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                                                                    EXHIBIT 99.1

                                 RISK FACTORS

  You should carefully consider the following factors 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 had net income in fiscal 2001 but may incur losses in the future.

  We have reported $25.8 million net income for fiscal 2001. We reported net
losses for fiscal 2000 and 1999 of $20.6 million and $15.7 million,
respectively. Due to the current downturn in the semiconductor industry and the
related downturn in the semiconductor capital equipment industry, weak economic
conditions worldwide, and other factors, we cannot predict how long we will
remain profitable.


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 current downturn in the semiconductor industry will have a material
adverse effect on our business, financial condition and results of operations.
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. 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. There is typically a six to twelve month lag between changes in the
semiconductor industry and the related impact on the level of capital
expenditures. In most cases, the resulting decrease in capital expenditures has
been more pronounced than the precipitating downturn in semiconductor industry
revenues. We cannot be sure:

  .  when the semiconductor industry will recover; or
  .  whether the recovery, if happened, will result in increased demand for
     capital equipment by the semiconductor industry.

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;
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  .  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 revenue 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 two product lines, changes in product mix may cause
fluctuations in operating results. In addition, we cannot assure you that the
market price of our common stock will not experience significant fluctuations in
the future, including fluctuations that are material, adverse and unrelated to
our performance.


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, 2001, two customers represented 22%
and 13% of our net revenues. During the year ended March 31, 2000, two customers
represented 14% and 10% of our net revenues. During the year ended March 31,
1999, two customers represented 23% and 18% 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 our
two key product families, the Opti-Probe and Therma-Probe, 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 or
results of operations.

  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

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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.

  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 or results of operations.


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. 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 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 or results of operations.


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 could be
required to employ similar promotions in order to remain competitive if this
practice becomes 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 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.

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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 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.


We may incur indebtedness in the future under our bank credit facility, which
could require the use of a portion of our excess cash flow and may limit our
access to additional capital.

  As of March 31, 2001, we had no significant debt outstanding. We may incur
indebtedness from time to time to finance acquisitions, capital expenditures and
working capital, make deferred bonus payments to our executive officers or for
other purposes.

  The level of our indebtedness could have important consequences for us. The
following summarizes the material consequences:

  .  a substantial portion of our cash flow from operations would be required to
     be dedicated to the repayment of indebtedness and will 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 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 are also developing the Meta-Probe system, which is a
thin film metrology system specifically designed to measure the thickness and
material properties of opaque and metallic thin films. 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.


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

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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 substantially all of our revenues
from sales of our two major product families, the Opti-Probe 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 key members of our
senior management team, including Messrs. Schwartz, Christie, Smith and Opsal.
In addition, we maintain and are the named beneficiary under key-man life
insurance policies for Mr. Opsal in the amounts of $250,000. To support our
future growth, we will need to attract and retain additional qualified
employees. Competition for such personnel in our industry is high, and we cannot
assure you that we will be successful in attracting and retaining such
personnel.


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. We
expect the level of research and development expenses to increase in the near
future in absolute dollar terms.


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, and in
recent months due to the increase in demand for semiconductor capital equipment,
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, require
sophisticated and costly equipment and a specially designed facility. As a
result, any prolonged disruption in the operations of our manufacturing
facility,

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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 or results of
operations.


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.

  Approximately 50% of our sales have historically been made through
manufacturers' sales representatives. 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 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 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 47%, 50% and
33% of total net revenues for fiscal 2001, 2000 and 1999, respectively.
Companies in the Asia Pacific region, including Japan, Korea and Taiwan, each of
which accounts for a significant portion of our business in that region, are
currently experiencing weaknesses in their currency, banking and equity markets.
These weaknesses will adversely affect our sales to semiconductor device and
capital equipment manufacturers located in these regions in the coming quarters
of fiscal 2001.

We are subject to operational, financial, political and foreign exchange risks
due to our significant level of international sales.

  International sales accounted for approximately 59%, 63% and 69% of our total
revenues for fiscal 2001, 2000 and 1999, respectively. We anticipate that
international sales will continue to account for a significant portion of our
revenue 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 staffing and managing foreign 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.

Provisions of our charter documents and Delaware law could discourage potential
acquisition proposals and could delay, deter or prevent a change in control.

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  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 would 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.


The forward-looking statements contained in this Annual Report are based on our
predictions of future performance. As a result, you should not place undue
reliance on these forward-looking statements.

This annual report contains forward-looking statements, including, without
limitation, 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 and growth strategy and product development efforts. The words
"believe," "expect," "anticipate," "intend" and other similar expressions
generally identify forward-looking statements. Potential investors are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. 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 "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. In addition, important factors to
consider in evaluating such forward-looking statements include changes in
external market factors, changes in our business or growth strategy or an
inability to execute our strategy due to changes in our industry or the economy
generally, the emergence of new or growing competitors and various other
competitive factors. In light of these risks and uncertainties, there can be no
assurance that the matters referred to in the forward-looking statements
contained in this annual report will in fact occur.

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