate by the President and CEO, and as the Board of Directors may approve.

          (b) Bonus. Beginning with the Company’s 2005 fiscal year and for each fiscal year thereafter during the Employment Period, the Executive will be eligible to receive an annual bonus (the “Bonus”) of up to 35% of the Executive’s Base Salary for such fiscal year based upon certain financial and individual performance criteria to be determined by the President and CEO and the Board of Directors including revenue and profitability targets and other organizational milestones.

     The Bonus payable hereunder shall be payable quarterly in accordance with the Company’s normal practices and policies and shall be determined with respect to the first three quarters of each fiscal year on the basis of unaudited quarterly financial statements and, with respect to the fourth quarter, on the basis of audited financial statements. The earned Bonus shall be paid within 30 days after such statements have been finally delivered to the Board of Directors or as otherwise agreed by the Board of Directors and the Executive.

          (c) Stock Option.

               (i) Initial Option. Effective as of the Effective Date, the Company shall grant the Executive an option (the “Initial Option”) to purchase 150,000 shares of the Company’s common stock (the “Initial Option Shares”) at the closing price per share the day prior to the Board of Directors meeting. The Initial Option shall vest as described in paragraph 4(c)(ii) below.

               (ii) Vesting. Subject to the accelerated vesting provisions set forth herein, the Option Shares will vest as to 25% of the shares subject to the Option one year after the date of grant, and as to 1/48th of the shares subject to the Option monthly thereafter, so that the Option will be fully vested and exercisable four (4) years from the date of grant, subject to Executive’s continued service to the Company on the relevant vesting dates. In addition, in the event that Executive’s employment is terminated by the Company without Cause (as defined below) or Employee terminates his employment for Good Reason (as defined below), or Executive is assigned to a position, without his consent, that is not equivalent to his current position as Vice President and Chief Financial Officer, within six months after a Change in Control (as defined below), the unvested portion of the Initial Option and additional options if any, shall automatically accelerate and the Executive shall have the right to exercise all or any portion of such Options, in addition to any portion of the Option(s) exercisable prior to such event.

     For purposes of this Agreement, the term “Change of Control” shall mean the occurrence of any of the following events:

                    (1) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing forty percent (40%) or more of the total voting power represented by the Company’s then outstanding voting securities; provided, however, that a Change in Control shall be deemed to occur in the event any one individual becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the

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Company representing thirty percent (30%) or more of the voting power represented by the Company’s then outstanding voting securities; or

                    (2) A change in the composition of the Board of Directors of the Company occurring within a two-year period, as a result of which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” shall mean directors who either (A) are directors of the Company as of the date hereof, or (B) are elected, or nominated for election, to the Board of Directors of the Company with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but shall not include an individual whose election or nomination is in connection with an actual or threatened proxy contest relating to the election of directors to the Company); or

                    (3) A merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least seventy percent (70%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all the Company’s assets.

               (iii) Option Provisions. The Initial Option and each additional option, if any, shall be granted under the Company’s 2000 Equity Incentive Plan Stock Option Plan (the “Stock Plan”) and, except as expressly provided otherwise in this paragraph 4, shall be subject to the terms and conditions of the Stock Plan and form of option agreement; provided, however, that the Company’s Board of Directors may, in its discretion, grant the Initial Option and/or the additional option(s), if any, outside of the Stock Plan, and any such Options shall include such other terms as the Board of Directors may specify that are not inconsistent with the terms hereof.

          (d) Car Allowance. During the Employment Period, the Executive shall receive a car allowance in the amount of $900.00 per month. This payment shall be made to employee on the first payroll check of each month.

     5. Employee Benefits. During the Employment Period, the Executive shall be entitled to participate in employee benefit plans or programs of the Company, if any, to the extent that his position, tenure, salary, age, health and other qualifications make him eligible to participate, subject to the rules and regulations applicable thereto. The Company reserves the right to cancel or change the benefit plans and programs it offers to its employees at any time.

     6. Vacation. Executive will be entitled to accrue PTO at the rate of 120 hours per year in accordance with the Company’s vacation policy, with the timing and duration of specific vacations mutually and reasonably agreed to by the parties hereto.

     7. Expenses. The Executive shall be entitled to prompt reimbursement by the Company for all reasonable ordinary and necessary travel, entertainment, and other expenses incurred by the Executive during the Employment Period (in accordance with the policies and procedures established by the Company for its senior executive officers) in the performance of his duties and

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responsibilities under this Agreement; provided, that the Executive shall properly account for such expenses in accordance with Company policies and procedures. The parties agree that for purposes of this paragraph, the Executive’s air travel shall be coach class domestically and business class internationally.

     8. Other Activities. The Executive shall devote substantially all of his working time and efforts during the Company’s normal business hours to the business and affairs of the Company and its subsidiaries and to the diligent and faithful performance of the duties and responsibilities duly assigned to him pursuant to this Agreement, except for vacations, holidays and sickness. However, the Executive may devote a reasonable amount of his time to civic, community, or charitable activities and, with the prior written approval of the Board of Directors, to serve as a director of other corporations and to other types of business or public activities not expressly mentioned in this paragraph.

     9. Severance.

          (a) Involuntary Termination Not for Cause. If Executive’s employment with the Company terminates other than voluntarily, without Good Reason (as defined herein) or for Cause (as defined herein), and Executive signs and does not revoke the Company’s severance and release agreement, then, subject to paragraph 11 of this Agreement, Executive shall be entitled to continuing payments of severance pay (less applicable withholding taxes) at a rate equal to his Base Salary rate, as then in effect, for a period of six (6) months from the date of such termination, to be paid periodically in accordance with the Company’s normal payroll policies; and (ii) any unvested portion of the Option shall immediately vest and become exercisable.

          (b) Voluntary Termination; Termination for Cause. If Executive’s employment with the Company terminates voluntarily by Executive, without Good Reason or for Cause by the Company, then (i) all vesting of the Option will terminate immediately and all payments of compensation by the Company to Executive hereunder will terminate immediately (except as to amounts already earned), and (ii) Executive will only be eligible for severance benefits in accordance with the Company’s established policies as then in effect.

          (c) Involuntary Termination Not for Cause within Six (6) Months after Change of Control. If, within six (6) months following a Change of Control, Executive’s employment with the Company terminates other than voluntarily, without Good Reason (as defined herein) or for Cause (as defined herein), or because there is no position available in the new company equivalent to Executive’s current position of Vice President and Chief Financial Officer, and Executive signs and does not revoke the Company’s severance and release agreement, then, subject to paragraph 11, Executive shall be entitled to continuing payments of severance pay (less applicable withholding taxes) at a rate equal to his Base Salary rate, as then in effect, for a period of twelve (12) months from the date of such termination, to be paid periodically in accordance with the Company’s normal payroll policies; and (ii) any unvested portion of the Option shall immediately vest and become exercisable.

          (d) Cause. For all purposes under this Agreement, “Cause” shall mean (i) willful failure by the Executive to substantially perform his duties hereunder, other than a failure resulting from the Executive’s complete or partial incapacity due to physical or mental illness or impairment,

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(ii) a willful act by the Executive which constitutes gross misconduct and which is injurious to the Company, (iii) a willful breach by the Executive of a material provision of this Agreement, or (iv) a material and willful violation of a federal or state law or regulation applicable to the business of the Company. No act, or failure to act, by the Executive shall be considered “willful” unless committed without good faith without a reasonable belief that the act or omission was in the Company’s best interest. No compensation or benefits will be paid or provided to the Executive under this Agreement on account of a termination for Cause, or for periods following the date when such a termination of employment is effective. The Executive’s rights under the benefit plans of the Company shall be determined under the provisions of those plans.

          (e) Good Reason. For purposes of this Agreement “Good Reason” shall mean the occurrence (without Executive’s consent) of any one of the following acts by the Company, or failure by the Company to act: (i) the assignment to Executive of duties that represent a substantial and material adverse alteration in the nature or status of his responsibilities as a senior executive officer of the Company, except in the event Executive is unable to or fails to perform his normal full-time duties and responsibilities with the Company as a result of incapacity due to physical or mental illness or incapacity; (ii) a reduction in the Base Salary as in effect on the date hereof; (iii) the relocation of the Company’s principal executive offices to a location outside of the San Francisco Bay Area (which includes the counties of San Francisco, Alameda, Santa Clara, Contra Costa, San Mateo and Marin) or the Company’s requiring Executive to be based anywhere other than the Company’s principal executive offices (but not including required travel on Company business); or (iv) the wrongful failure by the Company to pay Executive any portion of the Base Salary, Bonus or Benefits, or to pay to deferred compensation or benefits program of the Company, within 45 days of the date such Base Salary, Bonus, compensation or Benefit is due.

     10. Proprietary Information. During the Employment Period and thereafter, the Executive shall not, without the prior written consent of the Board of Directors, disclose or use for any purpose (except in the course of his employment under this Agreement and in furtherance of the business of the Company or any of its affiliates or subsidiaries) any confidential information or proprietary data of the Company. As an express condition of the Executive’s employment with the Company, the Executive agrees to execute confidentiality agreements as requested by the Company, including but not limited to the Company’s standard Proprietary Information and Employee Inventions Agreement (the “Confidentiality Agreement”), which is attached hereto as Exhibit A and incorporated herein by reference.

     11. Non-Solicitation.

          (a) Non-Solicitation. During the twelve (12) months after the termination of Executive’s employment with the Company for any reason, Executive agrees and acknowledges that Executive will not either directly or indirectly solicit, induce, attempt to hire, recruit, encourage, take away, hire any employee of the Company or cause an employee to leave his or her employment either for Executive or for any other entity or person.

          (b) Conditional Nature of Severance Payments. Executive agrees and acknowledges that Executive’s right to receive the severance payments set forth in paragraph 9 (to the extent Executive is otherwise entitled to such payments) shall be conditioned upon compliance with the restriction in this paragraph 11.

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     12. Right to Advice of Counsel. The Executive acknowledges that he has consulted with counsel and is fully aware of his rights and obligations under this Agreement.

     13. Successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption agreement prior to the effectiveness of any such succession shall entitle the Executive to the benefits described in paragraph 9 of this Agreement, subject to the terms and conditions therein.

     14. Assignment. This Agreement and all rights under this Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective personal or legal representatives, executors, administrators, heirs, distributees, devisees, legatees, successors and assigns. This Agreement is personal in nature, and neither of the parties to this Agreement shall, without the written consent of the other, assign or transfer this Agreement or any right or obligation under this Agreement to any other person or entity; except that the Company may assign this Agreement to any of its affiliates or wholly-owned subsidiaries, provided, that such assignment will not relieve the Company of its obligations hereunder. If the Executive should die while any amounts are still payable to the Executive hereunder, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive’s devisee, legatee, or other designee or, if there be no such designee, to the Executive’s estate.

     15. Absence of Conflict. The Executive represents and warrants that his employment by the Company as described herein shall not conflict with and will not be constrained by any prior employment or consulting agreement or relationship.

     16. Notices. All notices, requests, demands and other communications called for hereunder shall be in writing and shall be deemed given (i) on the date of delivery, or, if earlier, (ii) one (1) day after being sent by a well established commercial overnight service, or (iii) three (3) days after being mailed by registered or certified mail, return receipt requested, prepaid and addressed to the parties or their successors at the following addresses, or at such other addresses as the parties may later designate in writing:

If to the Executive:	Joseph J. Passarello
	63 Morton Street
	Palo Alto, CA 94303
If to the Company:	Boris Lipkin
	c/o Therma-Wave
	1250 Reliance Way
	Fremont, CA 94539-6100

or to such other address or the attention of such other person as the recipient party has previously furnished to the other party in writing in accordance with this paragraph.

     17. Waiver. Failure or delay on the part of either party hereto to enforce any right, power, or privilege hereunder shall not be deemed to constitute a waiver thereof. Additionally, a

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waiver by either party or a breach of any promise hereof by the other party shall not operate as or be construed to constitute a waiver of any subsequent waiver by such other party.

     18. Severability. Whenever possible, each provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or any other jurisdiction, but this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein.

     19. Arbitration.

          (a) Arbitration. In consideration of Executive’s employment with the “Company”, its promise to arbitrate all employment-related disputes and Executive’s receipt of the compensation, pay raises and other benefits paid to Executive by the Company, at present and in the future, Executive agrees that any and all controversies, claims, or disputes with anyone (including the Company and any employee, officer, director, shareholder or benefit plan of the Company in their capacity as such or otherwise) arising out of, relating to, or resulting from Executive’s employment with the Company or the termination of Executive’s employment with the Company, including any breach of this agreement, shall be subject to binding arbitration under the arbitration rules set forth in California Code of Civil Procedure Section 1280 through 1294.2, including Section 1283.05 (the “Rules”) and pursuant to California law. Disputes which Executive agrees to arbitrate, and thereby agrees to waive any right to a trial by jury, include any statutory claims under State or Federal law, including, but not limited to, claims under Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Age Discrimination in Employment Act of 1967, the Older Workers Benefit Protection Act, the California Fair Employment and Housing Act, the California Labor Code, claims of harassment, discrimination or wrongful termination and any statutory claims. Executive further understands that this agreement to arbitrate also applies to any disputes that the Company may have with employee.

          (b) Procedure. Executive agrees that any arbitration will be administered by the American Arbitration Association (“AAA”) and that a neutral arbitrator will be selected in a manner consistent with its national rules for the resolution of employment disputes. The arbitration proceedings will allow for discovery according to the rules set forth in the National Rules for the Resolution of Employment Disputes. Executive agrees that the arbitrator shall have the power to decide any motions brought by any party to the arbitration, including motions for summary judgment and/or adjudication and motions to dismiss and demurrers, prior to any arbitration hearing. Executive agrees that the arbitrator shall issue a written decision on the merits. Executive also agrees that the arbitrator shall have the power to award any remedies, including attorneys’ fees and costs, available under applicable law. Executive understands the Company will pay for any administrative or hearing fees charged by the arbitrator or AAA except that Executive shall pay the first $200.00 of any filing fees associated with any arbitration Executive initiates. Executive agrees that the arbitrator shall administer and conduct any arbitration in a manner consistent with the rules and that to the extent that the AAA’s National Rules for the Resolution of Employment Disputes conflict with the rules, the rules shall take precedence.

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          (c) Remedy. Except as provided by the rules, arbitration shall be the sole, exclusive and final remedy for any dispute between Executive and the Company. Accordingly, except as provided for by the rules, neither Executive nor the Company will be permitted to pursue court action regarding claims that are subject to arbitration. Notwithstanding, the arbitrator will not have the authority to disregard or refuse to enforce any lawful Company policy, and the arbitrator shall not order or require the Company to adopt a policy not otherwise required by law which the Company has not adopted.

          (d) Availability of injunctive relief. In accordance with Rule 1281.8 of the California Code of Civil Procedure, Executive agrees that any party may also petition the court for injunctive relief where either party alleges or claims a violation of the employment, confidential information, invention assignment agreement between Executive and the Company or any other agreement regarding trade secrets, confidential information, nonsolicitation or Labor Code §2870. In the event either party seeks injunctive relief, the prevailing party shall be entitled to recover reasonable costs and attorneys fees.

          (e) Administrative relief. Executive understands that this agreement does not prohibit Executive from pursuing an administrative claim with a local, state or federal administrative body such as the department of fair employment and housing, the equal employment opportunity commission or the workers’ compensation board. This agreement does, however, preclude Executive from pursuing court action regarding any such claim.

          (f) Voluntary Nature of Agreement. Executive acknowledges and agrees that Executive is executing this agreement voluntarily and without any duress or undue influence by the Company or anyone else. Executive further acknowledges and agrees that Executive has carefully read this agreement and that Executive has asked any questions needed for Executive to understand the terms, consequences and binding effect of this agreement and fully understand it, including that Executive is waiving Executive’s right to a jury trial. Finally, Executive agrees that he/she has been provided an opportunity to seek the advice of an attorney before signing this agreement.

     20. Integration. This Agreement, together with the Option Plan, Option Agreement and the Proprietary Information and Employee Inventions Agreement represents the entire agreement and understanding between the parties as to the subject matter herein and supersedes all prior or contemporaneous agreements whether written or oral. No waiver, alteration, or modification of any of the provisions of this Agreement will be binding unless in writing and signed by the Company.

     21. Headings. The headings of the paragraphs contained in this Agreement are for reference purposes only and shall not in any way affect the meaning or interpretation of any provision of this Agreement.

     22. Applicable Law. This Agreement shall be governed by and construed in accordance with the internal substantive laws, and not the choice of law rules, of the State of California. Executive hereby consents to the exclusive personal jurisdiction and venue of the courts of the federal and state courts in the State of California.

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     23. Counterparts. This Agreement may be executed in one or more counterparts, none of which need contain the signature of more than one party hereto, and each of which shall be deemed to be an original, and all of which together shall constitute a single agreement.

     24. Tax Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable taxes.

     25. Acknowledgment. Executive acknowledges that he has had the opportunity to discuss this matter with and obtain advice from his private attorney, has had sufficient time to, and has carefully read and fully understands all the provisions of this Agreement, and is knowingly and voluntarily entering into this Agreement.

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     IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by their duly authorized officers, as of the day and year first above written.

Therma-Wave, Inc.:
Boris Lipkin
By:	/s/ Boris Lipkin	Date: 6/21/05
Title:	President & CEO
EXECUTIVE:
/s/ Joseph J. Passarello		Date: 6/20/05
Joseph J. Passarello

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EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-30870, 333-36140, 333-83282, 333-10037, 333-111458 and 333-111459) of Therma-Wave, Inc. of our report dated June 27, 2005 relating to the consolidated financial statements, management’s assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP
San Jose, California
June 27, 2005

EX-31.1

Exhibit 31.1

THERMA-WAVE, INC.

CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Boris Lipkin, certify that:

1.	I have reviewed this annual report on Form 10-K of Therma-Wave, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

June 27, 2005	/s/ Boris Lipkin
	Boris Lipkin
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

THERMA-WAVE, INC.

CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, L. Ray Christie, certify that:

1.	I have reviewed this annual report on Form 10-K of Therma-Wave, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a.	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
b.	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c.	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a.	All significant deficiencies and material weaknesses in the design or operation of internal control which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

June 27, 2005	/s/ L. Ray Christie
	L. Ray Christie
	Senior Vice President
	Chief Financial Officer and Secretary

EX-32.1

Exhibit 32.1

THERMA-WAVE, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, Boris Lipkin, in my capacity as President and Chief Executive Officer of Therma-Wave, Inc., a Delaware corporation (“Therma-Wave”), and in connection with the annual report on Form 10-K filed by Therma-Wave with the Securities and Exchange Commission on June 27, 2005 (the “Report”), hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Therma-Wave.

     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Therma-Wave and will be retained by Therma-Wave and furnished to the Securities and Exchange Commission or its staff upon request.

     IN WITNESS WHEREOF, the undersigned has executed this certification as of the 27th day of June 2005.

/s/ Boris Lipkin

Boris Lipkin

President and Chief Executive Officer

The foregoing certification shall not be deemed filed by Therma-Wave as part of the report or as a separate disclosure document for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended.

EX-32.2

Exhibit 32.2

THERMA-WAVE, INC.
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

     I, L. Ray Christie, in my capacity as Senior Vice President and Chief Financial Officer of Therma-Wave, Inc., a Delaware corporation (“Therma-Wave”), and in connection with the annual report on Form 10-K filed by Therma-Wave with the Securities and Exchange Commission on June 27, 2005 (the “Report”), hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

     1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

     2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Therma-Wave.

     A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Therma-Wave and will be retained by Therma-Wave and furnished to the Securities and Exchange Commission or its staff upon request.

     IN WITNESS WHEREOF, the undersigned has executed this certification as of the 27th day of June 2005.

/s/ L. Ray Christie

L. Ray Christie

Senior Vice President,

Chief Financial Officer and Secretary

The foregoing certification shall not be deemed filed by Therma-Wave as part of the report or as a separate disclosure document for purposes of Section 18 or any other provision of the Securities Exchange Act of 1934, as amended.