<PAGE>

                                                                    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 significant net losses and such losses may continue.

     We have not reported net income since the first quarter of fiscal 1998. We
reported net losses for fiscal 2000, 1999 and 1998 of $20.6 million, $15.7
million and $1.0 million, respectively. Due to the recent downturn in the
semiconductor industry and the related downturn in the semiconductor capital
equipment industry, weak economic conditions in the Asia Pacific region,
including Japan, our significant leverage and other factors, we may remain
unprofitable. Although we intend to significantly reduce our leverage using the
net proceeds of this offering, we cannot predict how long we will continue to
experience net losses or when we will become 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 recent downturn in the semiconductor industry has had a material
adverse effect on our recent operating results. 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. The semiconductor industry experienced
downturns in 1998 and 1996. Although the semiconductor industry is recovering,
we cannot assure you that:

     .    the semiconductor industry will continue to improve;

     .    the semiconductor industry will not experience other, possibly more
           severe and prolonged, downturns in the future; or

     .    the current recovery will continue to result in increased demand for
           capital equipment by the semiconductor industry.

     The end of the current recovery or any future downturn in the semiconductor
industry will have a material adverse effect on our business, financial
condition and results of operations.

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.
<PAGE>

     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 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, 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. During the year ended March 31,
1998, one customer represented 23% 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. See "Part I.
Business--Customers."


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
<PAGE>

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 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. We are currently involved in
litigation regarding our thin-film thickness measuring technology.

     We are currently involved in four litigation proceedings with KLA-Tencor
Corporation regarding our thin-film thickness measuring technology and our
optical measurement systems. We cannot assure you that we will prevail in any of
these proceedings or any of our other ongoing litigation proceedings. 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. See "Part I.
Business--Legal Proceedings."


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
<PAGE>

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.


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

     As of March 31, 2000, we were able to borrow a maximum of $21.5 million,
subject to a borrowing base, under our bank credit facility. In addition,
subject to the restrictions in our senior bank credit facility, we may incur
additional indebtedness, including secured 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.

     Most of our competitors currently operate on a less leveraged basis and
have significantly greater operating and financing flexibility than we do.
<PAGE>

If the bank accelerates all amounts owing under the bank credit facility because
of a default under the bank credit facility and we are unable to pay such
amounts, the bank has the right to foreclose on our assets, including the
capital stock pledged as security under our bank credit facility.

     Our bank credit facility contains restrictive covenants and requires us to
maintain specified financial ratios and satisfy financial condition tests at the
end of each fiscal quarter. In June 1998 and August 1999, we entered into
amendments to our bank credit facility to adjust the financial tests that
require us to maintain minimum levels of EBITDA during each six-month period
ending on the last day of each fiscal quarter and minimum levels of cumulative
EBITDA from April 7, 1996 and April 4, 1999, respectively, to the last day of
each fiscal quarter. Both of these amendments were effected in light of the
impact of the downturn in the semiconductor market on our operating results.
Without the first amendment to our bank credit facility, we would have violated
the financial test relating to the maintenance of minimum levels of EBITDA for
the six-month period ending June 30, 1998. Our ability to meet these financial
ratios and tests can be affected by events beyond our control, and there can be
no assurance that we will meet those tests. A breach of any of these covenants
could result in a default under our bank credit facility. Substantially all of
our assets and those of our subsidiaries, together with all of the capital stock
of any domestic subsidiary and 65% of the capital stock of each of our first-
tier foreign subsidiaries, are pledged as security under our bank credit
facility. If the bank accelerates all amounts owing under the bank credit
facility because of a default under the bank credit facility and we are unable
to pay such amounts, the bank has the right to foreclose on our assets,
including the capital stock pledged as security under our bank credit facility.


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 in-situ systems
and networking these systems together. In-situ 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 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 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
<PAGE>

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. Rosencwaig,
Schwartz, Christie, Smith, Opsal and Willenborg. In addition, we maintain and
are the named beneficiary under key-man life insurance policies for Messrs.
Rosencwaig, Opsal and Willenborg in the amounts of $500,000, $250,000 and
$100,000, respectively. 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 are 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, 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
<PAGE>

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 40%, 33%
and 50% of total net revenues for fiscal 1998, 1999 and 2000, 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, have
experienced weaknesses in their currency, banking and equity markets over the
last 24 months. These weaknesses began to adversely affect our sales to
semiconductor device and capital equipment manufacturers located in these
regions in the fourth quarter of calendar 1997 and continued to adversely affect
them in 1998. Although we have recently experienced increased sales and new
orders from customers in the Asia Pacific region, we cannot assure you that
turbulence in the Asian markets will not adversely affect our sales in the
future.


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

     International sales accounted for approximately 55%, 69% and 63% of our
total revenues for fiscal 1998, 1999 and 2000, 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 are 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.
<PAGE>

Investment funds affiliated with Bain Capital, Inc. will continue to have
significant influence over our business, and could delay, deter or prevent a
change of control or other business combination.


     Investment funds affiliated with Bain Capital, Inc. hold approximately 29%
of our outstanding common stock. In addition, three of the eight directors that
will serve on our board are representatives of Bain Capital, Inc. By virtue of
such stock ownership and board representation, these investment funds will
continue to have a significant influence over all matters submitted to our
stockholders, including the election of our directors, and to exercise
significant control over our business, policies and affairs. Such concentration
of voting power could have the effect of delaying, deterring or preventing a
change of control of Therma-Wave or other business combination that might
otherwise be beneficial to stockholders.


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
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
<PAGE>

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.