##### 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 October 1, 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 October 31, 2006Common stock, $0.01 par value
    
    
    37,188,800




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##### 



THERMA-WAVE, INC.
TABLE OF CONTENTS
 Page No.PART I. FINANCIAL INFORMATIONITEM 1. Financial Statements (Unaudited)Condensed Consolidated Balance Sheets as of October 1, 2006 and April 2, 2006
    
    
    3Condensed Consolidated Statements of Operations for the Three and Six Months
Ended October 1, 2006 and October 2, 2005
    
    
    4Condensed Consolidated Statements of Cash Flows for the Six Months Ended
October 1, 2006 and October 2, 2005
    
    
    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
    
    
    41ITEM 4. Controls and Procedures
    
    
    42PART II. OTHER INFORMATIONITEM 1. Legal Proceedings
    
    
    43ITEM 1A. Risk Factors
    
    
    43ITEM 4. Submission of Matters to a Vote of Security Holders
    
    
    53ITEM 5. Other Information
    
    
    54ITEM 6. Exhibits
    
    
    55SIGNATURES
    
    
    57EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
(Unaudited)
 October 1,
    
    
    April 2,2006
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    17,529
    
    
    $
    20,623Accounts receivable, net of allowances of
$418 and $774 at October 1, 2006 and April
2, 2006, respectively
    
    
    10,872
    
    
    
    12,701Inventories
    
    
    28,386
    
    
    
    22,353Other current assets
    
    
    1,024
    
    
    
    1,621Total current assets
    
    
    57,811
    
    
    
    57,298Property and equipment, net
    
    
    752
    
    
    
    789Other assets, net
    
    
    1,186
    
    
    
    1,291Total assets
    
    $
    59,749
    
    
    $
    59,378LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    7,408
    
    
    $
    4,062Accrued liabilities
    
    
    12,919
    
    
    
    13,642Deferred revenues
    
    
    8,539
    
    
    
    7,874Term loan facility, net
    
    
    4,915
    
    
    
    4,896Warrants and embedded derivatives
    
    
    1,462
    
    
    
    2,178Total current liabilities
    
    
    35,243
    
    
    
    32,652Non-current deferred revenues
    
    
    490
    
    
    
    662Other long-term liabilities
    
    
    826
    
    
    
    1,076Total liabilities
    
    
    36,559
    
    
    
    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 October 1, 2006 and April 2,
2006
    
    
    7,260
    
    
    
    6,940Stockholders equity:Common stock, $0.01 par value; 75,000,000
shares authorized; 37,189,412 shares issued
and outstanding at October 1, 2006;
37,045,692 shares issued and outstanding at
April 2, 2006
    
    
    372
    
    
    
    371Additional paid-in capital
    
    
    336,973
    
    
    
    336,036Notes receivable from stockholders
    
    
    (174
    )
    
    
    (174
    )Accumulated other comprehensive loss
    
    
    (1,119
    )
    
    
    (1,108
    )Deferred stock-based compensation
    
    
    
    
    
    
    (36
    )Accumulated deficit
    
    
    (320,122
    )
    
    
    (317,041
    )Total stockholders equity
    
    
    15,930
    
    
    
    18,048Total liabilities and stockholders equity
    
    $
    59,749
    
    
    $
    59,378
  3




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##### Table of Contents



THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In thousands, except per share data)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedOctober 1,
    
    
    October 2,
    
    
    October 1,
    
    
    October 2,2006
    
    
    2005
    
    
    2006
    
    
    2005Net revenuesProduct
    
    $
    11,181
    
    
    $
    12,348
    
    
    $
    24,299
    
    
    $
    25,068Service and parts
    
    
    4,636
    
    
    
    4,917
    
    
    
    9,428
    
    
    
    9,736Total net revenues
    
    
    15,817
    
    
    
    17,265
    
    
    
    33,727
    
    
    
    34,804Cost of revenuesProduct
    
    
    6,439
    
    
    
    7,320
    
    
    
    14,037
    
    
    
    13,738Service and parts
    
    
    3,291
    
    
    
    4,001
    
    
    
    6,751
    
    
    
    8,007Total cost of revenues
    
    
    9,730
    
    
    
    11,321
    
    
    
    20,788
    
    
    
    21,745Gross profit
    
    
    6,087
    
    
    
    5,944
    
    
    
    12,939
    
    
    
    13,059Operating expenses:Research and development
    
    
    3,120
    
    
    
    3,052
    
    
    
    6,268
    
    
    
    6,888Selling, general and administrative
    
    
    5,329
    
    
    
    4,922
    
    
    
    10,327
    
    
    
    12,676Restructuring, severance and other
    
    
    77
    
    
    
    2,264
    
    
    
    77
    
    
    
    3,731Total operating expenses
    
    
    8,526
    
    
    
    10,238
    
    
    
    16,672
    
    
    
    23,295Operating loss
    
    
    (2,439
    )
    
    
    (4,294
    )
    
    
    (3,733
    )
    
    
    (10,236
    )Other income (expense):Gain on sale of product line
    
    
    
    
    
    
    171
    
    
    
    
    
    
    
    8,721Interest expense
    
    
    (206
    )
    
    
    (90
    )
    
    
    (406
    )
    
    
    (147
    )Interest income
    
    
    197
    
    
    
    43
    
    
    
    395
    
    
    
    75Fair value adjustment  warrants and
embedded derivatives and other, net
    
    
    409
    
    
    
    33
    
    
    
    721
    
    
    
    (63
    )Total other income, net
    
    
    400
    
    
    
    157
    
    
    
    710
    
    
    
    8,586Loss before provision (benefit) for income taxes
    
    
    (2,039
    )
    
    
    (4,137
    )
    
    
    (3,023
    )
    
    
    (1,650
    )Provision (benefit) for income taxes
    
    
    (404
    )
    
    
    11
    
    
    
    (577
    )
    
    
    52Net loss
    
    
    (1,635
    )
    
    
    (4,148
    )
    
    
    (2,446
    )
    
    
    (1,702
    )Accretion of Series B preferred stock to
redemption value and dividends accrued
    
    
    (321
    )
    
    
    
    
    
    
    (635
    )
    
    
    Net loss available to common stockholders
    
    $
    (1,956
    )
    
    $
    (4,148
    )
    
    $
    (3,081
    )
    
    $
    (1,702
    )Net loss per share:Basic
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    (0.05
    )Diluted
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    (0.05
    )Weighted average common shares outstanding:Basic
    
    
    36,835
    
    
    
    36,682
    
    
    
    36,810
    
    
    
    36,530Diluted
    
    
    36,835
    
    
    
    36,682
    
    
    
    36,810
    
    
    
    36,530
  4




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THERMA-WAVE, INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In thousands)
 (Unaudited)
 Six months endedOctober 1, 2006
    
    
    October 2, 2005Operating activities:Net loss
    
    $
    (2,446
    )
    
    $
    (1,702
    )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
    
    
    221
    
    
    
    1,230Amortization of intangible assets
    
    
    312
    
    
    
    366Fair value adjustmentwarrants and embedded derivatives
    
    
    (716
    )
    
    
    Stock-based compensation expense (benefit)
    
    
    823
    
    
    
    (239
    )Provision (credit) for doubtful accounts receivable
    
    
    (356
    )
    
    
    133Loss on disposal of property and equipment
    
    
    10
    
    
    
    95Changes in operating assets and liabilities (excluding assets sold and
liabilities assumed):Accounts receivable
    
    
    2,185
    
    
    
    3,832Inventories
    
    
    (6,033
    )
    
    
    5,447Other assets
    
    
    524
    
    
    
    967Accounts payable
    
    
    3,346
    
    
    
    (4,569
    )Accrued and other liabilities
    
    
    (981
    )
    
    
    (1,414
    )Deferred revenues
    
    
    493
    
    
    
    (8,692
    )Net cash used in operating activities
    
    
    (2,618
    )
    
    
    (12,982
    )Investing activities:Sale of product line
    
    
    
    
    
    
    8,950Purchases of property and equipment
    
    
    (194
    )
    
    
    (52
    )Purchase of patents
    
    
    (107
    )
    
    
    (138
    )Net cash provided by (used in) investing activities
    
    
    (301
    )
    
    
    8,760Financing activities:Borrowings from term loan facility
    
    
    
    
    
    
    5,000Proceeds from issuance of common stock
    
    
    151
    
    
    
    599Payment of Series B preferred stock dividends
    
    
    (315
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (164
    )
    
    
    5,599Effect of exchange rates on cash
    
    
    (11
    )
    
    
    (258
    )Net increase (decrease) in cash and cash equivalents
    
    
    (3,094
    )
    
    
    1,119Cash and cash equivalents at beginning of period
    
    
    20,623
    
    
    
    13,419Cash and cash equivalents at end of period
    
    $
    17,529
    
    
    $
    14,538Supplementary disclosures:Cash paid for interest
    
    $
    484
    
    
    $
    258Cash paid for income taxes
    
    $
    44
    
    
    $
    148Application of customer deposit to sale of product line
    
    $
    
    
    
    $
    1,000Dividends and accretion on Series B convertible preferred stock
    
    $
    635
    
    
    $
    
  5




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##### Table of Contents



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




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Revenue Recognition
  
     Persuasive evidence of an arrangement exists:
 7




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##### Table of Contents



Delivery has occurred or services have been rendered:
 The sellers price to the buyer is fixed or determinable:
 Collectibility is reasonably assured:
  a.
    
    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.b.
    
    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.c.
    
    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.d.
    
    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.
   Service and Parts Revenues.
 8




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##### Table of Contents



Allowances for Doubtful Accounts Receivable and Sales Allowances
  Recently Issued Accounting Pronouncements
      9




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##### Table of Contents



2. Balance Sheet Components
 (in thousands)
    
    October 1,
    
    
    April 2,2006
    
    
    2006Inventories:Raw materials and field service inventory
    
    $
    12,799
    
    
    $
    11,136Systems in process
    
    
    11,414
    
    
    
    6,265Finished systems
    
    
    2,313
    
    
    
    3,648Inventory at customer locations
    
    
    1,860
    
    
    
    1,304Total inventories
    
    $
    28,386
    
    
    $
    22,353
 October 1,
    
    
    April 2,2006
    
    
    2006Property and equipment:Laboratory and test equipment
    
    $
    4,059
    
    
    $
    4,053Office furniture and equipment
    
    
    10,302
    
    
    
    10,241Machinery and equipment
    
    
    736
    
    
    
    728Leasehold improvements
    
    
    7,219
    
    
    
    7,218Total property and equipment
    
    
    22,316
    
    
    
    22,240Accumulated depreciation and amortization
    
    
    (21,564
    )
    
    
    (21,451
    )Total property and equipment, net
    
    $
    752
    
    
    $
    789
  (in thousands)
    
    October 1,
    
    
    April 2,2006
    
    
    2006Accrued liabilities:Accrued compensation and related expenses
    
    $
    3,595
    
    
    $
    3,078Accrued warranty
    
    
    1,141
    
    
    
    1,244Commissions payable
    
    
    1,997
    
    
    
    1,928Income taxes
    
    
    4,113
    
    
    
    4,696Restructuring liabilities
    
    
    527
    
    
    
    817Accrued auditing
    
    
    299
    
    
    
    831Accrued sales and property taxes
    
    
    416
    
    
    
    306Other accrued liabilities
    
    
    831
    
    
    
    742Total accrued liabilities
    
    $
    12,919
    
    
    $
    13,642
 10




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##### Table of Contents



3. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005Net loss
    
    $
    (1,635
    )
    
    $
    (4,148
    )
    
    $
    (2,446
    )
    
    $
    (1,702
    )Other comprehensive loss:Net change in cumulative
translation adjustment
    
    
    (60
    )
    
    
    (115
    )
    
    
    (11
    )
    
    
    (258
    )Comprehensive loss
    
    $
    (1,695
    )
    
    $
    (4,263
    )
    
    $
    (2,457
    )
    
    $
    (1,960
    )
 11




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##### Table of Contents



4. Net Loss Per Share
    Three Months Ended
    
    Six Months EndedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005Securities
excluded from
diluted net loss
per share:Stock options
    
    
    6,200
    
    
    
    5,565
    
    
    
    6,200
    
    
    
    5,565Warrants
    
    
    1,722
    
    
    
    162
    
    
    
    1,722
    
    
    
    162Series B redeemable
convertible
preferred stock
(assuming
conversion to
common shares)
    
    
    7,374
    
    
    
    
    
    
    
    7,374
    
    
    
    
   Three Months Ended
    
    
    Six Months EndedOctober 1, 2006
    
    
    October 2, 2005
    
    
    October 1, 2006
    
    
    October 2, 2005Basic:Net loss available to common
stockholders
    
    $
    (1,956
    )
    
    $
    (4,148
    )
    
    $
    (3,081
    )
    
    $
    (1,702
    )Weighted shares outstanding
    
    
    36,835
    
    
    
    36,682
    
    
    
    36,810
    
    
    
    36,530Net loss per share
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    (0.05
    )Diluted:Net loss available to common
stockholders
    
    $
    (1,956
    )
    
    $
    (4,148
    )
    
    $
    (3,081
    )
    
    $
    (1,702
    )Weighted shares outstanding
    
    
    36,835
    
    
    
    36,682
    
    
    
    36,810
    
    
    
    36,530Effect of dilutive securities:Stock options, warrants and
convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Dilutive weighted shares
outstanding
    
    
    36,835
    
    
    
    36,682
    
    
    
    36,810
    
    
    
    36,530Net loss per share
    
    $
    (0.05
    )
    
    $
    (0.11
    )
    
    $
    (0.08
    )
    
    $
    (0.05
    )
 12




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##### Table of Contents



5. Stock-Based Compensation
  i.e. Accounting for Stock-Based Compensation,
   Prior to the adoption of SFAS No. 123(R)
  13




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Three Months Ended
    
    
    Six Months EndedOctober 2, 2005
    
    
    October 2, 2005(In thousands, except
    
    
    (In thousands, exceptper share data)
    
    
    per share data)Pro forma Net Loss Under SFAS No. 123:Net lossAs reported
    
    $
    (4,148
    )
    
    $
    (1,702
    )Add: Stock-based employee compensation
expense (benefit) included in the
determination of net loss, as reported
    
    
    (80
    )
    
    
    (239
    )Deduct: Stock-based employee
compensation expense as determined
using the fair value method
    
    
    (224
    )
    
    
    (523
    )Pro forma net loss
    
    $
    (4,452
    )
    
    $
    (2,464
    )Basic net loss per shareAs reported
    
    $
    (0.11
    )
    
    $
    (0.05
    )Pro forma
    
    $
    (0.12
    )
    
    $
    (0.07
    )Diluted net loss per shareAs reported
    
    $
    (0.11
    )
    
    $
    (0.05
    )Pro forma
    
    $
    (0.12
    )
    
    $
    (0.07
    )
  Impact of the adoption of SFAS No. 123(R)
  Three Months Ended
    
    
    Six Months EndedOctober 1, 2006
    
    
    October 1, 2006(In thousands)
    
    
    (In thousands)Stock-based compensation expense by type of award:Employee stock options
    
    $
    466
    
    
    $
    785Employee stock purchase plan
    
    
    17
    
    
    
    38Net effect on net loss
    
    $
    483
    
    
    $
    823Effect on net loss per share:Basic
    
    $
    (0.01
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )
  14




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Valuation Assumptions
  Three Months Ended
    
    Six Months EndedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005Assumptions Used for
Estimating Fair Value of
Option Grants:Risk-free interest rate
    
    
    4.8
    %
    
    
    4.0
    %
    
    
    4.9
    %
    
    
    3.9
    %Dividend yield
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Volatility
    
    
    94
    %
    
    
    74
    %
    
    
    95
    %
    
    
    74
    %Expected life (in years)
    
    
    5.4
    
    
    
    3.2
    
    
    
    5.4
    
    
    
    3.2
  Three Months Ended
    
    Six Months EndedOctober 1, 2006
    
    October 2, 2005
    
    October 1, 2006
    
    October 2, 2005Assumptions Used for
Estimating Fair Value of
ESPP Purchase Rights:Risk-free interest rate
    
    
    4.5
    %
    
    
    3.1
    %
    
    
    4.3
    %
    
    
    3.3
    %Dividend yield
    
    
    
    %
    
    
    
    %
    
    
    
    %
    
    
    
    %Volatility
    
    
    66
    %
    
    
    71
    %
    
    
    69
    %
    
    
    59
    %Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
   15




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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
    
    
    119,023
    
    
    
    (119,023
    )
    
    
    7.51Balance at October 1, 2006
    
    
    1,791,156
    
    
    
    6,199,540
    
    
    $
    3.08
    
    
    
    6.6
    
    
    $
    916Options exercisable at
October 1, 2006
    
    
    
    
    
    
    3,515,354
    
    
    $
    4.04
    
    
    
    6.4
    
    
    $
    659
 16




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##### Table of Contents



Three
    
    
    SixMonths
    
    
    MonthsEnded
    
    
    EndedOctober 1, 2006
    
    
    October 1, 2006Weighted average grant date fair value of options granted (per share)
    
    $
    0.78
    
    
    $
    0.87Total fair value of shares vested (in thousands)
    
    $
    423
    
    
    $
    787Total intrinsic value of options exercised (in thousands)
    
    $
    1
    
    
    $
    1Total cash received from employees as a result of employee stock
option exercises (in thousands)
    
    $
    
    
    
    $
    Tax benefits realized as a result of employee stock option exercises
    
    $
    
    
    
    $
    
   6. Commitments and Contingencies
    2007(6 months)
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    Total(In thousands)Contractual
obligations by
Fiscal Year:Operating lease
obligations
    
    $
    932
    
    
    $
    1,725
    
    
    $
    1,299
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    6
    
    
    $
    6,194Asset retirement
obligations
    
    
    
    
    
    $
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    275Total
    
    $
    932
    
    
    $
    2,000
    
    
    $
    1,299
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    6
    
    
    $
    6,469
 Operating Leases
 17




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18




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##### Table of Contents



Six Months EndedOctober 2, 2005(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
 Indemnification
  Legal Proceedings
  7. Financing Arrangements
  19




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20




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##### Table of Contents



8. Restructuring, Severance and Other Costs
  Liability as of
    
    
    
    
    
    
    Payments and
    
    
    Liability as ofApril 2, 2006
    
    
    Provision
    
    
    Reductions
    
    
    October 1, 2006(In thousands)Restructuring, severance and other
costs incurredSeverance and workforce reduction
    
    $
    66
    
    
    $
    50
    
    
    $
    (97
    )
    
    $
    19Consolidation of excess facilities
    
    
    1,529
    
    
    
    27
    
    
    
    (521
    )
    
    
    1,035Total
    
    $
    1,595
    **
    
    $
    77
    
    
    $
    (618
    )
    
    $
    1,054
    *
 Liability as of
    
    
    
    
    
    
    Payments and
    
    
    Liability as ofApril 3, 2005
    
    
    Provision
    
    
    Reductions
    
    
    October 2, 2005(In thousands)Restructuring, severance and other
costs incurredSeverance and workforce reduction
    
    $
    
    
    
    $
    1,448
    
    
    $
    (1,434
    )
    
    $
    14Consolidation of excess facilities
    
    
    178
    
    
    
    2,283
    
    
    
    (555
    )***
    
    
    1,906Total
    
    $
    178
    **
    
    $
    3,731
    
    
    $
    (1,989
    )
    
    $
    1,920
    *
 
 *
    
    Includes $527,000 and $0 classified as long-term as of October 1, 2006 and
October 2, 2005, 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.
   21




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##### Table of Contents



9. Accrued Warranty
  ProvisionsFor Warranties
    
    
    SettlementsIssued
    
    
    ofBeginning
    
    
    During
    
    
    Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantyThree Months
Ended October 1,
2006
    
    $
    1,179
    
    
    $
    108
    
    
    $
    (146
    )
    
    $
    1,141Three Months
Ended October 2,
2005
    
    $
    1,303
    
    
    $
    283
    
    
    $
    (749
    )*
    
    $
    837
 
 *
    
    Includes $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. ProvisionsFor Warranties
    
    
    SettlementsIssued
    
    
    ofBeginning
    
    
    During
    
    
    Pre-Existing
    
    
    EndingBalance
    
    
    the Period
    
    
    Warranties
    
    
    Balance(In thousands)Accrued WarrantySix Months Ended
October 1, 2006
    
    $
    1,244
    
    
    $
    245
    
    
    $
    (348
    )
    
    $
    1,141Six Months Ended
October 2, 2005
    
    $
    1,656
    
    
    $
    387
    
    
    $
    (1,206
    )*
    
    $
    837
 
 *
    
    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
  11. Mandatorily Redeemable Convertible Preferred Stock
  22




---



##### Table of Contents



October 1,
    
    
    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
    
    
    546
    
    
    
    226Convertible preferred stock
    
    $
    7,260
    
    
    $
    6,940
   Registration Rights
  Voting Rights
  23




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##### Table of Contents



Board Nomination Rights
   Dividends
    Conversion
    24




---



##### Table of Contents



Redemptions
    25




---



##### Table of Contents



Liquidation Preference
  Warrants
  Embedded Derivatives
  12. Segment Information
   26




---



##### Table of Contents



Three Months Ended
    
    Six Months EndedOctober 1,
    
    October 2,
    
    October 1,
    
    October 2,2006
    
    2005
    
    2006
    
    2005Revenues by CountryUnited States
    
    
    35
    %
    
    
    38
    %
    
    
    38
    %
    
    
    29
    %Germany
    
    
    12
    %
    
    
    19
    %
    
    
    9
    %
    
    
    28
    %Taiwan
    
    
    17
    %
    
    
    19
    %
    
    
    19
    %
    
    
    15
    %Japan
    
    
    5
    %
    
    
    10
    %
    
    
    9
    %
    
    
    14
    %Europe, excluding Germany
    
    
    6
    %
    
    
    5
    %
    
    
    4
    %
    
    
    6
    %Korea
    
    
    8
    %
    
    
    8
    %
    
    
    5
    %
    
    
    6
    %China
    
    
    1
    %
    
    
    
    %
    
    
    3
    %
    
    
    1
    %Singapore
    
    
    16
    %
    
    
    1
    %
    
    
    13
    %
    
    
    1
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
   27




---



##### Table of Contents



OtherForeignU.S.
    
    
    Locations
    
    
    Eliminations
    
    
    ConsolidatedSegment Information (in thousands)Three Months Ended October 1, 2006Sales to unaffiliated customers
    
    $
    14,476
    
    
    $
    1,341
    
    
    $
    
    
    
    $
    15,817Transfers between geographic regions
    
    
    167
    
    
    
    104
    
    
    
    (271
    )
    
    
    Total net revenues
    
    $
    14,643
    
    
    $
    1,445
    
    
    $
    (271
    )
    
    $
    15,817Operating income (loss)
    
    $
    (2,412
    )
    
    $
    25
    
    
    $
    (52
    )
    
    $
    (2,439
    )Three Months Ended October 2, 2005Sales to unaffiliated customers
    
    $
    15,377
    
    
    $
    1,888
    
    
    $
    
    
    
    $
    17,265Transfers between geographic regions
    
    
    (415
    )
    
    
    167
    
    
    
    248
    
    
    
    Total net revenues
    
    $
    14,962
    
    
    $
    2,055
    
    
    $
    248
    
    
    $
    17,265Operating income (loss)
    
    $
    (4,790
    )
    
    $
    (394
    )
    
    $
    890
    
    
    $
    (4,294
    )Six Months Ended October 1, 2006Sales to unaffiliated customers
    
    $
    31,184
    
    
    $
    2,543
    
    
    $
    
    
    
    $
    33,727Transfers between geographic regions
    
    
    461
    
    
    
    202
    
    
    
    (663
    )
    
    
    Total net revenues
    
    $
    31,645
    
    
    $
    2,745
    
    
    $
    (663
    )
    
    $
    33,727Operating income (loss)
    
    $
    (3,411
    )
    
    $
    (155
    )
    
    $
    (167
    )
    
    $
    (3,733
    )Six Months Ended October 2, 2005Sales to unaffiliated customers
    
    $
    30,489
    
    
    $
    4,315
    
    
    $
    
    
    
    $
    34,804Transfers between geographic regions
    
    
    (845
    )
    
    
    689
    
    
    
    156
    
    
    
    Total net revenues
    
    $
    29,644
    
    
    $
    5,004
    
    
    $
    156
    
    
    $
    34,804Operating income (loss)
    
    $
    (11,145
    )
    
    $
    (450
    )
    
    $
    1,359
    
    
    $
    (10,236
    )
 28




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##### Table of Contents



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




---



##### Table of Contents



Critical Accounting Policies and Estimates
   Stock-Based Compensation
 Share-Based Payment, Accounting for Stock Issued to Employees" Accounting for Stock-Based compensation.
 Recently Issued Accounting Pronouncements
    30




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##### Table of Contents



Results of Operations
  Three Months Ended(Dollars in thousands)October 1, 2006
    
    
    October 2, 2005% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenues:Product
    
    $
    11,181
    
    
    
    70.7
    %
    
    $
    12,348
    
    
    
    71.5
    %
    
    $
    (1,167
    )
    
    
    (9.5
    )%Service and parts
    
    
    4,636
    
    
    
    29.3
    %
    
    
    4,917
    
    
    
    28.5
    %
    
    
    (281
    )
    
    
    (5.7
    )%Total net revenues
    
    
    15,817
    
    
    
    100.0
    %
    
    
    17,265
    
    
    
    100.0
    %
    
    
    (1,448
    )
    
    
    (8.4
    )%Cost of revenues:Product
    
    
    6,439
    
    
    
    40.7
    %
    
    
    7,320
    
    
    
    42.4
    %
    
    
    (881
    )
    
    
    (12.0
    )%Service and parts
    
    
    3,291
    
    
    
    20.8
    %
    
    
    4,001
    
    
    
    23.2
    %
    
    
    (710
    )
    
    
    (17.7
    )%Total cost of revenues
    
    
    9,730
    
    
    
    61.5
    %
    
    
    11,321
    
    
    
    65.6
    %
    
    
    (1,591
    )
    
    
    (14.1
    )%Gross profit
    
    $
    6,087
    
    
    
    38.5
    %
    
    $
    5,944
    
    
    
    34.4
    %
    
    $
    143
    
    
    
    2.4
    %
 31




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##### Table of Contents



Six Months Ended(Dollars in thousands)October 1, 2006
    
    
    October 2, 2005% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeNet revenues:Product
    
    $
    24,299
    
    
    
    72.0
    %
    
    $
    25,068
    
    
    
    72.0
    %
    
    $
    (769
    )
    
    
    (3.1
    )%Service and parts
    
    
    9,428
    
    
    
    28.0
    %
    
    
    9,736
    
    
    
    28.0
    %
    
    
    (308
    )
    
    
    (3.2
    )%Total net revenues
    
    
    33,727
    
    
    
    100.0
    %
    
    
    34,804
    
    
    
    100.0
    %
    
    
    (1,077
    )
    
    
    (3.1
    )%Cost of revenues:Product
    
    
    14,037
    
    
    
    41.6
    %
    
    
    13,738
    
    
    
    39.5
    %
    
    
    299
    
    
    
    2.2
    %Service and parts
    
    
    6,751
    
    
    
    20.0
    %
    
    
    8,007
    
    
    
    23.0
    %
    
    
    (1,256
    )
    
    
    (15.7
    )%Total cost of revenues
    
    
    20,788
    
    
    
    61.6
    %
    
    
    21,745
    
    
    
    62.5
    %
    
    
    (957
    )
    
    
    (4.4
    )%Gross profit
    
    $
    12,939
    
    
    
    38.4
    %
    
    $
    13,059
    
    
    
    37.5
    %
    
    $
    (120
    )
    
    
    0.9
    %
 Net Revenues.
      Gross Profit.
 32




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##### Table of Contents



Research and Development, Selling, General and Administrative Expenses, and Restructuring,
Severance and Other.
 Three Months Ended(Dollars in thousands)October 1, 2006
    
    
    October 2, 2005% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenues
    
    
    Amount
    
    
    Revenues
    
    
    (Decrease)
    
    
    ChangeResearch and development
    
    $
    3,120
    
    
    
    19.7
    %
    
    $
    3,052
    
    
    
    17.7
    %
    
    $
    68
    
    
    
    2.2
    %Selling, general and administrative
    
    
    5,329
    
    
    
    33.7
    %
    
    
    4,922
    
    
    
    28.5
    %
    
    
    407
    
    
    
    8.3
    %Restructuring, severance and other
    
    
    77
    
    
    
    0.5
    %
    
    
    2,264
    
    
    
    13.1
    %
    
    
    (2,187
    )
    
    
    (96.6
    )%Total operating expenses
    
    $
    8,526
    
    
    
    53.9
    %
    
    $
    10,238
    
    
    
    59.3
    %
    
    $
    (1,712
    )
    
    
    (16.7
    )%
 Six Months EndedOctober 1, 2006
    
    
    October 2, 2005% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)
    
    
    ChangeResearch and development
    
    $
    6,268
    
    
    
    18.6
    %
    
    $
    6,888
    
    
    
    19.8
    %
    
    $
    (620
    )
    
    
    (9.0
    )%Selling, general and administrative
    
    
    10,327
    
    
    
    30.6
    %
    
    
    12,676
    
    
    
    36.4
    %
    
    
    (2,349
    )
    
    
    (18.5
    )%Restructuring, severance and other
    
    
    77
    
    
    
    0.2
    %
    
    
    3,731
    
    
    
    10.7
    %
    
    
    (3,654
    )
    
    
    (97.9
    )%Total operating expenses
    
    $
    16,672
    
    
    
    49.4
    %
    
    $
    23,295
    
    
    
    66.9
    %
    
    $
    (6,623
    )
    
    
    (28.4
    )%
 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).
 33




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##### Table of Contents



Three Months Ended,October 1, 2006
    
    
    October 2, 2005% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income (expense)Gain on sale of product line
    
    $
    
    
    
    
    0.0
    %
    
    $
    171
    
    
    
    1.0
    %
    
    $
    (171
    )Interest expense
    
    
    (206
    )
    
    
    (1.3
    )%
    
    
    (90
    )
    
    
    (0.5
    )%
    
    
    (116
    )Interest income
    
    
    197
    
    
    
    1.2
    %
    
    
    43
    
    
    
    0.2
    %
    
    
    154Fair value adjustment  warrants
and embedded
derivatives and other, net
    
    
    409
    
    
    
    2.6
    %
    
    
    33
    
    
    
    0.2
    %
    
    
    376Total other income (expense), net
    
    $
    400
    
    
    
    2.5
    %
    
    $
    157
    
    
    
    0.9
    %
    
    $
    243
 Six Months Ended,October 1, 2006
    
    
    October 2, 2005% of Net
    
    
    
    
    
    
    % of Net
    
    
    IncreaseAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    (Decrease)Other income (expense)Gain on sale of product line
    
    $
    
    
    
    
    0.0
    %
    
    $
    8,721
    
    
    
    25.1
    %
    
    $
    (8,721
    )Interest expense
    
    
    (406
    )
    
    
    (1.2
    )%
    
    
    (147
    )
    
    
    (0.4
    )%
    
    
    (259
    )Interest income
    
    
    395
    
    
    
    1.2
    %
    
    
    75
    
    
    
    0.2
    %
    
    
    320Fair value adjustment  warrants
and embedded
derivatives and other, net
    
    
    721
    
    
    
    2.1
    %
    
    
    (63
    )
    
    
    (0.2
    )%
    
    
    784Total other income (expense), net
    
    $
    710
    
    
    
    2.1
    %
    
    $
    8,586
    
    
    
    24.7
    %
    
    $
    (7,876
    )
 Other Income (Expense).
 Provision for Income Taxes (Benefit).
 Accretion of Series B Preferred Stock to Redemption Value and Dividends Accrued.
 Stock-Based Employee Compensation
  34




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##### Table of Contents



Three Months EndedOctober 1,
    
    
    October 2,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Cost of revenues
    
    $
    40
    
    
    $
    (2
    )
    
    $
    42Research and development
    
    
    76
    
    
    
    (68
    )
    
    
    144Selling, general and administrative
    
    
    367
    
    
    
    (10
    )
    
    
    377Subtotal
    
    
    443
    
    
    
    (78
    )
    
    
    521Total stock-based compensation expense (benefit)
    
    $
    483
    
    
    $
    (80
    )
    
    $
    563
 Six Months EndedOctober 1,
    
    
    October 2,
    
    
    Increase2006
    
    
    2005
    
    
    (Decrease)Cost of revenues
    
    $
    79
    
    
    $
    2
    
    
    $
    77Research and development
    
    
    150
    
    
    
    (246
    )
    
    
    396Selling, general and administrative
    
    
    594
    
    
    
    5
    
    
    
    589Subtotal
    
    
    744
    
    
    
    (241
    )
    
    
    985Total stock-based compensation expense (benefit)
    
    $
    823
    
    
    $
    (239
    )
    
    $
    1,062
 Liquidity and Capital Resources
    35




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##### Table of Contents



Commitments
  36




---



##### Table of Contents



2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2012 AndFiscal Year:
    
    (6 months)
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    Thereafter
    
    
    TotalOperating leases
    
    $
    932
    
    
    $
    1,725
    
    
    $
    1,299
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    6
    
    
    $
    6,194Asset retirement obligations
    
    
    
    
    
    
    275
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    275Purchase commitments
    
    
    7,435
    
    
    
    398
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,837Minimum royalty payments
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    40Cancellation fees
    
    
    37
    
    
    
    74
    
    
    
    37
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    148Series B redeemable convertible
preferred stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,400
    
    
    
    10,400Term debt *
    
    
    1,250
    
    
    
    2,500
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,000Interest payments on term debt **
    
    
    244
    
    
    
    284
    
    
    
    40
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    568Total future minimum payments
    
    $
    9,938
    
    
    $
    5,256
    
    
    $
    2,630
    
    
    $
    1,193
    
    
    $
    1,039
    
    
    $
    10,406
    
    
    $
    30,462
 
 *
    
    The term loan has a stated maturity of September 2008, however the entire outstanding balance has
been classified as a current liability as of October 1, 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 Footnote 7, Financing
Arrangements. Payment commitments included in this disclosure are estimated based on the quarter
ended October 1, 2006 interest rate of 10.75%. 37




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##### Table of Contents



Operating Leases.
 Purchase Commitment and Cancellation Fees.
 Minimum Royalty Payments.
 Financing/Other Contingencies.
  38




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39




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##### Table of Contents



Series B Redeemable Convertible Preferred Stock.
  Inflation
  40




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##### Table of Contents



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
  Interest Rates and Stock Price Related to Warrants
  Embedded Derivatives
  41




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##### Table of Contents



Item 4. Controls and Procedures
 Disclosure Controls and Procedures
    Changes in Internal Control over Financial Reporting
  
    
    Implemented 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;
    
    Hired new senior accounting personnel and experienced accounting and finance staff, and
    
    Enhanced 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
  42




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
 Factors Affecting Future Results
  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.
   43




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##### Table of Contents



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.
  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.
  44




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##### Table of Contents



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.
  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.
  45




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##### Table of Contents



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.
   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.
  46




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##### Table of Contents



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.
   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.
  47




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##### Table of Contents



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.
   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.
  48




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##### Table of Contents



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.
  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.
 49




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##### Table of Contents



® ®
 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.
  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.
  50




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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.
  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.
 51




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##### Table of Contents



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.
   PROVISIONS OF OUR CHARTER 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.
   52




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##### Table of Contents



IF WE ISSUE ADDITIONAL SHARES OF STOCK IN THE FUTURE, IT MAY HAVE A DILUTIVE EFFECT ON OUR
STOCKHOLDERS.
  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 4. Submission of Matters to a Vote of Security Holders
   Directors
    
    Director Class
    
    Total Vote For Each Director:
    
    Total Vote Withheld From Each Director:G. Leonard Baker, Jr.
    
    (I)
    
    
    28,585,563
    
    
    
    2,370,695Gregory Graves
    
    (I)
    
    
    28,848,039
    
    
    
    2,108,219Boris Lipkin
    
    (I)
    
    
    26,581,082
    
    
    
    4,375,176John Willinge
    
    (I)
    
    
    28,695,839
    
    
    
    2,260,419
  53




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##### Table of Contents



BrokerFor
    
    Against
    
    Abstain
    
    Non Votes26,219,797
    
    3,391,110
    
    1,345,351
    
    12,867,486
  
 Item 5. Other Information
  54




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##### Table of Contents



Item 6. Exhibits
 ExhibitNumber
    
    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)
    
    Amended and Restated Loan and Security Agreement between Therma-Wave, Inc. and Silicon Valley Bank
dated June 10, 200510.2
    (7)
    
    Streamline Facility Agreement between Therma-Wave, Inc. and Silicon Valley Bank dated June 10, 200510.3
    (8)
    
    Second Modification to Loan and Security Agreement between Therma-Wave, Inc. and Silicon Valley Bank
dated July 31, 200610.4
    (9)
    
    Revised Second Modification to Loan and Security Agreement between Therma-Wave, Inc. and Silicon
Valley Bank dated October 2, 200631.1
    
    
    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 Registration Statement on Form S-3
(Registration No 333-130717) and filed with the SEC on
December 27, 2005.(4)
    
    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. 55




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##### Table of Contents



(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 by reference to Therma-Waves Current Report on Form 8-K dated June 10, 2005
(File No. 000-26911) and filed with the SEC on June 16, 2005.(7)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated July 31, 2006
(File No. 000-26911) and filed with the SEC on August 2, 2006.(8)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated July 27, 2006
(File No. 000-26911) and filed with the SEC on July 28, 2006.(9)
    
    Incorporated herein by reference to Therma-Waves Current Report on Form 8-K (File No.
000-26911) dated October 2, 2006. 56




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##### Table of Contents



SIGNATURES
  THERMA-WAVE, INC./s/ Boris LipkinBoris LipkinPresident and Chief Executive Officer DirectorNovember 8, 2006 THERMA-WAVE, INC./s/ Joseph PassarelloJoseph PassarelloSenior Vice President, Chief Financial Officer and Secretary(as Principal Financial and Accounting Officer)November 8, 2006 57




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    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)
    

Amended and Restated Loan and Security Agreement between Therma-Wave, Inc. and Silicon Valley Bank
dated June 10, 200510.2
    (7)
    
    Streamline Facility Agreement between Therma-Wave, Inc. and Silicon Valley Bank dated June 10, 200510.3
    (8)
    
    Second Modification to Loan and Security Agreement between Therma-Wave, Inc. and Silicon Valley Bank
dated July 31, 200610.4
    (9)
    
    Revised Second Modification to Loan and Security Agreement between Therma-Wave, Inc. and Silicon
Valley Bank dated October 2, 200631.1
    
    
    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 Registration Statement on Form S-3
(Registration No 333-130717) and filed with the SEC on December 27, 2005.(4)
    
    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.(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 by reference to Therma-Waves Current Report on Form 8-K dated June 10, 2005
(File No. 000-26911) and filed with the SEC on June 16,
2005.(7)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated July 31, 2006
(File No. 000-26911) and filed with the SEC on August 2,
2006.(8)
    
    Incorporated by reference to Therma-Waves Current Report on Form 8-K dated July 27, 2006
(File No. 000-26911) and filed with the SEC on July 28,
2006.(9)
    
    Incorporated herein by reference to Therma-Waves Current Report on Form 8-K (File No.
000-26911) dated October 2, 2006.