STOCKHOLDERS? AGREEMENT

Exhibit 10.3

STOCKHOLDERS’ AGREEMENT

     This Stockholders’ Agreement (“ Agreement ”) is entered into as of November 22, 2005, by and among Therma-Wave, Inc., a Delaware corporation (the “ Company ”), and the parties set forth on Exhibit A hereto (each a “ Purchaser ” and collectively, the “ Purchasers ”).

Recitals

     WHEREAS, it is a condition to the closing of the sale of the Company’s Series B Convertible Preferred Stock to the Purchasers pursuant to the Stock Purchase Agreement of even date herewith (the “Purchase Agreement”) that the parties hereto enter into this Agreement to make certain provisions with respect to the Company’s organization and governance.

     NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties hereto agree as follows:

SECTION 1
DEFINITIONS

     1.1. Definitions . As used in this Agreement, the following terms shall have the following respective meanings:

     “ Affiliate ” has the meaning set forth in Regulation D under the Securities Act of 1933.

     “ Board ” means the Board of Directors of the Company.

     “ Change of Control ” means any of the events described below:

     (1) The occurrence of any event that would, if known to the Company’s management, be required to be reported by the Company under Item 5.01(a) of Form 8-K pursuant to the Securities Exchange Act of 1934 (the “ Exchange Act ”); or

     (2) The acquisition or receipt, in any manner, by any person (as defined for purposes of the Exchange Act) or any group of persons acting in concert, of direct or indirect beneficial ownership (as defined for purposes of the Exchange Act) of fifty percent (50%) or more of the combined voting securities ordinarily having the right to vote for the election of directors of the Company; provided that the following shall not constitute a Change in Control: (i) any acquisition directly from the Company; (ii) any acquisition by the Company or any of its affiliates, or (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any of its affiliates; or

     (3) A change in the constituency of the Board with the result that individuals (the “ Incumbent Directors ”) who are members of the Board as of the date of this Agreement cease for any reason to constitute at least a majority of the Board; provided that any individual

who is elected to the Board after the date of this Agreement and whose nomination for election was unanimously approved by the Incumbent Directors shall be considered an Incumbent Director beginning on the date of his or her election to the Board; or

     (4) Consummation of a merger, consolidation or reorganization involving the Company, unless such merger, consolidation or reorganization results in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or parent thereof) more than fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity or parent thereof outstanding immediately after such merger, consolidation or reorganization; or

     (5) A complete liquidation or dissolution of the Company;

     (6) A sale, exchange or other disposition or transfer of all or substantially all of the Company’s business or assets, other than pursuant to a spin-off or comparable transaction in which the transferee is controlled by the Company or its existing stockholders immediately prior to such transfer; or

     (7) execution of a binding agreement with respect to a transaction that, if completed, would constitute or result in a Change in Control.

     “ Common Stock ” means the common stock, $0.01 par value per share, of the Company.

     “ GAAP ” means United States generally accepted accounting principles.

     “ Holders ” means the Purchasers and their respective Affiliates.

     “ Person ” means an individual, partnership, corporation, limited liability company, association, trust, joint venture, unincorporated organization and any government, governmental department or agency or political subdivision thereof.

     “ Permitted Transferee ” means (i) any affiliate of a Purchaser, (ii) any successor entity that succeeds to all or substantially all of the assets of transferor,(iii) any limited partner, general partner or limited liability company member who receives a distribution from a Purchaser, (iv) any Person with at least $25.0 million in assets whose primary purpose is to invest in other entities or securities, including registered and unregistered investment companies and investment funds, financial institutions and other investment or financial entities (a “ Financial Entity ”), and (v) any Person following such time as the Purchasers are entitled to an additional director pursuant to Section 2.1(a)(iii) hereof, but without giving effect to any limitation imposed by the proviso in Section 2.1(a)(iii).

     “ Preferred Stock ” means the Series B Convertible Preferred Stock, par value $0.01 per share, of the Company.

     “ Purchaser ” has the meaning set forth in the introductory paragraph of this Agreement.

SECTION 2
BOARD OF DIRECTORS

     2.1. Board Composition .

          (a) Effective at the closing of the sale of the Company’s Series B Convertible Preferred Stock to the Purchasers pursuant to the Purchase Agreement, the Purchasers shall be entitled to designate members to the Board (the “ Purchaser Designees ”), as follows: (i) one individual designated by North Run Master Fund, LP (the “ North Run Designee ”), (ii) one individual designated collectively by Deephaven Relative Value Equity Trading Ltd and Deephaven Long Short Equity Trading Ltd (the “ Deephaven Designee ”); and (iii) in the event the Company’s cash and cash equivalents, determined in accordance with GAAP applied consistently with the Company’s past practice, are less than $15.0 million as of the end of a fiscal quarter as reported on the Company’s balance sheet included in Form 10-Q or Form 10-K for such quarter, the holders of a majority of Preferred Stock shall be entitled to designate one additional director (or such greater number as may be required such that the aggregate number of directors designated pursuant to this Section 2.1 equals the minimum number of directors necessary such that the aggregate number of directors equals at least thirty percent (30%) of the then sitting board members); provided, however, that notwithstanding the foregoing, in no event shall the percentage of board seats that holders of Preferred Stock are entitled to elect exceed their proportion of ownership of voting securities of the Company. Notwithstanding the foregoing, any individual (or individuals) to be nominated or elected to the Board pursuant to this Agreement that is designated by an initial Purchaser or a Permitted Transferee (pursuant to sections (i) – (iv) of the Permitted Transferee definition) shall be appointed only after reasonable consultation, review and discussion with the Company’s board of directors and its nominating committee. The Company agrees that its review process for the initial designees shall be completed no later than December 9, 2005. Any individual or individuals to be nominated or elected to the Board pursuant to this Agreement by a Permitted Transferee pursuant solely to section (v) of the Permitted Transferee definition must first be reasonably acceptable to a majority of the existing directors (excluding the North Run Designee and the Deephaven Designee), who shall not unreasonably withhold or delay their approval of such individual.

          (b) Notwithstanding the foregoing, (i) in the event the Purchasers together hold less than 50% of the number of shares of Preferred Stock originally purchased by them pursuant to the Purchase Agreement, the holders of a majority in interest of the Preferred Stock shall be entitled to elect a single director (and the Purchasers shall cause any director nominated pursuant to Section 2.1(a) and not reelected pursuant to this section to promptly tender his or her resignation from the Board) and (ii) in the event the Purchasers together hold less than 20% of the number of shares of Preferred Stock originally purchased by them pursuant to the Purchase Agreement, the rights set forth in this Section 2.1 shall terminate and Purchasers shall cause any director elected pursuant to Section 2.1(a) to promptly tender his or her resignation from the Board. In the event that any Purchaser Designee fails to deliver his or her resignation as may be required by this Section 2.1(b), the Company and the Purchasers shall be

entitled to take all necessary and appropriate action to cause such Purchaser Designee to be removed .

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