##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended December 31, 2006
 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.
  Delaware
    
    94-3000561(State or Other Jurisdiction of. 
Incorporation or Organization)
    
    (I.R.S. Employer Identification
Number)
 1250 Reliance Way
Fremont, California 94539
 (510) 668-2200
 þ o
  o þ o
 o þ
  Class
    
    Outstanding as of January 31, 2007Common stock, $0.01 par value
    
    37,230,516




---



##### 



THERMA-WAVE, INC.
TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of December 31, 2006
and April 2, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three
and Nine Months Ended December 31, 2006 and January 1, 2006
    
    
    4Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended December 31, 2006 and January 1, 2006
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6ITEM 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    29ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    39ITEM 4. Controls and Procedures
    
    
    40PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    42ITEM 1A. Risk Factors
    
    
    42ITEM 5. Other Information
    
    
    53ITEM 6. Exhibits
    
    
    54SIGNATURES
    
    
    55EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



THERMA-WAVE,
INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 December 31,
    
    
    April 2,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    14,656
    
    
    $
    20,623Accounts receivable, net of allowances of
$508 and $774 at December 31, 2006 and April
2, 2006, respectively
    
    
    11,086
    
    
    
    12,701Inventories
    
    
    26,475
    
    
    
    22,353Other current assets
    
    
    713
    
    
    
    1,621Total current assets
    
    
    52,930
    
    
    
    57,298Property and equipment, net
    
    
    835
    
    
    
    789Other assets, net
    
    
    1,207
    
    
    
    1,291Total assets
    
    $
    54,972
    
    
    $
    59,378LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,278
    
    
    $
    4,062Accrued liabilities
    
    
    13,745
    
    
    
    13,642Deferred revenues
    
    
    5,639
    
    
    
    7,874Term loan facility, net
    
    
    4,508
    
    
    
    4,896Warrants and embedded derivatives
    
    
    1,044
    
    
    
    2,178Total current liabilities
    
    
    32,214
    
    
    
    32,652Non-current deferred revenues
    
    
    896
    
    
    
    662Other long-term liabilities
    
    
    703
    
    
    
    1,076Total liabilities
    
    
    33,813
    
    
    
    34,390Commitments and contingencies (Note 6)Series B redeemable convertible preferred
stock: $0.01 par value; 10,400 shares
authorized; 10,400 shares issued and
outstanding at December 31, 2006 and April 2,
2006
    
    
    7,426
    
    
    
    6,940Stockholders equity:Common stock, $0.01 par value; 75,000,000
shares authorized; 37,230,516 shares issued
and outstanding at December 31, 2006;
37,045,692 shares issued and outstanding at
April 2, 2006
    
    
    372
    
    
    
    371Additional paid-in capital
    
    
    337,408
    
    
    
    336,036Notes receivable from stockholders
    
    
    (174
    )
    
    
    (174
    )Accumulated other comprehensive loss
    
    
    (1,161
    )
    
    
    (1,108
    )Deferred stock-based compensation
    
    
    
    
    
    
    (36
    )Accumulated deficit
    
    
    (322,712
    )
    
    
    (317,041
    )Total stockholders equity
    
    
    13,733
    
    
    
    18,048Total liabilities and stockholders equity
    
    $
    54,972
    
    
    $
    59,378
  3




---



##### Table of Contents



THERMA-WAVE,
INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedDecember 31,
    
    
    January 1,
    
    
    December 31,
    
    
    January 1,2006
    
    
    2006
    
    
    2006
    
    
    2006Net revenuesProduct
    
    $
    14,548
    
    
    $
    10,488
    
    
    $
    38,847
    
    
    $
    35,556Service and parts
    
    
    4,361
    
    
    
    4,940
    
    
    
    13,789
    
    
    
    14,676Total net revenues
    
    
    18,909
    
    
    
    15,428
    
    
    
    52,636
    
    
    
    50,232Cost of revenuesProduct
    
    
    8,773
    
    
    
    6,121
    
    
    
    22,810
    
    
    
    20,545Service and parts
    
    
    3,607
    
    
    
    3,939
    
    
    
    10,358
    
    
    
    11,260Total cost of revenues
    
    
    12,380
    
    
    
    10,060
    
    
    
    33,168
    
    
    
    31,805Gross profit
    
    
    6,529
    
    
    
    5,368
    
    
    
    19,468
    
    
    
    18,427Operating expenses:Research and development
    
    
    3,302
    
    
    
    2,755
    
    
    
    9,570
    
    
    
    9,643Selling, general and administrative
    
    
    6,147
    
    
    
    5,707
    
    
    
    16,474
    
    
    
    18,384Restructuring, severance and other
    
    
    10
    
    
    
    800
    
    
    
    87
    
    
    
    4,530Total operating expenses
    
    
    9,459
    
    
    
    9,262
    
    
    
    26,131
    
    
    
    32,557Operating loss
    
    
    (2,930
    )
    
    
    (3,894
    )
    
    
    (6,663
    )
    
    
    (14,130
    )Other income (expense), net:Gain on sale of product line
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,721Interest expense
    
    
    (203
    )
    
    
    (205
    )
    
    
    (609
    )
    
    
    (352
    )Interest income
    
    
    138
    
    
    
    103
    
    
    
    533
    
    
    
    178Fair value adjustment -Warrants and
embedded derivatives and other, net
    
    
    452
    
    
    
    (1
    )
    
    
    1,173
    
    
    
    (64
    )Total other income (expense), net
    
    
    387
    
    
    
    (103
    )
    
    
    1,097
    
    
    
    8,483Loss before benefit for income taxes
    
    
    (2,543
    )
    
    
    (3,997
    )
    
    
    (5,566
    )
    
    
    (5,647
    )Benefit for income taxes
    
    
    (275
    )
    
    
    (157
    )
    
    
    (852
    )
    
    
    (105
    )Net loss
    
    
    (2,268
    )
    
    
    (3,840
    )
    
    
    (4,714
    )
    
    
    (5,542
    )Accretion of Series B preferred stock to
redemption value and dividends accrued
    
    
    (322
    )
    
    
    (98
    )
    
    
    (957
    )
    
    
    (98
    )Net loss available to common stockholders
    
    $
    (2,590
    )
    
    $
    (3,938
    )
    
    $
    (5,671
    )
    
    $
    (5,640
    )Net loss per share:Basic
    
    $
    (0.07
    )
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    (0.15
    )Diluted
    
    $
    (0.07
    )
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    (0.15
    )Weighted average common shares outstanding:Basic
    
    
    37,216
    
    
    
    36,879
    
    
    
    36,819
    
    
    
    36,647Diluted
    
    
    37,216
    
    
    
    36,879
    
    
    
    36,819
    
    
    
    36,647
  4




---



##### Table of Contents



THERMA-WAVE,
INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Nine months endedDecember 31,
    
    
    January 1,2006
    
    
    2006Operating activities:Net loss
    
    $
    (4,714
    )
    
    $
    (5,542
    )Adjustments to reconcile net loss to net cash used in operating activities:Gain on sale of product line
    
    
    
    
    
    
    (8,721
    )Non-cash restructuring charge
    
    
    
    
    
    
    285Depreciation of property and equipment
    
    
    320
    
    
    
    1,597Amortization of intangible assets
    
    
    414
    
    
    
    545Fair value adjustment  warrants and embedded derivatives
    
    
    (1,134
    )
    
    
    20Stock-based compensation expense (benefit)
    
    
    1,216
    
    
    
    (267
    )Provision (credit) for doubtful accounts receivable and sales allowances
    
    
    (266
    )
    
    
    74Loss on disposal of property and equipment
    
    
    13
    
    
    
    111Changes in operating assets and liabilities (excluding assets sold and
liabilities assumed):Accounts receivable
    
    
    1,881
    
    
    
    2,976Inventories
    
    
    (4,122
    )
    
    
    8,719Other assets
    
    
    747
    
    
    
    1,206Accounts payable
    
    
    3,216
    
    
    
    (4,884
    )Accrued and other liabilities
    
    
    (241
    )
    
    
    (885
    )Deferred revenues
    
    
    (2,001
    )
    
    
    (10,440
    )Net cash used in operating activities
    
    
    (4,671
    )
    
    
    (15,206
    )Investing activities:Sale of product line
    
    
    
    
    
    
    8,950Purchases of property and equipment
    
    
    (379
    )
    
    
    (155
    )Purchase of patents
    
    
    (169
    )
    
    
    (197
    )Net cash provided by (used in) investing activities
    
    
    (548
    )
    
    
    8,598Financing activities:Borrowings from term loan facility
    
    
    
    
    
    
    5,000Repayments on term loan facility
    
    
    (417
    )
    
    
    Proceeds from issuance of common stock
    
    
    193
    
    
    
    669Net proceeds from issuance of Series B preferred stock and warrants
    
    
    
    
    
    
    9,791Payment of Series B preferred stock dividends
    
    
    (471
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (695
    )
    
    
    15,460Effect of exchange rates on cash
    
    
    (53
    )
    
    
    (436
    )Net increase (decrease) in cash and cash equivalents
    
    
    (5,967
    )
    
    
    8,416Cash and cash equivalents at beginning of period
    
    
    20,623
    
    
    
    13,419Cash and cash equivalents at end of period of period
    
    $
    14,656
    
    
    $
    21,835Supplementary disclosures:Cash paid for interest
    
    $
    585
    
    
    $
    392Cash paid for income taxes
    
    $
    95
    
    
    $
    227Application of customer deposit to sale of product line
    
    $
    
    
    
    $
    1,000Issuance costs incurred  Series B preferred stock
    
    $
    
    
    
    $
    609Fair market value of warrants issued in conjunction with Series B
preferred stock
    
    $
    
    
    
    $
    1,320Dividends and accretion on Series B convertible preferred stock
    
    $
    957
    
    
    $
    98Fair value embedded derivatives  Series B preferred stock
    
    $
    
    
    
    $
    1,022Beneficial conversion feature  Series B preferred stock
    
    $
    
    
    
    $
    1,314Fair market value of warrants issued in conjunction with loan and
security agreement
    
    $
    
    
    
    $
    121
  5




---



##### Table of Contents



THERMA-WAVE, INC.
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (As of December 31, 2006)
 1. Basis of Presentation
   Subsequent Event
 Subsequent Event
 Use of Estimates
  Liquidity
  6




---



##### Table of Contents



Revenue Recognition
  
     7




---



##### Table of Contents



Persuasive evidence of an arrangement exists:
 Delivery has occurred or services have been rendered:
 The sellers price to the buyer is fixed or determinable:
 Collectibility is reasonably assured:
  
    
    Systems Sold Through Resellers. The Company accounts separately for the services
provided by resellers, including sales services and any post-shipment services that the
resellers may be contractually obligated to provide according to the terms of the specific
sales contract.
    
    Standard Product Warranty. The Company offers a standard product warranty of one year,
usually, beginning on the date of customer final acceptance. Additional periods of warranty
are sometimes included in the price of the system sale or are sold separately. When service
coverage outside the one-year warranty is included in the price of the system sale, the
Company defers the fair market value of that service coverage as a liability for deferred
service contract revenues and recognizes those revenues ratably over the service delivery
time periods applicable to the contract.
    
    Systems Under Trial and Evaluation Agreements. Revenues are not recognized for shipments
of systems under trial and evaluation agreements until the customer places a firm order for
the system and all other revenue recognition criteria are satisfied.
    
    Payment Terms. Payment terms usually are net 30 to net 90 days. In rare circumstances,
the Company agrees to extended payment terms greater than net 90 days. In those instances,
which generally involve foreign sales, revenue recognition is deferred until payment is
received.
   8




---



##### Table of Contents



Service and Parts Revenues.
  Allowances for Doubtful Accounts Receivable and Sales Allowances
  Reclassifications
  Recently Issued Accounting Pronouncements
    9




---



##### Table of Contents



2. Balance Sheet Components
 December 31,
    
    
    April 2,(in thousands)
    
    2006
    
    
    2006Inventory:Raw materials and field service inventory
    
    $
    12,466
    
    
    $
    11,136Systems in process
    
    
    7,688
    
    
    
    6,265Finished systems
    
    
    4,339
    
    
    
    3,648Inventory at customer locations
    
    
    1,982
    
    
    
    1,304Total inventory
    
    $
    26,475
    
    
    $
    22,353
 December 31,
    
    
    April 2,(in thousands)
    
    2006
    
    
    2006Property and equipment:Laboratory and test equipment
    
    $
    4,096
    
    
    $
    4,053Office furniture and equipment
    
    
    10,382
    
    
    
    10,241Machinery and equipment
    
    
    791
    
    
    
    728Leasehold improvements
    
    
    7,214
    
    
    
    7,218Total property and equipment
    
    
    22,483
    
    
    
    22,240Accumulated depreciation and amortization
    
    
    (21,648
    )
    
    
    (21,451
    )Total property and equipment, net
    
    $
    835
    
    
    $
    789
  December 31,
    
    
    April 2,(in thousands)
    
    2006
    
    
    2006Accrued and other liabilities:Accrued compensation and related expenses
    
    $
    3,347
    
    
    $
    3,078Accrued warranty
    
    
    1,277
    
    
    
    1,244Commissions payable
    
    
    1,983
    
    
    
    1,928Income taxes
    
    
    3,809
    
    
    
    4,696Restructuring liabilities
    
    
    506
    
    
    
    817Accrued professional fees
    
    
    294
    
    
    
    831Accrued sales and property taxes
    
    
    904
    
    
    
    306Other accrued liabilities
    
    
    1,625
    
    
    
    742Total accrued liabilities
    
    $
    13,745
    
    
    $
    13,642
 3. Comprehensive (Loss)
  10




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months Ended(in thousands)
    
    December 31, 2006
    
    
    January 1, 2006
    
    
    December 31, 2006
    
    
    January 31, 2006Net loss
    
    $
    (2,268
    )
    
    $
    (3,840
    )
    
    $
    (4,714
    )
    
    $
    (5,542
    )Other comprehensive loss:Net change in cumulative
translation adjustment
    
    
    (42
    )
    
    
    (178
    )
    
    
    (53
    )
    
    
    (436
    )Comprehensive loss
    
    $
    (2,310
    )
    
    $
    (4,018
    )
    
    $
    (4,767
    )
    
    $
    (5,978
    )
 4. Net Loss Per Share
    Three Months
    
    
    Three Months
    
    
    Nine Months
    
    
    Nine Monthsended
    
    
    ended
    
    
    ended
    
    
    endedDecember 31,
    
    
    January 1,
    
    
    December 31,
    
    
    January 1,(In thousands)
    
    2006
    
    
    2006
    
    
    2006
    
    
    2006Securities Excluded
From Diluted Net
Loss per
ShareStock options
    
    
    6,136
    
    
    
    5,366
    
    
    
    6,136
    
    
    
    5,366Warrants
    
    
    1,722
    
    
    
    1,722
    
    
    
    1,722
    
    
    
    1,722Series B redeemable
convertible preferred
stock (assuming
conversion to common
shares)
    
    
    6,710
    
    
    
    6,710
    
    
    
    6,710
    
    
    
    6,710
  11




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedDecember 31, 2006
    
    
    January 1, 2006
    
    
    December 31, 2006
    
    
    January 1, 2006Basic:Net loss available
to common
stockholders
    
    $
    (2,590
    )
    
    $
    (3,938
    )
    
    $
    (5,671
    )
    
    $
    (5,640
    )Weighted shares
outstanding
    
    
    37,216
    
    
    
    36,879
    
    
    
    36,819
    
    
    
    36,647Net loss per share
    
    $
    (0.07
    )
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    (0.15
    )Diluted:Net loss available
to common
stockholders
    
    $
    (2,590
    )
    
    $
    (3,938
    )
    
    $
    (5,671
    )
    
    $
    (5,640
    )Weighted shares
outstanding
    
    
    37,216
    
    
    
    36,879
    
    
    
    36,819
    
    
    
    36,647Effect of dilutive
securities:Stock options,
warrants and
convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive
weighted shares
outstanding
    
    
    37,216
    
    
    
    36,879
    
    
    
    36,819
    
    
    
    36,647Net loss per share
    
    $
    (0.07
    )
    
    $
    (0.11
    )
    
    $
    (0.15
    )
    
    $
    (0.15
    )
 5. Stock-Based Compensation
  i.e. Accounting for Stock-Based Compensation,
   12




---



##### Table of Contents



Prior to the adoption of SFAS No. 123(R)
   Three Months Ended
    
    
    Nine Months EndedJanuary 1, 2006
    
    
    January 1, 2006(In thousands, except
    
    
    (In thousands, exceptper share data)
    
    
    per share data)Pro forma Net Loss Under SFAS No. 123:Net loss available to common stockholdersAs reported
    
    $
    (3,938
    )
    
    $
    (5,640
    )Add: Stock-based employee
compensation benefit included in the
determination of net loss, as
reported
    
    
    (28
    )
    
    
    (267
    )Deduct: Stock-based employee
compensation expense as determined
using the fair value method
    
    
    (404
    )
    
    
    (927
    )Pro forma net loss
    
    $
    (4,370
    )
    
    $
    (6,834
    )Basic net loss per shareAs reported
    
    $
    (0.11
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.12
    )
    
    $
    (0.19
    )Diluted net loss per shareAs reported
    
    $
    (0.11
    )
    
    $
    (0.15
    )Pro forma
    
    $
    (0.12
    )
    
    $
    (0.19
    )
  Impact of the adoption of SFAS No. 123(R)
  Three Months Ended
    
    
    Nine Months EndedDecember 31, 2006
    
    
    December 31, 2006(In thousands, except
    
    
    (In thousands, exceptper share data)
    
    
    per share data)Stock-based compensation expense by type of award:Employee stock options
    
    $
    393
    
    
    $
    1,178Employee stock purchase plan
    
    
    
    
    
    
    38Net effect on net loss
    
    $
    393
    
    
    $
    1,216Effect on net loss per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )
  13




---



##### Table of Contents



Valuation Assumptions
   Three Months Ended
    
    
    Nine Months EndedDecember 31, 2006
    
    
    January 1, 2006
    
    
    December 31, 2006
    
    
    January 1, 2006Assumptions Used for
Estimating Fair Value of
Option Grants:Risk-free interest rate*
    
    
    
    %
    
    
    4.5
    %
    
    
    4.9
    %
    
    
    4.1
    %Dividend yield*
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Volatility*
    
    
    
    %
    
    
    72
    %
    
    
    95
    %
    
    
    73
    %Expected life (in years) *
    
    
    
    
    
    
    3.2
    
    
    
    5.4
    
    
    
    3.2
 
 * There were no option grants during the quarter ended December 31, 2006.  Three Months Ended
    
    
    Nine Months EndedDecember 31, 2006
    
    
    January 1, 2006
    
    
    December 31, 2006
    
    
    January 1, 2006Assumptions Used for
Estimating Fair Value of ESPP
Purchase Rights:Risk-free interest rate**
    
    
    
    %
    
    
    4.3
    %
    
    
    4.3
    %
    
    
    3.6
    %Dividend yield**
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Volatility**
    
    
    
    %
    
    
    67
    %
    
    
    69
    %
    
    
    62
    %Expected life (in years) **
    
    
    
    
    
    
    1.12
    
    
    
    0.5
    
    
    
    0.62
 
 ** There was no compensation expense under the employee stock purchase plans during the quarter
ended December 31, 2006.   14




---



##### Table of Contents



WeightedWeighted
    
    
    AverageOptions
    
    
    
    
    
    
    Average
    
    
    RemainingAvailable for
    
    
    Number of
    
    
    Exercise
    
    
    Contractual
    
    
    AggregateFuture
    
    
    Options
    
    
    Price Per
    
    
    Term (in
    
    
    IntrinsicIssuance
    
    
    Outstanding
    
    
    Share
    
    
    years)
    
    
    Value (000s)Stock Option ActivityBalance at April 2, 2006
    
    
    2,798,744
    
    
    
    5,136,655
    
    
    $
    3.66
    
    
    
    6.3Authorized
    
    
    59,282
    
    
    
    
    
    
    
    Granted
    
    
    (264,000
    )
    
    
    264,000
    
    
    
    1.62Exercised
    
    
    
    
    
    
    (3,000
    )
    
    
    0.47Forfeited or expired
    
    
    105,207
    
    
    
    (105,207
    )
    
    
    3.06Balance at July 2, 2006
    
    
    2,699,233
    
    
    
    5,292,448
    
    
    $
    3.57
    
    
    
    6.2
    
    
    $
    896Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    (1,027,100
    )
    
    
    1,027,100
    
    
    
    1.03Exercised
    
    
    
    
    
    
    (985
    )
    
    
    0.47Forfeited or expired
    
    
    112,879
    
    
    
    (112,879
    )
    
    
    7.73Balance October 1, 2006
    
    
    1,785,012
    
    
    
    6,205,684
    
    
    $
    3.08
    
    
    
    6.6
    
    
    $
    916Authorized
    
    
    
    
    
    
    
    
    
    
    Granted
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    (5,625
    )
    
    
    0.47Forfeited or expired
    
    
    64,471
    
    
    
    (64,471
    )
    
    
    2.63Balance at December 31, 2006
    
    
    1,849,483
    
    
    
    6,135,588
    
    
    $
    3.08
    
    
    
    6.4
    
    
    $
    911Options exercisable at December 31, 2006
    
    
    
    
    
    
    3,709,108
    
    
    $
    3.93
    
    
    
    6.2
    
    
    $
    703
  Three Months Ended
    
    
    Nine Months EndedDecember 31, 2006
    
    
    December 31, 2006Weighted average grant date fair value of options granted (per share)
    
    $
    
    
    
    $
    0.87Total fair value of shares vested (in thousands)
    
    $
    351
    
    
    $
    1,138Total intrinsic value of options exercised (in thousands)
    
    $
    3
    
    
    $
    4Total cash received from employees as a result of employee stock
option exercises (in thousands)
    
    $
    3
    
    
    $
    3Tax benefits realized as a result of employee stock option exercises
(in thousands)
    
    $
    
    
    
    $
    
   15




---



##### Table of Contents



6. Commitments and Contingencies
    2007(3 months)
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    Total(In thousands)Contractual obligations by Fiscal Year:Operating lease obligations
    
    $
    464
    
    
    $
    1,863
    
    
    $
    1,405
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    6
    
    
    $
    5,970Asset retirement obligations
    
    $
    
    
    
    $
    275
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    275Total
    
    $
    464
    
    
    $
    2,138
    
    
    $
    1,405
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    6
    
    
    $
    6,245
 Operating Leases
    16




---



##### Table of Contents



Nine Months EndedJanuary 1, 2006(In thousands)Calculation of gain on sale of product line:Proceeds from sale of product line:Cash payment by TEL
    
    $
    8,950TEL deposit applied to sale of product line
    
    
    1,000Total proceeds from sale of product line
    
    
    9,950Less: Net assets sold and transaction expenses:Property and equipment, net
    
    
    79Inventory
    
    
    803Patents, net
    
    
    271Accrued warranty assumed by TEL
    
    
    (243
    )Legal expenses
    
    
    296Transaction costs and other
    
    
    23Total net assets sold, and transaction expenses:
    
    
    1,229Gain on sale of product line
    
    $
    8,721
 17




---



##### Table of Contents



Indemnification
  Legal Proceedings
  7. Financing Arrangements
    18




---



##### Table of Contents



8. Restructuring, Severance and Other Costs
  Liability as of
    
    
    
    
    
    
    Payments and
    
    
    Liability as ofApril 2, 2006
    
    
    Provision
    
    
    Reductions
    
    
    December 31, 2006(In thousands)Restructuring, severance and other
costs incurredSeverance and workforce reduction
    
    $
    66
    
    
    $
    33
    
    
    $
    (97
    )
    
    $
    2Consolidation of excess facilities
    
    
    1,529
    
    
    
    55
    
    
    
    (668
    )
    
    
    916Total
    
    $
    1,595
    **
    
    $
    88
    
    
    $
    (765
    )
    
    $
    918
    *
 19




---



##### Table of Contents



Liability as of
    
    
    
    
    
    
    Payments and
    
    
    Liability as ofApril 3, 2005
    
    
    Provision
    
    
    Reductions
    
    
    January 1, 2006(In thousands)Restructuring, severance and other
costs incurredSeverance and workforce reduction
    
    $
    
    
    
    $
    2,219
    
    
    $
    (1,567
    )
    
    $
    652Consolidation of excess facilities
    
    
    178
    
    
    
    2,311
    
    
    
    (812
    )***
    
    
    1,677Total
    
    $
    178
    
    
    $
    4,530
    
    
    $
    (2,379
    )
    
    $
    2,329
    *
 
 *
    
    Includes $412,000 and $982,000 classified as long-term as of December 31, 2006 and January 1,
2006, respectively.**
    
    Includes $778,000 and $0 classified as long-term as of April 2, 2006 and April 3, 2005,
respectively.***
    
    Includes non-cash fixed asset write-off of approximately $285,000 related to July 29,
2005 restructuring plan for North American operations. Severance and workforce reduction.
   Consolidation of excess facilities.
   9. Accrued Warranty
  ProvisionsFor Warranties
    
    
    SettlementsBeginning
    
    
    Issued During
    
    
    Of Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantyThree Months Ended December 31, 2006
    
    $
    1,141
    
    
    $
    301
    
    
    $
    (165
    )
    
    $
    1,277Three Months Ended January 1, 2006
    
    $
    837
    
    
    $
    154
    
    
    $
    (425
    )
    
    $
    566
 20




---



##### Table of Contents



ProvisionsFor Warranties
    
    
    SettlementsBeginning
    
    
    Issued During
    
    
    Of Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantyNine Months Ended December 31, 2006
    
    $
    1,244
    
    
    $
    546
    
    
    $
    (513
    )
    
    $
    1,277Nine Months Ended January 1, 2006
    
    $
    1,656
    
    
    $
    541
    
    
    $
    (1,631
    )*
    
    $
    566
 
 *
    
    Includes $243,000 assumed by TEL and $469,000 reclassified to Accrued Commissions related to
Hermes agreement. See Note 6 of Notes to the Unaudited Condensed Consolidated Financial
Statements, titled Commitments and Contingencies.  10. Other Assets, Net
  21




---



##### Table of Contents



11. Mandatorily Redeemable Convertible Preferred Stock
    December 31,
    
    
    April 2,2006
    
    
    2006(In thousands)
    
    
    (In thousands)Redeemable convertible preferred stock
    
    $
    10,400
    
    
    $
    10,400Less:Issuance costs
    
    
    609
    
    
    
    609Fair value of warrants at issuance (see Warrants)
    
    
    1,634
    
    
    
    1,634Fair value of embedded derivative features at issuance (see
Embedded Derivatives)
    
    
    484
    
    
    
    484Beneficial conversion feature at issuance (see Conversion)
    
    
    1,115
    
    
    
    1,115Subtotal
    
    $
    3,842
    
    
    $
    3,842Plus:Accrued unpaid dividends (see Dividends)
    
    
    156
    
    
    
    156Cumulative accretion of discount to redemption value
    
    
    712
    
    
    
    226Convertible preferred stock
    
    $
    7,426
    
    
    $
    6,940
   Registration Rights
  22




---



##### Table of Contents



Voting Rights
  Board Nomination Rights
    Dividends
    Conversion
  23




---



##### Table of Contents



Redemptions
  24




---



##### Table of Contents



Liquidation Preference
  Warrants
  Embedded Derivatives
  25




---



##### Table of Contents



12. Segment Information
      Three Months Ended
    
    Nine Months EndedDecember 31, 2006
    
    January 1, 2006
    
    December 31, 2006
    
    January 1, 2006Revenues by CountryUnited States
    
    
    51
    %
    
    
    39
    %
    
    
    43
    %
    
    
    33
    %Taiwan
    
    
    10
    %
    
    
    10
    %
    
    
    16
    %
    
    
    13
    %Japan
    
    
    23
    %
    
    
    5
    %
    
    
    14
    %
    
    
    11
    %Europe
    
    
    8
    %
    
    
    22
    %
    
    
    11
    %
    
    
    31
    %Korea
    
    
    5
    %
    
    
    12
    %
    
    
    5
    %
    
    
    7
    %China
    
    
    2
    %
    
    
    11
    %
    
    
    3
    %
    
    
    4
    %Singapore
    
    
    1
    %
    
    
    1
    %
    
    
    8
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   26




---



##### Table of Contents



OtherForeignSegment Information (in thousands)
    
    U.S.
    
    
    Locations
    
    
    Eliminations
    
    
    ConsolidatedThree Months Ended December 31, 2006Sales to unaffiliated customers
    
    $
    17,600
    
    
    $
    1,309
    
    
    $
    
    
    
    $
    18,909Transfers between geographic regions
    
    
    115
    
    
    
    107
    
    
    
    (222
    )
    
    
    Total net revenues
    
    $
    17,715
    
    
    $
    1,416
    
    
    $
    (222
    )
    
    $
    18,909Operating income (loss)
    
    $
    (2,762
    )
    
    $
    (93
    )
    
    $
    (75
    )
    
    $
    (2,930
    )Three Months Ended January 1, 2006Sales to unaffiliated customers
    
    $
    13,506
    
    
    $
    1,922
    
    
    $
    
    
    
    $
    15,428Transfers between geographic regions
    
    
    465
    
    
    
    287
    
    
    
    (752
    )
    
    
    Total net revenues
    
    $
    13,971
    
    
    $
    2,209
    
    
    $
    (752
    )
    
    $
    15,428Operating income (loss)
    
    $
    (3,845
    )
    
    $
    (100
    )
    
    $
    51
    
    
    $
    (3,894
    )Nine Months Ended December 31, 2006Sales to unaffiliated customers
    
    $
    48,784
    
    
    $
    3,852
    
    
    $
    
    
    
    $
    52,636Transfers between geographic regions
    
    
    576
    
    
    
    309
    
    
    
    (885
    )
    
    
    Total net revenues
    
    $
    49,360
    
    
    $
    4,161
    
    
    $
    (885
    )
    
    $
    52,636Operating income (loss)
    
    $
    (6,173
    )
    
    $
    (248
    )
    
    $
    (242
    )
    
    $
    (6,663
    )Nine Months Ended January 1, 2006Sales to unaffiliated customers
    
    $
    43,995
    
    
    $
    6,237
    
    
    $
    
    
    
    $
    50,232Transfers between geographic regions
    
    
    (380
    )
    
    
    976
    
    
    
    (596
    )
    
    
    Total net revenues
    
    $
    43,615
    
    
    $
    7,213
    
    
    $
    (596
    )
    
    $
    50,232Operating income (loss)
    
    $
    (14,990
    )
    
    $
    (550
    )
    
    $
    1,410
    
    
    $
    (14,130
    )
 13. Subsequent Event
    27




---



##### Table of Contents



Contingent Consideration
  28




---



##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 FORWARD-LOOKING STATEMENTS
   Overview
      Critical Accounting Policies and Estimates
  29




---



##### Table of Contents



Stock-Based Compensation
 Share-Based Payment, Accounting
for Stock Issued to Employees Accounting for Stock-Based compensation.
 Recently Issued Accounting Pronouncements
   30




---



##### Table of Contents



Results of Operations
  Three Months EndedDecember 31, 2006
    
    
    January 1, 2006% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenuesProduct
    
    $
    14,548
    
    
    
    76.9
    %
    
    $
    10,488
    
    
    
    68.0
    %
    
    $
    4,060
    
    
    
    38.7
    %Service and parts
    
    
    4,361
    
    
    
    23.1
    %
    
    
    4,940
    
    
    
    32.0
    %
    
    
    (579
    )
    
    
    (11.7
    )%Total net revenues
    
    
    18,909
    
    
    
    100.0
    %
    
    
    15,428
    
    
    
    100.0
    %
    
    
    3,481
    
    
    
    22.6
    %Cost of revenuesProduct
    
    
    8,773
    
    
    
    46.4
    %
    
    
    6,121
    
    
    
    39.7
    %
    
    
    2,652
    
    
    
    43.3
    %Service and parts
    
    
    3,607
    
    
    
    19.1
    %
    
    
    3,939
    
    
    
    25.5
    %
    
    
    (332
    )
    
    
    (8.4
    )%Total cost of revenues
    
    
    12,380
    
    
    
    65.5
    %
    
    
    10,060
    
    
    
    65.2
    %
    
    
    2,320
    
    
    
    23.1
    %Gross profit
    
    $
    6,529
    
    
    
    34.5
    %
    
    $
    5,368
    
    
    
    34.8
    %
    
    $
    1,161
    
    
    
    21.6
    %
 Nine Months EndedDecember 31, 2006
    
    
    January 1, 2006% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenuesProduct
    
    $
    38,847
    
    
    
    73.8
    %
    
    $
    35,556
    
    
    
    70.8
    %
    
    $
    3,291
    
    
    
    9.3
    %Service and parts
    
    
    13,789
    
    
    
    26.2
    %
    
    
    14,676
    
    
    
    29.2
    %
    
    
    (887
    )
    
    
    (6.0
    )%Total net revenues
    
    
    52,636
    
    
    
    100.0
    %
    
    
    50,232
    
    
    
    100.0
    %
    
    
    2,404
    
    
    
    4.8
    %Cost of revenuesProduct
    
    
    22,810
    
    
    
    43.3
    %
    
    
    20,545
    
    
    
    40.9
    %
    
    
    2,265
    
    
    
    11.0
    %Service and parts
    
    
    10,358
    
    
    
    19.7
    %
    
    
    11,260
    
    
    
    22.4
    %
    
    
    (902
    )
    
    
    (8.0
    )%Total cost of revenues
    
    
    33,168
    
    
    
    63.0
    %
    
    
    31,805
    
    
    
    63.3
    %
    
    
    1,363
    
    
    
    4.3
    %Gross profit
    
    $
    19,468
    
    
    
    37.0
    %
    
    $
    18,427
    
    
    
    36.7
    %
    
    $
    1,041
    
    
    
    5.6
    %
 31




---



##### Table of Contents



Net Revenues.
    Gross Profit.
   32




---



##### Table of Contents



Research and Development, Selling, General and Administrative Expenses, and Restructuring,
Severance and Other.
 Three Months EndedDecember 31, 2006
    
    
    January 1, 2006% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)
    
    
    ChangeResearch and development
    
    $
    3,302
    
    
    
    17.5
    %
    
    $
    2,755
    
    
    
    17.8
    %
    
    $
    547
    
    
    
    19.9
    %Selling, general and administrative
    
    
    6,147
    
    
    
    32.4
    %
    
    
    5,707
    
    
    
    37.0
    %
    
    
    440
    
    
    
    7.7
    %Restructuring, severance and other
    
    
    10
    
    
    
    0.1
    %
    
    
    800
    
    
    
    5.2
    %
    
    
    (790
    )
    
    
    (98.8
    )%Total operating expenses
    
    $
    9,459
    
    
    
    50.0
    %
    
    $
    9,262
    
    
    
    60.0
    %
    
    $
    197
    
    
    
    2.1
    %
 Nine Months EndedDecember 31, 2006
    
    
    January 1, 2006% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)
    
    
    ChangeResearch and development
    
    $
    9,570
    
    
    
    18.2
    %
    
    $
    9,643
    
    
    
    19.2
    %
    
    $
    (73
    )
    
    
    (0.8
    )%Selling, general and administrative
    
    
    16,474
    
    
    
    31.2
    %
    
    
    18,384
    
    
    
    36.6
    %
    
    
    (1,910
    )
    
    
    (10.4
    )%Restructuring, severance and other
    
    
    87
    
    
    
    0.2
    %
    
    
    4,530
    
    
    
    9.0
    %
    
    
    (4,443
    )
    
    
    (98.1
    )%Total operating expenses
    
    $
    26,131
    
    
    
    49.6
    %
    
    $
    32,557
    
    
    
    64.8
    %
    
    $
    (6,426
    )
    
    
    19.7
    %
 Research and Development (R&D) Expenses.
 Selling, General and Administrative (SG&A) Expenses.
 Restructuring, Severance and Other. Restructuring,
Severance and Other Costs
 Other Income (Expense).
 Three Months Ended,December 31, 2006
    
    
    January 1, 2006% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income (expense)Interest expense
    
    
    (203
    )
    
    
    (1.1
    )%
    
    
    (205
    )
    
    
    (1.3
    )%
    
    
    2Interest income
    
    
    138
    
    
    
    0.7
    %
    
    
    103
    
    
    
    0.7
    %
    
    
    35Fair value adjustment 
warrants and embedded
derivatives and other, net
    
    
    452
    
    
    
    2.4
    %
    
    
    (1
    )
    
    
    
    %
    
    
    453Total other income (expense), net
    
    $
    387
    
    
    
    2.0
    %
    
    $
    (103
    )
    
    
    (0.6
    )%
    
    $
    490
 33




---



##### Table of Contents



Nine Months Ended,December 31, 2006
    
    
    January 1, 2006% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income (expense)Gain on sale of product line
    
    $
    
    
    
    
    
    %
    
    $
    8,721
    
    
    
    17.3
    %
    
    $
    (8,721
    )Interest expense
    
    
    (609
    )
    
    
    (1.2
    )%
    
    
    (352
    )
    
    
    (0.7
    )%
    
    
    (257
    )Interest income
    
    
    533
    
    
    
    1.0
    %
    
    
    178
    
    
    
    0.4
    %
    
    
    355Fair value adjustment 
warrants and embedded
derivatives and other, net
    
    
    1,173
    
    
    
    2.3
    %
    
    
    (64
    )
    
    
    (0.1
    )%
    
    
    1,237Total other income (expense), net
    
    $
    1,097
    
    
    
    2.1
    %
    
    $
    8,483
    
    
    
    16.9
    %
    
    $
    (7,386
    )
 Other Income (Expense).
 Provision for Income Taxes (Benefit).
 Accretion of Series B Preferred Stock to Redemption Value and Dividends Accrued.
 Stock-Based Employee Compensation
   Three Months EndedDecember 31,
    
    
    January 1,
    
    
    Increase2006
    
    
    2006
    
    
    (Decrease)Cost of revenues
    
    $
    43
    
    
    $
    (2
    )
    
    $
    45Research and development
    
    
    68
    
    
    
    (17
    )
    
    
    85Selling, general and administrative
    
    
    282
    
    
    
    (9
    )
    
    
    291Subtotal
    
    
    350
    
    
    
    (26
    )
    
    
    376Total stock-based compensation expense (benefit)
    
    $
    393
    
    
    $
    (28
    )
    
    $
    421
 34




---



##### Table of Contents



Nine Months EndedDecember 31,
    
    
    January 1,
    
    
    Increase2006
    
    
    2006
    
    
    (Decrease)Cost of revenues
    
    $
    122
    
    
    $
    
    
    
    $
    122Research and development
    
    
    218
    
    
    
    (263
    )
    
    
    481Selling, general and administrative
    
    
    876
    
    
    
    (4
    )
    
    
    880Subtotal
    
    
    1,094
    
    
    
    (267
    )
    
    
    1,361Total stock-based compensation expense (benefit)
    
    $
    1,216
    
    
    $
    (267
    )
    
    $
    1,483
 Liquidity and Capital Resources
     35




---



##### Table of Contents



Commitments
  2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012 AndFiscal Year:
    
    (3 months)
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    464
    
    
    $
    1,863
    
    
    $
    1,405
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    6
    
    
    $
    5,970Asset retirement obligations
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275Purchase commitments
    
    
    5,443
    
    
    
    1,272
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,719Minimum royalty payments
    
    
    205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    205Cancellation fees
    
    
    5
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15Series B redeemable convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,400
    
    
    
    10,400Term debt *
    
    
    833
    
    
    
    2,500
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,583Interest payments on term debt **
    
    
    158
    
    
    
    289
    
    
    
    41
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    488Total future minimum payments
    
    $
    7,108
    
    
    $
    6,209
    
    
    $
    2,700
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    10,406
    
    
    $
    28,655
 
 *
    
    The term loan has a stated maturity of September 2008, however the entire outstanding balance
has been classified as a current liability as of December 31, 2006, primarily due to the
Material Adverse Change clause that permits the lender to accelerate the maturity of the debt
based upon factors that are subjective in nature.**
    
    Interest payments are based on a variable rate as described in Note 7, Financing
Arrangements. Payment commitments included in this disclosure are estimated based on the
quarter ended December 31, 2006 interest rate of 10.75%. 36




---



##### Table of Contents



Operating Leases.
 Purchase Commitment and Cancellation Fees.
 Minimum Royalty Payments.
 Financing/Other Contingencies.
   37




---



##### Table of Contents



38




---



##### Table of Contents



Series B Redeemable Convertible Preferred Stock.
  Contingent Consideration
 Subsequent Event
 Inflation
  
 Item 3. Quantitative and Qualitative Disclosure about Market Risk
 Market Risk Disclosures
  Market Risk Related to Interest Rate, Stock Price and Foreign Currency
  Interest Rates Related to Investment Portfolio
  39




---



##### Table of Contents



Interest Rates and Stock Price Related to Warrants
  Embedded Derivatives
  
 Item 4. Controls and Procedures
 Disclosure Controls and Procedures
    40




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
  
    
    Additional monitoring controls used in conjunction with the performance of independent
internal reviews of all key account reconciliations, including inventory and warranty
related transactions and all corresponding journal entries and related support;
    
    Hiring new senior accounting personnel and experienced accounting and finance staff and
    
    Enhancement of our training programs for accounting staff as well as our overall supervision of finance personnel.
  Internal Control Over Financial Reporting
  Limitation on Effectiveness of Controls
  41




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Factors Affecting Future Results
  OUR PROPOSED TRANSACTION WITH KLA-TENCOR INVOLVES A HIGH DEGREE OF RISK, INCLUDING THE RISK THAT
THE TRANSACTION MAY NOT BE CONSUMMATED.
    42




---



##### Table of Contents



WE HAVE INCURRED SIGNIFICANT OPERATING LOSSES AND MAY NOT BE PROFITABLE IN THE FUTURE; OUR PLANS TO
MAINTAIN AND INCREASE LIQUIDITY MAY NOT BE SUCCESSFUL; THE REPORT OF OUR INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM INCLUDES A GOING CONCERN UNCERTAINTY EXPLANATORY PARAGRAPH.
  WE NEED TO HAVE SUFFICIENT CASH TO OPERATE IF OUR BUSINESS IS TO SUCCEED.
   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.
  
    
    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 the 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;
    
    delays in manufacturing or product shipments or contractual terms that require a delay
between when our products are shipped and when we can recognize revenue in connection with
such shipments; and
    
    levels of fixed expenses relative to revenue levels, including research and development costs
associated with product development.
 43




---



##### Table of Contents



WE COMPLETED A PRIVATE PLACEMENT TRANSACTION IN NOVEMBER 2005, PURSUANT TO WHICH CERTAIN OF OUR
STOCKHOLDERS HAVE PROTECTIVE RIGHTS THAT MAY LIMIT OUR ACCESS TO ADDITIONAL DEBT OR EQUITY CAPITAL
AND OTHERWISE SIGNIFICANTLY IMPACT OUR LIQUIDITY, FINANCIAL POSITION AND EARNINGS.
  WE MAY INCUR INDEBTEDNESS IN THE FUTURE UNDER OUR BANK CREDIT FACILITIES OR OTHERWISE, WHICH COULD
REQUIRE THE USE OF A PORTION OF OUR CASH FLOWS AND MAY LIMIT OUR ACCESS TO ADDITIONAL CAPITAL.
   
    
    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 downturn in the semiconductor and/or semiconductor capital equipment
industries.
 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.
  44




---



##### Table of Contents



IF WE FAIL TO REMEDIATE THE MATERIAL WEAKNESS AND CONTROL DEFICIENCY IN OUR INTERNAL CONTROL OVER
FINANCIAL REPORTING WE MAY BE UNABLE TO ACCURATELY REPORT OUR FINANCIAL RESULTS OR PREVENT FRAUD
WHICH COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE
EFFECT ON OUR BUSINESS AND OPERATING RESULTS AND OUR STOCK PRICE.
 Controls and Procedures
  OUR ABILITY TO MAKE NEW BORROWINGS UNDER OUR BANK CREDIT FACILITIES REQUIRES CONSENT FROM THE
HOLDERS OF OUR SERIES B REDEEMABLE PREFERRED STOCK AND OUR CREDIT FACILITIES ARE SUBJECT TO A
BORROWING BASE CALCULATION AND A MATERIAL ADVERSE CHANGE CLAUSE.
   45




---



##### Table of Contents



OUR RESTRUCTURING ACTIVITIES COULD RESULT IN MANAGEMENT DISTRACTIONS, OPERATIONAL DISRUPTIONS AND
OTHER DIFFICULTIES.
  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.
  ANY SIGNIFICANT ORDER CANCELLATIONS OR ORDER DEFERRALS COULD ADVERSELY AFFECT OUR OPERATING
RESULTS.
  OUR PRODUCTS TYPICALLY HAVE LENGTHY DESIGN CYCLES DURING WHICH A CUSTOMER MAY DECIDE TO CANCEL OR
CHANGE ITS PRODUCT PLANS, WHICH COULD CAUSE US TO LOSE ANTICIPATED SALES.
  46




---



##### Table of Contents



IF ANY OF OUR SYSTEMS FAIL TO MEET OR EXCEED OUR INTERNAL QUALITY SPECIFICATIONS, WE CANNOT SHIP
THEM UNTIL SUCH TIME AS THEY HAVE MET SUCH SPECIFICATIONS. IF WE EXPERIENCE SIGNIFICANT DELAYS OR
ARE UNABLE TO SHIP OUR PRODUCTS TO OUR CUSTOMERS AS A RESULT OF OUR INTERNAL PROCESSES, OR FOR ANY
OTHER REASON, OUR BUSINESS AND REPUTATION MAY SUFFER.
  OUR CUSTOMERS FREQUENTLY REQUEST US TO PROVIDE LONG SUPPORT PERIODS THAT CAN RESULT IN EXCESS OR
OBSOLETE INVENTORY.
  OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY TECHNOLOGY OR
IF WE INFRINGE THE PROPRIETARY TECHNOLOGY OF OTHERS.
  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 AND CUSTOMERS. HOWEVER, THESE AGREEMENTS MAY BE BREACHED, WE MAY NOT HAVE ADEQUATE
REMEDIES FOR ANY BREACH AND OUR CONFIDENTIAL AND PROPRIETARY INFORMATION AND TECHNOLOGY MAY BE
INDEPENDENTLY DEVELOPED BY, OR BECOME OTHERWISE KNOWN TO, THIRD PARTIES.
  47




---



##### Table of Contents



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 OPERATE IN THE HIGHLY COMPETITIVE SEMICONDUCTOR CAPITAL EQUIPMENT INDUSTRY AND COMPETE AGAINST
SIGNIFICANTLY LARGER COMPANIES.
  COMPETITIVE CONDITIONS IN OUR INDUSTRY MAY REQUIRE US TO REDUCE OUR PRICES.
  WE ENCOUNTER DIFFICULTIES IN SOLICITING CUSTOMERS OF OUR COMPETITORS BECAUSE OF HIGH SWITCHING
COSTS IN THE MARKETS IN WHICH WE OPERATE.
  48




---



##### Table of Contents



OUR FUTURE GROWTH DEPENDS ON OUR ABILITY TO DEVELOP NEW AND ENHANCED PRODUCTS FOR THE SEMICONDUCTOR
INDUSTRY. WE MAY NOT BE SUCCESSFUL IN OUR PRODUCT DEVELOPMENT EFFORTS OR OUR NEW PRODUCTS MAY NOT
GAIN GENERAL MARKET ACCEPTANCE.
  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.
  RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY WILL REQUIRE US TO CONTINUALLY DEVELOP NEW AND ENHANCED
PRODUCTS.
  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 INTENSE.
  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 AN ADVERSE EFFECT ON
OUR OPERATIONS.
  49




---



##### Table of Contents



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 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.
  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.
  WE RECENTLY CHANGED THE WAY WE MARKET AND SELL OUR PRODUCTS IN CERTAIN COUNTRIES IN ASIA, ONE OF
OUR LARGEST MARKETS. AS A RESULT, OUR SALES IN THAT REGION MAY NOT BE IN LINE WITH HISTORICAL
TRENDS.
  50




---



##### Table of Contents



WE ARE SUBJECT TO OPERATIONAL, FINANCIAL, POLITICAL AND FOREIGN EXCHANGE RISKS DUE TO OUR
SIGNIFICANT LEVEL OF INTERNATIONAL SALES.
  
    
    unexpected changes in regulatory requirements;
 
    
    tariffs and other market barriers;
 
    
    foreign currency exchange fluctuations;
 
    
    political and economic instability;
 
    
    potentially adverse tax consequences;
 
    
    outbreaks of hostilities;
 
    
    difficulties in accounts receivable collection;
 
    
    reduced or uncertain protection for intellectual property rights in some countries;
 
    
    extended payment terms;
 
    
    difficulties in managing foreign sales representatives; and
 
    
    difficulties in managing staffing and other elements of foreign subsidiary and branch operations.
  FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS OR PRACTICES OR EXISTING TAXATION RULES OR
PRACTICES MAY CAUSE ADVERSE UNEXPECTED REVENUE FLUCTUATIONS AND AFFECT OUR REPORTED RESULTS OF
OPERATIONS.
  51




---



##### Table of Contents



PROVISIONS OF OUR CHARTER DOCUMENTS, OUR PREFERRED STOCK FINANCING DOCUMENTS AND DELAWARE LAW COULD
DISCOURAGE POTENTIAL ACQUISITION PROPOSALS AND COULD DELAY, DETER OR PREVENT A CHANGE IN CONTROL.
  
    
    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 our bylaws; and
 
    
    the authority of the board of directors to issue, without stockholder approval, preferred
stock with such terms as the board may determine, which could have a dilutive effect on our
stockholders.
    IF WE ISSUE ADDITIONAL SHARES OF STOCK IN THE FUTURE, IT MAY HAVE A DILUTIVE EFFECT ON OUR
STOCKHOLDERS.
  52




---



##### Table of Contents



WE HAVE RECEIVED A NUMBER OF INQUIRIES FROM OUR STOCKHOLDERS, WHICH MAY BE A PRECURSOR TO
LITIGATION
  WE ARE NOT CERTIFIED UNDER THE INTERNATIONAL ORGANIZATION FOR STANDARDIZATION
  
 Item 5. Other Information
     53




---



##### Table of Contents



Item 6. Exhibits
 Exhibit Number
    
    Description3.1(1)
    
    Restated Certificate of Incorporation of Therma-Wave, Inc.3.2(2)
    
    Certificate of Amendment to Restated Certificate of
Incorporation of Therma-Wave, Inc.3.3(3)
    
    Amended and Restated By-Laws of Therma-Wave, Inc.3.4(4)
    
    Certificate of Designation of Rights, Preferences and
Privileges of Series B convertible preferred stock of
Therma-Wave, Inc.4.1(5)
    
    Form of certificate representing shares of Common Stock of
Therma-Wave, Inc.10.1(6)
    
    Second Modification to Loan and Security Agreement between
Therma-Wave, Inc. and Silicon Valley Bank dated October 2,
2006.31.1
    
    Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 2, 2000 (File No. 000-26911) and filed with the SEC on June 30, 2000.(2)
    
    Incorporated herein by reference to Therma-Waves Quarterly Report on Form 10-Q for the
period ended September 29, 2002 (File No. 000-26911) and filed with the SEC on November 13,
2002.(3)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 1, 2001 (File No. 000-26911) and filed with the SEC on June 21, 2001.(4)
    
    Incorporated herein by reference to Therma-Waves Registration Statement on Form S-3 (File
No. 333-130717) filed with the SEC on December 27, 2005.(5)
    
    Incorporated herein by reference to Therma-Waves Amendment No. 3 to Registration Statement
on Form S-1 (Registration No 333-76019) and filed with the SEC on July 21, 1999.(6)
    
    Incorporated herein by reference to Therma-Waves Current Report on Form 8-K filed on October
2, 2006 (File No. 000-26911). 54




---



##### Table of Contents



SIGNATURES
  THERMA-WAVE, INC.(Registrant)/s/ Boris LipkinBoris LipkinPresident, Chief Executive Officer and DirectorFebruary 7, 2007THERMA-WAVE, INC.(Registrant)/s/ Joseph PassarelloJoseph PassarelloSenior Vice President, Chief Financial Officer and Secretary(as Registrant and as Principal Accounting Officer)February 7, 2007
 55




---



##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description3.1(1)
    
    Restated Certificate of Incorporation of Therma-Wave, Inc.3.2(2)
    
    Certificate of Amendment to Restated Certificate of
Incorporation of Therma-Wave, Inc.3.3(3)
    
    Amended and Restated By-Laws of Therma-Wave, Inc.3.4(4)
    
    Certificate of Designation of Rights, Preferences and
Privileges of Series B convertible preferred stock of
Therma-Wave, Inc.4.1(5)
    
    Form of certificate representing shares of Common Stock of
Therma-Wave, Inc.10.1(6)
    
    Second Modification to Loan and Security Agreement between
Therma-Wave, Inc. and Silicon Valley Bank dated October 2,
2006.31.1
    
    Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification of Principal Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Principal Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 2, 2000 (File No. 000-26911) and filed with the SEC on June 30, 2000.(2)
    
    Incorporated herein by reference to Therma-Waves Quarterly Report on Form 10-Q for the
period ended September 29, 2002 (File No. 000-26911) and filed with the SEC on November 13,
2002.(3)
    
    Incorporated herein by reference to Therma-Waves Annual Report on Form 10-K for the period
ended April 1, 2001 (File No. 000-26911) and filed with the SEC on June 21, 2001.(4)
    
    Incorporated herein by reference to Therma-Waves Registration Statement on Form S-3 (File
No. 333-130717) and filed with the SEC on December 27, 2005.(5)
    
    Incorporated herein by reference to Therma-Waves Amendment No. 3 to Registration Statement
on Form S-1 (Registration No 333-76019) and filed with the SEC on July 21, 1999.(6)
    
    Incorporated herein by reference to Therma-Waves Current Report on Form 8-K filed on October
2, 2006 (File No. 000-26911).