THERMA WAVE INC, S-1, 1999-04-09

THERMA WAVE INC
S-1, 1999-04-09
INDUSTRIAL INSTRUMENTS FOR MEASUREMENT, DISPLAY, AND CONTROL

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<PAGE>

As filed with the Securities and Exchange Commission on April 9, 1999
Registration No. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

---------------
THERMA-WAVE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 3823 94-3000561
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation or Code Number)
organization)
1250 Reliance Way, Fremont, California 94539
(510) 668-2200
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)

---------------

DR. ALLAN ROSENCWAIG
Chairman and Chief Executive Officer
Therma-Wave, Inc.
1250 Reliance Way, Fremont, California 94539
(510) 668-2200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)

---------------
Copies of all communications, including communications sent to agent for
service, should be sent to:
Dennis M. Myers, Esq. David B. Walek, Esq.
Kirkland & Ellis Ropes & Gray
200 East Randolph Drive One International Place
Chicago, Illinois 60601 Boston, Massachusetts 02110
(312) 861-2000 (617) 951-7000

Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.

---------------

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]

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CALCULATION OF REGISTRATION FEE
<TABLE>
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
<CAPTION>
Title of Each Class of Securities Proposed Maximum Aggregate
to be Registered Offering Price(1)(2) Amount of Registration Fee
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, par
value $.01 per
share............. $32,000,000 $8,896
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Includes shares of Common Stock that the Underwriters have the option to
purchase from Therma-Wave to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933, as amended.
---------------
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until this Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this prospectus is not complete and may be +
+changed. The Underwriters may not confirm sales of these securities until the +
+registration statement filed with the Securities and Exchange Commission +
+becomes effective. This prospectus is not an offer to sell these securities, +
+and is not soliciting an offer to buy these securities in any state where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject To Completion,
Dated April 9, 1999

[Therma-Wave Logo]

Common Stock

Therma-Wave, Inc. is offering shares of its common stock. This is the
initial public offering of our common stock, and no public market currently
exists for our shares. We have applied to have our common stock approved for
quotation on the Nasdaq National Market under the symbol "TWAV." We estimate
that the initial public offering price will be between $ and $ .

-----------

Investing in our common stock involves a high degree of risk.
See "Risk Factors" beginning on page 9.

-----------

<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price $ $
Discounts and Commissions to Underwriters $ $
Proceeds to Therma-Wave $ $
</TABLE>

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.

We have granted the underwriters a 30-day option to purchase up to an
additional shares of common stock to cover over-allotments. NationsBanc
Montgomery Securities LLC expects to deliver the shares of common stock to
investors on , 1999.

-----------
NationsBanc Montgomery Lehman Brothers
Securities LLC
The date of this prospectus is , 1999.
<PAGE>

[pictures of an Opti-Probe(R) system and a Therma-Probe(R) system]

2
<PAGE>

You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, "Therma-
Wave," "we," "us" and "our" refer to Therma-Wave, Inc., unless the context
otherwise requires.

Our fiscal year is a 52 to 53 week year ending on the Sunday on or nearest
preceding March 31 for periods prior to 1997 and the Sunday on or following
March 31 of each year for periods thereafter. Fiscal years 1998, 1997 and 1996
ended on April 5, 1998, April 6, 1997 and March 31, 1996, respectively. Fiscal
years are identified in this prospectus according to the calendar year in which
they end. For example, the fiscal year ended April 4, 1999 is referred to
herein as "fiscal 1999." For convenience, the financial information included in
this prospectus has been presented as ending on the last day of the nearest
calendar month.

Until , 1999, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This requirement is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 18
The Reclassification..................................................... 18
Capitalization........................................................... 19
Dividend Policy.......................................................... 20
Dilution................................................................. 20
Selected Historical Financial Data....................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 33
Management............................................................... 48
Principal Stockholders................................................... 60
Certain Relationships and Related Transactions........................... 61
Description of Certain Indebtedness...................................... 66
Description of Capital Stock............................................. 69
Shares Eligible for Future Sale.......................................... 72
Underwriting............................................................. 74
Experts.................................................................. 76
Legal Matters............................................................ 76
Change in Independent Accountants........................................ 76
Additional Information................................................... 76
Index to Consolidated Financial Statements............................... F-1
</TABLE>

Therma-Wave(R), Therma-Probe(R), Opti-Probe(R) and Meta-Probe(R) are
registered trademarks of Therma-Wave. Fab Productivity Enhancement(TM),
FPE(TM), AE(TM), BPE(TM) and BPR(TM) are trademarks of Therma-Wave. This
prospectus contains trademarks, service marks and trade names of companies and
organizations other than Therma-Wave.

3
<PAGE>

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus.
This summary is not complete and may not contain all of the information that
you should consider before investing in our common stock. You should read the
entire prospectus carefully. This prospectus contains forward-looking
statements, which involve risks and uncertainties. Our actual results could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including those set forth in "Risk Factors" and
elsewhere in this prospectus. Unless otherwise stated, the information
contained in this prospectus: (1) assumes no exercise of the underwriters'
over-allotment option and (2) reflects the reclassification of all of our
classes of common stock into a single class of common stock.

Therma-Wave, Inc.

We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems used in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to help enable semiconductor manufacturers to reduce feature size,
increase wafer size, increase equipment productivity and improve device
performance. Our current product families, the Therma-Probe and Opti-Probe, use
proprietary and patented technology to provide precise, non-contact, non-
destructive measurement of two of the most critical and pervasive process steps
in semiconductor manufacturing, ion implantation and thin film deposition and
removal.

Historically, semiconductor manufacturers have achieved an approximate 30%
annual reduction in the cost per chip function through productivity
improvements including reduced feature size, increased wafer size and increased
equipment productivity. Although increasing wafer size and yields will continue
to be sources of fab productivity gains for semiconductor manufacturers,
increasingly, we believe, gains will come from reduced feature size and non-
yield related equipment productivity enhancements, including increased
equipment uptime, reduced fab floor footprint requirements, reduced use of test
wafers and lower tool maintenance costs. Our strategy, which we refer to as Fab
Productivity Enhancement(TM) ("FPE(TM)"), is to be a leader in providing
semiconductor manufacturers with enabling technologies to improve fab
productivity. Our current FPE(TM) solutions, the Therma-Probe and Opti-Probe
systems, enhance fab productivity by helping to enable semiconductor
manufacturers to reduce feature size, increase wafer size and increase
equipment productivity by providing non-contact, non-destructive enabling
technologies extendable over multiple process generations. Our future FPE(TM)
solutions are expected to include:

. Combining separate metrology systems into one tool;

. Implementing in-situ (within the process chamber) systems to improve the
direct control of process equipment and to provide real-time measurement
of product wafers; and

. Networking these systems together.

4
<PAGE>

We believe we are a technology leader in process control metrology and one
of the first companies to pioneer the usage of non-contact, non-destructive
process control metrology technology. We have focused heavily on the
development and protection of our proprietary technology as we hold 51 U.S. and
foreign patents. In addition, we have filed applications for 22 additional U.S.
and foreign patents. We believe we have superior technical resources including
a staff of 46 Ph.Ds, which represents over 13% of our employees. We have
accomplished a number of significant innovations including the development of
patented technologies for:

. the most widely accepted metrology system for measuring the critical ion
implantation process on product wafers;

. a state-of-the-art metrology system for measuring thin films on product
wafers;

. the successful combination of thin film measurement technologies in one
system; and

. metrology software providing for advanced signal processing and data
analysis.

We believe we can leverage our strong intellectual property position and our
core technological expertise in non-contact based process control metrology
systems to provide additional FPE(TM) solutions to semiconductor manufacturers.

We believe we have achieved leading market share positions in our two
principal markets. We estimate we have over 95% of the market for the non-
destructive measurement of ion implantation on product wafers and over 30% of
the thin film measurement market. We sell our products worldwide to leading
semiconductor manufacturers including: Advanced Micro Devices, Inc., Chartered
Semiconductor, Ltd., Intel Corporation, Lucent Technologies, Samsung America,
Inc., Siemens AG, STMicroelectronics N.V., Toshiba Corporation and the UMC
Group. International sales represented approximately 60%, 52% and 61% of our
net revenues in fiscal 1997, 1998 and the nine months ended December 31, 1998,
respectively. We have sold our products to over 70 semiconductor manufacturers
located in 14 different countries. We provide our customers with a worldwide
network of sales and support personnel. We intend to continue to invest in our
sales and support network, as we believe it is an increasingly important
competitive factor in today's global semiconductor capital equipment market.

Therma-Wave was established in 1982 by Dr. Allan Rosencwaig, our current
Chairman and CEO and the principal developer of the field of thermal wave
physics. In fiscal 1992, Therma-Wave was acquired by Toray Industries, Inc. and
Shimadzu Corporation. Through a recapitalization effected in May 1997, Bain
Capital, Inc., Sutter Hill Ventures and our senior management team collectively
acquired securities representing approximately 88% of our outstanding voting
power. Our senior management team currently owns approximately 22% of our
outstanding common stock and holds options to acquire an additional 9% of the
common stock. Such equity ownership represents a significant economic
commitment to, and participation in, the continued success of Therma-Wave.

Therma-Wave is a Delaware corporation organized in October 1990. Our
principal executive offices are located at 1250 Reliance Way, Fremont,
California 94539, and our telephone number is (510) 668-2200. We maintain a
website on the Internet at www.thermawave.com. Our website, and the information
contained therein, is not a part of this prospectus.

5
<PAGE>

The Offering

<TABLE>
<S> <C>
Common Stock offered by Therma-Wave............. shares

Common Stock to be outstanding after this
offering....................................... shares

Use of proceeds................................. To redeem a portion of our 10 5/8% senior
notes. See "Use of Proceeds."

Proposed Nasdaq National Market symbol.......... "TWAV"
</TABLE>

The common stock to be outstanding after this offering is based on shares
outstanding as of March 31, 1999 and excludes: (1) 1,780,559 shares of common
stock issuable upon the exercise of outstanding options granted under our stock
option plans, of which 1,164,435 were then exercisable, at exercise prices
ranging from $6.00 to $15.89 per share; (2) additional shares of common
stock expected to be reserved for future grants, awards or sale under the 1999
Equity Incentive Plan or sale under the 1999 Employee Stock Purchase Plan; and
(3) 748,739 shares of common stock issuable upon the conversion of our
mandatorily redeemable convertible preferred stock. See "Management--Stock
Plans."

6
<PAGE>

Summary Historical Financial Data
(in thousands, except per share data)

<TABLE>
<CAPTION>
Nine-Month Period Ended
Fiscal Year (1) December 31,
--------------------------------------------- ---------------------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- -------- -------- ----------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data (2):
Net revenues............ $20,770 $55,675 $79,293 $109,493 $115,459 $ 86,155 $ 47,603
Gross margin............ 9,508 30,651 44,266 59,698 59,776 45,181 20,784
Operating income
(loss)................. (5,082) 9,498 13,578 23,369 11,942 8,022 (5,524)
Income (loss) before
provision for income
taxes.................. (6,419) 7,487 11,965 22,108 (429) (893) (15,382)
Net income (loss)....... $(6,419) $ 7,487 $ 7,281 $ 13,101 $ (1,033) $ (546) $(13,381)
Net income (loss)
attributable to common
stockholders (3)....... $(6,419) $ 7,487 $ 7,281 $ 13,101 $ (1,771) $ (1,078) $(14,005)
Pro Forma Statement of
Operations Data (4):
Pro forma net income
(loss)................. $ $
Pro forma net income
(loss) per share:
Basic.................. $ $
Diluted................ $ $
Pro forma weighted
average common shares
outstanding:
Basic..................
Diluted................
Other Financial Data:
EBITDA (5) (6).......... $(2,117) $12,496 $17,185 $ 27,113 $ 21,110 $ 15,780 $ 159
Cash provided by (used
in) operating
activities............. (6,006) 1,876 5,867 11,860 8,113 3,342 (7,655)
Cash used in investing
activities............. (299) (2,048) (4,965) (1,575) (2,900) (3,693) (751)
Cash provided by (used
in) financing
activities............. 6,069 5,701 (1,541) (1,234) (1,532) (563) 632
Capital expenditures.... 61 1,616 4,361 1,091 2,900 2,634 323
<CAPTION>
March 31, December 31, 1998
------------------ ---------------------------
1997 1998 Actual As Adjusted (7)
-------- -------- ----------- ---------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 16,741 $ 20,422 $ 12,648 $ 12,648
Working capital......... 38,720 43,348 32,802 33,098
Total assets............ 68,620 89,762 69,930 68,451
Long-term debt.......... 23,100 115,000 115,000 94,784
Mandatorily redeemable
convertible preferred
stock (3).............. -- 14,515 15,139 15,139
Stockholders' equity
(net capital
deficiency)............ 20,145 (70,990) (84,278) (65,255)
</TABLE>
- --------
(1) Our fiscal year refers to the 52/53 week period ending on the Sunday on or
nearest preceding March 31 of each year for periods prior to 1997 and the
Sunday on or following March 31 of each year for periods thereafter.

(2) On May 16, 1997, we effected the recapitalization. We issued $115 million
in aggregate principal amount of 10 5/8% senior notes in connection with
the recapitalization.

(3) We issued shares of mandatorily redeemable convertible preferred stock (the
"Preferred Stock") with an aggregate liquidation value of $15,139
(including accrued and unpaid dividends thereon as of December 31, 1998) to
our then existing stockholders as part of the recapitalization. Dividends
on the Preferred Stock accrue at a rate of 6.0% per annum. The Preferred
Stock has a scheduled redemption date of May 17, 2004 and is otherwise
redeemable by us at any time at our sole discretion. See "Description of
Capital Stock--Preferred Stock."

(4) The pro forma statement of operations data gives pro forma effect to: (1)
the reclassification of our three classes of common stock into a single
class and (2) this offering and the application of the net proceeds
therefrom as described under "Use of Proceeds," as if each had occurred as
of the beginning of the periods presented. The unaudited pro forma
statement of operations data does not purport to represent what our results
of operations actually would have been if such transactions had actually
occurred as of the beginning of the periods presented, or what such results
will be for any future periods.

7
<PAGE>

(5) "EBITDA" is defined herein as income (loss) before income taxes, plus
depreciation, amortization, interest expense, interest income and other
non-operating (income) expenses, net. EBITDA is presented because we
believe it is a widely accepted financial indicator of a company's
historical ability to service and/or incur indebtedness. However, EBITDA
should not be considered as an alternative to net income as a measure of
operating results or to cash flows as a measure of liquidity in accordance
with generally accepted accounting principles. Additionally, EBITDA as
defined herein may not be comparable to similarly titled measures reported
by other companies.

(6) EBITDA in the fiscal year ended March 31, 1998 and the nine months ended
December 31, 1997 does not include $4,188 in recapitalization and other
non-recurring expenses. Including such expenses, EBITDA for the period
would have been reduced to $16,922 for fiscal 1998 and $11,592 for the nine
months ended December 31, 1997.

(7) Adjusted to reflect the sale of shares of common stock and the
application of the net proceeds as described under "Use of Proceeds."

8
<PAGE>

RISK FACTORS

You should carefully consider the following factors in addition to the other
information set forth in this prospectus in analyzing an investment in the
common stock offered hereby. The risks and uncertainties described below are
not the only ones facing us. Additional risks and uncertainties that we do not
presently know about or that we currently believe are immaterial may also
adversely impact our business operations. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock could
fall, and you may lose all or part of the money you paid to buy our common
stock.

This prospectus contains forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those discussed
herein. Factors that could cause or contribute to such differences include, but
are not limited to, those identified below as well as those discussed elsewhere
in this prospectus.

We have had significant net losses and we anticipate losses to continue.

We have not reported net income since the first quarter of fiscal 1998. We
reported a net loss for the nine-month period ended December 31, 1998 of $13.4
million and for fiscal 1998 of $1.0 million. Due to the current downturn in the
semiconductor industry and the related downturn in the semiconductor capital
equipment industry, weak economic conditions in the Asia Pacific region and
Japan, and other factors, we expect to remain unprofitable at least through the
end of calendar 1999. We cannot predict how long we will continue to experience
significant net losses or when we will become profitable.

Our performance is affected by the cyclicality of the semiconductor device
industry which may, from time to time, lead to decreased demand for our
products.

The current downturn in the semiconductor industry has had a material
adverse effect on our recent operating results. Our business depends upon the
capital expenditures of semiconductor manufacturers, which, in turn, depend
upon the current and anticipated market demand for semiconductors and products
utilizing semiconductors. The semiconductor industry is cyclical and has
historically experienced periodic downturns, which have often resulted in a
decrease in the semiconductor industry's demand for capital equipment,
including process control metrology systems. There is typically a six to twelve
month lag between changes in the semiconductor industry and the related impact
on the level of capital expenditures. In most cases, the resulting decrease in
capital expenditures has been more pronounced than the precipitating downturn
in semiconductor industry revenues. The semiconductor industry experienced
downturns in 1998 and 1996, during which industry revenues declined by an
estimated 8.4% and 6.4%, respectively (as reported by Dataquest). Dataquest
forecasts that sales of semiconductor capital equipment will decrease by
approximately 1.7% in calendar 1999 as compared to 1998. Although there are
indications that the semiconductor industry is beginning to recover, there can
be no assurance that (1) the semiconductor industry will improve, (2) the
semiconductor industry will not experience other, possibly more severe and
prolonged, downturns in the future or (3) any such recovery will result in
increased demand for capital equipment by the semiconductor industry. The
continuation of the current downturn or any future downturn in the
semiconductor industry will have a material adverse effect on our business,
financial condition and results of operations.

Our quarterly operating results have historically and may, in the future, vary
significantly. This may result in volatility in the market price for our
shares.

Our quarterly operating results have historically and may in the future vary
significantly. Some of the factors that may influence our operating results in
a given quarter include:

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

9
<PAGE>

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

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

. expenses incurred in connection with litigation;

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

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

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

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.

During the nine months ended December 31, 1998, sales to Intel Corporation
and Advanced Micro Devices, Inc. accounted for approximately 23% and 13% of our
net revenues, respectively, and sales to our top five customers in the
aggregate accounted for approximately 49% of our net revenues. During fiscal
1998, sales to Intel Corporation accounted for approximately 23% of our net
revenues, and sales to our top five customers in the aggregate accounted for
approximately 45% of our net revenues. As customers seek to establish closer
relationships with their suppliers, we expect that our customer base will
continue to become more concentrated with a limited number of customers
accounting for a significant portion of our revenues. If, for any reason, any
of our key customers were to purchase significantly less of our products in the
future, such decreased level of purchases could have a material adverse effect
on our business, financial condition and results of operations. See "Business--
Customers."

We operate in the highly competitive semiconductor capital equipment industry,
compete against larger companies, face increased price competition and
encounter difficulties in soliciting customers of our competitors because of
high switching costs in the markets in which we operate.

We operate in the highly competitive semiconductor capital equipment
industry and face competition from a number of competitors, certain of which
have greater financial, engineering, manufacturing and marketing resources and
broader product offerings than Therma-Wave. Many of our competitors are
investing heavily in the development of new products aimed at applications we
currently serve. Our competitors in each product area can be expected to
continue to improve the design and performance of their products and to
introduce new products with competitive prices and performance characteristics.
In addition, we believe that our competitors sometimes provide demonstration
systems to semiconductor manufacturers at no cost. We could be required to
employ similar promotions in order to remain competitive if this practice
becomes more pervasive in the industry. Due to competitive conditions in our
industry, we have reduced prices on certain of our products in order to
maintain our market share. There can be no assurance that competitive pressures
will not necessitate further price reductions. Maintaining technological
advantages to mitigate the adverse affect of pricing pressures will require a
continued high level of investment by us in research and development and sales
and marketing. There can be no assurance that we will have sufficient resources
to continue to make such investments or that we will be able to make the
technological advances necessary to maintain such competitive advantages. To
the extent our products do not provide technological advantages over products
offered by our competitors, we are likely to experience increased price
competition or loss of market share with respect to such products.

10
<PAGE>

In addition, we believe that once a device manufacturer has selected a
particular vendor's capital equipment, that manufacturer generally relies upon
that vendor's equipment for that specific production line application and, to
the extent possible, subsequent generations of that vendor's systems.
Accordingly, it may be difficult to achieve significant sales to a particular
customer once another vendor's capital equipment has been selected by that
customer unless there are compelling reasons to do so, such as significant
performance or cost advantages.

Our business may be adversely impacted as a result of our substantial leverage,
which requires the use of a substantial portion of our excess cash flow, may
limit our access to additional capital and reduces our operating flexibility.

We incurred substantial indebtedness in connection with our
recapitalization, which occurred on May 16, 1997. At December 31, 1998, on a
pro forma basis giving effect to this offering and the application of the net
proceeds therefrom, our total indebtedness would have been approximately $94.8
million and our net capital deficiency would have been $65.3 million. In
addition, as of December 31, 1998, we had unused borrowing capacity of $21.7
million under our senior bank credit facility. Furthermore, subject to the
restrictions in our senior bank credit facility and the indenture relating to
our 10 5/8% senior notes, we may incur additional indebtedness, including
secured indebtedness, from time to time to finance acquisitions, capital
expenditures and working capital, redeem our Preferred Stock, make certain
deferred bonus payments to our executive officers or for other purposes.

The level of our indebtedness could have important consequences, including,
but not limited to, the following:

. a substantial portion of our cash flow from operations must be dedicated
to the repayment of indebtedness and will not be available for other
purposes;

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

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

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

The indenture relating to our senior notes and our senior bank credit
facility contain restrictive covenants that limit our operating flexibility. In
addition, our senior bank credit facility requires us to maintain specified
financial ratios and satisfy certain financial condition tests. In June 1998,
we amended our senior bank credit facility to adjust these financial tests in
light of the impact of the downturn in the semiconductor industry on our
operating results. These adjustments relate to periods prior to March 31, 2000.
For periods after that time, the financial tests and covenants contained in the
original agreement will apply. Our ability to meet those financial ratios and
tests can be affected by events beyond our control, and there can be no
assurance that we will meet those tests. A breach of any of these covenants
could result in a default under our senior bank credit facility and/or the
indenture relating to our senior notes. Substantially all of our assets and
those of our subsidiaries, together with all of the capital stock of any
domestic subsidiary and 65% of the capital stock of each of our first-tier
foreign subsidiaries, are pledged as security under our senior bank credit
facility. See "Description of Certain Indebtedness."

11
<PAGE>

Our success depends on our ability to develop new and enhanced products for the
semiconductor industry. This will require continued significant expenditures
for research and development activities, which will not necessarily result in
the development of viable products that gain general market acceptance.

Our success in the semiconductor capital equipment industry will depend upon
our ability to design, develop, manufacture, assemble, test, market and support
new products and enhancements on a timely and cost-effective basis. For
example, we expect our product development efforts to include combining
separate metrology systems into one tool, implementing in-situ systems and
networking these systems together. We are also developing the Meta-Probe
system, which is a thin film metrology system specifically designed to measure
the thickness and material properties of opaque and metallic thin films. We
cannot assure you that we will not experience difficulties or delays in our
development efforts with respect to these products or that we will be
successful in developing these products. In addition, we cannot assure you that
these products will gain market acceptance or that we will not experience
reliability or quality problems. Our failure to successfully develop,
manufacture, assemble or introduce these or other new products could have a
material adverse effect on our growth prospects.

Responding to rapid technological change and the need to develop and
introduce new products to meet customers' expanding needs and evolving industry
standards will require us to make substantial investments in research and
product development. Any failure by us to anticipate or respond adequately to
technological developments and customer requirements, or any significant delays
in product development or introduction could result in a loss of
competitiveness and could materially adversely affect our operating results.
There can be no assurance that we will successfully identify new product
opportunities and develop and bring new products to market in a timely and
cost-effective manner, that any product enhancement or new product developed by
us will gain market acceptance, or that products or technologies developed by
others will not render our products or technologies obsolete or noncompetitive.
A fundamental shift in technology in our product markets could have a material
adverse effect on us, particularly in light of the fact that we currently
derive substantially all of our revenues from sales of our two product
families, the Opti-Probe and Therma-Probe.

Our business could be adversely affected if we are unable to protect our
proprietary technology or if we infringe on the proprietary technology of
others.

Our future success and competitive position depend in part upon our ability
to obtain and maintain certain proprietary technology used in our principal
product families, and we rely, in part, on patent, trade secret and trademark
law to protect that technology. We have obtained a number of patents relating
to our two key product families, the Opti-Probe and Therma-Probe. As of March
31, 1999, we owned 26 U.S. patents with expiration dates ranging from 2004 to
2017 and had filed applications for eleven additional U.S. patents. In
addition, we owned 25 foreign patents with expiration dates ranging from 2004
to 2017 and had filed applications for eleven additional foreign patents.

There can be no assurance that any of our pending patent applications will
be approved, that we will develop additional proprietary technology that is
patentable, that any patents owned by or issued to us will provide us with
competitive advantages or that these patents will not be challenged by any
third parties. Furthermore, there can be no assurance that third parties will
not design around our patents. Any of the foregoing results could have a
material adverse effect on our business, financial condition or results of
operations.

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

12
<PAGE>

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

Protection of our intellectual property rights, or third parties seeking to
enforce their own intellectual property rights against us, may result in
litigation, the cost of which could be substantial.

We may be required to initiate litigation in order to enforce any patents
issued to or licensed to us or to determine the scope and/or validity of a
third party's patent or other proprietary rights. In addition, we may be
subject to lawsuits by third parties seeking to enforce their own intellectual
property rights. Any such litigation, regardless of outcome, could be expensive
and time consuming and, as discussed above in the prior risk factor, could
subject us to significant liabilities or require us to cease using certain
technology and, consequently, could have a material adverse effect on our
business, financial condition or results of operations. We are currently
involved in litigation with KLA-Tencor Corporation regarding our thin-film
thickness measuring technology. See "Business--Legal Proceedings."

We will need to be able to attract and retain key personnel with knowledge of
instruments used in semiconductor manufacturing processes to help support our
future growth. Competition for such personnel in our industry is high.

Our success depends to a significant degree upon the continued contributions
of key management, engineering, sales and marketing, customer support, finance
and manufacturing personnel. The loss of the services of certain personnel, who
would be extremely difficult to replace, could have a material adverse effect
on us. There can be no assurance that the services of such personnel will
continue to be available to us. We have employment agreements with certain
members of our senior management team, including Messrs. Rosencwaig, Schwartz,
Christie, Smith, Opsal and Willenborg. In addition, we maintain and are the
named beneficiary under key-man life insurance policies for Messrs. Rosencwaig,
Willenborg and Opsal in the amounts of $500,000, $100,000 and $250,000,
respectively. To support our future growth, we will need to attract and retain
additional qualified employees. Competition for such personnel in our industry
is high, and we cannot be certain that we will be successful in attracting and
retaining such personnel. See "Management--Employment Agreements."

Our operations are characterized by the need for continued investment in
research and development and, as a result, our ability to reduce costs is
limited.

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

We obtain some of the components and subassemblies included in our systems from
a single source or limited group of suppliers, the partial or complete loss of
which could have at least a temporary adverse effect on our operations.

Some of the components and subassemblies included in our systems are
obtained from a single source or a limited group of suppliers. From time to
time, we have experienced temporary difficulties in receiving orders

13
<PAGE>

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

We are subject to risks associated with manufacturing all of our products at a
single facility. Any prolonged disruption in the operations of that facility
could have a material adverse effect on our business.

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

We rely upon manufacturers' sales representatives for a significant portion of
our sales. A disruption in our relationship with any sales representative could
have a material adverse effect on our business.

A significant portion of our sales are made through manufacturers' sales
representatives. The activities of these representatives are not within our
control, and they may sell products manufactured by other manufacturers. In
addition, in some locations our manufacturing sales representatives also
provide field service to our customers. A reduction in the sales efforts or
financial viability of such manufacturers' sales representatives, or a
termination of our relationship with such representatives, could have a
material adverse effect our sales, financial results and ability to support our
customers. Although we believe that we maintain good relations with our sales
representatives, there can be no assurance that such relationships will
continue.

Our net sales and results of operations can be adversely affected by the
instability of Asian economies, from which we derive a significant portion of
our revenues.

Our sales to customers in Asian markets represented approximately 48%, 40%
and 29% of total net revenues for fiscal 1997 and 1998, and for the nine-month
period ended December 31, 1998, respectively. Companies in the Asia Pacific
region, including Japan, Korea and Taiwan, each of which accounts for a
significant portion of our business in that region, have experienced weaknesses
in their currency, banking and equity markets over the last 18 months. These
weaknesses began to adversely affect our sales to semiconductor device and
capital equipment manufacturers located in these regions in the fourth quarter
of calendar 1997 and have continued to adversely affect them in 1998. Although
we have recently received an increased level of orders from customers in the
Asia Pacific region, we expect that turbulence in the Asian markets could
adversely affect our sales at least through the end of calendar 1999.

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

International sales accounted for approximately 52% and 61% of our total
revenues for fiscal 1998 and the nine-month period ended December 31, 1998,
respectively. We anticipate that international sales will continue to account
for a significant portion of our revenue in the foreseeable future.
International sales are subject to certain risks, including, among others,
unexpected changes in regulatory requirements, tariffs and other market
barriers, political and economic instability, potentially adverse tax
consequences, outbreaks of hostilities, difficulties in accounts receivable
collection, extended payment terms, difficulties in managing foreign sales
representatives and difficulties in staffing and managing foreign branch
operations. In addition, the laws of certain countries in which our products
are or may be sold may not provide our products and intellectual property
rights with the same degree of protection as the laws of the United States.

14
<PAGE>

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

Our failure to identify and remediate all material Year 2000 risks could
significantly disrupt our business if we are forced to devote substantial
resources to Year 2000 remediation efforts, or if Year 2000 problems among our
suppliers or customers cause delays in shipping or receiving products.

We have implemented a multi-phase Year 2000 project consisting of assessment
and remediation, and testing following remediation. We cannot, however, be
certain that we have identified all of the potential risks. Failure by us to
identify and remediate all material Year 2000 risks could adversely affect our
business, financial condition and results of operations. We have identified the
following risks you should be aware of:

. we cannot be certain that the entities on whom we rely for certain goods
and services that are important for our business will be successful in
addressing all of their software and systems problems in order to
operate without disruption in the year 2000 and beyond;

. our customers or potential customers may be affected by Year 2000 issues
that may, in part:

--cause a reduction, delay or cancellation of customer orders

--cause a delay in payments for products shipped

--cause customers to expend significant resources on Year 2000
compliance matters, rather than investing in our products; and

. we have not developed a contingency plan related to a failure of our, or
a third-party's, Year 2000 remediation efforts and may not be prepared
for such an event.

Further, while we have made efforts to notify our customers who have
purchased potentially non-compliant products, we cannot be sure that such
customers will not assert claims against us alleging that such products should
have been Year 2000 compliant at the time of purchase, which could result in
costly litigation and divert management's attention.

We expect to use all of the net proceeds of this offering to repay indebtedness
and, as a result, we may be unable to meet our future capital and liquidity
requirements.

We expect to use all of the net proceeds of this offering to repay
indebtedness. As a result, none of the net proceeds will be available to fund
future operations. We expect that our principal sources of funds following this
offering will be cash generated from operating activities and, if necessary,
borrowings under our senior bank credit facility. We believe that these funds
will provide us with sufficient liquidity and capital resources for us to meet
our current and future financial obligations, as well as to provide funds for
our working capital, capital expenditures and other needs for the foreseeable
future. No assurance can be given, however, that this will be the case. We may
require additional equity or debt financing to meet our working capital
requirements or to fund our research and development efforts. There can be no
assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to us.

One of our stockholders will continue to have significant influence over our
business after this offering, and could delay, deter or prevent a change of
control or other business combination.

Upon completion of this offering, investment funds affiliated with Bain
Capital, Inc. (the "Bain Capital Funds") will hold approximately % of our
outstanding common stock ( % if the underwriters' over-allotment is exercised
in full). In addition, three of the seven directors that will serve on our
Board following this offering will be representatives of the Bain Capital
Funds. By virtue of such stock ownership and Board representation, the Bain
Capital Funds will continue to have a significant influence over all matters
submitted to our stockholders, including the election of our directors, and to
exercise significant control over our business,

15
<PAGE>

policies and affairs. Such concentration of voting power could have the effect
of delaying, deterring or preventing a change of control of Therma-Wave or
other business combination that might otherwise be beneficial to stockholders.

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

Certain provisions of our certificate of incorporation and by-laws may
inhibit changes in control of Therma-Wave not approved by our Board of
Directors and would limit the circumstances in which a premium may be paid for
the common stock in proposed transactions, or a proxy contest for control of
the Board may be initiated. These provisions include:

. a classified Board of Directors;

. a prohibition on stockholder action through written consents;

. a requirement that special meetings of stockholders be called only by
our Chief Executive Officer or the Board of Directors;

. advance notice requirements for stockholder proposals and nominations;

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

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

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

Trading in our shares could be subject to extreme price fluctuations and you
will experience an immediate and significant dilution in the book value of your
investment.

The market for our shares may be subject to extreme price and volume
fluctuations. We believe that a number of factors, both within and outside our
control, could cause the price of our common stock to fluctuate, perhaps
substantially. These factors include, but are not limited to:

. announcements of developments related to our business or our
competitors' or customers' businesses;

. fluctuations in our financial results;

. general conditions or developments in the semiconductor and/or
semiconductor capital equipment industries;

. potential sales of our common stock into the marketplace by Therma-Wave
or our stockholders;

. announcements of technological innovations or new or enhanced products
by us or our competitors or customers;

. a shortfall in revenue, gross margin, earnings or other financial
results or changes in research analysts' expectations; and

. the limited number of shares of our common stock traded on a daily
basis.

We cannot be certain that the market price of our common stock will not
experience significant fluctuations in the future, including fluctuations that
are material, adverse and unrelated to our performance.

Because the initial public offering price is substantially higher than the
book value per share of common stock, purchasers of the common stock in this
offering will be subject to immediate and substantial dilution. See "Dilution."

16
<PAGE>

Future sales by our existing stockholders could adversely affect the market
price of our common stock.

Future sales of the shares of common stock held by existing stockholders
could have a material adverse effect on the market price of our common stock.
Upon completion of this offering, we expect that:

. the shares of common stock ( shares if the underwriters' over-
allotment option is exercised in full) sold in this offering will be
freely tradeable without restriction under the Securities Act, except
any such shares which may be acquired by an "affiliate" of Therma-Wave;
and

. shares of common stock held by our existing stockholders will be
eligible for sale into the public market, subject to compliance with the
resale volume limitations and other restrictions of Rule 144 under the
Securities Act, beginning 180 days after the date of this prospectus.

Beginning 180 days after the completion of this offering, the holders of an
aggregate of approximately shares of common stock will have certain rights
to require us to register their shares of common stock under the Securities Act
at our expense.

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

This prospectus contains certain forward-looking statements, including,
without limitation, statements concerning the conditions in the semiconductor
and semiconductor capital equipment industries, our operations, economic
performance and financial condition, including in particular statements
relating to our business and growth strategy and product development efforts.
The words "believe," "expect," "anticipate," "intend" and other similar
expressions generally identify forward-looking statements. Potential investors
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of their dates. These forward-looking statements are based
largely on our current expectations and are subject to a number of risks and
uncertainties, including, without limitation, those identified under "Risk
Factors" and elsewhere in this prospectus and other risks and uncertainties
indicated from time to time in our filings with the SEC. Actual results could
differ materially from these forward-looking statements. In addition, important
factors to consider in evaluating such forward-looking statements include
changes in external market factors, changes in our business or growth strategy
or an inability to execute our strategy due to changes in our industry or the
economy generally, the emergence of new or growing competitors and various
other competitive factors. In light of these risks and uncertainties, there can
be no assurance that the matters referred to in the forward-looking statements
contained in this prospectus will in fact occur.

17
<PAGE>

USE OF PROCEEDS

We estimate that our net proceeds from the sale of shares of common stock
in this offering will be approximately $22.7 million ($26.1 million if the
underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $ per share, the midpoint of the range set forth on
the cover page of this prospectus. We intend to use all of the net proceeds to
redeem or repurchase senior notes and to pay the redemption premium, if any,
and accrued and unpaid interest thereon.

Our senior notes mature on May 15, 2004, and bear interest at the rate of 10
5/8% per annum. Under the terms of the indenture relating to the senior notes,
we are required to use the net proceeds from this offering (assuming we receive
net proceeds equal to or in excess of $25.0 million) to make an offer to
purchase up to 35% of the aggregate principal amount of the senior notes
outstanding at a price equal to 110.625% of the principal amount thereof plus
accrued and unpaid interest thereon. If we are not required to make this
redemption offer, we may repurchase the senior notes through privately-
negotiated transactions, open market purchases or by exercising our option
under the indenture to redeem a portion of the senior notes with the net
proceeds from this offering. Pending such use, we will invest such proceeds in
short-term, interest-bearing, investment-grade securities. See "Description of
Certain Indebtedness--Senior Notes."

THE RECLASSIFICATION

We currently have three classes of common stock, designated as Class A
Common Stock, Class B Common Stock and Class L Common Stock. The Class A Common
Stock and Class B Common Stock are identical, except that the Class B Common
Stock is non-voting and is convertible on a share-for-share basis into Class A
Common Stock at any time following this offering. The Class L Common Stock is
identical to the Class A Common Stock, except that each share of Class L Common
Stock is entitled to a preferential payment upon any distribution by us to
holders of our capital stock (whether by dividend, liquidating distribution or
otherwise) equal to the original cost of such share ($19.085) plus an amount
which accrues on a daily basis at a rate of 12.0% per annum, compounded
annually (the "Preference Amount"). As of March 31, 1999, the Preference Amount
was $23.65 per share of Class L Common Stock issued at the time of the
recapitalization.

Immediately prior to the completion of this offering, we will amend our
certificate of incorporation in order to reclassify:

. all of the outstanding shares of Class A Common Stock and Class B Common
Stock into a single class of common stock on a share-for-share basis and

. all of the outstanding shares of Class L Common Stock into one share of
common stock plus an additional number of shares of common stock
determined by dividing the Preference Amount by the value of a share of
common stock (based on the initial public offering price).

The foregoing is referred to in this prospectus as the "Reclassification."

Assuming an initial public offering price of $ per share (the mid-point of
the range set forth on the cover page of this prospectus), and a closing date
of , 1999 for this offering, an aggregate of shares of common stock
will be issued in exchange for the outstanding shares of Class L Common Stock
in connection with the Reclassification. The actual number of shares of common
stock that will be issued as a result of the Reclassification is subject to
change based on the actual offering price and the closing date of this
offering. Fractional shares otherwise issuable as a result of the
Reclassification will be rounded to the nearest whole number. See "Description
of Capital Stock."

18
<PAGE>

CAPITALIZATION

The following table sets forth the cash and cash equivalents and the
capitalization of Therma-Wave as of December 31, 1998 on an actual basis and on
an as adjusted basis to reflect: (1) the Reclassification and (2) the sale by
us of shares of common stock pursuant to this offering, assuming an
offering price of $ per share (the midpoint of the range set forth on the
cover page of this prospectus) and the application of the net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the "Selected Historical Financial Data" included elsewhere in
this prospectus.

<TABLE>
<CAPTION>
December 31, 1998
----------------------
Actual As Adjusted
--------- -----------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................... $ 12,648 $ 12,648
========= =========
Long-term debt:
Bank Credit Facility.................................. $ -- $ --
Senior Notes (1)...................................... 115,000 94,784
Other long-term obligations........................... 2,263 2,263
--------- ---------
Total long-term debt................................ 117,263 97,047
Mandatorily redeemable convertible preferred stock (2).. 15,139 15,139
Stockholders' equity (net capital deficiency):
Preferred Stock, $0.01 par value, 5,000,000 shares
authorized; no shares issued on an actual and as
adjusted basis....................................... -- --
Common Stock, $0.01 par value, 25,000,000 shares
authorized; no shares issued on an actual basis;
shares issued and outstanding on an as adjusted
basis (3)............................................ -- --
Class A Common Stock, $0.01 par value, 20,000,000
shares authorized; 9,073,532 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 91 --
Class B Common Stock, $0.01 par value, 4,000,000
shares authorized; 1,118,092 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 11 --
Class L Common Stock, $0.01 par value, 2,000,000
shares authorized; 1,008,170 shares issued and
outstanding on an actual basis and no shares
authorized, issued and outstanding on an as adjusted
basis................................................ 10 --
Additional paid-in capital............................ 21,324 44,086
Accumulated deficit................................... (104,429) (108,056)
Other................................................. (1,285) (1,285)
--------- ---------
Total stockholders' equity (net capital
deficiency)........................................ (84,278) (65,255)
--------- ---------
Total capitalization................................ $ 48,124 $ 46,931
========= =========
</TABLE>
- --------
(1) Assumes all net proceeds are used to redeem senior notes at a redemption
price of 110.625% of the aggregate principal amount thereof.

(2) We issued shares of Preferred Stock with an aggregate liquidation value of
$15,139 (including accrued and unpaid dividends thereon as of December 31,
1998) to our then existing stockholders as part of the recapitalization.
Dividends on the Preferred Stock accrue at a rate of 6.0% per annum. The
Preferred Stock has a scheduled redemption date of May 17, 2004 and is
otherwise redeemable by us at any time at our sole discretion. See
"Description of Capital Stock--Preferred Stock."

(3) Par value of common stock on an as adjusted basis has not been presented as
the number of shares to be sold in this offering has not yet been
determined. Consequently, the value which would have otherwise been
ascribed to the common stock on an as adjusted basis has been included in
additional paid-in capital.

19
<PAGE>

DIVIDEND POLICY

We have not in the past paid, and do not expect for the foreseeable future
to pay, dividends on our common stock. Instead, we anticipate that all of our
earnings in the foreseeable future will be used for working capital purposes
and to reduce indebtedness. The payment of dividends by us to holders of our
common stock is prohibited by our senior bank credit facility and is restricted
by our indenture relating to the senior notes. Any future determination to pay
dividends will be at the discretion of the Board of Directors and will depend
upon, among other factors, our results of operations, financial condition,
capital requirements and contractual restrictions.

DILUTION

Our pro forma net tangible book value as of December 31, 1998 was $
million, or $ per share of common stock. Pro forma net tangible book value
(deficiency) per share is determined by dividing our tangible net capital
deficiency (total assets less intangible assets and total liabilities) by the
aggregate number of shares of common stock outstanding, assuming the
Reclassification had taken place on December 31, 1998. After giving effect to
the sale of the shares of common stock offered hereby (at an assumed offering
price of $ per share, the midpoint of the range set forth on the cover page of
this prospectus) and the receipt and application of the net proceeds therefrom,
pro forma net tangible book value as of December 31, 1998 would have been
approximately $ million, or $ per share. This represents an immediate
increase in pro forma net tangible book value of $ per share to the current
stockholders and an immediate dilution in pro forma net tangible book value of
$ per share to purchasers of common stock in the offering. The following
table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $
Pro forma net tangible book value (deficiency) per share at
December 31, 1998................................................. $
Increase per share attributable to new investors...................
----
Pro forma net tangible book value per share after this offering......
----
Net tangible book value dilution per share to new investors (1)...... $
====
</TABLE>
- --------
(1) Dilution is determined by subtracting pro forma net tangible book value per
share after the offering from the offering price per share.

The following table summarizes, on a pro forma basis, as of December 31,
1998, the number of shares purchased, the total consideration paid (or to be
paid) and the average price per share paid (or to be paid) by the existing
stockholders and the purchasers of common stock in the offering, at an assumed
offering price of $ per share (the midpoint of the range set forth on the
cover page of this prospectus), before deducting the estimated offering
expenses and underwriting discounts and commissions:

<TABLE>
<CAPTION>
Shares Total Average Price
Purchased Consideration Per Share
-------------- -------------- -------------
Number Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... % $ % $
New investors....................... $
--- ----- ---- -----
Total............................. 100.0% $ 100.0%
=== ===== ==== =====
</TABLE>

As of March 31, 1999, there were an aggregate of: (1) 1,780,559 shares of
common stock issuable upon the exercise of outstanding options granted under
our stock plans, of which 1,164,435 were then exercisable, at exercise prices
ranging from $6.00 to $15.89 per share; (2) additional shares of common
stock expected to be reserved for grants, awards or sale under the 1999 Equity
Incentive Plan or sale under the 1999 Employee Stock Purchase Plan; and (3)
748,739 shares of common stock issuable upon the conversion of our Preferred
Stock. See "Management--Stock Plans."

20
<PAGE>

SELECTED HISTORICAL FINANCIAL DATA
(in thousands, except per share data)

The following selected historical financial data as of March 31, 1997 and
1998 and December 31, 1998 and for the fiscal years ended March 31, 1996, 1997
and 1998 and the nine-month period ended December 31, 1998 have been derived
from our audited consolidated financial statements and notes thereto, which are
included elsewhere in this prospectus. The selected historical financial data
as of March 31, 1994, 1995 and 1996 and for the fiscal years ended March 31,
1994 and 1995 were derived from our audited consolidated financial statements,
which do not appear elsewhere in this prospectus. The summary historical
financial data for the nine-month period ended December 31, 1997 was derived
from our unaudited consolidated financial statements which, in the opinion of
management, reflect all adjustments (consisting of normal recurring
adjustments) necessary for the fair presentation of the financial condition and
results of operations for such period. The selected historical financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and accompanying notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Nine-Month
Period Ended
Fiscal Year (1) December 31,
--------------------------------------------- -----------------
1994 1995 1996 1997 1998 1997 1998
------- ------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data (2):
Net revenues............ $20,770 $55,675 $79,293 $109,493 $115,459 $86,155 $ 47,603
Cost of revenues........ 11,262 25,024 35,027 49,795 55,683 40,974 26,819
------- ------- ------- -------- -------- ------- --------
Gross margin............ 9,508 30,651 44,266 59,698 59,776 45,181 20,784
Operating expenses:
Research and
development........... 3,586 5,942 10,072 13,050 19,057 14,677 11,617
Selling, general and
administrative........ 9,092 13,299 18,704 22,004 24,589 18,294 13,634
Amortization of
goodwill and purchased
intangibles........... 1,912 1,912 1,912 1,275 -- -- --
Recapitalization and
other non-recurring
expenses.............. -- -- -- -- 4,188 4,188 --
Expenses relating to
operating cost
improvements.......... -- -- -- -- -- -- 1,057
------- ------- ------- -------- -------- ------- --------
Total operating
expenses.............. 14,590 21,153 30,688 36,329 47,834 37,159 26,308
------- ------- ------- -------- -------- ------- --------
Operating income
(loss)................. (5,082) 9,498 13,578 23,369 11,942 8,022 (5,524)
Interest expense........ 1,543 1,998 1,722 1,621 12,930 9,362 10,491
Interest income......... (331) (102) (247) (346) (753) (548) (518)
Other (income) expense,
net.................... 125 115 138 (14) 194 101 (115)
------- ------- ------- -------- -------- ------- --------
Income (loss) before
provision for income
taxes.................. (6,419) 7,487 11,965 22,108 (429) (893) (15,382)
Provision (benefit) for
income taxes........... -- -- 4,684 9,007 604 (347) (2,001)
------- ------- ------- -------- -------- ------- --------
Net income (loss)....... $(6,419) $ 7,487 $ 7,281 $ 13,101 $ (1,033) $ (546) $(13,381)
======= ======= ======= ======== ======== ======= ========
Net income (loss)
attributable to common
stockholders (3)....... $(6,419) $ 7,487 $ 7,281 $ 13,101 $ (1,771) $(1,078) $(14,005)
======= ======= ======= ======== ======== ======= ========
Net income (loss) per
share (4):
Basic.................. $ (0.28) $ 0.25 $ 0.16 $ 0.29 $ (0.27) $ (0.17) $ (1.56)
Diluted................ $ (0.28) $ 0.24 $ 0.16 $ 0.29 $ (0.27) $ (0.17) $ (1.56)
Weighted average common
shares outstanding:
Basic.................. 22,717 30,412 45,515 45,515 13,540 15,001 9,316
Diluted................ 22,717 31,497 45,515 45,515 13,540 15,001 9,316
Pro Forma Statement of
Operations Data (5):
Pro forma net income....
Pro forma net income per
share:
Basic..................
Diluted................
Pro forma weighted
average common shares
outstanding:
Basic..................
Diluted................
Other Financial Data:
EBITDA (6) (7).......... $(2,117) $12,496 $17,185 $ 27,113 $ 21,110 $15,780 $ 159
Cash provided by (used
in) operating
activities............. (6,006) 1,876 5,867 11,860 8,113 3,342 (7,655)
Cash used in investing
activities............. (299) (2,048) (4,965) (1,575) (2,900) (3,693) (751)
Cash provided by (used
in) financing
activities............. 6,069 5,701 (1,541) (1,234) (1,532) (563) 632
Capital expenditures.... 61 1,616 4,361 1,091 2,900 2,634 323
</TABLE>

21
<PAGE>

<TABLE>
<CAPTION>
March 31, December 31, 1998
------------------------------------------- ----------------------
As
1994 1995 1996 1997 1998 Actual Adjusted (8)
-------- ------- ------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 2,800 $ 8,329 $ 7,690 $16,741 $ 20,422 $ 12,648 $ 12,648
Working capital......... (6,484) 17,240 23,740 38,720 43,348 32,802 33,088
Total assets............ 23,039 45,081 53,056 68,620 89,762 69,930 68,451
Long-term debt.......... 23,100 23,100 23,100 23,100 115,000 115,000 94,784
Mandatorily redeemable
convertible preferred
stock (3).............. -- -- -- -- 14,515 15,139 15,139
Stockholders' equity
(net capital
deficiency)............ (22,845) (379) 6,903 20,145 (70,990) (84,278) (65,255)
</TABLE>
- --------
(1) Our fiscal year refers to the 52/53 week period ending on the Sunday on or
nearest preceding March 31 of each year for periods prior to 1997 and the
Sunday on or following March 31 of each year for periods thereafter.

(2) On May 16, 1997, we effected the recapitalization. We issued $115 million
in aggregate principal amount of 10 5/8% senior notes in connection with
the recapitalization.

(3) We issued shares of Preferred Stock with an aggregate liquidation value of
$15,139 (including accrued and unpaid dividends thereon as of December 31,
1998) to our then existing stockholders as part of the recapitalization.
Dividends on the Preferred Stock accrue at a rate of 6.0% per annum. The
Preferred Stock has a scheduled redemption date of May 17, 2004 and is
otherwise redeemable by us at any time at our sole discretion. See
"Description of Capital Stock--Preferred Stock."

(4) For the calculation of net loss per share for the year ended March 31, 1998
and the nine months ended December 31, 1997 and 1998: (a) net loss excludes
the 12% yield on our Class L Common Stock and the income (loss)
attributable to the weighted average number of shares of Class L Common
Stock outstanding and (b) average common shares outstanding excludes
unvested Class B Common Stock.

(5) The pro forma statement of income data give pro forma effect to: (1) the
reclassification of our three classes of common stock into a single class
and (2) this offering and the application of the net proceeds therefrom as
described under "Use of Proceeds," as if each had occurred as of the
beginning of the periods presented. The unaudited pro forma statement of
income data do not purport to represent what our results of operations
actually would have been if such transactions had actually occurred as of
the beginning of the periods presented or what such results will be for any
future periods.

(6) "EBITDA" is defined herein as income before income taxes, plus
depreciation, amortization, interest expense, interest income and other
non-operating (income) expenses, net. EBITDA is presented because we
believe it is a widely accepted financial indicator of a company's
historical ability to service and/or incur indebtedness. However, EBITDA
should not be considered as an alternative to net income as a measure of
operating results or to cash flows as a measure of liquidity in accordance
with generally accepted accounting principles. Additionally, EBITDA as
defined herein may not be comparable to similarly titled measures reported
by other companies.

(7) EBITDA in the fiscal year ended March 31, 1998 and the nine months ended
December 31, 1997 does not include $4,188 in recapitalization and other
non-recurring expenses. Including such expenses, EBITDA would have been
reduced to $16,922 for fiscal 1998 and $11,592 for the nine months ended
December 31, 1997.

(8) Adjusted to reflect the sale of shares of common stock and the
application of the net proceeds as described under "Use of Proceeds."

22
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems for use in the manufacture of
semiconductors. Process control metrology is used to monitor process parameters
in order to enable semiconductor manufacturers to reduce feature size, increase
wafer size, increase equipment productivity and improve device performance. Our
current process control metrology systems are principally used to measure ion
implantation and thin film deposition and removal. We have developed two
product families of process control metrology systems: Therma-Probe systems and
Opti-Probe systems.

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

Opti-Probe Product Family. Opti-Probe systems significantly improve upon
existing thin film metrology systems by successfully integrating different
measurement technologies and utilizing our proprietary optical technologies.

We derive our revenues from product sales, sales of replacement and spare
parts and service contracts. During the nine months ended December 31, 1998, we
derived approximately 79% of our revenues from product sales, 11% from sales of
replacement and spare parts (including associated labor) and 10% from service
contracts. In fiscal 1998, we derived approximately 89% of our revenues from
product sales, 6% from sales of replacement and spare parts (including
associated labor), and 5% from service contracts. Revenue from product sales
and replacement and spare parts is recognized at the time of shipment. Revenue
from service contracts is deferred and recognized on a straight-line basis over
the period of the contract.

International sales accounted for approximately 61% and 52% of our total
revenues for the nine months ended December 31, 1998 and fiscal 1998,
respectively. We anticipate that international sales will continue to account
for a significant portion of our revenue in the foreseeable future. A
substantial portion of our international sales are denominated in U.S. dollars.
As a result, changes in the values of foreign currencies relative to the value
of the U.S. dollar can render our products comparatively more expensive. Such
conditions could negatively impact our international sales.

We were acquired by Toray and Shimadzu in fiscal 1992. As a result, we
incurred substantial interest expense and amortization expense from goodwill
and purchased intangibles in periods prior to the recapitalization. In May
1997, we effected the recapitalization. We incurred significant indebtedness in
connection with the recapitalization.

On June 22, 1998, we announced and implemented an operating cost reduction
program aimed at bringing operating expenses in line with then prevailing
industry conditions. These efforts were in response to the continued cutbacks
in capital equipment investment by semiconductor manufacturers. As a result of
the implementation of this program, we recorded a charge of $1.1 million in the
first half of fiscal 1999, which consisted principally of severance and other
related charges.

In connection with this offering, we expect to incur in the first quarter of
fiscal 2000 a non-recurring extraordinary charge for early debt extinguishment
of approximately $3.6 million (net of tax) relating primarily to the redemption
premium on our senior notes.

23
<PAGE>

Results of Operations

The following table summarizes our historical results of operations as a
percentage of net revenues for the periods indicated. The historical financial
data for the fiscal years ended March 31, 1996, 1997 and 1998 and the nine-
month period ended December 31, 1998 were derived from our audited consolidated
financial statements included elsewhere in this prospectus. The historical
financial data for the nine-month period ended December 31, 1997 was derived
from our unaudited consolidated financial statements which, in the opinion of
management, reflect all adjustments (consisting only of normal recurring
adjustments) necessary for the fair presentation of the financial condition and
results of operations for such period. The information contained in this table
should be read in conjunction with "Selected Historical Financial Data," and
the Consolidated Financial Statements and accompanying notes thereto included
elsewhere in this prospectus.

<TABLE>
<CAPTION>
Nine-Month
Period Ended
Fiscal Year (1) December 31,
------------------- ------------------
1996 1997 1998 1997 1998
----- ----- ----- ----------- ------
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (2):
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues..................... 44.2 45.5 48.2 47.6 56.3
----- ----- ----- ----- -----
Gross margin......................... 55.8 54.5 51.8 52.4 43.7
Operating expenses:
Research and development expenses.. 12.7 11.9 16.5 17.0 24.4
Selling, general and administrative
expenses.......................... 23.6 20.1 21.3 21.2 28.6
Amortization of goodwill and
purchased intangibles............. 2.4 1.2 -- -- --
Recapitalization and other non-
recurring expenses................ -- -- 3.6 4.9 --
Expenses relating to operating cost
improvements...................... -- -- -- -- 2.2
----- ----- ----- ----- -----
Total operating expenses......... 38.7 33.2 41.4 43.1 55.2
----- ----- ----- ----- -----
Operating income (loss).............. 17.1 21.3 10.4 9.3 (11.5)
Interest expense..................... 2.1 1.5 11.2 10.8 22.0
Interest income...................... (0.3) (0.4) (0.6) (0.6) (1.1)
Other (income) expense, net.......... 0.2 -- 0.2 0.1 (0.2)
----- ----- ----- ----- -----
Income (loss) before provision for
income taxes........................ 15.1 20.2 (0.4) (1.0) (32.2)
Provision for income taxes........... 5.9 8.2 0.5 (0.4) (4.2)
----- ----- ----- ----- -----
Net income (loss).................... 9.2% 12.0% (0.9%) (0.6%) (28.0%)
===== ===== ===== ===== =====
Other Financial Data:
EBITDA (3)........................... 21.7% 24.8% 18.3% 18.3% 0.3%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) Our fiscal year refers to the 52/53 week period ending on the Sunday on or
nearest preceding March 31 of each year for periods prior to 1997 and the
Sunday on or following March 31 of each year for periods thereafter.
(2) On May 16, 1997, we effected the recapitalization. We issued $115 million
in aggregate principal amount of 10 5/8% senior notes in connection with
the recapitalization.
(3) "EBITDA" is defined herein as income before taxes, plus depreciation,
amortization, interest expense, interest income and other non-recurring
operating (income) expenses, net. EBITDA as a percent of sales for the
fiscal year ended March 31, 1998 and the nine months ended December 31,
1997 does not include the recapitalization and other non-recurring
expenses. Including such expenses, EBITDA as a percent of sales for the
period would have been 14.7% for fiscal 1998 and 13.5% for the nine months
ended December 31, 1997.

Nine Months Ended December 31, 1998 Compared to Nine Months Ended December 31,
1997

Net Revenues. Net revenues for the nine months ended December 31, 1998 and
1997 were $47.6 million and $86.2 million, respectively. Compared to the
corresponding period of fiscal 1998, net revenues decreased $38.6 million or
44.7% for the nine month period ended December 31, 1998. The decline in
revenues is

24
<PAGE>

attributable to the current downturn in the global semiconductor industry due
primarily to excess dynamic random access memory ("DRAM") capacity and a
slowdown in product demand as a result of lower than expected sales of high-end
personal computers and the economic conditions in the Asia Pacific region. This
slowdown has caused the semiconductor industry to reduce or delay both
purchases of semiconductor manufacturing equipment and construction of new
fabrication facilities. Net revenues attributable to international sales for
the nine months ended December 31, 1998 and 1997 accounted for 61.4% and 47.0%
of our total revenues for such periods, respectively. We anticipate that
international sales will continue to account for a significant portion of our
total revenues.

Gross Margin. Gross margin for the nine months ended December 31, 1998
decreased by $24.4 million, or 54.0%, to $20.8 million from $45.2 million for
the nine months ended December 31, 1997. As a percentage of net revenues, gross
margin for the nine months ended December 31, 1998 decreased to 43.7% from
52.4% for the comparable period ended December 31, 1997. The decline in gross
margin was due to manufacturing overhead costs being a higher percentage of
revenues due to lower sales volumes in the nine months ended December 31, 1998.

Research and Development ("R&D") Expenses. R&D expenses were $11.6 million
and $14.7 million for the nine months ended December 31, 1998 and 1997,
respectively. Compared to the corresponding period of fiscal 1998, R&D expenses
decreased $3.1 million, or 20.8% for the nine months ended December 31, 1998.
R&D expenses as a percentage of net revenues for the nine months ended December
31, 1998 increased to 24.4% from 17.0% for the comparable period ended December
31, 1997. R&D expenses relating to the new Opti-Probe 5000 series and 300
millimeter products have decreased from prior periods as these projects near
completion. Although we are currently in a downturn, we believe that technical
leadership is essential to our success and expect to continue to commit
significant resources to R&D projects. In the near term, we expect our R&D
expenses to increase in both absolute dollar terms and as a percentage of our
net revenues.

Selling, General and Administrative ("SG&A") Expenses. SG&A expenses were
$13.6 million and $18.3 million for the nine months ended December 31, 1998 and
1997, respectively. Compared to the corresponding period of fiscal 1998, SG&A
expenses decreased $4.7 million, or 25.5% for the nine months ended December
31, 1998. SG&A expenses as a percentage of net revenues for the nine months
ended December 31, 1998 increased to 28.6% from 21.2% for the comparable period
ended December 31, 1997. The decrease in SG&A expenses is due primarily to the
decrease in sales commissions and the decrease in headcount as a result of the
operating cost reduction program described below.

Recapitalization and Other Non-Recurring Expenses. Recapitalization and
other non-recurring expenses for the nine months ended December 31, 1997 were
$4.2 million, which consisted mainly of non-cash charges related to the
arrangements for our executive officers in connection with the
recapitalization.

Expenses Relating to Operating Cost Improvements. On June 22, 1998, we
announced and implemented an operating cost reduction program aimed at bringing
operating expenses in line with then prevailing industry conditions. These
efforts are in response to the continued cutbacks in capital equipment
investment by semiconductor manufacturers. As a result of the implementation of
this program, we recorded a charge of $582,000 during the first quarter of
fiscal 1999, of which $406,000 related to severance and other related charges,
$76,000 to vacated leased facilities and $100,000 to certain excess operating
assets. During the second quarter of fiscal 1999, we recorded a charge of
$475,000, which related primarily to severance and other related charges.

Interest Expense. Interest expense for the nine months ended December 31,
1998 and 1997 was $10.5 million and $9.4 million, respectively. As a percentage
of net revenues, interest expense for the nine months ended December 31, 1998
increased to 22.0% from 10.8% for the comparable period ended December 31,
1997. The increased interest expense from the prior fiscal year is attributable
to the additional debt incurred as part of the recapitalization.

25
<PAGE>

Provision for Income Taxes. For the nine months ended December 31, 1998 and
1997, we recorded a benefit for income taxes of $2.0 million and $0.3 million,
respectively. Our tax benefit for the period ended December 31, 1998 reflects
the expected tax benefit rate of 13% for the fiscal year based upon our loss
carryback potential.

Net Loss. Net loss for the nine months ended December 31, 1998 and 1997 was
$13.4 million and $0.5 million, respectively, for the reasons described above.

Fiscal Year Ended March 31, 1998 Compared to Fiscal Year Ended March 31, 1997

Net Revenues. Net revenues for the fiscal year ended March 31, 1998
increased by $6.0 million, or 5.4%, to $115.5 million from $109.5 million for
the fiscal year ended March 31, 1997. This is primarily attributed to higher
Opti-Probe sales and increased service revenues, partially offset by a decrease
in Therma-Probe sales. Therma-Probe sales decreased as a result of the decrease
in the number of new semiconductor manufacturing facilities being constructed.
International sales, primarily export sales from the United States to foreign
countries, accounted for approximately 52.3% and 59.7% of our total revenues
for fiscal 1998 and 1997, respectively.

Gross Margin. Gross margin for the fiscal year ended March 31, 1998
increased by $0.1 million to $59.8 million from $59.7 million for the fiscal
year ended March 31, 1997. As a percentage of net revenues, gross margin for
the fiscal year ended March 31, 1998 decreased to 51.8% from 54.5% for the
comparable period ended March 31, 1997. This decrease is primarily attributable
to increased investment in our service organization.

Research and Development Expenses. R&D expenses were $19.1 million and $13.1
million for the fiscal years ended March 31, 1998 and 1997, respectively.
Compared to fiscal year 1997, R&D expenses increased $6.0 million, or 46.0%.
R&D expenses as a percentage of net revenues for the fiscal year ended March
31, 1998 increased to 16.5% from 11.9% for the comparable period ended March
31, 1997. The increase in R&D expenses is due to the increased headcount and
increases in project expense related to new product development. We believe
that technical leadership is essential to our success and expect to continue to
commit significant resources to research and development projects.

Selling, General and Administrative Expenses. SG&A expenses were $24.6
million and $22.0 million and, as a percentage of net revenues, were 21.3% and
20.1% for the fiscal years ended March 31, 1998 and 1997, respectively. The
increase is a result of increased spending in marketing and related expenses
for new products, slightly offset by a decrease in sales commissions.

Amortization of Goodwill and Purchased Intangibles. Amortization of goodwill
and purchased intangibles decreased $1.3 million from the prior year as such
intangibles related to the acquisition of Therma-Wave by Toray and Shimadzu in
December 1991 were fully amortized in fiscal year 1997.

Recapitalization and Other Non-Recurring Expenses. Recapitalization and
other non-recurring expenses for the year ended March 31, 1998 was $4.2
million. Such charges were primarily non-cash charges related to the
arrangements for our executive officers in connection with the
recapitalization.

Operating Income. Operating income for the fiscal year ended March 31, 1998
decreased by $11.5 million, or 48.9%, to $11.9 million from $23.4 million for
the fiscal year ended March 31, 1997. As a percentage of net revenues,
operating income for the fiscal year ended March 31, 1998 decreased to 10.4%
from 21.3% for the comparable period ended March 31, 1997.

Interest Expense. Interest expense for the fiscal year ended March 31, 1998
increased by $11.3 million to $12.9 million from $1.6 million for the year
ended March 31, 1997. As a percentage of net revenues, interest expense for the
fiscal year ended March 31, 1998 was 11.2% as compared to 1.5% for the year
ended March 31, 1997. The increased interest expense is attributed to the
additional debt incurred as part of the recapitalization.

26
<PAGE>

Provisions for Income Taxes. Income taxes for the fiscal year ended March
31, 1998 decreased by $8.4 million, or 93.3%, to $0.6 million from $9.0 million
for the year ended March 31, 1997. The effective tax rate increased to 140.8%
from 40.7%, primarily due to the increase in the valuation allowance and other
items, offset by the benefit from our foreign sales corporation.

Net (Loss) Income. For the reasons stated above, earnings for the fiscal
year ended March 31, 1998 decreased to a net loss of $1.0 million from $13.1
million of net income for the fiscal year ended March 31, 1997.

Fiscal Year Ended March 31, 1997 Compared to Fiscal Year Ended March 31, 1996

Net Revenues. Net revenues for the fiscal year ended March 31, 1997
increased by $30.2 million, or 38.1%, to $109.5 million from $79.3 million for
the fiscal year ended March 31, 1996. This increase in our net revenues is
primarily attributable to the increased market penetration of the Opti-Probe
and the overall expansion of the semiconductor industry. Of the increase in net
revenues, 85.4% was attributable to increases in Opti-Probe sales and 11.1% was
attributable to increases in Therma-Probe sales. International sales for the
fiscal year ended March 31, 1997, increased to $65.4 million, or 59.7% of net
revenues, from $45.8 million, or 57.8% of net revenues, for the comparable
period ended March 31, 1996.

Gross Margin. Gross margin for the fiscal year ended March 31, 1997
increased by $15.4 million, or 34.9% to $59.7 million from $44.3 million for
the fiscal year ended March 31, 1996. This increase is primarily attributable
to increased shipments of both the Therma-Probe and Opti-Probe systems. As a
percentage of net revenues, gross margin for the fiscal year ended March 31,
1997 decreased to 54.5% from 55.8% for the comparable period ended March 31,
1996. This decrease in gross margin as a percentage of net revenues is due to a
change in product mix, which was partially offset by operating leverage
associated with increased sales volumes and improved average selling prices.

Research and Development Expenses. R&D expenses for the fiscal year ended
March 31, 1997 increased by $3.0 million, or 29.6%, to $13.1 million from $10.1
million for the fiscal year ended March 31, 1996 due to an increase in the
number of employees in the R&D department. R&D expenses as a percentage of net
revenues for the fiscal year ended March 31, 1997 decreased to 11.9% from 12.7%
for the comparable period ended March 31, 1996. The decrease in R&D expenses as
a percentage of net revenues is primarily attributable to net revenues
increasing at a higher rate than R&D expenses.

Selling, General and Administrative Expenses. SG&A expenses for the fiscal
year ended March 31, 1997 increased by $3.3 million, or 17.6%, to $22.0 million
from $18.7 million for the fiscal year ended March 31, 1996 due to an increase
in headcount in relevant departments and increased commission expense on a
larger net revenue base. SG&A expenses as a percentage of net revenues for the
fiscal year ended March 31, 1997 decreased to 20.1% from 23.6% for the
comparable period ended March 31, 1996. The decrease in SG&A expenses as a
percentage of net revenues is primarily due to the relatively fixed nature of
SG&A expenses, with the exception of sales representative commission expenses.

Operating Income. Operating income for the fiscal year ended March 31, 1997
increased by $9.8 million, or 72.0%, to $23.4 million from $13.6 million for
the fiscal year ended March 31, 1996. As a percentage of net revenues,
operating income for the fiscal year ended March 31, 1997 increased to 21.3%
from 17.1% for the comparable period ended March 31, 1996.

Interest Expense. Interest expense for the fiscal year ended March 31, 1997
decreased by $0.1 million, or 5.9%, to $1.6 million from $1.7 million for the
comparable period ended March 31, 1996. As a percentage of net revenues,
interest expense for the fiscal year ended March 31, 1997 was 1.5% as compared
to 2.1% for the comparable period ended March 31, 1996.

Provision for Income Taxes. Income taxes for the fiscal year ended March 31,
1997 increased by $4.3 million, or 92.3%, to $9.0 million from $4.7 million for
the comparable period ended March 31, 1996. In

27
<PAGE>

addition to higher earnings, this increase was also caused by an increase in
the effective tax rate to 40.7% from 39.1% for the comparable period ended
March 31, 1996. The lower effective rate for the fiscal year ended March 31,
1996 reflects utilization of net operating loss carry-forwards.

Net Income. For the reasons stated above, net income for the fiscal year
ended March 31, 1997 increased $5.8 million, or 79.9%, to $13.1 million from
$7.3 million.

Quarterly Results of Operations

We have experienced, and expect to continue to experience, significant
fluctuations in our quarterly results. Our expense levels are based, in part,
on expectations of future revenues. If revenue levels in a particular quarter
do not meet expectations, operating results are adversely affected. A variety
of factors could have an influence on the level of our revenues in a particular
quarter. These factors include:

. product and customer mix,
. mix of domestic and international sales,
. specific economic conditions in the semiconductor and/or semiconductor
capital equipment industries,
. the timing of the receipt of orders from major customers,
. customer cancellations or postponement of shipments,
. specific feature requests by customers,
. production delays or manufacturing inefficiencies,
. exchange rate fluctuations,
. management decisions to commence or discontinue product lines,
. our ability to design, introduce and manufacture new products on a cost
effective and timely basis,
. the introduction of new products by us or our competitors,
. the timing of research and development expenditures,
. acquisitions, strategic alliances and the future development of
marketing and service capabilities, and
. increased price competition.

28
<PAGE>

The following table sets forth our unaudited operating results for our last
eight quarters. The information for each of the quarters is unaudited but
includes all adjustments, consisting only of normal recurring adjustments,
which management considers necessary for the basic presentation thereof.

<TABLE>
<CAPTION>
Fiscal Year
1997 Fiscal Year 1998 Fiscal Year 1999
----------- ---------------------------------- -------------------------
Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
----------- ------- ------- ------- ------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues............ $25,538 $28,205 $28,286 $29,664 $29,304 $15,246 $15,196 $17,161
Gross margin............ 13,335 14,942 15,148 15,091 14,595 6,267 6,313 8,204
Operating income
(loss)................. 3,678 2,540 2,313 3,168 3,921 (3,546) (2,586) 608
Net income (loss)....... 2,275 311 (671) (186) (487) (6,090) (5,010) (2,281)

Other Financial Data:
EBITDA (1).............. $ 4,252 $ 6,464 $ 4,533 $ 4,782 $ 5,331 $(1,480) $ (589) $ 2,228
Cash provided by (used
in):
Operating activities... 4,259 (969) 4,817 (506) 4,771 (3,533) (370) (3,752)
Investing activities... (215) (1,939) (936) (818) 793 (250) (222) (279)
Financing activities... (247) 184 (284) 404 (1,836) (30) 69 593
</TABLE>
- --------
(1) EBITDA in the first, second and third quarters of fiscal 1998 do not
include $2,888, $1,000 and $300, respectively, in recapitalization and
other non-recurring expenses. Including such expenses, EBITDA for such
periods would have been reduced to $3,576, $3,533 and $4,482, respectively.

Backlog

At December 31, 1998, our backlog was $17.9 million compared to $46.7
million at December 31, 1997. Our backlog consists of product orders for which
a customer purchase order has been received and accepted and which is scheduled
for shipment within six months. Orders that are scheduled for shipment beyond
the six-month window are not included in backlog until they fall within the
six-month window. Orders are subject to rescheduling or cancellation by the
customer, usually without penalty. Backlog also consists of recurring fees
payable under support contracts with our customers and orders for spare parts
and billable service. Because of possible changes in product delivery schedules
and cancellation of product orders and because our sales will sometimes reflect
orders shipped in the same quarter that they are received, our backlog at any
particular date is not necessarily indicative of actual sales for any
succeeding period.

Liquidity and Capital Resources

Our principal liquidity requirements are for working capital, consisting
primarily of accounts receivable, inventories, capital expenditures and debt
service. Since the recapitalization, we have funded our operating activities
principally from funds generated from operations.

Cash flow (used in) provided by operating activities was ($7.7) million and
$3.3 million for the nine months ended December 31, 1998 and 1997,
respectively. The decrease in cash flow from operating activities from the
prior year period is mainly due to the increase in our net loss for the reasons
described above. This decrease was partially offset by a reduction in working
capital.

Cash flow provided by operating activities was $8.1 million, $11.9 million
and $5.9 million for the years ended March 31, 1998, 1997 and 1996,
respectively. The decrease in cash flow provided by operating activities from
fiscal 1997 to 1998 is mainly due to the increased R&D expenses and decreased
gross margins. This decrease was partially offset by a lower investment in
working capital and by the increase in non-cash recapitalization and other non-
recurring expenses. The improvement in cash flow provided by operating
activities in fiscal 1997 compared to 1996 is due to higher net income.

29
<PAGE>

Purchases of property and equipment were $0.3 million and $2.6 million for
the nine months ended December 31, 1998 and 1997, respectively. Purchases of
property and equipment were $2.9 million, $1.1 million and $4.4 million for the
years ended March 31, 1998, 1997 and 1996, respectively. Capital expenditures
for the fourth quarter of fiscal 1999 were approximately $0.3 million. Capital
expenditures for fiscal 2000 are expected to be approximately $1.2 million.

In May 1997, we issued $115.0 million in aggregate principal amount of
senior notes to finance the recapitalization, including the repayment of notes
payable, redemption of common stock, payment of related fees and expenses and
for general working capital purposes.

In conjunction with the recapitalization, we entered into a senior credit
facility with various lending institutions, and Bankers Trust Company, as Agent
(the "Bank Credit Facility"). The Bank Credit Facility bears interest, at our
option, at (1) the Base Rate (as defined in the Bank Credit Facility) plus
1.75% or (2) the Eurodollar Rate (as defined in the Bank Credit Facility) plus
3.00%. Our borrowings under the Bank Credit Facility are secured by
substantially all of our assets, a pledge of all of the capital stock of any
domestic subsidiaries and a pledge of 65% of the capital stock of our first-
tier foreign subsidiaries. The Bank Credit Facility matures on May 16, 2002.

During the quarter ended June 30, 1998, we amended the Bank Credit Facility
to have our borrowing availability subject to a borrowing base formula, which
provides a maximum revolving credit facility of $30.0 million, and to make
certain necessary adjustments to the financial tests and covenants contained
therein in light of then prevailing industry conditions. The adjustments to the
financial tests and covenants relate to periods prior to March 31, 2000. For
periods after that time, the financial tests and covenants contained in the
original agreement will apply. We may borrow amounts under the amended Bank
Credit Facility to finance our working capital requirements and other general
corporate purposes. The amended Bank Credit Facility requires us to meet
certain financial tests and contains covenants customary for this type of
financing. At December 31, 1998, there was $3.5 million outstanding under a
letter of credit and $21.7 million of unused borrowing capacity under the
amended Bank Credit Facility.

Our principal sources of funds following the offering are anticipated to be
cash on hand ($12.6 million as of December 31, 1998), cash flows from operating
activities and, if necessary, borrowings under the Bank Credit Facility. In
addition, we expect to receive a significant tax refund in the early part of
fiscal 2000. We believe that these funds will provide us with sufficient
liquidity and capital resources for us to meet our current and future financial
obligations, as well as to provide funds for our working capital, capital
expenditures and other needs for at least the next 12 months and, assuming
continued improvement in the semiconductor industry, through the next 24
months. No assurance can be given, however, that this will be the case. We may
require additional equity or debt financing to meet our working capital
requirements or to fund our research and development activities. There can be
no assurance that additional financing will be available when required or, if
available, will be on terms satisfactory to us.

Disclosure Relating to Market Risks

Interest Rate Risk

As of December 31, 1998, our cash included money market securities. Due to
the short duration of our investment portfolio, an immediate 10% change in
interest rates would not have a material effect on the fair market value of our
portfolio, therefore, we would not expect our operating results or cash flows
to be affected to any significant degree by the effect of a sudden change in
market interest rates on its securities portfolio.

Foreign Currency Exchange Risk

A substantial portion of our sales are denominated in U.S. dollars and as a
result, we have relatively little exposure to foreign currency exchange risk
with respect to sales made. We do not use forward exchange contracts to hedge
exposures denominated in foreign currencies or any other derivative financial
instruments for trading or speculative purposes. The effect of an immediate 10%
change in exchange rates would not have a material impact on our future
operating results or cash flows.

30
<PAGE>

Year 2000

Many computer systems used by us and our suppliers may not properly
recognize a date using "00" as the year 2000. This could result in
system/program failure or logic errors that could disrupt normal business
activities. We have established a formal project with a project office and
project team to address this issue and achieve year 2000 readiness.

The project is focused on four key readiness areas:

. Internal Infrastructure Readiness, addressing internal hardware,
software and non-information technology systems;

. Supplier Readiness, addressing the preparedness of those suppliers
providing material incorporated into our products;

. Product Readiness, addressing product functionality; and

. Customer Readiness, addressing customer support and transactional
activity.

For each readiness area, we are systematically performing a global risk
assessment, conducting testing and remediation (renovation and implementation),
developing contingency plans to mitigate unknown risk, and communication with
employees, suppliers and customers to raise awareness of the Year 2000 problem.

Internal Infrastructure Readiness Program. We are conducting an assessment
of internal applications and computer hardware. Some software applications have
been made Year 2000 compliant, and resources have been assigned to address
other applications based on their criticality and the time required to make
them Year 2000 compliant. All software remediation is scheduled to be completed
no later than September 30, 1999. The Year 2000 compliance evaluation of
hardware, including network fabric, telecommunications equipment, workstations
and other items is nearing completion.

In addition to applications and information technology hardware, we are
testing and developing remediation plans for facilities and other operations.

Supplier Readiness Program. This program focuses on minimizing the risks
associated with suppliers in two areas: (1) a supplier's business capability to
continue providing products and services; and (2) a supplier's product
integrity. We have identified and contacted key suppliers based on their
relative risks in these two areas. To date, we have received responses from
more than 95% of our key suppliers, most of which indicate that they are in the
process of developing and implementing remediation plans. Based on our
assessment of each supplier's progress to adequately address the Year 2000
issue, we are developing a supplier action list and contingency plans.

Product Readiness Program. This program focuses on identifying and resolving
Year 2000 issues existing in our products. The program encompasses a number of
activities including testing, evaluation, engineering and manufacturing
implementation. We have adopted the Sematech Year 2000 Readiness Testing
Scenarios as the baseline for product testing. Customers are being notified of
known risk areas and proposed remediation plans.

Customer Readiness Program. This program is focused on customer support,
including the coordination of retrofit activity, and developing contingency
plans where appropriate, as well as the ability of our customers to continue to
conduct business with us. We notified our customers that Year 2000 retrofits on
our products would be available beginning in the third quarter of fiscal 1999.
Our field service representatives will be available to assist customers should
they experience difficulties with our products.

We estimate that total Year 2000 incremental costs will be approximately
$200,000. Through March 31, 1999, we have spent approximately $110,000 to
address the Year 2000 issue. We are continuing our assessments and developing
alternatives that will necessitate refinement of this estimate over time. There
can be no assurance, however, that there will not be a delay in, or increased
costs associated with, the programs described in this section.

31
<PAGE>

Since the programs described in this section are ongoing, all potential Year
2000 complications may not have yet been identified. Therefore, the potential
impact of these complications on our financial condition and results of
operations cannot be determined at this time. If computer systems used by us or
our suppliers, products provided to us by our suppliers, or the software
applications of hardware used in systems manufactured or sold by us, fail or
experience significant difficulties related to the Year 2000 issue, our results
of operations and financial condition could be materially adversely affected.

Inflation

The impact of inflation on our business has not been material for the fiscal
years ended March 31, 1996, 1997 and 1998 or for the nine-month periods ended
December 31, 1997 and 1998.

Recently Issued Accounting Pronouncements

In June 1998, the FASB issued Statement on Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
No. 133"). SFAS No. 133 establishes a new model for accounting for derivatives
and hedging activities and supersedes and amends a number of existing
accounting standards. SFAS No. 133 requires that all derivatives be recognized
in the balance sheet at their fair market value, and the corresponding
derivative gains or losses be either reported in the statement of operations or
as a deferred item depending on the type of hedge relationship that exists with
respect to such derivative. We currently do not hold any derivative instruments
that will be affected by the adoption of SFAS No. 133.

32
<PAGE>

BUSINESS

Market data used throughout this prospectus were obtained from internal
surveys and from industry publications, including a report generated by
Dataquest. This industry publication generally indicates that the information
contained therein has been obtained from sources believed to be reliable, but
that the accuracy and completeness of such information is not guaranteed. We
have not independently verified such market data. This publication was not
commissioned by, or prepared at the request of, us or any of our affiliates.
Similarly, internal surveys, while believed to be reliable, have not been
verified by any independent source. Our belief as to our share of both the ion
implantation market generally and the non-destructive implantation market
specifically derives from internal estimates of the size of such market and
internal records as to our sales in such market. Our belief as to our share of
the thin film measurement market is derived from industry data as to the size
of such market and internal records as to our sales in such market.

Overview

Industry Background

The demand for semiconductors has continually increased as the use of
semiconductors has expanded beyond personal computers and computer systems to a
wide array of additional applications, including telecommunications and data
communications systems, automotive systems, consumer electronics, medical
products and household appliances. Additionally, the Internet has stimulated
the need for more high performance semiconductor devices. As a result,
semiconductors have become more complex, requiring decreases in feature line
width (e.g. from .25 microns to .18 microns), as many as 500 process steps and
an increase in the number of metal layers. Additionally, the life cycle for
these devices has compressed from four years in the early 1990s to
approximately two years today. The increase in device complexity and reduction
in product life cycles have led to a more costly and complex manufacturing
process. At the same time, semiconductor manufacturers have continued to face
significant price pressure due to competitive conditions in the industry. These
factors have led semiconductor manufacturers to intensify efforts to improve
fab productivity, including the increased use of process control metrology.
From 1992 to 1998, Dataquest reports that sales of process control metrology
systems and instruments have increased at a CAGR of 20.8% to approximately $1.8
billion in 1998 and are expected to increase at a CAGR of 22.9% to
approximately $4.1 billion in 2002.

Process control metrology is used to monitor process parameters in order to
enable semiconductor manufacturers to reduce costs and improve device
performance. Historically, semiconductor manufacturers have achieved an
approximate 30% annual reduction in cost per chip function through productivity
improvements including reduced feature size, increased wafer size and increased
equipment productivity. Although increasing wafer size and yields will continue
to be sources of fab productivity gains by semiconductor manufacturers,
increasingly, we believe, gains will come from reduced feature size and non-
yield manufacturing productivity enhancements, including increased equipment
uptime, reduced fab floor footprint requirements, reduced use of test wafers
and lower tool maintenance costs. According to Sematech, as summarized in the
following table, the greatest potential for future productivity gains are
expected to come primarily from gains in equipment productivity and continuing
reduction of feature sizes:

33
<PAGE>

Key Drivers of Fab Productivity*

<TABLE>
<CAPTION>
Factor 1980 1995 Future
------ ------ ------ ------
<S> <C> <C> <C>
Reduced feature sizes................................. 12% 12-14% 12-14%

Increased wafer sizes................................. 8% 4% (less than)2%

Improved yields....................................... 5% 2% (less than)1%

Other gains in equipment productivity................. 3% 7-10% (greater than)9-15%
</TABLE>

--------
* Percentages reflect the annual reduction in the cost per chip
function.
Source: Sematech

To continue to improve fab productivity, semiconductor manufacturers must
increase equipment and overall fab productivity. The following diagram sets
forth the principal areas on which we will focus to enhance semiconductor
manufacturer productivity. Those items in bold correspond to our existing
FPE(TM) solutions. We believe planned new additions to our FPE(TM) solutions
(italics) will significantly enhance the productivity gains provided by our
existing FPE(TM) solutions (bold) and, in addition, will provide new areas of
productivity gains for semiconductor manufacturers.

======================
Technology
======================
* Reduced feature size
* Increased wafer size
----------------------
|
|
============================== | =========================
Production/Cost Quality
============================== =========================
* Fewer pilot runs ___ FAB ___ * Higher yields
* Fewer test wafers PRODUCTIVITY * Less misprocessing
* Higher throughput ENHANCEMENT/TM/ * Less rework
* Reduced setup time * Better equipment
* Reduced fab floor footprints reliability
* Lower tool maintenance costs
- ------------------------------ -------------------------
| |
| |
=========================== ============================
Speed Responsiveness
=========================== ============================
* Faster production ramp-up * Connectivity among process
* Shorter cycle times tools
* Real-time feedback
--------------------------- ----------------------------

34
<PAGE>

The Therma-Wave Solution

We are a worldwide leader in the development, manufacture, marketing and
service of process control metrology systems used in the manufacture of
semiconductors. Our patented solutions help enable semiconductor manufacturers
to reduce feature size, increase wafer size, increase equipment productivity
and improve device performance by providing non-contact, non-destructive,
enabling technologies extendable over multiple process generations. We believe
that our technological capabilities, proven track record in process control
metrology systems and our FPE(TM) initiatives will allow us to continue to
provide industry-leading fab productivity solutions for semiconductor
manufacturers.

Current Industry Leading Metrology Solutions

We have successfully developed FPE(TM) metrology solutions for two critical
and pervasive process steps in semiconductor manufacturing: ion implantation
and thin film deposition and removal.

Ion Implant Metrology

A key process step in the fabrication of semiconductor devices is the
implantation of ions, usually boron, phosphorous or arsenic, into selective
areas of the silicon wafer to alter its electrical properties. Control of the
accuracy and uniformity of the ion implant dose is critical to device
performance and yield. Ion implantation is generally performed several times
during the early phases of the fabrication cycle. As a result, there is
typically a time lag of several weeks between these implant steps and the first
electrical measurements that indicate whether the ion implantation process was
properly executed. Failure to identify improper ion implantation can be
extremely costly to a semiconductor manufacturer if the fabrication cycle is
permitted to continue. To test on a more timely basis whether the ion
implantation was properly executed, semiconductor manufacturers historically
used a four-point probe to perform test wafer monitoring (i.e., testing a non-
production blank wafer that has no devices on it), which measured electrical
resistance and required physical contact between the probe and the silicon
wafer surface. As a result of the high probability of contamination of the
silicon wafer from contact with the probe, this procedure was only used on a
limited number of test wafers. As compared to test wafer monitoring, product
wafer monitoring using our Therma-Probe systems decreases manufacturing costs
by reducing the need for test wafers and shortening the cycle time between the
implant and monitoring steps. In addition, our systems detect implant
processing problems inherent in product wafers that are often missed when
utilizing test wafer monitoring alone.

Therma-Probe Product Family. Therma-Probe systems are the predominant non-
destructive process control metrology system used to measure the critical ion
implantation process in the fabrication of semiconductors. The Therma-Probe
systems employ proprietary thermal wave technology which uses highly focused
but low power laser beams to generate and detect thermal wave signals in the
silicon wafer. Proprietary software correlates the signals to the ion implant
dose. Unlike previous ion implant metrology systems, the Therma-Probe systems
utilize a totally non-contact, non-damaging technology and thus can be used to
monitor product wafers immediately after the ion implantation process. These
features have been integrated into an easy-to-use and reliable package with
automated wafer handling and statistical data processing. Since their
introduction, we believe the Therma-Probe systems have captured over 50% of the
market for ion implant measurement in general and over 95% of the market for
non-destructive ion implantation measurement of product wafers.

Thin Film Measurement

The majority of the 100 to 500 process steps required to fabricate
semiconductors on a silicon wafer involve the deposition and removal of a
variety of insulating and conducting thin films. Thin film metrology measures
the thickness and material properties of these thin films and, because it is
used to measure a large number of process steps, is one of the most important
metrology systems utilized at semiconductor fabrication facilities. The most
widely used technologies to measure the thickness and properties of thin films
have

35
<PAGE>

historically been reflection spectrometry and ellipsometry. Reflection
spectrometers obtain an optical spectrum as a function of wavelength for light
reflected from the surface of a wafer. This spectrum is then analyzed with
appropriate algorithms to obtain film thickness and, in some cases, other
properties of the film. In ellipsometry, the change of polarization of the
reflected light is measured. The polarization change is analyzed with
appropriate algorithms to obtain film thickness, and, in some cases, other
properties of the film.

Increasingly, these systems have been unable to meet the process control
metrology demands of the semiconductor industry. For example, the industry is
rapidly moving toward measuring product wafers rather than test wafers, both
because of the inability to adequately control the manufacturing process using
test wafers alone, and the costs associated with the processing of non-
productive test wafers. Measurements on product wafers, however, must be
performed in small areas, and both spectrometers and ellipsometers generally
require fairly large measurement areas. Additionally, increasing demands for
improved precision and repeatability require the ability to measure thicknesses
that range from extremely thin films (i.e., below 20 Angstroms) to films that
are hundreds of thousands times thicker. Reflection spectrometers are most
suitable for measuring thicker films, whereas ellipsometers are most suitable
for measuring very thin films. Thus, neither system alone is capable of
accurate and reliable measurements over the full range of film thicknesses.
Further, the industry is now using film stacks composed of several layers of
different films and many films whose optical properties are functions of the
actual deposition conditions. Generally, spectrometers and ellipsometers alone
generate insufficient data to simultaneously determine the thicknesses and
properties of these film stacks and new films with the precision that
semiconductor manufacturers require. Reflection spectrometers and most
ellipsometers have very limited capabilities for such simultaneous measurements
of both thickness and optical parameters.

Opti-Probe Product Family. Opti-Probe systems significantly improve upon
existing thin film metrology systems by successfully integrating up to five
distinct film measurement technologies, three of which are patented by Therma-
Wave. By combining the measured data from these multiple technologies and
correlating it by using our proprietary software, Opti-Probe systems provide
increased measurement capability, speed and productivity on both test and
product wafers. These techniques of combining optical measurement technologies
and correlating the results have also been patented by Therma-Wave. We believe
Opti-Probe systems have captured over 30% of the thin film measurement market.

New Initiatives to Further Fab Productivity Enhancement(TM)

We believe our process control metrology tools have already significantly
improved fab productivity. We believe our technological capabilities will
enable semiconductor manufacturers to address a broader range of issues that
impact fab productivity. We expect new product developments to come from
combining separate metrology systems into one tool, implementing in-situ
systems to improve the direct control of process equipment and to provide real-
time measurement of product wafers, and networking these systems together.

In light of the industry's drive to reduce costs and improve productivity,
we believe combination products will be of considerable benefit to
semiconductor manufacturers. We believe that combination metrology tools will
significantly reduce capital expenditure requirements, floorplan footprint,
wafer handling and tool maintenance costs. Additionally, semiconductor
manufacturers use in-situ (within the process chamber) systems to provide real-
time measurement of product wafers and monitoring of process equipment.
Although this market is in its infancy, the industry's need to improve process
tool productivity through increased uptime and higher equipment utilization is
expected to bring rapid growth to this industry sector. We believe we can
leverage our core competencies of strong intellectual property and
technological expertise to develop a wide range of in-situ systems. In
addition, by linking together our metrology tools (both stand-alone and
combination) and in-situ monitoring systems, we believe we can offer a
significant competitive advantage by allowing manufacturers to address overall
fab productivity in addition to the productivity of individual tools.

We are also developing the Meta-Probe system, which is a thin film metrology
system specifically designed to measure the thickness and material properties
of opaque and metallic thin films. These materials are increasingly being used
by semiconductor manufacturers as the industry moves to 0.25 micron and 0.18
micron

36
<PAGE>

feature sizes with an increase in the number and complexity of the metal
layers. In addition, the accelerated drive towards the use of copper rather
than aluminum layers produces a need for better metal metrology products. We
believe that existing metal film metrology systems are unable to perform the
required measurements with the required precision and repeatability.

Competitive Strengths

. Technologically Advanced Capabilities and Products. We have focused
heavily on the development and protection of our proprietary technology
and currently hold 51 U.S. and foreign patents. In addition, we have
filed applications for 22 additional U.S. and foreign patents. We
believe we have superior technical resources, including a staff of 46
Ph.Ds, which represents over 13% of our employees. We believe that our
expertise in engineering, research and development enables us to offer
process control metrology systems with more advanced technical
capabilities and features than those offered by our competitors. Our
systems provide superior measurement capabilities, including resolution,
accuracy, repeatability and reliability. The Therma-Probe product family
employs a patented optically-based thermal wave technology to provide
the industry's only non-contact, non-contaminating ion implant
measurement capability on product wafers. We believe a combination of
measurement technologies is critical to perform advanced thin film
metrology. We are a pioneer in providing products that possess
combination film measurement technologies. We believe we will continue
to be the industry leader as the need for combinations of technologies
grows. Our Opti-Probe systems combine up to five distinct measurement
technologies, three of which we have patented. Additionally, we hold
patents on the use of many of the combinations of these thin film
measurement technologies.

. Leading Market Share. We are one of the world's leading manufacturers of
process control metrology equipment and systems. We believe we are the
largest provider of non-destructive ion implant process control
metrology systems worldwide with over 95% of the market. Our Therma-
Probe systems have become the industry standard for ion implant process
control metrology and are installed in virtually every major
semiconductor fabrication facility. We are also a leading supplier of
thin film measurement metrology systems worldwide. We believe that our
Opti-Probe systems have captured over 30% of the market as a result of
technological superiority and lower cost of ownership to our customers.

. Strong and Diverse Customer Base. We market and sell our products
worldwide to virtually all of the major semiconductor manufacturers,
including: Advanced Micro Devices, Inc., Chartered Semiconductor, Ltd.,
Intel Corporation, Lucent Technologies, Samsung America, Inc., Siemens
AG, STMicroelectronics N.V., Toshiba Corporation and the UMC Group. We
believe our top customers are among the fastest growing manufacturers in
the semiconductor industry. In addition, we have a diverse customer base
in terms of both geographic location and the types of semiconductor
devices manufactured. In the aggregate, we serve more than 70 customers
located in 14 different countries.

. Worldwide Distribution and Strong Customer Support Capabilities. We have
expended considerable resources to create a high-quality worldwide
distribution network with highly trained sales and support personnel.
International sales represented approximately 60%, 52%, and 61% of our
net revenues in fiscal 1997, 1998 and the nine months ended December 31,
1998, respectively. We provide our customers with comprehensive support
before, during and after delivery of our systems. Our engineers have
extensive experience and provide valuable assistance to our customers,
thereby strengthening our relationships with them. We anticipate we will
continue to strengthen and expand our distribution and customer support
organizations worldwide, particularly in Asia.

. Experienced and Successful Management Team. We are led by an experienced
senior management team whose members average more than 10 years in the
semiconductor capital equipment manufacturing industry. Dr. Allan
Rosencwaig has over 17 years of experience in the industry. Under this
leadership, our net revenues have grown from $2.7 million in fiscal 1985
to $115.4 million in

37
<PAGE>

fiscal 1998, representing a CAGR of 33.5%. Our senior management team
currently owns approximately 22% of the outstanding common stock and
holds options to acquire an additional 9% of such common stock. Such
equity ownership represents a significant economic commitment to and
participation in our continued success.

Business and Growth Strategy

Our objective is to be a leader in providing FPE(TM) solutions to
semiconductor manufacturers. Our business and growth strategy includes the
following key initiatives:

. Focus on Fab Productivity Enhancement(TM). We plan to continue to
develop products which enable semiconductor manufacturers to reduce
feature size, increase wafer size and increase equipment productivity.
Although increasing wafer size and yields will continue to be sources of
fab productivity gains by semiconductor manufacturers, increasingly, we
believe, gains will come from reduced feature size and non-yield related
equipment productivity enhancements, including increased equipment
uptime, reduced fab floor footprint requirements, reduced use of test
wafers and lower tool maintenance costs. We believe our technological
capabilities will enable semiconductor manufacturers to address a
broader range of issues that impact fab productivity. We expect our new
product development efforts to include combining separate metrology
systems into one tool, implementing in-situ systems to improve the
direct control of process equipment and provide real-time measurement of
product wafers, and networking these systems together.

. Continue to Focus on Technological Innovation. We intend to continue to
emphasize engineering and research and development in our effort to
anticipate and address technological advances in semiconductor
manufacturing. We currently have a staff of 46 Ph.Ds, which represents
more than 13% of our employees. Our current product development efforts
include combining separate metrology systems into one tool, implementing
in-situ systems and networking all of these systems together.
Additionally, we are developing Meta-Probe, a thin film metrology system
specifically designed to measure the thickness and material properties
of opaque and metallic films. The Meta-Probe system, as a non-contact,
non-destructive metrology system, will reduce the quantity of test
wafers, thereby decreasing the costs of the semiconductor manufacturing
process. We believe that continued product innovation and investment in
research and development will help us strengthen our leadership
position.

. Maintain and Leverage Strong Customer Relationships. We expect to
continue to strengthen our existing customer relationships and foster
working partnerships by providing technologically superior systems and
high levels of customer support. We believe we are the dominant supplier
of ion implant metrology systems to virtually all major semiconductor
manufacturers and have become the primary supplier of thin film
metrology systems to many of our customers. Furthermore, we intend to
continue to capitalize on our strong customer relationships, which have
enabled us to develop new products and applications through close
collaboration with customers. Such collaboration has often resulted in
products and applications which have a broader market appeal.

. Leverage Existing Infrastructure. To support our worldwide growth, we
have expended considerable resources in establishing our infrastructure,
including a worldwide customer support organization and a state-of-the-
art manufacturing facility. We believe we have the opportunity to
improve our operating margins by leveraging our existing infrastructure
through increased sales.

Products and Technology

Our FPE(TM) solutions currently consist of two major product families of in-
line process control metrology systems. Our Therma-Probe product family was
introduced in 1985 as our initial product line, and our Opti-Probe product
family was introduced in 1992. Both product families feature our proprietary
and patented measurement technologies and offer robotic wafer handling,
advanced vision processing, sophisticated but user-friendly software and high
throughput and reliability. The modular design of the hardware and software
enables continuous product enhancement as new advances are made.

38
<PAGE>

Therma-Probe Product Family

Our Therma-Probe systems are the predominant non-contact, non-contaminating
ion implant metrology systems capable of measuring ion implant dose and its
uniformity across the wafer with a high degree of precision and repeatability.
In addition, Therma-Probe systems have unparalleled sensitivity for the most
critical implants. By the end of December 1998, 386 Therma-Probe systems had
been installed in virtually every major semiconductor fab worldwide. A typical
semiconductor fab uses Therma-Probe systems to monitor and control critical ion
implant steps. In addition, all major manufacturers of ion implant equipment
utilize Therma-Probe systems to help develop and qualify their ion implanters.
We believe Therma-Probe systems have captured over 50% of the market for ion
implant measurement in general and over 95% of the market for non-destructive
measurement of ion implantation of product wafers. The selling prices for
Therma-Probe systems range from approximately $650,000 to $900,000.

We believe that our Therma-Probe systems offer technological advantages and
features that distinguish them from the ion implant metrology systems offered
by our competitors:

Proprietary Technology. To provide non-contact, non-contaminating ion
implant measurements on product wafers, our Therma-Probe systems employ
proprietary thermal wave technology, which uses highly focused but low power
laser beams to generate and detect thermal wave signals in the silicon wafer
that can be correlated to the ion implant dose. The thermal wave technology
used to measure the ion implant dose in the silicon wafer is a highly
proprietary and extensively patented technology of ours. We believe that these
patents help to maintain our competitive position.

Ease of Use and Reliability. We believe we have integrated our thermal wave
technology into easy-to-use and reliable process control metrology systems.
These systems are configured specifically for use by semiconductor device
manufacturers and feature automated wafer handling, automated data collection,
statistical data processing and data management.

Installed Base. Virtually all major semiconductor manufacturers use Therma-
Probe systems to monitor and control their ion implant processes. In addition,
virtually all major manufacturers of ion implant equipment utilize Therma-Probe
systems to help develop and qualify their implanters. Additionally, our
engineers have extensive experience in addressing many different types of ion
implant applications and provide valuable assistance to our customers, thereby
strengthening our relationships with them. We believe our significant installed
base of Therma-Probe systems acts as a barrier to entry for current and
potential competitors in the ion implant measurement market.

Continuous Improvement. We continue to develop, manufacture and market new
and improved Therma-Probe systems to enhance system capability and to lower the
cost of ownership to the customer. For example, we recently introduced the TP-
630, which possesses state of the art ion implant measurement technology for
wafer sizes up to 300 millimeters.

The following table summarizes our improvements to the Therma-Probe product
family:

<TABLE>
<CAPTION>
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
<C> <C> <S>
TP-200 1985 Introduced first non-destructive process control metrology system
to measure ion implantation.
TP-300 1987 Added cassette-to-cassette wafer handling and automation software
to the capability of the TP-200.
TP-400 1992 Significantly improved repeatability and added second cassette
station for tool calibration.
TP-500 1996 Built on the same platform as the OP-2600, added pattern
recognition and improved reliability and throughput.
TP-630 1998 Expanded wafer measurement capability to 300 millimeters.
</TABLE>

39
<PAGE>

Opti-Probe Product Family

Our Opti-Probe systems were developed to address the limitations of
conventional thin film metrology systems. Opti-Probe systems combine the thin
film metrology capabilities of spectrometers, reflectometers and ellipsometers
into a single integrated system. We believe a combination of measurement
technologies is critical to perform advanced thin film processes. We are a
pioneer in providing products that possess combination film measurement
technologies. We believe we will continue to be the industry leader as the need
for combinations of technologies grows. By the end of calendar 1998, 617 Opti-
Probe systems have been installed in major semiconductor fabrication facilities
worldwide. By the end of calendar 1998, we believe Opti-Probe systems had
captured over 30% of the thin film measurement market. The selling prices for
Opti-Probe systems range from approximately $450,000 to $900,000.

We believe our Opti-Probe systems offer technological advantages and
features that distinguish them from thin film metrology systems offered by our
competitors:

Proprietary Technology. Conventional spectrometers and ellipsometers are
unable to meet the current and future requirements of semiconductor fabrication
facilities. These requirements include the ability to measure in very small
areas on product wafers, high precision and repeatability for very thin as well
as thick films, and the ability to simultaneously determine thickness and
optical parameters on one or more films. Our Opti-Probe systems combine up to
five distinct measurement technologies, three of which we have patented.
Additionally, we hold patents on the use of many of the combinations of these
thin film measurement technologies. Because of the wealth of data that can be
obtained from these combined optical technologies, it is possible to determine
the thickness and optical parameters of one or more films simultaneously. In
addition, since our proprietary technologies employ a highly focused laser
beam, Opti-Probe systems can perform certain measurements with a spot size that
is the smallest in the industry. Although our competitors have now introduced
systems that contain both spectrometers and ellipsometers in one tool, we have
patented the technique of combining the measurement data from these
technologies. We believe our patented technologies, and the patented
combinations thereof, result in a superior product.

Ease of Use and Reliability. We believe our Opti-Probe systems are regarded
as easy-to-use and highly reliable. These systems are configured specifically
for semiconductor device manufacturers and feature automated wafer handling,
advanced image processing, automated data collection, statistical data
processing and data management.

Proprietary Software. We believe our proprietary software incorporated into
Opti-Probe systems is superior to that of the competition. During the
fabrication of semiconductors, many different films and film stacks, consisting
of several layers of different films, are deposited and selectively removed
from the silicon wafer. This, in turn, means that hundreds of film measurement
data analysis algorithms ("recipes") must be developed and stored in the
computer of a thin film metrology system. Thus, the full benefit of a thin film
metrology system to the customer is a result of a combination of superior
measurement capability and superior recipe development. We have a staff of over
fifty experienced applications scientists and engineers stationed worldwide
near all major customers that provides full applications support to develop new
recipes as device manufacturing processes change.

Continuous Improvement. While we have achieved rapid market share growth in
the thin film metrology market with our current Opti-Probe systems, we continue
to develop, manufacture and market new and improved systems. We believe we
provide the semiconductor industry with thin film metrology systems that
operate with greater reliability in the deep ultra-violet region of the optical
spectrum. This is of paramount importance since device manufacturers are now
developing patterning technology utilizing optical radiation in this ultra-
violet region.

In 1998, we introduced the Opti-Probe 5000 series, which integrates up to
two additional measurement technologies into the Opti-Probe product family. As
a result, the Opti-Probe 5000 series has up to five independent, yet fully
integrated measurement technologies. We believe current competitive products
include

40
<PAGE>

no more than two independent measurement technologies. The two additional
technologies that have been integrated into the 5000 series are spectroscopic
ellipsometry and absolute laser ellipsometry, each of which has expanded the
Opti-Probe's measurement capabilities and improved measurement integrity.

Spectroscopic ellipsometry has long been recognized as a powerful thin film
characterization technology. However, we believe that spectroscopic
ellipsometry, by itself, still suffers from slow measurement time and poor
measurement integrity. The poor measurement integrity arises from high
sensitivity to small process changes due to the difficulties in measuring
thickness and material parameters simultaneously with only wavelength dependent
technologies. The Opti-Probe 5000 series has been designed to overcome these
limitations by integrating spectroscopic ellipsometry with up to four other
independent measurement technologies to accelerate the ability to determine the
correct thin film solution. Furthermore, by integrating spectroscopic
ellipsometry, a wavelength dependent measurement, with our proprietary beam
profile reflectometry ("BPR(TM)"), an angle dependent measurement, we believe
the Opti-Probe 5000 series will overcome the excessive sensitivity to small
process changes.

The addition of absolute laser ellipsometry ("AE(TM)") to Opti-Probe systems
enable stable, reference-free absolute measurements on ultra-thin films with
high precision and repeatability. Integrating absolute laser ellipsometry with
our proprietary beam profile ellipsometry ("BPE(TM)") provides fast, precise
and small spot size film measurements. We believe the successful market
transition to the Opti-Probe 5000 series will further strengthen our
technological capabilities in the thin film measurement market. We sold our
first Opti-Probe 5000 series system in April 1998 and, as of March 31, 1999,
have sold 18 Opti-Probe 5000 series systems.

The following table summarizes our improvements to the Opti-Probe product
family:

<TABLE>
<CAPTION>
Year
System Introduced Description of Innovation/Advancement
------ ---------- -------------------------------------
<C> <S> <C>
OP-1000 1992 Introduced a new patented optical technology, BPR(TM), to measure thin film
deposition and removal.

OP-2000 1993 Integrated BPR(TM) with a new patented optical technology, BPE(TM), to enhance
measurement capabilities.

OP-2600 1994 Integrated BPR(TM), BPE(TM) and Spectrometry to further enhance
measurement capabilities.

OP-2600 DUV 1996 Integrated deep ultra-violet reflectance ("DUV Reflectance") with the existing
system to expand measurement range.

OP-3260 1996 Increased throughput of Opti-Probe.

OP-3260 DUV 1996 Integrated OP-3260 system with DUV Reflectance.

OP-5200 Series 1998 Integrated up to five measurement technologies (BPR(TM), BPE(TM) and
DUV Reflectance with Spectroscopic Ellipsometry and AE(TM)).

OP-5300 Series 1998 Expanded OP-5200 series wafer measurement capability to 300 millimeters.
</TABLE>

New Product Initiatives

We are currently pursuing several new FPE(TM) product initiatives. We are
combining separate metrology systems into one tool. In addition, we are
developing in-situ (within the process chamber) systems to improve the direct
control of process equipment. Semiconductor manufacturers use in-situ (within
the process chamber) metrology systems in their process equipment to improve
the direct control of process equipment and to provide real-time measurement of
product wafers. Although this market is in its infancy, the industry's need to
improve process tool productivity through increased uptime and higher equipment
utilization is expected to bring rapid growth to this industry sector. We are
also developing solutions to network these systems.

41
<PAGE>

Additionally, we are developing the Meta-Probe system, a thin film metrology
system specifically designed to measure the thickness and material properties
of opaque and metallic films. These materials are increasingly being used by
semiconductor manufacturers as the industry moves to 0.25 micron and 0.18
micron feature sizes with an increase in the number and complexity of the metal
layers. In addition, the accelerated drive towards the use of copper rather
than aluminum layers produces a need for better metal metrology products. The
Meta-Probe system, as a non-contact, non-destructive metrology system, will
reduce the quantity of test wafers thereby decreasing the cost of the
semiconductor manufacturing process. Most existing metal film metrology systems
cannot perform tests on product wafers, and thus, we believe, our Meta-Probe
system will be even more cost effective for the next generation 300 millimeter
wafer size.

Customers

Therma-Wave sells its products to leading semiconductor and semiconductor
equipment manufacturers throughout the world. Certain of our top customers are
listed below:

<TABLE>
<CAPTION>
<S> <C>
Advanced Micro Devices, Inc. (AMD) Siemens AG
Chartered Semiconductor Ltd. STMicroelectronics N.V.
Intel Corporation Taiwan Semiconductor Manufacturing Corp. (TSMC)
Lucent Technologies Toshiba Corporation
Samsung America, Inc. UMC Group
</TABLE>

Sales to Intel and AMD represented approximately 23% and 13% of our net
revenues for the nine months ended December 31, 1998. Sales to Intel
represented approximately 23% of our net revenues for fiscal 1998. Sales to
Samsung and Intel represented approximately 10% and 13%, respectively, for
fiscal 1997 and approximately 15% and 17%, respectively for fiscal 1996. Our
top five customers accounted for approximately 39%, 41% and 48% of our net
revenues in fiscal 1998, 1997 and 1996.

Sales and Marketing

We maintain sales offices and regional sales representatives throughout the
world. In the United States, we maintain sales offices in California, Florida
and Texas. We also utilize manufacturers' sales representatives to cover those
regions of the United States with too few customers to support a direct sales
effort. In Asia, we maintain sales offices in Japan, Korea, Singapore and
Taiwan. The Japan, Singapore and Taiwan offices work with manufacturers' sales
representatives to sell our products to customers in Japan and Taiwan, while
the Korean office sells to customers directly. We also work with manufacturers'
sales representatives in Singapore, Malaysia, Thailand and China. In Europe, we
maintain a sales office in the United Kingdom and work with manufacturers'
sales representatives throughout the rest of Europe.

In addition, we provide direct customer support in most parts of the world.
In some locations, field service is still provided by the same manufacturers'
sales representative that handles the sales function, but applications support
is provided by our employees in that territory. In the United States, we have
field service and applications engineers located in Arizona, California,
Florida, Massachusetts, New Mexico, Oregon and Texas. Certain customers, such
as Intel, contract dedicated site-specific field service and applications
engineers. In Asia, we provide customer support in Japan, Taiwan, Korea and
Singapore. In Europe, we maintain a customer support office in the United
Kingdom to support customers there and to assist the field service engineers of
our European manufacturers, sales representatives in the rest of Europe.
Applications personnel supporting continental Europe are located in France,
Germany and Italy.

We provide our customers with comprehensive support before, during and after
delivery of our systems. Prior to shipment, our support personnel typically
assist the customer in site preparation and inspection and typically provide
customers with training at our facilities or at the customer's location. Our
customer training programs include instructions in the maintenance of our
systems and in system hardware and software tools for

42
<PAGE>

optimizing the performance of our systems. Our field support personnel work
with the customers' employees to install the system and demonstrate system
readiness. In addition, we maintain a group of highly skilled applications
scientists to respond to customers' process needs worldwide when a higher level
of technical expertise is required.

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

See Note 11 to Notes to Consolidated Financial Statements for a summary of
our operations in certain geographic areas.

Research and Development and Engineering

The process control metrology market is characterized by continuous
technological development and product innovations. We believe that continued
and timely development of new products and enhancements to existing products is
necessary to maintain our competitive position. Accordingly, we devote a
significant portion of our personnel and financial resources to engineering and
research and development programs. Our research, development and engineering
staff is comprised of 70 persons (as of December 31, 1998). We seek to maintain
our close relationships with customers to make improvements in our products
which respond to customers' needs. For example, several of the improvements
relating to the Opti-Probe product family were developed in cooperation with
some of our major customers to address the need for more capable thin film
measurement systems.

Software development accounts for a significant portion of our research and
development efforts. We are currently transitioning all of our software
applications from DOS to the Microsoft NT operating system in order to better
serve our customers.

Our ongoing engineering and research and development efforts can be
classified into three categories: new products; feature enhancements (such as
features to improve precision, speed and automation); and customer-driven
product enhancements (such as new measurement recipes or algorithms). We have
research and development and engineering staffs which work both on developing
new products and features and on responding to the particular needs of
customers.

Engineering and research and development expenses were $11.6 million in the
nine months ended December 31, 1998, $19.1 million in fiscal 1998, $13.1
million in fiscal 1997 and $10.1 million in fiscal 1996, or 24%, 17%, 12% and
13% of net revenues for those periods, respectively. We expect engineering and
research and development expenditures will continue to represent a substantial
percentage of our revenues for the foreseeable future.

Manufacturing

Our manufacturing strategy is to produce high quality, cost effective
assemblies and systems. We currently perform the majority of our system
assembly activities in-house. In order to lower production costs in the future,
we intend to perform only those manufacturing activities that add significant
value or that require unique technology or specialized knowledge. As a result,
we expect to rely increasingly on subcontractors and turnkey suppliers to
fabricate components, build assemblies and perform other activities in a cost
effective manner.

43
<PAGE>

Our principal manufacturing activities include assembly and test work, both
of which are conducted at our facility in Fremont, California. Assembly
activities include inspection, subassembly and final assembly. Test activities
include modular testing, system integration and final test. Components and
subassemblies, such as lasers, robots and stages, are acquired from third party
vendors and integrated into our finished systems. While we use standard
components and subassemblies wherever possible, most mechanical parts, metal
fabrications and critical components are engineered and manufactured to our
specifications. Certain of the components and subassemblies are obtained from a
limited group of suppliers, and occasionally from a single source supplier. We
have not entered into any formal agreements with such limited source suppliers,
other than long-term purchase orders and, in some cases, volume pricing
agreements. Those parts coming from a limited group of suppliers are monitored
by management to ensure that adequate supplies are available to maintain
manufacturing schedules and to reduce our dependence on these suppliers should
supply lines become interrupted. The partial or complete loss of such suppliers
could increase our manufacturing costs or delay product shipments while we
qualify new suppliers. Additionally, any such loss could require us to redesign
products, thereby having a material adverse effect on our business or customer
relationships. Furthermore, a significant increase in the price of one or more
of these components could adversely affect our financial condition or results
of operations.

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

We conduct the assembly of certain optical components and final testing of
our systems in clean-room environments. This procedure is intended to (1)
reduce the amount of particulates and other contaminants in the final assembled
system; and (2) test our products against our customers' acceptance criteria
prior to shipment. Following the final test, the completed system is packaged
within triple vacuum sealed bags to maintain a high level of cleanliness during
shipment and installation. As part of our ongoing quality program, all systems
are monitored during the installation process.

Competition

The market for semiconductor capital equipment is highly competitive. We
face substantial competition from established companies in each of the markets
that we serve. Some of our competitors have greater financial, engineering,
manufacturing and marketing resources and broader product offerings than
Therma-Wave. Significant competitive factors in the market for metrology
systems include system performance, ease of use, reliability, cost of ownership
to the customer, technical support and customer relationships. We believe we
compete favorably on the basis of these factors in each of our served markets.
We compete with both larger and smaller United States and Japanese companies in
the markets we serve. European companies are generally not significant
competitors in markets we serve.

Our Therma-Probe systems compete primarily with other metrology systems
designed to measure ion implant dose, such as contact and destructive four-
point probe measurement systems, including those manufactured by KLA-Tencor
Corporation ("KLA-Tencor"), Kokusai Electric Ltd. and Bio-Rad Semiconductor
Systems. Our Therma-Probe systems are the semiconductor industry's predominant
non-contact, non-destructive ion implant metrology systems for product wafers.
Several years ago, Jenoptik GmbH ("Jenoptik") introduced a competitive product
to our Therma-Probe systems, which utilized thermal wave technology. In
November 1997, we received a favorable verdict for patent infringement by
Jenoptik in the United States. As a result of the settlement of this
litigation, Jenoptik has agreed not to sell any of such products in the United
States and to pay us a royalty fee for systems sold in Japan. To date, the sale
of these products by Jenoptik has not had a material impact on our market
position. Our Opti-Probe systems primarily compete with thin film metrology
systems manufactured by KLA-Tencor, Rudolph Technologies, Nanometrics and Dai
Nippon Screen.

44
<PAGE>

In recent years, there has been significant merger and acquisition activity
among our competitors and potential competitors. Acquisitions by our
competitors and potential competitors could allow them to expand their product
offerings, which could afford such competitors and potential competitors an
advantage in meeting customers' demands. The greater resources, including
financial, marketing and support resources, of competitors engaged in these
acquisitions could permit them to accelerate the development and
commercialization of new products and the marketing of existing products to
their larger installed bases. Accordingly, such business combinations and
acquisitions could have a detrimental impact on both our market share and the
pricing of our products, which could result in a material adverse effect on our
business and results of operations.

Patents and Proprietary Rights

We believe the success of our business depends as much on the technical
competence, creativity and marketing abilities of our employees as on the
protection derived from our patents and other proprietary rights. Nevertheless,
our success will depend, at least in part, on our ability to obtain and
maintain patents and proprietary rights to protect our technology.

We have a policy of seeking patents where appropriate on inventions
concerning new products and improvements as part of our ongoing engineering and
research and development activities. We have acquired a number of patents
relating to our two key product families, the Opti-Probe and Therma-Probe
systems. As of March 31, 1999, we owned 26 U.S. patents with expiration dates
ranging from 2004 to 2017 and had filed applications for eleven additional U.S.
patents. In addition, we owned 25 foreign patents with expiration dates ranging
from 2004 to 2017 and had filed applications for eleven additional foreign
patents.

As of March 31, 1999, we owned five registered trademarks in the U.S. and
one in Japan and had filed 11 trademark registration applications in the U.S.
and one in Japan.

Facilities

Our executive offices and manufacturing, engineering, research and
development operations are located in a 102,000 square foot building in
Fremont, California with approximately 800 square feet of Class 100 clean rooms
for customer demonstrations and approximately 10,000 square feet of Class 1000
clean rooms for manufacturing. This facility is occupied under a lease expiring
in 2006 at an aggregate annual rental expense of approximately $1.0 million. We
have the option of extending this lease for another 15 years after 2006. We own
substantially all of the equipment used in our facilities. We believe that our
existing facilities and capital equipment are adequate to meet our current
requirements and that suitable additional or substitute space is readily
available if needed.

We also lease sales and customer support offices in California, Florida,
Texas, Japan, Korea, Taiwan and the United Kingdom.

45
<PAGE>

Employees

As of December 31, 1998, we employed 339 persons, including 70 in
engineering, research and development, 82 in manufacturing, 137 in customer
support, 20 in sales and marketing and 30 in executive and administrative
functions. Many of our employees are highly trained and hold advanced post-
graduate degrees in science and engineering. None of our employees are
represented by a labor union or covered by a collective bargaining agreement.
We consider our employee relations to be good. We believe we have low employee
turnover relative to our industry and have been able to attract and retain a
highly talented group of managers, designers and engineers which enables us to
continually improve our products and customer support.

Legal Proceedings

On July 19, 1994, we filed a patent infringement suit against Jenoptik in
the United States District Court for the Northern District of California. We
alleged that the manufacture and sale by Jenoptik of its TWIN and TWIN SC
systems infringed six of our United States patents that are related to our
Therma-Probe ion implant metrology systems. Jenoptik denied infringement and
claimed that our patents were invalid and unenforceable.

On February 1, 1996, we filed a patent infringement suit against Jenoptik in
the Patent Court in Dusseldorf, Germany. We alleged that the manufacture and
sale by Jenoptik of its TWIN and TWIN SC systems infringed our German
counterpart to one of our United States patents being asserted against Jenoptik
in the United States lawsuit. This German counterpart patent was found to be
invalid by a patent court in Munich, Germany.

On November 26, 1997, we received a favorable jury verdict in our United
States patent infringement suit against Jenoptik. The jury found all six of our
patents valid and concluded that Jenoptik infringed all thirty-one claims at
issue from these patents. As a result of the settlement of this litigation,
Jenoptik has agreed not to sell any of such products in the United States and
to pay us a royalty fee for systems sold in Japan. To date, the sale of these
products by Jenoptik has not had a material impact on our market position. This
settlement resolved all outstanding legal claims and pending appeals relating
to these matters.

On June 5, 1998, at our request, the United States Patent Office initiated
an interference proceeding between Therma-Wave and Rudolph Technologies
("Rudolph"). The subject matter of the interference relates to ellipsometer
technology which Rudolph employs in its commercial devices. We believe we
developed and patented this technology prior to Rudolph. The interference
proceedings will determine ownership of the technology. A successful outcome of
the interference proceeding may result in Rudolph being required to pay us
licensing fees. Since we have not commercialized this technology, an
unsuccessful outcome in the interference proceeding would not have a material
adverse effect on us.

On September 3, 1998, we were named in a patent infringement suit filed by
KLA-Tencor. KLA-Tencor alleged that it patented an aspect of the thin film
thickness measuring technology that we use in our Opti-Probe product family.
KLA-Tencor is seeking damages and an injunction to stop the sale of the
equipment they allege uses this aspect. We believe none of our products
infringe any of the claims of KLA-Tencor's patent and that their infringement
allegations are unfounded. We intend to vigorously defend our position, and we
expect to prevail.

On January 14, 1999, we commenced an action against KLA-Tencor for patent
infringement with respect to one of our fundamental thin film technology
combination patents. The suit seeks damages for patent infringement and a
permanent injunction against any future activities undertaken by KLA-Tencor or
any third party working in conjunction with them, which infringe on our patent.
The suit was filed as a counterclaim in the infringement action initiated by
KLA-Tencor and also seeks a declaratory judgment that KLA-Tencor's patent,
which we were alleged of infringing, is invalid and not infringed by any of our
systems.

There can be no assurances, however, that we will prevail in any ongoing
patent litigation described above. We believe, however, the litigation
described above will not have a material adverse effect on our business,
financial condition or results of operations.

46
<PAGE>

We are also involved in various legal proceedings from time to time arising
in the ordinary course of business, none of which are expected to have a
material adverse effect on our business or financial condition.

Environmental Matters

Therma-Wave, like all manufacturing companies, is subject to various
federal, state and local environmental statutory requirements. We believe we
are in material compliance with existing applicable environmental laws and
regulations and possess all permits and licenses necessary to conduct our
business.

47
<PAGE>

MANAGEMENT

Executive Officers, Directors and Key Employees

Executive officers, Directors and certain key employees of Therma-Wave are
as follows:

<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Allan Rosencwaig........ 57 Chairman of the Board and Chief Executive Officer

Martin M. Schwartz...... 54 President, Chief Operating Officer and Director

L. Ray Christie......... 55 Vice President, Chief Financial Officer and Secretary

David Mak............... 41 Vice President, Factory Operations

Jon L. Opsal............ 57 Vice President, Research and Development

Raymond Osofsky......... 48 Vice President, Engineering

W. Lee Smith............ 49 Vice President, Strategic Marketing

David Willenborg........ 48 Vice President, Marketing/Software Projects

G. Leonard Baker, Jr ... 55 Director

David Dominik........... 41 Director

Adam W. Kirsch.......... 37 Director
</TABLE>

We anticipate that two additional directors will be appointed to the Board
of Directors following the completion of this offering.

Allan Rosencwaig co-founded Therma-Wave in January 1982 and has served as
its Chairman and Chief Executive Officer since that time. In addition, Dr.
Rosencwaig served as President from January 1982 to April 1998 and from May
1994 to August 1998. Prior to founding Therma-Wave, Dr. Rosencwaig was a Group
Leader at the Lawrence Livermore National Laboratory from 1977 to 1982 and a
Member of Technical Staff at AT&T Bell Laboratories from 1969 to 1977. Dr.
Rosencwaig holds Bachelor of Science, Master of Science and Ph.D. degrees in
Physics from the University of Toronto.

Martin M. Schwartz joined Therma-Wave in August 1998 as its President, Chief
Operating Officer and a Director. Mr. Schwartz served as a director, President
and Chief Executive Officer of Southwall Technologies Inc. ("Southwall") from
May 1994 to March 1998. From April 1988 to May 1994, he served as Vice
President, Operations of Southwall.

L. Ray Christie joined Therma-Wave in August 1998 as its Vice President,
Chief Financial Officer and Secretary. From April 1996 to July 1998, Mr.
Christie has served as the Vice President, Chief Financial Officer and
Secretary of Southwall, and from February 1990 to November 1993, as Controller
for Southwall. From November 1993 to March 1996, he served in various positions
with a subsidiary of California Microwave, Inc., including Vice President
Finance and Administration. From June 1981 to January 1990, he served as
Controller of the Farinon Division of Harris Corporation. From May 1969 to June
1981, he served in various positions of Potlatch Corporation, including
controller of their Packaging Division.

David Mak joined Therma-Wave in October 1992 and has served as its Vice
President, Factory Operations since November 1996. Mr. Mak has also served as
the Manufacturing Manager and Director of Manufacturing. Prior to joining
Therma-Wave, Mr. Mak served in a variety of positions at Tencor Instruments,
including Manufacturing Engineering Manager, Mechanical Design Engineering
Manager, and Project Manager. Mr. Mak also served as Senior Mechanical Engineer
for Priam Corp., Advisory Engineer for Optimem, and Product Engineer for
Memorex Corp. Mr. Mak holds a Bachelor of Science degree in Mechanical
Engineering from the Polytechnic Institute of New York.

48
<PAGE>

Jon L. Opsal joined Therma-Wave in September 1982 and has served as its Vice
President, Research and Development since June 1994. Mr. Opsal has served in
several research and management positions since that time, including Senior
Scientist, Manager of Analytical Software, Manager of the Physics Department,
Manager of Research and Development Director of Research and Development. Prior
to joining Therma-Wave, Dr. Opsal was a Physicist at the Lawrence Livermore
National Laboratory from 1978 to 1982 and a Research Associate and Assistant
Professor at Michigan State University from 1974 to 1978. Dr. Opsal holds a
Bachelor of Arts degree in Physics and Mathematics from Eastern Washington
University and Master of Science and Ph.D. degrees in Physics from Michigan
State University.

Ray Osofsky joined Therma-Wave in 1993 and has served as Vice President,
Engineering since November 1998. Mr. Osofsky has also served as the Director of
Engineering, Director of Opti-Probe Engineering and Opti-Probe Manager. From
1985 to 1993, Mr. Osofsky was employed by KLA Instruments Corp., most recently
as Director of Engineering. Mr. Osofsky holds a Bachelor of Science in
Electrical Engineering from the University of California at Davis and a Master
of Science in Computer Engineering from Santa Clara University.

W. Lee Smith joined Therma-Wave in March 1983 and has served as its Vice
President, Strategic Marketing since June 1995. Mr. Smith has also served as
its Research Group Leader, Applications Manager, Director of Applications, Vice
President, Product Development and Vice President, Marketing. From 1976 to
1983, Dr. Smith was a Physicist and Nonlinear Optics Group Leader at the
Lawrence Livermore National Laboratory. Dr. Smith holds a Bachelor of Science
degree in Physics from North Carolina State University and a Ph.D. in Physics
from Harvard University.

David Willenborg co-founded Therma-Wave with Dr. Rosencwaig in January 1982
and has served as its Vice President, Marketing/Software Projects since October
1998. Mr. Willenborg has also served as Director of Engineering, Vice
President, Engineering, Vice President, Technology and Vice President,
Marketing. Prior to founding Therma-Wave, Mr. Willenborg was an engineer at the
Lawrence Livermore National Laboratory from 1975 to 1982 and at McDonnell-
Douglas Aerospace from 1972 to 1973. Mr. Willenborg holds Bachelor of Science
and Master of Science degrees in Electrical Engineering from the University of
Illinois.

G. Leonard Baker, Jr. has served as a Director of Therma-Wave since May
1997. Mr. Baker has been a Managing Director of the General Partner of Sutter
Hill Ventures since 1974. Mr. Baker joined Sutter Hill Ventures in 1973, and,
prior to that time, was Manager of Product Planning for Europe, Africa and
India at Cummins Engine Company, where he also held various manufacturing
positions. He serves on the board of several companies primarily in the high-
technology area.

David Dominik has served as a Director of Therma-Wave since May 1997. Mr.
Dominik has been a General Partner of Information Partners, L.P. since January
1990 and Managing Director of Information Partners, Inc. since June 1993. In
addition, Mr. Dominik has been a Managing Director of Bain Capital since May
1993. Mr. Dominik also serves as a director of Oasis Healthcare Inc., Dynamic
Details, Incorporated and several privately held companies.

Adam W. Kirsch has served as a Director of Therma-Wave since May 1997. Mr.
Kirsch has been a Managing Director of Bain Capital since May 1993 and a
general partner of Bain Venture Capital since 1990. Mr. Kirsch joined Bain
Venture Capital in 1985 as an associate and, prior to joining Bain Venture
Capital, Mr. Kirsch was a consultant at Bain & Company where he worked in
mergers and acquisitions. He serves on the board of several companies including
Brookstone, Inc., Dade Behring Inc. and Wesley Jessen VisionCare, Inc.

At present, all Directors are elected and serve until a successor is duly
elected and qualified or until his or her earlier death, resignation or
removal. All members of the Board of Directors set forth herein were elected
pursuant to a stockholders agreement that was entered into in connection with
the recapitalization. See "Certain Relationships and Related Transactions."
There are no family relationships between any of our Directors or executive
officers. Our executive officers are elected by, and serve at the discretion
of, the Board of Directors.

49
<PAGE>

Prior to the completion of this offering, the Board will be divided into
three classes, as nearly equal in number as possible, with each Director
serving a three-year term and one class being elected at each year's annual
meeting of stockholders. The two additional directors anticipated to be
appointed by the Board will be in the class of directors whose term expires at
the 2000 annual meeting of our stockholders. Messrs. Schwartz and Dominik will
be in the class of directors whose term expires at the 2001 annual meeting of
our stockholders. Messrs. Rosencwaig, Kirsch and Baker will be in the class of
directors whose term expires at the 2002 annual meeting of our stockholders. At
each annual meeting of our stockholders, successors to the class of directors
whose term expires at such meeting will be elected to serve for three-year
terms and until their respective successors are elected and qualified.

Compensation of Executive Officers

The following table sets forth information concerning the compensation for
fiscal 1999, 1998 and 1997 for our Chief Executive Officer and our four other
most highly compensated executive officers at the end of our last fiscal year
(collectively, the "Named Executive Officers").

Summary Compensation Table

<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
----------------- ------------
Other Annual Securities
Fiscal Bonus Compensation Underlying All Other
Name and Position Year Salary ($) ($) (1) Options # Compensation ($)
- ----------------- ------ -------- -------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Allan Rosencwaig........ 1999 $429,236 $ -- -- -- $63,245(2)
Chairman and 1998 417,508 318,623(3) -- 671,875 54,679(2)
Chief Executive Officer 1997 332,846 243,989(4) -- -- 1,898(5)

Martin M. Schwartz (6).. 1999 $161,042 -- -- 200,000 --
President and
Chief Operating Officer

Jon L. Opsal............ 1999 $192,532 $ -- -- -- $ 1,262(7)
Vice President, 1998 186,482 68,247(3) -- 127,656 1,107(7)
Research and 1997 168,184 56,637(4) -- -- --
Development

David Willenborg........ 1999 $164,592 $ -- -- -- $ 6,910(7)
Vice President, 1998 160,368 52,930(3) -- 100,781 6,063(7)
Marketing 1997 154,479 50,778(4) -- -- --

David Mak............... 1999 $164,739 $ -- -- -- --
Vice President, 1998 154,830 58,767(3) -- 38,650 --
Factory Operations 1997 143,453 47,523(3) -- -- --
</TABLE>
- --------
(1) None of the perquisites and other benefits paid to each named executive
officer exceeded the lesser of $50,000 or 10% of the total annual salary
and bonus received by each Named Executive Officer. Does not include
amounts received by the Named Executive Officers during fiscal 1998 from
our prior owner. See "Certain Relationships and Related Transactions--Stock
Repurchase Agreement."
(2) Includes insurance premiums paid by us on behalf of Dr. Rosencwaig of
$9,669 and $7,671 for fiscal 1998 and fiscal 1999, respectively. The
balance represents imputed interest on outstanding borrowings from Therma-
Wave.
(3) Reflects bonuses paid to Messrs. Rosencwaig, Opsal, Willenborg and Mak in
fiscal 1998 as a result of Therma-Wave achieving certain performance
targets in fiscal 1998.
(4) Reflects bonuses paid to Messrs. Rosencwaig, Opsal, Willenborg and Mak in
fiscal 1997 as a result of Therma-Wave achieving certain performance
targets in fiscal 1997.
(5) Reflects insurance premiums paid by us on behalf of Dr. Rosencwaig.
(6)Mr. Schwartz joined Therma-Wave in August 1998.
(7)Reflects imputed interest on outstanding borrowings from Therma-Wave.

50
<PAGE>

Option Grants in Last Fiscal Year

The following table sets forth information regarding stock options granted
by us to the Named Executive Officers during our last fiscal year. Stock
options are generally granted at 100% of the fair value of Therma-Wave's common
stock as determined by the Board of Directors on the date of grant. In reaching
the determination of fair value at the time of each grant, the Board of
Directors considers a range of factors, including Therma-Wave's current
financial position, its recent revenues, results of operations and cash flows,
its assessment of Therma-Wave's competitive position in its markets and
prospects for the future, the status of Therma-Wave's product development and
marketing efforts, current valuations for comparable companies and the
illiquidity of an investment in Therma-Wave's common stock.

<TABLE>
<CAPTION>
Number of
Securities % of Total Potential Realizable
Underlying Options Market Value at Assumed
Options Granted in Exercise or Price on Annual Rate of Stock
Granted Fiscal Base Price Date of Expiration Price Appreciation for
Name (a) Year ($/Share) Grant (b) Date (c) Option Term (d)
---- ---------- ---------- ----------- --------- ---------- -----------------------
5%($) 10%($)
---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Allan Rosencwaig........ -- -- -- -- -- -- --
Martin M. Schwartz (e).. 200,000 62.5% $4.00 $4.00 8/3/08 $504,000 $1,275,000
Jon L. Opsal............ -- -- -- -- -- -- --
David Willenborg........ -- -- -- -- -- -- --
David Mak............... -- -- -- -- -- -- --
</TABLE>
- --------
(a) All options listed in the table vest in five equal installments beginning
on the first anniversary of their grant date.
(b) Market price on the date of grant was determined by the Board of Directors
based upon a good faith estimate.
(c) Options will expire on the earlier of 90 days after the date of termination
of employment or the date indicated above.
(d) Amounts reflect certain assumed rates of appreciation set forth in the
executive compensation disclosure rules of the SEC. Actual gains, if any,
on stock option exercises depend on future performance of our stock and
overall market conditions. At an annual rate of appreciation of 5% per year
for the option term, the price of the Class B Common Stock would be
approximately $6.52 per share. At an annual rate of appreciation of 10% per
year for the option term, the price of the Class B Common Stock would be
approximately $10.37 per share.
(e) Mr. Schwartz joined Therma-Wave in August 1998.

Option Exercises in Last Fiscal Year and Fiscal Year End Option Values

The following table sets forth information for the Named Executives Officers
concerning stock option exercises during our last fiscal year and options
outstanding at the end of the last fiscal year:

<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money
Unexercised Options Options at
at Fiscal Year End Fiscal Year End ($) (a)
--------------------- -----------------------
Shares Acquired Value Unexercisable/ Unexercisable/
Name on Exercise Realized ($) Exercisable Exercisable
---- --------------- ------------ --------------------- -----------------------
<S> <C> <C> <C> <C>
Allan Rosencwaig........ -- -- 0/671,875 0/0
Martin M. Schwartz (b).. -- -- 200,000/0 $600,000/0
Jon L. Opsal............ -- -- 0/127,656 0/0
David Willenborg........ -- -- 0/100,781 0/0
David Mak............... -- -- 0/38,650 0/0
</TABLE>
- --------
(a) Based on an estimated fair market value of the Class B Common Stock at
March 31, 1999.
(b) Mr. Schwartz joined Therma-Wave in August 1998.

51
<PAGE>

Compensation Committee Interlocks and Insider Participation

We currently do not have a compensation committee. The compensation
arrangements for each of our executive officers was established pursuant to the
terms of the respective employment agreements between us and each executive
officer. The terms of the employment agreements were established pursuant to
arms-length negotiations between representatives of Bain Capital Funds and each
executive officer, except those agreements relating to Messrs. Schwartz and
Christie, which were negotiated with Therma-Wave and approved by the Board of
Directors. On a going forward basis, any changes in the compensation
arrangements of our executive officers will be determined by the Board of
Directors.

Committees of the Board of Directors

Prior to this offering, our Board of Directors had one committee, the Audit
Committee. Immediately prior to the completion of this offering, the Board of
Directors will establish an additional committee, the Compensation Committee.

The Audit Committee makes recommendations to the Board of Directors
regarding the independent auditors to be nominated for election by the
stockholders and reviews the independence of such auditors, approves the scope
of the annual audit activities of the independent auditors, approves the audit
fee payable to the independent auditors and reviews such audit results with the
independent auditors. The Audit Committee is currently comprised of Messrs.
Dominick and Baker and, following this offering, will be comprised of a
majority of Directors not otherwise affiliated with us or any of our principal
stockholders. PricewaterhouseCoopers LLP presently serves as our independent
auditors.

The duties of the Compensation Committee will be to provide a general review
of our compensation and benefit plans to ensure that they meet corporate
objectives. In addition, the Compensation Committee will review the Chief
Executive Officer's recommendations on (1) compensation of all of our officers
and (2) adopting and changing major compensation policies and practices, and
report its recommendations to the whole Board of Directors for approval and
authorization. The Compensation Committee will administer our stock plans and
is expected to be comprised of at least two non-employee directors (as defined
in Rule 16b-3 under the Exchange Act). The Board may also establish other
committees to assist in the discharge of its responsibilities.

Employment Agreements

In connection with the recapitalization, we entered into an employment
agreement with Dr. Allan Rosencwaig (the "Employment Agreement"). The
Employment Agreement provides that Dr. Rosencwaig will serve as the Chairman of
the Board, President and Chief Executive Officer for a period that will end on
the fifth anniversary of the consummation of the recapitalization (the
"Employment Period"). In August 1998, however, the Board and Dr. Rosencwaig
agreed that Mr. Schwartz would be appointed to the position of President. The
Employment Period will automatically terminate upon Dr. Rosencwaig's
resignation, death or disability or termination for Good Reason (as defined
therein), or upon termination by us, with or without Cause (as defined
therein). Under the Employment Agreement, Dr. Rosencwaig will receive:

. an annual base salary of at least $400,000 (subject to annual review by
the Board and certain annual increases beginning in 1998);

. an annual bonus based upon our achievement of certain operating targets
and the attainment of certain individual goals by Dr. Rosencwaig, each
to be determined by the Board on an annual basis; and

. certain fringe benefits.

In addition, Dr. Rosencwaig is also entitled to receive a deferred payment
in the event we achieve certain operating results. See "--Stock Plans".

52
<PAGE>

If the Employment Period is terminated by us without Cause, by Dr.
Rosencwaig for Good Reason or as a result of his disability, Dr. Rosencwaig
will be entitled to receive his then current base salary, bonus (equal to 50%
of base salary) and fringe benefits for 30 months following such termination
(the "Severance Period"). If the Employment Period is terminated by us for
Cause or if Dr. Rosencwaig resigns without Good Reason, Dr. Rosencwaig will be
entitled to receive his then current base salary through the date of
termination. Under the Employment Agreement, Dr. Rosencwaig has agreed not to:

. compete with us during the period in which he is employed by us;

. disclose any confidential information during the period in which he is
employed by us and for five years thereafter;

. solicit any customer, supplier, licensee, licensor, franchisee or other
business relation of ours while he is employed by us, during the
Severance Period and for a period of 30 months thereafter; and

. solicit or hire any of our management employees for a period of 30
months following the date of termination.

In addition, Dr. Rosencwaig has agreed to disclose to us any and all
Inventions (as defined in such employment agreement) relating to our business
conceived or learned by him during his employment and acknowledge that such
Inventions will be our property.

We also entered into substantially similar employment agreements (the
"Executive Employment Agreements") with Messrs. Willenborg, Smith, Opsal and
Lin at the time of the recapitalization and with Messrs. Schwartz and Christie
in August 1998 (collectively, the "Executives"). Mr. Lin's employment agreement
was terminated in July 1998 in connection with his voluntary resignation. Each
of the employment agreements provide that such Executive will serve with
Therma-Wave in his current position for a period that will end on the fifth
anniversary of the consummation of the recapitalization or, in the case of
Messrs. Schwartz and Christie, August 2003 (the "Executive Employment Period");
provided, however, that the Executive Employment Period will automatically
terminate upon such Executive's resignation, death or disability or termination
for Good Reason (as defined therein), or upon termination by Therma-Wave, with
or without Cause (as defined therein). Under the Executive Employment
Agreements, Messrs. Schwartz, Christie, Willenborg, Smith and Opsal will
receive:

. an annual base salary of at least the following (subject to review by
the Board and the President or Chief Executive Officer):

<TABLE>
<CAPTION>
Name Annual Base Salary
---- ------------------
<S> <C>
Martin M. Schwartz..................................... $265,000
L. Ray Christie........................................ $155,000
David Willenborg....................................... $168,480
W. Lee Smith........................................... $143,859
Jon L. Opsal........................................... $197,077
</TABLE>

. an annual bonus based upon our achievement of certain operating targets
and the attainment of certain individual goals by such Executive, each
to be determined by the Board and our President or Chief Executive
Officer on an annual basis; and
. certain fringe benefits.

In addition, each Executive (other than Messrs. Schwartz and Christie) is
also entitled to receive a deferred payment in the event we achieve certain
operating results. See "--Stock Plans."

If the Executive Employment Period is terminated by us without Cause, by
such Executive for Good Reason or as a result of his disability, each Executive
will be entitled to receive his then current base salary, bonus (equal to 30%
to 37.5% of base salary) and fringe benefits for 15 months or, in the case of
Mr. Christie,

53
<PAGE>

6 months following such termination and, in the case of Mr. Schwartz, 15 months
if he is terminated after August 3, 2000 and 12 months if he is terminated
before such time (each, an "Executive Severance Period"). If the Executive
Employment Period is terminated by us for Cause or if such Executive resigns
without Good Reason, such Executive will be entitled to receive his then
current base salary through the date of termination. Under the Executive
Employment Agreements, each Executive has agreed not to:

. compete with us during the period in which he is employed by us;

. disclose any confidential information during the period in which he is
employed by us and for all times thereafter;

. solicit any customer, supplier, licensee, licensor, franchisee or other
business relation of ours while he is employed by us, during the
applicable Executive Severance Period and for two years thereafter; and

. solicit or hire any of our employees for a period of five years
following the date of termination.

In addition, each Executive has agreed to disclose to us any and all
Inventions (as defined in such employment agreement) relating to our business
conceived or learned by him during his employment with us and acknowledge that
such Inventions will be our property.

Compensation of Directors

Directors serving on the Board of Directors are currently not entitled to
receive any compensation for serving on the Board. Directors are reimbursed for
their out-of-pocket expenses incurred in connection with such services.
Following this offering, directors who are not employees of Therma-Wave or who
are not otherwise affiliated with our principal stockholders will receive an
annual fee of $ .

Stock Plans

1997 Stock Purchase and Option Plan

In connection with the recapitalization, the Board of Directors adopted the
Therma-Wave, Inc. 1997 Stock Purchase and Option Plan (the "1997 Stock Plan"),
which authorizes the granting of stock options and the sale of Class A Common
Stock ("Class A Common") or Class B Common Stock ("Class B Common") to current
or future employees, directors, consultants or advisors of Therma-Wave or its
subsidiaries. Under the 1997 Stock Plan, the Board is authorized to sell or
otherwise issue any class or classes of Common Stock at any time prior to the
termination of the 1997 Stock Plan in such quantity, at such price, on such
terms and subject to such conditions as established by the Board up to an
aggregate of 3,000,000 shares of Class A Common and 3,000,000 shares of Class B
Common (including shares of Common Stock with respect to which options may be
granted), subject to adjustment upon the occurrence of certain events to
prevent any dilution or expansion of the rights of participants that might
otherwise result from the occurrence of such events. As of March 31, 1999, an
aggregate of 1,118,091 shares of Class B Common have been sold, and options to
purchase an aggregate of 1,396,830 shares of Class B Common have been granted,
with exercise prices ranging from $4.00 to $15.89 per share, under the 1997
Stock Plan.

At the time of the recapitalization, each of the Management Investors
entered into a Stock Agreement, which provided for the sale of the Class L
Common Stock (the "Class L Common"), Class A Common and Class B Common and
established the terms of the options granted pursuant to the 1997 Stock Plan.
Pursuant to the Stock Agreements, we:

. sold shares of Class L Common and Class A Common at the same price per
share as paid by the Bain Capital Funds (the "Rollover Stock");

. sold shares of Class B Common at the same price as paid by the Bain
Capital Funds, which are subject to vesting over a five year period (the
"Time Vesting Stock"); and

. granted options to acquire shares of Class B Common, which were divided
into five equal tranches with the exercise prices of $8.93, $10.68,
$12.43, $14.18 and $15.89 per share.

54
<PAGE>

The aggregate exercise price of the options granted under the Stock
Agreements was approximately $16.6 million at the time of the recapitalization.
The options granted under the Stock Agreements were immediately exercisable.
The shares of Class B Common issuable upon the exercise of such options will
vest (regardless of whether the option has been exercised) on the fifth
anniversary of their date of grant provided that the Management Investor has
been continuously employed by Therma-Wave during such period (the "Option
Shares"). In addition, some or all of such shares of Class B Common are subject
to earlier vesting upon certain events, including all of such shares vesting
immediately on a sale of Therma-Wave.

Pursuant to the terms of the Stock Agreement, each Management Investor is
entitled to pay the exercise price for his options through the issuance of a
promissory note to us. The promissory note will be full recourse and will be
repayable upon the earliest of:

. the consummation of a sale of Therma-Wave;

. the later of (a) the fifth anniversary of its date and (b) the date
which is two weeks after the effectiveness of a registration statement
filed under the Securities Act as a result of the exercise of demand
registration rights granted to the Management Investors;

. the termination of the Management Investor's employment with Therma-
Wave;

. the tenth anniversary of its date; and

. the date such Management Investor violates the non-competition provision
of his employment.

The promissory note will bear interest at the lesser of:

. the applicable federal rate at such time or

. the highest rate permitted by applicable law, and will be payable at
such time as the principal under the note is due.

The Management Investor is required to repay the promissory note to the
extent of any net proceeds received from:

. any cash dividends on the Option Shares;

. any proceeds from the transfer of the Option Shares; and

. any deferred payments under such Management Investor's employment
agreement.

The indebtedness evidenced by the promissory note will be secured by a
pledge of all the shares of common stock purchased with the proceeds of the
loan. Under the terms of their respective employment agreements, each of the
Management Investors is entitled to receive a deferred payment in an amount
that is sufficient to repay the outstanding principal of such promissory note
if we achieve certain operating results.

55
<PAGE>

The following table summarizes the shares of capital stock that were
purchased by the Named Executive Officers under the Stock Agreements:

<TABLE>
<CAPTION>
No. of Shares Purchased
--------------------------------------------------
No. of
Class A Class B Class L Aggregate Purchase Options
Name Common Common Common Price (1) Granted
---- ------- ------- ------- ------------------ -------
<S> <C> <C> <C> <C> <C>
Allan Rosencwaig............. 993,279 671,875 110,364 $2,497,608 671,875
Anthony W. Lin (2)........... 40,588 127,656 4,510 125,611 127,656
Jon L. Opsal................. 23,427 127,656 2,603 85,183 127,656
W. Lee Smith................. 40,738 100,781 4,526 119,636 100,781
David Willenborg............. 128,299 100,781 14,255 325,890 100,781
</TABLE>
- --------
(1) Substantially all of the purchase price for such shares was funded by cash
payments received by each Named Executive Officer from Toray in
satisfaction of Toray's obligations under the Stock Repurchase Agreement
(as defined herein). See "Certain Relationships and Related Transactions
Stock Repurchase Agreement."
(2) Mr. Lin purchased 25,531 shares upon his resignation from Therma-Wave. We
repurchased the remainder of his shares.

In addition, the Stock Agreements granted us and the Bain Capital Funds (in
the event that we do not elect to exercise such option) the right, upon the
occurrence of certain conditions, to repurchase the shares of Class L Common,
Class A Common and Class B Common (including shares received upon the exercise
of options) held by a Management Investor in the event that the Management
Investor ceases to be employed by us. The shares that are subject to such
repurchase option and, with respect to Dr. Rosencwaig, the repurchase price
(either fair market value or original cost) are dependent upon the
circumstances under which such Management Investor's employment was terminated.
In general, if Dr. Rosencwaig is terminated by us with "cause" or if he
resigns, other than for "good reason" or if any of the other Management
Investors cease to be employed by us for any reason:

. the unvested Option Shares are subject to repurchase at a price per
share equal to their original cost;

. the unvested Time Vesting Stock will be subject to repurchase at a price
per share equal to the lesser of fair market value or their original
cost;

. the vested Option Shares are subject to repurchase at a price per share
equal to fair market value; and

. the vested Time Vesting Stock and the Rollover Stock will be subject to
repurchase at a price per share equal to fair market value, provided
that if we complete a public offering prior to such Management
Investor's termination, the Rollover Stock, the vested Time Vesting
Stock and the vested Option Shares are not subject to repurchase.

If Dr. Rosencwaig is terminated without "cause" or if he resigns for "good
reason":

. the unvested Option Shares and the unvested Time Vesting Shares will be
subject to repurchase at a price per share equal to their original cost;

. the vested Option Shares and the vested Time Vesting Stock will be
subject to repurchase at a price per share equal to the greater of fair
market value or their original cost; and

. the Rollover Stock will not be subject to repurchase.

The Stock Agreements also:

. restrict the transfer of the Management Investors' securities, subject
to certain exceptions;

. grant each Management Investor certain participation rights in
connection with certain transfers made by the Bain Capital Funds; and

. require each Management Investor to consent to a sale of Therma-Wave
approved by holders representing a majority of the shares of common
stock held by the Bain Capital Funds.

56
<PAGE>

1997 Employee Stock Purchase and Option Plan

On October 31, 1997, the Board of Directors approved the 1997 Employee Stock
Purchase and Option Plan ("1997 Employee Stock Plan"), which authorizes the
granting of stock options and the sale of Class A Common or Class B Common to
current or future employees, directors, consultants or advisors of Therma-Wave
or its subsidiaries. The 1997 Employee Stock Plan authorizes the granting of
stock options up to an aggregate of 689,375 shares of Class A Common and
689,375 shares of Class B Common, subject to adjustment upon the occurrence of
certain events to prevent any dilution or expansion of the rights of
participants that might otherwise result from the occurrence of such events.

Options to purchase an aggregate of 336,729 shares of Class B Common were
outstanding as of March 31, 1999 under the 1997 Employee Stock Plan. Such
options will vest and become exercisable in four equal installments beginning
on the first anniversary of the grant date and continuing thereafter on an
annual basis. Unvested options will terminate in the event that the optionee
ceases to be employed with Therma-Wave and vested but unexercised options will
terminate immediately if the optionee is terminated for cause or after 30 days
if the optionee ceases to be employed by Therma-Wave for any other reason. All
of the options granted have an exercise price equal to the fair market value of
the Class B Common on the date of grant.

1997 Special Employee Stock Purchase and Option Plan

On October 31, 1997, the Board of Directors approved the 1997 Special
Employee Stock Purchase and Option Plan ("1997 Special Employee Stock Plan"
and, together with the 1997 Employee Stock Plan, the "1997 Plans"), which
authorizes the granting of stock options and the sale of Class A Common or
Class B Common to current or future employees, directors, consultants or
advisors of Therma-Wave or its subsidiaries. The 1997 Special Employee Stock
Plan authorizes the granting of stock options up to an aggregate of
53,125 shares of Class A Common and 53,125 shares of Class B Common, subject to
adjustment upon the occurrence of certain events to prevent any dilution or
expansion of the rights of participants that might otherwise result from the
occurrence of such events.

Options to purchase an aggregate of 47,000 shares of Class B Common were
outstanding as of March 31, 1999 under the 1997 Special Employee Stock Plan.
Such options will vest and become exercisable in four equal installments
beginning on the first anniversary of the grant date and continuing thereafter
on an annual basis. Unvested options will terminate in the event that the
optionee ceases to be employed by Therma-Wave and vested but unexercised
options will terminate immediately if the optionee is terminated for cause or
after 30 days if the optionee ceases to be employed by Therma-Wave for any
other reason. All of the options granted have an exercise price equal to the
fair market value of the Class B Common on the date of grant.

1999 Equity Incentive Plan

The 1999 Equity Incentive Plan (the "1999 Plan") is expected to be adopted
by the Board of Directors and approved by our stockholders prior to the
completion of this offering. As of the date of this prospectus, no awards have
been made under the 1999 Plan. The 1997 Plans will be terminated and no future
grants will be made thereunder upon the effectiveness of the 1999 Plan.

The 1999 Plan provides for the grant of incentive stock options to our
employees (including officers and employee directors) and for the grant of
nonstatutory stock options and to our employees, directors and consultants. A
total of (1) shares of common stock, (2) any shares returned to the 1997
Plans as a result of termination of options and (3) annual increases to be
added on the date of each annual meeting of stockholders of Therma-Wave
commencing in 2000 equal to % of the outstanding shares of common stock, or
such lesser amount as may be determined by the Board of Directors, are
currently reserved for issuance pursuant to the 1999 Plan.

57
<PAGE>

The administrator of the 1999 Plan (the "Administrator") has the power to
determine the terms of the options granted, including the exercise price of the
option, the number of shares subject to each option, the exercisability
thereof, and the form of consideration payable upon such exercise. In addition,
our Board of Directors has the authority to amend, suspend or terminate the
1999 Plan, provided that no such action may affect any share of common stock
previously issued and sold or any option previously granted under the 1999
Plan.

Options granted under the 1999 Plan are generally not transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
and only by such optionee. Options granted under the 1999 Plan must generally
be exercised within 3 months after the end of an optionee's status as an
employee, director or consultant of Therma-Wave, or within 18 months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option term.

The exercise price of all incentive stock options granted under the 1999
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of nonstatutory stock options granted under
the 1999 Plan is determined by the Administrator, but with respect to
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the exercise
price must be at least equal to the fair market value of the common stock on
the date of grant. With respect to any participant who owns stock possessing
more than 10% of the voting power of all classes of the outstanding capital
stock of Therma-Wave, the exercise price of any incentive stock option granted
must be at least equal to 110% of the fair market value on the grant date and
the term of such incentive stock option must not exceed five years. The term of
all other options granted under the 1999 Plan may not exceed ten years.

The 1999 Plan provides that in the event of a merger of Therma-Wave with or
into another corporation, or a sale of substantially all of our assets, each
option shall be assumed or an equivalent option substituted for by the
successor corporation. If the outstanding options are not assumed or
substituted for by the successor corporation, the Administrator shall provide
for the optionee to have the right to exercise the option as to all of the
optioned stock, including shares as to which it would not otherwise be
exercisable. If the Administrator makes an option exercisable in full in the
event of a merger or sale of assets, the Administrator shall notify the
optionee that the option shall be fully exercisable for a period of fifteen
(15) days from the date of such notice, and the option will terminate upon the
expiration of such period.

Employee Stock Purchase Plan

The 1999 Employee Stock Purchase Plan (the "Stock Purchase Plan") will be
adopted by the Board and stockholders prior to the completion of this offering.
The Stock Purchase Plan will be established to give employees desiring to do so
a convenient means of purchasing shares of common stock through payroll
deductions. The Stock Purchase Plan provides an incentive to participate by
permitting purchases at a discounted price. We believe that ownership of stock
by employees will foster greater employee interest in the success, growth and
development of Therma-Wave.

Subject to certain restrictions, each of our employees is eligible to
participate in the Stock Purchase Plan if he or she has been employed by us for
more than six months. Participation is discretionary with each eligible
employee. We have reserved shares of common stock for issuance in
connection with the Stock Purchase Plan. Each eligible employee is entitled to
purchase a maximum of shares per year. Elections to participate and
purchases of stock will be made on a quarterly basis. Each participating
employee contributes to the Stock Purchase Plan by choosing a payroll deduction
in any specified amount. A participating employee may increase or decrease the
amount of such employee's payroll deduction, including a change to a zero
deduction as of the beginning of any calendar quarter. Elected contributions
will be credited to participants' accounts at the end of each calendar quarter.
In addition, employees may make lump sum contributions at the end of the year
to enable them to purchase the maximum number of shares available for purchase
during the plan year.

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<PAGE>

Set forth below is a summary of how the Stock Purchase Plan will operate:

. Each participating employee's contributions will be used to purchase
shares for the employee's share account within 15 days after the last
day of each calendar quarter.

. The cost per share is 85% of the lower of the closing price of our
common stock on the Nasdaq National Market on the first or the last day
of the calendar quarter.

. The number of shares purchased on each employee's behalf and deposited
in his/her share account is based on the amount accumulated in such
participant's cash account and the purchase price for shares with
respect to any calendar quarter.

. Shares purchased under the Stock Purchase Plan carry full rights to
receive dividends declared from time to time.

. Any dividends attributable to shares in the employee's share account are
automatically used to purchase additional shares for such employee's
share account.

. Share distributions and share splits will be credited to the
participating employee's share account as of the record date and
effective date, respectively.

. A participating employee has full ownership of all shares in his/her
share account and may withdraw them for sale or otherwise by written
request to the Committee following the close of each calendar quarter.

Subject to applicable federal securities and tax laws, the Board of
Directors has the right to amend or to terminate the Stock Purchase Plan.
Amendments to the Stock Purchase Plan will not affect a participating
employee's right to the benefit of the contributions made by such employee
prior to the date of any such amendment. In the event the Stock Purchase Plan
is terminated, the Committee is required to distribute all shares held in each
participating employee's share account plus an amount of cash equal to the
balance in each participating employee's cash account.

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<PAGE>

PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding our beneficial
ownership as of March 31, 1999 by: (i) each person or entity known to us to own
more than 5% of any class of outstanding voting securities and (ii) each of our
Directors, each Named Executive Officer and all of our Directors and executive
officers as a group. All of the outstanding shares of Class A Common, Class B
Common and Class L Common will be reclassified into a single class of common
stock in the Reclassification. The actual number of shares of common stock to
be issued to each holder of Class L Common in the Reclassification is subject
to change based upon changes in the initial public offering price and the
completion date of this offering. See "The Reclassification." To our knowledge,
each of such stockholders has sole voting and investment power as to the shares
shown unless otherwise noted. Beneficial ownership of the securities listed in
the table has been determined in accordance with the applicable rules and
regulations promulgated under the Exchange Act.

<TABLE>
<CAPTION>
Shares Beneficially Owned
--------------------------------------------------------------
Class A Common Stock Class B Common Stock Class L Common Stock
-------------------- -------------------- --------------------
Number of Percentage Number of Percentage Number of Percentage
Name and Address Shares of Class Shares of Class Shares of Class
- ---------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Bain Capital Funds 5,536,948 61.0% -- --% 615,217 61.0%
(1)....................
c/o Bain Capital, Inc.
Two Copley Place
Boston, Massachusetts
02116
Sutter Hill Ventures 1,642,382 18.1 -- -- 182,487 18.1
(2)....................
755 Page Mill Road
Palo Alto, California
94304
Toray Industries, Inc. 980,818 10.8 -- -- 44,630 4.4
(3)....................
8-1, Mihama 1-chome
Urayasu, Chiba 279,
Japan
Shimadzu Corporation 287,207 3.2 -- -- 13,069 1.3
(4)....................
1, Nishinokyo-
Kuwabaracho
Nakagyo-ku, Kyoto 604,
Japan

Directors and Executive
Officers:
Allan Rosencwaig (5).... 993,279 10.9 1,343,750 75.1 110,364 10.9
Martin M. Schwartz (6).. -- -- -- -- -- --
Jon L. Opsal (7)........ 23,427 * 255,312 20.5 2,603 *
David Willenborg (8).... 128,299 1.4 201,562 16.5 14,255 1.4
David Mak (9)........... -- -- 77,299 6.7 -- --
G. Leonard Baker, Jr.
(10)................... 1,642,382 18.1 -- -- 182,487 18.1
David Dominik (11)...... 1,629,806 18.0 -- -- 181,090 18.0
Adam W. Kirsch (11)..... 1,629,806 18.0 -- -- 181,090 18.0
All Directors and
executive officers as a
group (11 persons)..... 4,457,931 49.1 2,105,250 96.9 495,325 49.1
</TABLE>
- --------
* Less than one percent.
(1) Includes: 1,084,115 shares of Class A Common and 120,457 shares of Class L
Common held by Bain Capital Fund V, L.P. ("Fund V"); 2,823,028 shares of
Class A Common and 313,670 shares of Class L Common held by Bain Capital
Fund V-B, L.P. ("Fund V-B"); 648,340 shares of Class A Common and 49,155
shares of Class L Common held by BCIP Associates ("BCIP"); and 981,466
shares of Class A Common and 131,935 shares of Class L Common held by BCIP
Trust Associates, L.P. ("BCIP Trust" and Fund V, Fund V-B and BCIP have
been defined herein as the "Bain Capital Funds"). Does not include shares
subject to the Stockholders Agreement or the Voting Agreement (each as
defined herein).
(2) Also includes shares held by certain affiliates and related parties of
Sutter Hill.
(3) The 980,818 shares of Class A Common included in the table represent: (i)
401,668 shares of Class A Common; and (ii) 579,150 shares of Preferred
Stock, which are immediately convertible into an equal number of shares of
Class A Common at the option of the holder thereof. A portion of each
class of the listed shares are held by Toray Industries (America), Inc., a
wholly owned subsidiary of Toray.
(4) The 287,207 shares of Class A Common included in the table represent: (i)
117,618 shares of Class A Common; and (ii) 169,589 shares of Preferred
Stock, which are immediately convertible into an equal number of shares of
Class A Common at the option of the holder thereof.

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<PAGE>

(5) The 1,343,750 shares of Class B Common included in the table represent:
(i) 671,875 shares of Class B Common, which are subject to vesting; and
(ii) 671,875 shares of Class B Common that can be acquired upon the
exercise of outstanding options. The address of Dr. Rosencwaig is c/o
Therma-Wave, Inc., 1250 Reliance Way, Fremont, California 94539.
(6) Mr. Schwartz joined Therma-Wave in August 1998.
(7) The 255,312 shares of Class B Common included in the table represent: (i)
127,656 shares of Class B Common, which are subject to vesting; and (ii)
127,656 shares of Class B Common that can be acquired upon the exercise of
outstanding options.
(8) The 201,562 shares of Class B Common included in the table represent: (i)
100,781 shares of Class B Common, which are subject to vesting; and (ii)
100,781 shares of Class B Common that can be acquired upon the exercise of
outstanding options.
(9) The 77,298 shares of Class B Common included in the table represent: (i)
38,650 shares of Class B Common, which are subject to vesting; and (ii)
38,649 shares of Class B Common that can be acquired upon the exercise of
outstanding options.
(10) Mr. Baker is a Managing Director of the General Partner of Sutter Hill. As
a result, the shares of Class A Common and Class L Common acquired by
Sutter Hill may be deemed to be beneficially owned by Mr. Baker, who
disclaims beneficial ownership of any such shares in which he will not
have a pecuniary interest. The address of Mr. Baker is c/o Sutter Hill
Ventures, 755 Page Mill Road, Palo Alto, California 94304.
(11) Messrs. Dominik and Kirsch are each general partners of BCIP and BCIP
Trust and, accordingly, may be deemed to beneficially own shares owned by
such funds. Each such person disclaims beneficial ownership of any such
shares in which he does not have a pecuniary interest. The address of such
persons is c/o Bain Capital, Inc., Two Copley Place, Boston, Massachusetts
02116.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Recapitalization Agreement

On December 18, 1996, the Bain Capital Funds and Toray Industries, Inc.,
Toray Industries (America), Inc. (collectively, "Toray") and Shimadzu
Corporation ("Shimadzu" and, collectively with Toray, the "Existing
Stockholders") and Therma-Wave entered into a Recapitalization Agreement (the
"Recapitalization Agreement"). The recapitalization was effected on May 16,
1997. Pursuant to the Recapitalization Agreement:

. we redeemed from the Existing Stockholders approximately 86.6% of their
existing shares of the common stock of Therma-Wave ("Old Common Stock");

. the Bain Capital Funds and Sutter Hill purchased from us shares of Old
Common Stock;

. the Existing Stockholders converted all of their shares of Old Common
Stock not otherwise redeemed for newly authorized and issued shares of
our Preferred Stock, Class L Common and Class A Common; and

. the Bain Capital Funds and Sutter Hill converted all of their shares of
Old Common Stock for newly authorized and issued shares of Class L
Common and Class A Common.

As part of the recapitalization, we also: (1) repaid substantially all of
our outstanding borrowings under existing loan agreements and (2) paid fees and
expenses related to the financing of the recapitalization. We used
approximately $150.0 million to complete the recapitalization, including the
payment of related fees and expenses. In order to finance the recapitalization,
we:

. issued $115.0 million in aggregate principal amount of 10 5/8% senior
notes due 2004;

. received an equity contribution of $20.0 million in cash from the Bain
Capital Funds, Sutter Hill and members of our senior management team,
including Dr. Allan Rosencwaig, Anthony W. Lin, W. Lee Smith, David
Willenborg and Jon L. Opsal (collectively, the "Management Investors");
and

. converted equity securities received from the Existing Stockholders
having a value of $15.0 million for purposes of the recapitalization
into shares of Preferred Stock and Common Stock (collectively, with the
equity investments made by the investors described above, the "Equity
Contribution").

Pursuant to the Recapitalization Agreement, the Existing Stockholders agreed
to jointly indemnify the Bain Capital Funds and Sutter Hill against any and all
losses resulting from any misrepresentation or breach of warranty made by them
in the Recapitalization Agreement, a claim for which must be made (in most
cases) no later than 18 months after the closing date of the recapitalization.
The indemnification obligations of the Existing

61
<PAGE>

Stockholders under the Recapitalization Agreement are generally subject to a
$2.0 million minimum aggregate threshold amount and limited to an aggregate
payment of no more than $30.0 million. Notwithstanding the foregoing, the
Existing Stockholders have jointly agreed to indemnify Therma-Wave, the Bain
Capital Funds and Sutter Hill for any and all losses with respect to: (1) taxes
for all taxable periods prior to March 31, 1996; and (2) any breach of the
representation relating to taxes in the Recapitalization Agreement (subject to
the limitations of the preceding sentence). In addition, we agreed to indemnify
the Existing Stockholders against any and all losses arising out of: (1) any
employee benefit plan of Therma-Wave; (2) the severance of any employee of
Therma-Wave or its subsidiaries on or after the closing date; and (3) subject
to certain exceptions, violations of Environmental Laws (as defined therein).

In addition, the Existing Stockholders have agreed for a period of three
years after the closing date of the recapitalization not to compete with us in
the business of manufacturing, marketing or selling: (1) measuring equipment
used for material characterization (such as ion implantation monitoring or
measurements in metal films); (2) thin film measurement equipment; or (3)
equipment that utilizes our intellectual property. The Existing Stockholders
have also agreed for a period of two years after the closing date not to
solicit the employment of our employees without the prior written consent of
the Bain Capital Funds.

Loans to Executive Officers

In connection with the recapitalization, we made loans in an aggregate
principal amount of $297,931.55 to certain of our executive officers in
connection with their purchase of shares of capital stock under the Stock
Agreements. These loans are secured by a pledge of the shares of common stock
owned by such executive officers and bear interest at a rate equal to the
applicable federal rate at the time of the recapitalization. The loans are
payable upon a sale of Therma-Wave or earlier under certain circumstances.

In addition, we made loans in May 1997 to such executive officers to pay
certain tax liabilities associated with the distribution from Toray. Such loans
do not bear interest and mature upon the consummation of an "Approved Sale" of
Therma-Wave, which is defined in the Stock Agreements to include a sale of all
or substantially all of our assets determined on a consolidated basis or a sale
of all of our capital stock to an independent third party or group of
independent third parties, which has been approved by the holders of a majority
of the shares of common stock held by the Bain Group (as defined in the Stock
Agreements to include the Bain Capital Funds and Randolph Street Partners).
Each loan must be prepaid in the event that such executive officer receives:
(1) any cash dividends or distributions on the Rollover Stock or (2) any
proceeds from the transfer of the Rollover Stock. The loans are secured by a
pledge of the Rollover Stock.

The following table sets forth the amount of each of these loans to the
following executive officers:

<TABLE>
<CAPTION>
Amount of Loan
-------------------
Name Stock Loan Tax Loan
---- ---------- --------
<S> <C> <C>
Allan Rosencwaig......................................... $151,172 $874,000
Anthony W. Lin........................................... $ 28,723 $ 35,663
Jon L. Opsal............................................. $ 28,723 $ 20,583
W. Lee Smith............................................. $ 22,676 $ 35,790
David Willenborg......................................... $ 22,676 $112,723
</TABLE>

All of the foregoing loans were outstanding as of December 31, 1998, except
the loans to Mr. Lin, which were repaid in August 1998 in connection with his
resignation.

Advisory Agreement

In connection with the recapitalization, we entered into an Advisory
Agreement with Bain Capital, Inc. ("Bain Capital") pursuant to which Bain
Capital agreed to provide:

. general executive and management services;

. identification, support, negotiation and analysis of acquisitions and
dispositions;

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<PAGE>

. support, negotiation and analysis of financial alternatives;

. finance, marketing and human resource functions; and

. other services agreed upon by Therma-Wave and Bain Capital.

In exchange for such services, Bain Capital receives (1) an annual
management fee of $1.0 million, plus reasonable out-of-pocket expenses (payable
quarterly); and (2) a transaction fee in connection with the consummation of
each additional acquisition by us of an additional business in an amount equal
to 1% of the aggregate transaction value. In connection with the
recapitalization, Bain Capital received a transaction fee of $1.8 million. In
fiscal 1998, we paid an aggregate of $750,000 in fees to Bain Capital under the
Advisory Agreement. The Advisory Agreement has an initial term of ten years,
subject to automatic one-year extensions unless we or Bain Capital provides
written notice of termination.

Stockholders Agreement

In connection with the recapitalization, Therma-Wave, the Bain Capital Funds
(together with certain of their designees that execute a counterpart to such
agreement, including Randolph Street Partners (the "Bain Group")), Sutter Hill
and the Existing Stockholders entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement:

(1) requires that each of the parties thereto vote all of his voting
securities and to take all other necessary or desirable actions to cause
the size of the Board of Directors to be established at five members and to
cause five designees of the Bain Capital Funds to be elected to the Board
of Directors;

(2) grants Therma-Wave and the Bain Group a right of first refusal on
any proposed transfer of shares held by the Existing Stockholders;

(3) grants the Existing Stockholders and Sutter Hill certain
participation rights in connection with certain transfers made by the Bain
Group; and

(4) requires the Existing Stockholders and Sutter Hill to consent to a
sale of Therma-Wave to an independent third party if such sale is approved
by holders representing a majority of the shares held by the Bain Group (an
"Approved Sale").

In addition, we agreed not to issue, sell or otherwise transfer for
consideration to any member of the Bain Group or Sutter Hill or any affiliates
thereof at any time prior to a registered initial public offering, any shares
of common stock (or securities convertible into or otherwise exercisable or
exchangeable for common stock or securities containing any profit participation
features or options) unless each of the Existing Stockholders is given the
opportunity to subscribe for and purchase their pro rata portion of such
additional shares at the same price and on the same terms.

All of the foregoing provisions of the Stockholders Agreement will terminate
upon the consummation of an initial public offering registered under the
Securities Act (a "Public Offering").

Interests of Certain Experts

Randolph Street Partners purchased 84,906 shares of Class A Common and 9,434
shares of Class L Common in the recapitalization. In connection therewith,
Randolph Street Partners entered into the Stockholders Agreement and is
considered part of the Bain Group under the Stock Agreements and the
Registration Agreement. Certain partners of Kirkland & Ellis are partners in
Randolph Street Partners. Kirkland & Ellis has provided legal services to
Therma-Wave and Bain Capital from time to time and expects to continue to do so
in the foreseeable future.

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<PAGE>

Stock Repurchase Agreement

In connection with the Existing Stockholders' acquisition of Therma-Wave in
October 1991, Toray and certain of our key employees (which included all of the
Management Investors) entered into a Key Employee Stock Agreement, as amended
on December 16, 1994 (the "Key Employee Agreement"). Pursuant to the terms of
the Key Employee Agreement, each key employee retained a portion of his
outstanding options that had been granted to such key employee under our 1986
Stock Option Plan (the "Key Employee Options") and was granted rights to
require Toray to purchase such Key Employee Options or shares of Old Common
Stock issued upon the exercise of such Key Employee Options (the "Key Employee
Shares") beginning on April 1, 1996 upon the terms and conditions set forth
therein. In January 1996, Toray and the key employees entered into an agreement
(the "Stock Repurchase Agreement"), pursuant to which, among other things,
Toray acquired from the key employees on April 1, 1996 the Key Employee Shares
and Key Employee Options held by such key employees for approximately $11.0
million in cash and terminated the Key Employee Agreement. The execution of the
Stock Repurchase Agreement was designed to fulfill Toray's obligations under
the Key Employee Agreement and was not entered into in anticipation of a future
sale or reorganization of Therma-Wave. The per share purchase price for the
Employee Shares under the Stock Repurchase Agreement was equal to the price
established under the Key Employee Agreement, which was the price paid by the
Existing Stockholders in their acquisition of Therma-Wave, plus a 12% annual
return on such amount from the date of the acquisition.

In addition, the Stock Repurchase Agreement provided that the key employees
would be entitled to receive an additional payment from Toray in the event that
there was a "sale" of Therma-Wave during the periods specified therein. Under
the terms of the Stock Repurchase Agreement, the recapitalization was
considered a sale of Therma-Wave and resulted in the key employees being
entitled to receive additional payments. In general, the amount of the
additional payment due to the key employees was determined by calculating the
difference between the per share consideration received by Toray for the Old
Common Stock in the recapitalization and the price paid for such Employee
Shares by Toray under the Stock Repurchase Agreement. In connection with the
recapitalization, the key employees received the following amounts of cash from
Toray in satisfaction of Toray's obligations under the Stock Repurchase
Agreement:

<TABLE>
<CAPTION>
Name Cash
---- ----------
<S> <C>
Allan Rosencwaig................................................ $2,339,718
Anthony W. Lin.................................................. 95,612
Jon L. Opsal.................................................... 55,183
W. Lee Smith.................................................... 95,952
David Willenborg................................................ 302,207
</TABLE>

Voting Agreement

In connection with the recapitalization, Therma-Wave, the Bain Group, Sutter
Hill and certain key employees of Therma-Wave, including the Management
Investors, entered into a voting agreement (the "Voting Agreement") pursuant to
which each party thereto agreed to vote his or its voting securities and to
take all necessary or desirable actions to cause the size of the Board to be
set at five directors and to cause three designees of the Bain Group and Dr.
Rosencwaig (as long as he is employed by Therma-Wave) and another management
employee of Therma-Wave designated by Dr. Rosencwaig to be elected to the Board
of Directors. The Voting Agreement terminates by its terms upon the completion
of an initial public offering and sale of common stock pursuant to an effective
registration statement under the Securities Act.

Option Agreements Among Investors

Pursuant to certain option agreements, each dated May 16, 1997, among the
Bain Group, Sutter Hill, Antares International Partners, Inc. (collectively,
the "Investors") and each of the Management Investors (collectively, the
"Option Agreements"), the Investors granted the Management Investors options to
purchase

64
<PAGE>

an aggregate of 2,669,750 shares of Class A Common at an exercise price equal
to $0.235 per share. Such options become exercisable upon:

. any sale by the Investors (an "Investor Sale") of all or a portion of
the shares of Class A Common or Class L Common issued to the Investors
pursuant to the recapitalization (the "Investors' Investment"); and
. the fifth anniversary of the date of the Option Agreements (the "Fifth
Anniversary").

The number of options exercisable upon an Investor Sale or on the Fifth
Anniversary is dependent upon the fair market value of the Investors'
Investment and the shares of Common Stock issued to the Management Investors in
the recapitalization. No options are exercisable until the fair market value of
such shares is equal to or greater than $500 million.

Development License Agreement

In 1992, we entered into a Development License Agreement with Toray and
Shimadzu (the "Development License Agreement"). The purpose of the Development
License Agreement was to allow the parties to share patents and technology
related to:

. the entire field of thermal wave technology;

. the field of laser technology related to thin film metrology;

. the field of optical processing; and

. any other fields designated by a research and development committee to
be formed by the parties (collectively, the "Field of Research").

Under the Development License Agreement:

. we granted to each of Toray and Shimadzu a royalty-free, non-exclusive
license to use our patents and technology related to the Field of
Research for the purpose of conducting research and new product
development activities in Japan; and

. Toray and Shimadzu granted to Therma-Wave a royalty-free, non-exclusive
license to use those of Toray's and Shimadzu's patents and technology
determined to be useful in connection with certain development projects
for the purpose of conducting research and new product development
activities in the U.S. and Japan.

The Development License Agreement requires the parties to take certain steps
to coordinate their research and development activities. All enhancements,
modifications and improvements to certain of our products existing at the time
the agreement was entered into will be owned by us, regardless of which party
creates such enhancements, modifications and improvements. However, to the
extent any such enhancements, modifications and improvements are based upon
patents and technology owned by Toray or Shimadzu, we will have to pay a
development fee or royalty to those parties. Other developments ("New
Developments") will be jointly owned by the party or parties who created the
New Development and the party or parties whose patents or technology were used
in such New Development. The commercialization, marketing and other use of each
New Development will be governed by the terms of a separate agreement to be
entered into by the relevant parties on a case-by-case basis ("New Development
Agreements"). To date, only one New Development Agreement has been entered into
between the parties, which relates to certain film measurement equipment for a
non-semiconductor application.

65
<PAGE>

DESCRIPTION OF CERTAIN INDEBTEDNESS

Bank Credit Facility

In connection with the recapitalization, we entered into the Bank Credit
Facility with Bankers Trust Company. We may borrow amounts under the Bank
Credit Facility to finance our working capital requirements and other general
corporate purposes. All revolving loans incurred under the Bank Credit Facility
will mature on May 16, 2002. During the quarter ended June 30, 1998, we amended
the Bank Credit Facility, to have our borrowing availability subject to a
borrowing base formula, which provides a maximum revolving credit facility of
$30.0 million, and to make certain necessary adjustments to the financial tests
and covenants contained therein in light of then current market conditions. At
December 31, 1998, there was $3.5 million of an outstanding letter of credit
and $21.7 million of unused borrowing capacity under the amended Bank Credit
Facility.

The Bank Credit Facility provides that all of our indebtedness be secured
by:

. a first priority security interest in all of our receivables, contracts,
contract rights, equipment, intellectual property, inventory and all
other tangible and intangible assets and each of our domestic
subsidiaries, subject to certain customary exceptions;

. a pledge of all capital stock of any direct and indirect domestic
subsidiaries; and

. a pledge of 65% of the capital stock of each of our first-tier foreign
subsidiaries.

Our borrowings under the Bank Credit Facility bear interest at a floating
rate and may be maintained as Base Rate Loans (as defined in the Bank Credit
Facility) or, at our option, as Eurodollar Loans (as defined in the Bank Credit
Facility). Base Rate Loans bear interest at the Base Rate (defined as the
higher of (x) the applicable prime lending rate of Bankers Trust Company and
(y) the Federal Reserve reported certificate of deposit rate plus of 1%) plus
1.75%. Eurodollar Loans bear interest at the Eurodollar Rate (as defined in the
Bank Credit Facility) applicable for one, two, three, six or twelve month
periods, in each case plus 3.00%.

Amounts borrowed under the Bank Credit Facility may be repaid and
reborrowed. We are required to pay to the lenders under the Bank Credit
Facility a commitment fee equal to .50% per annum, payable in arrears on a
quarterly basis, on the average unused portion of the Bank Credit Facility
during such quarter; provided, however, that such commitment fee increases to
.75% per annum if during any quarterly payment period the daily average
outstanding borrowings were less than 1/2 of the total revolving loan
commitment. We are also required to pay to the lenders a letter of credit fee
with respect to each letter of credit outstanding equal to 3.00% per annum of
the average daily stated amount of such letter of credit and an additional
fronting fee of .25% on such average daily stated amount to the lender issuing
such letter of credit, in each case payable in arrears on a quarterly basis.
The Agent and the lenders will receive and continue to receive such other fees
as have been separately agreed upon with the Agent.

The Bank Credit Facility requires us to meet certain financial tests,
including, without limitation, minimum levels of EBITDA (as defined in the Bank
Credit Facility), minimum interest coverage, maximum leverage ratio and maximum
amount of capital expenditures. The adjustments to the financial tests and
covenants in the June 1998 amendment relate to periods prior to March 31, 2000.
For periods after that time, the financial tests and covenants contained in the
original agreement will apply. The Bank Credit Facility contains certain
covenants which among other things limit the incurrence of additional
indebtedness, investments, dividends, transactions with affiliates, asset
sales, acquisitions, mergers and consolidations, prepayments of other
indebtedness (including the senior notes), liens and encumbrances and other
matters customarily restricted in such agreements.

The Bank Credit Facility contains customary events of default, including
without limitation, payment defaults, breaches of representations and
warranties, covenant defaults, cross-defaults to certain other indebtedness in
excess of $1.5 million, certain events of bankruptcy and insolvency, judgment
defaults in excess of $1.5 million that are otherwise not covered by insurance,
failure of any guaranty or security document supporting the Bank Credit
Facility to be in full force and effect and change of control of Therma-Wave.

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<PAGE>

The foregoing summary of the material provisions of the Bank Credit
Facility, as amended, is qualified in its entirety by reference to all of the
provisions of the Bank Credit Facility, which has been filed as an exhibit to
the registration statement of which this prospectus forms a part. See
"Additional Information."

Senior Notes

The senior notes were issued pursuant to the Indenture, dated as of May 15,
1997 (the "Indenture"), by and between us and IBJ Schroder Bank & Trust
Company, as trustee. The senior notes are limited in aggregate principal amount
to $115,000,000 and will mature on May 15, 2004. Interest on the Notes accrues
at the rate of 10 5/8% per annum and is payable semiannually in cash on each
May 15 and November 15, to the persons who are registered holders of the senior
notes at the close of business on the May 1 and November 1, respectively,
immediately preceding the applicable interest payment date. The senior notes
are not entitled to the benefit of any mandatory sinking fund. The senior notes
are senior unsecured obligations of Therma-Wave, ranking pari passu in right of
payment with all other senior unsecured obligations of Therma-Wave.

The senior notes are redeemable, at our option, in whole at any time or in
part from time to time, on and after May 15, 2001, upon not less than 30 nor
more than 60 days' notice, at the following redemption prices (expressed as
percentages of the principal amount thereof) if redeemed during the twelve-
month period commencing on May 15 of the year set forth below, plus, in each
case, accrued interest to the date of redemption:

<TABLE>
<CAPTION>
Year Percentage
---- ----------
<S> <C>
2001............................................................ 105.313%
2002............................................................ 102.656
2003............................................................ 100.000
</TABLE>

At any time, or from time to time, on or prior to May 15, 2000, we may, at
our option, use the net cash proceeds of one or more equity offerings to redeem
up to 35% of the aggregate principal amount of senior notes originally issued
at a redemption price equal to 110.625% of the principal amount thereof plus
accrued and unpaid interest thereon, if any, to the date of such redemption;
provided that at least $69.0 million aggregate principal amount of senior notes
originally issued remains outstanding immediately after any such redemption.

If we consummate an initial public offering prior to May 15, 2000 in which
we receive net proceeds equal to or greater than $25.0 million, we are required
to apply the net cash proceeds relating to such initial public offering to make
an offer to purchase from all holders on a pro rata basis that amount of senior
notes equal to the net cash proceeds from such initial public offering at a
price equal to 110.625% of the aggregate principal amount of senior notes to be
repurchased, plus accrued and unpaid interest thereon, if any, to the date of
purchase. The aggregate amount of net cash proceeds required to be applied
pursuant to this provision is reduced dollar-for-dollar (1) to the extent such
net cash proceeds are used to prepay indebtedness under the Bank Credit
Facility and effect a permanent reduction in the availability thereunder and
(2) by the aggregate amount of net cash proceeds of one or more equity
offerings consummated prior to the consummation of the initial public offering
to the extent used to redeem senior notes. We are not required pursuant to this
provision to redeem an aggregate principal amount of Notes in excess of 35% of
the aggregate principal amount of Notes originally issued.

The Indenture provides that, upon the occurrence of a Change of Control (as
defined below), each holder will have the right to require that we purchase all
or a portion of such senior notes, at a purchase price equal to 101% of the
principal amount thereof plus accrued interest thereon to the date of purchase.
"Change of Control" is defined under the Indenture to include one or more of
the following events:

. any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of our
assets to any person or group of related persons (a "Group"), together
with any affiliates thereof;

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<PAGE>

. the approval by the holders of our capital stock of any plan or proposal
for the liquidation or dissolution of Therma-Wave (whether or not
otherwise in compliance with the provisions of the Indenture);

. any Person or Group (other than the Bain Capital Funds, Sutter Hill or
their respective related parties) shall become the owner, directly or
indirectly, beneficially or of record, of shares representing more than
50% of the aggregate ordinary voting power represented by our issued and
outstanding capital stock; or

. the first day within any two-year period on which a majority of the
members of the Board of Directors are not continuing directors.

The following events are defined in the Indenture as "Events of Default":

. the failure to pay interest on any senior notes and such default
continues for a period of 30 days;

. the failure to pay the principal on any senior notes;

. a default in the observance or performance of any other covenant or
agreement contained in the Indenture which default continues for a
period of 30 days;

. the failure to pay at final stated maturity the principal amount of any
Indebtedness of Therma-Wave or any Restricted Subsidiary (as defined
therein) of Therma-Wave and such failure continues for a period of 20
days or more, if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5.0 million or more at any time;

. one or more judgments in an aggregate amount in excess of $5.0 million
shall have been rendered against us or any of our Significant
Subsidiaries (as defined therein) and such judgments remain
undischarged, unpaid or unstayed for a period of 60 days after such
judgment or judgments become final and non-appealable; and

. certain events of bankruptcy affecting us or any of our Significant
Subsidiaries.

The Indenture contains certain covenants for the benefit of the holders of
the senior notes that, among other things, limit our ability and any of our
Restricted Subsidiaries to:

. enter into certain transactions with affiliates;

. pay dividends or make certain other restricted payments;

. consummate certain asset sales;

. enter into certain transactions with affiliates;

. incur indebtedness that is senior in right of payment to the senior
notes;

. incur liens;

. impose restrictions on the ability of a subsidiary to pay dividends or
make certain payments to Therma-Wave and its subsidiaries;

. merge or consolidate with any other person; or

. sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of Therma-Wave.

The foregoing summary of the material provisions of the Indenture is
qualified in its entirety by reference to all of the provisions of the
Indenture, which has been filed as an exhibit to the registration statement, of
which this prospectus forms a part. See "Additional Information."

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

General Matters

Upon completion of this offering, the total amount of our authorized capital
stock will consist of 25,000,000 shares of common stock, 1,000,000 shares of
Preferred Stock and 5,000,000 shares of preferred stock (the "Serial Preferred
Stock"). As of March 31, 1999, we had outstanding 9,073,532 shares of Class A
Common, 1,118,092 shares of Class B Common, 1,008,170 shares of Class L Common
and 748,739 shares of Preferred Stock. Prior to the completion of this
offering, all of the outstanding shares of Class A Common, Class B Common and
Class L Common will be reclassified into a single class of common stock in the
Reclassification. See "The Reclassification."

After giving effect to this offering, we will have shares of common
stock ( shares if the underwriters' over-allotment option is exercised in
full), 748,739 shares of Preferred Stock and no shares of Serial Preferred
Stock outstanding. As of December 31, 1998, we had 37 stockholders of record
with respect to our common stock and two stockholders of record with respect to
our Preferred Stock. The following summary of certain provisions of our capital
stock describes all material provisions of, but does not purport to be complete
and is subject to, and qualified in its entirety by, our Restated Certificate
of Incorporation (the "Restated Certificate") and our Amended and Restated By-
laws (the "By-laws"), which are included as exhibits to the registration
statement of which this prospectus forms a part, and by the provisions of
applicable law.

The Restated Certificate and By-laws contain certain provisions that are
intended to enhance the likelihood of continuity and stability in the
composition of the Board of Directors and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of
Therma-Wave unless such takeover or change in control is approved by the Board
of Directors.

Common Stock

The issued and outstanding shares of common stock are, and the shares of
common stock to be issued by us in connection with the offering will be,
validly issued, fully paid and nonassessable. Subject to the prior rights of
the holders of the Preferred Stock and any Serial Preferred Stock, the holders
of outstanding shares of common stock are entitled to receive dividends out of
assets legally available therefor at such time and in such amounts as the Board
of Directors may from time to time determine. See "Dividend Policy." The shares
of common stock are not convertible and the holders thereof have no preemptive
or subscription rights to purchase any of our securities. Upon liquidation,
dissolution or winding up of Therma-Wave, the holders of common stock are
entitled to receive pro rata our assets which are legally available for
distribution, after payment of all debts and other liabilities and subject to
the prior rights of any holders of the Preferred Stock or Serial Preferred
Stock then outstanding. Each outstanding share of common stock is entitled to
one vote on all matters submitted to a vote of stockholders. There is no
cumulative voting. Except as otherwise required by law or the Restated
Certificate, the holders of the common stock and the holders of the Preferred
Stock vote together as a single class on all matters submitted to a vote of
stockholders.

We have applied to have the common stock approved for inclusion on the
Nasdaq National Market under the symbol "TWAV."

Preferred Stock

The Preferred Stock has a liquidation preference of $18.40 per share and is
convertible into one share of common stock at the option of the holder thereof.
Dividends on the Preferred Stock accrue at a rate of 6.0% per annum. The
Preferred Stock has a scheduled redemption date of May 17, 2004 and is
otherwise redeemable by us at any time in our sole discretion. The Preferred
Stock entitles the holder thereof to one vote for each share of common stock
issuable upon conversion of such Preferred Stock on all matters submitted to a
vote of stockholders. All of the shares of Preferred Stock are held by Toray
and Shimadzu. The terms of the Preferred Stock can not be amended, modified or
waived without the prior written consent of the holders of a majority of the
Preferred Stock outstanding at the time such action is taken.

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<PAGE>

If: (1) in connection with any registered public offering of our shares of
common stock any member of the Bain Group receives any proceeds in respect of
common stock owned by such member; (2) the Bain Group sells or transfers 25% of
the common stock acquired by the Bain Group pursuant to the Recapitalization
Agreement; or (3) Therma-Wave or any of its subsidiaries engages in any
transaction or series of transactions which would result in the sale of all or
substantially all of our assets on a consolidated basis, the holders of a
majority of the Preferred Stock then outstanding may require us, upon written
notice, to redeem all of the outstanding shares of Preferred Stock at a price
of $18.40 per share (plus all accrued and unpaid dividends thereon). Any
redemptions by us of the Preferred Stock for the reasons described in (1), (2)
or (3) above does not extinguish our obligation to redeem shares of such stock
pursuant to the preceding paragraph.

Serial Preferred Stock

Our Board of Directors may, without further action by our stockholders, from
time to time, direct the issuance of shares of Serial Preferred Stock in a
series and may, at the time of issuance, determine the rights, preferences and
limitations of each series. Satisfaction of any dividend preferences of
outstanding shares of Serial Preferred Stock would reduce the amount of funds
available for the payment of dividends on shares of common stock. Holders of
shares of Serial Preferred Stock may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of Therma-
Wave before any payment is made to the holders of shares of common stock. Under
certain circumstances, the issuance of shares of Serial Preferred Stock may
render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of our
securities or the removal of incumbent management. Upon the affirmative vote of
a majority of the total number of Directors then in office, the Board of
Directors, without stockholder approval, may issue shares of Serial Preferred
Stock with voting and conversion rights which could adversely affect the
holders of shares of common stock. There are no shares of Serial Preferred
Stock outstanding, and we have no present intention to issue any shares of
Serial Preferred Stock.

Certain Provisions of the Restated Certificate of Incorporation and By-laws

The Restated Certificate provides for the Board to be divided into three
classes, as nearly equal in number as possible, serving staggered terms.
Approximately one-third of the Board will be elected each year. See
"Management." Under the Delaware General Corporation Law, directors serving on
a classified board can only be removed for cause. The provision for a
classified board could prevent a party who acquires control of a majority of
the outstanding voting stock from obtaining control of the Board until the
second annual stockholders meeting following the date the acquiror obtains the
controlling stock interest. The classified board provision could have the
effect of discouraging a potential acquiror from making a tender offer or
otherwise attempting to obtain control of Therma-Wave and could increase the
likelihood that incumbent directors will retain their positions.

The Restated Certificate provides that stockholder action can be taken only
at an annual or special meeting of stockholders and cannot be taken by written
consent in lieu of a meeting. The Restated Certificate and the By-laws provide
that, except as otherwise required by law, special meetings of the stockholders
can only be called pursuant to a resolution adopted by a majority of the Board
of Directors or by our Chief Executive Officer. Stockholders will not be
permitted to call a special meeting or to require the Board to call a special
meeting.

The By-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of our stockholders, including proposed
nominations of persons for election to the Board. Stockholders at an annual
meeting may only consider proposals or nominations specified in the notice of
meeting or brought before the meeting by or at the direction of the Board or by
a stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
Secretary timely written notice, in proper form, of such stockholder's
intention to bring that business before the meeting. Although the By-laws do
not give the Board the power to approve or disapprove stockholder nominations
of candidates or proposals regarding other business to be conducted at a
special or annual meeting,

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<PAGE>

the By-laws may have the effect of precluding the conduct of certain business
at a meeting if the proper procedures are not followed or may discourage or
defer a potential acquiror from conducting a solicitation of proxies to elect
its own slate of directors or otherwise attempting to obtain control of Therma-
Wave.

The Restated Certificate and By-laws provide that the affirmative vote of
holders of at least 66 2/3% of the total votes eligible to be cast in the
election of directors is required to amend, alter, change or repeal certain of
their provisions. This requirement of a super-majority vote to approve
amendments to the Restated Certificate and By-laws could enable a minority of
our stockholders to exercise veto power over any such amendments.

Certain Provisions of Delaware Law

Following the consummation of this offering, we will be subject to the
"Business Combination" provisions of the Delaware General Corporation Law. In
general, such provisions prohibit a publicly held Delaware corporation from
engaging in various "business combination" transactions with any "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an "interested stockholder," unless:

. the transaction is approved by the Board of Directors prior to the date
the "interested stockholder" obtained such status;

. upon consummation of the transaction which resulted in the stockholder
becoming an "interested stockholder," the "interested stockholder,"
owned at least 85% of the voting stock of the corporation outstanding at
the time the transaction commenced, excluding for purposes of
determining the number of shares outstanding those shares owned by (a)
persons who are directors and also officers and (b) employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or

. on or subsequent to such date the "business combination" is approved by
the Board of Directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the "interested
stockholder."

A "business combination" is defined to include mergers, asset sales and
other transactions resulting in financial benefit to a stockholder. In general,
an "interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of a
corporation's voting stock. The statute could prohibit or delay mergers or
other takeover or change in control attempts with respect to Therma-Wave and,
accordingly, may discourage attempts to acquire Therma-Wave.

Limitations on Liability and Indemnification of Officers and Directors

The Restated Certificate limits the liability of Directors to the fullest
extent permitted by the Delaware General Corporation Law. In addition, the
Restated Certificate provides that we will indemnify our Directors and officers
to the fullest extent permitted by such law. We expect to enter into
indemnification agreements with our current Directors and executive officers
prior to the completion of the offering and expect to enter into a similar
agreement with any new Directors or executive officers.

Transfer Agent and Registrar

The Transfer Agent and Registrar for our common stock is Boston EquiServe
Trust Company.

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<PAGE>

SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there was no market for our common stock. We can
make no predictions as to the effect, if any, that sales of shares or the
availability of shares for sale will have on the market price prevailing from
time to time. Nevertheless, sales of significant amounts of our common stock in
the public market, or the perception that such sales may occur, could adversely
affect prevailing market prices.

Sale of Restricted Shares

Upon completion of this offering, we will have shares of common stock
outstanding. In addition, shares of common stock are issuable upon the
exercise of outstanding stock options. Of the shares outstanding after the
offering, shares of common stock ( shares if the underwriters' over-
allotment is exercised in full) are freely tradeable without restriction under
the Securities Act, except for any such shares which may be held or acquired by
an "affiliate" of Therma-Wave (an "Affiliate"), as that term is defined in Rule
144 promulgated under the Securities Act ("Rule 144"), which shares will be
subject to the volume limitations and other restrictions of Rule 144 described
below. An aggregate of shares of common stock held by our existing
stockholders upon completion of the offering will be "restricted securities"
(as that phrase is defined in Rule 144) and may not be resold in the absence of
registration under the Securities Act or pursuant to an exemption from such
registration, including among others, the exemptions provided by Rule 144 under
the Securities Act.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" were acquired from us or the
date they were acquired from an Affiliate, then the holder of such restricted
securities (including an Affiliate) is entitled to sell in the public market a
number of shares within any three-month period that does not exceed the greater
of 1% of the then outstanding shares of the common stock (approximately
shares immediately after the Offering) or the average weekly reported volume of
trading of the common stock on the Nasdaq National Market during the four
calendar weeks preceding such sale. The holder may only sell such shares
through "brokers' transactions" or in transactions directly with a "market
maker" (as such terms are defined in Rule 144). Sales under Rule 144 are also
subject to certain requirements regarding providing notice of such sales and
the availability of current public information concerning us. Affiliates may
sell shares not constituting restricted securities in accordance with the
foregoing volume limitations and other requirements but without regard to the
one-year holding period.

Under Rule 144(k), if a period of at least two years has elapsed between the
later of the date restricted securities were acquired from us or the date they
were acquired from an Affiliate, as applicable, a holder of such restricted
securities who is not an Affiliate at the time of the sale and has not been an
Affiliate for at least three months prior to the sale would be entitled to sell
the shares in the public market without regard to the volume limitations and
other restrictions described above. Beginning 90 days after the date of this
prospectus, approximately shares of common stock will be eligible for sale
in the public market pursuant to Rule 144(k).

Securities issued in reliance on Rule 701, such as shares of common stock
acquired upon exercise of certain options granted under Therma-Wave stock
plans, are also restricted and, beginning 90 days after the effective date of
this prospectus, may be sold by stockholders other than affiliates of Therma-
Wave subject only to the manner of sale provisions of Rule 144 and by
affiliates under Rule 144 without compliance with its one-year holding period
requirement.

Options

We intend to file registration statements on Form S-8 under the Securities
Act to register approximately shares of common stock issuable under our
stock plans. These registration statements are expected to be filed within six
months of the effective date of the registration statement of which this
prospectus is a part

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and will be effective upon filing. Shares issued upon the exercise of stock
options after the effective date of the Form S-8 registration statements will
be eligible for resale in the public market without restriction, subject to
Rule 144 limitations applicable to Affiliates and the lock-up agreements
described below.

Lock-Up Agreements

Notwithstanding the foregoing, Therma-Wave, our executive officers,
Directors and substantially all of our existing stockholders and certain of our
optionholders have agreed not to offer, sell, contract to sell or otherwise
dispose of any common stock for a period of 180 days after the date of this
prospectus without the prior written consent of NationsBanc Montgomery
Securities LLC, except, in the case of Therma-Wave, for the shares of common
stock to be issued in connection with the offering or pursuant to employee
benefit plans existing on the date of this prospectus or upon the conversion of
the Preferred Stock, sales or dispositions to Therma-Wave, certain permitted
transfers to related parties that agree to be bound by the foregoing
restrictions and certain permitted sales of shares acquired in the open market
following the completion of the offering.

Registration Agreement

Pursuant to the recapitalization, Therma-Wave, the Bain Group, Sutter Hill,
the Existing Stockholders and the Management Investors entered into a
registration agreement (the "Registration Agreement"). Under the Registration
Agreement, the holders of a majority of the registerable securities owned by
the Bain Group have the right at any time, subject to certain conditions, to
require us to register any or all of their shares of common stock under the
Securities Act on Form S-1 (a "Long-Form Registration") on three occasions at
our expense or on Form S-2 or Form S-3 (a "Short-Form Registration") on six
occasions at our expense. In addition, at any time after a Public Offering, the
holders of a majority of the registrable securities owned by the Existing
Stockholders have the right, subject to certain conditions, to require either a
Long-Form Registration or a Short-Form Registration on one occasion at our
expense. Further, at any time after the later of the fifth anniversary of the
closing of the recapitalization and 180 days after a Public Offering, the
Management Investors have the right, subject to certain conditions, to require
either a Long-Form Registration or a Short-Form Registration, at our expense,
with respect to a number of shares of common stock the proceeds of which
(subject to certain limitations) would be sufficient to pay taxes incurred by
them upon receipt of the deferred bonuses under their employment contracts. See
"Management--Employment Agreements." We are not required, however, to effect
any such Long-Form Registration or Short-Form Registration within six months
after the effective date of a prior demand registration and may postpone the
filing of such registration for up to six months if we believe that such a
registration would reasonably be expected to have an adverse effect on any
proposal or plan by us or any of our subsidiaries to engage in an acquisition,
merger or similar transaction.

In addition, all holders of registerable securities are entitled to request
the inclusion of any shares of common stock subject to the Registration
Agreement in any registration statement at our expense whenever we propose to
register any of our securities under the Securities Act (other than: (a) in
connection with a Public Offering, unless any holders of registrable securities
are permitted to participate in the Public Offering; (b) pursuant to a demand
registration; or (c) pursuant to a registration on Form S-4 or S-8). In
connection with all such registrations, we have agreed to indemnify all holders
of registerable securities against certain liabilities, including liabilities
under the Securities Act. In addition, all the parties to the Registration
Agreement have agreed not to make any public sales of their registerable
securities for a period beginning seven days prior to the effective date of any
registration statement and continuing for a period of 180 days thereafter
(other than registerable securities included in such registration statement).
Beginning 180 days after the completion of the offering, the holders of an
aggregate of shares of common stock will have certain rights to require us to
register their shares of common stock under the Securities Act at our expense.

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<PAGE>

UNDERWRITING

Therma-Wave is offering the shares of common stock described in this
prospectus through a number of underwriters. NationsBanc Montgomery Securities
LLC and Lehman Brothers Inc. are the representatives of the underwriters.
Therma-Wave has entered into an underwriting agreement with the
representatives. Subject to the terms and conditions of the underwriting
agreement, Therma-Wave has agreed to sell to the underwriters, and each
underwriter has severally agreed to purchase, the number of shares of common
stock listed next to its name in the following table.

<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ---------
<S> <C>
NationsBanc Montgomery Securities LLC............................
Lehman Brothers Inc. ............................................
---
Total..........................................................
===
</TABLE>

Shares sold by the underwriters to the public will initially be offered on
the terms set forth on the cover page of this prospectus. The underwriters may
allow to selected dealers a concession of not more than $ per share, and the
underwriters may also allow, and any other dealers may reallow, a concession of
not more than $ per share to certain other dealers. If all the shares are
not sold at the initial public offering price, the underwriters may change the
offering price and the other selling terms. The common stock is offered subject
to receipt and acceptance by the underwriters and certain other conditions,
including the right to reject orders in whole or in part.

If the underwriters sell more shares than the total number set forth in the
table above, they have an option to buy up to a maximum of additional
shares from Therma-Wave to cover such sales. The underwriters have 30 days to
exercise this option. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.

Therma-Wave, our executive officers, Directors and substantially all of our
existing stockholders as well as certain holders of options to purchase common
stock have agreed with the underwriters not to dispose of or hedge any of their
common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus without the prior
written consent of NationsBanc Montgomery Securities LLC. At any time and
without notice, NationsBanc Montgomery Securities LLC may, in its sole
discretion, release all or any portion of the securities from these lock-up
agreements.

The underwriting agreement provides that Therma-Wave will indemnify the
underwriters against certain liabilities, including civil liabilities under the
Securities Act, or will contribute to payments the underwriters may be required
to make in respect thereof.

At our request, the underwriters have reserved up to shares of common
stock offered by this prospectus for sale at the initial public offering price
to certain eligible employees and persons having business relationships with
us. The number of shares of common stock available to the general public will
be reduced to the extent that these persons purchase the reserved shares. Any
reserved shares of common stock that are not so purchased by such employees at
the closing of the initial public offering, will be offered by the underwriters
to the general public on the same terms as the other shares in the initial
public offering.

In connection with this offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include:

. short sales

. stabilizing transactions

. purchases to cover positions created by short sales

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Short sales involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
this offering is in progress.

The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares
sold by or for the account of such underwriter in stabilizing or short covering
transactions.

The underwriters may engage in activities that stabilize, maintain or
otherwise affect the price of the common stock, including:

. over-allotment

. stabilization

. syndicate covering transactions

. imposition of penalty bids

As a result of these activities, the price of the common stock may be higher
than the price that otherwise might exist in the open market. If the
underwriters commence these activities, they may discontinue them at any time.
The underwriters may carry out these transactions on the Nasdaq National
Market, in the over-the-counter market or otherwise.

The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.

Prior to this offering, there has been no public market for the common stock
of Therma-Wave. The initial public offering price will be negotiated among
Therma-Wave and the underwriters. Among the factors to be considered in such
negotiations are:

. the history of, and prospects for, Therma-Wave and the industry in which
it competes

. the past and present financial performance of Therma-Wave

. an assessment of Therma-Wave's management

. the present state of Therma-Wave's development

. the prospects for future earnings of Therma-Wave

. the prevailing market conditions of the applicable U.S. securities
market at the time of this offering

. market valuations of publicly traded companies that Therma-Wave and the
representatives believe to be comparable to Therma-Wave

. other factors deemed relevant

75
<PAGE>

EXPERTS

The consolidated financial statements of Therma-Wave, Inc. as of December
31, 1998 and for the nine months ended December 31, 1998 appearing in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
such firm as experts in auditing and accounting.

Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at March 31, 1997 and 1998, and for each of the three
fiscal years in the period ended March 31, 1998, as set forth in their report.
We have included our financial statements in the prospectus and elsewhere in
the registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for
Therma-Wave by Kirkland & Ellis, Chicago, Illinois. Certain partners of
Kirkland & Ellis are partners in Randolph Street Partners, which owns 84,906
shares of Class A Common and 9,434 shares of Class L Common. Certain legal
matters in connection with this offering will be passed upon for the
underwriters by Ropes & Gray, Boston, Massachusetts. Kirkland & Ellis and Ropes
& Gray have, from time to time, represented, and may continue to represent,
certain of the underwriters in connection with various legal matters and the
Bain Capital Funds and certain of their affiliates (including Therma-Wave) in
connection with certain legal matters.

CHANGE IN INDEPENDENT ACCOUNTANTS

Effective July 16, 1998, we dismissed Ernst & Young LLP as our independent
accountants. Concurrent with such dismissal, we engaged PricewaterhouseCoopers
LLP as our independent accountants. The decision to dismiss Ernst & Young LLP
as our independent accountants was approved by Therma-Wave's Board of
Directors.

The reports of Ernst & Young LLP on our consolidated financial statements
for each of the two fiscal years in the period ended March 31, 1998 did not
contain an adverse opinion or a disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles.

In connection with the audits of our consolidated financial statements for
each of the two fiscal years in the period ended March 31, 1998, and through
July 16, 1998, there were no disagreements between us and Ernst & Young LLP on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope and procedures which, if not resolved to the
satisfaction of Ernst & Young LLP, would have caused them to make reference to
the matter in their reports.

ADDITIONAL INFORMATION

We are currently subject to the informational requirements of the Exchange
Act, and in accordance therewith we are required to file periodic reports and
other information with the SEC. The reports and other information filed by us
with the SEC may be inspected and copied at the public reference facilities
maintained by the SEC as described below.

We have filed with the SEC a registration statement on Form S-1 (the
"Registration Statement," which term shall encompass all amendments, exhibits,
annexes and schedules thereto) pursuant to the Securities Act, and the rules
and regulations promulgated thereunder, with respect to the shares of common
stock offered hereby. This prospectus, which constitutes part of the
Registration Statement, does not contain all the

76
<PAGE>

information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to us and the common stock offered hereby, reference
is made to the Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed as an exhibit to the Registration Statement, reference is made
to the exhibit for a more complete description of the document or matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.

The Registration Statement, including the exhibits thereto, can be inspected
and copied at the public reference facilities maintained by the SEC at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549 (telephone number: 1-800-
SEC-0330), at the Regional Offices of the SEC at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the SEC at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The SEC maintains a website
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the SEC. The address of
such site is http://www.sec.gov.

We intend to furnish our stockholders with annual reports containing
financial statements audited by an independent accounting firm, and to make
available quarterly reports containing unaudited financial information for the
first three quarters of each fiscal year.

77
<PAGE>

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<S> <C>
Therma-Wave, Inc. Audited Consolidated Financial Statements

Report of Independent Accountants........................................ F-2

Report of Ernst & Young LLP, Independent Auditors........................ F-3

Consolidated Balance Sheets as of March 31, 1997 and 1998 and December
31, 1998................................................................ F-4

Consolidated Statements of Operations for the years ended March 31, 1996,
1997 and 1998 and the nine months ended December 31, 1997 (unaudited)
and 1998................................................................ F-5

Consolidated Statements of Mandatorily Redeemable Convertible Preferred
Stock and Stockholders' Equity (Net Capital Deficiency) for the years
ended March 31, 1996, 1997 and 1998 and the nine months ended December
31, 1998................................................................ F-6

Consolidated Statements of Cash Flows for the years ended March 31, 1996,
1997 and 1998 and the nine months ended December 31, 1997 (unaudited)
and 1998................................................................ F-7

Notes to Consolidated Financial Statements............................... F-8
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

To The Board of Directors and Stockholders of
Therma-Wave, Inc.

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of mandatorily redeemable convertible
preferred stock and stockholders' equity (net capital deficiency) and of cash
flows present fairly, in all material respects, the financial position of
Therma-Wave, Inc. and its subsidiaries at December 31, 1998, and the results of
their operations and their cash flows for the nine months ended December 31,
1998 in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.

PricewaterhouseCoopers LLP
San Jose, California
April 5, 1999

F-2
<PAGE>

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

The Board of Directors and Stockholders
Therma-Wave, Inc.

We have audited the accompanying consolidated balance sheets of Therma-Wave,
Inc. as of March 31, 1997 and 1998, and the related consolidated statements of
operations, mandatorily redeemable convertible preferred stock and
stockholders' equity (net capital deficiency), and cash flows for each of the
three years in the period ended March 31, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Therma-Wave, Inc. at March 31, 1997 and 1998 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended March 31, 1998, in conformity with generally accepted accounting
principles.

Ernst & Young LLP

San Jose, California
May 1, 1998

F-3
<PAGE>

THERMA-WAVE, INC.

CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Pro forma
Stockholders'
Equity
(net capital
March 31, deficiency)
------------------ December 31, at December
1997 1998 1998 31, 1998
-------- -------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 16,741 $ 20,422 $ 12,648
Accounts receivable, net of
allowance for doubtful
accounts of $1,622, $3,016 and
$2,077 at March 31, 1997 and
1998 and December 31, 1998,
respectively.................. 20,107 22,098 15,453
Inventory...................... 17,427 21,292 18,453
Deferred income taxes.......... 5,556 7,693 7,666
Other current assets........... 1,808 245 388
-------- -------- ---------
Total current assets......... 61,639 71,750 54,608
Property and equipment, net.... 5,843 6,241 4,636
Deferred financing costs, net.. -- 9,956 8,752
Other assets................... 1,138 1,815 1,934
-------- -------- ---------
Total assets................. $ 68,620 $ 89,762 $ 69,930
======== ======== =========
LIABILITIES, MANDATORILY
REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (NET
CAPITAL DEFICIENCY)
Current liabilities:
Short term debt................ $ 3,834 $ -- $ --
Accounts payable............... 4,076 4,019 2,986
Accrued liabilities............ 13,846 22,198 15,345
Deferred revenue .............. 1,075 2,111 3,401
Capital lease obligations,
current portion............... 88 74 74
-------- -------- ---------
Total current liabilities..... 22,919 28,402 21,806
Long term debt.................. 23,100 115,000 115,000
Capital lease obligations, long-
term portion................... 429 315 230
Deferred income taxes........... 1,685 1,716 1,716
Deferred rent and other......... 342 804 317

Commitments and contingencies
(Note 4)
Mandatorily redeemable
convertible preferred stock,
$.01 par value; 1,000,000
shares authorized; none issued
and outstanding in 1997;
748,739 shares issued and
outstanding at March 31 and
December 31, 1998 (aggregate
liquidation preference of
$15,139)....................... -- 14,515 15,139

Stockholders' equity (net
capital deficiency)
Common stock, $.001 par value;
50,000,000 shares authorized;
45,515,339 shares issued and
outstanding in 1997; none at
March 31 or December 31, 1998;
$.01 par value,
25,000,000 shares authorized,
no shares issued or
outstanding at December 31,
1998 on a pro forma
basis (unaudited)............. 45 -- --
Class A Common Stock, $.01 par
value; 20,000,000 shares
authorized; none issued and
outstanding in 1997;
9,073,532 shares issued and
outstanding at March 31 and
December 31, 1998, and
shares issued and outstanding
at December 31, 1998 on a pro
forma basis (unaudited)....... -- 91 91
Class B Common Stock, $.01 par
value; 4,000,000 shares
authorized; none issued and
outstanding in 1997;
1,289,785 and 1,118,092 shares
issued and outstanding at
March 31 and December 31,
1998, respectively; no shares
authorized, issued or
outstanding at December 31,
1998 on a pro forma basis
(unaudited)................... -- 13 11
Class L Common Stock, $.01 par
value; 2,000,000 shares
authorized; none issued and
outstanding in 1997;
1,008,170 shares issued and
outstanding at March 31 and
December 31, 1998; no shares
authorized, issued or
outstanding at December 31,
1998 on a pro forma basis
(unaudited)................... -- 10 10
Additional paid-in capital..... 60,465 21,363 21,324
Accumulated deficit............ (38,927) (90,424) (104,429) $(104,429)
Notes receivable from
stockholders.................. -- (288) (241) (241)
Accumulated other comprehensive
loss.......................... (1,438) (1,755) (1,044) (1,044)
-------- -------- --------- ---------
Total stockholders' equity
(net capital deficiency)..... 20,145 (70,990) (84,278) $ (84,278)
-------- -------- --------- =========
Total liabilities and
stockholders' equity (net
capital deficiency).......... $ 68,620 $ 89,762 $ 69,930
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)

<TABLE>
<CAPTION>
Fiscal Year Ended March Nine Months Ended
31, December 31,
--------------------------- --------------------
1996 1997 1998 1997 1998
------- -------- -------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenues................ $79,293 $109,493 $115,459 $86,155 $ 47,603
Cost of revenues............ 35,027 49,795 55,683 40,974 26,819
------- -------- -------- ------- --------
Gross margin................ 44,266 59,698 59,776 45,181 20,784
Operating expenses:
Research and development.. 10,072 13,050 19,057 14,677 11,617
Selling, general and
administrative........... 18,704 22,004 24,589 18,294 13,634
Amortization of goodwill
and purchased
intangibles.............. 1,912 1,275 -- -- --
Recapitalization and other
non-recurring expenses... -- -- 4,188 4,188 --
Expenses relating to
operating cost
improvements............. -- -- -- -- 1,057
------- -------- -------- ------- --------
Total operating expenses.... 30,688 36,329 47,834 37,159 26,308
------- -------- -------- ------- --------
Operating income (loss)..... 13,578 23,369 11,942 8,022 (5,524)
Other income (expense):
Interest expense.......... 1,722 1,621 12,930 9,362 10,491
Interest income........... (247) (346) (753) (548) (518)
Other (income) expense.... 138 (14) 194 101 (115)
------- -------- -------- ------- --------
(1,613) (1,261) (12,371) (8,915) (9,858)
------- -------- -------- ------- --------
Income (loss) before
provision for income
taxes...................... 11,965 22,108 (429) (893) (15,382)
Provision (benefit) for
income taxes............... 4,684 9,007 604 (347) (2,001)
------- -------- -------- ------- --------
Net income (loss)........... $ 7,281 $ 13,101 (1,033) (546) (13,381)
======= ========
Preferred stock dividends... 738 532 624
-------- ------- --------
Net loss attributable to
common stockholders........ $ (1,771) $(1,078) $(14,005)
======== ======= ========
Net income (loss) per share:
Basic..................... $ 0.16 $ 0.29 $ (0.27) $ (0.17) $ (1.56)
Diluted................... $ 0.16 $ 0.29 $ (0.27) $ (0.17) $ (1.56)
Weighted average number of
shares outstanding:
Basic..................... 45,515 45,515 13,540 15,001 9,316
Diluted................... 45,515 45,515 13,540 15,001 9,316
Pro forma basic and diluted
net loss per share
(unaudited)................ $ $
Weighted average number of
shares outstanding in pro
forma basic and diluted net
loss per share calculation
(unaudited)................
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY)
(in thousands, except share data)

<TABLE>
<CAPTION>
Class A Class B Class L
Preferred Stock Common Stock Common Stock Common Stock Common Stock Additional
---------------- ------------------- ---------------- ----------------- ---------------- Paid-In
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital
------- ------- ----------- ------ --------- ------ --------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at March
31, 1995......... -- $ -- 45,515,339 $ 45 -- $-- -- $-- -- $-- $60,201
Net income....... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustment....... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income..........
Tax benefit from
exercise of
employee
options.......... -- -- -- -- -- -- -- -- -- -- 264
------- ------- ----------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March
31, 1996......... -- -- 45,515,339 45 -- -- -- -- -- -- 60,465
Net income....... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustment....... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
income..........
Repayment of
notes receivable
from
shareholders..... -- -- -- -- -- -- -- -- -- -- --
------- ------- ----------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March
31, 1997......... -- -- 45,515,339 45 -- -- -- -- -- -- 60,465
Net loss......... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Recapitalization
Transactions:.... -- -- 8,614,997 9 -- -- -- -- -- -- 17,102
Conversion of
outstanding
Common Stock into
shares of Class A
and Class L
Common Stock..... -- -- (8,614,997) (9) 7,264,236 73 -- -- 807,138 8 (72)
Conversion of
outstanding
common stock into
shares of
Preferred Stock,
Class A and Class
L Common Stock... 750,000 13,800 (6,101,252) (6) 509,433 5 -- -- 56,604 1 (8,100)
Redemption of
Common Stock..... -- -- (39,414,087) (39) -- -- -- -- -- -- (52,835)
Issuances of
Class A, B and L
Common Stock..... -- -- -- -- 1,290,010 13 1,334,875 13 143,333 1 3,328
Conversion of
Preferred Stock
into Class A
Common Stock..... (1,261) (23) -- -- 9,853 -- -- -- 1,095 -- 23
Recapitalization
related expenses
paid by Toray and
Shimadzu......... -- -- -- -- -- -- -- -- -- -- 2,888
Forgiveness of
receivable from
Toray and
Shimadzu......... -- -- -- -- -- -- -- -- -- -- (1,425)
Preferred stock
dividends........ -- 738 -- -- -- -- -- -- -- -- --
Repurchased
shares........... -- -- -- -- -- -- (45,090) -- -- -- (11)
------- ------- ----------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at March
31, 1998......... 748,739 14,515 -- -- 9,073,532 91 1,289,785 13 1,008,170 10 21,363
Net loss......... -- -- -- -- -- -- -- -- -- -- --
Currency
translation
adjustments...... -- -- -- -- -- -- -- -- -- -- --
Comprehensive
loss............
Preferred stock
dividends........ -- 624 -- -- -- -- -- -- -- -- --
Repurchased
shares........... -- -- -- -- -- -- (171,693) (2) -- -- (39)
------- ------- ----------- ---- --------- ---- --------- ---- --------- ---- -------
Balance at
December 31,
1998............. 748,739 $15,139 -- $-- 9,073,532 $ 91 1,118,092 $ 11 1,008,170 $ 10 $21,324
======= ======= =========== ==== ========= ==== ========= ==== ========= ==== =======
<CAPTION>
Accumu-
lated
Other
Notes Compre- Compre-
Receivable hensive hensive
Accumulated from Income Income
Deficit Stockholders (Loss) Total (Loss)
----------- ------------ -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at March
31, 1995......... $ (59,309) $(524) $ (792) $ (379)
Net income....... 7,281 -- -- 7,281 $ 7,281
Currency
translation
adjustment....... -- -- (263) (263) (263)
---------
Comprehensive
income.......... 7,018
=========
Tax benefit from
exercise of
employee
options.......... -- -- -- 264
----------- ------------ -------- ---------
Balance at March
31, 1996......... (52,028) (524) (1,055) 6,903
Net income....... 13,101 -- -- 13,101 13,101
Currency
translation
adjustment....... -- -- (383) (383) (383)
---------
Comprehensive
income.......... 12,718
=========
Repayment of
notes receivable
from
shareholders..... -- 524 -- 524
----------- ------------ -------- ---------
Balance at March
31, 1997......... (38,927) -- (1,438) 20,145
Net loss......... (1,033) -- -- (1,033) (1,033)
Currency
translation
adjustments...... -- -- (317) (317) (317)
---------
Comprehensive
loss............ (1,350)
=========
Recapitalization
Transactions:.... -- -- -- 17,111
Conversion of
outstanding
Common Stock into
shares of Class A
and Class L
Common Stock..... -- -- -- --
Conversion of
outstanding
common stock into
shares of
Preferred Stock,
Class A and Class
L Common Stock... (5,700) -- -- (13,800)
Redemption of
Common Stock..... (44,026) -- -- (96,900)
Issuances of
Class A, B and L
Common Stock..... -- (299) -- 3,056
Conversion of
Preferred Stock
into Class A
Common Stock..... -- -- -- 23
Recapitalization
related expenses
paid by Toray and
Shimadzu......... -- -- -- 2,888
Forgiveness of
receivable from
Toray and
Shimadzu......... -- -- -- (1,425)
Preferred stock
dividends........ (738) -- -- (738)
Repurchased
shares........... -- 11 -- --
----------- ------------ -------- ---------
Balance at March
31, 1998......... (90,424) (288) (1,755) (70,990)
Net loss......... (13,381) -- -- (13,381) (13,381)
Currency
translation
adjustments...... -- -- 711 711 711
---------
Comprehensive
loss............ $(12,670)
=========
Preferred stock
dividends........ (624) -- -- (624)
Repurchased
shares........... -- 47 -- 6
----------- ------------ -------- ---------
Balance at
December 31,
1998............. $(104,429) $(241) $(1,044) $(84,278)
=========== ============ ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

THERMA-WAVE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

<TABLE>
<CAPTION>
Nine Months Ended
Year Ended March 31, December 31,
-------------------------- --------------------
1996 1997 1998 1997 1998
------- ------- -------- ----------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss).......... $ 7,281 $13,101 $ (1,033) $ (546) $(13,381)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation.............. 967 1,382 2,102 1,483 1,927
Amortization.............. 2,640 2,362 1,493 1,098 1,495
Amortization of deferred
financing costs.......... -- -- 1,385 989 1,204
Deferred income taxes..... (453) (2,214) (2,106) -- --
Noncash recapitalization
and related expenses..... -- -- 3,888 3,888 --
Loss on disposal of
property, plant and
equipment................ -- -- 400 400 100
Changes in assets and
liabilities:
Accounts receivable...... (1,381) (1,277) (1,991) (2,542) 6,645
Inventories.............. (5,061) (5,006) (4,956) (3,928) 1,629
Other current assets..... (142) (44) 78 (1,642) (90)
Accounts payable......... (545) 732 (57) 579 (1,033)
Accrued and other
liabilities............. 2,654 2,572 8,497 3,155 (5,563)
Other long-term
liabilities............. (93) 252 413 408 (588)
------- ------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. 5,867 11,860 8,113 3,342 (7,655)
------- ------- -------- -------- --------
Investing activities:
Purchases of property and
equipment................ (4,361) (1,091) (2,900) (2,634) (323)
Other..................... (604) (484) -- (1,059) (428)
------- ------- -------- -------- --------
Net cash used in
investing activities... (4,965) (1,575) (2,900) (3,693) (751)
------- ------- -------- -------- --------
Financing activities:
Issuance of Senior Notes.. -- -- 115,000 115,000 --
Proceeds from notes
payable.................. -- 250 -- -- --
Repayment of notes
payable.................. (1,231) (1,435) (26,934) (26,934) --
Principal payments under
capital lease
obligations.............. (311) (190) (128) (100) (86)
Redemption of common
stock.................... -- -- (96,900) (96,900) --
Proceeds from issuance of
common stock............. -- -- 20,169 20,169 --
Deferred financing costs.. -- -- (11,341) (11,212) --
Other..................... 1 141 (1,398) (586) 718
------- ------- -------- -------- --------
Net cash used in
financing activities... (1,541) (1,234) (1,532) (563) 632
------- ------- -------- -------- --------
Net (decrease)/increase in
cash and cash equivalents.. (639) 9,051 3,681 (914) (7,774)
Cash and cash equivalents at
beginning of period........ 8,329 7,690 16,741 16,741 20,422
------- ------- -------- -------- --------
Cash and cash equivalents at
end of period.............. $ 7,690 $16,741 $ 20,422 $ 15,827 $ 12,648
======= ======= ======== ======== ========
Supplementary disclosures:
Cash paid for interest.... $ 2,228 $ 2,059 $ 6,323 $ 6,495 $ 12,407
======= ======= ======== ======== ========
Cash paid for income
taxes.................... $ 5,039 $10,661 $ 2,764 $ 2,825 $ 293
======= ======= ======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Information as of December 31, 1997 and relating to the nine months
ended December 31, 1997 is unaudited)

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Therma-Wave, Inc. was incorporated in California on March 11, 1986 and
reincorporated in Delaware on October 16, 1990 and subsequently amended on May
16, 1997. Therma-Wave, Inc. (the "Company") develops, manufactures, and markets
process control metrology systems for use in the manufacture of semiconductors.
These systems are based on the Company's proprietary thermal wave and optical
technologies. The Company markets and sells its products worldwide to major
semiconductor manufacturers.

Basis of Presentation

The Company's fiscal year is a 52 to 53-week year ending on the Sunday on or
nearest preceding March 31 for periods prior to 1997 and the Sunday on or
following March 31 of each year for periods thereafter. The nine month periods
of fiscal 1998 and 1999 ended on January 4, 1998 and January 3, 1999,
respectively. Fiscal years 1996, 1997 and 1998 ended on March 31, 1996, April
6, 1997 and April 5, 1998, respectively. For convenience, the accompanying
financial statements have been presented as ending on the last day of the
nearest calendar month.

The financial information for the nine months ended December 31, 1997 is
unaudited but includes all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of
the Company's operating results and cash flows for such period. Results for the
nine months ended December 31, 1998 are not necessarily indicative of results
to be expected for the year ended March 31, 1999 or for any future period.

Certain items previously reported in specific financial statement captions
have been reclassified to conform with the December 31, 1998 presentation.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of
Therma-Wave, Inc. and its wholly owned subsidiaries. All significant
intercompany transactions and balances are eliminated in consolidation.

Recapitalization

In December 1996, the Board of Directors approved the Recapitalization
Agreement (the "Recapitalization Agreement"). Pursuant to the Recapitalization
Agreement, which closed on May 16, 1997, the Company: (i) redeemed from Toray
Industries, Inc., ("Toray") and Shimadzu Corporation ("Shimadzu") approximately
86.6% of its outstanding capital stock for $96.9 million; (ii) converted its
remaining outstanding capital stock of 6.1 million shares to newly issued
shares of preferred stock and common stock; (iii) repaid substantially all of
its outstanding borrowings of approximately $26.9 million; (iv) canceled its
receivable from Toray and Shimadzu of $1.4 million which was recorded as a
reduction of additional paid-in capital; and (v) paid the estimated fees and
expenses of approximately $11.3 million related to the Recapitalization. In
order to finance the transactions effected by the Recapitalization Agreement,
the Company: (i) issued $115.0 million in aggregate principal amount of senior
notes in a private debt offering; (ii) received an equity contribution of
approximately $20.0 million in cash from an investor group, including
investment funds associated with

F-8
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

Bain Capital, Inc. ("Bain"), and members of the Company's senior management
team; and (iii) converted equity securities of Toray and Shimadzu having a
value of $15.0 million into newly issued shares of preferred stock and common
stock.

Revenue Recognition

Revenue from system sales and spare parts is generally recognized at the
time of shipment. Revenue on service contracts is deferred and recognized on a
straight-line basis over the period of the contract. Estimated contractual
warranty obligations are recorded when related sales are recognized.

Concentration of Credit Risk/Major Customers

The Company sells its products to major semiconductor manufacturing
companies throughout the world. The Company performs continuing credit
evaluations of its customers and, generally, does not require collateral.
Letters of credit may be required from its customers in certain circumstances.

Sales to customers representing 10% or more of net revenues were as follows:

<TABLE>
<CAPTION>
Year Ended Nine Months
March 31, Ended
---------------- December 31,
Customer 1996 1997 1998 1998
-------- ---- ---- ---- ------------
<S> <C> <C> <C> <C>
A................................................ 17% 13% 23% 23%
B................................................ 15% 10% -- --
C................................................ -- -- -- 13%
</TABLE>

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

Accounts receivable from three customers accounted for approximately 18%,
17% and 13% of total accounts receivable at December 31, 1998. Accounts
receivable from three customers accounted for approximately 31%, 10% and 9% of
total accounts receivable at March 31, 1998. Accounts receivable from three
customers accounted for approximately 28%, 13% and 10% of total accounts
receivable at March 31, 1997. Accounts receivable from three customers
accounted for approximately 16%, 15% and 13% of total accounts receivable at
March 31, 1996.

Risks and Uncertainties

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

Foreign Currency Translations and Transactions

The Company has determined that the functional currency of its foreign
operations is the local foreign currency. The accumulated effects of foreign
translation rate changes related to net assets located outside the United
States are included as a component of stockholders' equity (net capital
deficiency). Foreign currency

F-9
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

transaction gains (losses) are included in other income and expense in the
accompanying consolidated statements of operations and amounted to $(217,000),
$74,000, $(275,000), $(21,000) for the years ended March 31, 1996, 1997 and
1998 and nine month period ended December 31, 1998, respectively.

Cash and Cash Equivalents

The Company maintains its cash and cash equivalents in depository accounts,
money market accounts and certificates of deposit with several financial
institutions. The Company considers all highly liquid investments purchased
with original maturities of three months or less to be cash equivalents.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined by
the first-in, first-out method.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation
and amortization. Depreciation and amortization are provided on the straight-
line basis over the estimated useful lives of the respective assets, generally
three to five years. Leasehold improvements and assets recorded under capital
leases are amortized on the straight-line basis over the shorter of the assets'
useful lives or lease terms. Depreciation and amortization expense for fiscal
years 1996, 1997 and 1998 are $967,000, $1,382,000 and $2,102,000,
respectively. Depreciation and amortization expense for the nine months ended
December 31, 1998 is $1,927,000.

Long-lived Assets

The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount. No such impairment losses have
been identified by the Company.

Deferred Financing Costs

Deferred financing costs represent the costs incurred in connection with the
issuance of the Senior Notes. These amounts are stated net of accumulated
amortization and amortized on the straight-line basis over the term of the
related notes.

Research and Development Expenses

Expenditures for research and development are expensed as incurred.

Stock-Based Compensation

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company accounts for employee stock options in
accordance with Accounting Principles Board Opinion No. 25 and has adopted the
"disclosure only" alternative described in SFAS 123.

Unaudited Pro Forma Stockholders' Equity (Net Capital Deficiency)

Prior to the closing of the Company's initial public offering, each
outstanding share of Class L common stock (the "Class L Stock") will be
reclassified into one share of Class A common stock (the "Class A Stock") plus
an additional number of shares of Class A Stock (determined by dividing the
preference amount for such

F-10
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

share by the assumed initial public offering price of $ per share) and each
share of Class B common stock (the "Class B Stock") will be reclassified into
one share of Class A Stock. In addition, the Company will file a Restated
Certificate of Incorporation which will authorize 25,000,000 shares of Common
Stock.

Net Income (Loss) Per Share and Unaudited Pro Forma Net Loss Per Share

The Company had adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 requires
the Company to report both basic net income (loss) per share, which is based on
the weighted-average number of common shares outstanding excluding contingently
issuable or returnable shares such as unvested Class B Stock or shares that
contingently convert into Common Stock upon certain events, and diluted net
income (loss) per share, which is based on the weighted average number of
common shares outstanding and dilutive potential common shares outstanding. Net
income (loss) excludes the 12% yield on Class L Stock and the income (loss)
attributable to the weighted average number of shares of Class L Stock
outstanding during the period. As a result of the losses incurred by the
Company during fiscal 1998 and for the nine months ended December 31, 1998, all
potential common shares were anti-dilutive and excluded from the diluted net
income (loss) per share calculation.

Unaudited pro forma basic and diluted net loss per share for the year ended
March 31, 1998 and the nine months ended December 31, 1998 have been calculated
based on net loss applicable to all classes of Common Stock and assuming the
reclassification of the Company's Class B and L Stock prior to the completion
of this offering, as if such reclassification had occurred at the beginning of
the period, or the issuance of the stock, if later. Each share of Class L Stock
will be reclassified into one share of Class A Stock plus an additional number
of shares of Class A Stock (determined by dividing the preference amount for
such share by the assumed initial public offering price of $ per share. Each
share of Class B Stock will then be reclassified into one share of Class A
Stock.

Advertising Costs

The Company expenses advertising and promotional costs, which are not
material, as they are incurred.

Recently Issued Accounting Standards

In June 1998, the FASB issued Statement on Financial Accounting Standards
No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes a new model for accounting for
derivatives and hedging activities and supercedes and amends a number of
existing accounting standards. SFAS No. 133 requires that all derivatives be
recognized in the balance sheet at their fair market value, and the
corresponding derivative gains or losses be either reported in the statement of
operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. The Company currently does not
hold any derivative instruments that will be affected by the adoption of SFAS
No. 133.

F-11
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
March 31,
---------------- December 31,
1997 1998 1998
------- ------- ------------
(in thousands)
<S> <C> <C> <C>
Inventory:
Purchased materials............................. $ 8,937 $ 9,958 $ 8,338
Systems in process.............................. 7,252 7,146 4,718
Finished systems................................ 1,238 4,188 5,397
------- ------- -------
$17,427 $21,292 $18,453
======= ======= =======
Property and equipment:
Laboratory and test equipment................... $ 3,721 $ 3,786 $ 3,817
Office furniture and equipment.................. 4,292 5,423 5,656
Machinery and equipment......................... 1,521 1,766 1,816
Leasehold improvements.......................... 2,237 3,145 3,154
------- ------- -------
11,771 14,120 14,443
Accumulated depreciation and amortization....... (5,928) (7,879) (9,807)
------- ------- -------
$ 5,843 $ 6,241 $ 4,636
======= ======= =======
Accrued liabilities:
Interest payable................................ $ 93 $ 5,074 $ 1,828
Accrued compensation and related expenses....... 2,922 4,051 2,716
Income taxes payable............................ 1,507 1,340 888
Accrued warranty costs.......................... 4,990 6,671 4,962
Other accrued liabilities....................... 4,334 5,062 4,951
------- ------- -------
$13,846 $22,198 $15,345
======= ======= =======
</TABLE>

3. NET INCOME (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
Nine Months
Ended December
Year Ended March 31, 31,
---------------------- -----------------
1996 1997 1998 1997 1998
------ ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Numerator (in thousands):
Net income (loss)................... $7,281 $13,101 $(1,033) $ (546) $(13,381)
Less: Preferred stock dividend...... -- -- (738) (532) (624)
Less: Loss attributable to Class L
Stock.............................. -- -- (1,947) (1,429) (543)
------ ------- ------- ------- --------
$7,281 $13,101 $(3,718) $(2,507) $(14,548)
====== ======= ======= ======= ========
Denominator (in thousands):
Common Stock........................ 45,515 45,515 5,563 7,418 --
Class A Stock....................... -- -- 7,939 7,561 9,074
Class B Stock (vested).............. -- -- 38 22 242
------ ------- ------- ------- --------
Weighted average shares outstanding
used for basic and diluted income
(loss) per share................... 45,515 45,515 13,540 15,001 9,316
====== ======= ======= ======= ========
</TABLE>

F-12
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

<TABLE>
<CAPTION>
March 31, December 31,
------------------- -------------------
1996 1997 1998 1997 1998
---- ---- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Class B Stock Subject to Repurchase
(unvested)........................... -- -- 1,251,725 1,274,226 876,092
Mandatorily Redeemable Convertible
Preferred Stock...................... -- -- 748,739 748,739 748,739
Stock Options......................... -- -- 1,765,458 1,752,167 1,742,691
</TABLE>

The stock options outstanding at March 31, 1998, December 31, 1997 and 1998
had a weighted average exercise price of $10.69, $10.75, and $9.69,
respectively. Upon the completion of an initial public offering, Class L Stock
is convertible into one share of Class A Stock plus an additional number of
shares of Class A Stock (determined by dividing the preference amount for such
share by the assumed initial public offering price).

4. FINANCING ARRANGEMENTS

Senior Notes

The $115.0 million of senior notes ("Notes") issued to finance the
Recapitalization are senior unsecured obligations of the Company and will
mature on May 15, 2004. Interest on the Notes will accrue at the rate of 10
5/8% per annum and is payable semiannually in cash on each May 15 and November
15 to registered holders at the close of business on May 1 and November 1,
respectively, immediately preceding the applicable interest payment date. The
Notes are not entitled to the benefit of any mandatory sinking fund and are
redeemable at the Company's option in whole at any time or in part from time to
time, on and after May 15, 2001, upon not less than 30 nor more than 60 days
notice, at specified redemption prices. At any time, or from time to time, on
or prior to May 15, 2000, the Company may, at its option, use the net cash
proceeds of one or more equity offerings to redeem up to 35% of the aggregate
principal amount of Notes originally issued at a redemption price equal to
110.625% of the principal amount thereof plus accrued and unpaid interest.

Based upon the terms of the original notes, the Company issued new notes
with substantially identical terms as the old notes except that the new notes
are registered under the Securities Act and therefore do not bear legends
restricting their transfer.

Bank Credit Facility

In conjunction with the Recapitalization, the Company entered into the
Credit Agreement among Therma-Wave, Inc., various lending institutions, and
Bankers Trust Company, as Agent (the "Bank Credit Facility"), which provided
for a revolving credit facility of $30.0 million. During the quarter ended June
30, 1998, the Company entered into the First Amendment to the Credit Agreement
among Therma-Wave, Inc., various lending institutions, and Bankers Trust
Company, as Agent (the "Amended Bank Credit Facility"), to have its borrowing
availability subject to a borrowing base formula, which provides a maximum
revolving credit facility of $30.0 million, and to make certain necessary
adjustments to the financial tests and covenants contained therein in light of
current market conditions. The Company may borrow amounts under the Amended
Bank Credit Facility to finance its working capital requirements and other
general corporate purposes. The Amended Bank Credit Facility requires the
Company to meet certain financial tests and contains covenants customary for
this type of financing. At December 31, 1998, there was $3.5 million of an
outstanding letter of credit and unused borrowing capacity under the Amended
Bank Credit Facility of $21.7 million.

F-13
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

At March 31, 1997, the Company had a credit agreement with a Japanese bank
for an unsecured, renewable note payable with an outstanding principal balance
of $3.8 million and $23.1 million of unsecured long-term debt under four
separate loan agreements with banks. These notes payable were repaid in
conjunction with the Recapitalization Agreement.

The fair value of the Company's long-term debt is estimated based on the
quoted market prices for the same issues or on the current rates offered to the
Company for debt of the same remaining maturities. The estimated fair value of
long-term debt is $54,068,000 at December 31, 1998.

5. INCOME TAXES

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

<TABLE>
<CAPTION>
Fiscal Year Ended March Nine Months
31, Ended
------------------------- December 31,
1996 1997 1998 1998
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Domestic............................. $ 9,814 $19,419 $ (436) $ (15,845)
Foreign.............................. 2,151 2,689 7 463
------- ------- ------- ---------
Total.............................. $11,965 $22,108 $ (429) $ (15,382)
======= ======= ======= =========

The components of the provision (benefit) for income taxes are as follows
(in thousands):

<CAPTION>
Fiscal Year Ended March Nine Months
31, Ended
------------------------- December 31,
1996 1997 1998 1998
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Current:
Federal............................. $ 4,429 $ 9,696 $ 2,314 $ (2,032)
State............................... 708 1,525 396 4
Foreign............................. -- -- -- --
------- ------- ------- ---------
5,137 11,221 2,710 (2,028)
Deferred:
Federal............................. (313) (1,921) (1,710) (74)
State............................... (140) (293) (396) --
Foreign............................. -- -- -- 101
------- ------- ------- ---------
(453) (2,214) (2,106) 27
------- ------- ------- ---------
$ 4,684 $ 9,007 $ 604 $ (2,001)
======= ======= ======= =========
</TABLE>

F-14
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

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

<TABLE>
<CAPTION>
Fiscal Year Nine Months
Ended March 31, Ended
----------------- December 31,
1996 1997 1998 1998
---- ---- ----- ------------
<S> <C> <C> <C> <C>
Provision at statutory rate............... 35.0% 35.0% (35.0)% (35.0)%
State taxes, net of federal benefit....... 3.8 3.6 -- --
Amortization of goodwill and purchased
intangibles.............................. 5.6 2.0 -- --
Utilization of net operating loss and
credit carryforwards..................... (5.4) (3.2) -- --
Foreign sales corporations................ -- (0.9) (40.5) --
Other changes in valuation allowances..... (4.8) -- 195.4 25.8
Other..................................... 4.9 4.2 20.9 (3.8)
---- ---- ----- -----
39.1% 40.7% 140.8% (13.0)%
==== ==== ===== =====
</TABLE>

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

<TABLE>
<CAPTION>
March 31,
---------------- December 31,
1997 1998 1998
------- ------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Accrued costs and expenses................... $ 4,359 $ 5,935 $ 5,940
State taxes.................................. 534 117 1
Other........................................ 663 2,441 1,169
Net operating loss........................... 491 491 5,819
------- ------- -------
Total gross deferred tax assets.............. 6,047 8,984 12,929
Less: valuation allowance..................... (491) (1,291) (5,263)
------- ------- -------
Total gross deferred tax assets.............. 5,556 7,693 7,666
------- ------- -------
Deferred tax liabilities:
Deferred revenue on foreign sales............ (1,424) (1,281) (1,174)
Other........................................ (261) (435) (542)
------- ------- -------
Net deferred tax liabilities................. (1,685) (1,716) (1,716)
------- ------- -------
Total net deferred tax assets................ $ 3,871 $ 5,977 $ 5,950
======= ======= =======
</TABLE>

The net changes in the total valuation allowance for the years ended March
31, 1997 and 1998 and the nine months ended December 31, 1998 were ($714,000),
$800,000 and $3,972,000, respectively, and relate primarily to changes in state
deferred tax assets and certain foreign net operating losses.

At December 31, 1998, the Company has net operating loss carryforwards for
foreign income tax purposes of approximately $390,000, which expire in varying
amounts through 2003.

6. EXPENSES RELATING TO OPERATING COST IMPROVEMENTS

On June 22, 1998, the Company announced and implemented an operating cost
improvement program aimed at bringing operating expenses in line with the
Company's current operating environment. These efforts are in response to the
continued cutbacks in capital equipment investment by semiconductor
manufacturers. As a result of the implementation of this program, the Company
recorded a charge of $582,000 during the

F-15
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

first quarter of fiscal year 1999, of which $406,000 related to severance and
related charges, $76,000 of vacated leased facilities and $100,000 of certain
excess operating assets. During the second quarter, the Company recorded a
charge of $475,000, which related primarily to severance and related charges.
At December 31, 1998, $204,000 remained in accrued liabilities relating to
severance and vacated lease facilities.

7. COMMITMENTS AND CONTINGENCIES

The Company leases its facilities under noncancellable operating leases
which require the Company to pay maintenance and operating expenses, such as
taxes, insurance and utilities. The Company is required pursuant to the terms
of a facility lease to maintain a $3,500,000 standby letter of credit.

Property and equipment includes equipment recorded under capital leases of
approximately $1,050,000, $895,000 and $895,000 and related accumulated
amortization of $547,000, $506,000 and $592,000 at March 31, 1997 and 1998 and
December 31, 1998, respectively.

Rent expense was approximately $897,000, $1,524,000 and $1,629,000 for the
fiscal years ended March 31, 1996, 1997 and 1998, respectively. Rent expense
was approximately $1,276,000 for the nine months ended December 31, 1998.

At December 31, 1998, future minimum lease payments under capital and
noncancellable operating leases are as follows (in thousands):

<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Fiscal Year
1999....................................................... $ 26 $ 362
2000....................................................... 90 1,378
2001....................................................... 88 1,165
2002....................................................... 212 1,180
2003....................................................... -- 1,229
Thereafter................................................. -- 3,375
----- ------
Future Minimum Lease Payments.............................. 416 $8,689
======
Less: Amounts Representing Interest........................ (112)
-----
Present Value of Minimum Lease Payments.................... 304
Less: Current Portion...................................... (74)
-----
$ 230
=====
</TABLE>

Deferred Bonus Arrangements

Pursuant to the terms of certain management bonus arrangements, the Company
may be obligated to pay up to an aggregate of $12.4 million after May 16, 2002
based upon achieving certain operating results and each employee's continued
employment. No amounts have been accrued to date as the achievement of the
required operating results is not considered probable as of December 31, 1998.

Legal Proceedings

On September 3, 1998, the Company was named in a patent infringement suit
filed by KLA-Tencor Corporation ("KLA-Tencor"). KLA-Tencor alleged that it
patented an aspect of the thin film thickness measuring technology that the
Company uses in its Opti-Probe product family. KLA-Tencor is seeking damages
and an

F-16
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

injunction to stop the sale of the equipment they allege uses this aspect. The
Company believes none of its products infringe any of the claims of KLA-
Tencor's patent and that their infringement allegations are unfounded. The
Company intends to vigorously defend its position and expects to prevail.

On January 14, 1999, the Company commenced an action against KLA-Tencor for
patent infringement with respect to one of the Company's fundamental thin film
technology combination patents. The suit seeks damages for patent infringement
and a permanent injunction against any future activities undertaken by KLA-
Tencor or any third party working in conjunction with them, which infringes on
the Company's patent. The suit was filed as a counterclaim in the infringement
action initiated by KLA-Tencor and also seeks a declaratory judgment that KLA-
Tencor's patent, which the Company was alleged of infringing, is invalid and
not infringed by any of the Company's systems.

There can be no assurances, however, that the Company will prevail in any
patent litigation. The Company believes that the outcome of any resultant
litigation will not have a material adverse effect on the Company's financial
condition or results of operations.

The Company is involved in various other legal proceedings from time to time
arising in the ordinary course of business, none of which management expects to
have a material adverse effect on the Company's results of operations or
financial condition.

8. MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY)

Mandatorily Redeemable Convertible Preferred Stock

The Series A Convertible Voting Preferred Stock ("Preferred Stock") has a
liquidation preference of $18.40 and is convertible at any time into one share
of Class A Common Stock at the option of the holder. Dividends on each share of
the Preferred Stock shall be cumulative and accrue at the rate of 6% per annum.
The Preferred Stock has a scheduled redemption on May 17, 2004, and is
otherwise redeemable by the Company at any time from time after the earlier of
(a) June 30, 1998 or (b) an initial public offering. Each share of Preferred
Stock is convertible into one share of Class A Common Stock (as adjusted for
stock splits, stock dividends, recapitalizations and similar transactions). The
Preferred Stock entitles the holder to one vote for each share of Class A
Common Stock issuable upon conversion of the Preferred Stock. Upon any
liquidation, dissolution or winding up of the Company, each holder of the
Preferred Stock shall be entitled to be paid, before any distribution or
payment is made upon any capital stock or other equity securities of the
Company.

Common Stock

Immediately after the Recapitalization, the outstanding equity securities of
the Company consisted of 9,073,532 shares of Class A Common; 1,334,875 shares
of Class B Common; 1,008,170 shares of Class L Common; and 748,739 shares of
Preferred Stock. The shares of Class A Common Stock and Class L Common Stock
each entitle the holder to one vote per share on all matters to be voted upon
by the stockholders of the Company and are otherwise identical, except that the
shares of Class L are entitled to a preference over Class A with respect to any
distribution by the Company to holders of its capital stock equal to the
original cost of such share ($19.085) plus an amount which accrues on a daily
basis at a rate of 12% per annum, compounded annually. The Class B Common Stock
is identical to the Class A Common Stock except that the Class B is non-voting
and is convertible into Class A at any time following an initial public
offering by the Company at the option of the holder.

F-17
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

All unvested shares of Class B Common Stock are subject to repurchase by the
Company if the holder is no longer employed by the Company. Such shares vest
over five years from the date of issuance. During the nine months ended
December 31, 1998, 171,693 shares of Class B Common Stock were repurchased by
the Company. As of December 31, 1998, 317,416 shares of Class B Common Stock
were vested and 800,676 shares of Class B Common Stock were subject to
repurchase by the Company at the paid-in amount.

Stock Based Compensation

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock awards because, as
discussed below, the alternative fair value accounting provided for under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation" ("SFAS 123") requires use of option valuation models for
use in valuing employee stock options. Under APB 25, when the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

During fiscal year 1998, the Company adopted several stock option plans (the
"Plans") whereby the Board of Directors may grant incentive stock options and
nonstatutory stock options to employees, directors or consultants. The Company
has reserved 3,742,500 shares of Class A Common Stock and 3,742,500 shares of
Class B Common Stock for issuance under the Plans. Unless terminated sooner,
the Plans will terminate automatically in May 2007. Vesting provisions for
stock options granted under the Plans are determined by the Board of Directors.
Unless the Board of Directors specifically determines otherwise at the time of
the grant, the option shall vest 25% on each of the first four anniversaries
from the date of grant. Stock options expire no later than ten years from the
date of grant. Common shares issued on exercise of options prior to vesting are
subject to repurchase by the Company if the holder is no longer employed by the
Company.

A summary of the Company's stock option activity, and related information
for the year ended March 31, 1998 and nine months ended December 31, 1998
follows:

<TABLE>
<CAPTION>
Options
Outstanding
-------------------
Weighted
Average
Exercise
Price
Shares Number of per
Available Shares Share
---------- --------- --------
<S> <C> <C> <C>
Balance at March 31, 1997.................... -- -- $ --
Authorized.................................. 7,485,000 -- --
Granted..................................... (1,836,384) 1,836,384 10.67
Exercised................................... -- -- --
Canceled.................................... 70,926 (70,926) 10.08
---------- --------- ------
Balance at March 31, 1998.................... 5,719,542 1,765,458 10.69
---------- --------- ------
Granted..................................... (276,900) 276,900 4.05
Exercise.................................... -- -- --
Canceled.................................... 299,667 (299,667) 10.39
---------- --------- ------
Balance at December 31, 1998................. 5,742,309 1,742,691 $ 9.69
========== ========= ======
</TABLE>

F-18
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following table summarizes information about stock options outstanding
as of December 31, 1998:

<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Remaining Average
Number Contractual Exercise
Outstanding Life Price
----------- ----------- --------
<S> <C> <C> <C>
Range of exercise prices:
$4.00.................................... 270,000 9.57 $ 4.00
$6.00.................................... 387,860 8.86 $ 6.00
$8.93-15.89.............................. 1,084,831 8.37 $12.42
---------
1,742,691
=========
</TABLE>

At December 31, 1998, there were 79,604 vested shares and 1,164,435 shares
were exercisable.

Pro forma information regarding net loss and net loss per share is required
by FAS 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
March 31, 1996 under the fair value method. The fair value for these options
was estimated using the Black-Scholes option pricing model.

The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's options have characteristics significantly different from
those of options of publicly traded companies and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
the opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options.

For the year ended March 31, 1998 and the nine months ended December 31,
1998, the fair value of each option grant was estimated on the date of the
grant using the Black-Scholes option-pricing model using a dividend yield of 0%
for both periods and the following additional weighted-average assumptions:
volatility of zero and expected life of an option of 5 years and a risk-free
interest rate of 7.0% and 5.0%, respectively.

Had compensation costs been determined based upon the fair value at the
grant date for awards under these plans, consistent with the methodology
prescribed under SFAS 123, the Company's pro forma net loss attributable to
common stockholders and pro forma basic and diluted net loss per share under
SFAS 123 would have been $(1,856,000) and $(0.28) for the year ended March 31,
1998 and $(14,121,000) and $(1.57) for the nine months ended December 31, 1998,
respectively.

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the option's vesting period. The effects
on pro forma disclosure of applying SFAS 123 are not likely to be
representative of the effects on pro forma disclosure of future years. Because
SFAS 123 is applicable only to options granted subsequent to March 31, 1995,
the pro forma effect will not be fully reflected until fiscal 2003.

The weighted average fair value of options granted during the year ended
March 31, 1998 and December 31, 1998 with exercise prices equal to the market
price at the date of grant is $0.45 and $0.86 per share, respectively.

F-19
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

9. RELATED PARTY TRANSACTIONS

Account balances with Toray & Shimadzu are as follows (in thousands):

<TABLE>
<CAPTION>
March 31,
------------- December 31,
1997 1998 1998
------ ----- ------------
<S> <C> <C> <C>
Due from (due to) Toray & Shimadzu:
Accounts receivable............................... $ 18 $ -- $ --
Receivable from parent............................ 1,425 -- --
Accrued expenses.................................. (25) -- --
------ ----- -----
$1,418 $ -- $ --
====== ===== =====
</TABLE>

<TABLE>
<CAPTION>
Fiscal Year
Ended Nine Months
March 31, Ended
-------------- December 31,
1996 1997 1998 1998
---- ---- ---- ------------
<S> <C> <C> <C> <C>
Revenue.......................................... -- $590 $82 $31
Purchases of inventories......................... -- 94 -- --
</TABLE>

The Company incurred expenses of approximately $739,000, $559,000, $75,000
and $167,000 for the fiscal years ended March 31, 1996, 1997 and 1998 and the
nine months ended December 31, 1998, respectively, for employees loaned to the
Company by Toray and Shimadzu.

On December 31, 1998, the Company had loans to executive officers of
$241,000 used to acquire the Company's capital stock (notes receivable from
stockholders) and $1,043,000 used to pay certain tax liabilities incurred by
certain executives in connection with the Recapitalization (the Tax Notes). The
notes receivable from stockholders bear interest at the federal rate in effect
at the time of the Recapitalization. The Tax Notes do not bear interest. The
executives have pledged their stock as security for the notes.

In connection with the Recapitalization, the Company entered into an
Advisory Agreement with Bain Capital, a majority stockholder, pursuant to which
Bain Capital agreed to provide management services. The management fees
incurred, excluding out-of pocket expenses, during the fiscal year ended March
31, 1998 and the nine months ended December 31, 1998 were $750,000 in each
period.

10. RETIREMENT PLAN

The Company has a retirement plan under Section 401(k) of the Internal
Revenue Code covering substantially all employees. Discretionary company
contributions which are based on achieving certain operating profit goals, were
$499,000, $540,000 and $566,000 in fiscal 1996, 1997 and 1998, respectively. No
amounts were contributed during the nine months ended December 31, 1998.

11. SEGMENT INFORMATION

The Company operates in one segment as it manufactures, markets and services
process control metrology systems within the semiconductor equipment market.
All products and services are marketed within the geographic regions in which
the Company operates. The Company's current product offerings qualify for
aggregation under SFAS No. 131 as its products are manufactured and distributed
in the same manner, have similar long-term gross margins and are sold to the
same customer base.

F-20
<PAGE>

THERMA-WAVE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

The following is a summary of operations in geographic areas (in thousands):

<TABLE>
<CAPTION>
Other
U.S. Japan Foreign Eliminations Consolidation
-------- ------- ------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Fiscal year ended March
31, 1996
Sales to unaffiliated
customers............... $ 75,020 $11,303 $ -- $ (7,030) $ 79,293
Transfers between
geographic locations.... -- -- -- -- --
-------- ------- ------ -------- --------
Total net sales.......... $ 75,020 $11,303 $ -- $ (7,030) $ 79,293
Operating income (loss).. $ 11,200 $ 503 $ -- $ 1,875 $ 13,578
Long-lived assets........ $ 13,295 $ 816 $ -- $ (5,675) $ 8,436
All other identifiable
assets.................. 39,972 7,798 -- (3,150) 44,620
-------- ------- ------ -------- --------
Total assets............. $ 53,387 $ 8,614 $ -- $ (8,825) $ 53,056
======== ======= ====== ======== ========

Fiscal year ended March
31, 1997
Sales to unaffiliated
customers............... $ 97,237 $ 9,730 $2,526 $ -- $109,493
Transfers between
geographic locations.... 3,859 1,261 2,028 (7,148) --
-------- ------- ------ -------- --------
Total net sales.......... $101,096 $10,991 $4,554 $ (7,148) $109,493
Operating income (loss).. $ 21,965 $ 1,633 $ 136 $ (365) $ 23,369
Long-lived assets........ $ 13,829 $ 739 $ 513 $ (8,100) $ 6,981
All other identifiable
assets.................. 54,868 6,758 2,869 (2,856) 61,639
-------- ------- ------ -------- --------
Total assets............. $ 68,697 $ 7,497 $3,382 $(10,956) $ 68,620
======== ======= ====== ======== ========
Fiscal year ended March
31, 1998
Sales to unaffiliated
customers............... $110,098 $ 2,645 $2,716 $ -- $115,459
Transfers between
geographic locations.... (1,929) 1,706 2,572 (2,349) --
-------- ------- ------ -------- --------
Total net sales.......... $108,169 $ 4,351 $5,288 $ (2,349) $115,459
Operating income (loss).. $ 11,661 $ 103 $ 458 $ (280) $ 11,942
Long-lived assets........ $ 24,272 $ 234 $ 417 $ (6,911) $ 18,012
All other identifiable
assets.................. 69,237 2,841 3,030 (3,358) 71,750
-------- ------- ------ -------- --------
Total assets............. $ 93,509 $ 3,075 $3,447 $(10,269) $ 89,762
======== ======= ====== ======== ========

Nine months ended
December 31, 1998
Sales to unaffiliated
customers............... $ 43,629 $ 1,559 $2,415 $ -- $ 47,603
Transfers between
geographic locations.... (1,382) 707 2,523 (1,848) --
-------- ------- ------ -------- --------
Total net sales.......... $ 42,247 $ 2,266 $4,938 $ (1,848) $ 47,603
Operating income (loss).. $ (5,040) $ 35 $ 318 $ (837) $ (5,524)
Long-lived assets........ $ 21,943 $ 303 $ 372 $ (7,296) $ 15,322
All other identifiable
assets.................. 52,136 2,312 4,036 (3,876) 54,608
-------- ------- ------ -------- --------
Total assets............. $ 74,079 $ 2,615 $4,408 $(11,172) $ 69,930
======== ======= ====== ======== ========
</TABLE>

Revenue in each geographic area is recognized upon shipment from the
locations within a designated geographic region. Transfers and commission
arrangements between geographic areas are at prices sufficient to recover a
reasonable profit. Export sales were $34,503,000, $54,390,000, and $56,006,000
of the net sales in fiscal 1996, 1997 and 1998, respectively. Export sales were
$25,273,000 of net sales for the nine months ended December 31, 1998. Other
foreign balances at March 31, 1996 and for the year ended March 31, 1996 were
immaterial for individual disclosure.

F-21
<PAGE>

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

[Therma-Wave Logo]

Common Stock

----------------

Prospectus

, 1999

----------------

NationsBanc Montgomery Securities LLC

Lehman Brothers

Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the common stock, whether or not participating in
this distribution, may be required to deliver a prospectus. This is in addition
to the obligation of dealers to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

Item 13. Other Expenses of Issuance and Distribution.

The following is a statement of estimated expenses, to be paid solely by
Therma-Wave, of the issuance and distribution of the securities being
registered hereby:

<TABLE>
<S> <C>
Securities and Exchange Commission registration fee................. $8,896
NASD filing fee..................................................... 3,700
Nasdaq National Market listing fee.................................. *
Blue Sky fees and expenses (including attorneys' fees and
expenses).......................................................... *
Printing expenses................................................... *
Accounting fees and expenses........................................ *
Transfer agent's fees and expenses.................................. *
Legal fees and expenses............................................. *
Miscellaneous expenses.............................................. *
------
Total............................................................. $ *
======
</TABLE>
- --------
* To be provided by Amendment.

Item 14. Indemnification of Directors and Officers.

General Corporation Law

We are incorporated under the laws of the State of Delaware. Section 145
("Section 145") of the General Corporation Law of the State of Delaware, as the
same exists or may hereafter be amended (the "General Corporation Law"), inter
alia, provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such corporation),
by reason of the fact that such person is or was an officer, director, employee
or agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding,
provided such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the corporation's best interests and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
his conduct was illegal. A Delaware corporation may indemnify any persons who
are, were or are threatened to be made, a party to any threatened, pending or
completed action or suit by or in the right of the corporation by reasons of
the fact that such person was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. The
indemnity may include expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's best
interests, provided that no indemnification is permitted without judicial
approval if the officer, director, employee or agent is adjudged to be liable
to the corporation. Where an officer, director, employee or agent is successful
on the merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses which such officer or
director has actually and reasonably incurred.

Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability

II-1
<PAGE>

asserted against him and incurred by him in any such capacity, arising out of
his status as such, whether or not the corporation would otherwise have the
power to indemnify him under Section 145.

Certificate of Incorporation and By-Laws

Our Certificate of Incorporation and By-laws provides for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.

Item 15. Recent Sales of Unregistered Securities.

During the last three years, Therma-Wave has issued the following securities
without registration under the Securities Act of 1933 as amended (the
"Securities Act"):

(1) Therma-Wave completed the recapitalization on May 16, 1997. In connection
with the recapitalization, Therma-Wave issued:

(a) an aggregate of 6,960,035 shares of Old Common Stock to the Bain
Capital Funds and Sutter Hill (which were later converted into an
aggregate of 7,264,236 shares of Class A Common and an aggregate of
807,138 shares of Class L Common) for an aggregate of $17.1 million;

(b) an aggregate of (i) 1,226,331 shares of Class A Common; (ii) 136,258
shares of Class L Common; and (iii) 1,128,749 shares of Class B Common
to the Management Investors for an aggregate of $2.9 million;

(c) an aggregate of (i) 509,433 shares of Class A Common; (ii) 56,604
shares of Class L Common; and (iii) 750,000 shares of Preferred Stock
to the Existing Stockholders in exchange for their 6,101,252 shares of
Old Common Stock;

(d) an aggregate of (i) 9,853 shares of Class A Common and (ii) 1,095
shares of Class L Common to the Existing Stockholders in exchange for
an aggregate of 1,261 shares of Preferred Stock; and

(e) 63,679 shares of Class A Common and 7,075 shares of Class L Common to
Antares International Partners for an aggregate of $150,000.

(2) To finance a portion of the recapitalization, Therma-Wave sold an aggregate
of $115.0 million aggregate principal amount of 10 5/8% Senior Notes due
2004 to BT Securities Corporation pursuant to a Purchase Agreement, dated
May 16, 1997.

(3) On July 15, 1997, Therma-Wave sold an aggregate of 206,126 shares of Class
B Common to certain employees of Therma-Wave for an aggregate of $48,440.

The sales and issuances listed above in paragraphs (1)(a), (1)(b), (1)(e),
(2) and (3) were deemed exempt from registration under the Securities Act by
virtue of Section 4(2) thereof, as transactions not involving a public
offering. The issuance of securities listed in paragraphs (1)(c) and(1)(d) were
deemed exempt from registration under the Securities Act by virtue of Section
3(a)(9). Certain defined terms used herein not otherwise defined have the
meanings ascribed to them in the prospectus, which forms a part of this
Registration Statement.

II-2
<PAGE>

Item 16. Exhibits and Financial Statement Schedules.

(a) Exhibits.

<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
**1.1 Form of Underwriting Agreement.

*2.1 Recapitalization Agreement, dated as of December 18, 1996, by and
among Bain Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP
Associates, BCIP Trust Associates, L.P., Toray Industries, Inc., Toray
Industries (America), Inc. and Shimadzu Corporation as amended by
Amendment No. 1 and Supplement to Recapitalization Agreement, dated
May 16, 1997, by and among Therma-Wave, Inc., Toray Industries, Inc.,
Toray Industries (America), Inc., Shimadzu Corporation and Bain
Capital Fund V, L.P., Bain Capital Fund V-B, L.P., BCIP Trust
Associates and BCIP Trust Associates, L.P.

*3.1 Restated Certificate of Incorporation of Therma-Wave.

*3.2 Amended and Restated By-Laws of Therma-Wave.

*4.1 Purchase Agreement, dated as of May 16, 1997, by and among Therma-Wave
and BT Securities Corporation.

*4.2 Indenture, dated as of May 15, 1997, by and among Therma-Wave and IBJ
Schroder Bank & Trust Company, as trustee.

*4.3 Form of 10 5/8% Senior Notes.

*4.4 Form of Series B 10 5/8% Senior Notes.

*4.5 Registration Rights Agreement, dated as of May 15, 1997, by and among
Therma-Wave and BT Securities Corporation, as Initial Purchaser.

**4.6 Form of certificate representing shares of Common Stock.

**5.1 Opinion of Kirkland & Ellis.

*10.1 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Dr. Allan Rosencwaig.

*10.2 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and David L. Willenborg.

*10.3 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and W. Lee Smith.

*10.4 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Jon L. Opsal.

*10.5 Employment Agreement, dated as of May 16, 1997, by and between Therma-
Wave and Anthony W. Lin.

*10.6 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Dr. Allan Rosencwaig.

*10.7 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and David L. Willenborg.

*10.8 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and W. Lee Smith.

*10.9 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Jon L. Opsal.

*10.10 Executive Stock Agreement, dated as of May 16, 1997, by and between
Therma-Wave and Anthony W. Lin.

*10.11 Stockholders Agreement, dated as of May 16, 1997, by and among Therma-
Wave and certain stockholders named therein.
</TABLE>

II-3
<PAGE>

<TABLE>

<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*10.12 Development License Agreement, dated June 12, 1992, by and among
Therma-Wave and Therma-Wave K.K., Toray Industries, Inc. and Shimadzu
Corporation.

*10.13 New Development Agreement, dated December 22, 1995, by and between
Therma-Wave and Toray Industries, Inc.

*10.14 Lease Agreement, dated as of May 26, 1995, by and between Therma-Wave
and Sobrato Interests.

*10.15 Advisory Agreement, dated as of May 16, 1996, between Therma-Wave and
Bain Capital, Inc.

*10.16 Voting Agreement, dated as of May 16, 1997, between Therma-Wave and
certain stockholders named therein.

*10.17 Credit Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent, and certain financial institutions
named therein.

*10.18 Pledge Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent.

*10.19 Security Agreement, dated as of May 16, 1997, between Therma-Wave and
Bankers Trust Company, as agent.

*10.20 Therma-Wave, Inc. 1997 Stock Purchase and Option Plan.

*10.21 Registration Agreement, dated as of May 16, 1997, between Therma-Wave
and the stockholders named therein.

*10.22 Stock Repurchase Agreement, dated as of January 26, 1996, between
Toray Industries, Inc. and the key employees of Therma-Wave named
therein.

*10.23 Key Employee Stock Agreement, dated as of October 30, 1991 and amended
as of December 16, 1994, by and among Toray Industries, Inc., TS
Subsidiary Corp., Therma-Wave, Inc. and the key employees named
therein.

**10.24 Therma-Wave, Inc. 1999 Equity Incentive Plan.

10.25 First Amendment to Credit Agreement, dated as of June 30, 1998,
between Therma-Wave and Bankers Trust Company, as agent, incorporated
by reference to Exhibit 10.1 of Therma-Wave's Quarterly Report on Form
10-Q for the quarter ended July 5, 1998.

**10.26 Employment Agreement, dated as of August 3, 1998, by and between
Therma-Wave and Martin M. Schwartz.

**10.27 Employment Agreement, dated as of August 10, 1998, by and between
Therma-Wave and L. Ray Christie.

**10.28 1999 Employee Stock Purchase Plan.

*21.1 Subsidiaries of Therma-Wave.

23.1 Consent of Ernst & Young LLP, Independent Auditors.

23.2 Consent of Independent Accountants.

**23.3 Consent of Kirkland & Ellis (included in Exhibit 5.1).

24.1 Powers of Attorney (included in Part II to the Registration
Statement).

27.1 Financial Data Schedule.
</TABLE>
- --------
* Incorporated herein by reference to the same numbered exhibit to Therma-
Wave's Registration Statement on Form S-4 (Registration No. 333-29871).
** To be filed by Amendment.
+ Therma-Wave agrees to furnish supplementally to the Commission a copy of any
omitted schedule or exhibit to such agreement upon request by the
Commission.

II-4
<PAGE>

(b) Financial Statement Schedule.

<TABLE>
<CAPTION>
Index
-----
<S> <C>
Report of Independent Accountants on Financial Statement Schedule.. S-1
Schedule II--Valuation and Qualifying Accounts..................... S-2
</TABLE>

All other schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions,
are inapplicable or not material, or the information called for thereby is
otherwise included in the financial statements and therefore has been omitted.

Item 17. Undertakings.

The undersigned registrant hereby undertakes to provide to the underwriters
at closing specified in the underwriting agreement certificates in such
denominations and registered in such manner as requested by the underwriters to
permit prompt delivery to each purchaser.

The undersigned registrants hereby undertake:

(1) For purposes of determining any liability under the Securities Act of
1933 (the "Securities Act"), the information omitted from the form of
prospectus filed as part of this registration statement in reliance upon Rule
430A and contained in a form of prospectus filed by the registrants pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrants pursuant to the provisions described under Item 20 or otherwise,
the registrants have been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrants of expenses incurred or paid by a director, officer or
controlling person of the registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrants will,
unless in the opinion of their counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.

II-5
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Therma-Wave,
Inc. has duly caused this Registration Statement on Form S-1 to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Fremont, State of California, on April 9, 1999.

Therma-Wave, Inc.

/s/ Allan Rosencwaig
By: _________________________________
Allan Rosencwaig
Chief Executive Officer

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Allan Rosencwaig, Martin M. Schwartz, L. Ray
Christie, Adam W. Kirsch and Ian K. Loring, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any or all amendments (including post-effective amendments)
to this registration statement (and any registration statement filed pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, for the offering
which this Registration Statement relates), and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact an
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents or any of them, or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.

* * * *

Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 and Power of Attorney have been signed by
the following persons in the capacities and on the dates indicated:

<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----

<S> <C> <C>
/s/ Allan Rosencwaig Chairman of the Board and April 9, 1999
______________________________________ Chief Executive Officer
Allan Rosencwaig (Principal Executive
Officer)

/s/ Martin M. Schwartz President, Chief Operating April 9, 1999
______________________________________ Officer and Director
Martin M. Schwartz

/s/ L. Ray Christie Vice President and Chief April 9, 1999
______________________________________ Financial Officer
L. Ray Christie (Principal Financial and
Accounting Officer)

/s/ G. Leonard Baker, Jr. Director April 9, 1999
______________________________________
G. Leonard Baker, Jr.

/s/ David Dominik Director April 9, 1999
______________________________________
David Dominik

/s/ Adam W. Kirsch Director April 9, 1999
______________________________________
Adam W. Kirsch
</TABLE>

II-6
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE

To the Board of Directors
of Therma-Wave, Inc.

Our audit of the consolidated financial statements as of December 31, 1998 and
for the nine months then ended referred to in our report dated April 5, 1999
appearing on page F-2 of the consolidated financial statements in this
Registration Statement on Form S-1 also included an audit of the Financial
Statement Schedule for the nine months ended December 31, 1998 listed in Item
16(b) in this Registration Statement on Form S-1. In our opinion, this
Financial Statement Schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.

PricewaterhouseCoopers LLP

San Jose, California
April 5, 1999

S-1
<PAGE>

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
THERMA-WAVE, INC.
(in thousands)

<TABLE>
<CAPTION>
Additions
---------------------
Charged to
Balance at Charged to Other
Beginning Costs and Accounts-- Deductions-- Balance at
Description of Period Expenses Describe Describe End of Period
- ----------- ---------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Nine months ended
December 31, 1998:
Reserves and allowances
deducted from asset
accounts; Allowance
for Doubtful
Accounts.............. $3,016 $ (631) $ -- $ 308 $2,077

Year ended March 31,
1998:
Reserves and allowances
deducted from asset
accounts; Allowance
for Doubtful
Accounts.............. $1,622 $1,394 $ -- $ -- $3,016

Year ended March 31,
1997:
Reserves and allowances
deducted from asset
accounts; Allowance
for Doubtful
Accounts.............. $ 284 $1,338 $ -- $ -- $1,622

Year ended March 31,
1996:
Reserves and allowances
deducted from asset
accounts; Allowance
for Doubtful
Accounts.............. $ 280 $ 4 $ -- $ -- $ 284
</TABLE>

S-2

<PAGE>

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS

We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated May 1, 1998, in the Registration Statement on Form S-1
and related Prospectus of Therma-Wave, Inc. for the registration of common
stock.

Our audits also included the financial statement schedule of Therma-Wave, Inc.
listed in Item 16(b). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

San Jose, California
April 9, 1999

<PAGE>

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated April 5, 1999, relating
to the financial statements of Therma-Wave, Inc. as of December 31, 1998 and
for the nine months then ended, which appears in such Prospectus. We also
consent to the use of our report on the Financial Statement Schedule for the
nine months ended December 31, 1998 listed under Item 16(b) of this
Registration Statement, which appears in such Prospectus, when such schedule is
read in conjunction with the financial statements referred to in our report. We
also consent to the reference to us under the heading "Experts" in such
Prospectus.

PricewaterhouseCoopers LLP

San Jose, California
April 9, 1999

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,648
<SECURITIES> 0
<RECEIVABLES> 17,530
<ALLOWANCES> 2,077
<INVENTORY> 18,453
<CURRENT-ASSETS> 54,608
<PP&E> 14,443
<DEPRECIATION> 9,807
<TOTAL-ASSETS> 69,930
<CURRENT-LIABILITIES> 21,806
<BONDS> 115,000
15,139
0
<COMMON> 21,436
<OTHER-SE> 1,285
<TOTAL-LIABILITY-AND-EQUITY> 69,930
<SALES> 47,603
<TOTAL-REVENUES> 47,603
<CGS> 26,819
<TOTAL-COSTS> 53,127
<OTHER-EXPENSES> (115)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,491
<INCOME-PRETAX> (15,382)
<INCOME-TAX> (2,001)
<INCOME-CONTINUING> (13,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,381)
<EPS-PRIMARY> (1.56)
<EPS-DILUTED> (1.56)

</TABLE>