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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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Form 10-Q

|(Mark One)                             |                                                                                         
|-------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                      | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For Quarter Ended: October 31, 2002 or
|o                                      | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period from
 to    

Commission file number 0-26714

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ADE CORPORATION(Exact Name of Registrant as Specified in its Charter)

|Massachusetts(State or Other Jurisdiction of Incorporation or Organization) |  | 04-2441829(I.R.S. Employer Identification No.)
|--------------------------------------------------------------------------- |  | ----------------------------------------------

80 Wilson Way, Westwood, Massachusetts 02090(Address of Principal Executive Offices, Including Zip Code)

(781) 467-3500(Registrant's Telephone Number, Including Area Code)

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 ý    NO o

Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2) of the Exchange Act.

YES o    NO ý

Indicate
the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

|Common Stock, par value $.01 per share |  | 13,712,179 shares               
|-------------------------------------- |  | --------------------------------
|Class                                  |  | Outstanding at December 13, 2002

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ADE CORPORATION

INDEX



|                              |                                                                                               |                                                                                                     |    | Page
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | -- | ----
|Part I.Financial Information |                                                                                               |                                                                                                    
|                              | Item 1. Condensed Consolidated Financial Statements (unaudited)                               |                                                                                                     |   
|                              |                                                                                               | Condensed Consolidated Balance SheetOctober 31, 2002 and April 30, 2002                            |    | 3   
|                              |                                                                                               | Condensed Consolidated Statement of OperationsThree and Six Months Ended October 31, 2002 and 2001 |    | 4   
|                              |                                                                                               | Condensed Consolidated Statement of Cash FlowsSix Months Ended October 31, 2002 and 2001           |    | 5   
|                              |                                                                                               | Notes to Unaudited Condensed Consolidated Financial Statements                                      |    | 6   
|                              | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                     | 13
|                              | Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                     | 26
|                              | Item 4. Controls and Procedures                                                               |                                                                                                     | 26
|Part II.Other Information    |                                                                                               |                                                                                                    
|                              | Item 4. Submission of Matters to a Vote of Security Holders                                   |                                                                                                     | 27
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                     | 28
|Signatures                    |                                                                                               | 29                                                                                                 
|Certifications                |                                                                                               | 30                                                                                                 

2

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PART I.  FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (unaudited):

ADE CORPORATION        CONDENSED CONSOLIDATED BALANCE SHEET        (in thousands, unaudited)

|                                           |                                                | October 31,
2002           |         | April 30,
2002 |       
|------------------------------------------ | ---------------------------------------------- | -------------------------- | ------- | -------------- | ------
|Assets                                     |                                                |                            |         |                |       
|Current assets:                            |                                                |                            |         |                |       
|                                           | Cash and cash equivalents                      |                            | $       | 14,185         |       
|                                           | Marketable securities                          |                            |         | 997            |       
|                                           | Accounts receivable, net                       |                            |         | 15,067         |       
|                                           | Inventories                                    |                            |         | 32,242         |       
|                                           | Prepaid expenses and other current assets      |                            |         | 718            |       
|                                           |                                                |                            |         |                |       
|                                           |                                                | Total current assets       |         |                | 63,209
|Fixed assets, net                          |                                                |                            | 28,969  |                |       
|Investments                                |                                                |                            | 3,519   |                |       
|Intangible assets, net                     |                                                |                            | 1,058   |                |       
|Goodwill, net                              |                                                |                            | 1,318   |                |       
|Restricted cash                            |                                                |                            | 3,252   |                |       
|Other assets                               |                                                |                            | 144     |                |       
|                                           |                                                |                            |         |                |       
|Total assets                               |                                                | $                          | 101,469 |                | $     
|                                           |                                                |                            |         |                |       
|Liabilities and stockholders' equity       |                                                |                            |         |                |       
|Current liabilities:                       |                                                |                            |         |                |       
|                                           | Current portion of long-term debt              |                            | $       | 659            |       
|                                           | Accounts payable                               |                            |         | 5,933          |       
|                                           | Accrued expenses and other current liabilities |                            |         | 8,573          |       
|                                           | Deferred income on sales to affiliates         |                            |         | 2,174          |       
|                                           |                                                |                            |         |                |       
|                                           |                                                | Total current liabilities  |         |                | 17,339
|                                           |                                                |                            |         |                |       
|Long-term debt                             |                                                |                            | 10,400  |                |       
|                                           |                                                |                            |         |                |       
|Stockholders' equity:                      |                                                |                            |         |                |       
|                                           | Common stock                                   |                            |         | 137            |       
|                                           | Capital in excess of par value                 |                            |         | 103,746        |       
|                                           | Accumulated deficit                            |                            |         | (30,650        | )     
|                                           | Accumulated other comprehensive income         |                            |         | 497            |       
|                                           |                                                |                            |         |                |       
|                                           |                                                | Total stockholders' equity |         |                | 73,730
|                                           |                                                |                            |         |                |       
|Total liabilities and stockholders' equity |                                                | $                          | 101,469 |                | $     
|                                           |                                                |                            |         |                |       

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

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ADE CORPORATION        CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS        (in thousands, except per share data, unaudited)

|                                                                                                 |                            | Three months
ended October 31, |        | Six months
ended October 31, |       
|------------------------------------------------------------------------------------------------ | -------------------------- | ------------------------------ | ------ | ---------------------------- | ------
|
|Net Revenue:                                                                                     |                            |                                |        |                              |       
|Systems and parts                                                                                |                            | $                              | 15,941 |                              | $     
|Service                                                                                          |                            |                                | 2,114  |                              |       
|                                                                                                 |                            |                                |        |                              |       
|                                                                                                 | Total revenue              |                                |        | 18,055                       |       
|                                                                                                 |                            |                                |        |                              |       
|Cost of revenue:                                                                                 |                            |                                |        |                              |       
|Systems and parts                                                                                |                            |                                | 7,730  |                              |       
|Service                                                                                          |                            |                                | 2,277  |                              |       
|                                                                                                 |                            |                                |        |                              |       
|                                                                                                 | Total cost of revenue      |                                |        | 10,007                       |       
|                                                                                                 |                            |                                |        |                              |       
|                                                                                                 |                            | Gross profit                   |        |                              | 8,048 
|                                                                                                 |                            |                                |        |                              |       
|Operating expenses:                                                                              |                            |                                |        |                              |       
|                                                                                                 | Research and development   |                                |        | 4,349                        |       
|                                                                                                 | Marketing and sales        |                                |        | 2,909                        |       
|                                                                                                 | General and administrative |                                |        | 2,441                        |       
|                                                                                                 | Restructuring charges      |                                |        | 711                          |       
|                                                                                                 |                            |                                |        |                              |       
|                                                                                                 |                            | Total operating expenses       |        |                              | 10,410
|                                                                                                 |                            |                                |        |                              |       
|Loss from operations                                                                             |                            |                                | (2,362 | )                            |       
|Interest and other income (expense), net                                                         |                            |                                | (88    | )                            |       
|                                                                                                 |                            |                                |        |                              |       
|Loss before provision for income taxes and equity in net earnings (loss) of affiliated companies |                            |                                | (2,450 | )                            |       
|Provision for income taxes                                                                       |                            |                                | 14     |                              |       
|                                                                                                 |                            |                                |        |                              |       
|Loss before equity in net earnings (loss) of affiliated companies                                |                            |                                | (2,464 | )                            |       
|Equity in net earnings (loss) of affiliated companies                                            |                            |                                | 34     |                              |       
|                                                                                                 |                            |                                |        |                              |       
|Net loss                                                                                         |                            | $                              | (2,430 | )                            | $     
|                                                                                                 |                            |                                |        |                              |       
|Basic loss per share                                                                             |                            | $                              | (0.18  | )                            | $     
|Diluted loss per share                                                                           |                            | $                              | (0.18  | )                            | $     
|Weighted average shares outstandingbasic                                                        |                            |                                | 13,695 |                              |       
|Weighted average shares outstandingdiluted                                                      |                            |                                | 13,695 |                              |       

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

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ADE CORPORATION        CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS        (in thousands, unaudited)

|                                                     |                                                                                           | Six months
ended
October 31,                                                     |                                               
|---------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------- | ----------------------------------------------
|
|Cash flows from operating activities:                |                                                                                           |                                                                                  |                                               
|                                                     | Net loss                                                                                  |                                                                                  | $                                             
|                                                     | Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |                                                                                  |                                               
|                                                     |                                                                                           | Depreciation and amortization                                                    |                                               
|                                                     |                                                                                           | Deferred income taxes                                                            |                                               
|                                                     |                                                                                           | Equity in net (earnings) loss of affiliated companies, net of dividends received |                                               
|                                                     |                                                                                           | Changes in assets and liabilities:                                               |                                               
|                                                     |                                                                                           |                                                                                  | Accounts receivable, net                      
|                                                     |                                                                                           |                                                                                  | Inventories                                   
|                                                     |                                                                                           |                                                                                  | Prepaid expenses and other current assets     
|                                                     |                                                                                           |                                                                                  | Accounts payable                              
|                                                     |                                                                                           |                                                                                  | Accrued expenses and other current liabilities
|                                                     |                                                                                           |                                                                                  | Deferred income on sales to affiliate         
|                                                     |                                                                                           |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|Cash flows from investing activities:                |                                                                                           |                                                                                  |                                               
|                                                     | Purchases of fixed assets                                                                 |                                                                                  |                                               
|                                                     | Change in restricted cash                                                                 |                                                                                  |                                               
|                                                     | Decrease in other assets                                                                  |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|Cash flows from financing activities:                |                                                                                           |                                                                                  |                                               
|                                                     | Repayment of long-term debt                                                               |                                                                                  |                                               
|                                                     | Proceeds from issuance of common stock                                                    |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|                                                     |                                                                                           |                                                                                  |                                               
|Net increase (decrease) in cash and cash equivalents |                                                                                           |                                                                                  | (11,923                                       
|Cash and cash equivalents, beginning of period       |                                                                                           |                                                                                  | 26,108                                        
|                                                     |                                                                                           |                                                                                  |                                               
|Cash and cash equivalents, end of period             |                                                                                           | $                                                                                | 14,185                                        
|                                                     |                                                                                           |                                                                                  |                                               

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

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ADE CORPORATION        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.    Basis of Preparation

The accompanying unaudited condensed consolidated financial statements of ADE Corporation (the "Company") include, in the opinion of management, all adjustments
(consisting only of normal and recurring adjustments) necessary for a fair statement of the Company's financial position, results of operations and cash flows at the dates and for the periods
indicated. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years.

Pursuant
to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying unaudited condensed
consolidated financial statements and these notes do not include all disclosures required by generally accepted accounting principles for complete financial statements. Accordingly, these statements
should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2002.

2.    Comprehensive Loss

Comprehensive loss was as follows:

|                          |                                                         | Three months ended |        | Six months ended |  
|------------------------- | ------------------------------------------------------- | ------------------ | ------ | ---------------- | -
|
|
|Net loss                  |                                                         | $                  | (2,430 | )                | $
|Other comprehensive loss: |                                                         |                    |        |                  |  
|                          | Unrealized loss on marketable securities, net of $0 tax |                    |        | (293             | )
|                          |                                                         |                    |        |                  |  
|Other comprehensive loss  |                                                         |                    | (293   | )                |  
|                          |                                                         |                    |        |                  |  
|Comprehensive loss        |                                                         | $                  | (2,723 | )                | $
|                          |                                                         |                    |        |                  |  

3.    Inventories

Inventories consist of the following:

October 31,
2002

April 30,
2002(unaudited)(in thousands)Raw materials and purchased parts

$
16,651

$
16,228Work-in-process


14,858


15,104Finished goods


733


1,369$
32,242

$
32,701


4.    Goodwill and Intangible Assets

In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and
Other Intangible Assets," which was effective for the Company on May 1, 2002. SFAS 142 requires, among other things, the discontinuance of goodwill amortization and includes provisions
for the reclassification of certain existing recognized intangibles as

6

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goodwill, reassessment of the useful lives of existing recognized intangibles, and reclassification of certain intangibles out of previously reported goodwill. In accordance with this statement, the
Company discontinued the amortization of its net goodwill of $1.3 million. In addition, the Company completed the transitional impairment test of its goodwill in the six months ended
October 31, 2002 and no adjustment to goodwill was necessary. The Company is required to perform impairment tests under SFAS 142 annually and whenever events or changes in circumstances
suggest that the goodwill may be impaired. During the second quarter of fiscal year 2003, the Company's market capitalization value fell below its book value for a brief period of time. If the
Company's market value subsequently falls below its book value for an extended period of time in the future, the Company may be required to record an impairment of its goodwill and such amount could
be material to the Company's results of operations. Had SFAS 142 been in effect during the three and six months ended October 31, 2001, the Company's net loss and net loss per share
would have been as follows:

|                                              |  | Three months ended
October 31, |        | Six months ended
October 31, |  
|--------------------------------------------- |  | ------------------------------ | ------ | ---------------------------- | -
|
|
|Reported net loss                             |  | $                              | (2,430 | )                            | $
|Add back of goodwill amortization             |  |                                |       |                              |  
|                                              |  |                                |        |                              |  
|Adjusted net loss                             |  | $                              | (2,430 | )                            | $
|                                              |  |                                |        |                              |  
|Reported basic and diluted net loss per share |  | $                              | (0.18  | )                            | $
|Add back of goodwill amortization             |  |                                |       |                              |  
|                                              |  |                                |        |                              |  
|Adjusted basic and diluted loss per share     |  | $                              | (0.18  | )                            | $
|                                              |  |                                |        |                              |  

The
Company has $2.9 million in capitalized license fees for software included in the Company's products, which are still being amortized and have accumulated amortization of
$1.8 million and $1.6 million at October 31, 2002 and April 30, 2002, respectively. These license fees are amortized at the greater of 1) the ratio that current
gross revenue for the related products bear to the total current and anticipated future gross revenue for those products or 2) on a straight-line basis over the estimated useful
life of the related products. For the three and six months ended October 31, 2002, respectively, the Company amortized $113,000 and $226,000 of the license fees to the cost of revenue.
Estimated amortization is $450,000 for the fiscal year ended April 30, 2003, $150,000 for each of the fiscal years ended April 30, 2004, 2005 and 2006, and $50,000 for the fiscal year
ended April 30, 2007.

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5.    Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

October 31,
2002

April 30,
2002(unaudited)(in thousands)Accrued salaries, wages and vacation pay

$
1,736

$
2,223Accrued commissions


969


1,191Accrued warranty costs


928


1,146Accrued restructuring


576


Deferred revenue


1,927


4,537Other


2,437


2,907$
8,573

$
12,004


6.    Restructuring

During the second quarter of fiscal 2003, as a result of the continued downturn in the semiconductor industry, the Company recorded a restructuring charge of
$711,000, which consisted primarily of severance expenses for the 41 terminated employees across all segments and various functional areas of
the Company. The Company expects that all severance payments from the second quarter restructuring will be made by the end of fiscal year 2003.

In
August 2002, an agreement was entered into between the Company and its former Chief Executive Officer, Robert C. Abbe. Under the terms of the agreement, Mr. Abbe will
receive a total of $1.1 million over a three year period, beginning in September 2002, for severance and consulting services. The Company recorded a restructuring charge of $307,000 for
the severance portion of Mr. Abbe's agreement, which will be paid through September 2003. This amount is included in the $711,000 discussed above. The consulting portion of the agreement
will be expensed as incurred.

During
the first quarter of fiscal 2003, the Company implemented selective headcount reductions and closed three satellite offices in response to the prolonged downturn in the
semiconductor industry. The Company recorded a restructuring charge of $877,000, which consisted of $679,000 in employee severance expenses for the 39 terminated employees spread across all functional
areas of the Company and $198,000 related to the closing of the satellite offices, which primarily represents future lease obligations on the vacated offices. When applicable, anticipated future
sublease income relating to vacated offices was offset against the charge for the remaining lease payments. The sublease income was based on estimates and will be monitored going forward and is
subject to change. The Company expects that all severance payments from the first quarter restructuring will be made by the end of

8

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fiscal year 2003. Below is a table summarizing the activity related to the restructuring accrual for the six months ended October 31, 2002:

(in thousands)Severance

Office
Closures

TotalRestructuring accrual

$
679

$
198

$
877Cash payments


(338
)

(44
)

(382
)Balance at July 31, 2002


341


154


495Restructuring accrual


701


10


711Cash payments


(566
)

(64
)

(630
)Balance at October 31, 2002

$
476

$
100

$
576


7.    Earnings (Loss) Per Share

Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and gives effect to all dilutive potential common shares outstanding during the
period. For the three months ended October 31, 2002 and 2001, respectively, 1,147,376 and 735,450 common shares issuable upon the exercise of stock options have been excluded from the
computation of diluted earnings per share, as their effect would have been antidilutive. For the six months ended October 31, 2002 and 2001, respectively, 1,081,716 and 524,690 common shares
issuable upon the exercise of stock options have been excluded from the computation of diluted earnings per share, as their effect would have been antidilutive. For the three and six months ended
October 31, 2002 and 2001, basic and diluted loss per share is the same due to the antidilutive effect of potential common shares outstanding.

8.    Segment Reporting

The Company has three reportable segments: ADE Semiconductor Systems Group ("SSG"), ADE Phase Shift ("PST") and ADE Technologies ("ATI"). SSG manufactures and
markets metrology and inspection systems to the semiconductor wafer and device manufacturing industries that are used to improve yield and capital productivity. Sales of the Company's stand-alone
software products and software consulting services are also included in the SSG segment. PST manufactures and markets high performance, non-contact surface metrology equipment using
advanced interferometric technology that provides enhanced yield management to the data storage, semiconductor and optics industries. ATI manufactures and markets high precision magnetic
characterization and non-contact dimensional metrology gaging systems primarily to the data storage industry.

The
Company's reportable segments are determined based upon the nature of the products, the external customers and customer industries and the sales and distribution methods used to
market the products. The Company evaluates performance based upon profit or loss from operations. The Company does not measure the assets allocated to the segments. Management fees representing
certain
services provided by corporate offices have been allocated to each of the reportable segments based upon the usage of those services by each segment. Additionally, other income (loss), the provision
for (benefit from) income taxes and the equity in net earnings (loss) of affiliated companies are not included in segment profitability.

9

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Some
sales to JAL, ADE's 50% affiliate, are reflected in segment revenue during the period they are shipped by the respective segment, which can differ from the period the revenue is
recognized for consolidated financial reporting purposes. For the reportable segments, intercompany sales are recorded at 60% of the domestic list price of the respective product.

|                                       |                                       | SSG |   | PST    |   | ATI |       | Total |  
|-------------------------------------- | ------------------------------------- | --- | - | ------ | - | --- | ----- | ----- | -
|
|For the quarter ended October 31, 2002 |                                       |     |   |        |   |     |       |       |  
|                                       | Revenue from external customers       |     | $ | 13,323 |   | $   | 2,139 |       | $
|                                       | Intersegment revenue                  |     |   | 50     |   |     |      |       |  
|                                       | Income (loss) from operations         |     |   | (1,855 | ) |     | (569  | )     |  
|                                       | Depreciation and amortization expense |     |   | 1,004  |   |     | 103   |       |  
|                                       | Capital expenditures                  |     |   | 53     |   |     | 5     |       |  
|For the quarter ended October 31, 2001 |                                       |     |   |        |   |     |       |       |  
|                                       | Revenue from external customers       |     | $ | 17,142 |   | $   | 2,590 |       | $
|                                       | Intersegment revenue                  |     |   | 199    |   |     |      |       |  
|                                       | Loss from operations                  |     |   | (3,410 | ) |     | (344  | )     |  
|                                       | Depreciation and amortization expense |     |   | 1,195  |   |     | 94    |       |  
|                                       | Capital expenditures                  |     |   | 1,139  |   |     |      |       |  

|                                          |                                       | SSG |   | PST    |   | ATI |        | Total |  
|----------------------------------------- | ------------------------------------- | --- | - | ------ | - | --- | ------ | ----- | -
|
|For the six months ended October 31, 2002 |                                       |     |   |        |   |     |        |       |  
|                                          | Revenue from external customers       |     | $ | 23,654 |   | $   | 4,972  |       | $
|                                          | Intersegment revenue                  |     |   | 50     |   |     |       |       |  
|                                          | Loss from operations                  |     |   | (7,297 | ) |     | (457   | )     |  
|                                          | Depreciation and amortization expense |     |   | 2,070  |   |     | 201    |       |  
|                                          | Capital expenditures                  |     |   | 367    |   |     | 90     |       |  
|For the six months ended October 31, 2001 |                                       |     |   |        |   |     |        |       |  
|                                          | Revenue from external customers       |     | $ | 36,699 |   | $   | 3,744  |       | $
|                                          | Intersegment revenue                  |     |   | 397    |   |     |       |       |  
|                                          | Loss from operations                  |     |   | (4,946 | ) |     | (1,625 | )     |  
|                                          | Depreciation and amortization expense |     |   | 2,533  |   |     | 189    |       |  
|                                          | Capital expenditures                  |     |   | 1,959  |   |     | 49     |       |  

10

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The
following is a reconciliation for the above items where aggregate reportable segment amounts differ from amounts contained in the Company's consolidated financial statements.

|                                                                                               |  | Three months
ended October 31, |        | Six months
ended October 31, |  
|---------------------------------------------------------------------------------------------- |  | ------------------------------ | ------ | ---------------------------- | -
|
|Total external revenue for reportable segments                                                 |  | $                              | 17,966 |                              | $
|Net impact of revenue recognition on sales to affiliate                                        |  |                                | 89     |                              |  
|                                                                                               |  |                                |        |                              |  
|Total consolidated revenue                                                                     |  | $                              | 18,055 |                              | $
|                                                                                               |  |                                |        |                              |  
|Total operating loss for reportable segments                                                   |  | $                              | (2,421 | )                            | $
|Net impact of intercompany gross profit eliminations and deferred profit on sales to affiliate |  |                                | 59     |                              |  
|                                                                                               |  |                                |        |                              |  
|Total consolidated operating loss                                                              |  | $                              | (2,362 | )                            | $
|                                                                                               |  |                                |        |                              |  

9.    New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the
fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial statements of interim or annual periods that end after December 15,
2002. The provisions for initial recognition and
measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The impact of FIN 45 on
the Company's financial statements has not yet been determined.

In
June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and must be applied beginning January 1, 2003. SFAS 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when the exit or disposal plan is approved. The Company will
adopt the provisions of SFAS 146 for exit and disposal activities that are initiated after December 31, 2002 as required by the standard.

In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 requires one method of accounting for long-lived assets disposed of by sale. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 by the Company during the quarter ended July 31, 2002 did not have a material impact on its current
financial position and results of operations.

10.  Pending Litigation

On October 12, 2000, the Company filed a patent infringement lawsuit against KLA-Tencor (KLA), a competitor, in the U.S. District Court in
Delaware. The Company seeks damages and a permanent injunction against further infringement of United States Patent Number 6,118,525, entitled "Wafer

11

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Inspection System for Distinguishing Pits and Particles." On November 22, 2000, KLA filed a counterclaim in the United States District Court in Delaware alleging that the Company has infringed
three patents owned by KLA. KLA is seeking damages for the alleged patent infringement and a permanent injunction against future infringement. In addition, KLA has asked the District Court for a
declaration that United States Patent Number 6,118,525, owned by the Company, is invalid and not infringed by KLA. At this time, the Company cannot predict the outcome or the amount of gain or loss,
if any, from this lawsuit.

On
October 18, 2002, a former employee of the Company filed a civil action against the Company in Massachusetts Superior Court, Suffolk County, alleging that the Company breached
his employment contract with the Company and seeking damages of approximately $500,000. The Company has filed an answer to the former employee's complaint denying his allegations, and believes that
the former employee's claim lacks merit. The Company has also filed counterclaims against the employee. In July 2002, the same former employee filed two charges of discrimination against the
Company with the Massachusetts Commission Against Discrimination ("MCAD") alleging that the Company exposed him
to hostile work environment, and retaliated against him for complaining about that environment. The former employee seeks damages in an unspecified amount. The MCAD served the charges on ADE in late
October 2002. The Company has filed an answer to the former employee's charges, which remain under investigation by the MCAD, and believes that the charges lack merit. The Company plans to
defend the civil action and MCAD charges vigorously. Since the matters are at a preliminary stage, the Company is unable to predict the outcome or amount of the related expense, or loss, if any,
associated with either litigation. However, the Company believes that any related expense or loss will be fully covered under the Company's insurance policies.

12

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations:

Introduction

ADE Corporation (the "Company") designs, manufactures, markets and services highly precise, automated measurement, defect detection and handling equipment with
current applications in the production of semiconductor wafers, semiconductor devices and computer disks. The Company operates three major business segments, the Semiconductor Systems Group ("SSG"),
ADE Phase Shift ("PST") and ADE Technologies ("ATI"). The Semiconductor Systems Group manufactures multifunctional semiconductor metrology and automation systems and optical wafer defect inspection
equipment used to detect particles and other defects on silicon wafer surfaces. ADE Phase Shift manufactures high-performance, non-contact surface metrology equipment using
advanced interferometric technology that provides enhanced yield management to the data storage, semiconductor and optics industries. ADE Technologies manufactures high precision magnetic
characterization and non-contact dimensional metrology gaging systems primarily for the data storage industry.

The
Company's markets are cyclical. Since the second quarter of fiscal year 2002, the Company has experienced decreased demand for its products in all business segments as a result of
the downturn in the semiconductor wafer and device manufacturing industries as well as the magnetic data storage industry. Consequently, the Company has experienced reduced order levels and revenues.
In response to the industry downturn, we have undertaken cost reduction measures, including headcount reductions, while maintaining our investment in research and development to position the Company
for the next wave of capital spending in the semiconductor wafer and device manufacturing industries as well as the data storage industry. Although the Company is beginning to see signs of increased
capital spending in the semiconductor wafer and device manufacturing and magnetic data storage industries, no assurances can be made that it will lead to a sustainable increase in orders and revenue
for the Company.

The
following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this quarterly report and the audited
consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for
the fiscal year ended April 30, 2002.

Forward-Looking Statements

This quarterly report on Form 10-Q contains certain forward-looking statements that are subject to known and unknown risks and uncertainties
that could cause actual results to differ materially from those expressed by such statements. Those statements that make reference to the Company's expectations, predictions and anticipations should
be considered forward-looking statements. These statements include, but are not limited to, risks and uncertainties associated with the strength of the semiconductor and hard disk markets, wafer
pricing and wafer demand, the results of its product development efforts, the success of ADE's product offerings in meeting customer needs within the timeframes required by customers in these markets,
further increases in backlog, the Company's visibility and the it's predictions of future financial outcomes. Further information on potential factors that could affect the Company's business is
described in "Other Risk Factors" appearing at the end of this Management's Discussion and Analysis of Financial Condition and Results of Operations and in the Company's reports on file with the
Securities and Exchange Commission, including its Form 10-K for the fiscal year ended April 30, 2002.

Restructuring

During the second quarter of fiscal 2003, as a result of the continued downturn in the semiconductor industry, the Company recorded a restructuring charge of
$711,000, which consisted

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primarily of severance expenses for the 41 terminated employees across all segments and various functional areas of the Company. The Company expects that all severance payments from the second
quarter restructuring will be made by the end of fiscal year 2003.

In
August 2002, an agreement was entered into between the Company and its former Chief Executive Officer, Robert C. Abbe. Under the terms of the agreement, Mr. Abbe will
receive a total of $1.1 million over a three year period, beginning in September 2002, for severance and consulting services. The Company recorded a restructuring charge of $307,000 for
the severance portion of Mr. Abbe's agreement, which will be paid through September 2003. This amount is included in the $711,000 discussed above. The consulting portion of the agreement
will be expensed as incurred.

During
the first quarter of fiscal 2003, the Company implemented selective headcount reductions and closed three satellite offices in response to the prolonged downturn in the
semiconductor industry. The Company recorded a restructuring charge of $877,000, which consisted of $679,000 in employee severance expenses for the 39 terminated employees spread across all functional
areas of the Company and $198,000 related to the closing of the satellite offices, which primarily represents future lease obligations on the vacated offices. When applicable, anticipated future
sublease income relating to vacated offices was offset against the charge for the remaining lease payments. The sublease income was based on estimates and will be monitored going forward and is
subject to change. The Company
expects that all severance payments from the first quarter restructuring will be made by the end of fiscal year 2003. Below is a table summarizing the activity related to the restructuring accrual for
the six months ended October 31, 2002:

(in thousands)Severance

Office
Closures

TotalRestructuring accrual

$
679

$
198

$
877Cash payments


(338
)

(44
)

(382
)Balance at July 31, 2002


341


154


495Restructuring accrual


701


10


711Cash payments


(566
)

(64
)

(630
)Balance at October 31, 2002

$
476

$
100

$
576


Critical Accounting Policies, Significant Judgments and Estimates

The discussion and analysis of the Company's financial condition and results of operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure at the date of our financial statements. On an on-going
basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, intangible assets, income taxes, and warranty obligations. Management bases its estimates
and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company
considers certain accounting policies related to revenue recognition and allowance for doubtful accounts, inventory valuation, accounting for incomes taxes and valuation of long-lived
assets to be critical policies due to the estimates and judgments involved in each. Except for the critical accounting policy regarding the valuation of long-lived assets, described below,
our critical accounting policies have not changed since April 30, 2002.

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Revenue Recognition and Allowance for Doubtful Accounts

The Company changed its revenue recognition policy effective May 1, 2000, based on guidance provided in SEC Staff Accounting Bulletin No. 101 ("SAB
101"), "Revenue Recognition in Financial Statements." The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, our price
is fixed or determinable and collectibility is reasonably assured. Our standard customer arrangement includes a signed purchase order, in which we offer payment terms of 30 to 90 days, no right
of return of delivered products and a twelve month warranty. We assess whether the fee associated with our revenue transactions is fixed or determinable based on the payment terms associated with the
transaction. If a significant portion of the fee is due after our normal payment terms, 30 to 90 days, we determine that the fee is not fixed or determinable. In these cases, we recognize
revenue as the fees become due. We assess collectibility based on the credit worthiness of the customer and past transaction history. We perform on-going credit evaluations of our
customers and do not require collateral from our customers.    For many of our international customers, we require an irrevocable letter of credit to be issued by the customer before the
purchase order is accepted. If we determine that collection of a fee is not reasonably assured, we defer the fee and recognize the revenue at the time that collection becomes reasonably assured, which
is generally upon the receipt of cash.

For
some of the Company's sales transactions, a portion, usually 10%, of the fee is not due until installation occurs and the customer accepts the product. The other 90% of the fee is
normally due 30 to 90 days after shipment. If the Company has met defined customer acceptance experience levels with a specific type of product, these transactions are accounted for as
multiple-element arrangements with the deferral of the portion of the fee not due until installation is complete and customer acceptance has occurred. Management of the Company must make a
determination of what constitutes an appropriate experience level with a product. This determination is based on, but not limited to, the extent to which a product contains significantly new
technology, the number of similarly configured products previously delivered and our experience with a particular customer. The portion of the fee related to the installation of the product and
customer training is classified as service revenue. All other sales with customer acceptance provisions are recognized as revenue upon customer acceptance.

The
Company's transactions frequently involve the sales of systems and services under multiple element arrangements. Revenue under multiple element arrangements is allocated to all
elements except systems based upon the fair value of those elements. The amounts allocated to training are based upon the price charged when this element is sold separately and unaccompanied by the
other elements. The amount allocated to installation revenue is based upon hourly rates and the estimated time to complete the service. The amount allocated to system and parts is done on a residual
method basis. Under this method, the total arrangement value is allocated first to undelivered elements, based on their fair values, with the remainder being allocated to system revenue. Installation
and training are not essential to the functionality of systems as these services do not alter the equipment's capabilities, are available from other vendors and the systems are standard products.

We
accrue for anticipated warranty costs upon shipment. Service revenue is recognized as the services are performed provided collection of the related receivable is probable. Service
contract revenue is recognized ratably over the contractual periods in which the services are provided. We do not provide the right to return products. Revenue from software licenses is recognized
when an agreement has been executed, software has been delivered, fees are fixed or determinable and collection of the related receivable is probable. Revenue from software consulting services
provided on a time and reimbursable expense basis is recognized as the services are provided.

Revenue
from sales to Japan ADE Ltd, our 50% owned affiliate and a distributor of our products, by the SSG, ATI and PST segments are reflected in segment revenue during the period
they are shipped by the respective segment, which can differ from the period the revenue is recognized for

15

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consolidated financial reporting purposes. Consolidated revenue on sales to Japan ADE Ltd is recognized when the related product or software is shipped to and accepted by the end user of the
product or software.

The
Company maintains an allowance for doubtful accounts based on a continuous review of customer accounts, payment patterns and specific collection issues. Where specific collection
issues are identified, the Company records a specific allowance based on the amount that the Company believes will be collected. For accounts where specific collection issues are not identified, the
Company will record a reserve based on the age of the receivable and historical collection patterns.

Inventory Valuation

Inventories are valued at the lower of cost or market, cost being determined on a first-in, first-out basis. Management evaluates the need
to record adjustments for impairment of inventory on a monthly basis. The Company's policy is to assess the valuation of all inventories, including raw materials,
work-in-process, finished goods and spare parts. Obsolete inventory or inventory in excess of management's estimated usage is written-down to its estimated market
value, if less than its cost. Inherent in the estimates of market value are management's estimates related to current economic
trends, future demand for the Company's products, and technological obsolescence. Significant management judgments must be made when establishing the reserve for obsolete and excess inventory. If our
judgments and estimates relating to obsolete and excess inventory prove to be inadequate, our financial results could be materially adversely affected in future periods. If the inventory value is
written down to its net realizable value, and subsequently there is an increased demand for the inventory at a higher value, the increased value of the inventory is not realized until the inventory is
sold.

Accounting for Income Taxes

We record income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards.
Our financial statements contain certain deferred tax assets, which have arisen primarily as a result of operating losses incurred in prior years, as well as other temporary differences between book
and tax accounting. Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," requires the establishment of a valuation allowance to reflect the likelihood of the
realization of deferred tax assets. Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance
recorded against our net deferred tax assets. We evaluate the weight of all available evidence to determine whether it is more likely than not that some portion or all of the deferred income tax
assets will not be realized. The Company currently has a valuation allowance for the full amount of its deferred tax assets. The decision to record the valuation allowance required significant
judgment. Had we not recorded this allowance, we would have reported materially different results. If the realization of deferred tax assets in the future is considered more likely than not, an
adjustment to the deferred tax assets would increase net income in the period such determination was made. The amount of the deferred tax asset considered realizable is based on significant estimates,
and it is at least reasonably possible that changes in these estimates in the near term could materially affect our financial condition and results of operations. Our effective tax rate may vary from
period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, and deductibility of certain costs and
expenses by jurisdiction.

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Valuation of Goodwill and Long-Lived Assets

Intangible assets consist of $1.3 million of goodwill obtained through the acquisition of the Semiconductor Solutions Division of LPA Software, Inc.
("SSD") in September 1997 as well as $1.1 million of capitalized license fees for software included in the Company's products. In July 2001, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which was effective for the Company on May 1, 2002.
SFAS 142 requires, among other things, the discontinuance of goodwill amortization and includes provisions for the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles, and reclassification of certain intangibles out of
previously reported goodwill. In accordance with this statement, the Company discontinued the amortization of its net goodwill of $1.3 million on May 1, 2002. In addition, the Company
was required to perform a transitional impairment test for goodwill under SFAS 142. The impairment test under SFAS 142 uses a two-step process. The first step compares the
fair value of the reporting unit with the unit's carrying value, including goodwill. If the carrying value of the reporting unit is greater than fair value, the unit's goodwill may be impaired, and
the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the reporting unit's goodwill is compared with the
carrying amount of the unit's goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value.

The
Company completed the transitional impairment test of its goodwill in the six months ended October 31, 2002 and no adjustment to goodwill was necessary. The Company is
required to perform impairment tests under SFAS 142 annually and whenever events or changes in circumstances suggest that the goodwill may be impaired. During the second quarter of fiscal 2003,
the Company's market capitalization value fell below its book value for a brief period of time. If the Company's market value subsequently falls below its book value for an extended period of time in
the future, the Company may be required to record an impairment of its goodwill and such amount could be material to the Company's results of operations

Net
capitalized license fees of $1.1 million for software included in the Company's products are amortized at the greater of 1) the ratio that current gross revenue for the
related products bear to the total current and anticipated future gross revenue for those products or 2) on a straight-line basis over its estimated useful life. In accordance with
Statement of Financial Accounting Standards Board No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which was adopted by the Company on May 1, 2002,
the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances, both internally and externally, that may
suggest an asset is not recoverable, that is, if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the assets use and eventual disposition. Factors we consider
important that could trigger the impairment review include:



17

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If
such circumstances exist, we evaluate the carrying value of long-lived assets to determine if impairment exists based upon estimated undiscounted future cash flows over
the remaining useful life of the assets and comparing that value to the carrying value of the assets. If the carrying value of the asset is greater than the estimated future cash flows, the asset is
written down to the estimated fair value. We determine the estimated fair value of the assets on a projected discounted cash flow method using a discount rate determined by management to be
commensurate with the risk inherent in the current business model. In determining expected future cash flows, assets are grouped at the lowest level for which cash flows are identifiable and
independent of cash flows from other asset groups. Our cash flow estimates contain management's best estimates, using appropriate and customary assumptions and projections at the time.

Significant
management judgments and estimates must be made when establishing criteria for future cash flows, estimating reporting unit fair value and assessing impairment. If our
judgments and estimates relating to goodwill and long-lived assets prove to be inadequate, an asset may be determined to be impaired and our financial results could be materially adversely
impacted. Likewise, if a future event or circumstance indicates that an impairment assessment is required and, through the performance of that assessment, an asset is determined to be impaired, our
financial results could be materially and adversely impacted in future periods.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or
operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial
statements that are reasonably likely to materially affect our
liquidity or the availability of our capital resources, except as set forth below under "Liquidity and Capital Resources."

Results of Operations

Three Months Ended October 31, 2002 compared to Three Months Ended October 31, 2001

Systems and parts revenue.Systems and parts revenue decreased 18% to $15.9 million in the second quarter of fiscal
2003 from $19.5 million in the second quarter of fiscal 2002. Revenue in the SSG segment decreased 28% to $11.5 million in the second quarter of fiscal 2003 compared to
$15.9 million in the year earlier period. Decreased sales of the Company's products in the SSG segment reflected a decrease in demand for capital equipment in the semiconductor wafer and device
industries as a result of the current severe down cycle. Revenue in the PST segment decreased 17% to $2.1 million in the second quarter of fiscal 2003 compared to $2.6 million in the
year earlier period. The decrease in revenue from the PST segment was due primarily to the timing of revenue recognition by the Company's Japanese affiliate.

Wafer
manufacturers' capital equipment purchases have been focused on advanced industry requirements rather than on capacity expansion, which resulted in technology purchases of the
Company's next generation of products. However, wafer manufacturers have been slowly adding capacity and the Company has experienced an increase in shipments of legacy products as a result of these
capacity related purchases. For the three months ended October 31, 2002, 79% of the Company's revenue was derived from the semiconductor industry compared to 84% for the year earlier period.
The Company sells its semiconductor products to both wafer and device manufacturers. Historically, the Company's semiconductor revenue has been derived more from wafer manufacturers than device
manufacturers. For the three months ended October 31, 2002, 85% of semiconductor revenue was derived from wafer manufacturers while 15% was derived from device manufacturers compared to 81% and
19%, respectively, for the year earlier period. An increase in short-term chip demand or increases

18

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in semiconductor market capital expenditures is expected to impact device manufacturers prior to wafer manufacturers as wafer manufacturers are further down on the overall semiconductor industry
supply chain. For the third quarter of fiscal 2003, the Company expects revenue from the semiconductor industry to increase slightly from second quarter revenues. However, the Company can make no
assurances that the expected increase in third quarter revenue can be sustained over the balance of its fiscal year.

The
data storage industry has experienced extreme pricing pressure, consolidation and excess supply in many data storage market segments, which has resulted in reduced production and
capital equipment purchases. However, revenue from the products that are marketed to the data storage industry by the Company's ATI segment increased 38% to $2.7 million in the second quarter
of fiscal 2003 compared to $2.0 million in the year earlier period. The increase in revenue is due primarily to increased shipments of the Company's magnetic storage products during the second
quarter of fiscal 2003. Data storage industry revenue comprised 21% of total revenue for the three months ended October 31, 2002, compared to 16% for the year earlier period. The Company can
make no assurances that the increase in revenue in the short term can be sustained into the next quarter and over the balance of its fiscal year.

Service revenue.Service revenue decreased 11% to $2.1 million in the second quarter of fiscal 2003 compared to
$2.4 million in the second quarter of fiscal 2002. The Company's service revenue consists of fees for installation, training, product maintenance and technical support services. The majority of
the Company's service revenue is derived from the SSG segment. The decrease in service revenue reflects the current severe down cycle in the wafer and device manufacturing industries.

Gross profitsystems and parts.Gross profit increased to 52% in the second quarter of fiscal 2003 from 42% in
the second quarter of fiscal 2002. The increase in gross profit in all segments was primarily due to factory overhead cost reductions undertaken over the past fiscal year. The Company expects gross
profit over the short term to be consistent with the quarter ended October 31, 2002.

Gross profitservice.Gross profit decreased to (8%) in the second quarter of fiscal 2003 from (1%) in the second
quarter of fiscal 2002. The decrease in gross profit was due primarily to the decreased level of service revenue in the second quarter of fiscal 2003 compared to the year earlier period.

Research and development.Research and development expense decreased $1.6 million, or 27%, to $4.3 million in
the second quarter of fiscal 2003 from $6.0 million in the second quarter of fiscal 2002 and decreased as a percentage of revenue to 24% compared to 27% in the second quarter of fiscal 2002.
The decrease in expense resulted primarily from a decrease in payroll, consulting and project material expenses in all segments, which were part of the overall cost reduction measures taken by the
Company over the past fiscal year. The Company continues to invest in its AFS, AWIS, NanoMapperand WaferSight products as well as new
products for the magnetic storage industry, including those that measure the magnetic properties of materials used in manufacturing disk drives. The decrease in expense as a percentage of revenues
reflects the cost reductions mentioned above. The Company expects the decrease in research and development expense to continue over the short term as the benefit of recent cost reduction measures
takes effect.

Marketing and sales.Marketing and sales expense decreased $0.6 million, or 18%, to $2.9 million in the second
quarter of fiscal 2003 from $3.6 million in the second quarter of 2002 and was consistent as a percentage of revenue at 16% compared to the second quarter of fiscal 2002. The decreased expense
resulted primarily from decreased payroll expense and discretionary spending including travel and advertising in all segments of the Company. Also contributing to the decrease in expense was a
decrease in commissions expense on sales made through internal and external sales representatives
directly attributable to the decrease in sales during the second quarter of fiscal 2003. The mix of sales channels through which the Company's products are sold may have a significant impact on the
Company's marketing and sales expense and the results in any period may not be indicative of marketing and sales expense for future periods.

19

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General and administrative.General and administrative expense decreased $0.4 million, or 13%, to $2.4 million
in the second quarter of fiscal 2003 from $2.8 million in the second quarter of fiscal 2002 and increased as a percentage of revenue to 14% from 13% in the second quarter of 2002. Expense
decreased primarily due a decrease in payroll and benefits expenses, which were part of the overall cost reduction measures taken by the Company over the past fiscal year. Legal and patent expenses in
the second quarter of fiscal 2003 were consistent with the same period in the prior fiscal year.

Interest and other income (expense), net.Net interest and other income (expense) was ($88,000) in the second quarter of
fiscal 2003 compared to net interest and other income (expense) of $48,000 in the second quarter of fiscal 2002. Interest income and other income of $109,000 for the second quarter of fiscal 2003 was
offset by $197,000 of interest expense. The decrease in interest and other income resulted primarily from lower interest returns due to lower interest rates and invested cash balances during the
second quarter of fiscal 2003 compared to the year earlier period. Interest expense in the second quarter of fiscal 2003 was slightly less than the year earlier period.

Income taxes.There was a provision for income taxes of $14,000 in the second quarter of fiscal 2003 compared to a provision
for income taxes of $10.6 million in the second quarter of fiscal 2002. The provision for income taxes in the second quarter of fiscal 2003 primarily consists of foreign income taxes. The
provision for income taxes in the second quarter of fiscal 2002 was due primarily to an increase in the valuation allowance against the Company's deferred tax assets in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."

Equity in net earnings of affiliated companies.Equity in net earnings of affiliated companies was $34,000 in the second
quarter of fiscal 2003 compared to $109,000 in the second quarter of fiscal 2002. The Company's Japanese affiliate sells primarily to the semiconductor industry and the current period earnings reflect
the timing of shipments and the recognition of revenue by the affiliate.

Six Months Ended October 31, 2002 compared to Six Months Ended October 31, 2001

Systems and parts revenue.Systems and parts revenue decreased 32% to $28.8 million in the six months ended
October 31, 2002 from $42.6 million in the year earlier period. Revenue in the SSG segment
decreased 40% to $20.1 million in the six months ended October 31, 2002 from $33.6 million in the year earlier period. Decreased sales of the Company's products in the SSG segment
reflected a decrease in demand for capital equipment in the semiconductor wafer and device industries as a result of the current severe down cycle. Revenue in the PST segment increased 33% to
$5.0 million in the six months ended October 31, 2002 from to $3.7 million in the year earlier period. The increase in revenue from the PST segment was due to increased shipments
of PST's NanoMappertool in the six months ended October 31, 2002, compared to the year earlier period.

Wafer
manufacturers' capital equipment purchases have been focused on advanced industry requirements rather than on capacity expansion, which resulted in technology purchases of the
Company's next generation of products. However, wafer manufacturers have been slowly adding capacity and the Company has experienced an increase in shipments of legacy products as a result of these
capacity related purchases. For the six months ended October 31, 2002, 72% of the Company's revenue was derived from the semiconductor industry compared to 86% for the year earlier period. The
Company sells its semiconductor products to both wafer and device manufacturers. Historically, the Company's semiconductor revenue has been derived more from wafer manufacturers than device
manufacturers. For the six months ended October 31, 2002, 89% of semiconductor revenue was derived from wafer manufacturers while 11% was derived from device manufacturers compared to 87% and
13%, respectively, for the year earlier period. An increase in short-term chip demand or increases in semiconductor market capital expenditures is expected to impact device manufacturers
prior to wafer manufacturers as wafer manufacturers are further down on the overall semiconductor industry supply

20

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chain. For the third quarter of fiscal 2003, the Company expects revenue from the semiconductor industry to increase slightly from second quarter revenues. However, the Company can make no assurances
that the expected increase in revenue in the third quarter can be sustained over the balance of its fiscal year.

The
data storage industry has experienced extreme pricing pressure, consolidation and excess supply in many data storage market segments, which has resulted in reduced production and
capital equipment purchases. However, revenue from the products that are marketed to the data storage industry by the Company's ATI segment increased 11% to $4.3 million in the six months ended
October 31, 2002 from $3.9 million in the year earlier period. The increase in revenue is due primarily to increased shipments of the Company's magnetic storage products during the
second quarter of fiscal 2003. Data storage industry revenue comprised 19% of total revenue for the six months ended October 31, 2002, compared to 14% for the year earlier period. The Company
can make no assurances that the increase in revenue in the short term can be sustained into the next quarter and over the balance of its fiscal year.

Service revenue.Service revenue decreased 15% to $4.0 million in the six months ended October 31, 2002 from
$4.7 million in the year earlier period. The Company's service revenue consists of fees for installation, training, product maintenance and technical support services. The majority of the
Company's service revenue is derived from the SSG segment. The decrease in service revenue reflects the current severe down cycle in the wafer and device manufacturing industries.

Gross profitsystems and parts.Gross profit increased to 50% in the six months ended October 31, 2002
from 45% in the year earlier period. The increase in gross profit in all segments was due primarily to factory overhead cost reductions undertaken over the past fiscal year. Also contributing to the
increase in gross profit was an increase in gross profit from the PST segment due to increased revenue as discussed above. The Company expects gross profit over the short term to be consistent with
the quarter ended October 31, 2002.

Gross profitservice.Gross profit decreased to (15%) in the six months ended October 31, 2002 from (12%)
in the year earlier period. The decrease in gross profit was due primarily to the decreased level of service revenue in the six months ended October 31, 2002 compared to the year earlier
period.

Research and development.Research and development expense decreased $2.9 million, or 24%, to $9.2 million in
the six months ended October 31, 2002 from $12.1 million in the year earlier period and increased as a percentage of revenue to 28% compared to 26% in the year earlier period. The
decrease in expense resulted primarily from a decrease in payroll, consulting and project material expenses in all segments, which were part of the overall cost reduction measures taken by the Company
over the past fiscal year. The Company continues to invest in its AFS, AWIS, NanoMapper and WaferSight products as well as new products for the magnetic storage industry, including those that measure
the magnetic properties of materials used in manufacturing disk drives. The increase in expense as a percentage of revenues reflects the decrease in revenue mentioned above. The Company expects the
decrease in research and development expense to continue over the short term as the benefit of recent cost reduction measures takes effect.

Marketing and sales.Marketing and sales expense decreased $1.4 million, or 20%, to $5.7 million in the six
months ended October 31, 2002 from $7.1 million in the year earlier period and increased as a percentage of revenue to 17% compared to 15% in the year earlier period. The decreased
expense resulted primarily from a decrease in commissions expense on sales made through internal and external sales representatives due to the decrease in sales during the six months ended
October 31, 2002. Also contributing to the decrease in expense was decreased payroll expense and discretionary spending including travel and advertising in all segments of the Company. The mix
of sales channels through which the Company's products are sold may have a significant impact on the Company's marketing and

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sales expense and the results in any period may not be indicative of marketing and sales expense for future periods.

General and administrative.General and administrative expense increased $0.2 million, or 4%, to $5.3 million
in the six months ended October 31, 2002 from $5.1 million in the year earlier period and increased as a percentage of revenue to 16% from 11% in the year earlier period. Expense
increased primarily due an increase in legal and patent expense as a result of the ongoing litigation with KLA-Tencor. This increase in legal and patent expense was slightly offset by a
decrease in payroll and benefits expense, which was part of the overall cost reduction measures taken by the Company over the past fiscal year.

Interest and other income (expense), net.Net interest and other income (expense) was ($207,000) in the six months ended
October 31, 2002 compared to net interest and other income (expense) of $360,000 in the year earlier period. Interest income and other income of $191,000 for the six months ended
October 31, 2002 was offset by $398,000 of interest expense. The decrease in interest and other income resulted primarily from lower interest returns due to lower interest rates and invested
cash balances during the six months ended October 31, 2002 compared to the year earlier period. Interest expense in the six months ended October 31, 2002 was slightly less than the year
earlier period.

Income taxes.There was a provision for income taxes of $35,000 in the six months ended October 31, 2002 compared to a
provision for income taxes of $10.6 million in the year earlier period. The provision for income taxes in the six months ended October 31, 2002 primarily consists of foreign income
taxes. The provision for income taxes in the six months ended October 31, 2001 was due primarily to an increase in the valuation allowance against the Company's deferred tax assets in
accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes."

Equity in Net Earnings (Loss) of Affiliated Companies.Equity in net earnings (loss) of affiliated companies was ($31,000) in
the six months ended October 31, 2002 compared to $177,000 in the year earlier period. The Company's Japanese affiliate sells primarily to the semiconductor industry and the current period loss
reflects the timing of shipments and the recognition of revenue by the affiliate.

Liquidity and Capital Resources

At October 31, 2002, the Company had $14.2 million in cash and cash equivalents and $45.9 million in working capital. In addition, the
Company had $3.3 million in restricted cash used as security for a tax-exempt Industrial Development Bond ("IDB") issued through the Massachusetts Industrial Finance Agency in
December 1997. Under the terms of the bond agreement, the Company may substitute a letter of credit in an amount equal to approximately 105% of the outstanding principal balance as collateral
for the Company's obligations under the IDB, assuming the Company has the ability to borrow under a credit facility. Such actions would allow the restricted cash balance to be used for general
corporate purposes. The Company has a standby letter of credit from a financial institution to collateralize the issuance of a tax-exempt IDB in June 1996 through the Massachusetts
Industrial Finance Agency. The Company also has a standby letter of credit from the same financial institution to collateralize the issuance of a tax-exempt IDB in April 1999
through the Industrial Development Authority of the County of Pima, Arizona. The agreements under which the letters of credit were issued are secured by mortgages on Company buildings and land in
Westwood, Massachusetts and Tucson, Arizona. Under the terms of the agreements under which these letters of credit were issued, the Company is required to comply with certain financial covenants. As
of October 31, 2002, the Company was in violation of one covenant under each such agreement, relating in one instance to maintaining a requisite level of cash and in the other to maintaining a
requisite debt service coverage ratio. The Company has obtained a waiver for these violations for the quarter ended October 31, 2002. The Company cannot provide assurance that it will be in
compliance with these covenants at the end of the fiscal quarter ending January 31, 2003. If it were not to be in compliance at that time, the

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Company would attempt to obtain additional waivers. The Company is engaged in discussions with financial institutions regarding obtaining financing to replace or eliminate the letters of credit. If
the Company were unsuccessful in obtaining refinancing or additional waivers, the issuer of the letters of credit could notify the holders of the IDBs, as the beneficiaries of the letters of credit,
of its intention to terminate the letters of credit. The beneficiaries would then be able to draw upon the letters of credit. The issuer of the letters of credit would then have the right to demand
immediate reimbursement from the Company of the amounts paid to the beneficiaries and to foreclose on collateral (restricted cash and real property) securing the amounts due to the issuer of the
letters of credit.

Cash
used in operating activities for the six months ended October 31, 2002 was $11.5 million. This amount resulted from net loss of $8.2 million adjusted for
non-cash charges of $2.5 million and a $5.7 million net increase in working capital accounts. Non-cash items consisted primarily of $2.4 million of
depreciation and amortization and $0.1 million of equity in the net earnings of affiliated companies. Working capital items consisted primarily of increases in accounts receivable of
$3.3 million and deferred income on sales to affiliates of $0.7 million and decreases in inventories of $0.5 million, prepaid expenses and other current assets of
$0.6 million, accounts payable of $0.7 million, and accrued expenses and other current liabilities of $3.4 million. The increase in accounts receivable was due to the increase of
shipments during the second quarter of fiscal 2003. The increase in deferred income on sales to affiliate is due to the timing of shipments and revenue recognition by the Company's Japanese affiliate.
The decrease in inventory was due to increased shipments during the second quarter of fiscal 2003. The decrease in accounts payable was primarily due to the timing of payments to vendors. The decrease
in accrued expenses and other current liabilities was primarily due to the decrease in deferred revenue, accrued salaries, wages and vacation pay and accrued warranty.

Cash
used in investing activities was $0.4 million, and consisted primarily of $0.5 million for purchases of fixed assets, which was partially offset by a combined decrease
in other assets and restricted cash of $0.1 million.

Cash
used in financing activities was $0.1 million, which consisted of $0.3 million in repayments of long-term debt, which were offset by $0.2 million of
aggregate proceeds from the issuance of common stock from the exercise of stock options and stock purchased through the Company's employee stock purchase plan.

Under
GAAP, certain obligations and commitments are not required to be included in the consolidated balance sheet. These obligations and commitments, while entered into in the normal
course of business, may have a material impact on liquidity. The Company does not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited
purposes. As such, the Company is not exposed to any financing, liquidity, market or credit risk that could arise if the Company had engaged in such relationships.

The
following table discloses our contractual payment obligations as of October 31, 2002. The operating lease and consulting agreement obligations are not included in the
unaudited condensed consolidated financial statements included under "Item 1. Financial Information." The principal portion of the long term debt is included in the unaudited condensed
consolidated financial statements.

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Payments due by period

(in thousands)Less than
1 year

1-3 years

Greater than
3 years

TotalLong term debt

$
1,264

$
2,493

$
10,091

$
13,848Operating leases


649


817


343


1,809Consulting agreement (Note 6)


306


411





717$
2,219

$
3,721

$
10,434

$
16,374


The
Company also enters into purchase order commitments in the normal course of business, of which the liability is not included in the financial statements in accordance with GAAP.

The
Company expects to meet its near-term working capital needs and capital expenditures primarily through available cash and cash equivalents, which will primarily be
generated from sales to both existing and new customers. However, the Company can provide no assurance that it will be able to maintain its current customer base or acquire new customers. The Company
expects to further reduce its cash burn rate, approaching cash break-even, as it expects revenues to increase slightly and expenses to be lower than the quarter ended October 31,
2002.

Other Risk Factors and Trends

Capital expenditures by semiconductor wafer and device manufacturers historically have been cyclical as they in turn depend upon the current and anticipated
demand for integrated circuits. While the semiconductor industry is in the midst of a severe down cycle, it is not clear when semiconductor wafer manufacturers, who account for approximately 67% of
the Company's revenue, will be in a position to increase their purchases of capital equipment. The data storage industry has been in a period of oversupply and excess manufacturing capacity for an
extended period of time and this has also had an adverse impact on the Company. At October 31, 2002, the Company's backlog was $23.3 million. The Company remains uncertain about when
sustained growth in revenue will return. The Company continues to evaluate its cost structure relative to expected revenue and will continue to implement aggressive cost containment measures where
necessary. However, the Company cannot provide assurance that it will be able to implement cost containment measures in a timely or cost effective manner.

Furthermore,
the Company's success is dependent upon supplying technologically superior products to the marketplace at appropriate times to satisfy customer needs. Product development
requires substantial investment and is subject to technological risks. Delays or difficulties in product development or market acceptance of newly developed products could adversely affect the future
performance of the Company.

As
discussed above, the Company was in violation of covenants under two standby letters of credit and has obtained a waiver for the violated covenants. The Company cannot provide
assurance that it will be in compliance with its covenants in the future, or if it were to not be in compliance, whether or not it would be able to obtain additional waivers, be able to refinance the
letters of credit, be required to reimburse the amounts of the letters of credit or lose its collateral securing the amounts of the letters of credit.

New Accounting Pronouncements

In November 2002, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires that upon

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issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. The disclosure provisions of FIN 45 are effective for financial
statements of interim or annual periods that end after December 15, 2002. The provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are
issued or modified after December 31, 2002, irrespective of a guarantor's year-end. The impact of FIN 45 on the Company's financial statements has not yet been determined.

In
June 2002, the FASB issued Statement of Financial Accounting Standards No. 146 ("SFAS 146"), "Accounting for Costs Associated with Exit or Disposal Activities."
SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" and must be applied beginning January 1, 2003. SFAS 146
requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred rather than when the exit or disposal plan is approved. The Company will
adopt the provisions of SFAS 146 for exit and disposal activities that are initiated after December 31, 2002 as required by the standard.

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In
October 2001, the FASB issued Statement of Financial Accounting Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets." SFAS 144 requires one method of accounting for long-lived assets disposed of by sale. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 by the Company during the quarter ended July 31, 2002 did not have a material impact on its current
financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk:

At October 31, 2002, the Company's exposure to market risk relates primarily to changes in interest rates on its investment portfolio. The Company's cash
equivalents consist primarily of fixed income securities. The Company invests only with high credit quality issuers and does not use derivative financial instruments in its investment portfolio. The
Company does not believe that a sharp increase
or decrease in interest rates would have a material adverse impact on the fair value of its investment portfolio. The Company's long-term borrowings are at fixed interest rates.

In
addition, a portion of the Company's business is conducted outside the United States through its foreign subsidiaries and an affiliate. The Company generally transacts business in
international markets in United States currency, but pays its employees in local currencies. Accordingly, the Company is subject to exposure from adverse movements in foreign currency exchange rates.

Item 4. Controls and Procedures:

The
term "disclosure controls and procedures" is defined in Rules 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the
Exchange Act is recorded, processed, summarized and reported within required time periods. Within 90 days prior to the filing date of this Form 10-Q (the "Evaluation Date"),
the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's chief executive officer and chief financial officer, of the
effectiveness of the design and operation of the Company's disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer have concluded that,
as of the Evaluation Date, such disclosure controls and procedures were effective in ensuring that required information will be disclosed on a timely basis in the Company's reports filed under the
Exchange Act.

The
Company maintains a system of internal accounting controls that are designed to provide reasonable assurance that the Company's transactions are properly recorded, that the Company's
assets are safeguarded against unauthorized or improper use and that the Company's transactions are properly recorded and reported. As part of the evaluation of the Company's disclosure controls and
procedures, the Company evaluated its internal controls. There were no significant changes to the Company's internal controls or other factors that could significantly affect the controls subsequent
to the Evaluation Date, nor were any corrective actions taken with regard to any significant deficiencies or material weaknesses.

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PART II.  OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders:

The Annual Meeting of Stockholders of the Company was held on September 18, 2002. The stockholders voted on the following matters:

|Nominee                 |  | For        |  | Withheld 
|----------------------- |  | ---------- |  | ---------
|Harris Clay             |  | 11,760,364 |  | 38,814   
|Landon T. Clay          |  | 11,760,364 |  | 38,814   
|H. Kimball Faulkner     |  | 11,744,154 |  | 55,024   
|Francis B. Lothrop, Jr. |  | 11,760,364 |  | 38,814   
|Chris L. Koliopoulos    |  | 10,201,339 |  | 1,597,839
|Kendall Wright          |  | 11,760,264 |  | 38,914   

There
were no abstentions with respect to this matter.

|For       |  | Against   |  | Abstain
|--------- |  | --------- |  | -------
|9,497,917 |  | 2,292,961 |  | 8,300  

|For        |  | Against |  | Abstain
|---------- |  | ------- |  | -------
|11,782,487 |  | 13,110  |  | 3,581  

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Item 6. Exhibits and Reports on Form 8-K:

|Exhibit Number |  | Description                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|21.1           |  | Subsidiaries of the Company.                                                                                                                      
|99.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|99.2           |  | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

|                        |  | ADE CORPORATION                                                                     
|----------------------- |  | ------------------------------------------------------------------------------------
|Date: December 16, 2002 |  | /s/CHRIS L. KOLIOPOULOSChris L. Koliopoulos
President and Chief Executive Officer   
|Date: December 16, 2002 |  | /s/BRIAN C. JAMESBrian C. James
Executive Vice President and Chief Financial Officer

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CERTIFICATION

Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002

I,
Chris L. Koliopoulos, Ph.D., certify that:





|Date: December 16, 2002 |  | /s/CHRIS L. KOLIOPOULOSChris L. Koliopoulos
President and Chief Executive Officer
|----------------------- |  | ---------------------------------------------------------------------------------

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CERTIFICATION

Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002

I,
Brian C. James, certify that:





|Date: December 16, 2002 |  | /s/BRIAN C. JAMESBrian C. James
Executive Vice President, Treasurer and Chief Financial Officer
|----------------------- |  | -----------------------------------------------------------------------------------------------

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