Adept Technology (ADEP) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended December 31, 2005

OR

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

For the transition period from                    to                    

Commission File No. 0-27122

ADEPT TECHNOLOGY, INC.

(Exact name of Registrant as Specified in its Charter)

Delaware	94-2900635
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
3011 Triad Drive, Livermore, California	94550
(Address of Principal Executive Offices)	(Zip Code)

(925) 245-3400

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  ¨                Accelerated filer  ¨                Non-accelerated filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES  ¨    NO  x

The number of shares of the Registrant’s common stock outstanding as of February 10, 2006 was 6,204,106.

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ADEPT TECHNOLOGY, INC.

	Page
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets December 31, 2005 and June 30, 2005	3
Condensed Consolidated Statements of Operations Three and Six months ended December 31, 2005 and January 1, 2005	4
Condensed Consolidated Statements of Cash Flows Six months ended December 31, 2005 and January 1, 2005	5
Notes to Condensed Consolidated Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3. Quantitative and Qualitative Disclosures About Market Risk	22
Item 4. Controls and Procedures	23
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	24
Item 1.A. Risk Factors	24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3. Defaults upon Senior Securities	38
Item 4. Submission of Matters to a Vote of Security Holders	38
Item 5. Other Information	38
Item 6. Exhibits	39
Signatures	41
Index to Exhibits	42

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ADEPT TECHNOLOGY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

	December 31, 2005			June 30, 2005*
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,923		$	5,334
Accounts receivable, less allowance for doubtful accounts of $742 at December 31, 2005 and $754 at June 30, 2005		13,989			11,184
Inventories, net		9,916			10,201
Other current assets		539			642
Total current assets		27,367			27,361
Property and equipment at cost		11,061			10,112
Less accumulated depreciation and amortization		9,124			8,869
Property and equipment, net		1,937			1,243
Goodwill		3,176			3,176
Other intangible assets, net		130			228
Other assets		223			201
Total assets	$	32,833		$	32,209
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Subordinated convertible note	$	3,000		$	3,000
Accounts payable		6,933			6,916
Accrued payroll and related expenses		1,664			1,501
Accrued warranty expenses		1,806			2,040
Deferred revenue		31			60
Accrued restructuring expenses		—			22
Other accrued liabilities		692			727
Total current liabilities		14,126			14,266
Long-term liabilities:
Other long-term liabilities		261			242
Total liabilities		14,387			14,508
Shareholders’ equity:
Common stock, $0.001 par value and no par value: 19,000 and 14,000 shares authorized, 6,199 and 6,137 shares issued and outstanding at December 31, 2005 and June 30, 2005, respectively		144,777			144,183
Accumulated deficit:		(126,331	)		(126,482	)
Total shareholders’ equity		18,446			17,701
Total liabilities and shareholders’ equity	$	32,833		$	32,209

Reflects the one-for-five reverse stock split by Adept effective February 25, 2005

See accompanying notes

*Derived from audited consolidated financial statements

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ADEPT TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

(in thousands, except per share data)

	Three months ended						Six months Ended
	December 31, 2005			January 1, 2005			December 31, 2005			January 1, 2005
Revenues	$	12,979		$	11,785		$	27,620		$	23,078
Cost of revenues		6,139			6,461			13,306			12,288
Gross margin		6,840			5,324			14,314			10,790
Operating expenses:
Research, development and engineering		1,737			1,561			3,639			3,222
Selling, general and administrative		4,853			3,844			10,018			7,637
Restructuring charge (reversal), net		—			9			—			(33	)
Amortization of intangible assets		49			49			98			97
Total operating expenses		6,639			5,463			13,755			10,923
Operating income (loss)		201			(139	)		559			(133	)
Interest expense, net		(18	)		(36	)		(46	)		(73	)
Foreign currency exchange gain (loss)		(204	)		241			(368	)		324
Income (loss) before income taxes		(21	)		66			145			118
Provision for (reversal of) income taxes		(11	)		6			(5	)		17
Net income (loss)	$	(10	)	$	60		$	150		$	101
Basic income (loss) per share	$	0.00		$	0.01		$	0.02		$	0.02
Diluted income (loss) per share	$	0.00		$	0.01		$	0.02		$	0.02
Number of shares used in computing basic per share amounts		6,178			6,073			6,158			6,031
Number of shares used in computing diluted per share amounts		6,178			6,381			6,782			6,319

Reflects the one-for-five reverse stock split by Adept effective February 25, 2005

See accompanying notes

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ADEPT TECHNOLOGY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

(in thousands)

	Six months ended
	December 31,			January 1,
	2005			2005
Operating activities
Net income	$	150		$	101
Non-cash adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		255			484
Stock compensation		439			—
Amortization of intangibles		98			98
Non-cash interest expense		90			90
Net changes in operating assets and liabilities:
Accounts receivable, net		(2,805	)		2,996
Inventories, net		285			(1,443	)
Other current assets		103			(199	)
Other assets		(22	)		(6	)
Accounts payable		17			(952	)
Other accrued liabilities and deferred revenues		(226	)		(1,653	)
Accrued restructuring expenses		(22	)		—
Other long-term liabilities		20			69
Net cash used in operating activities		(1,618	)		(416	)
Investing activities
Purchase of property and equipment		(949	)		(446	)
Net cash used in investing activities		(949	)		(446	)
Financing activities
Proceeds from employee stock incentive program and employee stock purchase plan		156			640
Net cash provided by financing activities		156			640
Increase (decrease) in cash and cash equivalents		(2,411	)		(222	)
Cash and cash equivalents, beginning of period		5,334			4,957
Cash and cash equivalents, end of period	$	2,923		$	4,735
Cash paid during the period for:
Interest	$	2		$	2
Taxes	$	10		$	17

See accompanying notes.

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ADEPT TECHNOLOGY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. General

The accompanying condensed consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished in this report reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the consolidated financial position, results of operations and cash flows as of and for the interim periods. The results for such periods are not necessarily indicative of the results to be expected for the full fiscal year or for any other future period. Such adjustments consist of items of a normal recurring nature. The condensed consolidated financial statements included in this quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2005 included in Adept Technology, Inc.’s (“Adept” or the “Company”) Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2005.

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Therefore, actual results could differ from those estimates and could have a material impact on our consolidated financial statements, and it is possible that such changes could occur in the near term.

The Company applies Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” with respect to its international operations, which are primarily sales and service entities. The accounts denominated in non-U.S. currencies have been re-measured using the U.S. dollar as the functional currency. All monetary assets and liabilities are remeasured at the current exchange rate at the end of the period, nonmonetary assets and liabilities are remeasured at historical exchange rates, and revenues and expenses are remeasured at average exchange rates in effect during the period.

All current and historical share and per share information included in these condensed consolidated financial statements has been restated to reflect the results of Adept’s one-for-five reverse stock split effective February 25, 2005.

Certain amounts presented in the consolidated financial statements for prior periods have been reclassified to conform to the fiscal year 2006 presentation.

2. Stock-Based Compensation

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share –Based Payment”, effective July 1, 2005. SFAS 123R requires the recognition of fair value of stock compensation as an expense in the calculation of net income. We recognize the stock compensation expense ratably over the vesting period of the individual equity instruments. All stock compensation recorded during the three and six months ended December 31, 2005 has been accounted for as an equity instrument. Prior to July 1, 2005 we followed the Accounting Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees”, and related interpretations for our stock compensation.

We have elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all stock-based awards granted or other awards granted that are subsequently reclassified into equity. The unrecognized expense of awards not yet vested as of July 1, 2005, the date of SFAS 123R adoption by the Company, is now being recognized as expense in the calculation of net income using the same valuation method (Black-Scholes) and assumptions disclosed prior to our adoption of SFAS 123R.

Under the provisions of SFAS 123R we recorded $213,000 and $439,000 of stock compensation expense on our unaudited condensed consolidated statement of operations for the three and six months ended December 31, 2005,

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respectively. We utilized the Black-Scholes valuation model for estimating the fair value of the compensation after the adoption of SFAS 123R. During the three and six months ended December 31, 2005, the weighted average fair values of the options granted under the stock option plans and shares subject to purchase under the employee stock purchase plan for the three months ended December 31, 2005 were $5.24 and $3.18 respectively, and for the six months ended December 31, 2005 were $4.62 and $2.74, respectively using the following assumptions.

	Three Months Ended December 31, 2005				Six Months Ended December 31, 2005
	Stock Option Plan		Purchase Plan		Stock Option Plan		Purchase Plan
Average risk free interest rate	4.29	%	3.60	%	3.92	%	3.54	%
Expected life (in years)	4.28		0.50		3.24		0.50
Expected volatility	0.80		0.85		0.86		0.87
Dividend yield	0	%	0	%	0	%	0	%

The dividend yield of zero is based on the fact that we have never paid cash dividends and have no present intention to pay cash dividends. Expected volatility is based on the historical volatility of our common stock over the period commensurate with the expected life of the options. The risk-free interest rate is based on observed and expected time to post-vesting exercise and forfeitures of options by our employees.

Based on our historical experience of option pre-vesting cancellations, we have assumed an annualized forfeiture rate of 20% for our options. Under the true-up provisions of SFAS 123R, we will record additional expense if the actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense if the actual forfeiture is higher than we estimated.

SFAS 123R requires us to present pro forma information for the comparative period prior to the adoption as if we had accounted for all our employee stock options under the fair value method of the original SFAS 123. The following table illustrates the effect on net income and earnings per share if we had applied the fair value recognition provisions of SFAS 123 to stock-based employee compensation to the prior-year periods (dollars in thousands, except per share data).

	Three Months Ended January 1, 2005			Six Months Ended January 1, 2005
Net income as reported	$	60		$	101
Add: Employee stock compensation included in reported net income		—			—
Less: employee stock compensation under SFAS No. 123		(222	)		(453	)
Pro forma net loss	$	(162	)	$	(352	)
Net income per basic share as reported	$	0.01		$	0.02
Pro forma net loss per basic share	$	(0.03	)	$	(0.06	)
Net income per diluted share as reported	$	0.01		$	0.02
Pro forma net loss per basic and diluted share	$	(0.03	)	$	(0.06	)

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During the three and six months ended January 1, 2005, the weighted average fair values of the options granted under the stock option plans and shares subject to purchase under the employee stock purchase plan for the three months ended January 1, 2005 were $4.70 and $4.90 respectively, and for the six months ended January 1, 2005 were $4.70 and $4.90, respectively using the following assumptions.

	Three Months Ended January 1, 2005				Six Months Ended January 1, 2005
	Stock Option Plan		Purchase Plan		Stock Option Plan		Purchase Plan
Average risk free interest rate	4.03	%	4.56	%	4.03	%	4.56	%
Expected life (in years)	8.58		0.50		8.58		0.50
Expected volatility	0.66		3.23		0.66		3.23
Dividend yield	0	%	0	%	0	%	0	%

The amortization of stock compensation under SFAS 123R for the period after its adoption, and under APB 25 or SFAS 123 (pro forma disclosure) for the period prior to the adoption of SFAS 123R was done in accordance with Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 28. The unamortized compensation cost (previously being recognized under FAS 123 on a pro-forma basis) for options granted but not vested as of July 1, 2005 will be recognized ratably over the remaining vesting period of such options.

3. Cash and Cash Equivalents

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Short-term investments typically consist of marketable securities and money market investments with maturities between three and 12 months. Investments are classified as held-to-maturity, trading, or available-for-sale at the time of purchase. At December 31, 2005, the Company held no short-term investments.

4. Inventories

Inventories, net of reserves, are stated at the lower of standard cost, which approximates actual cost under the first-in, first-out method, or market value. The components of inventory are as follows:

	(in thousands)
	December 31, 2005		June 30, 2005
Raw materials	$	4,051	$	3,835
Work-in-process		1,814		2,176
Finished goods		4,051		4,190
	$	9,916	$	10,201

Inventory reserves for estimated obsolescence or unmarketable inventory were $2.3 million at December 31, 2005 and $2.5 million at June 30, 2005.

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5. Property and Equipment

Property and equipment are recorded at cost.

The components of property and equipment are summarized as follows:

	(in thousands)
	December 31, 2005			June 30, 2005
Machinery and equipment	$	3,437		$	2,844
Computer equipment		5,542			5,234
Office furniture and equipment		2,082			2,034
		11,061			10,112
Accumulated depreciation and amortization		(9,124	)		(8,869	)
Net property and equipment	$	1,937		$	1,243

6. Intangible Assets

The following is a summary of the gross carrying amount and accumulated amortization, aggregate amortization expense, and estimated remaining annual amortization expense related to the intangible assets subject to amortization.

	(in thousands) As of December 31, 2005
Amortizable intangible assets	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology	$	2,389	$	(2,259	)	$	130
Non-compete agreements		380		(380	)		—
Total	$	2,769	$	(2,639	)	$	130

The aggregate amortization expense for the six months ended December 31, 2005 totaled $98,000 and the estimated amortization expense for the next two years is as follows:

	(in thousands) Amount
Remaining for fiscal year 2006	$	97
For fiscal year 2007		33
	$	130

7. Warranties

The Company generally offers a two year parts and one year labor limited warranty for most of its hardware component products. The specific terms and conditions of those warranties are set forth in the Company’s “Terms and Conditions of Sale,” and published in sales catalogs and on each sales order acknowledgement. The Company estimates the costs that may be incurred under its limited warranty, and records a liability through charges to cost of revenues at the time product revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and costs per claim. The Company periodically assesses the adequacy of its recorded warranty liabilities and adjusts the amounts as necessary.

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Changes in the Company’s warranty liability are as follows:

	(in thousands) Six months ended
	December 31, 2005			January 1, 2005
Balance at beginning of period	$	2,040		$	2,111
Provision for warranties issued		623			551
Change in estimated warranty provision including expirations		—			(264	)
Warranty claims		(857	)		(489	)
Balance at end of period	$	1,806		$	1,909

8. Accrued Restructuring Expenses

The following table summarizes the Company’s accrued restructuring expenses:

	Balance June 30, 2005		Amounts Paid Q1 Fiscal 2006		Balance October 1, 2005		Amounts Paid Q2 Fiscal 2006		Balance December 31, 2005
Lease commitments	$	22	$	6	$	16	$	16	$	—

9. Legal Proceedings

From time to time, the Company is party to various legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of its business. The Company has reviewed pending legal matters and believes that the resolution of these matters will not have a material adverse effect on its business, financial condition or results of operations.

Adept has in the past received communications from third parties asserting that it has infringed certain patents and other intellectual property rights of others, or seeking indemnification against alleged infringement. While it is not feasible to predict or determine the likelihood or outcome of any actual or potential actions from such assertions against the Company, it believes the ultimate resolution of these matters will not have a material adverse effect on its financial position, results of operations or cash flows.

10. Income Taxes

The Company provides for income taxes during interim reporting periods based upon an estimate of its annual effective tax rate. The Company also maintains a liability to cover the cost of additional probable tax exposure items pertaining to the filing of federal and state income tax returns, as well as filings in foreign jurisdictions. Each of these filing jurisdictions may audit the tax returns filed and propose adjustments. Adjustments arise from a variety of factors, including different interpretations of statutes and regulations. For the six months ended December 31, 2005, the Company conducted an analysis of existing reserves for taxes and made a net $5,000 reduction in reserve levels since the beginning of fiscal 2006.

11. Income (Loss) per Share

Basic income (loss) per share is computed by dividing net income (loss), the numerator, by the weighted average number of shares of common stock outstanding, the denominator, during the period. Diluted income per share gives effect to equity instruments considered to be potential common shares, if dilutive, computed using the treasury stock method of accounting.

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	Three months ended					Six months ended
(in thousands)	December 31, 2005			January 1, 2005		December 31, 2005		January 1, 2005
Net Income (loss)	$	(10	)	$	60	$	150	$	101
Basic:
Weighted average number of shares used in computing basic per share amounts		6,178			6,073		6,158		6,031
Basic net income per share	$	0.00		$	0.01	$	0.02	$	0.02
Diluted:
Weighted average number of common shares used in computing basic net income per share		6,178			6,073		6,158		6,031
Add: Weighted average number of dilutive potential Common stock		—			308		624		288
Weighted average number of common shares used in computing diluted net income per share		6,178			6,381		6,782		6,319
Diluted net income per share	$	0.00		$	0.01	$	0.02	$	0.02

12. Segment Information

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” requires disclosures of certain information regarding operating segments, products and services, geographic areas of operation and major customers. SFAS No. 131 reporting is based upon the “management approach”: how management organizes the company’s operating segments for which separate financial information is (i) available and (ii) evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Adept’s chief operating decision maker is its President and Chief Executive Officer, or CEO.

Adept’s business is focused towards delivering intelligent flexible production automation products, components and services for assembly and material handling applications under two categories: (1) Robotics and (2) Services and Support.

The Robotics segment provides intelligent production automation software and hardware component products externally to customers.

The Services and Support segment provides support services to customers including: supplies of spare parts and refurbished and new direct drive robots; providing information regarding the use of the Company’s automation equipment; assisting with the ongoing support of installed systems; consulting services for applications; and training courses ranging from system operation and maintenance to advanced programming geared towards manufacturing engineers who design and implement automation lines.

The Company evaluates performance and allocates resources based on segment revenue and segment profit. Segment profit is comprised of income before unallocated research, development and engineering expenses, unallocated general and administrative expenses, interest income, and interest and other expenses.

Management does not fully allocate research, development and engineering expenses and general and administrative expenses when making capital spending and expense funding decisions or assessing segment performance. There is no inter-segment revenue recognized. Transfers of materials or labor between segments are recorded at cost.

Segment information for total assets and capital expenditures is not presented as such information is not used in measuring segment performance or allocating resources between segments.

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	Three months ended						Six months ended
(in thousands)	December 31, 2005			January 1, 2005			December 31, 2005			January 1, 2005
Revenues:
Robotics	$	7,868		$	8,273		$	16,072		$	15,856
Services and Support		5,111			3,512			11,548			7,222
Total revenues	$	12,979		$	11,785		$	27,620		$	23,078
Operating income:
Robotics	$	185		$	1,452		$	1,275		$	3,014
Services and Support		2,521			485			4,256			1,320
Segment profit		2,706			1,937			5,531			4,334
Unallocated research, development and engineering and general and administrative		2,456			2,017			4,874			4,403
Restructuring (charges) reversal, net		—			(9	)		—			33
Amortization of intangible assets		49			49			98			97
Operating income (loss)		201			(138	)		559			(133	)
Interest income		27			9			45			19
Interest expense		(45	)		(46	)		(92	)		(92	)
Foreign currency gain (loss)		(204	)		241			(368	)		324
Income before income taxes	$	(21	)	$	66		$	144		$	118

Management also assesses the Company’s performance, operations and assets by geographic areas, and therefore revenue and long-lived assets are summarized in the following table:

	Three months ended				Six months ended
(in thousands)	December 31, 2005		January 1, 2005		December 31, 2005		January 1, 2005
Revenue:
United States	$	3,833	$	4,368	$	8,252	$	7,591
Germany		2,537		2,682		6,942		5,620
France		2,337		1,300		4,168		2,286
Switzerland		246		674		1,059		1,410
Other European countries		1,387		1,053		2,789		2,048
Singapore		1,596		447		2,728		1,145
All other countries		1,043		1,261		1,682		2,978
Total	$	12,979	$	11,785	$	27,620	$	23,078

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(in thousands)	December 31, 2005		June 30, 2005
Long-lived assets:
United States	$	5,142	$	4,583
All other countries		312		213
Total long-lived assets	$	5,454	$	4,796

13. Comprehensive Income

For the three and six months ended December 31, 2005 and January 1, 2005, there were no significant differences between the Company’s comprehensive income or loss and its net income or loss.

14. Equity

During the six months ended December 31, 2005, 10,852 shares of common stock were issued upon the exercise of options under the Company’s stock option plans, and 25,544 shares of common stock were issued under the Company’s employee stock purchase plan (ESPP). Shares are issued semi-annually under the ESPP, in February and August. Total shares outstanding at December 31, 2005 were 6,199,760.

15. Foreign Currency Translation

Translation gains resulting from the process of remeasuring foreign currency financial statements into U.S. dollars were $48,000 and $123,000 for the three and six months ended December 31, 2005, respectively, and $37,000 and $44,000 for the three and six months ended January 1, 2005, respectively. Foreign currency transaction gains (losses) were $(252,000) and $(491,000) for the three and six months ended December 31, 2005, respectively, and $200,000 and $271,000 for the three and six months ended January 1, 2005, respectively. In the past the Company has included foreign currency exchange gains or losses in selling, general and administrative expenses, but beginning in the second quarter of fiscal 2005, foreign currency gains or losses are reported as a separate line item in the income statement.

16. Impact of Recently Issued Accounting Standards

Statement 151, Inventory Cost, an amendment to ARB No 43, Chapter 4, was issued by the Financial Accounting Standards Board (FASB) in November 2004. The pronouncement clarifies that abnormal amounts of idle facility exposure, freight, handling costs and wasted materials (spoilage) be recognized as current period charges and requires the allocation of fixed production overheads to inventory based on the normal capacity and cost of the production facilities. Statement 151 is the result of a broader effort by the FASB to improve the comparability of cross-border financial reporting by working with the International Accounting Standards Board (IASB) toward development of a single set of high quality accounting standards. Statement 151 is effective for inventory costs incurred during fiscal periods beginning after June 15, 2005. The Company believes that it is currently following the practices mandated in Statement 151, and as a result, the Company does not anticipate that the adoption of Statement 151 will have a significant impact on its financial condition or results of operations.

On December 16, 2004, the Financial Accounting Standards Board issued Statement 123R, Share-Based Payment, which is a revision of Statement 123, Accounting for Stock Based Compensation. Statement 123R supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees and amends Statement No. 95, Statement of Cash Flows. As amended effective April 14, 2005, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values (i.e., proforma disclosure is no longer an alternative to financial statement recognition). Statement 123R is effective for public companies (excluding small business issuers) at the beginning of the first interim or annual period beginning after June 15, 2005. Statement 123R became effective for Adept for the quarter ending October 1, 2005. See “Stock-Based Compensation” in Note 2 to the Company’s Condensed Consolidated Financial Statements for the pro forma net income and net income per share amounts, for the three and six months ended January 1, 2005.

On November 10, 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 123R-3Transition Election Related to Accounting for Tax Effects of Share-Based Payment Awards. The Company has elected to adopt the “short-cut” method provided in the FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The “short-cut” method includes simplified methods to establish the beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of share-based compensation, and to determine the subsequent impact on the APIC pool and the Condensed Consolidated Statements of Cash Flows of the tax effects of share-based compensation awards that are outstanding upon adoption of SFAS 123R.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This report contains forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

• the economic environment affecting us and the markets we serve;

• sources of revenues and anticipated revenues, including the contribution from the growth of new products and markets;

• impact of new products or change in product mix on margins;

• our expectations regarding our cash flows and the impact of the timing of receipts and disbursements;

• our estimates regarding our liquidity and capital requirements;

• marketing and commercialization of our products under development;

• our ability to attract customers and the market acceptance of our products;

• our ability to establish relationships with suppliers, systems integrators and OEMs for the supply and distribution of our products;

• plans for future products and services and for enhancements of existing products and services;

• plans for future acquisitions of products, technologies and businesses; and

• our intellectual property.

In some cases, you can identify forward-looking statements by terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “predict,” “potential,” or the negative of these terms, and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions which may or may not prove to be correct, and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these statements. We discuss many of these risks in this quarterly report on Form 10-Q in greater detail under the heading “Risk Factors.” Also, these statements represent our estimates and assumptions only as of the date of this report.

In this report, unless the context indicates otherwise, the terms “Adept,” “we,” “us,” and “our” refer to Adept Technology, Inc., a California corporation, and its subsidiaries.

This report contains trademarks and trade names of Adept and other companies. Adept has 140 trademarks of which 15 are registered trademarks, some of which include the Adept Technology logo including (among others) AIM^®, FireBlox^®, HexSight^®, Adept Cobra 600™, Adept Cobra 800™, Adept Python™ Linear Modules, Adept SmartServo™, AdeptOne™, AdeptSix™, AdeptViper™ and Adept i-Sight™.

OVERVIEW

We provide intelligent vision-guided robotics and global robotics services to our customers in many industries including the electronics/communications, automotive, industrial appliance, food and pharmaceuticals, semiconductor, original equipment manufacturer, or OEM, and life sciences industries. This mix varies considerably from period to period due to a variety of market and economic factors. We utilize our comprehensive portfolio of high reliability mechanisms, high-performance motion controllers and application development software to deliver automation products that meet our customers’ increasingly complex manufacturing requirements. We offer our customers comprehensive and tailored automation products that reduce the time and cost to design, engineer and launch products into high-volume production. The benefits of Adept automation products include increased manufacturing flexibility for future product generations, less customized engineering and reduced dependence on production engineers. Our product range currently includes system design software, process knowledge software, integrated real-time vision and multi-axis motion controls, machine vision systems and software, industrial robots, and other flexible automation equipment. Our software has not generally been sold or licensed separately, except for vision software, though we intend to market and sell additional software licenses on a standalone basis in the foreseeable future. In recent years, we have expanded our robot product lines and developed advanced software and sensing technologies that have enabled robots to perform a wider range of functions. The Adept 4-axis robots, Adept’s SCARA (Selective Compliance Assembly Robot Arm) robots, are designed for a broad

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range of basic applications that otherwise utilize dedicated automation or manual labor. This technology is fundamental to Adept’s business and Adept has recently made developments and launched new SCARA products, which we believe will favorably impact on our gross margins during fiscal 2006, as discussed in “Results of Operations-Gross Margin” below.

In response to the market need for a 6-axis robot that combines speed, flexibility and precision, in April 2005, we expanded our product portfolio to include the AdeptViper robot family, a line of 6-axis articulated robots designed specifically for precision assembly applications. The AdeptViper family consists of the S-650 and S-850 which combine an advanced 6-axis arm design with Adept’s high performance SmartControl software platform allowing 6-axis robotics to be used in small part assembly and material handling manufacturing. Sales of 6-axis robots have increased 13% in the first half of fiscal 2006 compared to the same period of the prior year.

In December 2005, we began shipments of a family of new high performance linear modules called Adept Python Linear Modules, primarily for the electronics and automotive markets. These single axis devices can be coupled together by the user to form application-specific custom robot mechanisms ranging from two to four axes. Each Adept Python Module is powered by an Adept MotionBlox 10, an integrated single axis motion controller and power amplifier. Adept Python Linear Modules feature fast delivery times, lower delivered costs, and reduced installation time. This new level of modularity and system level performance reduces the amount of software programming and cabling required in a workcell or a robotic system that performs a specific automation function. Historically, linear modules was significant product line for Adept, which have more recently experienced declining sales volumes. The introduction of the new family of linear modules is expected to increase the percentage of our sales from this line.

International sales represented approximately 70% of our total revenues for the three and six months ended December 31, 2005, as compared with 63% and 67% for the three and six months ended January 1, 2005, respectively. In recognition of the increasingly international nature of our business, late in the third quarter of fiscal 2005 we announced a new global vertical market business initiative. The new initiative focused resources initially on developing applications for customers in the telecom and data storage vertical markets. We intend to work directly with leading customers in these markets, providing direct sales, service and engineering to develop more targeted products and applications. Through our direct involvement with end users during their product planning phase, rather than learning about the end users’ project after planning has been completed, we believe we will be more successful being included in the final design specifications for customers’ production and assembly lines, which we expect will positively impact the size of orders for our products. In fiscal 2006, we are also looking for complementary products and technologies to enhance and extend our product offerings.

Effective November 4, 2005, Adept reincorporated from California into Delaware. As a result of the reincorporation, Adept’s common stock now has a par value of $0.001 per share. The reincorporation will not result in any significant change in Adept’s business, management, employees, fiscal year, assets or liabilities, and will not cause the principal executive offices or other facilities or any employees of Adept to be relocated.

In addition, effective November 4, 2005, Adept’s Certificate of Incorporation was amended to increase the number of shares of authorized capital stock of Adept to 20,000,000, consisting of 19,000,000 shares of common stock and 1,000,000 shares of preferred stock.

This discussion summarizes the significant factors affecting our consolidated operating results, financial condition, liquidity and cash flow during the three and six month periods ended December 31, 2005. Unless otherwise indicated, references to any quarter in this Management’s Discussion and Analysis of Financial Condition and Results of Operations refer to our second quarter ended December 31, 2005. This discussion should be read with the unaudited condensed consolidated financial statements and related disclosures included in this Quarterly Report on Form 10-Q and in conjunction with the audited consolidated financial statements and notes thereto for the fiscal year ended June 30, 2005 included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2005.

Critical Accounting Policies

Management’s discussion and analysis of Adept’s financial condition and results of operations are based upon Adept’s condensed consolidated financial statements which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets and liabilities and disclosure of

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contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates, including those related to fixed price contracts, product returns, warranty obligations, bad debt, inventories, cancellation costs associated with long-term commitments, investments, intangible assets, income taxes, restructuring expenses, service contracts, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making estimates and judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ from those estimates and could have a material impact on our condensed consolidated financial statements, and it is possible that such changes could occur in the near term.

We have identified the accounting principles which we believe are most critical to our consolidated financial statements while considering accounting policies that involve the most complex or subjective decisions or assessments. These critical accounting policies described below include:

• revenue recognition;

• allowance for doubtful accounts;

• inventories;

• warranties;

• deferred tax valuation allowance;

• foreign currency exchange gain (loss); and

• goodwill

Revenue Recognition.

We generate revenues primarily from sales of production automation equipment and parts, and to a lesser extent from support and service activities associated with this equipment. A small portion of our revenues arises from sales of software. Non-software product revenue consists primarily of sales of robots, refurbished robots and spare parts. We recognize non-software product revenue in accordance with Staff Accounting Bulletin 104, (“SAB 104”), when persuasive evidence of a non-cancelable arrangements exists, delivery has occurred and/or services have been rendered, the price is fixed or determinable, collectibility is reasonably assured, legal title and economic risk is transferred to the customer, and when an economic exchange has taken place. We use the signed purchase contract or purchase order as evidence of an arrangement. Product revenues are normally recognized at the point of shipment from Adept facilities since title and risk of loss passes to the customers at that time. Customers have no right of return other than for product defects covered by our warranty. Adept maintains a warranty liability based on its historical warranty experience and managements’ best estimate of Adept’s warranty liability at each balance sheet date. There are no acceptance criteria on our standard non-software products. We do not deem the fee to be fixed or determinable where a significant portion of the price is due after our normal payment terms, which are 30 to 90 days from the invoice date. In these cases, if all of the other conditions referred to above are met, we recognize the revenue as the invoice becomes due. In recording revenue, management exercises judgment about the collectibility of receivables based on a number of factors, including the customer’s past payment history and its current creditworthiness. If we conclude that collection is not reasonably assured, then the revenue is deferred until the uncertainty is removed, generally upon receipt of payment. Our experience is that we have been able to reliably determine whether collection is reasonably assured.

Adept sells two separate and distinct categories of software: (1) software elements within Adept’s robot and controller products, and (2) standalone software consisting primarily of Hexsight, a library of machine vision software tools. The software elements within Adept’s products are not sold separately nor are they marketed as separate product offerings to our customers. Our robots and controllers have features that are enabled or enhanced through the use of the software enabling tools and other software elements. Our software enabling tools or other software elements do not operate independently of the robots or controllers, and they are not sold separately and cannot be used without the robots or controllers. Adept believes that the software component of its products is incidental to its products and services taken as a whole. As a result, we recognize software revenue related to product sales in accordance with SAB 104, in consort with SOP 97-2.

We recognize stand-alone software revenue in accordance with the American Institute of Certified Public Accountants’ Statement of Position 97-2 (“SOP 97-2”),Software Revenue Recognition, as amended by SOP 98-9,Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions. Under SOP 97-2,

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revenue attributable to an element in a customer arrangement is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, (iv) collectibility is probable and (v) the arrangement does not require services that are essential to the functionality of the software. License revenue is recognized on shipment of the product provided that no significant vendor or post-contract support obligations remain and that collection of the resulting receivable is deemed probable by management. Insignificant vendor and post-contract support obligations are accrued upon shipment of the licensed product. For software that is installed and integrated by the customer, revenue is recognized upon shipment assuming functionality has already been proven in prior sales and there are no customizations that would cause a substantial acceptance risk.

Service and Support revenue consists primarily of sales of spare parts and refurbished robots. Service revenue also includes training, consulting and customer support, the latter of which includes all field service activities; i.e., maintenance, repairs, system modifications or upgrades. Revenues from training and consulting are recognized at the time the service is performed and the customer has accepted the work. These revenues are not essential to the product functionality and, therefore, do not bear on revenue recognition policy for Adept’s component products.

Deferred revenues represent payments received from customers in advance of the delivery of products and/or services, or before the satisfaction of all revenue recognition requirements enumerated above, as well as cases in which we have invoiced the customer but cannot yet recognize the revenue for the same reasons discussed above.

Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We assess the customer’s ability to pay based on a number of factors, including our past transaction history with the customer and credit-worthiness of the customer. Management specifically analyzes accounts receivable and historical bad debts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowances for doubtful accounts. We do not generally request collateral from our customers. If the financial condition of our customers were to deteriorate in the future, resulting in an impairment of their ability to make payments, additional allowances may be required.

Our policy is to record specific allowances against known doubtful accounts. An additional allowance is also calculated based on the greater of 0.5% of consolidated accounts receivable or 20% of consolidated accounts receivable more than 120 days past due. Specific allowances are netted out of the respective receivable balances for purposes of calculating this additional allowance. On an ongoing basis, we evaluate the credit worthiness of our customers and, should the default rate change or the financial positions of our customers change, we may increase this additional allowance percentage.

Inventories. Inventories are stated at the lower of standard cost, which approximates actual cost under the first-in, first-out method, or market value. We perform a detailed assessment of inventory at each balance sheet date, which includes, among other factors, a review of component demand requirements, product lifecycle and product development plans, and quality issues. As a result of this assessment, we write down inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated liquidation value based upon assumptions about future demand and market conditions. If actual demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Manufacturing inventory includes raw materials, work-in-process, and finished goods. All work-in-process inventories with work orders that are open in excess of 180 days are fully written down. The remaining inventory valuation provisions are based on an excess and obsolete systems report, which captures all obsolete parts and products and all other inventory, which have quantities on hand in excess of one year’s projected demand. Individual line item exceptions are identified for either inclusion or exclusion from the inventory valuation provision. The materials control group and cost accounting function monitor the line item exceptions and make periodic adjustments as necessary.

Warranties. Our warranty policy is included in our Terms of Sale, generally as a two year parts and one year labor limited warranty on most hardware and component products, and states that there are no rights of return, and that a refund may be made at Adept’s discretion, and only if there is an identified fault in the product and the customer has complied with Adept’s approved maintenance schedules and procedures, and the product has not been subject to abuse. We provide for the estimated cost of product warranties at the time revenue is recognized. Factors that affect the Company’s warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and costs per claim for repair or replacement. While we engage in extensive product quality programs and

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processes, including actively monitoring and evaluating the quality of our components suppliers, our warranty obligation is affected by product failure rates, material usage and service labor and delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage, service labor or delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Deferred Tax Valuation Allowance. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize deferred tax assets in the future in excess of our net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we have a net deferred tax asset and determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax assets would be charged to income in the period that such determination was made.

Foreign Currency Exchange Gain (Loss). The Company applies Financial Accounting Standards Board Statement No. 52 (“SFAS 52”), “Foreign Currency Translation,” with respect to its international operations, which are primarily sales and service entities. The accounts denominated in non-U.S. currencies have been re-measured using the U.S. dollar as the functional currency. All monetary assets and liabilities are remeasured at the current exchange rate at the end of the period, nonmonetary assets and liabilities are remeasured at historical exchange rates, and revenues and expenses are remeasured at average exchange rates in effect during the period. The Company performs a detailed review of the underlying monetary and nonmonetary transactions each quarter to ensure these transactions are correctly evaluated based on FAS 52 pronouncement guidelines. Adept does not currently apply a hedging strategy against its currency positions as defined under FAS 133,Accounting for Derivative Instruments and Hedging Activities.

Goodwill. The carrying value of goodwill and other intangible assets are reviewed for possible impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The Company’s impairment review is based on a discounted cash flow approach that requires significant management judgment with respect to future sales and production volumes, revenue and expense growth rates, changes in working capital use, foreign exchange rates and selection of an appropriate discount rate. Impairment occurs when the carrying value of a reporting unit exceeds the fair value of that reporting unit. An impairment charge is recorded for the difference between the carrying value and the net present value of estimated future cash flows, which represents the estimated fair value of the reporting unit. The Company tests its intangible assets annually on April 1 unless there are indications during an interim period that such assets may have become impaired. The Company uses its judgment in assessing whether intangible assets may have become impaired between annual valuations. Indicators such as unexpected adverse economic factors, unanticipated technological change or competitive activities may signal that an intangible asset has become impaired.

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Results of Operations

Three Months and Six Months Ended December 31, 2005 as compared to Three and Six Months Ended January 1, 2005

Revenues. Revenues increased by 10.1% to $13.0 million for the three months ended December 31, 2005 as compared to $11.8 million for the three months ended January 1, 2005. Revenues for the six months ended December 31, 2005 were $27.6 million, an increase of 19.7% from net revenues of $23.1 million for the six months ended January 1, 2005. The increases resulted primarily from increased sales in the Service and Support (“Service”) business segment. Robotics segment revenues increased modestly in the first half due to continuing sales of 4-axis Cobra robots and improving sales of the new 6-axis Viper robots, partially offset by reduced revenues from vision software. The Service segment benefited from very substantial growth in revenues compared to prior periods from the sale of remanufactured robots.

Specifically, Robotics revenues decreased 4.9% to $7.9 million for the three months ended December 31, 2005 from $8.3 million for the three months ended January 1, 2005. For the six months ended December 31, 2005, Robotics revenues increased 1.4% to $16.1 million, compared to $15.9 million for the six months ended January 1, 2005. Services and Support revenues were $5.1million for the three months ended December 31, 2005, compared to $3.5 million for the three months ended January 1, 2005, representing a 45.5% increase. Services and Support revenues were $11.5 million for the six months ended December 31, 2005, a 60% increase compared to $7.2 million for the six months ended January 1, 2005.

Our domestic sales were $3.8 million for the three months ended December 31, 2005 compared to $4.4 million for the three months ended January 1, 2005, a decrease of 12.2%. The decrease in second quarter domestic sales occurred in the Service segment as our business shifted strongly towards international activity. For the six months ended December 31, 2005, domestic sales were $8.3 million, an 8.7% increase as compared to $7.6 million for the six months ended January 1, 2005 as both business segments experienced growth in the first half. Our international sales were $9.1 million for the three months ended December 31, 2005, compared to $7.4 million for the comparable period in fiscal 2005, an increase of 23.3%. International sales for the six months ended December 31, 2005 were $19.4 million, a 25.1% increase compared to $15.5 million for the same period in fiscal 2005. The increase in revenues from international sales is primarily attributable to strong sales associated with automotive component and consumer electronics applications in Europe, and in addition rapidly expanding sales in Asia. We have strengthened our international presence with the introduction in fiscal 2005 of European-sourced manufacturing and are increasing our staffing levels in Asia. We expect that a substantial part of our revenues will involve international sales and that we will continue to grow our sales in Asia.

We expect that revenues from our international customers will continue to account for a significant portion of our total revenue and approximately 40 to 50% of our product sales to European customers are priced in euros. The mix of euro denominated business has historically enhanced the competitiveness of our prices, and has increased our revenues and gross margins when the euro has strengthened relative to the US dollar, however, the euro has weakened of late, and future fluctuations in the rate of exchange between the dollar and the euro have the potential to significantly impact, either positively or adversely, our business and operating results.

Gross Margin. Gross margin as a percentage of revenues was 52.7% for the three months ended December 31, 2005 compared to 45.2% for three months ended January 1, 2005. Gross margin as a percentage of revenues was 51.8% for the six months ended December 31, 2005, compared to 46.8% for the six months ended January 1, 2005. The gross margin improvement resulted from a sales mix favoring higher margin products, as well as improved robot component designs that achieve the same functionality at reduced cost, increased outsourcing of robot subassemblies, and reduced manufacturing overhead costs. Over the past several years, we have aggressively sought to outsource those processes where we provide little or no additional manufacturing value. The improvements in production volumes combined with the lower fixed overhead expense resulted in lower unit standard costs and higher corresponding gross margins. We could, however, experience significant fluctuations in our gross margin percentage due to changes in volume, changes in availability of components, changes in product configuration, increased price based competition, and/or changes in sales mix, particularly with respect to the impact of software license sales.

Research, Development and Engineering Expenses. Research, development and engineering expenses increased by 11.3% to $1.7 million, or 13.4% of revenues for the three months ended December 31, 2005, from $1.6 million, or

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13.2% of revenues for three months ended January 1, 2005. Research, development and engineering expenses increased by 12.9% to $3.6 million, or 13.2% of revenues for the six months ended December 31, 2005, from $3.2 million, or 14.0% of revenues for six months ended January 1, 2005. The growth in R&D outlays was the result primarily of increased expenditures for software development activities.

Research and development costs are expensed as incurred, except that software development costs incurred subsequent to establishing technological feasibility through the general release of the software products are capitalized. Technological feasibility is demonstrated by the completion of a working model. Capitalized costs are amortized on a straight-line basis over either two or three years, whichever term is the estimated life of the software product. Adept’s software capitalization, which commenced in the second quarter of fiscal 2006, was $101,000. None of this amount was amortized in the quarter.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.9 million, or 37.4% of revenues, for the three months ended December 31, 2005, an increase of $1.1 million from $3.8 million or 32.6% of revenues, for the three months ended January 1, 2005. Selling, general and administrative expenses were $10.0 million, or 36.3% of revenues, for the six months ended December 31, 2005, an increase of $2.4 million from $7.6 million or 33.1% of revenues, for the six months ended January 1, 2005. The increases are primarily due to new product launches, increased marketing activities and an expanded sales force, plus expenses related to the company’s reincorporation in Delaware, stock-based employee compensation charges, and re-listing of Adept’s common stock on the Nasdaq National Market.

Operating Income. Operating income was $201,000 and $559,000 for the three and six months ended December 31, 2005, respectively, as compared with operating losses of $139,000 and $133,000 for the three and six months ended January 1, 2005, respectively. Effective July 1, 2005, Adept adopted the provisions of FAS 123R, which requires the recognition of the fair value of stock-based employee compensation as an expense in the calculation of net income, and this had a significant impact on operating income. The fair value of stock-based employee compensation received only footnote disclosure in fiscal 2005 (see Note 2 to the Financial Statements). On a pro-forma basis, with the inclusion of the fair value of stock-based employee compensation, the operating losses in fiscal 2005 would have increased to $361,000 and $586,000 for the three and six months ended January 1, 2005, respectively.

Interest Expense, Net. Interest expense, net of interest income, was $18,000 for the three months ended December 31, 2005 compared to $36,000 for the three months ended January 1, 2005. Interest expense, net of interest income, was $46,000 for the six months ended December 31, 2005 compared to $73,000 for the six months ended January 1, 2005. Interest expense for all of these periods primarily consisted of accrued interest expense on a $3.0 million convertible note due June 2006, which bears a 6% fixed interest rate.

Foreign Currency Exchange Gain (Loss). Foreign currency exchange loss was $(204,000) for the three months ended December 31, 2005 compared to a gain of $241,000 for the three months ended January 1, 2005. Foreign currency exchange loss was $(368,000) for the six months ended December 31, 2005 compared to a gain of $324,000 for the three months ended January 1, 2005. These foreign currency exchange gains and losses resulted primarily from our sales and operating activities in Europe and movements in the euro versus the U.S. dollar. The dollar made a strong upward move against the Euro from September through November 2005 which led to the losses we experienced in the first three and six months of fiscal 2006. By contrast, the first quarter of fiscal 2005 witnessed the start of a significant move downward for the dollar compared with the Euro that lasted until March 2005 and resulted in the gains we recorded in the first three and six months of fiscal 2005. In the past we included foreign currency exchange gains or losses in selling, general and administrative expenses, but beginning in the second quarter of fiscal 2005, we began to classify foreign currency gains or losses as a separate line item in the income statement.

Provision for Income Taxes. Adept typically provides for income taxes during interim reporting periods based upon an estimate of our annual effective tax rate. We also maintain a liability to cover the cost of additional tax exposure items on the filing of federal and state income tax returns as well as filings in foreign jurisdictions. Each of these filing jurisdictions may audit the tax returns filed and propose adjustments. Adjustments arise from a variety of factors, including different interpretations of statutes and regulations. We have net operating losses which are sufficient to offset most of our domestic and foreign tax obligations, and an analysis of our existing reserves for taxes led us to make a net $5,000 reduction in our reserve levels since the beginning of fiscal 2006 and expect this provision to be modest for fiscal 2006.

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Liquidity and Capital Resources

Cash and Cash Equivalents. Cash and cash equivalents decreased $2.4 million from June 30, 2005 to $2.9 million. The decrease in cash is due, in part, to increased accounts receivable. The increase in receivables is in current account balances, as past due balances have declined since June, and cash is expected to improve as the current balances are collected. Net cash used in operating activities of $1.6 million was attributable primarily to an increase in accounts receivable of $2.8 million, partially offset by decreases in inventory and prepaid expenses, net income of $150,000, depreciation and amortization of $353,000, non-cash interest expense of $90,000, and non-cash stock compensation charges of $439,000 relating to the fair value of stock option grants and share purchases under an employee stock purchase plan.

Cash used in investing activities of $949,000 reflects capital expenditures primarily for test equipment, test stations, and computer hardware and software.

Cash provided by financing activities of $147,000 reflects activity in our employee stock purchase program as well as stock option exercises.

We have limited cash resources, and because of certain regulatory restrictions impeding our ability to move certain cash reserves from our foreign operations to our U.S. operations, we may have limited access to a portion of our existing cash balances held outside the United States, although this portion is estimated to be less than $500,000. As of December 31, 2005, we had an aggregate cash balance of $2.9 million, and a short term receivables financing credit facility of up to $5.0 million, with no outstanding balance at quarter-end. We currently depend on funds generated from operating activities, plus our cash and the funds available through our credit facility to meet our operating requirements. As a result, if any of our assumptions, some of which are described below, are incorrect, we may have difficulty satisfying our obligations in a timely manner. Our ability to effectively operate and grow our business is predicated upon certain assumptions, including (i) that we will receive continued timely payment of outstanding receivables and not otherwise experience severe cyclical swings in our billings and associated receipts resulting in a shortfall of cash available for our disbursements during any given quarter, (ii) that we will not incur significant unplanned capital expenditures for the balance of fiscal 2006, (iii) that funds remain available under our credit facility, and (iv) that the $3.0 million convertible subordinated note will be converted into shares of our common stock prior to maturity in June 2006. We believe our sources of funds will be sufficient to finance our operations for at least the next twelve months, and if necessary we will take various actions to reduce our operating expenses in an effort to achieve that result.

We issued a $3.0 million convertible subordinated note to Tri-Valley Campus I, LLC in August 2003 maturing June 30, 2006 and bearing interest at 6% per annum. Payment under the note will be accelerated in the event of a default, including the insolvency or bankruptcy of Adept, Adept’s failure to pay its obligations under the note when due, Adept’s default on certain material agreements, including the Livermore lease, the occurrence of a material adverse change with respect to Adept’s business or ability to pay its obligations under the note, or a change of control of Adept without the landlord’s consent. The note holder may elect at any time to convert all or any part of the outstanding principal balance of $3,000,000 into 600,000 shares of Adept common stock at an exercise price of $5.00 per share and the resulting shares carry certain rights, including piggyback registration rights, participation rights and co-sale rights in equity sales by Adept. At our election, Adept may also issue shares of common stock in payment of accrued interest under the convertible note. As the trading price of our common stock has been greater than $5.00 per share during this fiscal year, we expect the convertible note to be converted into our common stock before maturity. However, if such conversion does not occur, we may have difficulty satisfying our obligations.

On June 15, 2005, Adept entered into an Amendment to Loan Documents (the “Amendment”) with Silicon Valley Bank (“SVB”), which effectively extended and increased Adept’s line of credit with SVB. The Amendment provides that Adept may borrow amounts under the credit facility not to exceed the lesser of (i) $5.0 million (an increase of $1.0 million from the predecessor agreement) or (ii) the sum of 80% of Adept’s eligible accounts receivable plus any overadvance loans that may be granted by SVB from time to time in its sole and absolute discretion, plus foreign accounts, less the amount of all outstanding letters of credit and less the amount equal to 10% of outstanding FX Contracts. The aggregate of overadvance loans may not exceed the lesser of $1.0 million or 30% of Adept’s eligible accounts receivable. Foreign accounts represent an additional borrowing base under the Amendment, must meet the same eligibility requirements as domestic receivables except they may be located outside the U.S. and Canada, and are permitted up to a maximum of 25% of the total eligible accounts receivable, the latter being defined as the “Borrowing Base”.

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As amended, the Loan and Security Agreement includes certain financial and other covenants with which Adept must comply. Financial covenants specify that Adept must maintain a tangible net worth of at least $10.8 million, plus 50% of all consideration received by Adept for any equity securities and subordinated debt of Adept issued subsequent to the date of the Loan and Security Agreement, plus 50% of Adept’s net income in each fiscal quarter ending after the date of the agreement. Once an increase in the minimum tangible net worth of Adept takes effect, it remains in effect thereafter, and does not decrease. Other covenants with which Adept must comply, include, but are not limited to, the payment of Adept’s tax obligations as and when due and the maintenance of Adept’s primary operating deposit accounts with SVB. Adept cannot make any transfers to any of its subsidiaries of money or other assets with an aggregate value in excess of $300,000 in any fiscal quarter and is subject to customary default provisions. In the event of default under the Loan and Security Agreement, SVB may, among other things, cease making loans to Adept; accelerate and declare all or any part of Adept’s obligations to be immediately due and payable, and enforce its security against the collateral. Adept was in compliance with the covenants of the Loan and Security Agreement as of December 31, 2005 and remains in compliance with such covenants.

Contractual Obligations

Total long term debt and operating lease obligations at December 31, 2005 were $11.4 million, which consists of $8.4 million in operating lease obligations and $3.0 million in short-term debt in the form of a convertible subordinated note due June 30, 2006. A summary of our contractual obligations, including short-term debt and operating lease obligations as of December 31, 2005 follows:

	Total		Less Than 1 Year		Years 2 and 3		Years 4 and 5		More than 5 Years
Operating lease obligations	$	8,398	$	1,061	$	3,318	$	2,612	$	1,407
Short-term debt		3,000		3,000		—		—		—
Total obligations	$	11,398	$	4,061	$	3,318	$	2,612	$	1,407

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We maintain an investment policy, which seeks to ensure the safety and preservation of our invested funds by limiting default risk, market risk and reinvestment risk. The table below presents principal cash amounts and related weighted-average interest rates for our investment portfolio, all of which matures in less than 12 months.

(in thousands)	December 31, 2005			Fair Value
Cash and cash equivalents	$	2,923		$	2,923
Average rate		1.5	%		1.5	%

We mitigate default risk by investing in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and contains what management believes to be a prudent amount of diversification.

We conduct business on a global basis. Most of our sales are priced in U. S. dollars with the exception of a portion of our European sales, which are priced in euros. Our European facility’s operating costs are in euros, which act as a natural hedge against a portion of the revenue exposure there. Our U. S. facility’s costs are in dollars with the exception of certain purchased robot arms priced in Japanese yen. Consequently, we are to some extent exposed to adverse or beneficial movements in foreign currency exchange rates. We translate foreign currencies into U.S. dollars for reporting purposes; currency fluctuations can have an impact on our results. We have historically employed, but do not currently employ, a currency hedging strategy.

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ITEM 4. CONTROLS AND PROCEDURES

As of the end of the quarter ended December 31, 2005, Adept carried out an evaluation, under the supervision and with the participation of members of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Adept’s disclosure controls and procedures pursuant to Rule 13a-15(b) of the Securities Exchange Act of 1934. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2005, our disclosure controls and procedures, designed to ensure that information related to Adept and our consolidated subsidiaries is recorded, processed, and reported timely and is accumulated and made known to our Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosures, were not effective in light of the material weaknesses described below.

We were advised by Armanino McKenna LLP, our independent auditors, that in performing their review of our financial statements for the quarter ended December 31, 2005, they noted certain matters involving internal control over financial reporting and its operation that they consider to be control deficiencies under standards established by the Public Company Accounting Oversight Board (United States). A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the company’s annual or interim consolidated financial statements that is more than inconsequential will not be prevented or detected. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected. The control deficiencies related to errors in the calculation of equity common stock equivalents and thereby earnings per share and in the calculation of stock option compensation under FAS123R, and were determined to be a material weakness. This weakness could prevent our reasonable assurance that financial information is processed accurately and reported timely. We are in the process of reviewing and strengthening our internal control procedures and intend to pursue remedial actions such as more detailed procedures, redesigning certain reporting methodologies to detect errors in stock compensation reports provided by vendors, and generally increasing the automation of reports and our international subsidiary consolidation process to eliminate sources of error in the consolidations, and additional training for appropriate finance personnel to ensure all aspects of our financial statement close processes reflect full compliance with U.S. generally accepted accounting principles.

In connection with the audit of our fiscal 2005 results, we were advised by our former independent auditors, that during their performance of audit procedures related to our financial statements for the year ended June 30, 2005 they identified a material weakness related to the high number of post-closing adjustments recorded by Adept. Additionally, we were advised by our new independent auditors, that in performing their review of our financial statements for the quarter ended October 1, 2005, they noted certain matters involving internal control over financial reporting and its operation that they consider to be control deficiencies related to errors in the calculation of inventory reserves and stock option compensation under FAS123R. To remediate these issues we have increased management oversight of the close process and calculation of key reserves, implemented daily status meetings during close, accelerated the account reconciliation process for more timely results, provided additional training for the accounting staff, added an accounting manager position for increased supervision and review, and are actively monitoring improvements our vendor is making to the stock compensation reports we rely on for accurate reporting under 123R. We believe we have effectively remediated the issues reported in prior periods.

Our disclosure controls and procedures are designed to ensure that the information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to reasonably assure that such information is accumulated and communicated to our management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met under all potential conditions, regardless of how remote, and may not prevent or detect all error and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adept have been prevented or detected.

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We continue to improve and refine our internal controls as an ongoing process. Other than as summarized above, there have been no changes in our internal controls over financial reporting or other factors that have materially affected, or are reasonably likely to materially affect, our internal controls.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are party to various legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of our business. We have reviewed pending legal matters and believe that the resolution of these matters will not have a material adverse effect on our business, financial condition or results of operations.

Adept has in the past received communications from third parties asserting that we have infringed certain patents and other intellectual property rights of others, or seeking indemnification against alleged infringement. While it is not feasible to predict or determine the likelihood or outcome of any actual or potential actions from such assertions against us, we believe the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

ITEM 1A. RISK FACTORS

Risks Related to Our Business

Our operating results fluctuate from quarter to quarter due to factors which are difficult to forecast, are often out of our control and can be extremely volatile.

Our past revenues and other operating results may not be accurate indicators of our future performance, and you should not rely on such results to predict our future performance. Our operating results have been subject to significant fluctuations in the past, and could be subject to fluctuations in the future. The factors that may contribute to these fluctuations include:

• our limited cash resources;

• our ability to effectively manage our working capital;

• fluctuations in aggregate capital spending, cyclicality and other economic conditions domestically and internationally in one or more industries in which we sell our products;

• changes or reductions in demand in the electronics/communications, automotive, food, pharmaceutical, and other markets we serve;

• a change in market acceptance of our products or a shift in demand for our products;

• new product introductions by us or by our competitors;

• changes in product mix and pricing by us, our suppliers or our competitors;

• pricing and related availability of components and raw materials for our products;

• our failure to manufacture a sufficient volume of products in a timely and cost-effective manner;

• our failure to anticipate the changing product requirements of our customers;

• changes in the mix of sales by distribution channel;

• impact of accounting adjustments, such as those relating to share based compensation expense required under SFAS 123R;

• exchange rate fluctuations;

• seasonal fluctuations in demand and our associated revenue, for which demand is generally lower in the first half of the fiscal year;

• our ability to expand our product offerings through acquired technologies and products;

• extraordinary events such as litigation or acquisitions;

• decline or slower than expected growth in those industries requiring precision assembly automation; and

• slower than expected adoption of distributed controls architecture or the adoption of alternative automated technologies.

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Revenues also impact our gross margins. Our gross margins can vary greatly for a number of reasons, and our operating results tend to fluctuate as a result of the variance in gross margins. The mix of products we sell can vary from period to period, particularly with respect to the volume of lower margin hardware products (such as mechanical subsystems purchased from third party vendors), and higher margin software products. Other factors that impact gross margins include:

• currency exchange rate fluctuations for our international sales;

• the average selling prices of products we sell including changes in the average discounts offered;

• the costs to manufacture, service and support our products and enhancements;

• the costs to customize our systems;

• the volume of products produced and associated production volume variances, if any, generated;

• our efforts to enter new markets; and

• certain inventory-related costs including obsolescence of products and component demand changes resulting in excess inventory.

We generally recognize product revenues upon shipment or, for certain international sales, upon receipt by the customers. As a result, our net revenues and results of operations for a fiscal period will be affected by the timing of orders received and orders shipped during the period. A significant percentage of our product shipments occur in the last month of each fiscal quarter. Historically, this has been due in part, at times, to our inability to forecast the level of demand for our products or the product mix for a particular fiscal quarter. To address this problem we periodically stock inventory levels of completed robots, machine controllers and certain strategic components. A delay in shipments near the end of a fiscal period, for example, due to product development delays or delays in obtaining materials may cause sales to fall below expectations and harm our operating results for the period.

Similarly, our indirect costs, production capacity and operating expenses are largely fixed in the short run. Continued investments in research and development, capital equipment and ongoing customer service and support capabilities result in significant fixed costs that we cannot reduce rapidly. As a result, if our sales for a particular fiscal period are below expected levels, our cost of revenue increases and our operating results for the period could be materially adversely affected. Further, if shipments of our products fail to meet forecasted levels, the increased inventory levels and increased operating expenses in anticipation of sales that do not materialize could adversely affect our business and substantially impact our liquidity. In the event that in some fiscal quarter our net revenues or operating results fall below the expectations of public market analysts and investors, the price of our common stock may fall. We may not be able to increase or sustain our profitability on a quarterly or annual basis in the future.

Our international operations and sales subject us to foreign currency exchange risks, divergent regulatory requirements and other financial and operating risks outside of our control that may harm our operating results.

We have significant and expanding operations outside the United States and a substantial majority of our revenue is derived from non-U.S. sales. International sales were $19.4 million for the six months ended December 31, 2005, $33.9 million for the fiscal year ended June 30, 2005 and $22.7 million for the fiscal year ended June 30, 2004. This represented 70.1%, 67.2% and 46.1% of revenue for the respective periods. We expect that revenue from our international operations will continue to account for a significant portion of our total revenue. We expect that revenue for sales into Asia, in particular, will grow as a percentage of total revenue, as we expand our presence in the Asia-Pacific region. We also purchase some critical components and mechanical subsystems from, and increasingly rely upon, foreign suppliers. As a result, our operating results are subject to the risks inherent in international sales and purchases, which include the following:

• unexpected changes in regulatory requirements;

• political, military and economic changes and disruptions, including terrorist activity;

• transportation costs and delays;

• foreign currency fluctuations;

• export/import controls;

• tariff regulations and other trade barriers;

• higher freight rates;

• difficulties in staffing and managing foreign sales operations;

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• stringent local jurisdictional requirements regarding employees and union activity;

• greater difficulty in accounts receivable collection in foreign jurisdictions; and

• potentially adverse tax consequences.

Ongoing global economic and political developments and the resulting changes in currency exchange rates, most notably between the U.S. dollar, the euro, and the Japanese yen, have had, and may in the future have, a significant effect on our business, operating results and financial condition. The decline in value of the U.S. dollar to the euro in fiscal 2004 and 2005 resulted in a currency exchange gain for us, whereas the increase in value of the U.S. dollar to the euro in the first half of fiscal 2006 resulted in a currency exchange loss, and future fluctuations may result in significant gains or losses. If there is an increase in the rate at which a foreign currency exchanges into U.S. dollars, the dollar has appreciated relative to the foreign currency, and it will take more of the foreign currency to equal the same amount of U.S. dollars than before the rate increase. Pricing our products and services in U.S. dollars in this circumstance results in an increase in the price for our products and services compared to those products of our competitors that are priced in local currency. This could result in our prices being uncompetitive in markets where business is transacted in the local currency. Foreign exchange fluctuations may render our products less competitive relative to locally manufactured product offerings, or could result in foreign exchange losses. To maintain a competitive price for our products in Europe and elsewhere, we may have to provide discounts or otherwise effectively reduce our prices, resulting in a lower margin on products sold in Europe and other relevant locations. Continued change in the values of the euro or changes in the values of other foreign currencies could have a negative impact on our business, financial condition and results of operations.

We are in the process of expanding our presence in Asia in response to the increase in our sales into that region, and anticipate further increasing business as our customers expand manufacturing in China and elsewhere in Asia. We maintain an office in Singapore and sell standard components for products to OEMs who deliver products to Asian markets such as Japan, Malaysia, Korea, and China. Past turmoil in Asian financial markets and weakness in underlying economic conditions in certain Asian countries may continue to impact our sales to OEM customers who deliver to, are located in, or whose projects are based in those Asian countries. In addition, customers in those countries may face reduced access to working capital to fund component purchases, such as our products, due to higher interest rates, reduced bank lending due to contractions in the money supply or the deterioration in the customer’s or their bank’s financial condition or the inability to access local equity financing. In the past, as a result of this lack of working capital and higher interest rates, we have experienced periodic declines in sales to OEMs serving the Asian market.

Maintaining operations in different countries requires us to expend significant resources to keep our operations coordinated and subjects us to differing laws and regulatory regimes that may affect our offerings and revenue.

We have limited cash resources, and the possibility of future operating losses, negative cash flow and debt obligations could impair our operations and revenue-generating activities and adversely affect our results of operations.

We have limited cash resources, and because of certain regulatory restrictions impeding our ability to move certain cash reserves from our foreign operations to our U.S. operations, we may have limited access to a portion of our existing cash balances. As of December 31, 2005, we had an aggregate cash balance of $2.9 million, and a short term credit facility of up to $5.0 million, under which no amounts were outstanding. We currently depend on funds generated from operating activities, plus our cash and the funds available through our credit facility to meet our operating requirements. As a result, if any of our assumptions, some of which are described below, are incorrect, we may have difficulty satisfying our obligations in a timely manner. Our ability to effectively operate and grow our business is predicated upon certain assumptions, including (i) that we will receive continued timely receipt of payment of outstanding receivables, and not otherwise experience severe cyclical swings in our receipts resulting in a shortfall of cash available for our disbursements during any given quarter, (ii) that we will not incur unplanned capital expenditures in the balance of fiscal 2006, (iii) that funds remain available under our existing credit facility or a new credit facility, and (iv) that the $3.0 million convertible subordinated note due June 2006 will be converted into shares of our common stock before maturity.

If our projected revenue falls below current estimates or if operating expenses exceed current estimates beyond our available cash resources, we may be forced to curtail our operations, or, at a minimum, we may not be able to take advantage of market opportunities, develop or enhance new products to an extent desirable to execute our strategic growth plan, pursue acquisitions that would complement our existing product offerings or enhance our technical

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capabilities to fully execute our business plan or otherwise adequately respond to competitive pressures or unanticipated requirements. Any of these actions would adversely impact our business and results of operations.

The long sales cycle, customer evaluation process, and implementation period of our products may increase the costs of obtaining orders and reduce the predictability of our earnings.

Our products are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. Orders expected in one quarter may shift to another quarter or be cancelled with little advance notice as a result of the customers’ budgetary constraints, internal acceptance reviews, and other factors affecting the timing of customers’ purchase decisions. In addition, customers often require a significant number of product presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in the product’s performance and compatibility with the customer’s requirements to place an order. As a result, our sales process is often subject to delays associated with lengthy evaluation and approvals that typically accompany capital expenditure approval processes. The sales cycles of our products often last for many months or even years. In addition, the time required for our customers to incorporate our products into their systems can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results. Longer sales cycles require us to invest significant resources in attempting to make sales, which may not be realized in the near term and therefore may delay or prevent the generation of revenue. In addition, should our financial condition deteriorate, prospective customers may be reluctant to purchase our products, which would have an adverse effect on our revenue.

Sales of our products depend on the capital spending patterns of our customers, which tend to be cyclical; we have experienced reduced demand in some of the industries in which we operate, which has and may continue to adversely affect our revenue and we may not be able to quickly ramp up if demand significantly increases.

Intelligent automation systems using our products can range in price from $25,000 to $500,000. Accordingly, our success is directly dependent upon the capital expenditure budgets of our customers. Our future operations may be subject to substantial fluctuations as a consequence of domestic and foreign economic conditions, industry patterns and other factors affecting capital spending. Although the majority of our international customers are not in the Asia-Pacific region, a significant portion of our revenues comes from sales in this region, and we believe that any instability in the Asia-Pacific economies could also have a material adverse effect on the results of our operations as a result of a reduction in sales by our customers to those markets. Domestic or international recessions or a downturn in one or more of our major markets, such as the electronic/communications and food and pharmaceuticals industries, and resulting cutbacks in capital spending would have a direct, negative impact on our business.

Downturns in the industries we serve often occur in connection with, or anticipation of, maturing product cycles for both companies and their customers and declines in general economic conditions. Industry downturns have been characterized by reduced demand for devices and equipment, production over-capacity and accelerated decline in average selling prices. During a period of declining demand, we must be able to quickly and effectively reduce expenses while at the same time, continue to motivate and retain key employees. In fiscal 2005 and the first half of fiscal 2006, U.S. manufacturing markets remain soft. We implemented a worldwide restructuring program in fiscal 2002 to realign our businesses to the changes in our industry and our customers’ decrease in capital spending. We made additional cost reductions in fiscal 2003, 2004 and 2005 to further realign our business. Despite this restructuring activity, our ability to reduce expenses in response to any downturn in any of these industries is limited by our need for continued investment in engineering and research and development and extensive ongoing customer service and support requirements. The long lead-time for production and delivery of some of our products creates a risk that we may incur expenditures or purchase inventories for products that we cannot sell. We believe our future performance will continue to be affected by the cyclical nature of these industries, and thus, any future downturn in these industries could therefore harm our revenue and gross margin if demand drops or average selling prices decline.

Industry upturns have been characterized by abrupt increases in demand for devices and equipment and production under-capacity. During a period of increasing demand and rapid growth, we must be able to quickly increase manufacturing capacity to meet customer demand and hire and assimilate a sufficient number of qualified personnel. Our inability to ramp-up in times of increased demand could harm our reputation and cause some of our existing or potential customers to place orders with our competitors.

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We have significant dependence on outsourced manufacturing capabilities and single source suppliers. If we experience disruptions in the supply of one or more key components, we may be unable to meet product demand and we may lose customers and suffer decreased revenue.

We obtain many key components and materials and some significant mechanical subsystems from sole or single source suppliers with whom we have no guaranteed supply arrangements. In addition, some of our sole or single sourced components and mechanical subsystems incorporated into our products have long procurement lead times. Our increased reliance on outsourced manufacturing and other capabilities, and particularly our reliance on sole or single source suppliers, involves certain significant risks including:

• loss of control over the manufacturing process;

• potential absence of adequate supplier capacity;

• potential for significant price increases in the components and mechanical subsystems;

• potential inability to obtain an adequate supply of required components, materials or mechanical subsystems; and

• reduced control over manufacturing yields, costs, timely delivery, reliability and quality of components, materials and mechanical subsystems.

We do not have contracts with certain of our sole or single source suppliers. If any one of our suppliers were unable or unwilling to manufacture the components, materials or mechanical subsystems we need in the volumes we require, we would have to identify and qualify acceptable replacements. The process of qualifying suppliers may be lengthy, and additional sources may not be available to us on a timely basis, on acceptable terms or at all. If sufficient quantities of these items were not available from our existing suppliers and a relationship with an alternative vendor could not be developed in a timely manner, shipments of our products could be interrupted and reengineering of these products could be required. We have limited control over the quality of certain manufactured products and their acceptance by our customers. In the past, we have experienced quality control or specification problems with certain key components provided by sole source suppliers, and have had to design around the particular flawed item. Any quality issues could result in customer dissatisfaction, lost sales, and increased warranty costs. In addition, some of the components that we use in our products are in short supply. We have also experienced delays in filling customer orders due to the failure of certain suppliers to meet our volume and schedule requirements. Some of our suppliers have also ceased manufacturing components that we require for our products, and we have been required to purchase sufficient supplies for the estimated life of such product line. Problems of this nature with our suppliers may occur in the future.

Disruption, significant price increases, or termination of our supply sources could require us to seek alternative sources of supply, could delay our product shipments and damage relationships with current and prospective customers, require us to absorb a significant price increase or risk pricing ourselves out of the market, or prevent us from taking other business opportunities, any of which could have a material adverse effect on our business. If we incorrectly forecast product mix for a particular period and we are unable to obtain sufficient supplies of any components or mechanical subsystems on a timely and cost effective basis due to long procurement lead times, our business, financial condition and results of operations could be substantially impaired. Moreover, if demand for a product for which we have purchased a substantial amount of components fails to meet our expectations, or due to component price increases causes us to be priced out of the market, we would be required to write off the excess inventory. A prolonged inability to obtain adequate timely deliveries of key components or obtain components at prices within our business model could have a material adverse effect on our business, financial condition and results of operations.

New regulations requiring recognition of compensation expense related to equity compensation could significantly adversely affect our results of operations and harm our trading price.

On December 16, 2004, the Financial Accounting Standards Board issued Statement 123R, Share-Based Payment, which is a revision of Statement 123, Accounting for Stock Based Compensation, which became effective for Adept in the first quarter of fiscal 2006. Statement 123R requires share-based payments to employees, including grants of employee stock options, to be recognized as expense in the financial statements based on their fair values and does not allow proforma disclosure as an alternative to financial statement recognition. Adept evaluated option valuation methodologies and assumptions in light of FAS 123R pronouncement guidelines related to employee stock options and decided to continue using the Black-Scholes method, with adjustments to the methodology as necessary for reporting under Statement 123R guidelines. As a result, our operating results for the first half of fiscal year 2006 contain, and

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our operating results for future periods will contain, a charge for share-based compensation related to stock options and employee stock purchases. This charge is in addition to other share-based compensation expense we have recognized in prior periods. Statement 123R had a significant impact on our operating results for the first half of 2006, with 123R charges of $439,000 reducing operating income to $559,000, and Adept expects the adoption will have a significant adverse impact on our operating results in the future. We cannot predict the effect that this adverse impact on our reported operating results will have on the trading price of our common stock.

If we cannot identify and make acquisitions of other technologies and products, our ability to expand our operations and increase our revenue may be impaired.

In the past, a significant portion of our growth was attributable to acquisitions of other technologies and businesses. We expect that acquisitions of complementary products and technologies in the future may play an important role in our ability to expand our operations and increase our revenue. Our ability to make acquisitions is rendered more difficult due to our cash constraints and our common stock price and thin trading volume affecting liquidity considerations, making equity transactions more expensive. If we are unable to identify suitable targets for acquisition or complete acquisitions on acceptable terms, our ability to expand our product and/or service offerings and increase our revenue will be impaired. Even if we are able to identify and acquire acquisition candidates, we may be unable to realize the benefits anticipated as a result of these acquisitions.

Our business will decline if we cannot keep up with the rapid pace of technological change and new product development that characterize the intelligent automation industry.

The intelligent automation industry is characterized by rapid technological change and new product introductions and enhancements. Our ability to remain competitive depends greatly upon the technological quality of our products and processes compared to those of our competitors and our ability both to continue to develop new and enhanced products and to introduce those products at competitive prices and on a timely and cost-effective basis. We may not be successful in selecting, developing, and manufacturing new products or in enhancing our existing products on a timely basis or at all. Our new or enhanced products may not achieve market acceptance. Our failure to successfully select, develop, and manufacture new products, or to timely enhance existing technologies and meet customers’ technical specifications for any new products or enhancements on a timely basis, or to successfully market new products, could harm our business. If we cannot successfully develop and manufacture new products or meet specifications, our products could lose market share, our revenue and profits could decline, or we could experience operating losses. New technology or product introductions by our competitors could also cause a decline in sales or loss of market acceptance for our existing products or force us to significantly reduce the prices of our existing products.

From time to time we have experienced delays in the introduction of, and certain technical and manufacturing difficulties with, some of our products, and we may experience technical and manufacturing difficulties and delays in future introductions of new products and enhancements. Our failure to develop, manufacture, and sell new products in quantities sufficient to offset a decline in revenue from existing products or to successfully manage product and related inventory transitions could harm our business.

Our success in developing, introducing, selling, and supporting new and enhanced products depends upon a variety of factors, including timely and efficient completion of hardware and software design and development, implementation of manufacturing processes, and effective sales, marketing, and customer service. Because of the complexity of our products, significant delays may occur between a product’s initial introduction and commencement of volume production.

The development and commercialization of new products involve many difficulties, including:

• the identification of new product opportunities;

• the retention and hiring of appropriate research and development personnel;

• the determination of the product’s technical specifications;

• the successful completion of the development process;

• the successful marketing of the product and the risk of having customers embrace new technological advances; and

• additional customer service costs associated with supporting new product introductions and/or effecting subsequent potential field upgrades.

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The development of new products may not be completed in a timely manner, and these products may not achieve acceptance in the market. The development of new products has required, and will require, that we expend significant financial and management resources. If we are unable to continue to successfully develop new products in response to customer requirements or technological changes, our business may be harmed.

In connection with our cost control efforts, we have limited resources to allocate to research and development and must allocate our resources among a wide variety of projects. Because of intense competition in our industry, the cost of failing to invest in strategic products is high. If we fail to adequately invest in research and development, we may be unable to compete effectively in the intelligent automation markets in which we operate.

If we fail to develop and enhance an effective system of internal controls and disclosure controls, we may not be able to accurately report our financial results or obtain an unqualified attestation report from our independent auditors in the future, which could subject us to regulatory sanctions or litigation, harm our operating results and cause the trading price of our stock to decline.

Effective internal controls required under Section 404 of the Sarbanes-Oxley Act of 2002 and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, areas of our internal controls and disclosure controls that need improvement. For example, during the fiscal 2005 audit, our external auditors identified a material weakness related to the number of post-closing adjustments recorded by us, which meant that they believed that there was “a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements caused by errors or fraud in amounts that would be material in relation to the consolidated financial statements being audited may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.” Similarly, we received a notice of certain control deficiencies from our newly engaged external auditors during their review of financial results for the first and second quarters of fiscal 2006, primarily in connection with our controls related to SFAS 123R compensation expense. The issue was our inability to detect errors in compensation expense reports generated by third-party software we rely upon for the computations, as the vendor has not yet fully and properly incorporated the requirements of SFAS 123R into their software. We have modified our procedures and developed reasonable estimates of the necessary data, and we believe the vendor will have fully resolved the issues in time for our next quarterly filing. To prepare for compliance with Section 404, which for the Company under current regulations will be required as of June 30, 2008, we have undertaken certain actions including the adoption of an internal plan, which includes a timeline and schedule of activities for the evaluation, testing and remediation, as necessary, of internal controls. These actions have resulted in and are likely to continue to result in increased expenses, and have required and are likely to continue to require significant efforts by management and other employees. In the future, our independent auditors must evaluate management’s assessment concerning the effectiveness of our internal controls over financial reporting and render an opinion on our assessment and the effectiveness of our internal controls over financial reporting. We cannot be certain that our internal controls measures will be timely or successful to ensure that we implement and maintain adequate controls over our financial processes and reporting in the future and our independent auditors may not be able to render an unqualified attestation concerning our assessment and the effectiveness of our internal controls. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could subject us to regulatory sanctions, harm our business and operating results or cause us to fail to meet our reporting obligations. Inferior internal controls could also harm our reputation and cause investors to lose confidence in our reported financial information, which could have a negative impact on the trading price of our stock.

We may incur credit risk related losses because many of the resellers we sell to are small operations with limited financial resources.

A substantial portion of our sales are to system integrators that specialize in designing and building production lines for manufacturers. Many of these companies are small operations with limited financial resources, and we have from time to time experienced difficulty in collecting payments from certain of these companies. As a result, we perform ongoing credit evaluations of our customers. To the extent we are unable to mitigate this risk of collections from system integrators, our results of operations may be harmed. In addition, due to their limited financial resources, during extended market downturns the viability of some system integrators may be in question, which would also result in a reduction in our revenue or credit losses.

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We do not generally have long-term contracts with our customers, and our order bookings and backlog cannot be relied upon as a future indicator of sales.

We generally do not have long-term contracts with our customers and existing contracts and purchase commitments may, under certain circumstances, be cancelled. As a result, our agreements with our customers do not provide meaningful assurance of future sales. Furthermore, our customers are not required to make minimum purchases and may cease purchasing our products at any time without penalty. Backlog should not be relied on as a measure of anticipated demand for our products or future revenue, because the orders constituting our backlog are subject to changes in delivery schedules and in certain instances are subject to cancellation without significant penalty to the customer. Because our customers are free to purchase products from our competitors, we are exposed to competitive price pressure on each order. Any reductions, cancellations or deferrals in customer orders could have a negative impact on our financial condition and results of operations.

We have engaged in substantial restructuring activities in the past, and may need to implement further restructurings in the future, and our restructuring efforts may negatively impact our business.

The intelligent automation industry is subject to rapid change. We have responded to increased changes in the industry in which we compete by restructuring our operations and reducing the size of our workforce while attempting to maintain our market presence in the face of increased competition. Despite our efforts to structure Adept and our businesses to meet competitive pressures and customer needs, we cannot assure that we will be successful in continuing to implement these restructuring activities or that the reductions in workforce and other cost-cutting measures will not harm our business operations and prospects. Our inability to structure our operations based on evolving market conditions could negatively impact our business. We also cannot be certain that we will not be required to implement further restructuring activities, make additions or other changes to our management or reductions in workforce based on other cost reduction measures or changes in the markets and industry in which we compete. Restructuring activities can create unanticipated consequences and adverse impacts on the business, and we cannot be sure that any future restructuring efforts will be successful.

We market and sell our products primarily through an indirect channel comprised of third party resellers, and are subject to certain risks associated with this method of product marketing and distribution.

We believe that our ability to sell products to system integrators and OEMs will continue to be important to our success. However, our relationships with system integrators and OEMs are generally not exclusive, and some of our system integrators and OEMs may expend a significant amount of effort or give higher priority to selling products of our competitors. In the future, any of our system integrators or our OEMs may discontinue their relationships with us or form additional competing arrangements with our competitors. The loss of, or a significant reduction in revenue from, system integrators or OEMs to which we sell a significant amount of our product could negatively impact our business, financial condition or results of operations.

We cannot control the procurement, either with respect to the timing or amount of orders placed, by our resellers. We also cannot control the sales or marketing efforts of the systems integrators and OEMs who sell our products, which may result in lower revenue if they do not successfully market and sell our products or choose instead to promote competing products.

As we enter new geographic and applications markets, we must locate and establish relationships with system integrators and OEMs to assist us in building sales in those markets. It can take an extended period of time and significant resources to establish a profitable relationship with a system integrator or OEM because of product integration expenses, training in product and technologies and sales training. We may not be successful in obtaining effective new system integrators or OEMs or in maintaining sales relationships with them. In the event a number of our system integrators and/or OEMs experience financial problems, terminate their relationships with us or substantially reduce the amount of our products they sell, or in the event we fail to build or maintain an effective systems integrator or OEM channel in any existing or new markets, our business, financial condition and results of operations could be adversely affected.

We may incur currency exchange-related losses in connection with our reliance on our single or sole source foreign suppliers.

We make yen-denominated purchases of certain components and mechanical subsystems from certain of our sole or single source Japanese suppliers. We remain subject to the transaction exposures that arise from foreign exchange

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movements between the dates foreign currency export sales or purchase transactions are recorded and the dates cash is received or payments are made in foreign currencies. Our current or any future currency exchange risk management strategy may not be successful in avoiding exchange-related losses. Any exchange-related losses or exposure may negatively affect our business, financial condition or results of operations.

Our future success depends on our continuing ability to attract, integrate, retain and motivate highly-qualified managerial and technical personnel.

Competition for qualified personnel in the intelligent automation industry is intense. Our inability to recruit, train and motivate qualified management and technical personnel on a timely basis would adversely affect our ability to manage our operations and design, manufacture, market, and support our products. We reduced headcount in connection with our restructurings and made changes in other senior personnel, which changes may lead to employee questions regarding future actions by Adept leading to additional retention difficulties. Other than the CEO’s offer letter, and offer letters with certain of our officers that include only basic compensation terms, we have no employment agreements with our senior management.

Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and material differences between forecasted and actual tax rates could have a material impact on our results of operations.

Forecasts of our income tax position and resultant effective tax rate are complex and subject to uncertainty because our income tax position for each year combines the effects of a mix of profits and losses earned by us and our subsidiaries in tax jurisdictions with a broad range of income tax rates as well as benefits from available deferred tax assets and costs resulting from tax audits. To forecast our global tax rate, pre-tax profits and losses by jurisdiction are estimated and tax expense by jurisdiction is calculated. If the mix of profits and losses, our ability to use tax credits, or effective tax rates by jurisdiction is different than those estimates, our actual tax rate could be materially different than forecasted, which could have a material impact on our results of operations.

If we become subject to unfair hiring or termination claims, we could be prevented from hiring needed personnel, incur liability for damages and/or incur substantial costs in defending ourselves.

Companies in our industry whose employees accept positions with competitors frequently claim that these competitors have engaged in unfair hiring practices or that the employment of these persons would involve the disclosure or use of trade secrets. These claims could prevent us from hiring personnel or cause us to incur liability for damages. We could also incur substantial costs in defending ourselves or our employees against these claims, regardless of their merits. We may also experience actions against us for employment terminations which are perceived to be unjustified. Although to date we have not experienced any material claims, defending ourselves from these claims could divert the attention of our management away from our operations.

Our hardware and software products may contain defects that could increase our expenses and exposure to liabilities and or harm our reputation and future business prospects.

Our hardware and software products are complex and, despite extensive testing, our new or existing products or enhancements may contain defects, errors or performance problems when first introduced, when new versions or enhancements are released, or even after these products or enhancements have been used in the marketplace for a period of time. We may discover product defects only after a product has been installed and used by customers. We may discover defects, errors, or performance problems in future shipments of our products. These problems could result in expensive and time consuming design modifications or large warranty charges, expose us to liability for damages, damage customer relationships, and result in loss of market share, any of which could harm our reputation and future business prospects. In addition, increased development and warranty costs could reduce our operating profits and could result in losses.

The existence of any defects, errors, or failures in our products could also lead to product liability claims or lawsuits against us, our channel partners, or against our customers. A successful product liability claim could result in substantial cost and divert management’s attention and resources, which could have a negative impact on our business, financial condition and results of operations. Although we are not aware of any product liability claims to date, the sale and support of our products entail the risk of these claims.

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If our hardware products do not comply with standards set forth by the European Union, we will not be able to sell them in Europe.

The hardware products we sell in the European Union are required to comply with European Union Low Voltage, Electro-Magnetic Compatibility and Machinery Safety directives. The European Union mandates that our products carry the CE mark denoting that these products are manufactured in strict accordance to design guidelines in support of these directives. These guidelines are subject to change and to varying interpretation. New guidelines impacting machinery design go into effect each year. To date, we have retained TUV Rheinland to help certify that our controller-based products, including some of our robots, meet applicable European Union directives and guidelines. Adept hardware products have been declared as exempt by TUV Rheinland from the EU Directive WEEE/RoHS (Waste Electrical and Electronics Equipment/Reduction of Hazardous Substances) effective July 1, 2006. Although our existing certified products meet the requirements of the applicable European Union directives, we cannot provide any assurance that future products can be designed, within market window constraints, to meet the future requirements. If any of our robot products or any other major hardware products do not meet the requirements of the European Union directives, we would be unable to legally sell these products in Europe. Thus, our business, financial condition and results of operations could be harmed. Such directives and guidelines could change in the future, forcing us to redesign or withdraw from the market one or more of our existing products that may have been originally approved for sale.

Our failure to protect our intellectual property and proprietary technology may significantly impair our competitive advantage.

Our success and ability to compete depend in large part upon protecting our proprietary technology and trade secrets. We rely on a combination of patent, trademark and trade secret protection, and nondisclosure agreements to protect our proprietary rights. The steps we have taken may not be sufficient to prevent the misappropriation of our intellectual property, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The patent and trademark law and trade secret protection may not be adequate to deter third party infringement or misappropriation of our patents, trademarks, and similar proprietary rights. In addition, patents issued to Adept may be challenged, invalidated, or circumvented. Our rights granted under those patents may not provide competitive advantages to us, and the claims under our patent applications may not be allowed. We may be subject to or may initiate interference proceedings in the United States Patent and Trademark Office, which can demand significant financial and management resources. The process of seeking patent protection can be time consuming and expensive, and patents may not be issued from currently pending or future applications. Moreover, our existing patents or any new patents that may be issued may not be sufficient in scope or strength to provide meaningful protection or any commercial advantage to us.

We may in the future initiate claims or litigation against third parties for infringement of our proprietary rights in order to determine the scope and validity of our proprietary rights or the proprietary rights of our competitors. These claims could result in costly litigation and the diversion of our technical and management personnel.

We may face costly intellectual property infringement claims.

We have received in the past, and may receive in the future, communications from third parties asserting that we are infringing certain patents and other intellectual property rights of others or seeking indemnification against such alleged infringement. The asserted claims and/or initiated litigation could include claims against us or our manufacturers, suppliers, or customers, alleging infringement of their proprietary rights with respect to our existing or future products or components of those products. There are numerous patents in the automation components industry. It is not always practicable to determine in advance whether a product or any of its components infringes the intellectual property rights of others. As a result, from time to time, we may be forced to respond to intellectual property infringement claims to protect our rights or defend a customer’s rights. These claims, regardless of merit, could consume valuable management time, result in costly litigation, or cause product shipment delays, all of which could seriously harm our business, operating results and financial condition. In settling these claims, we may be required to enter into royalty or licensing agreements with the third parties claiming infringement. These royalty or licensing agreements, if available, may not have terms favorable to us. Being forced to enter into a license agreement with unfavorable terms could seriously harm our business, operating results and financial condition. Any potential intellectual property litigation could force us to do one or more of the following:

• pay damages, license fees or royalties to the party claiming infringement;

• stop selling products or providing services that use the challenged intellectual property;

• obtain a license from the owner of the infringed intellectual property to sell or use the relevant technology, which license may not be available on reasonable terms, or at all; or

• redesign the challenged technology, which could be time-consuming and costly.

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If we were forced to take any of these actions, our business, financial condition and results of operations may suffer.

Any acquisition we may make in the future could disrupt our business, increase our expenses and adversely affect our financial condition or operations.

In the future we may make acquisitions of, or investments in, other businesses that offer products, services, and technologies that management believes will further our strategic objectives. We cannot be certain that we would successfully integrate any businesses, technologies or personnel that we might acquire, and any acquisitions might divert our management’s attention away from our core business. Any future acquisitions or investments we might make would present risks commonly associated with these types of transactions, including:

• difficulty in combining the product offerings, operations, or workforce of an acquired business;

• potential loss of key personnel of an acquired business;

• adverse effects on existing relationships with suppliers and customers;

• disruptions of our on-going businesses;

• difficulties in realizing our potential financial and strategic objectives through the successful integration of the acquired business;

• difficulty in maintaining uniform standards, controls, procedures and policies;

• potential negative impact on results of operations due to goodwill impairment write-offs, amortization of intangible assets other than goodwill, or assumption of anticipated liabilities;

• risks associated with entering markets in which we have limited previous experience;

• potential negative impact of unanticipated liabilities or litigation; and

• the diversion of management attention.

The risks described above, either individually or in the aggregate, could significantly harm our business, financial condition and results of operations. We expect that future acquisitions, if any, could provide for consideration to be paid in cash, shares of our common stock, or a combination of cash and common stock. In addition, we may issue additional equity in connection with future acquisitions, which could result in dilution of our shareholders’ equity interest. Fluctuations in our stock price may make acquisitions more expensive or prevent us from being able to complete acquisitions on terms that are acceptable to us.

Risks Related to Our Industry

The market for intelligent automation products is intensely competitive, which may make it difficult to manage and grow our business or to maintain or enhance our profitability.

We compete with a number of robot, motion control, machine vision, and simulation software companies. Many of our competitors have substantially greater financial, technical, and marketing resources than we do. In addition, we may in the future face competition from new entrants in one or more of our markets.

Many of our competitors in the robot market are integrated manufacturers of products that produce robotics equipment internally for their own use and may also compete with our products for sales to other customers. Some of these large manufacturing companies have greater flexibility in pricing because they generate substantial unit volumes of robots for internal demand and may have access through their parent companies to large amounts of capital. Any of our competitors may seek to expand their presence in other markets in which we compete.

We believe that other principal competitive factors affecting the market for our products are:

• product functionality and reliability;

• price;

• customer service;

• delivery, including timeliness, predictability, and reliability of delivery commitment dates; and

• product features such as flexibility, programmability, and ease of use.

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Our current or potential competitors may develop products comparable or superior in terms of price and performance features to those developed by us or adapt more quickly than we can to new or emerging technologies and changes in customer requirements. We may be required to make substantial additional investments in connection with our research, development, engineering, marketing, and customer service efforts to meet any competitive threat, so that we will be able to compete successfully in the future. We expect that in the event the intelligent automation market expands, competition in the industry will intensify as additional competitors enter our markets and current competitors expand their product lines. Increased competitive pressure could result in a loss of sales or market share or cause us to lower prices for our products, any of which could harm our business.

If we are unable to effectively support the distinct needs of the multiple industries of our customers, the demand for our products may decrease and our revenue may decline.

We market products for the electronic/communications, automotive, appliance, food, and life sciences industries. Because we operate in multiple industries, we must work constantly to understand the needs, standards, and technical requirements of numerous different industries and must devote significant resources to developing different products for these industries. Our results of operations are also subject to the cyclicality and downturns in these markets. Product development is costly and time consuming. Many of our products are used by our customers to develop, manufacture, and test their own products. As a result, we must anticipate trends in our customers’ industries and develop products before our customers’ products are commercialized. If we do not accurately predict our customers’ needs and future activities, we may invest substantial resources in developing products that do not achieve broad market acceptance. Our decision to continue to offer products to a given market or to penetrate new markets is based in part on our judgment of the size, growth rate, and other factors that contribute to the attractiveness of a particular market. If our product offerings in any particular market are not competitive or our analyses of a market are incorrect, our business and results of operations could be harmed.

We may not receive significant revenue from our current research and development efforts for several years, if at all.

Internally developing intelligent automation products is expensive, and these investments often require a long time to generate returns. Our strategy involves significant investments in research and development and related product opportunities. Although our total expenditures for research and development have declined, we believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we cannot predict that we will receive significant revenue from these investments, if at all.

If we do not comply with environmental regulations, we may incur significant costs causing our overall business to suffer.

We are subject to a variety of environmental regulations relating to the use, storage, handling, and disposal of certain hazardous substances used in the manufacturing and assembly of our products. We believe that we are currently in compliance with all material environmental regulations in connection with our manufacturing operations, and that we have obtained all necessary environmental permits to conduct our business. However, our failure to comply with present or future regulations could subject us to such consequence as: the imposition of substantial fines, suspension of production, and alteration of manufacturing processes or cessation of operations.

Compliance with environmental regulations could require us to acquire expensive remediation equipment or to incur substantial expenses. Our failure to control the use, disposal, removal, storage, or to adequately restrict the discharge of or assist in the cleanup of hazardous or toxic substances, could subject us to significant liabilities, including joint and several liability under certain statutes. The imposition of liabilities of this kind would harm our financial condition.

Risks Related to our Stock

The conversion of our convertible note maturing June 2006, outstanding warrants and the sale of a substantial amount of our common stock, including shares issued upon exercise of outstanding options, warrants, or our convertible note in the public market , and the concentration of our equity ownership by a small number of stockholders, could adversely affect the prevailing market price of our common stock.

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We had an aggregate of 6,199,760 shares of common stock outstanding as of December 31, 2005. Our outstanding convertible note is convertible, at the option of the holder, into up to 600,000 shares at a conversion price of $5.00 per share (less than the price of our common stock at December 31, 2005) plus additional shares issuable in payment of accrued interest at the election of Adept, and matures on June 30, 2006. Thus this note must either be repaid or converted during the next five months. In November 2003, we completed a private placement of an aggregate of approximately 2.2 million shares of common stock to several accredited investors. Investors in the 2003 financing also received warrants to purchase an aggregate of approximately 1.1 million shares of common stock at an exercise price of $6.25 per share, with certain proportionate anti-dilution protections, and these warrants could be exercised at any time. These investors beneficially own a substantial portion of our total outstanding equity securities, which may affect the results of the outcome of any matter upon which stockholders must vote or otherwise participate. We have registered for resale by the investors the shares of common stock issued, and to be issuable upon exercise of the warrants, issued in the 2003 financing and the shares issuable upon conversion of the convertible note. Selling security holders included in the registration statement may offer up to an aggregate of approximately 4.5 million shares of our common stock, including more than 1.7 million shares of which are not currently outstanding but may be in the future.

Additionally, at December 31, 2005, options to purchase approximately 931,324 shares of our common stock were outstanding under our stock option plans, and an additional 572,071 shares of common stock were reserved for issuance under our stock option plans. We in addition issue shares under our employee stock purchase plan. Shares of common stock issued under these plans will be freely tradable in the public market, subject to the Rule 144 limitations applicable to our affiliates. The exercise of options and conversion of the warrants and note will significantly increase the number of common shares outstanding, diluting the ownership interests of our existing shareholders. Further, the sale of a substantial amount of our common stock, including shares issued upon exercise of these outstanding options or issuable upon exercise of our warrants, the convertible note, or future options in the public market could adversely affect the prevailing market price of our common stock.

Our common stock has recently begun trading on the NASDAQ National Market from the OTC Bulletin Board, and the change may not result in the expected increase in trading activity and price of our common stock.

Our common stock began trading on Nasdaq on November 15, 2005, moving from the OTC Bulletin Board, which is generally considered less liquid and efficient than Nasdaq and other listed exchanges. Trading in our stock has been relatively thin with increased price volatility because small quantities of shares are bought and sold, and securities analysts’ and news media coverage of Adept has not materially increased. We believe these factors lead to lower prices and larger spreads in the bid and ask prices for our common stock. We completed a 1-for-5 reverse stock split effective February 25, 2005, which may have further reduced liquidity. Reduced liquidity may reduce the value of our common stock and our ability to use our equity as consideration for an acquisition or other corporate opportunity. In addition, the reverse split decreased the number of shares outstanding, giving individual orders the potential to create increased volatility in our stock price. While we believe that relisting with Nasdaq will increase confidence by suppliers, customers, and employees, and improve institutional investor interest and the availability of business development and other strategic opportunities, the Nasdaq listing may not produce these results and may not increase the value of our common stock to our shareholders.

The ability of our Board of Directors to issue additional preferred stock could delay or impede a change of control of our company and may adversely affect the price an acquirer is willing to pay for our common stock.

The Board of Directors has the authority to issue, without further action by our shareholders, up to 1,000,000 shares of preferred stock in one or more series and to fix the price, rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, and the number of shares constituting a series or the designation of such series. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings, and other corporate purposes, could have the effect of delaying, deferring, or preventing a change in control of Adept without further action by the shareholders and may adversely affect the market price of, and the voting and other rights of, the holders of common stock. Additionally, the conversion of preferred stock into common stock may have a dilutive effect on the holders of common stock.

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Our stock price has fluctuated and may continue to fluctuate widely.

The market price of our common stock has fluctuated substantially in the past, and will continue to be subject to significant fluctuations in the future in response to a variety of factors, including:

• fluctuations in operating results, including as a result of compensation expense required by SFAS 123R and currency exchange fluctuations;

• our liquidity needs and constraints;

• effectiveness of cost control measures;

• our restructuring activities and changes in management and other personnel;

• the trading of our common stock on Nasdaq or other exchange;

• the business environment, including the operating results and stock prices of companies in the industries we serve;

• general conditions in the intelligent automation industry;

• announcements concerning our business or that of our competitors or customers;

• the introduction of new products or changes in product pricing policies by us or our competitors;

• litigation regarding proprietary rights or other matters;

• change in analysts’ earnings estimates;

• developments in the financial markets; and

• perceived dilution from stock issuances, including our 2003 financing and warrants, and the convertible note conversion.

Furthermore, stock prices for many companies, and high technology companies in particular, fluctuate widely for reasons that may be unrelated to their operating results. Those fluctuations and general economic, political and market conditions, such as recessions, terrorist or other military actions, or international currency fluctuations, as well as public perception of equity values of publicly-traded companies may adversely affect the market price of our common stock.

We may be subject to securities class action litigation if our stock price remains volatile or operating results suffer, which could result in substantial costs, distract management, and damage our reputation.

In the past, securities class action litigation has often been brought against companies following periods of volatility in the market price of their securities or where operating results suffer. Companies like us, that are involved in rapidly changing markets are particularly subject to this risk. Although our financial results have improved, we incurred net operating losses in recent fiscal years. We may be the target of litigation of this kind in the future. Any securities litigation could result in substantial costs, divert management’s attention and resources from our operations, and negatively affect our public image and reputation.

Recent legislation, higher liability insurance costs and other increased costs of being public are likely to impact our future consolidated financial position and results of operations.

Significant regulatory changes, including the Sarbanes-Oxley Act of 2002 and rules and regulations promulgated as a result of the Sarbanes-Oxley Act, and new accounting pronouncements or regulatory rulings will have an impact on our future financial position and results of operations. These regulatory requirements have, and in the future, are likely to increase general and administrative costs. In addition, insurance companies have significantly increased insurance rates as a result of higher claims in recent years, and our rates for our various insurance policies increased as well. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles and adversely affect our financial position and operating results.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

At Adept’s 2005 Annual Meeting of Shareholders, held on November 3, 2005, the shareholders of Adept approved the following actions:

a) Election of the following five (5) directors to serve until the next Annual Meeting of Shareholders or until their successors are duly elected and qualified;

NOMINEE	FOR	WITHHELD
Robert H. Bucher	5,923,114	81,685
Michael P. Kelly	5,925,645	79,154
Cary R. Mock	5,555,645	449,154
Robert J. Majteles	5,542,347	462,452
A. Richard Juelis	5,925,645	79,154

b) Approval of an amendment to our 2003 Stock Option Plan solely to increase the number of shares which may be authorized for grant to an individual within a calendar year to 250,000 shares of common stock, with no change to the total number of shares authorized for issuance under the 2003 Stock Option Plan;

For	Against	Abstain	Broker Non-Vote
3,423,439	420,029	6,783	2,154,548

c) Approval of the 2005 Equity Incentive Plan;

For	Against	Abstain	Broker Non-Vote
3,352,536	490,315	7,400	2,154,548

d) Approval of Amendment to the Articles of Incorporation to increase the number of shares of authorized capital stock of Adept from 15,000,000 to 20,000,000, increasing the authorized number of shares of common stock from 14,000,000 to 19,000,000; and

For	Against	Abstain	Broker Non-Vote
5,971,209	28,783	4,807	0

e) Approval of the reincorporation of Adept from California to Delaware.

For	Against	Abstain	Broker Non-Vote
3,290,304	548,987	10,960	2,154,548

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

The following exhibits are filed as part of this report.

2.1	Agreement and Plan of Merger dated November 4, 2005 between Adept Technology, Inc., a Delaware corporation (“Adept-Delaware”), and Adept Technology, Inc., a California corporation (“Adept-California”) (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
3.1	Certificate of Incorporation of Adept-Delaware, as filed with the Delaware Secretary of State on August 17, 2005 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
3.2	Certificate of Amendment of Certificate of Incorporation of Adept-Delaware, as filed with the Delaware Secretary of State on November 4, 2005 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
3.3	Bylaws of Adept-Delaware, as adopted on August 18, 2005 (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
4.1	Specimen of Common Stock Certificate of Adept-Delaware (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K12G3 filed with the Securities and Exchange Commission on November 10, 2005).
10.1**	Letter of Understanding (the “LOU”) between Adept Technology, Inc. and Parker Hannifin Corporation for the co-development of products.
10.2*	2003 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the first quarter of fiscal 2006 ended October 1, 2005) and form of Option Agreements to the 2003 Stock Option Plan (incorporated by reference to Exhibits 10.2 and 10.3 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange commission on January 19, 2005, No. 333-122148).
10.3*	2005 Equity Incentive Plan (incorporated by reference to Appendix B to Adept’s Schedule 14A definitive proxy statement filed with the Securities and Exchange Commission on October 6, 2005).
10.4 *	Form of Option Agreement for Employee Incentive Stock Options under 2005 Equity Incentive Plan (incorporated by reference to Exhibit 4.3 filed with the Securities and Exchange Commission on December 9, 2005).
10.5 *	Form of Option Agreement for Nonqualified Stock Options under 2005 Equity Incentive Plan (incorporated by reference to Exhibit 4.4 filed with the Securities and Exchange Commission on December 9, 2005).
10.6 *	Form of Restricted Stock Agreement under 2005 Equity Incentive Plan (incorporated by reference to Exhibit 4.5 filed with the Securities and Exchange Commission on December 9, 2005).
10.7*	Summary of Non-employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2006).
10.8*	Amended and Restated 2004 Director Option Plan.

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10.9	Form of Indemnification Agreement between Adept-Delaware and its directors and executive directors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
31.1	Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.

** Confidential treatment has been requested as to certain portions of this exhibit. An unredacted version of this exhibit has been filed separately with the SEC.

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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.

ADEPT TECHNOLOGY, INC.

By: /s/ Robert R. Strickland

Robert R. Strickland

Vice President, Finance and

Chief Financial Officer

Date: February 14, 2006

By: /s/ Robert H. Bucher

Robert H. Bucher

Chairman of the Board of Directors and

Chief Executive Officer

Date: February 14, 2006

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INDEX TO EXHIBITS

2.1	Agreement and Plan of Merger dated November 4, 2005 between Adept Technology, Inc., a Delaware corporation (“Adept-Delaware”), and Adept Technology, Inc., a California corporation (“Adept-California”) (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
3.1	Certificate of Incorporation of Adept-Delaware, as filed with the Delaware Secretary of State on August 17, 2005 (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
3.2	Certificate of Amendment of Certificate of Incorporation of Adept-Delaware, as filed with the Delaware Secretary of State on November 4, 2005 (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
3.3	Bylaws of Adept-Delaware, as adopted on August 18, 2005 (incorporated by reference to Exhibit 3.3 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
4.1	Specimen of Common Stock Certificate of Adept-Delaware (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K12G3 filed with the Securities and Exchange Commission on November 10, 2005).
10.1**	Letter of Understanding (the “LOU”) between Adept Technology, Inc. and Parker Hannifin Corporation for the co-development of products.
10.2*	2003 Stock Option Plan, as amended (incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the first quarter of fiscal 2006 ended October 1, 2005) and form of Option Agreements to the 2003 Stock Option Plan (incorporated by reference to Exhibits 10.2 and 10.3 to the Registrant’s Registration Statement on Form S-8 filed with the Securities and Exchange commission on January 19, 2005, No. 333-122148).
10.3*	2005 Equity Incentive Plan (incorporated by reference to Appendix B to Adept’s Schedule 14A definitive proxy statement filed with the Securities and Exchange Commission on October 6, 2005).
10.4 *	Form of Option Agreement for Employee Incentive Stock Options under 2005 Equity Incentive Plan (incorporated by reference to Exhibit 4.3 filed with the Securities and Exchange Commission on December 9, 2005).
10.5 *	Form of Option Agreement for Nonqualified Stock Options under 2005 Equity Incentive Plan (incorporated by reference to Exhibit 4.4 filed with the Securities and Exchange Commission on December 9, 2005).
10.6 *	Form of Restricted Stock Agreement under 2005 Equity Incentive Plan (incorporated by reference to Exhibit 4.5 filed with the Securities and Exchange Commission on December 9, 2005).
10.7*	Summary of Non-employee Director Compensation (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 1, 2006).
10.8*	Amended and Restated 2004 Director Option Plan.

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10.9	Form of Indemnification Agreement between Adept-Delaware and its directors and executive directors (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission on November 8, 2005).
31.1	Certification by the Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification by the Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification by the Chief Executive Officer and the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Management contract or compensatory plan or arrangement.

** Confidential treatment has been requested as to certain portions of this exhibit. An unredacted version of this exhibit has been filed separately with the SEC.

43