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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------



For the Quarterly Period Ended: January 31, 2005



| ̈ | 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)



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|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|Massachusetts                                                 |  | 04-2441829                         
|(State or Other Jurisdiction ofIncorporation or Organization) |  | (I.R.S. EmployerIdentification 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)



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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 ̈NO  x



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



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 |  | 14,164,890 shares           
|Class                                  |  | Outstanding at March 9, 2005



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##### Table of Contents

ADE CORPORATION

INDEX



|                                |  |                                                                                             |  |     
|------------------------------- |  | ------------------------------------------------------------------------------------------- |  | ----
|                                |  |                                                                                             |  | Page
|Part I. -
Financial Information |  |                                                                                            
|                                |  |                                                                                            
|Item 1.                         |  | Consolidated Financial Statements (unaudited)                                               |  |     
|                                |  |                                                                                            
|                                |  | Consolidated Balance Sheet- January 31, 2005 and April 30, 2004                             |  | 3   
|                                |  |                                                                                            
|                                |  | Consolidated Statement of Operations- Three and Nine Months Ended January 31, 2005 and 2004 |  | 4   
|                                |  |                                                                                            
|                                |  | Consolidated Statement of Cash Flows  Nine Months Ended January 31, 2005 and 2004          |  | 5   
|                                |  |                                                                                            
|                                |  | Notes to Unaudited Consolidated Financial Statements                                        |  | 6   
|                                |  |                                                                                            
|Item 2.                         |  | Managements Discussion and Analysis of Financial Condition and Results of Operations       |  | 14  
|                                |  |                                                                                            
|Item 3.                         |  | Quantitative and Qualitative Disclosures About Market Risk                                  |  | 28  
|                                |  |                                                                                            
|Item 4.                         |  | Controls and Procedures                                                                     |  | 28  
|                                | 
|Part II. -
Other Information    |  |                                                                                            
|                                |  |                                                                                            
|Item 1.                         |  | Legal Proceedings                                                                           |  | 29  
|                                |  |                                                                                            
|Item 6.                         |  | Exhibits                                                                                    |  | 29  
|                                | 
|Signatures                      |  | 30                                                                                         



2



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##### Table of Contents

PART I.

FINANCIAL INFORMATION



Item 1. Consolidated Financial Statements:



ADE CORPORATION

CONSOLIDATED BALANCE SHEET

(in thousands except share and per share information, unaudited)



|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                                                                                  |  | January31, 2005 |         |   | April 30,2004 |  
|Assets                                                                                                                                                            |  |                 |         |   |               |   |         |  
|Current assets:                                                                                                                                                   |  |                 |         |   |               |   |         |  
|Cash and cash equivalents                                                                                                                                         |  | $               | 64,803  |   |               | $ | 41,560  |  
|Marketable securities                                                                                                                                             |  |                 | 884     |   |               |   | 1,084   |  
|Accounts receivable, net                                                                                                                                          |  |                 | 19,273  |   |               |   | 13,604  |  
|Inventories                                                                                                                                                       |  |                 | 30,474  |   |               |   | 32,745  |  
|Prepaid expenses and other current assets                                                                                                                         |  |                 | 1,211   |   |               |   | 1,068   |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Total current assets                                                                                                                                              |  |                 | 116,645 |   |               |   | 90,061  |  
|                                                                                                                                                                  |  |                
|Fixed assets, net                                                                                                                                                 |  |                 | 9,642   |   |               |   | 10,829  |  
|Investments                                                                                                                                                       |  |                 | 499     |   |               |   | 499     |  
|Assets held for sale                                                                                                                                              |  |                 |        |   |               |   | 4,323   |  
|Intangible assets, net                                                                                                                                            |  |                 | 570     |   |               |   | 683     |  
|Goodwill                                                                                                                                                          |  |                 | 1,318   |   |               |   | 1,318   |  
|Restricted cash                                                                                                                                                   |  |                 | 631     |   |               |   | 637     |  
|Other assets                                                                                                                                                      |  |                 | 108     |   |               |   | 125     |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Total assets                                                                                                                                                      |  | $               | 129,413 |   |               | $ | 108,475 |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Liabilities and stockholders equity                                                                                                                              |  |                 |         |   |               |   |         |  
|Current liabilities:                                                                                                                                              |  |                 |         |   |               |   |         |  
|Current portion of long-term debt                                                                                                                                 |  | $               | 175     |   |               | $ | 168     |  
|Accounts payable                                                                                                                                                  |  |                 | 6,653   |   |               |   | 6,364   |  
|Accrued expenses and other current liabilities                                                                                                                    |  |                 | 12,959  |   |               |   | 10,557  |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Total current liabilities                                                                                                                                         |  |                 | 19,787  |   |               |   | 17,089  |  
|                                                                                                                                                                  |  |                
|Deferred gain on sale-leaseback                                                                                                                                   |  |                 | 1,524   |   |               |   | 1,609   |  
|Long-term debt, net of current portion                                                                                                                            |  |                 | 3,476   |   |               |   | 3,608   |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Total liabilities                                                                                                                                                 |  |                 | 24,787  |   |               |   | 22,306  |  
|                                                                                                                                                                  |  |                
|Stockholders equity:                                                                                                                                             |  |                 |         |   |               |   |         |  
|Common stock, $.01 par value: 25,000,000 shares authorized: 14,084,476 and 13,997,310 issued and outstanding at January 31, 2005 and April 30,
2004, respectively |  |                 | 141     |   |               |   | 141     |  
|Capital in excess of par value                                                                                                                                    |  |                 | 107,268 |   |               |   | 106,399 |  
|Accumulated deficit                                                                                                                                               |  |                 | (3,274  | ) |               |   | (21,071 | )
|Accumulated other comprehensive income                                                                                                                            |  |                 | 491     |   |               |   | 700     |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Total stockholders equity                                                                                                                                        |  |                 | 104,626 |   |               |   | 86,169  |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                                                                                        |  | $               | 129,413 |   |               | $ | 108,475 |  
|                                                                                                                                                                  |  |                 |         |   |               |   |         |  



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



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ADE CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data, unaudited)



|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------------------------- |  | ----------------------------- | ------ | - | ---------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                                           |  | Three months endedJanuary 31, |        |   | Nine months endedJanuary 31, |  
|                                                                                                           |  | 2005                          |        |   | 2004                         |   |        | 2005 |  |   | 2004   |  
|Net Revenue:                                                                                               |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Systems and parts                                                                                          |  | $                             | 26,426 |   |                              | $ | 20,904 |      |  | $ | 77,677 |   |  | $ | 55,561 |  
|Service                                                                                                    |  |                               | 3,079  |   |                              |   | 2,225  |      |  |   | 9,430  |   |  |   | 6,840  |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total revenue                                                                                              |  |                               | 29,505 |   |                              |   | 23,129 |      |  |   | 87,107 |   |  |   | 62,401 |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Cost of revenue:                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Systems and parts                                                                                          |  |                               | 11,507 |   |                              |   | 9,027  |      |  |   | 33,671 |   |  |   | 24,799 |  
|Service                                                                                                    |  |                               | 2,462  |   |                              |   | 2,403  |      |  |   | 7,233  |   |  |   | 7,385  |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total cost of revenue                                                                                      |  |                               | 13,969 |   |                              |   | 11,430 |      |  |   | 40,904 |   |  |   | 32,184 |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Gross profit                                                                                               |  |                               | 15,536 |   |                              |   | 11,699 |      |  |   | 46,203 |   |  |   | 30,217 |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Operating expenses:                                                                                        |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Research and development                                                                                   |  |                               | 4,130  |   |                              |   | 3,688  |      |  |   | 11,412 |   |  |   | 11,090 |  
|Marketing and sales                                                                                        |  |                               | 2,715  |   |                              |   | 3,006  |      |  |   | 9,000  |   |  |   | 7,420  |  
|General and administrative                                                                                 |  |                               | 2,413  |   |                              |   | 3,432  |      |  |   | 7,940  |   |  |   | 8,094  |  
|Restructuring charges                                                                                      |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   | 393    |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                                                   |  |                               | 9,258  |   |                              |   | 10,126 |      |  |   | 28,352 |   |  |   | 26,997 |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income from operations                                                                                     |  |                               | 6,278  |   |                              |   | 1,573  |      |  |   | 17,851 |   |  |   | 3,220  |  
|                                                                                                           |  |                               |        |  
|Gain on sale of long-term investment                                                                       |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   | 1,729  |  
|Gain on sale of marketable securities                                                                      |  |                               |       |   |                              |   | 398    |      |  |   |       |   |  |   | 398    |  
|Interest income                                                                                            |  |                               | 182    |   |                              |   | 47     |      |  |   | 379    |   |  |   | 181    |  
|Interest expense                                                                                           |  |                               | (70    | ) |                              |   | (76    | )    |  |   | (203   | ) |  |   | (370   | )
|Other income                                                                                               |  |                               | 163    |   |                              |   | 90     |      |  |   | 214    |   |  |   | 147    |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income before provision for (benefit from) income taxes and equity in net earnings of affiliated companies |  |                               | 6,553  |   |                              |   | 2,032  |      |  |   | 18,241 |   |  |   | 5,305  |  
|Provision for (benefit from) income taxes                                                                  |  |                               | 117    |   |                              |   | 11     |      |  |   | 444    |   |  |   | (174   | )
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Income before equity in net earnings of affiliated companies                                               |  |                               | 6,436  |   |                              |   | 2,021  |      |  |   | 17,797 |   |  |   | 5,479  |  
|Equity in net earnings of affiliated companies                                                             |  |                               |       |   |                              |   |       |      |  |   |       |   |  |   | 48     |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Net income                                                                                                 |  | $                             | 6,436  |   |                              | $ | 2,021  |      |  | $ | 17,797 |   |  | $ | 5,527  |  
|                                                                                                           |  |                               |        |   |                              |   |        |      |  |   |        |   |  |   |        |  
|Basic earnings per share                                                                                   |  | $                             | 0.46   |   |                              | $ | 0.15   |      |  | $ | 1.27   |   |  | $ | 0.40   |  
|Diluted earnings per share                                                                                 |  | $                             | 0.45   |   |                              | $ | 0.14   |      |  | $ | 1.25   |   |  | $ | 0.39   |  
|                                                                                                           |  |                               |        |  
|Weighted average shares outstanding - basic                                                                |  |                               | 14,065 |   |                              |   | 13,934 |      |  |   | 14,038 |   |  |   | 13,859 |  
|Weighted average shares outstanding - diluted                                                              |  |                               | 14,285 |   |                              |   | 14,250 |      |  |   | 14,276 |   |  |   | 14,077 |  



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



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ADE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands, unaudited)



|                                                                                  |  |                              |        |   |      |   |        |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                  |  | Nine months endedJanuary 31, |       
|                                                                                  |  | 2005                         |        |   | 2004 |  
|Cash flows from operating activities:                                             |  |                              |        |   |      |   |        |  
|Net income                                                                        |  | $                            | 17,797 |   |      | $ | 5,527  |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                              |        |   |      |   |        |  
|Depreciation and amortization                                                     |  |                              | 1,700  |   |      |   | 2,296  |  
|Long-lived asset impairment                                                       |  |                              |       |   |      |   | 200    |  
|Equity in net earnings of affiliate, net of dividends received                    |  |                              |       |   |      |   | 952    |  
|Shares issued in lieu of directors fees                                          |  |                              |       |   |      |   | 37     |  
|Gain on sale of long-term investment                                              |  |                              |       |   |      |   | (1,729 | )
|Gain on sale of marketable securities                                             |  |                              |       |   |      |   | (398   | )
|Gain on sale of building                                                          |  |                              | (69    | ) |      |   |       |  
|Non-cash compensation                                                             |  |                              | 20     |   |      |   |       |  
|Amortization of gain from sale-leaseback                                          |  |                              | (85    | ) |      |   | (56    | )
|Changes in assets and liabilities:                                                |  |                              |        |   |      |   |        |  
|Accounts receivable, net                                                          |  |                              | (5,669 | ) |      |   | (5,289 | )
|Inventories                                                                       |  |                              | 2,271  |   |      |   | (3,448 | )
|Prepaid expenses and other current assets                                         |  |                              | (143   | ) |      |   | 102    |  
|Accounts payable                                                                  |  |                              | 289    |   |      |   | 3,908  |  
|Accrued expenses and other current liabilities                                    |  |                              | 2,402  |   |      |   | 2,168  |  
|Deferred income on sales to affiliate                                             |  |                              |       |   |      |   | (2,259 | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net cash provided by operating activities                                         |  |                              | 18,513 |   |      |   | 2,011  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash flows from investing activities:                                             |  |                              |        |   |      |   |        |  
|Purchases of fixed assets                                                         |  |                              | (402   | ) |      |   | (448   | )
|Change in restricted cash                                                         |  |                              | 6      |   |      |   | 2,522  |  
|Proceeds from sale of building, net of selling expenses                           |  |                              | 4,394  |   |      |   | 9,753  |  
|Proceeds from sale of long-term investment                                        |  |                              |       |   |      |   | 4,000  |  
|Proceeds from sale of marketable securities                                       |  |                              |       |   |      |   | 515    |  
|Decrease in other assets                                                          |  |                              | 17     |   |      |   | (16    | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Net cash provided by investing activities                                         |  |                              | 4,015  |   |      |   | 16,326 |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash flows from financing activities:                                             |  |                              |        |   |      |   |        |  
|Repayment of long-term debt                                                       |  |                              | (125   | ) |      |   | (6,937 | )
|Proceeds from issuance of common stock                                            |  |                              | 849    |   |      |   | 1,826  |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) financing activities                               |  |                              | 724    |   |      |   | (5,111 | )
|                                                                                  |  |                              |        |   |      |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                      |  |                              | (9     | ) |      |   |       |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                         |  |                              | 23,243 |   |      |   | 13,226 |  
|Cash and cash equivalents, beginning of period                                    |  |                              | 41,560 |   |      |   | 21,476 |  
|                                                                                  |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                          |  | $                            | 64,803 |   |      | $ | 34,702 |  
|                                                                                  |  |                              |        |   |      |   |        |  



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



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ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



1. Basis of Preparation



The accompanying unaudited 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
consolidated financial statements and these notes do not include all disclosures required by generally accepted accounting principles in the United States of America 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, 2004.



2. Comprehensive Income



Comprehensive income was as follows:



|                                                            |  |                    |       |   |                   |   |       |                 |  |   |                 |   |  |   |      
|----------------------------------------------------------- |  | ------------------ | ----- | - | ----------------- | - | ----- | --------------- |  | - | --------------- | - |  | - | -----
|                                                            |  | (in thousands)     |       |   | (in thousands)   
|                                                            |  | Three months ended |       |   | Nine months ended
|                                                            |  | January 31,2005    |       |   | January 31,2004   |   |       | January 31,2005 |  |   | January 31,2004
|                                                            |  | (unaudited)        |       |   | (unaudited)      
|Net income                                                  |  | $                  | 6,436 |   |                   | $ | 2,021 |                 |  | $ | 17,797          |   |  | $ | 5,527
|Other comprehensive income (loss):                          |  |                    |       |   |                   |   |       |                 |  |   |                 |   |  |   |      
|Unrealized gain (loss) on marketable securities, net of tax |  |                    | (10   | ) |                   |   | (67   | )               |  |   | (200            | ) |  |   | 788  
|Currency translation adjustments                            |  |                    | (2    | ) |                   |   |      |                 |  |   | (9              | ) |  |   |     
|                                                            |  |                    |       |   |                   |   |       |                 |  |   |                 |   |  |   |      
|Other comprehensive income (loss)                           |  |                    | (12   | ) |                   |   | (67   | )               |  |   | (209            | ) |  |   | 788  
|                                                            |  |                    |       |   |                   |   |       |                 |  |   |                 |   |  |   |      
|Comprehensive income                                        |  | $                  | 6,424 |   |                   | $ | 1,954 |                 |  | $ | 17,588          |   |  | $ | 6,315
|                                                            |  |                    |       |   |                   |   |       |                 |  |   |                 |   |  |   |      



3. Inventories



Inventories consist of the following:



|                                  |  |                 |        |                |   |       
|--------------------------------- |  | --------------- | ------ | -------------- | - | ------
|                                  |  | (in thousands) 
|                                  |  | January 31,2005 |        | April 30, 2004
|                                  |  | (unaudited)    
|Raw materials and purchased parts |  | $               | 16,371 |                | $ | 18,168
|Work-in-process                   |  |                 | 12,667 |                |   | 13,357
|Finished goods                    |  |                 | 1,436  |                |   | 1,220 
|                                  |  |                 |        |                |   |       
|                                  |  | $               | 30,474 |                | $ | 32,745
|                                  |  |                 |        |                |   |       



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ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



4. Assets Held for Sale



In February 2003, the Companys Board of Directors approved a plan to sell the Companys Newton, Massachusetts property, which housed the
Companys ADE Technologies, Inc. (ATI) subsidiary. The operations of ATI were relocated to the Companys Westwood, Massachusetts facility during the fourth quarter of fiscal 2003. The Company listed the property for sale and
actively looked for a buyer. In accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets, the Company classified the assets associated with
the Newton property as Available for Sale and ceased depreciation on the assets. As required by SFAS 144, in order to classify this property as Available for Sale, it must be probable that it will be sold within one year
unless certain criteria are met. During the time that the Newton property was listed for sale, the real estate market for industrial properties in the Boston area was sluggish. The Company responded to these market conditions by decreasing the
asking price of the property and recorded charges of $378,000 during fiscal year 2004 to general and administrative expenses to reduce the net carrying value of the assets to the fair value less the cost to sell the property. The fair value of the
property was determined by the Companys best estimate of the current market value of the property as a result of negotiations with potential buyers since the property was listed for sale. On June 25, 2004, the Company entered into a purchase
and sale agreement with a buyer for the Newton property. The sale of the Newton property was completed on December 2, 2004. The Company received net proceeds of $4.4 million. A gain of approximately $69,000 was recognized on the transaction and was
recorded as income in the Companys consolidated statement of operations for the quarter ended January 31, 2005.



5. Intangible Assets



The Company has capitalized license fees for software included in the Companys products. These license fees are amortized at the greater of 1) the
ratio that current gross revenue for the related products bears 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. The carrying amount
and accumulated amortization for the Companys intangible assets are as follows:



|                         |  |                 |       |   |               |   |       |  
|------------------------ |  | --------------- | ----- | - | ------------- | - | ----- | -
|                         |  | (in thousands)  |      
|                         |  | January 31,2005 |       |   | April 30,2004 |  
|                         |  | (unaudited)     |      
|License fees at cost     |  | $               | 1,400 |   |               | $ | 1,400 |  
|Accumulated amortization |  |                 | (830  | ) |               |   | (717  | )
|                         |  |                 |       |   |               |   |       |  
|Net carrying value       |  | $               | 570   |   |               | $ | 683   |  
|                         |  |                 |       |   |               |   |       |  



Amortization expense
was $38,000 for the three months ended January 31, 2005 and 2004, respectively, and $113,000 for the nine months ended January 31, 2005 and 2004, respectively. Estimated annual amortization is $178,000, $316,000 and $189,000 for the fiscal years
ending April 30, 2005, 2006 and 2007, respectively.



7



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##### Table of Contents

ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



6. Accrued Expenses and Other Current Liabilities



Accrued expenses and other current liabilities consist of the following:



|                                                                 |  |                 |        |               |   |       
|---------------------------------------------------------------- |  | --------------- | ------ | ------------- | - | ------
|                                                                 |  | (in thousands) 
|                                                                 |  | January 31,2005 |        | April 30,2004
|                                                                 |  | (unaudited)    
|Accrued salaries, wages, vacation pay and incentive compensation |  | $               | 3,476  |               | $ | 2,144 
|Accrued commissions                                              |  |                 | 839    |               |   | 1,271 
|Accrued warranty costs                                           |  |                 | 1,485  |               |   | 1,257 
|Deferred revenue                                                 |  |                 | 3,251  |               |   | 2,367 
|Other                                                            |  |                 | 3,908  |               |   | 3,518 
|                                                                 |  |                 |        |               |   |       
|                                                                 |  | $               | 12,959 |               | $ | 10,557
|                                                                 |  |                 |        |               |   |       



7. Stock-based Compensation



Stock-based compensation awards to employees under the
Companys stock plans are accounted for using the intrinsic value method prescribed in Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees, and related interpretations. The Company
has adopted the disclosures required by SFAS No. 123 (SFAS 123), Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-based Compensation. Had compensation cost for the stock-based
compensation been determined based on the fair value at the grant dates of awards consistent with the provisions of SFAS 123, the Companys net income and earnings per share would have been reduced to the pro forma amounts as follows:



|                                                                                                                              |  |                                                                    |       |                                                                    |   |       |  |      |        |  |   |      
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------ | ----- | ------------------------------------------------------------------ | - | ----- |  | ---- | ------ |  | - | -----
|                                                                                                                              |  | (In thousands, exceptper share data)Three months ended January 31, |       | (In thousands, exceptper share data) Nine months ended January
31,
|                                                                                                                              |  | 2005                                                               |       | 2004                                                               |   | 2005  |  | 2004
|                                                                                                                              |  | (unaudited)                                                        |       | (unaudited)                                                       
|Net income, as reported                                                                                                       |  | $                                                                  | 6,436 |                                                                    | $ | 2,021 |  | $    | 17,797 |  | $ | 5,527
|Add back: Stock-based compensation included in net income, as reported                                                        |  |                                                                    | 5     |                                                                    |   | 37    |  |      | 20     |  |   | 37   
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related income taxes |  |                                                                    | 336   |                                                                    |   | 154   |  |      | 1,091  |  |   | 842  
|                                                                                                                              |  |                                                                    |       |                                                                    |   |       |  |      |        |  |   |      
|Pro forma net income                                                                                                          |  | $                                                                  | 6,105 |                                                                    | $ | 1,904 |  | $    | 16,726 |  | $ | 4,722
|                                                                                                                              |  |                                                                    |       |                                                                    |   |       |  |      |        |  |   |      
|Net earnings per share:                                                                                                       |  |                                                                    |       |                                                                    |   |       |  |      |        |  |   |      
|Basic - as reported                                                                                                           |  | $                                                                  | 0.46  |                                                                    | $ | 0.15  |  | $    | 1.27   |  | $ | 0.40 
|Basic - pro forma                                                                                                             |  | $                                                                  | 0.43  |                                                                    | $ | 0.14  |  | $    | 1.19   |  | $ | 0.34 
|Diluted - as reported                                                                                                         |  | $                                                                  | 0.45  |                                                                    | $ | 0.14  |  | $    | 1.25   |  | $ | 0.39 
|Diluted - pro forma                                                                                                           |  | $                                                                  | 0.43  |                                                                    | $ | 0.13  |  | $    | 1.17   |  | $ | 0.34 



8



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##### Table of Contents

ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



8. Earnings Per Share



Basic earnings per share is computed by dividing net income 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 January 31, 2005
and 2004, respectively, 363,362 and 67,000 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 because the exercise price of
the options was greater than the average market value of the Companys common stock during the respective periods. For the nine months ended January 31, 2005 and 2004, respectively, 361,000 and 595,327 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 because the exercise price of the options was greater than the average market value of the Companys stock
during the respective periods.



The following is a
reconciliation of the shares used in calculating basic and diluted earnings per share:



|                                                                                          |  |                                             |  |                                              |  |        |  |       
|----------------------------------------------------------------------------------------- |  | ------------------------------------------- |  | -------------------------------------------- |  | ------ |  | ------
|                                                                                          |  | (in thousands)Three months endedJanuary 31, |  | (in thousands) Nine months ended January 31,
|                                                                                          |  | 2005                                        |  | 2004                                         |  | 2005   |  | 2004  
|                                                                                          |  | (unaudited)                                
|Shares used in computation:                                                               |  |                                             |  |                                              |  |        |  |       
|Weighted average common stock outstanding used in computation of basic earnings per share |  | 14,065                                      |  | 13,934                                       |  | 14,038 |  | 13,859
|Dilutive effect of stock options outstanding                                              |  | 220                                         |  | 316                                          |  | 238    |  | 218   
|                                                                                          |  |                                             |  |                                              |  |        |  |       
|Shares used in computation of diluted earnings per share                                  |  | 14,285                                      |  | 14,250                                       |  | 14,276 |  | 14,077
|                                                                                          |  |                                             |  |                                              |  |        |  |       



9. 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 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 gauging
systems primarily to the data storage industry.



The
Companys reportable segments are determined based upon information used to evaluate the business by the chief operating decision maker, which includes 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, the provision for (benefit from) income taxes and the equity in net earnings of
affiliated companies are not included in segment profitability. For the reportable segments, intersegment sales are recorded at cost plus 20% and are eliminated in consolidation.



9



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##### Table of Contents

ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



9. Segment Reporting (Continued)



|                                           |  |                |        |     |   |        |  |   |       |   |  |   |       
|------------------------------------------ |  | -------------- | ------ | --- | - | ------ |  | - | ----- | - |  | - | ------
|                                           |  | (in thousands)
|                                           |  | SSG            |        | PST |   | ATI    |  |   | Total
|For the quarter ended January 31, 2005     |  |                |        |     |   |        |  |   |       |   |  |   |       
|Revenue from external customers            |  | $              | 15,528 |     | $ | 10,719 |  | $ | 3,258 |   |  | $ | 29,505
|Intersegment revenue                       |  |                | 171    |     |   | 23     |  |   | 129   |   |  |   | 323   
|Income from operations                     |  |                | 1,445  |     |   | 4,315  |  |   | 548   |   |  |   | 6,308 
|Depreciation and amortization expense      |  |                | 402    |     |   | 130    |  |   | 4     |   |  |   | 536   
|Capital expenditures                       |  |                | 19     |     |   | 82     |  |   | 149   |   |  |   | 250   
|                                           |  |                |        |    
|For the quarter ended January 31, 2004     |  |                |        |     |   |        |  |   |       |   |  |   |       
|Revenue from external customers            |  | $              | 16,589 |     | $ | 4,290  |  | $ | 2,250 |   |  | $ | 23,129
|Intersegment revenue                       |  |                |       |     |   |       |  |   | 176   |   |  |   | 176   
|Income (loss) from operations              |  |                | 1,155  |     |   | 771    |  |   | (353  | ) |  |   | 1,573 
|Depreciation and amortization expense      |  |                | 504    |     |   | 136    |  |   | 25    |   |  |   | 665   
|Capital expenditures                       |  |                | 389    |     |   | 73     |  |   |      |   |  |   | 462   
|                                           | 
|                                           |  | (in thousands)
|                                           |  | SSG            |        | PST |   | ATI    |  |   | Total
|For the nine months ended January 31, 2005 |  |                |        |     |   |        |  |   |       |   |  |   |       
|Revenue from external customers            |  | $              | 54,042 |     | $ | 24,088 |  | $ | 8,977 |   |  | $ | 87,107
|Intersegment revenue                       |  |                | 216    |     |   | 217    |  |   | 350   |   |  |   | 783   
|Income from operations                     |  |                | 9,474  |     |   | 7,604  |  |   | 828   |   |  |   | 17,906
|Depreciation and amortization expense      |  |                | 1,290  |     |   | 397    |  |   | 13    |   |  |   | 1,700 
|Capital expenditures                       |  |                | 155    |     |   | 82     |  |   | 165   |   |  |   | 402   
|                                           |  |                |        |    
|For the nine months ended January 31, 2004 |  |                |        |     |   |        |  |   |       |   |  |   |       
|Revenue from external customers            |  | $              | 42,598 |     | $ | 13,056 |  | $ | 6,548 |   |  | $ | 62,202
|Intersegment revenue                       |  |                | 48     |     |   |       |  |   | 231   |   |  |   | 279   
|Income (loss) from operations              |  |                | 1,347  |     |   | 2,358  |  |   | (516  | ) |  |   | 3,189 
|Depreciation and amortization expense      |  |                | 1,834  |     |   | 385    |  |   | 77    |   |  |   | 2,296 
|Long-lived asset impairment                |  |                | 200    |     |   |       |  |   |      |   |  |   | 200   
|Capital expenditures                       |  |                | 345    |     |   | 102    |  |   |      |   |  |   | 447   



10



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ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



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 endedJanuary 31, |        | Nine months endedJanuary 31,
|                                                                                               |  | 2005                          |        |                              | 2004 |   | 2005   |  |   | 2004  
|Total external revenue for reportable segments                                                 |  | $                             | 29,505 |                              |      | $ | 23,129 |  | $ | 87,107 |   |  | $ | 62,202
|Net impact of revenue recognition on sales to affiliate                                        |  |                               |       |                              |      |   |       |  |   |       |   |  |   | 199   
|                                                                                               |  |                               |        |                              |      |   |        |  |   |        |   |  |   |       
|Total consolidated revenue                                                                     |  | $                             | 29,505 |                              |      | $ | 23,129 |  | $ | 87,107 |   |  | $ | 62,401
|                                                                                               |  |                               |        |                              |      |   |        |  |   |        |   |  |   |       
|                                                                                               |  |                               |        |                             
|Total operating income for reportable segments                                                 |  | $                             | 6,308  |                              |      | $ | 1,573  |  | $ | 17,906 |   |  | $ | 3,189 
|Net impact of intercompany gross profit eliminations and deferred profit on sales to affiliate |  |                               | (30    | )                            |      |   |       |  |   | (55    | ) |  |   | 31    
|                                                                                               |  |                               |        |                              |      |   |        |  |   |        |   |  |   |       
|Total consolidated operating income                                                            |  | $                             | 6,278  |                              |      | $ | 1,573  |  | $ | 17,851 |   |  | $ | 3,220 
|                                                                                               |  |                               |        |                              |      |   |        |  |   |        |   |  |   |       



10. Commitments and Contingencies



Pending Litigation



On October 12, 2000, the Company filed a patent infringement lawsuit against
KLA-Tencor Corporation (KLA), a competitor, in United States District Court in Delaware. In the suit, the Company seeks damages and a permanent injunction against further infringement of United States Patent Numbers 6,118,525 and
6,292,259, both entitled Wafer Inspection System for Distinguishing Pits and Particles. KLA responded by filing counterclaims alleging that the Company has infringed four patents owned by KLA. KLA seeks damages for the alleged patent
infringement and a permanent injunction against future infringement. In addition, KLA seeks a declaration that United States Patent Numbers 6,118,525 and 6,292,259, owned by the Company, are invalid and not infringed by KLA. On March 13, 2003, the
District Court issued a ruling upholding KLAs principal arguments with respect to ADEs claims of infringement. On August 15, 2003, the District Court issued rulings upholding ADEs principal arguments with respect to KLAs
claims of infringement for two of KLAs asserted patents. On February 4, 2004, a jury in the United States District Court in Delaware returned a verdict in favor of ADE invalidating all the remaining claims asserted by KLA. A final judgment has
now been issued by the court in ADEs favor on all of KLAs counterclaims. The Company has appealed some of the District Courts rulings to the United States Court of Appeals for the Federal Circuit. On or about January 31, 2005, the
Company and KLA entered into a settlement agreement that resulted in dismissal with prejudice of the lawsuit against both the Company and KLA and of all related claims. Although terms of the settlement are confidential, the settlement agreement had
no material effect on the Companys financial position or results of operations.



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 an unspecified amount. The Company filed an answer to the former employees complaint denying his allegations, and believes that the former employees claim lacks merit. The Company also filed counterclaims
against the employee. On July 15, 2003, the former employee amended his complaint to add related allegations and to add Dr. Koliopoulos and Mr. James as individual defendants. The parties have reached a confidential settlement agreement that is in
the process of being executed. The Company believes that a majority of the settlement amount and the Companys related expenses will be covered under the Companys insurance policies.



In addition to the matters noted above, from time to time the Company is
subject to legal proceedings and claims in the ordinary course of business. In the opinion of management, the amount of ultimate expense with respect to any other current legal proceedings and claims will not have a material adverse effect on the
Companys financial position or results of operations.



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##### Table of Contents

ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



Guarantor agreements



The Company has an agreement with a vendor whereby it guarantees the expenses incurred by certain of the Companys employees. The term of the
agreement is from execution until cancellation and payment of any outstanding amounts. The Company would be required to pay any unsettled employee expenses upon notification from the vendor. The maximum potential amount of future payments the
Company could be required to make under this agreement is not significant. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, no liabilities have been recorded for this guaranty as of January 31,
2005.



Pursuant to one of the provisions in the Companys
standard terms and conditions of sale, the Company agrees, subject to certain limitations and conditions, to defend any suit or proceeding brought against a customer based on a claim that the Companys equipment, standing alone, infringes a
United States patent or copyright or misappropriates a trade secret protected under United States law. Actions arising under such provision may only be brought by customers within two years after the cause of action arises. The maximum potential
amount of payments the Company may be required to make under such provision is limited to the total purchase price of the Companys equipment sold under the particular contract. The Company has never incurred costs to defend lawsuits or settle
claims related to these customer contract provisions. As a result, the Company believes the estimated exposure of these provisions is minimal. Accordingly, the Company has no liabilities recorded for these provisions as of January 31, 2005.



The Company warrants that its products will perform in all
material respects in accordance with its standard published specifications. The term of the Companys standard warranty is 12 months. The Company accrues 2% or 3% of product revenues, based on history, to provide for estimated warranty costs,
depending on which business unit made the sale. The following is a reconciliation of the quarterly activity in the Companys warranty liability for the three and nine months ended January 31, 2005 and 2004.



|                                    |  |                                             |       |   |                                             |   |       |      |  |   |       |   |  |   |       |  
|----------------------------------- |  | ------------------------------------------- | ----- | - | ------------------------------------------- | - | ----- | ---- |  | - | ----- | - |  | - | ----- | -
|                                    |  | (in thousands)Three months endedJanuary 31, |       |   | (in thousands) Nine months endedJanuary 31, |  
|                                    |  | 2005                                        |       |   | 2004                                        |   |       | 2005 |  |   | 2004  |  
|                                    |  | (unaudited)                                 |       |   | (unaudited)                                 |  
|Accrued warranty, beginning balance |  | $                                           | 1,505 |   |                                             | $ | 1,079 |      |  | $ | 1,257 |   |  | $ | 1,041 |  
|                                    |  |                                             |       |  
|Accruals for warranties issued      |  |                                             | 164   |   |                                             |   | 226   |      |  |   | 881   |   |  |   | 600   |  
|Warranty settlements made           |  |                                             | (184  | ) |                                             |   | (124  | )    |  |   | (653  | ) |  |   | (460  | )
|                                    |  |                                             |       |   |                                             |   |       |      |  |   |       |   |  |   |       |  
|Accrued warranty, ending balance    |  | $                                           | 1,485 |   |                                             | $ | 1,181 |      |  | $ | 1,485 |   |  | $ | 1,181 |  
|                                    |  |                                             |       |   |                                             |   |       |      |  |   |       |   |  |   |       |  



12



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ADE CORPORATION

NOTES TO UNAUDITED CONSOLIDATED

FINANCIAL STATEMENTS

(unaudited)



11. New Accounting Pronouncements



In November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS
151), Inventory Costs. SFAS 151 amends the guidance in Accounting Review Board No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and
wasted material (spoilage). SFAS 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the Companys financial position and results of operations.



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 123 (revised 2004) (SFAS 123R), Share-Based Payment. SFAS 123R requires that the cost resulting from all share-based payment transactions be measured using a fair-value method and be recognized in the financial
statements. SFAS 123R is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. SFAS 123R is effective for the Companys second quarter of fiscal 2006 beginning August 1, 2005. The
adoption of SFAS 123R will have a material impact on the Companys financial position and results of operations. The Company is evaluating what transition method to select upon adoption.



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair
value of the assets exchanged. SFAS No. 153 is effective for the Company for nonmonetary asset exchanges after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material effect on the Companys consolidated financial
position or results of operations.



13



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##### Table of Contents

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 magnetic computer disks. The Company operates three major business segments, the Semiconductor Systems Group (SSG), ADE Phase Shift
(PST) and ADE Technologies (ATI). SSG manufactures multifunctional semiconductor metrology and automation systems and optical wafer defect inspection equipment used to detect particles and other defects on silicon wafer
surfaces primarily for the semiconductor wafer and device manufacturing industries. PST 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. ATI manufactures high precision magnetic characterization and non-contact dimensional metrology gauging systems primarily for the data storage industry.



Historically, the semiconductor wafer and device industries and the magnetic
data storage industry have been highly cyclical and have experienced both rapid periods of growth and rapid downturns that can be abrupt and result in significant changes in revenue and profits. During an industry wide downturn, the demand for
capital equipment significantly decreases as the Companys customers reduce production of semiconductor wafers and devices. Beginning in fiscal year 2002, the Company 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 data storage industry. Consequently, the Company experienced reduced order levels and revenues during fiscal year 2002 and early fiscal 2003. In
response to the industry downturn, the Company underwent cost reduction measures, including headcount reductions, and focused its research and development activities on projects to place the Company in the best possible position for the next wave of
capital spending in the semiconductor wafer and device manufacturing industries as well as the magnetic data storage industry. Beginning in the second half of fiscal year 2003 and continuing through the third quarter of fiscal year 2005, the Company
experienced sequential increases in quarterly revenue and backlog in all but the first quarter of fiscal 2004. As a result, the Company has achieved profitability, on a quarterly basis, since the third quarter of fiscal year 2003. These results were
due in part to increased order activity from Asia and Japan during fiscal years 2003, 2004 and the first quarter of fiscal 2005 as well as the aforementioned cost reduction measures. However, although revenue for the third quarter of fiscal 2005
increased compared to the second quarter and the Company achieved a book to bill ratio of one to one, the Companys bookings decreased consecutively in the second and third quarters of fiscal 2005 on an absolute dollar basis. At this time, the
Company cannot determine if this decrease in order activity is indicative of the beginning of a down cycle in the semiconductor manufacturing industry or if it is just a momentary pause while the industry absorbs the equipment ordered in the recent
expansion. As such, the Company makes no assurances that current order, revenue, backlog and profit levels can be sustained in future periods.



The following information should be read in conjunction with the unaudited 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,
2004.



Forward-Looking Statements



This quarterly report on Form 10-Q contains statements which constitute
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and Federal securities laws. Statements that make reference to the Companys expectations, predictions and anticipations are subject to known
and unknown risks and uncertainties that could cause actual results to differ materially from those expressed by such statements and should be considered forward-looking statements. These statements include, but are not limited to, expectations
about the Companys performance in the fourth quarter of fiscal 2005, risks and uncertainties associated with the strength of the semiconductor and magnetic data storage markets, wafer pricing and wafer demand, the results of product
development efforts, the success of the Companys product offerings in meeting customer needs within the timeframes required by customers in these markets, further increases in backlog, the Companys visibility, the Companys ability
to maintain current gross profit levels, expectations about the impact of Statement of Financial Accounting Standards No. 123 (revised 2004)



14



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##### Table of Contents

and its predictions of future financial outcomes. Subject to applicable law, the Company disclaims any intent or
obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Further information on potential factors that could affect the Companys business is described in Other Risk
Factors and Trends 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
Annual Report on Form 10-K for the fiscal year ended April 30, 2004.



Restructurings



During the first quarter of
fiscal 2004, as a result of continued cost cutting initiatives, the Company recorded a restructuring charge of $393,000, which consisted primarily of severance expenses for 20 terminated employees. The employees were terminated from various
functional areas within the Companys SSG and ATI business segments. The majority of all the severance payments from the first quarter restructuring were made by the end of fiscal year 2004. In connection with the first quarter restructuring,
the Company did not renew its lease at its Bethel, Connecticut facility, which expired in August 2003. Prior to the end of the first quarter of fiscal 2004, the operations of the Bethel facility were relocated to the Westwood, Massachusetts and
Tucson, Arizona facilities.



Sale of Long-term Investment



On July 24, 2003, the Company entered into an agreement to sell the
majority of its 50% ownership in Japan ADE, Ltd. (JAL) to Kanematsu Electronics, Ltd., the other 50% owner of JAL. The Company received proceeds of $4.0 million and realized a gain of $1.7 million from this transaction. The Company
retained a 9% ownership interest in JAL. Prior to the transaction, the Company accounted for its investment in JAL under the equity method. As a result of the decrease in both ownership and influence over the affairs of JAL, the Company accounts for
its remaining 9% interest under the cost method.



The $1.7 million gain on the
transaction was calculated as follows:



|                                         |  |                |        |   |  |     |  
|---------------------------------------- |  | -------------- | ------ | - |  | --- | -
|ADE shares held prior to sale            |  |                | 1,500  |   |  | 50  | %
|KEL shares held prior to sale            |  |                | 1,500  |   |  | 50  | %
|                                         |  |                |        |   |  |     |  
|Total ownership shares                   |  |                | 3,000  |   |  | 100 | %
|                                         |  |                |        |   |  |     |  
|Shares sold by ADE                       |  |                | 1,230  |   |  | 41  | %
|                                         |  |               
|Shares retained by ADE                   |  |                | 270    |   |  | 9   | %
|                                         |  |               
|                                         |  | (in thousands) |        |   |  |    
|Book value of ADE investment at 4/30/03  |  | $              | 3,722  |   |  |     |  
|Less: Dividend - received 7/10/03        |  |                | (1,000 | ) |  |     |  
|Add: Income from affiliate - April-June  |  |                | 48     |   |  |     |  
|                                         |  |                |        |   |  |     |  
|Book value of ADE investment before sale |  | $              | 2,770  |   |  |     |  
|                                         |  |                |        |   |  |     |  
|Book value per share - before sale       |  | $              | 1.85   |   |  |     |  
|                                         |  |               
|Book value of shares sold                |  | $              | 2,271  |   |  |     |  
|                                         |  |               
|Proceeds from sale                       |  | $              | 4,000  |   |  |     |  
|                                         |  |                |        |   |  |     |  
|Gain on sale of 41% ownership            |  | $              | 1,729  |   |  |     |  
|                                         |  |                |        |   |  |     |  



Prior to July 24,
2003, when the Company was accounting for its investment in JAL under the equity method, the revenue from sales to JAL, which had not in turn been sold by JAL to unrelated third parties, was eliminated and the related profit on such sales was
recorded as deferred income on sales to affiliate. As a result of the reduction of the Companys 50% investment in JAL to 9% and the change in accounting method for the remaining investment to



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the cost method, the Company recognized approximately $6.4 million of system and parts revenue in its statement of
operations that otherwise may have been deferred revenue on the balance sheet as of July 31, 2003. Cost of revenue, systems and parts in the statement of operations increased by $2.5 million during the quarter ended July 31, 2003 as a result of the
sale of part of the Companys JAL investment. Therefore, gross profit in the statement of operations increased by $3.9 million during the same period.



Critical Accounting Policies, Significant Judgments and Estimates



The discussion and analysis of the Companys financial condition and results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts
of assets, liabilities, revenues and expenses, and related disclosure at the date of the Companys 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 income taxes, valuation of goodwill and software and the accounting for leases to be critical policies due to the estimates
and judgments involved in each.



Revenue Recognition and Allowance for
Doubtful Accounts



The Companys revenue recognition
policy complies with SEC Staff Accounting Bulletin No. 104 (SAB 104), Revenue Recognition in Financial Statements. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price is fixed or determinable and collectibility is reasonably assured. The Companys standard customer arrangement includes a signed purchase order, in which it offers payment terms of 30 to 90 days, no right
of return of delivered products and a twelve month warranty. The Company assesses whether the fee associated with its 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 the Companys normal payment terms, 30 to 90 days, it determines that the fee is not fixed or determinable. In these cases, the Company recognizes revenue as the fees become due. The Company assesses collectibility based
on the credit worthiness of the customer and past transaction history. The Company performs on-going credit evaluations of its customers and does not require collateral from its customers. For many of the Companys international customers, it
requires that an irrevocable letter of credit be issued by the customer before the purchase order is accepted. If the Company determines that collection of a fee is not reasonably assured, it defers the fee and recognizes 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 the Companys experience with a particular customer. For new products, the Company must obtain at least three
acceptances before it will recognize the 90% portion of the fee upon shipment. All other sales with customer acceptance provisions are recognized as revenue upon customer acceptance. The portion of the fee related to the installation of the product
and customer training is classified as service revenue.



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##### Table of Contents

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.



The Company accrues 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. 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 systems sales to JAL, the Companys previously 50% owned affiliate and a distributor of the Companys products, by the SSG, ATI and
PST segments has been reflected in segment revenue during the period they were shipped by the respective segment, which could differ from the period the revenue was recognized for consolidated financial reporting purposes. Consolidated revenue on
systems sales to JAL was recognized when the related product or software was shipped to and accepted by the end user of the product or software. As a result of the Companys decreased investment in JAL, since July 24, 2003, all sales to JAL
have been reflected in both segment and consolidated revenue in the same period.



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. Inventory that, in the judgment of management, is obsolete or in excess of the Company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 the Companys judgments and estimates relating to obsolete and excess inventory prove to be inadequate, its 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



The Company records 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. The Companys 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 the Companys provision for income taxes, its deferred tax assets and liabilities and any valuation allowance recorded against its net deferred tax assets. The Company



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evaluates 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. As of January 31, 2005, the Company has a valuation allowance against the full amount of its deferred tax assets. The Company recorded a full valuation allowance during fiscal 2002. The
decision to record the valuation allowance required significant judgment. Had the Company not recorded this allowance, it 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 the Companys financial condition and results of operations. The Company will continue to evaluate both the positive and negative evidence obtained
from actual and forecasted results to determine if the deferred tax assets are realizable. It is possible that all, or a portion, of the valuation allowance will be released by the end of fiscal 2005. The Companys 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.



Valuation of Goodwill and Software



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 $0.6 million, net of amortization, 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 is required to perform impairment
tests under SFAS 142 annually and whenever events or changes in circumstances suggest that the goodwill may be impaired. Factors the Company considers important that could trigger the impairment review include:



| |  | significant underperformance relative to historical or projected future operating results;
|- |  | ------------------------------------------------------------------------------------------



| |  | significant negative industry or economic trends;
|- |  | -------------------------------------------------



| |  | significant adverse change in legal factors or in the business climate;
|- |  | -----------------------------------------------------------------------



| |  | significant decline in the Companys stock price for a sustained period;
|- |  | ------------------------------------------------------------------------



| |  | significant decline in the Companys technological value as compared to the market;
|- |  | -----------------------------------------------------------------------------------



| |  | the Companys market capitalization relative to net book value; and
|- |  | -------------------------------------------------------------------



| |  | unanticipated competition.
|- |  | --------------------------



Net capitalized license fees of $0.6 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 bears to the total current and anticipated future gross revenue for those products or 2) on a straight-line basis over its estimated useful life. At each quarter-end, the carrying value of the software
is compared to net realizable value (NRV). NRV is the estimated future gross revenues from products that incorporate the software reduced by the estimated future costs of disposal. If NRV is less than the carrying value, the excess is
written-off and NRV becomes the new carrying value of the software.



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Significant management judgments and estimates must be made when establishing criteria for future cash
flows, estimating reporting unit fair value and assessing impairment. If the Companys judgments and estimates relating to goodwill and software prove to be inadequate, an asset may be determined to be impaired and the Companys 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, the
Companys financial results could be materially and adversely impacted in future periods.



Accounting for Leases



On July 29, 2003, the Company entered into a lease agreement for its corporate headquarters in Westwood, Massachusetts. The classification of this lease as an operating lease involved a significant judgement by the Companys management
with respect to the Companys incremental borrowing rate. At the date of lease inception, the incremental borrowing rate is a significant element of the calculation in one of the four tests that must be performed to determine if a lease should
be classified as an operating lease or a capital lease. The Companys management determined the Companys incremental borrowing rate based on an analysis of its negotiations with various financial institutions, the implicit interest rate
in the lease for the Westwood, Massachusetts building and an estimate of the current yield on debt financing of comparable companies in the public securities markets. Because the criteria necessary for classification as a capital lease were not met,
the lease was accounted for as an operating lease and the leased building and related liability have not been recorded in the Companys consolidated balance sheet. If the Companys incremental borrowing rate was determined to be lower than
what was determined by the Companys management, the lease could have met the criteria for classification as a capital lease, which would have resulted in an asset of approximately $8.6 million and a liability of approximately $8.6 million
being recorded in the Companys consolidated balance sheet at July 31, 2003.



Off-Balance Sheet Arrangements



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



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Results of Operations



Three Months Ended January 31, 2005 compared to Three Months Ended January 31, 2004



Systems and parts revenue. Systems and parts revenue increased 26% to $26.4 million in the third quarter of fiscal
2005 from $20.9 million in the third quarter of fiscal 2004. Systems and parts revenue in the SSG segment decreased 11% to $13.0 million in the third quarter of fiscal 2005 compared to $14.6 million in the year earlier period. The decrease in
revenues from the SSG segment primarily reflects decreased orders for capacitance-based flatness tools in favor of the Companys newer optical-based flatness tools, which are sold by the Companys PST segment. System and parts revenue in
the PST segment increased 153% to $10.6 million in the third quarter of fiscal 2005 compared to $4.2 million in the year earlier period. The increase in revenue from the PST segment was due primarily to increased demand for its optical-based
flatness tools. System and parts revenue from the products that are marketed to the data storage industry by the Companys ATI segment increased 38% to $3.2 million in the third quarter of fiscal 2005 compared to $2.3 million in the year
earlier period. The increase can be attributed primarily to increased demand for ATIs magnetics products.



The Companys total revenue by industry is distributed as follows:



|                      |  |                                |   |  |      |  
|--------------------- |  | ------------------------------ | - |  | ---- | -
|                      |  | Three months ended January 31, |  
|                      |  | 2005                           |   |  | 2004 |  
|Wafer                 |  | 80                             | % |  | 80   | %
|Device / OEM          |  | 10                             | % |  | 10   | %
|Magnetic Data Storage |  | 10                             | % |  | 10   | %
|                      |  |                                |   |  |      |  
|Total                 |  | 100                            | % |  | 100  | %
|                      |  |                                |   |  |      |  



The Companys
total revenue by region is distributed as follows:



|              |  |                               |   |  |      |  
|------------- |  | ----------------------------- | - |  | ---- | -
|              |  | Three months endedJanuary 31, |  
|              |  | 2005                          |   |  | 2004 |  
|United States |  | 13                            | % |  | 12   | %
|Japan         |  | 51                            | % |  | 40   | %
|Asia          |  | 13                            | % |  | 31   | %
|Europe        |  | 23                            | % |  | 17   | %
|              |  |                               |   |  |      |  
|Total         |  | 100                           | % |  | 100  | %
|              |  |                               |   |  |      |  



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The geographical distribution of revenues can fluctuate from quarter to quarter due to differences in the
timing and rate of capital expenditures between geographical regions.



Service revenue. Service revenue increased 38% to $3.1 million in the third quarter of fiscal 2005 compared to $2.2 million in the third quarter of fiscal 2004. 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 increase is primarily due to service calls related to customers bringing and keeping equipment
on-line to meet higher demand levels.



Gross profit 
systems and parts. Gross profit on systems and parts decreased slightly to 56% in the third quarter of fiscal 2005 from 57% in the third quarter of fiscal 2004. Gross profit in the SSG segment decreased to 54% in the third quarter of fiscal 2005
compared to 58% in the third quarter of fiscal 2004 due primarily to changes in geographical sales mix. Gross profit in the PST segment decreased to 61% in the third quarter of fiscal 2005 compared to 63% in the third quarter of fiscal 2004 due
primarily to changes in geographical sales mix. The decrease in gross profit from the SSG and PST segments was partially offset by an increase in gross profit in the ATI segment. Gross profit in the ATI segment increased to 47% in the third quarter
of fiscal 2005 compared to 31% in the third quarter of fiscal 2004 due to continuing improvements in cost control, efficiencies and changes in product mix. In general, sales to Japan are made through distributors who buy the Companys products
at a discount and then perform installation and service after reselling the products to the end user. As a result, sales to Japan tend to have a lower gross margin than sales made to other parts of the world, which are made through internal and
external sales representatives who are compensated by means of commissions. Commissions expense is included in marketing and sales expense.



Gross profit  service. Gross profit from service increased to 20% in the third quarter of fiscal 2005 compared to (8%) in the third quarter
of fiscal 2004. The increased gross profit was primarily the result of both increased revenues related to service calls and decreased material and repair costs compared to the third quarter of fiscal 2004.



Research and development. Research and development expense for the
third quarter of fiscal 2005 increased $0.4 million, or 12%, to $4.1 million compared to $3.7 million in the third quarter of fiscal 2004, but decreased as a percentage of revenue to 14% compared to 16% in the third quarter of fiscal 2004. The
increase was due primarily to higher payroll expense. The decrease in expense as a percentage of revenues reflects the increased revenue mentioned above. The company expects research and development expense for the fourth quarter of fiscal 2005 to
remain flat or decrease slightly in absolute dollars compared to the third quarter of fiscal 2005. The Company continues to invest in its semiconductor wafer and device industry 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.



Marketing and sales. Marketing and sales expense decreased $0.3 million, or 10%, to $2.7 million in the third quarter of fiscal 2005 from $3.0
million in the third quarter of fiscal 2004 and decreased to 9% as a percentage of revenue compared to 13% in the third quarter of fiscal 2004. The decrease in expense was a result of a $0.7 million decrease in external commission expense, which was
partially offset by a $0.2 million increase in payroll expense. The Company expects marketing and sales expense to increase in the fourth quarter of fiscal 2005 to the $4.1 to $4.4 million range due to higher commission expense as shipments to the
Asia-Pacific region, where ADE engages external sales representatives, are expected to increase significantly. The mix of sales channels through which the Companys products are sold may also 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.



General and administrative. General and administrative expense decreased $1.0 million, or 30%, to $2.4 million in the third quarter of fiscal 2005
from $3.4 million in the third quarter of fiscal 2004 and decreased as a percentage of revenue to 8% from 15% in the third quarter of 2004. Expense decreased primarily as a result of a $1.5 million decrease in legal expense which was partially
offset by higher regulatory compliance related expense and incentive compensation expense of $0.5 million.



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The decrease in expense as a percentage of revenues reflects the increased revenue mentioned above. The Company expects
general and administrative expense to remain at or near current levels in absolute dollars in the fourth quarter of fiscal 2005 compared to the third quarter of fiscal 2005.



Interest income. Interest income was $182,000 in the third quarter of fiscal 2005 compared to interest income of
$47,000 in third quarter of fiscal 2004. The increase in interest income was the result of an increase in invested cash balances and increased investment returns during the third quarter of fiscal 2005.



Interest expense. Interest expense was $70,000 in the third quarter of
fiscal 2005 compared to interest expense of $76,000 in the third quarter of fiscal 2004. The decrease in interest expense was primarily due to a decrease in the principal balance of the Companys 1999 Industrial Development Bond for its Tucson,
Arizona facility.



Income taxes. The provision for
income taxes was $117,000 in the third quarter of fiscal 2005 compared to a provision for income taxes of $11,000 in the third quarter of fiscal 2004. The provision for income taxes consists of federal and state alternative minimum taxes and foreign
income taxes. The Company has a full valuation allowance against its deferred tax assets at January 31, 2005. Significant management judgment is required in determining the Companys provision for income taxes, its deferred tax assets and
liabilities and any valuation allowance recorded against its net deferred tax assets. The Company evaluates 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. 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 the Companys financial condition and results of
operations. The Company will continue to evaluate both the positive and negative evidence obtained from actual and forecasted results to determine if the deferred tax assets are realizable. It is possible that all, or a portion, of the valuation
allowance may be released by the end of fiscal 2005.



Nine Months Ended
January 31, 2005 compared to Nine Months Ended January 31, 2004



Systems and parts revenue. Systems and parts revenue increased 40% to $77.7 million in the nine months ended January 31, 2005 from $55.6 million in the year earlier period. Systems and parts revenue in the SSG segment increased 26%
to $46.0 million in the nine months ended January 31, 2005 compared to $36.5 million in the year earlier period. The increase in revenue from the Companys products in the SSG segment reflects increased demand for the Companys products
throughout the world as semiconductor wafer manufacturers have continued to increase capacity in their production of 300mm wafers. System and parts revenue in the PST segment increased 86% to $23.6 million in the nine months ended January 31, 2005
compared to $12.7 million in the year earlier period. The increase in revenue from the PST segment was due primarily to increased demand for its optical-based flatness tools. System and parts revenue from the products that are marketed to the data
storage industry by the Companys ATI segment increased 37% to $8.8 million in the nine months ended January 31, 2005 compared to $6.5 million in the year earlier period. The increase can be attributed primarily to increased demand for
ATIs magnetics products.



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##### Table of Contents

The Companys total revenue by industry is distributed as follows:



|                      |  |                              |   |  |      |  
|--------------------- |  | ---------------------------- | - |  | ---- | -
|                      |  | Nine months endedJanuary 31, |  
|                      |  | 2005                         |   |  | 2004 |  
|Wafer                 |  | 81                           | % |  | 81   | %
|Device / OEM          |  | 9                            | % |  | 8    | %
|Magnetic Data Storage |  | 10                           | % |  | 11   | %
|                      |  |                              |   |  |      |  
|Total                 |  | 100                          | % |  | 100  | %
|                      |  |                              |   |  |      |  



The Companys
total revenue by region is distributed as follows:



|              |  |                              |   |  |      |  
|------------- |  | ---------------------------- | - |  | ---- | -
|              |  | Nine months endedJanuary 31, |  
|              |  | 2005                         |   |  | 2004 |  
|United States |  | 17                           | % |  | 13   | %
|Japan         |  | 47                           | % |  | 53   | %
|Asia          |  | 20                           | % |  | 22   | %
|Europe        |  | 16                           | % |  | 12   | %
|              |  |                              |   |  |      |  
|Total         |  | 100                          | % |  | 100  | %
|              |  |                              |   |  |      |  



Service
revenue. Service revenue increased 38% to $9.4 million in the nine months ended January 31, 2005 compared to $6.8 million in the year earlier period. The increase is primarily due to service calls related to customers bringing and keeping
equipment on-line to meet higher demand levels.



Gross
profit  systems and parts. Gross profit on systems and parts increased to 57% in the nine months ended January 31, 2005 from 55% in the year earlier period. Gross profit in the SSG segment increased to 58% in the nine months ended January
31, 2005 from 56% in the year earlier period due to continuing improvements in cost controls, efficiencies and changes in geographical sales mix. Gross profit in the ATI segment increased to 43% in the nine months ended January 31, 2005 from 39% in
the year earlier period due to continuing improvements in cost controls, efficiencies and changes in product mix. The increase in gross profit from the SSG and ATI segments was partially offset by a decrease in gross profit in the PST segment. Gross
profit in the PST segment decreased to 58% in the nine months ended January 31, 2005 from 60% in the year earlier period due primarily to changes in geographical sales mix.



Gross profit  service. Gross profit from service increased to 23% in the nine months ended January 31, 2005
compared to (8%) in the year earlier period. The increased gross profit was primarily the result of both increased revenues related to service calls and decreased material and repair costs in the nine months ended January 31, 2005 compared to the
year earlier period.



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Research and development. Research and development expense increased $0.3 million, or 3%, to $11.4
in the nine months ended January 31, 2005 compared to $11.1 million in the year earlier period, but decreased as a percentage of revenue to 13% in the nine months ended January 31, 2005 compared to 18% in the year earlier period. The increase in
expense was primarily due to higher payroll expense. The decrease in expense as a percentage of revenues reflects the increased revenue mentioned above.



Marketing and sales. Marketing and sales expense increased $1.6 million, or 21%, to $9.0 million in the nine months ended January 31, 2005 from
$7.4 million in the year earlier period but decreased as a percentage of revenue to 10% in the nine months ended January 31, 2005 compared to 12% in the year earlier period. Expense increased primarily as a result of a $1.1 million increase in
payroll and external commission expenses during the nine months ended January 31, 2005. The decrease in expense as a percentage of revenues reflects the increased revenue mentioned above.



General and administrative. General and administrative expense decreased $0.2 million, or 2%, to $7.9 million in the
nine months ended January 31, 2005 from $8.1 million in the year earlier period and decreased as a percentage of revenue to 9% from 13% in the year earlier period. Expense decreased primarily as a result of a $2.5 million decrease in legal and
facility related expenses which was mostly offset by an increase in regulatory compliance and incentive compensation expense of $2.3 million. The decrease in expense as a percentage of revenues reflects the increased revenue mentioned above.



Interest income. Interest income was $379,000 in the
nine months ended January 31, 2005 compared to interest income of $181,000 in the year earlier period. The increase in interest income was the result of an increase in invested cash balances and increased investment returns during the nine months
ended January 31, 2005.



Interest expense. Interest
expense was $203,000 in the nine months ended January 31, 2005 compared to interest expense of $370,000 in the year earlier period. The decrease in interest expense was primarily due to the Companys retirement of its 1996 and 1997 Industrial
Development Bonds in the first quarter of fiscal 2004.



Income taxes. The provision for income taxes was $444,000 in the nine months ended January 31, 2005 compared to a benefit from income taxes of $174,000 in the year earlier period. The provision for income taxes in the nine months
ended January 31, 2005 consists of federal and state alternative minimum taxes and foreign income taxes. The benefit from income taxes in the nine months ended January 31, 2004 was due to a federal income tax refund of $367,000 for the years 1996
through 2000, which was offset somewhat by state, foreign and alternative minimum income taxes.



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Equity in net earnings of affiliated companies. Equity in net earnings of affiliated companies was
$0 in the nine months ended January 31, 2005 compared to $48,000 in the year earlier period. As of July 24, 2003, as a result of the reduction of the Companys 50% investment in JAL to 9%, and the change in accounting method from the equity
method to the cost method, the Company no longer records JALs earnings in its statement of operations.



Liquidity and Capital Resources



At January 31, 2005, the Company had $64.8 million in cash and cash equivalents and $96.9 million in working capital. In addition, the Company had $0.6 million in restricted cash used as a security deposit for the Companys lease of
its Westwood, Massachusetts headquarters.



Cash provided by
operating activities for the nine months ended January 31, 2005 was $18.5 million. This amount resulted from net income of $17.8 million adjusted for non-cash charges of $1.6 million and a $0.8 million net decrease in working capital accounts.
Non-cash items consisted primarily of $1.7 million of depreciation and amortization offset by $0.1 million of amortization of gain from the sale-leaseback of the Westwood, Massachusetts headquarters and production facility in the first quarter of
fiscal 2004, and a $0.1 million gain on the sale from the Newton, Massachusetts facility in the third quarter of fiscal 2005. Working capital items consisted primarily of a decrease in inventory of $2.3 million combined with increases in accounts
receivable of $5.7 million, prepaid expenses and other current assets of $0.1 million, accounts payable of $0.3 million, and accrued expenses and other current liabilities of $2.4 million. The decrease in inventory was due to the shipment of
products during the quarter. The increase in accounts receivable was due to an increase of shipments during the third quarter of fiscal 2005 as well as the timing of those shipments. The increase in prepaid expenses and other current assets was due
to the timing of payments to vendors. The increase in accounts payable was primarily due to the timing of payments to vendors. The increase in accrued expenses and other current liabilities was primarily due to increases in accrued salaries, wages
and incentive compensation of $1.3 million, an increase in deferred revenue of $0.9 million and a $0.4 million increase in other accrued expenses which was primarily related to the Companys ongoing regulatory compliance efforts.



Cash provided by investing activities for the nine months ended January 31,
2005 was $4.0 million, and consisted primarily of $4.4 million from the sale of the companys Newton, Massachusetts facility in the third quarter of fiscal 2005 offset by $0.4 million in purchases of fixed assets.



Cash provided by financing activities for the nine months ended January 31,
2005 was $0.7 million, which consisted of $0.8 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. These proceeds were
slightly offset by $0.1 million of principal repayments of long-term debt.



The Companys Newton, Massachusetts facility was listed for sale in February 2003. On July 31, 2003, the Company retired the 1997 Industrial Development Bond (IDB), which was used to finance the
acquisition of this property. On June 25, 2004, the Company entered into a purchase and sale agreement with a buyer for the Newton property. The sale of the Newton property was completed on December 2, 2004. The Company received net proceeds of $4.4
million. The cash proceeds from this sale will be used for general corporate purposes.



On July 22, 2004, the Company entered into a Standby Letter of Credit Agreement with Fleet National Bank in the amount of $4.5 million. One letter of credit issued under this facility serves as collateral for the $3.9
million principal balance on Companys IDB issued through the Industrial Development Authority of the County of Pima, Arizona and replaces a letter of credit the Company had with another financial institution. Another letter of credit under
this facility serves as collateral along with a $0.6 million cash security deposit required by the lease agreement for the Companys Westwood, Massachusetts headquarters building. The facility bears a fee of 1.5% per annum of the face amount of
each letter of credit. Under the terms of the Letter of Credit Agreement, the Company is required to comply with certain financial covenants. As of January 31, 2005, the Company is in compliance with these covenants.



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On December 10, 2004 the Company entered a lease agreement with Fleet Capital Corporation for certain
research and development equipment. The term of the lease is 60 months and the monthly rent is $36,812.



Under Generally Accepted Accounting Principles (GAAP) in the United States of America, 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 the Companys contractual payment obligations as of January 31, 2005. The operating lease
and consulting agreement obligations are not included in the unaudited consolidated financial statements included in Item 1. Financial Information. The principal portion of the long-term debt is included in the unaudited consolidated
financial statements. The long-term debt payments in the table below include both principal and interest. The unconditional purchase order obligations primarily represent open purchase orders for inventory, a significant portion of which is
necessary to produce and ship orders from the Companys backlog.



|                                         |  |                                       |        |           |   |           |  |                  |       |       |   |        |  |   |       
|---------------------------------------- |  | ------------------------------------- | ------ | --------- | - | --------- |  | ---------------- | ----- | ----- | - | ------ |  | - | ------
|                                         |  | Payments due by period (in thousands)
|                                         |  | Less than 1 year                      |        | 1-3 years |   | 3-5 years |  | More than5 years |       | Total
|Long term debt obligations               |  | $                                     | 372    |           | $ | 744       |  | $                | 3,289 |       | $ |       |  | $ | 4,405 
|Operating lease obligations              |  |                                       | 2,337  |           |   | 3,773     |  |                  | 2,984 |       |   | 11,018 |  |   | 20,112
|Unconditional purchase order obligations |  |                                       | 7,660  |           |   | 113       |  |                  |      |       |   |       |  |   | 7,773 
|Consulting agreement                     |  |                                       | 143    |           |   |          |  |                  |      |       |   |       |  |   | 143   
|                                         |  |                                       |        |           |   |           |  |                  |       |       |   |        |  |   |       
|                                         |  | $                                     | 10,512 |           | $ | 4,630     |  | $                | 6,273 |       | $ | 11,018 |  | $ | 32,433
|                                         |  |                                       |        |           |   |           |  |                  |       |       |   |        |  |   |       



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.



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 appeared to have emerged from the
most recent severe down cycle, it is not clear whether this recovery is still continuing for semiconductor wafer manufacturers, who have historically accounted for approximately 70% to 80% of the Companys revenue. In addition, the Company
cannot determine at this time if the current uncertainty in the industry is indicative of an impending slowdown or if the recent upward cycle will resume. 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. The data storage industry is also showing signs of recovery, but the outlook for sustained long-term growth in this industry is also uncertain. At January 31,
2005, the Companys backlog was $48.2 million. The Company remains uncertain about how long current revenue levels can be sustained. 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.



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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.



New
Accounting Pronouncements



In November 2004, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151 (SFAS 151), Inventory Costs. SFAS 151 amends the guidance in Accounting Review Board No. 43, Chapter 4, Inventory
Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 is effective for fiscal years beginning after June 15, 2005. The adoption of SFAS 151 is not
expected to have a material impact on the Companys financial position and results of operations.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), (SFAS 123R), Share-Based
Payment. SFAS 123R requires that the cost resulting from all share-based payment transactions be measured using a fair-value method and be recognized in the financial statements. SFAS 123R is effective as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005. SFAS 123R is effective for the Companys second quarter of fiscal 2006 beginning August 1, 2005. The adoption of SFAS 123R will have a material impact on the Companys financial
position and results of operations. The Company is evaluating what transition method to select upon adoption.



In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion
No. 29. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 is effective for the Company for
nonmonetary asset exchanges after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material effect on the Companys consolidated financial position or results of operations.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk:



At January 31, 2005, 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. Historically, the Companys exposure to adverse foreign currency fluctuations has been immaterial.



Item 4. Controls and Procedures:



The term disclosure controls and procedures is defined in Rules 13a-15(e) and 15d-15(e) 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. As of the end of the
period covered by 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.



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
control over financial reporting. There have been no changes to the Companys internal control over financial reporting during the third fiscal quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.



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PART II.



OTHER INFORMATION



Item 1. Legal Proceedings:



As
previously reported in the Companys Annual Report on Form 10-K for the fiscal year ended April 30, 2004, on October 12, 2000, the Company filed a patent infringement lawsuit against KLA-Tencor Corporation (KLA), a competitor, in
United States District Court in Delaware. In the suit, the Company seeks damages and a permanent injunction against further infringement of United States Patent Numbers 6,118,525 and 6,292,259, both entitled Wafer Inspection System for
Distinguishing Pits and Particles. KLA responded by filing counterclaims alleging that the Company has infringed four patents owned by KLA. KLA seeks damages for the alleged patent infringement and a permanent injunction against future
infringement. In addition, KLA seeks a declaration that United States Patent Numbers 6,118,525 and 6,292,259, owned by the Company, are invalid and not infringed by KLA. On March 13, 2003, the District Court issued a ruling upholding KLAs
principal arguments with respect to ADEs claims of infringement. On August 15, 2003, the District Court issued rulings upholding ADEs principal arguments with respect to KLAs claims of infringement for two of KLAs asserted
patents. On February 4, 2004, a jury in the United States District Court in Delaware returned a verdict in favor of ADE invalidating all the remaining claims asserted by KLA. A final judgment has now been issued by the court in ADEs favor on
all of KLAs counterclaims. The Company has appealed some of the District Courts rulings to the United States Court of Appeals for the Federal Circuit. On or about January 31, 2005, the Company and KLA entered into a settlement agreement
that resulted in dismissal with prejudice of the lawsuit against both the Company and KLA and of all related claims. Although terms of the settlement are confidential, the settlement agreement had no material effect on the Companys financial
position or results of operations.



Item 6. Exhibits:



|               |  |                                                                                                                                                   
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Description                                                                                                                                       
|               | 
|31.1           |  | Certification of Chief Executive Officer required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                 
|               | 
|31.2           |  | Certification of Chief Financial Officer required by Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended.                 
|               | 
|32.1           |  | 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.
|               | 
|32.2           |  | 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: March 14, 2005 |  | /s/ Chris L. Koliopoulos                            
|                     |  | Chris L. Koliopoulos, Ph.D.                         
|                     |  | President and Chief Executive Officer               
|                     | 
|Date: March 14, 2005 |  | /s/ Brian C. James                                  
|                     |  | Brian C. James                                      
|                     |  | Executive Vice President and Chief Financial Officer



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