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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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Form 10-Q



(Mark One)

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



For Quarter Ended: July 31, 2003



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



For the Transition Period from
 to



Commission file number 0-26714



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ADE CORPORATION

(Exact Name of Registrant as Specified in its Charter)



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



80 Wilson Way,
Westwood, Massachusetts 02090

(Address of Principal Executive Offices, Including Zip Code)



(781) 467-3500

(Registrants Telephone Number, Including Area Code)



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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  x    No ̈



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



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



|Common Stock, par value $.01 per share |  | 13,875,952 shares                
|-------------------------------------- |  | ---------------------------------
|Class                                  |  | Outstanding at September 12, 2003



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##### Table of Contents

ADE CORPORATION

INDEX



|                                |  |         |  |                                                                                          |  | Page
|------------------------------- |  | ------- |  | ---------------------------------------------------------------------------------------- |  | ----
|Part I. - Financial Information |  |        
|                                |  |         | 
|                                |  | Item 1. |  | Condensed Consolidated Financial Statements (unaudited)                                  |  |     
|                                |  |         | 
|                                |  |         |  | Condensed Consolidated Balance Sheet-July 31, 2003 and April 30, 2003                    |  | 3   
|                                |  |         | 
|                                |  |         |  | Condensed Consolidated Statement of Operations-Three Months Ended July 31, 2003 and 2002 |  | 4   
|                                |  |         | 
|                                |  |         |  | Condensed Consolidated Statement of Cash Flows-Three Months Ended July 31, 2003 and 2002 |  | 5   
|                                |  |         | 
|                                |  |         |  | Notes to Unaudited Condensed Consolidated Financial Statements                           |  | 6   
|                                |  |         | 
|                                |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations    |  | 15  
|                                |  |         | 
|                                |  | Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                               |  | 26  
|                                |  |         | 
|                                |  | Item 4. |  | Controls and Procedures                                                                  |  | 26  
|                                | 
|Part II. - Other Information    |  |        
|                                |  |         | 
|                                |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                         |  | 27  
|                                | 
|Signatures                      |  | 28     



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##### Table of Contents

PART I.

FINANCIAL INFORMATION



Item 1.
Condensed Consolidated Financial Statements (unaudited):



ADE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

(in thousands, unaudited)



|                                               |  | July 31,2003 |         |   | April 30,2003 |  
|---------------------------------------------- |  | ------------ | ------- | - | ------------- | -
|Assets                                         |  |              |         |   |               |  
|Current assets:                                |  |              |         |   |               |  
|Cash and cash equivalents                      |  | $            | 32,982  |   |               | $
|Marketable securities                          |  |              | 1,706   |   |               |  
|Accounts receivable, net                       |  |              | 11,661  |   |               |  
|Inventories                                    |  |              | 29,283  |   |               |  
|Prepaid expenses and other current assets      |  |              | 1,198   |   |               |  
|                                               |  |              |         |   |               |  
|Total current assets                           |  |              | 76,830  |   |               |  
|                                               |  |             
|Fixed assets, net                              |  |              | 12,033  |   |               |  
|Investments                                    |  |              | 500     |   |               |  
|Assets held for sale                           |  |              | 4,515   |   |               |  
|Intangible assets, net                         |  |              | 795     |   |               |  
|Goodwill                                       |  |              | 1,318   |   |               |  
|Restricted cash                                |  |              | 1,054   |   |               |  
|Other assets                                   |  |              | 133     |   |               |  
|                                               |  |              |         |   |               |  
|Total assets                                   |  | $            | 97,178  |   |               | $
|                                               |  |              |         |   |               |  
|Liabilities and stockholders equity           |  |              |         |   |               |  
|Current liabilities:                           |  |              |         |   |               |  
|Current portion of long-term debt              |  | $            | 161     |   |               | $
|Accounts payable                               |  |              | 3,726   |   |               |  
|Accrued expenses and other current liabilities |  |              | 9,938   |   |               |  
|Deferred income on sales to affiliate          |  |              |        |   |               |  
|                                               |  |              |         |   |               |  
|Total current liabilities                      |  |              | 13,825  |   |               |  
|                                               |  |              |         |   |               |  
|Deferred gain on sale-leaseback                |  |              | 1,694   |   |               |  
|Long-term debt                                 |  |              | 3,735   |   |               |  
|                                               |  |              |         |   |               |  
|Stockholders equity:                          |  |              |         |   |               |  
|Common stock                                   |  |              | 138     |   |               |  
|Capital in excess of par value                 |  |              | 104,623 |   |               |  
|Accumulated deficit                            |  |              | (28,043 | ) |               |  
|Accumulated other comprehensive income         |  |              | 1,206   |   |               |  
|                                               |  |              |         |   |               |  
|Total stockholders equity                     |  |              | 77,924  |   |               |  
|                                               |  |              |         |   |               |  
|Total liabilities and stockholders equity     |  | $            | 97,178  |   |               | $
|                                               |  |              |         |   |               |  



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



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ADE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(in thousands, except per share data, unaudited)



|                                                                                                          |  | Three monthsended July 31, |       
|--------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------
|                                                                                                          |  | 2003                       |       
|Net Revenue:                                                                                              |  |                            |       
|Systems and parts                                                                                         |  | $                          | 16,866
|Service                                                                                                   |  |                            | 2,200 
|                                                                                                          |  |                            |       
|Total revenue                                                                                             |  |                            | 19,066
|                                                                                                          |  |                            |       
|Cost of revenue:                                                                                          |  |                            |       
|Systems and parts                                                                                         |  |                            | 8,109 
|Service                                                                                                   |  |                            | 2,423 
|                                                                                                          |  |                            |       
|Total cost of revenue                                                                                     |  |                            | 10,532
|                                                                                                          |  |                            |       
|Gross profit                                                                                              |  |                            | 8,534 
|                                                                                                          |  |                            |       
|Operating expenses:                                                                                       |  |                            |       
|Research and development                                                                                  |  |                            | 3,697 
|Marketing and sales                                                                                       |  |                            | 2,005 
|General and administrative                                                                                |  |                            | 2,165 
|Restructuring charges                                                                                     |  |                            | 393   
|                                                                                                          |  |                            |       
|Total operating expenses                                                                                  |  |                            | 8,260 
|                                                                                                          |  |                            |       
|Income (loss) from operations                                                                             |  |                            | 274   
|                                                                                                          |  |                           
|Gain on sale of long-term investment                                                                      |  |                            | 1,729 
|Interest and other income (expense), net                                                                  |  |                            | (162  
|                                                                                                          |  |                            |       
|Income (loss) before provision for income taxes and equity in net earnings (loss) of affiliated companies |  |                            | 1,841 
|Provision for income taxes                                                                                |  |                            | 88    
|                                                                                                          |  |                            |       
|Income (loss) before equity in net earnings (loss) of affiliated companies                                |  |                            | 1,753 
|Equity in net earnings (loss) of affiliated companies                                                     |  |                            | 48    
|                                                                                                          |  |                            |       
|Net income (loss)                                                                                         |  | $                          | 1,801 
|                                                                                                          |  |                            |       
|Basic earnings (loss) per share                                                                           |  | $                          | 0.13  
|Diluted earnings (loss) per share                                                                         |  | $                          | 0.13  
|                                                                                                          |  |                           
|Weighted average shares outstanding - basic                                                               |  |                            | 13,768
|Weighted average shares outstanding - diluted                                                             |  |                            | 13,827



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



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ADE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands, unaudited)



|                                                                                                   |  | Three months endedJuly 31, |       
|-------------------------------------------------------------------------------------------------- |  | -------------------------- | ------
|                                                                                                   |  | 2003                       |       
|Cash flows from operating activities:                                                              |  |                            |       
|Net income (loss)                                                                                  |  | $                          | 1,801 
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                            |       
|Depreciation and amortization                                                                      |  |                            | 896   
|Long-lived asset impairment                                                                        |  |                            | 200   
|Equity in net earnings of affiliate, net of dividends received                                     |  |                            | 952   
|Gain on sale of long-term investment                                                               |  |                            | (1,729
|Changes in assets and liabilities:                                                                 |  |                            |       
|Accounts receivable, net                                                                           |  |                            | 1,724 
|Inventories                                                                                        |  |                            | 66    
|Prepaid expenses and other current assets                                                          |  |                            | (152  
|Accounts payable                                                                                   |  |                            | (801  
|Accrued expenses and other current liabilities                                                     |  |                            | 1,159 
|Deferred income on sales to affiliate                                                              |  |                            | (2,259
|                                                                                                   |  |                            |       
|Net cash provided by (used in) operating activities                                                |  |                            | 1,857 
|                                                                                                   |  |                            |       
|Cash flows from investing activities:                                                              |  |                            |       
|Purchases of fixed assets                                                                          |  |                            | (32   
|Change in restricted cash                                                                          |  |                            | 2,103 
|Proceeds from sale of building, net                                                                |  |                            | 9,753 
|Proceeds from sale of long-term investment                                                         |  |                            | 4,000 
|Decrease in other assets                                                                           |  |                            | 3     
|                                                                                                   |  |                            |       
|Net cash provided by (used in) investing activities                                                |  |                            | 15,827
|                                                                                                   |  |                            |       
|Cash flows from financing activities:                                                              |  |                            |       
|Repayment of long-term debt                                                                        |  |                            | (6,858
|Proceeds from issuance of common stock                                                             |  |                            | 680   
|                                                                                                   |  |                            |       
|Net cash used in financing activities                                                              |  |                            | (6,178
|                                                                                                   |  |                            |       
|Net increase (decrease) in cash and cash equivalents                                               |  |                            | 11,506
|Cash and cash equivalents, beginning of period                                                     |  |                            | 21,476
|                                                                                                   |  |                            |       
|Cash and cash equivalents, end of period                                                           |  | $                          | 32,982
|                                                                                                   |  |                            |       



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



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



1. Basis of Preparation



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



Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying unaudited condensed consolidated financial statements and these notes do not
include all disclosures required by generally accepted accounting principles 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, 2003.



2. Comprehensive Income (Loss)



Comprehensive
income (loss) was as follows:



|                                                                 |  | (in thousands) Three months ended |      
|---------------------------------------------------------------- |  | --------------------------------- | -----
|                                                                 |  | July 31,2003                      |      
|                                                                 |  | (unaudited)                       |      
|Net income (loss)                                                |  | $                                 | 1,801
|Other comprehensive income (loss):                               |  |                                   |      
|Unrealized income (loss) on marketable securities, net of $0 tax |  |                                   | 646  
|                                                                 |  |                                   |      
|Other comprehensive income (loss):                               |  |                                   | 646  
|                                                                 |  |                                   |      
|Comprehensive income (loss)                                      |  | $                                 | 2,447
|                                                                 |  |                                   |      



3. Inventories



Inventories consist of the following:



|                                  |  | (in thousands)
|--------------------------------- |  | --------------
|                                  |  | July 31,2003  
|                                  |  | (unaudited)   
|Raw materials and purchased parts |  | $             
|Work-in-process                   |  |               
|Finished goods                    |  |               
|                                  |  |               
|                                  |  | $             
|                                  |  |               



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



4. Investments



On July 10, 2003, the Company received a $1.0 million dividend payment from Japan ADE, Ltd (JAL). On July 24, 2003, the Company entered into
an agreement to sell the majority of its 50% ownership in 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 will account for its
remaining 9% interest under the cost method.



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 the cost method, the Company recognized
approximately $6.4 million of revenue and $3.9 million of profit that otherwise may have been deferred as of July 31, 2003.



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 bear to the total current and anticipated future gross revenue for those products or 2) on a straight-line basis over the estimated useful life of the related products. The carrying amount
and accumulated amortization for the Companys intangible assets are as follows:



|                         |  | (in thousands) |      
|------------------------ |  | -------------- | -----
|                         |  | July 31,2003   |      
|                         |  | (unaudited)    |      
|License fees at cost     |  | $              | 1,400
|Accumulated amortization |  |                | (605 
|                         |  |                |      
|Net carrying value       |  | $              | 795  
|                         |  |                |      



Amortization expense
for the three months ended July 31, 2003 and 2002 was $38,000 and $113,000, respectively. Estimated amortization is $150,000 for the fiscal years ended April 30, 2004, 2005 and 2006 and $50,000 for the fiscal year ended April 30, 2007.



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



6. Accrued Expenses and Other Current Liabilities



Accrued expenses and other current liabilities consist of the following:



|                                         |  | (in thousands)
|---------------------------------------- |  | --------------
|                                         |  | July 31,2003  
|                                         |  | (unaudited)   
|Accrued salaries, wages and vacation pay |  | $             
|Accrued commissions                      |  |               
|Accrued warranty costs                   |  |               
|Accrued restructuring                    |  |               
|Deferred revenue                         |  |               
|Other                                    |  |               
|                                         |  |               
|                                         |  | $             
|                                         |  |               



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 disclosure requirements of Statement of Financial Accounting Standards No. 123, (SFAS 123) Accounting for Stock-Based Compensation and SFAS 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 (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts as follows:



|                                                                                                                              |  | (In thousands, except per share data) Three months ended July 31, |      
|----------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------- | -----
|                                                                                                                              |  | 2003                                                              |      
|Net income (loss), as reported                                                                                                |  | $                                                                 | 1,801
|Deduct: Total stock-based employee compensation expense determined under fair value based method, net of related income
taxes |  |                                                                   | 309  
|                                                                                                                              |  |                                                                   |      
|Pro forma net income (loss)                                                                                                   |  | $                                                                 | 1,492
|                                                                                                                              |  |                                                                   |      
|Net earnings (loss) per share:                                                                                                |  |                                                                   |      
|Basic - as reported                                                                                                           |  | $                                                                 | 0.13 
|Basic - pro forma                                                                                                             |  | $                                                                 | 0.11 
|Diluted - as reported                                                                                                         |  | $                                                                 | 0.13 
|Diluted - pro forma                                                                                                           |  | $                                                                 | 0.11 



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



8. Restructuring



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 Semiconductor Systems and ADE Technologies business segments. The majority of all the
severance payments from the first quarter restructuring will be 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, the operations of the Bethel facility were relocated to the Westwood, Massachusetts and Tucson, Arizona facilities.



Below is a table summarizing the activity related to the restructuring accrual for the three months ended July 31, 2003:



|                          |  | (in thousands) |     
|------------------------- |  | -------------- | ----
|                          |  | Severance      |     
|Balance at April 30, 2003 |  | $              | 120 
|Restructuring accrual     |  |                | 393 
|Cash payments             |  |                | (191
|                          |  |                |     
|Balance at July 31, 2003  |  | $              | 322 
|                          |  |                |     



9. Sale-leaseback



On July 29, 2003, the Company entered into an agreement to sell and
leaseback its headquarters site in Westwood, Massachusetts, which resulted in a deferred gain of $1.7 million. The Company used $3.8 million of the approximately $10.1 million in proceeds, less transaction costs, from the transaction to retire its
1996 Industrial Development Bond and eliminated the related letter of credit. On July 31, 2003, the Company used approximately $3.0 million of the proceeds to retire its 1997 Industrial Development Bond, which resulted in $2.7 million of restricted
cash becoming available for general corporate purposes. As part of this transaction, the Company entered into a lease agreement with a 15 year term and annual rent payments increasing from approximately $1.0 million at the beginning of the lease
term to approximately $1.3 million by the end of the lease term. The lease has been classified as an operating lease and the gain of $1.7 million on the transaction has been deferred and will be amortized as a reduction of rent expense on a
straight-line basis over the term of the lease.



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



10. Earnings (Loss) Per Share



Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per share is computed using the weighted average number of common shares outstanding and gives effect to all dilutive potential common shares outstanding during the period.
For the three months ended July 31, 2003 and 2002, respectively, 941,515 and 645,971 common shares issuable upon the exercise of stock options have been excluded from the computation of diluted earnings per share, as their effect would have been
antidilutive. For the three months ended July 31, 2002, basic and diluted loss per share is the same due to the antidilutive effect of potential common shares outstanding.



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



|                                                                                                 |  | (in thousands) Three months ended July 31,
|------------------------------------------------------------------------------------------------ |  | ------------------------------------------
|                                                                                                 |  | 2003                                      
|Shares used in computation:                                                                      |  |                                           
|Weighted average common stock outstanding used in computation of basic earnings (loss) per share |  | 13,768                                    
|Dilutive effect of stock options outstanding                                                     |  | 59                                        
|                                                                                                 |  |                                           
|Shares used in computation of diluted earnings (loss) per share                                  |  | 13,827                                    
|                                                                                                 |  |                                           



11. Segment Reporting



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



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



Some sales to JAL were reflected in
segment revenue during the period they were shipped by the respective segment, which can differ from the period the revenue was recognized for consolidated financial reporting purposes. As a result of the transaction discussed in Note 4, as of July
24, 2003, all sales to JAL are reflected in both segment and consolidated revenue in the same period. For the reportable segments, intersegment sales are recorded at 60% of the domestic list price of the respective product.



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



11. Segment Reporting (Continued)



|                                      |  | (in thousands) |       
|------------------------------------- |  | -------------- | ------
|                                      |  | SSG            |       
|For the quarter ended July 31, 2003   |  |                |       
|Revenue from external customers       |  | $              | 12,790
|Intersegment revenue                  |  |                | 19    
|Income (loss) from operations         |  |                | (157  
|Depreciation and amortization expense |  |                | 756   
|Long-lived asset impairment           |  |                | 200   
|Capital expenditures                  |  |                | 32    
|                                      |  |                |       
|For the quarter ended July 31, 2002   |  |                |       
|Revenue from external customers       |  | $              | 10,332
|Intersegment revenue                  |  |                |      
|Income (loss) from operations         |  |                | (5,442
|Depreciation and amortization expense |  |                | 1,066 
|Capital expenditures                  |  |                | 313   



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



|                                                                                               |  | Three months ended July 31, |       
|---------------------------------------------------------------------------------------------- |  | --------------------------- | ------
|                                                                                               |  | 2003                        |       
|Total external revenue for reportable segments                                                 |  | $                           | 18,867
|Net impact of revenue recognition on sales to affiliate                                        |  |                             | 199   
|                                                                                               |  |                             |       
|Total consolidated revenue                                                                     |  | $                           | 19,066
|                                                                                               |  |                             |       
|Total operating income (loss) for reportable segments                                          |  | $                           | 241   
|Net impact of intercompany gross profit eliminations and deferred profit on sales to affiliate |  |                             | 33    
|                                                                                               |  |                             |       
|Total consolidated operating income (loss)                                                     |  | $                           | 274   
|                                                                                               |  |                             |       



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



12. New Accounting Pronouncements



In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards
No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. The
Company believes that the adoption of SFAS 150 will not have a material impact on its current financial position and results of operations.



In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51. FIN 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all VIEs created or acquired after January
31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of FIN 46 will not have a
significant impact on its consolidated financial statements.



In November 2002, the Emerging Issues Task Force issued No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for
arrangements under which it will perform multiple revenue-generating activities. EITF 00-21 establishes three principles: revenue arrangements with multiple deliverables should be divided into separate units of accounting, arrangement consideration
should be allocated among the separate units of accounting based on their relative fair values and revenue recognition criteria should be considered separately for separate units of accounting. EITF 00-21 is effective for all revenue arrangements
entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company does not expect the adoption of EITF 00-21 to have a material impact on the Companys consolidated financial statements.



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



13. Commitments and Contingencies



Pending Litigation



On October 12, 2000, the Company filed a patent infringement lawsuit against KLA-Tencor (KLA), a competitor, in the United States District
Court in Delaware. The Company seeks damages and a permanent injunction against further infringement of United States Patent Number 6,118,525, entitled Wafer Inspection System for Distinguishing Pits and Particles. On November 22, 2000,
KLA filed a counterclaim alleging that the Company has infringed three patents owned by KLA. KLA is seeking damages for the alleged patent infringement and a permanent injunction against future infringement. In addition, KLA has asked the District
Court for a declaration that United States Patent Number 6,118,525, owned by the Company, is invalid and not infringed by KLA. On March 13, 2003, the District Court issued a ruling upholding KLAs principal arguments with respect to ADEs
claims of infringement. The District Court has not yet ruled on KLAs counterclaims. Once all rulings have been issued by the District Court, the Company will consider whether or not to appeal the rulings to the United States Court of Appeals
for the Federal Circuit. Accordingly, at this time, the Company cannot predict the outcome or the amount of gain or loss, if any, from this lawsuit.



On October 18, 2002, a former employee of the Company filed a civil action against the Company in Massachusetts Superior Court, Suffolk County, alleging
that the Company breached his employment contract with the Company and seeking damages of approximately $500,000. The Company has filed an answer to the former employees complaint denying his allegations, and believes that the former
employees claim lacks merit. The Company has also filed counterclaims against the employee. 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 Company and the individual defendants plan to defend the civil action charges vigorously. Since the matters are at a preliminary stage, the Company is unable to predict the outcome or amount of the related expense, or loss, if any,
associated with this litigation. However, the Company believes that any related expense or loss will be fully 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.



Guarantor agreements



Under the Companys by-laws, the Company must indemnify its officers
and directors against all liabilities incurred or threatened by reason of serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements in unlimited; however,
the Company has a Director and Officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. As a result of the Companys insurance policy coverage, it believes the estimated fair
value of these indemnification arrangements is minimal. All of these indemnification arrangements were grandfathered under the provisions of FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, as they were in effect prior to December 31, 2002. Accordingly, no liabilities have been recorded for these arrangements as of July 31, 2003.



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 July 31, 2003.



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ADE CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS



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 fair value of these provisions is minimal. Accordingly, the Company has no liabilities recorded for these provisions as of July 31, 2003.



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 to provide for estimated warranty costs, based on which business unit made the
sale. The following is a reconciliation of the activity in the Companys warranty liability for the three months ended July 31, 2003.



|                               |  | (in thousands) |      
|------------------------------ |  | -------------- | -----
|Balance at April 30, 2003      |  | $              | 1,041
|                               | 
|Accruals for warranties issued |  |                | 101  
|Warranty settlements made      |  |                | (85  
|                               |  |                |      
|Balance at July 31, 2003       |  | $              | 1,057
|                               |  |                |      





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



Introduction



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



The Companys markets are cyclical. Beginning in the second quarter of fiscal year 2002, the Company had experienced
decreased demand for its products in its SSG and ATI business segments as a result of the downturn in the semiconductor wafer and device manufacturing industries as well as the magnetic data storage industry. Consequently, the Company experienced
reduced order levels and revenues. In response to the industry downturn, the Company underwent cost reduction measures, including headcount reductions, while maintaining its investment in research and development to position the Company for the next
wave of capital spending in the semiconductor wafer and device manufacturing industries as well as the magnetic data storage industry. Recently, the Company has seen signs of increased capital spending in the semiconductor wafer and device
manufacturing and magnetic data storage industries and has experienced increased order levels, revenue and profits, however, no assurances can be made that this trend will continue.



The following information should be read in conjunction with the unaudited condensed consolidated financial statements and
notes thereto included in this quarterly report and the audited consolidated financial statements and Managements Discussion and Analysis of Financial Condition and Results of Operations contained in the Companys Annual Report on Form
10-K for the fiscal year ended April 30, 2003.



Forward-Looking Statements



This quarterly report on Form 10-Q contains certain
forward-looking statements that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those expressed by such statements. Those statements that make reference to the Companys
expectations, predictions and anticipations should be considered forward-looking statements. These statements include, but are not limited to, risks and uncertainties associated with the strength of the semiconductor and 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 and its predictions of future financial outcomes. 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 Form 10-K for the fiscal year ended April
30, 2003.



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Restructuring



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 Semiconductor Systems and ADE Technologies business segments. The majority of all the
severance payments from the first quarter restructuring will be 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. The operations of the Bethel facility were relocated to the Westwood, Massachusetts and Tucson, Arizona facilities.



Below is a table summarizing the activity related to the restructuring accrual for the three months ended July 31, 2003:



|                          |  | (in thousands) |     
|------------------------- |  | -------------- | ----
|                          |  | Severance      |     
|Balance at April 30, 2003 |  | $              | 120 
|Restructuring accrual     |  |                | 393 
|Cash payments             |  |                | (191
|                          |  |                |     
|Balance at July 31, 2003  |  | $              | 322 
|                          |  |                |     



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 will retain 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
will account for its remaining 9% interest under the cost method.



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 the cost method, the
Company recognized approximately $6.4 million of revenue and $3.9 million of profit that otherwise may have been deferred as of July 31, 2003.



Sale-leaseback



On July 29, 2003, the Company entered into an agreement to sell and leaseback its headquarters site in Westwood, Massachusetts, which resulted in a
deferred gain of $1.7 million. The Company used $3.8 million of the approximately $10.1 million in proceeds, less transaction costs, from the transaction to retire its 1996 Industrial Development Bond and eliminated the related letter of credit. On
July 31, 2003, the Company used approximately $3.0 million of the proceeds to retire its 1997 Industrial Development Bond, which resulted in $2.7 million of restricted cash becoming available for general corporate purposes. As part of this
transaction, the Company entered into a lease agreement with a 15 year term and annual rent payments increasing from approximately $1.0 million at the beginning of the lease term to approximately $1.3 million by the end of the lease term. The lease
has been classified as an operating lease and the gain of $1.7 million on the transaction has been deferred and will be amortized as a reduction of rent expense on a straight-line basis over the term of the lease.



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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. 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 changed its revenue recognition policy effective May 1, 2000, based on guidance provided in SEC Staff Accounting Bulletin No. 101 (SAB
101), Revenue Recognition in Financial Statements. The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, 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. The portion of the fee related to the installation of the product and customer training is classified as service revenue. All
other sales with customer acceptance provisions are recognized as revenue upon customer acceptance.



The Companys transactions frequently involve the sales of systems and services under multiple element arrangements. Revenue under multiple element
arrangements is allocated to all elements except systems based upon the fair value of those elements. The amounts allocated to training are based upon the price charged when this element is sold separately and unaccompanied by the other elements.
The amount allocated to installation revenue is based upon hourly rates and the estimated time to complete the service. The amount allocated to system and parts is done on a residual method basis. Under this method, the total arrangement value is
allocated first to undelivered elements, based on their fair values, with the remainder being allocated to system revenue. Installation and training



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are not essential to the functionality of systems as these services do not alter the equipments capabilities, are available from other vendors and the
systems are standard products.



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, beginning July 24, 2003, all sales to JAL are 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 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. The Company currently has a valuation allowance for the full amount of its deferred tax
assets. The decision to record the valuation allowance required



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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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 $0.8 million of capitalized license fees for software included in the Companys products. In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Other Intangible Assets, which was effective for the Company on May 1, 2002. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization and includes provisions for the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, and reclassification of
certain intangibles out of previously reported goodwill. In accordance with this statement, the Company discontinued the amortization of its net goodwill of $1.3 million on May 1, 2002. In addition, the Company was required to perform a transitional
impairment test for goodwill under SFAS 142. The impairment test under SFAS 142 uses a two-step process. The first step compares the fair value of the reporting unit with the units carrying value, including goodwill. If the carrying value of
the reporting unit is greater than fair value, the units goodwill may be impaired, and the second step must be completed to measure the amount of the goodwill impairment charge, if any. In the second step, the implied fair value of the
reporting units goodwill is compared with the carrying amount of the units goodwill. If the carrying amount is greater than the implied fair value, the carrying value of the goodwill must be written down to its implied fair value.



The Company 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 $0.8 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.



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



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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 as of July 31, 2003. 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.



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 July 31, 2003 compared to Three Months Ended July 31, 2002



Systems and parts revenue. Systems and parts revenue increased 31% to $16.9 million in the first quarter of fiscal
2004 from $12.9 million in the first quarter of fiscal 2003. Revenue in the SSG segment increased 25% to $10.8 million in the first quarter of fiscal 2004 compared to $8.6 million in the year earlier period. Increased sales of the Companys
products in the SSG segment reflected an increase in demand in Japan for capital equipment in the semiconductor wafer and device industries. Revenue in the PST segment increased 56% to $4.4 million in the first quarter of fiscal 2004 compared to
$2.8 million in the year earlier period. The increase in revenue from the PST segment was due primarily to industry acceptance and demand for its semiconductor industry products. 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 the cost method, the Company recognized approximately $6.4 million of revenue and $3.9 million of profit that otherwise may have been deferred as of July 31, 2003.



Wafer manufacturers capital equipment purchases have
been focused on advanced industry requirements rather than on capacity expansion, which has resulted in technology purchases of the Companys next generation of products. However, wafer manufacturers have been slowly adding capacity and the
Company has experienced an increase in shipments of legacy products as a result of these capacity related purchases. The Company sells its semiconductor products to both wafer and device manufacturers. Historically, the Companys semiconductor
revenue has been derived more from wafer manufacturers than device manufacturers. An increase in short-term chip demand or increases in semiconductor market capital expenditures is expected to impact device manufacturers prior to wafer manufacturers
as wafer manufacturers are further down on the overall semiconductor industry supply chain. For the second quarter of fiscal 2004, the Company expects revenue from the semiconductor industry to be at or slightly above first quarter revenues.
However, the Company can make no assurances that the expected quarterly revenue level can be sustained for the remainder of the fiscal year.



The data storage industry has experienced extreme pricing pressure, consolidation and excess supply in many data storage market segments, which has
resulted in reduced production and capital equipment purchases. Consequently, revenue from the products that are marketed to the data storage industry by the Companys ATI segment decreased 7% to $1.5 million in the first quarter of fiscal 2004
compared to $1.6 million in the year earlier period. The decrease in revenue is due primarily to decreased shipments of the Companys magnetic storage products during the first quarter of fiscal 2004. Data storage industry revenue comprised 9%
of total revenue for the three months ended July 31, 2003, compared to 16% for the year earlier period.



A breakdown of the Companys total revenues by industry is as follows:



|                      |  | Three monthsended July 31, |  
|--------------------- |  | -------------------------- | -
|                      |  | 2003                       |  
|Wafer                 |  | 82                         | %
|Device / OEM          |  | 9                          | %
|Magnetic Data Storage |  | 9                          | %
|                      |  |                            |  
|Total                 |  | 100                        | %
|                      |  |                            |  



Service
revenue. Service revenue increased 18% to $2.2 million in the first quarter of fiscal 2004 compared to $1.9 million in the first quarter of fiscal 2003. 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 customers bringing equipment back on-line to increase capacity.



Gross profit  systems and parts. Gross profit increased to 52%
in the first quarter of fiscal 2004 from 49% in the first quarter of fiscal 2003. The increase in gross profit was primarily due to factory overhead cost reductions undertaken over the past fiscal year in the SSG segment. The increase in gross
profit in the SSG segment was partially offset by a decrease in gross profit in the ATI segment due to lower shipment volume.



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Gross profit  service. Gross profit improved to (10%) in the first quarter of fiscal 2004
compared to (26%) in the third quarter of fiscal 2003. The improved gross profit was the result of factory overhead cost reductions undertaken over the past fiscal year, primarily in the SSG segment.



Research and development. Research and development expense decreased
$1.1 million, or 24%, to $3.7 million in the first quarter of fiscal 2004 from $4.8 million in the first quarter of fiscal 2003 and decreased as a percentage of revenue to 19% compared to 33% in the first quarter of fiscal 2003. The decrease in
expense resulted primarily from a decrease in payroll, consulting and project material expenses in all segments, which were part of the overall cost reduction measures taken by the Company since the beginning of the current downturn in the
semiconductor wafer and device manufacturing industries. 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. The decrease in expense as a percentage of revenues reflects both the cost reductions and increased revenues mentioned above. The Company expects research and development expense over the
short term to be at or near current levels as a percentage of revenues.



Marketing and sales. Marketing and sales expense decreased $0.8 million, or 28%, to $2.0 million in the first quarter of fiscal 2004 from $2.8 million in the first quarter of 2003 and decreased as a percentage of revenue to 11% in
the first quarter of fiscal 2004 compared to 19% in the first quarter of fiscal 2003. The decreased expense resulted primarily from decreased payroll expense and discretionary spending including travel and advertising in all segments of the Company.
Also contributing to the decrease in expense was a decrease in commissions expense on sales made through internal and external sales representatives. The mix of sales channels through which the Companys products are sold may have a significant
impact on the Companys marketing and sales expense and the results in any period may not be indicative of marketing and sales expense for future periods.



General and administrative. General and administrative expense decreased $0.7 million, or 24%, to $2.2 million in the first quarter of fiscal
2004 from $2.9 million in the first quarter of fiscal 2003 and decreased as a percentage of revenue to 11% from 19% in the first quarter of 2003. Expense decreased primarily due to a decrease in legal and patent expenses in the first quarter of
fiscal 2004 compared to the first quarter of fiscal 2003. The decrease in expenses was partially offset by an impairment charge of $0.2 million related to the Companys Newton, Massachusetts property, which has been classified as held for sale
in the Companys consolidated balance sheet. The impairment charge was based on the Companys best estimate of the current value of the property less selling costs. It is possible that the Company could record further impairment on this
property if market conditions in the real estate market were to deteriorate. In addition, the Company expects that legal and patent expenses will increase in its third fiscal quarter as the patent infringement lawsuit with KLA-Tencor goes to trial
in January 2004.



Interest and other income (expense),
net. Net interest and other income (expense) was ($162,000) in the first quarter of fiscal 2004 compared to net interest and other income (expense) of ($119,000) in the first quarter of fiscal 2003. The increase in interest and other expense
resulted primarily from accrued interest prepayment fees associated with the Companys retirement of its 1996 and 1997 Industrial Development Bonds.



Income taxes. There was a provision for income taxes of $88,000 in the first quarter of fiscal 2004 compared to a provision for income taxes of
$22,000 in the first quarter of fiscal 2003. The increase in the income tax provision was due primarily to a liability for state income taxes in Arizona as a result of the profitability of the Companys PST division.



Equity in net earnings of affiliated companies. Equity in net earnings
(loss) of affiliated companies was $48,000 in the first quarter of fiscal 2004 compared to ($64,000) in the first quarter of fiscal 2003. The Companys Japanese affiliate, JAL sells primarily to the semiconductor industry and the increase in
current period earnings reflects the timing of shipments and the recognition of revenue by the affiliate. 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 (loss) in its statement of operations.



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Liquidity and Capital Resources



At July 31, 2003, the Company had $33.0 million in cash and cash equivalents and $63.0 million in working capital. In
addition, the Company had $0.4 million in restricted cash used as security for a tax-exempt Industrial Development Bond (IDB) issued through the through the Industrial Development Authority of the County of Pima, Arizona in April 1999
and $0.7 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 three months ended July 31, 2003 was $1.9 million. This amount resulted from net income of $1.8 million
adjusted for non-cash charges of $0.3 million and a $0.3 million net increase in working capital accounts. Non-cash items consisted primarily of $0.9 million of depreciation and amortization, a $0.2 million long-lived asset impairment charge and
$1.0 million of equity in the net earnings of affiliated companies, net of dividends received, offset by a gain of $1.7 million on the sale of 41% of JAL. Working capital items consisted primarily of increases in prepaid expenses and other current
assets of $0.2 million and accrued expenses and other current liabilities of $1.2 million and decreases in accounts receivable of $1.7 million, inventories of $0.1 million, accounts payable of $0.8 million and deferred income on sales to affiliates
of $2.3 million. The increase in prepaid expenses and other current assets was due to the timing of payments to vendors. The increase in accrued expenses and other current liabilities was primarily due to increases in accrued restructuring expenses
and deferred revenue. The decrease in accounts receivable was due to the timing of shipments and improved collections during the quarter. The decrease in accounts payable was primarily due to the timing of payments to vendors. The decrease in
deferred income on sales to affiliate is due to the decrease in the Companys investment in JAL and the associated recognition of previously deferred revenue and profit on sales to JAL.



Cash provided by investing activities was $15.8 million, and consisted
primarily of a $2.1 million decrease in restricted cash, net proceeds of $9.8 million from the sale of the Companys headquarters building and $4.0 million in proceeds from the sale of 41% of the Companys investment in JAL. The decrease
in restricted cash of $2.1 million was due to the retirement of the Companys 1997 Industrial Development Bond, which resulted in $2.7 million of previously restricted cash being allowed for use for general corporate purposes and was offset by
$0.7 million of newly restricted cash as a security deposit for the lease on the Companys headquarters building.



Cash used in financing activities was $6.2 million, which consisted of $6.9 million in repayments of long-term debt, which were offset by $0.7 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. The repayments of debt primarily consisted of the retirement of the Companys
1996 and 1997 Industrial Development Bonds.



The Companys
Newton, Massachusetts facility is currently listed for sale. On July 31, 2003, the Company retired the 1997 IDB, which was used to finance the acquisition of this property. At this time, the Company is not able to estimate when the property will be
sold, what the proceeds will be or the amount of gain or loss, if any.



Under Generally Accepted Accounting Principles (GAAP) in the United States, 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 July 31, 2003. The operating lease and consulting agreement obligations are not included
in the unaudited condensed consolidated financial statements included in Item 1. Financial Information. The principal portion of the long term debt is included in the unaudited condensed consolidated financial statements. The long-term
debt payments in the table below include both principal and interest.



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|                     |  | Payments due by period (in thousands)
|-------------------- |  | -------------------------------------
|                     |  | Less than1 year                      
|Long term debt       |  | $                                    
|Operating leases     |  |                                      
|Consulting agreement |  |                                      
|                     |  |                                      
|                     |  | $                                    
|                     |  |                                      



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



The Company expects to meet its near-term working capital needs and capital expenditures primarily through available cash
and cash equivalents, which will primarily be generated from sales to both existing and new customers. However, the Company can provide no assurance that it will be able to maintain its current customer base or acquire new customers.



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 has not yet emerged from the recent severe down cycle, it is not clear when semiconductor wafer
manufacturers, who have historically accounted for approximately 70% - 80% of the Companys revenue, will be in a position to increase their purchases of capital equipment. The data storage industry has been in a period of oversupply and excess
manufacturing capacity for an extended period of time and this has also had an adverse impact on the Company. At July 31, 2003, the Companys backlog was $27.4 million. The Company remains uncertain about how long revenue growth 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.



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 May 2003, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 150 (SFAS 150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The Company believes that the adoption of SFAS No. 150 will not have a material impact on its current financial position and results of operations.



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In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46 (FIN 46), Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51. FIN 46 requires certain variable interest entities, or VIEs, to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated
financial support from other parties. FIN 46 is effective for all VIE created or acquired after January 31, 2003. For VIEs created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period
beginning after June 15, 2003. The Company believes that the adoption of FIN 46 will not have a significant impact on its consolidated financial statements.



In November 2002, the Emerging Issues Task Force issued No. 00-21 (EITF 00-21), Accounting for Revenue Arrangements with Multiple
Deliverables. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF 00-21 establishes three principles: revenue arrangements with multiple
deliverables should be divided into separate units of accounting, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values and revenue recognition criteria should be considered
separately for separate units of accounting. EITF 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company does not expect the adoption of EITF 00-21 to
have a material impact on the Companys consolidated financial statements.



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Item 3. Quantitative and Qualitative Disclosures About Market Risk:



At July 31, 2003, the Companys exposure to market risk relates primarily to changes in interest rates on its investment portfolio. The
Companys cash equivalents consist primarily of fixed income securities. The Company invests only with high credit quality issuers and does not use derivative financial instruments in its investment portfolio. The Company does not believe that
a sharp increase or decrease in interest rates would have a material adverse impact on the fair value of its investment portfolio. The Companys long-term borrowings are at fixed interest rates.



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



Item 4. Controls and Procedures:



The term disclosure controls and procedures is defined in Rules 13a-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 in ensuring that required information will be disclosed on a timely basis in the Companys reports filed under the Exchange Act.



The Company maintains a system of internal accounting controls that are
designed to provide reasonable assurance that the Companys transactions are properly recorded, that the Companys assets are safeguarded against unauthorized or improper use and that the Companys transactions are properly recorded
and reported. As part of the evaluation of the Companys disclosure controls and procedures, the Company evaluated its internal control over financial reporting. During the first quarter of fiscal 2004, corrective action was taken for a
previously reported deficiency. There have been no other changes to the Companys internal control over financial reporting during the first fiscal quarter of 2004 that have materially affected, or are reasonably likely to materially affect,
the Companys internal control over financial reporting, including any corrective actions taken with regard to any significant deficiencies or material weaknesses.



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PART II.



OTHER INFORMATION



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



(a)
Exhibits



|Exhibit Number |  | Description                                                                                                                                                                
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               | 
|10.1           |  | Amendments to Employee Stock Purchase Plan.*                                                                                                                               
|               | 
|10.2           |  | Lease Agreement dated July 29, 2003 between the Company, as tenant, and Westwood Nominee Trust, as landlord, for the premises at 80-82 Wilson Way, Westwood,
Massachusetts.
|               | 
|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.                         

---

|* |  | Compensatory plan or arrangement applicable to management and/or employees.
|- |  | ---------------------------------------------------------------------------



(b) Reports on Form 8-K



None.



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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: September 15, 2003 |  | /s/ Chris L. Koliopoulos                            
|                         |  | Chris L. Koliopoulos, Ph.D.                         
|                         |  | President and Chief Executive Officer               
|                         | 
|Date: September 15, 2003 |  | /s/ Brian C. James                                  
|                         |  | Brian C. James                                      
|                         |  | Executive Vice President and Chief Financial Officer





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