UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended September 26, 2004

OR

For the transition period from ________to _________

Commission file number 000-26911

THERMA-WAVE, INC.

1250 Reliance Way
Fremont, California 94539

(510) 668-2200

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES x NO o

     Indicate the number of shares outstanding of the issuer’s class of common stock, as of the latest practical date:

THERMA-WAVE, INC.
TABLE OF CONTENTS

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

THERMA-WAVE, INC.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THERMA-WAVE, INC.

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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THERMA-WAVE, INC.

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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THERMA-WAVE, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(As of September 30, 2004)

1. Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission and include the accounts of Therma-Wave, Inc. (we, our, the “Company”) and its wholly-owned subsidiaries. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to such rules and regulations. In our opinion, the financial statements reflect all adjustments, consisting only of normal, recurring adjustments, necessary for a fair statement of the financial position at September 30, 2004, the operating results for the three and six months ended September 30, 2004 and 2003, and the cash flows for the six months ended September 30, 2004 and 2003. These financial statements and notes should be read in conjunction with our audited financial statements and the notes thereto included in our Form 10-K for the year ended March 31, 2004.

     The results of operations for the interim periods are not necessarily indicative of the results of operations that may be expected for any other period or for the fiscal year, which ends on April 3, 2005.

     The second quarters of fiscal years 2005 and 2004 and the fiscal year 2004 ended on September 26, 2004, September 28, 2003 and March 28, 2004, respectively. For presentation purposes, the accompanying unaudited condensed consolidated financial statements have been shown as ending on the last day of the calendar quarter closest to each of these dates.

     Revenue Recognition

     Revenues are recognized when our contractual obligations have been performed, title and risk of ownership have passed to the customer, collectibility of the sales price has been reasonably assured and customer acceptance has been obtained, if applicable. Shipments typically are made in compliance with shipment requirements specified in our customer’s purchase order. Freight terms of sales are FOB shipping point unless otherwise negotiated and agreed in writing between our customer and us.

     Systems Revenues. Systems (product) sales are accounted for as multiple-element arrangement sales that require the deferral of a significant portion of revenues in the amount of the greater of the fair market value of installation and related post shipment services or a percentage of payment subject to acceptance. Systems revenues are allocated on a fair value basis to each component of the multiple-element arrangement. Revenues on each element are recognized when the contractual obligations have been performed, title and risk of ownership have passed to the customer, collectibility of the sales price has been reasonably assured and customer acceptance has been obtained, if applicable. Estimated contractual warranty obligations are recorded as cost of revenues when related systems sales are shipped.

     Systems revenues on newly introduced products are deferred at shipment and recognized upon customer acceptance. Systems revenues are also deferred when the customer has the right to return the product for credit. In such cases, systems revenues are not recognized until all of the following conditions have been evidenced after the customer’s purchase order has been fulfilled: the right of return has expired, and any potential returns would require authorization by our company under warranty provisions; the price of sales is fixed or determinable; the payment terms are fixed and enforceable, and collectibility is reasonably assured.

     Services Revenues. We derive services revenues from three primary sources: sale of spare parts, service contracts and service labor. Revenues on the sale of spare parts are recognized when spare parts have been shipped and title and risk of ownership have transferred to the customer and collectibility of the sales price has been reasonably assured. Revenues on service contracts are deferred and recognized on a straight-line basis over the period of the contract. Revenues on time and material services performed are recognized when the services are completed, collectibility of the sales price has been reasonably assured and customer acceptance has been obtained, if applicable.

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     Deferred Revenues. Deferred revenues arise from systems (product) sales and service contracts. Revenues on service contracts are deferred and recognized on a straight-line basis over the respective contract term. Systems sales are accounted for as multiple-element arrangements that require the deferral of a significant portion of revenues in the amount of the greater of the fair market value of installation and related post shipment services or the percentage of payment subject to acceptance. Systems revenues are allocated on a fair value basis to each component of the multiple-element arrangement. Revenues on each element are recognized when contractual obligations have been performed, title and risk of ownership have passed to the customer, collectibility of the sales price has been reasonably assured and customer acceptance has been obtained if applicable.

     In accordance with SAB 104, we evaluate our systems sales to determine the appropriate timing for revenue recognition for each of the multiple elements involved in each sale. This sometimes results in deferrals of revenues from the period in which the tool is shipped to future periods.

     Reclassifications

     Certain prior year amounts in the unaudited condensed consolidated statements of cash flows have been changed to conform to current period classifications.

     Stock-Based Compensation

     In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company has applied Accounting Principles Board Opinion No. 25 in accounting for its stock option plans and has adopted the disclosure provisions of SFAS No. 123. In April 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation: An Interpretation of APB No. 25.” The Company has adopted the provisions of FIN 44, and such adoption did not materially impact the Company’s results of operations. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure.” The statement amends SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. The Company has adopted the disclosure provisions of SFAS No. 148.

     Had compensation costs been determined based upon the fair value at the grant date for awards under the stock option plans and employee stock purchase plans, consistent with the methodology prescribed under SFAS No. 123, our pro forma net loss and pro forma net loss per share under SFAS No. 123 would have been:

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     The weighted average grant-date fair value of our stock options was $2.70 and $1.59 for the three months ended September 30, 2004 and 2003, respectively, and $2.77 and $1.12 for the six months ended September 30, 2004 and 2003, respectively. These values were estimated using the Black-Scholes pricing model with the following assumptions:

     The weighted average grant-date fair value of our stock purchase rights granted under our employee stock purchase plans was $0.82 and $0.26 for the three months ended September 30, 2004 and 2003, respectively, and $0.27 and $0.24 for the six months ended September 30, 2004 and 2003, respectively. These values were estimated using the Black-Scholes pricing model with the following assumptions:

     Stock-based employee compensation expense (benefit) included in net income as reported includes amounts for two events, specifically, the stock options assumed during the acquisition of Sensys Corporation, and the stock option exchange on September 10, 2003.

     As part of the acquisition of Sensys, we recorded $3.5 million of stock-based compensation to be amortized over the vesting period of the options. The related deferred stock compensation amortization expenses were $44,000, $0.3 million, and $0.2 million for the three months ended September 30, 2004, June 30, 2004 and September 30, 2003, respectively, a portion of which was included in cost of revenues. For the six months ended September 30, 2004 and 2003, respectively, deferred stock compensation amortization expenses were $0.3 million and $0.4 million. These charges reflect the vesting schedules of the stock options and reductions in headcount due to employee turnover and reduction in force programs that began during fiscal 2003 and continued through the first three quarters of fiscal 2004. As of September 30, 2004, $0.2 million of deferred stock compensation related to the Sensys acquisition remains to be amortized over future periods ending in January 2006.

     We recorded a benefit from the amortization of deferred compensation expense related to the variable accounting treatment for stock options of $1.2 million for the three months ended September 30, 2004. For the six months ended September 30, 2004, we have recorded an expense of $0.3 million from the amortization of deferred compensation expense related to the variable accounting treatment for stock options. These expenses and benefits reflect the options eligible for exchange that were outstanding since September 10, 2003 and the options issued to eligible participants within the six months prior to or following September 10, 2003. Due to variable accounting, compensation expense is being recorded for the pro-rata vesting of these options over time based on increases or decreases in the period-end stock price over and above the exercise price of the new options. In future quarters, the expense could increase as more shares become vested and if the stock price increases. Reductions to expense may also be recorded if the stock price decreases, but such reductions will be limited to the amount of net expense previously recorded.

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2. Balance Sheet Components

     During the first six months of fiscal 2005, the company disposed of equipment having a gross value of $1,424,000 and accumulated depreciation of $1,409,000. There was a loss of approximately $15,000 on the disposals.

3. Comprehensive Income (Loss)

     Comprehensive income (loss) consists of net income (loss) for the period and the change in accumulated foreign currency translation adjustments during the period. For the three months ended September 30, 2004 and 2003, comprehensive income (loss) amounted to approximately $1.3 million and $(5.5) million, respectively. For the six months ended September 30, 2004 and 2003, comprehensive income (loss) amounted to approximately $15,000 and $(14.9) million, respectively.

4. Net Income (Loss) Per Share

     Basic net income (loss) per share is based on the weighted-average number of common shares outstanding excluding contingently issuable or returnable shares such as unvested common stock or shares that contingently convert into common stock upon certain events. Diluted net income (loss) per share is based on the weighted average number of common shares outstanding and the potential dilution of securities, by including stock options, outstanding warrants, less the share equivalents in deferred stock-based compensation related to the Sensys acquisition and the variable accounting treatment of certain stock options in the weighted average number of common shares outstanding for a period, to the extent they are dilutive.

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     The following table summarizes securities outstanding (in thousands) as of September 30, 2004 and 2003, respectively, which were not included in the calculation of diluted net income (loss) per share for the three months and six months ending September 30, 2004 and 2003, respectively.

     The stock options outstanding that were excluded from the net income (loss) per share had a weighted average exercise price at September 30, 2004 and 2003 of $6.63 and $9.07, respectively. The warrants outstanding that were excluded from the net income (loss) per share had a weighted average exercise price at September 30, 2004 and 2003 of $3.82 and $3.68, respectively.

5. Commitments and Contingencies

     We lease our facilities under non-cancelable operating leases that require us to pay maintenance and operating expenses, such as taxes, insurance and utilities. We are required pursuant to the terms of facility leases to maintain two standby letters of credit totaling $2.6 million. No amounts have been drawn against these standby letters of credit.

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     Rent expense was approximately $0.7 million and $0.6 million for the fiscal quarters ended September 30, 2004 and 2003, respectively and approximately $1.3 million and $1.5 million for the six months ended September 30, 2004 and 2003, respectively. As of September 30, 2004, future minimum lease payments under non-cancelable operating leases (facilities and equipment leases) and sub-lease income due to us under an existing sub-lease of an excess facility are as follows (in thousands):