Form 10-Q

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.

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 12, 2007 was 7,660,602.

The accompanying unaudited 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 (“SEC”). 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.

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 to for the fiscal year ended June 30, 2006 included in Adept Technology, Inc.’s (“Adept” or the “Company”) Annual Report on Form 10-K as filed with the SEC on October 13, 2006. The Company has restated the condensed consolidated financial statements for the six months ended December 31, 2005 in this report, consistent with amended Quarterly Report filed on Form 10-Q/A filed with the SEC on October 19, 2006. The restatement is described in Note 4. “Restatement of Fiscal 2006 Interim Periods” to the financial statements included in the Company’s Form 10-K filed with the SEC on October 13, 2006.

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 Adept’s consolidated financial statements, and it is possible that such changes could occur in the near term.

The Company has adopted stock plans that provide for the grant to employees of stock-based awards, including stock options and restricted shares, of Adept common stock. In addition, certain of these plans permit the grant of nonstatutory stock-based awards to paid consultants and outside directors. Option awards are granted with an exercise price equal to the market price of Adept’s stock on the date of grant; and have ten-year contractual terms. The Company also has an employee stock purchase plan (“ESPP”) that allows employees to purchase a limited number of shares of its common stock at a discount of 15% of the market value at certain plan-defined dates that are established at six-month intervals.

Adept has one employee stock purchase plan and four equity compensation plans currently in effect and used by Adept, including the 2001 Stock Option Plan, 2003 Stock Option Plan, 2004 Director Option Plan and 2005 Equity Incentive Plan. As of December 30, 2006, there were 384,992 shares available for issuance under the 1998 Employee Stock Purchase Plan. The plan provides for an annual automatic increase in the number of shares available for issuance by the lesser of 120,000 shares, 3% of the shares outstanding, or a lesser amount as may be determined by the Board of Directors. There are 288,533 shares subject to outstanding options under the 2001 Stock Option Plan with 85,346 available for grant. Under the 2003 Stock Option Plan, there are 357,981 shares subject to outstanding options with 26,253 available for grant. The 2004 Director Option Plan has 57,000 shares subject to outstanding options with 74,709 available for grant. The 2005 Equity Incentive Plan has 400,000 shares authorized with 198,240 available for grant. Under all of these plans, for employee grants, vesting is generally monthly in equal installments over a four year period. Under the director option plan, initial director grants vest one-fourth on the first anniversary of the grant, then monthly in equal installments thereafter for three years. Annual director grants vest monthly in equal installments over a four year period.

The Company adopted Statement of Financial Accounting Standards No. 123 (Revised 2004) (“SFAS123R”), 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 (loss). The Company recognizes 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 30, 2006 and December 31, 2005 has been accounted for as an equity instrument. Prior to July 1, 2005, Adept followed the Accounting Principles Board (“APB”) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations for its stock compensation.

The Company has 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 (the Black-Scholes model) and assumptions disclosed prior to the Company’s adoption of SFAS 123R.

Under the provisions of SFAS 123R, the Company recorded $561,582 and $439,000 of stock-based compensation expense on its unaudited condensed consolidated statement of operations for the six months ended December 30, 2006 and December 31, 2005, respectively, for its stock plans and ESPP. The Company did not record an income-tax benefit for the stock compensation expense because of the extent of its net operating loss carryforwards. The Company utilized the Black-Scholes valuation model for estimating the fair value of the compensation after the adoption of SFAS 123R. The weighted average grant-date fair values of the options granted under the stock option plans and shares subject to purchase under the ESPP for the three and six months ended December 30, 2006 was $4.95 and $3.82 respectively, using the following assumptions.

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the historical volatility of Adept’s common stock over the period commensurate with the expected life of the options or ESPP subscription period. The risk-free interest rate is also based on the expected life of the options or ESPP subscription period. The expected life in years is based on the historic time to post-vesting exercise and forfeitures of the ESPP shares.

Based on its historical experience of option cancellations prior to vesting, the Company has assumed an annualized forfeiture rate of 20% for its options. Under the true-up provisions of SFAS 123R, the Company records additional expense if the actual forfeiture rate is lower than it estimated, and records a recovery of prior expense if the actual forfeiture rate is higher than it estimated.

A summary of stock option activity under the option plans as of December 30, 2006 and changes during the six months then ended is presented below:

There were 326,000 granted during the six months ended December 30, 2006. The intrinsic value of options exercised during the six months ended December 30, 2006 was 295,033. Cash received from stock option exercises and ESPP purchases was $295,033 and $157,182, respectively, during the six months ended December 30, 2006. As of December 30, 2006, there was $1,452,543 of total unrecognized compensation cost related to non-vested stock options granted and outstanding; that cost is expected to be recognized through fiscal year 2010, with a weighted average remaining period of 1.6 years.

During the six months ended December 30, 2006, 53,948 shares of common stock were issued upon the exercise of options under the Company’s stock option plans, and 19,656 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 30, 2006 were 7,656,981.

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 twelve months. Investments are classified as held-to-maturity, trading, or available-for-sale at the time of purchase.

At December 30, 2006, all of the Company’s investments in marketable securities were classified as available-for-sale and were carried at fair market value, which approximated cost. Fair market value is based on quoted market prices on the last trading day of the quarter. The cost of securities is based upon the specific identification method.

Realized gains or losses, interest, and dividends are included in interest income. Unrealized gains or losses from available-for-sale securities were not material in the three and six months ended December 30, 2006 and for the year ended June 30, 2006.

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 net inventory are as follows:

Inventory reserves for estimated obsolescence or unmarketable inventory were $1.6 million at December 30, 2006 and $1.9 million at June 30, 2006.

Prior to July 1, 2006, property and equipment held outside of the U.S., along with its accumulated depreciation, was translated into U.S. dollars at historical rates. Due to the utilization of local currencies as functional currencies, effective July 1, 2006, property and equipment held outside of the U.S., along with its accumulated depreciation, was translated into U.S. dollars at current rates. The effect of the functional currency change on net property and equipment was an increase of $44,000 with a credit of the same amount to other cumulative comprehensive loss.

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.

Changes in the Company’s warranty liability are as follows for the six month periods ending December 30, 2006 and December 31, 2005:

As disclosed in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Adept was informed by Crosslink Capital Partners (“Crosslink”) that Crosslink believes the Company made misrepresentations regarding its financial statements relating to periods after June 2005 in the Purchase Agreement, dated June 9, 2006, entered into in connection with Adept’s $10.0 million private placement of common stock to Crosslink, and has requested compensation for such misrepresentations. No litigation has commenced regarding this matter. Adept has discussed these assertions with Crosslink. At this time, Adept cannot estimate the outcome of such discussions or any legal proceedings that may arise from this matter, nor the amount of liability, if any, of the Company that may result therefrom.

As disclosed in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Adept announced the restatement of its financial statements in September 2006 and in October 2006, Adept amended its quarterly reports on Form 10-Q/A for each of the first three quarters of fiscal 2006. To date, other than the Crosslink matter described above, there have been no claims or litigation commenced with respect to the restatements and related subjects discussed in the announcement; however, such matters may result in litigation of varying kinds against the issuer, including without limitation, claims in connection with issuances of, or transactions in, Adept securities, or defaults of covenants or agreements to lenders or other third parties. At this time, no assurances can be given regarding the potential outcome of such litigation, if it occurs, and no estimate can be made regarding any liability of Adept as a result of any potential claims.

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, the Company believes the ultimate resolution of these matters will not have a material adverse effect on its financial position, results of operations or cash flows.

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 may arise from a variety of factors, including different interpretations of statutes and regulations. For the six months ended December 30, 2006, the Company recorded a provision for income taxes of $9,000 for domestic and international tax liabilities.

The computation of diluted net income (loss) per share for the second quarter of fiscal 2007 does not include the following securities because the effect of their inclusion would be anti-dilutive as the Company experienced a loss for each of the periods reported: options to purchase common stock of 897,120; and warrants to purchase common stock of 1,111,112.

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 provides intelligent robotics systems 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 remanufactured 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.

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

The Company applies SFAS 52, Foreign Currency Translation, with respect to its international operations, which include manufacturing, sales and service entities. Prior to fiscal 2007, Adept’s non-U.S. operations used the U.S. dollar as the functional currency. Effective July 1, 2006, Adept’s non-U.S. operations changed to using the local currencies as the functional currencies based on the determination that the company expansion of the size and functions of its international operations had changed each of their economic environments, by one or more factors, to an environment more appropriate to the local currency being the functional currency. In Europe, the company is now manufacturing locally and is thereby incurring a greater part of its costs and expenses in the local currency. Singapore has become our Asian headquarters with a growing local staff incurring a greater percentage of local currency expenses. As a result, the company’s foreign subsidiaries’ balance sheet accounts are translated at current period ending exchange rates and statements of operations are translated at the average rate for the period. Translation gains and losses are recorded as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Foreign currency transaction gains (losses) were $(41,000) and $125,000 for the three and six months ended December 30, 2006, respectively, and $(131,000) and $(190,000) for the three and six months ended December 31, 2005, respectively.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48 (“FIN 48”), Accounting for Income Tax Uncertainties. FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more likely than not” to be sustained by the taxing authority. The recently issued pronouncement also provides guidance on the de-recognition, measurement, and classification of income tax uncertainties, along with any ancillary interest and penalties. FIN 48 includes guidance concerning accounting for income tax uncertainties in interim periods. It also increases the level of disclosures related to any recorded income tax uncertainties.

FIN 48 will become effective for Adept beginning in fiscal 2008. Any differences between the amount recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative effect adjustment, and recorded to the beginning balance of retained earnings. Adept is currently evaluating the potential impact of the implementation of FIN 48 on its financial position and operational results.

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:

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 greater detail in Item 1A – Risk Factors in this Form 10-Q filing and in our Annual Report on Form 10-K filed on October 13, 2006. The statements made in this report 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 Delaware 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 AdeptSight™.

We provide intelligent robotics systems, the core of which are our motion controls systems and application software, which we sell standalone or in combination with our own vision-guidance technology and/or third party robot mechanisms. Our vision guidance technology is tightly integrated with our motion controls technology, and this is a key differentiator for Adept. In addition, we provide robotics services and support for both our own customers and the installed base of other third party providers, which provides us with additional opportunities for revenue growth. We sell our robotics systems and services into a few broad industries where we believe we can provide the best solutions for particular applications. Through direct sales to companies, OEMs and via our systems integrators, we provide a suite of cost-effective robotics systems and services to the consumer and computer electronics, disk drive, machine tool automation, automotive electronics, food, consumer goods, medical devices and pharmaceuticals industries. Product revenue is comprised of sales of new systems, components, software and parts, and excludes revenue from training, consulting, and field service activities such as maintenance, repair, and system modifications. Mix of products sold varies considerably from period to period due to a variety of market and economic factors.

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. Adept’s 4-axis SCARA (Selective Compliance Assembly Robot Arm) robots are designed for a broad range of basic applications that otherwise utilize dedicated automation or manual labor. This technology is fundamental to our business and we have recently developed and launched new SCARA products.

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 Adept Viper robot family, a line of 6-axis articulated robots designed specifically for precision assembly applications, such as small part assembly and material handling manufacturing.

In the first half of fiscal 2006, we released new products to address the increasing demand for small parts assembly and material handling applications across multiple industries, including automotive, consumer electronics, consumer goods, disk drive, food, industrial tooling, medical devices and pharmaceuticals. New products included the Adept Cobra(TM) s350 and Clean Room/ESD s350 with MotionBox(TM) 40 servo controller and enhanced versions of Adept DeskTop™ and Adept iSight™. Additionally, 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.

In October 2006, we introduced Adept Quattro, a robot mechanism targeted at the global market for high-speed automated packaging and part-picking applications in the food, pharmaceuticals, packaged and consumer goods, and life sciences sectors. The robot utilizes four parallel arms, putting it in a new class of automation solutions from other competitive robot models in the market, which include Delta, Cartesian, articulated and SCARA class robotics.

In November 2006, Adept brought to market the Adept Viper™ s1700, a robot in the Adept Viper 6-Axis articulated robot family with a broader reach and higher payload capability than previous Adept products. Adept Viper s1700 is targeted at applications such as material handling, packaging, machine tending, and other operations requiring fast and precise automation.

Over the last several years, we have also focused on a strategy to leverage growth opportunities in the robotics market by building a service and support business. We have designed our core motion controller to work with multiple brands of robots currently being sold by Adept and other providers, as well as with multiple brands of robot mechanisms already installed in various automation environments. As a consequence, we are in a position to sell our motion controller into most of the installed base of compatible robot mechanisms when a controller update or upgrade is required. We use a combination of competitive selling and cooperative agreements to gain access to the customer bases of third party providers.

Over the last three years, Adept has taken a series of steps to strengthen our operational performance and to enhance our ability to serve our customers in Europe and in Asia. We moved a portion of our manufacturing operations to Dortmund, Germany to better address the European market; we implemented a more flexible supply chain; and we have expanded our field capabilities for both sales and services. Singapore has become our Asian headquarters with a growing local staff. The primary focus of the supply chain and field initiatives was to provide more local focus within each sales region, so that we are able to ship product more quickly, respond in the local language of our customers and provide better support through the sales and service cycles to our customers. Although services revenue was comparatively down during the first half of fiscal 2007, we believe the improvements in our operating performance and in our services revenues over the last two years are a result of these actions.

Following the second quarter of fiscal 2007, Adept announced plans to rebalance its sales and operational resources to support its strategy to sell its control and software products to OEM customers in certain markets, such as data management, life sciences, packaging and semiconductor. Adept also intends to expand the outsourcing of its manufacturing activities to reduce its operating costs and improve its gross margin as a percentage of revenue. While these measures are intended to improve the company’s operating results, Adept cannot provide assurances that these efforts will be successful.

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 30, 2006. 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 fiscal quarter ended December 30, 2006. 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, 2006 included in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission on October 13, 2006.

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 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, stock-based compensation, 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. 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 our historical warranty experience and management’s 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, generally 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 our 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 our products is incidental to our products and services taken as a whole. As a result, we recognize software revenue related to product sales in accordance with SAB 104.

We recognize stand-alone software revenue in accordance with the SOP 97-2, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition With Respect to Certain Transactions. Under SOP 97-2, 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 affect the revenue recognition for Adept’s component products.

Deferred revenues represents cases in which we have invoiced the customer before the satisfaction of all of the revenue recognition requirements enumerated above.

Revenue for robot refurbishment relates to Adept-owned or customer-owned remanufactured robots and components. Adept receives parts returned from customers under warranty contracts, or Adept purchases surplus used parts available from customers or suppliers. These parts traditionally have lower cost, and internal analysis indicates that on average, we pay a percentage of the new part cost to acquire these components. The standard cost for acquired parts is therefore set at such percentage of cost in compliance with GAAP as reflected in the SAB 100 pronouncement requiring valuation of inventory at “lower of cost or market”. By contrast, the cost basis starting point for customer-owned remanufactured or repaired robots is zero since Adept does not own the robots. For all refurbishment and remanufacturing, we track all related costs and activities (material and labor) required to bring the robots up to standard using work orders. This revenue stream and associated costs are included within the Services and Support segment.

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 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 our 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 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.

Capitalization of Software Development Costs. We capitalize certain software development costs in accordance with SFAS 86, Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed. We begin capitalizing software development costs upon the establishment of technological feasibility, which is established upon the completion of a working model or a detailed program design. Costs incurred prior to technological feasibility are charged to expense as incurred. Capitalization ceases when the product is considered available for general release to customers. Capitalized software development costs are amortized to costs of revenues over the estimated economic lives of the software products based on product life expectancy. Generally, estimated economic lives of the software products do not exceed 3 years.

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 SFAS 52, Foreign Currency Translation, with respect to our international operations, which include manufacturing, sales and service entities. Prior to fiscal 2007, Adept’s non-U.S. operations used the U.S. dollar as the functional currency. Effective July 1, 2006, Adept’s non-U.S. operations changed to using the local currencies as the functional currencies based on the determination that the company expansion of the size and functions of our international operations had changed each of their economic environments, by one or more factors, to an environment more appropriate to the local currency being the functional currency. In Europe, the company is now manufacturing locally and thereby incurring a greater part of our costs and expenses in the local currency. Singapore has become our Asian headquarters with a growing local staff incurring a greater percentage of local currency expenses. As a result, the company’s foreign subsidiary’s balance sheet accounts are translated at current period ending exchange rates and statements of operations are translated at the average rate for the period. Translation gains and losses are recorded as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. We do not currently apply a hedging strategy against our 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. Our 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. We test our intangible assets annually on April 1 unless there are indications during an interim period that such assets may have become impaired. We use our 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.

Valuation of Stock-Based Compensation Awards. We account for stock-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R, Share-Based Payment. Under SFAS No. 123R, stock-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period of the individual equity instrument. Determining the fair value of stock-based awards at the grant date requires judgment, including estimating the expected term of stock options, the expected volatility of our stock, and expected dividends. The computation of the expected volatility assumption used in the Black-Scholes calculation for option grants is based on historical volatility as options on our stock are not traded. When establishing the expected life assumption, we review annual historical employee exercise behavior with respect to option grants with similar vesting periods. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially affected.

Three and Six Months Ended December 30, 2006 as compared to Three and Six Months Ended December 31, 2005

Revenues. Revenues decreased by 14.6% to $11.1million for the three months ended December 30, 2006, as compared to $13.0 million for the three months ended December 31, 2005. Net revenues for the six months ended December 30, 2006 were $23.8 million, a decrease of 13.7% from net revenues of $27.6 for the six months ended December 31, 2005. This decrease resulted primarily from lower sales of remanufactured robots to disk drive manufacturers in the U.S. and Asia, along with reduced sales of robots and components to automotive component manufacturers in the U.S.

In terms of our business segments, Robotics revenues decreased 23.1% to $6.0 million for the three months ended December 30, 2006, from $7.9 million for the three months ended December 31, 2005. For the six months ended December 30, 2006 Robotics revenues decreased 12.9% to $14.0 million, compared to $16.1 million for the six months ended December 31, 2005. Services and Support revenues were $5.0 million for the three months ended December 30, 2006, essentially flat from $5.1 million for the three months ended December 31, 2005. Services and support revenues were $9.8 million for the six months ended December 30, 2006 decreasing 14.9% from $11.5 million in the quarter ended December 31, 2005.

Our domestic sales were $4.4 million for the three months ended December 30, 2006, compared to $6.7 million for the three months ended December 31, 2005, a decrease of 34.7%. This decrease in domestic sales primarily resulted from lower orders from automotive component manufacturers for our Cobra robots and related accessories, as well as a decrease in sales of remanufactured robots to disk drive manufacturers. A significant portion of our U.S. revenue includes product sales for end user customers actually located in Asia and Europe, although our point of sale is within the U.S. This is especially true for the disk drive market, where capital spending has been deferred for the past several months due to the merger of two major companies in the disk drive industry who were both customers. Our international sales were $6.7 million for the three months ended December 30, 2006, up 6.6% from $6.3 million for the comparable period in fiscal 2006.

Gross Margin. Gross margin as a percentage of revenues was 35.1% for the three months ended December 30, 2006, compared to 50.2% for the three months ended December 31, 2005. Gross margin as a percentage of revenues was 41.2% for the six months ended December 31, 2006, compared to 48.4% for the six months ended December 31, 2005. The decline in gross margin in the second quarter of fiscal 2007 resulted from a combination of: lower average selling prices for Cobra and Python products; a higher percentage mix of units sold through distribution channels, from which we generally experience lower margins; higher parts costs used in the remanufacturing of robots; and lower absorption of manufacturing costs.

Research, Development and Engineering Expenses. Research, development and engineering expenses for the three months ended December 30, 2006 decreased by 5.9% to $1.6 million, or 14.7% of revenues, from $1.7 million, or 13.4% of revenues for the three months ended December 31, 2005. Research, development and engineering expenses for the six months ended December 30, 2006 decreased by 7.8% to $3.4 million, or 14.1% of revenues, from $3.6 million, or 13.2% of revenues for the six months ended December 31, 2005. The decrease in expenses was primarily due to a reduction in prototype related expenses.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $4.9 million, or 44.6% of revenues, for the three months ended December 30, 2006, essentially unchanged from $4.9 million, representing 37.4% of revenues for the three months ended December 31, 2005. Selling, general and administrative expenses were $10.2 million, or 42.7% of revenues, for the six months ended December 30, 2006, compared to $10.0 million, representing 36.3% of revenues for the six months ended December 31, 2005.

Net Interest Income (Expense). Interest income, net of interest (expense), was $111,000 for the three months ended December 30, 2006 compared to $(18,000) for the three months ended December 31, 2005. Interest income, net of interest (expense), was $247,000 for the three months ended December 30, 2006 compared to $(46,000) for the six months ended December 31, 2005. Increased interest income in the three and six months ended December 30, 2006 is due to higher invested cash balances during the period.

Foreign Currency Exchange Gain (Loss). Foreign currency exchange (loss) was $(41,000) for the three months ended December 30, 2006 compared to a loss of $(131,000) for the three months ended December 31, 2005. Foreign currency exchange gain was $125,000 for the six months ended December 30, 2006 compared to a loss of $(190,000) for the three months ended December 31, 2005. Foreign currency exchange gains and losses resulted primarily from the movement of exchange rates between the euro and the U.S. dollar in the period between the time transactions are recorded and settled.

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. While we have net operating losses which are sufficient to offset most of our domestic and foreign tax obligations, we recorded a modest provision for minimum taxes owed.

Cash, cash equivalents and short-term investment decreased $2.3 million from June 30, 2006 to $11.7 million, primarily attributable to the net loss during the period. Net cash used in operating activities of $2.0 million was mainly attributable to a decrease in accounts payable of $2.3 million, partially offset by decreases in accounts receivable and inventories of $2.2 million and $579,000, respectively. Other items affecting the operating cash flows were a net loss of $3.4 million, augmented by non-cash charges including depreciation and amortization of $676,000 and non-cash, stock-related compensation charges of $562,000.

Cash used in investing activities of $2.7 million reflects the net movement of cash and cash equivalents into short-term investments of $1.8 million; capital expenditures of $376,000, primarily in demonstration equipment and equipment used in the assembly and test of our products; and capitalization of $465,000 in software development costs during the first six months of fiscal 2007.

Cash provided by financing activities of $453,000 reflects activity in our employee stock purchase program as well as stock option exercises.

Adept has a Loan and Security Agreement with Silicon Valley Bank, under which we have a facility to borrow amounts under predefined terms and conditions. This facility was not utilized during the three and six months ended December 30, 2006 and as such no amounts were outstanding in respect to the agreement.

On June 22, 2006, Adept completed the issuance and sale to affiliates of Crosslink pursuant to a common stock purchase agreement dated June 9, 2006 (the “Purchase Agreement”) of 731,251 shares of common stock for aggregate consideration of $10.0 million, representing a purchase price of $13.6752 per share, in a transaction not registered under the Securities Act of 1933, as amended (the transactions contemplated by the Purchase Agreement are referred to as the Financing).

The Purchase Agreement includes certain representations and warranties, covenants and agreements of Adept in connection with the private placement of stock, including retaining corporate existence, NASDAQ listing and reporting status. In connection with the Financing, we granted to Crosslink the right to designate an individual to serve as a director of Adept so long as Crosslink holds more than 5% of our outstanding stock, certain inspection rights of Adept company information, indemnification for breaches of representations and warranties and agreements in the Purchase Agreement and customary indemnification under the registration rights agreement for any violations of the securities laws or any material misstatements or omissions, and agreed to pay for certain expenses of Crosslink up to $35,000 incurred in connection with the Financing. As required under the registration rights agreement entered into at the time of the sales of the shares, we have registered the shares we sold for resale to the public, and these shares could be sold with little restriction. We must keep this registration statement effective for two years or until all of the shares issued in the Financing are sold in a public offering (under the registration statement or otherwise) or can be sold without restriction under Rule 144(k). Adept, however, does have the ability to suspend the registration statement for one or more periods of up to 20 consecutive days subject to a maximum of 45 days in any 12 months where we determine in good faith, on advice of counsel, that such disclosure required by the registration statement would not be in our best interest.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 48, (“FIN 48”), Accounting for Income Tax Uncertainties. FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more likely than not” to be sustained by the taxing authority. The recently issued pronouncement also provides guidance on the de-recognition, measurement, and classification of income tax uncertainties, along with any ancillary interest and penalties. FIN 48 includes guidance concerning accounting for income tax uncertainties in interim periods. It also increases the level of disclosures related to any recorded income tax uncertainties.

FIN 48 will become effective for Adept beginning in fiscal 2008. Any differences between the amount recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption will be accounted for as a cumulative effect adjustment, and recorded to the beginning balance of retained earnings. We are currently evaluating the potential impact of the implementation of FIN 48 on our financial position and operational results.

Total operating lease and capital lease obligations at December 30, 2006 were $8.6 million, which consists of $8.2 million in operating lease obligations and $0.4 million in capital lease obligations. A summary of our contractual obligations, including operating lease and capital lease obligations as of December 30, 2006 follows:

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.

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. Consequently, we are exposed to adverse or beneficial movements in foreign currency exchange rates. We have historically employed, but do not currently employ, a currency hedging strategy.

We also have a line of credit with Silicon Valley Bank. We did not borrow under this facility in fiscal 2006 and have no current intention to do so in fiscal 2007; however, if we were to drawdown under this facility or issue letters of credit thereunder, Adept would be subject to interest rate risk as described in the Section entitled “Liquidity and Capital Resources”.

As of the end of the fiscal quarter ended December 30, 2006, Adept carried out an evaluation, under the supervision and with the participation of members of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), 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 CEO and CFO concluded that 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 management, including the CEO and CFO, to allow timely decisions regarding required disclosures were not effective, because of the material weaknesses in our internal controls over financial reporting discussed below.

In connection with the annual consolidation, audit and preparation of Adept’s Annual Report on Form 10-K for the fiscal year ended June 30, 2006, which occurred during the quarter ended September 30, 2006, Adept and our auditors identified errors in a number of accounts, primarily involving intercompany eliminations associated with our consolidation of international subsidiaries. Management initiated a comprehensive review of Adept’s financial books and records, including those of all subsidiary companies, relating to certain historical financial statements.

As part of this review, conducted under the direction of senior management with involvement of the Audit Committee of the Board of Directors, we thoroughly examined our financial reporting consolidation and elimination process. Due to the volume of the consolidation adjustments and complexities involved in the consolidation process, we determined that it was necessary to essentially re-perform the consolidation of the financial statements for each of the interim periods of fiscal 2006. In October 2006, we concluded that the errors in our financial statements constituted material inaccuracies in the interim financial statements for the first three quarters of fiscal 2006 which required restatement, as further described in our fiscal 2006 Annual Report on Form 10-K, in Note 4 to the Notes to consolidated financial statements “Restatements of 2006 Quarterly Results”.

In addition to the conclusions of our CEO and CFO regarding Adept’s disclosure controls and procedures, our independent auditors, in performing their audit of our fiscal 2006 financial results, identified certain control deficiencies that constitute material weaknesses, some of which were orally reiterated during the course of the auditors’ review of our unaudited financial statements for the first quarter of fiscal 2007, as discussed below. 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 a 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 following material weaknesses in our controls resulting in the errors identified above have been identified by our management or our external auditor, in the course of their first audit of Adept for the fiscal 2006 financial statements or in the course of their review of the first quarter of fiscal 2007, for which our remediation was not completed as of the end of our second quarter of fiscal 2007:

During the second quarter of fiscal 2007 and in connection with the preparation of this Quarterly Report on Form 10-Q, we have continued to implement, as further specified below, certain changes and procedures to improve the effectiveness of our internal control over financial reporting, in part to remedy control deficiencies reported for prior periods and the restatement items discussed above, and are continuing to evaluate improvements which may be necessary. In general, the measures identified generally include, without limitation, (i) making personnel and organizational changes to improve communications and reporting, (ii) executing the company’s plan for improved IT systems to standardize numerous processes; (iii) improving monitoring controls, and (iv) simplifying and improving financial processes and procedures. More specifically, measures to strengthen internal control over financial reporting which we have identified for implementation include:

Specific remediation measures that we have begun to implement, primarily during the second fiscal quarter, include the following: The Company has hired several persons with specific capabilities for the finance organization and supplemented the permanent finance staff with qualified contract resources while in the process of recruiting additional staff. Additionally, Adept is implementing new software tools to assist in the consolidation and reporting process. The corporate finance organization continued to implement the following reporting process established in the first fiscal quarter: (i) review, by the interim Corporate Controller and his staff, of Adept’s subsidiary’s financial information, prior to the input of that information into the corporate consolidation system; (ii) review of account reconciliations for all material balance sheet accounts prior to consolidation; and (iii) review of all adjusting consolidation and intercompany elimination entries by the interim Corporate Controller and CFO.

We will continue to review our internal controls and disclosure controls and may identify other measures for implementation in connection with the weaknesses identified above or otherwise. The process of designing and implementing effective controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal control over financial reporting that is adequate to satisfy our reporting obligations as a public company. In our undertaking of this continuous effort, we may identify various control deficiencies. We will assess the significance of identified control deficiencies that come to our attention and determine the extent to which such deficiencies may be mitigated or require remediation.

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.

As disclosed in its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006, Adept has been informed by Crosslink Capital Partners (“Crosslink”) that Crosslink believes the Company made misrepresentations regarding Adept’s financial statements relating to periods after June 2005 in the Purchase Agreement, dated June 9, 2006, entered into in connection with Adept’s $10.0 million private placement of common stock to Crosslink, and has requested compensation for such misrepresentations. No litigation has commenced regarding this matter. Adept has discussed these assertions with Crosslink. At this time, Adept cannot estimate the outcome of these discussions or any legal proceedings that may arise from this matter, nor the amount of liability, if any, of the Company that may result therefrom.

As disclosed in its Quarterly Report on Form 10-Q for the quarter ended September 20, 2006, Adept announced the restatement of its financial statements in September 2006 and in October 2006, Adept amended our quarterly reports on Form 10-Q/A for each of the first three quarters of fiscal 2006. To date, other than the Crosslink matter described above, there have been no claims or litigation commenced with respect to the restatements and related subjects discussed in the announcement; however, such matters may result in litigation of varying kinds against the issuer, including without limitation, claims in connection with issuances of, or transactions in, Adept securities, or defaults of covenants or agreements to lenders or other third parties. At this time, no assurances can be given regarding the potential outcome of such litigation, if it occurs, and no estimate can be made regarding any liability of Adept as a result of any potential claims.

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 business. The company has reviewed pending legal matters and believes 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 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, the company believes the ultimate resolution of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

Before deciding to purchase, hold or sell our common stock, you should carefully consider the risks described below and the other cautionary statements and risks described in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on October 13, 2006, this Quarterly Report on Form 10-Q and in our other filings with the SEC. There are no material changes to the risk factors described in Item 1A of our Annual Report on Form 10-K, except for the risk factors included below, which risk factors supersede the description of the specific risk factors relating to the same subject matter previously disclosed in our Annual Report on Form 10-K:

We have identified material weaknesses in our internal controls and have restated certain historical financial statements. 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. These weaknesses, restatement and failure to develop adequate controls 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. In connection with the consolidation of our fiscal 2006 financial results, we identified a number of errors, primarily involving intercompany eliminations associated with our international subsidiaries, reflecting material weaknesses in our internal controls. Accordingly, during the fiscal 2006 audit, our external auditors identified certain material weaknesses, 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.” Adept completed amendments to our periodic reports to restate certain prior interim financial statements of fiscal 2006. We may be subject to claims, regulatory investigation, sanctions and/or litigation as a result of such restatements. As of the time of filing this Quarterly Report on Form 10-Q, we are continuing to address remediation of our internal controls and disclosure controls, as discussed under Item 4. titled “Controls and Procedures” but have not completed all of such remediation. Inadequate internal controls could lead to future restatements or impair our ability to timely file our future periodic reports with the SEC, all of which could subject us to regulatory sanctions or litigation.

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. The remedied actions mentioned above and these actions have resulted in and are likely to continue to result in increased and significant expense, and have required and are likely to continue to require significant efforts by management and other employees. Failure to successfully complete such actions would subject us to adverse actions by the SEC, NASDAQ and possibly litigation. 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 and disclosure 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 and disclosure 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.

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, motivate and retain 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, in addition to our ability to meet our requirements as a public company. We have recently experienced significant changes in our management, including hiring a new Chief Financial Officer (CFO) in June 2006 and changes in the last two years with respect to several other of our executive officers,

and have not completed our succession planning with respect to our existing Chief Executive Officer (CEO). In 2004, we reorganized management and have since had turnover in management team personnel, which will require us to identify appropriate replacements for these roles. We reduced headcount in connection with our restructurings in prior fiscal years and made changes in other senior personnel, which changes, taken with our more recent management changes, may lead to employee questions regarding future actions by Adept leading to additional retention difficulties. In connection with the strengthening of our internal controls over financial reporting, we have hired and intend to hire additional qualified individuals for our finance organization, and their engagement and retention is critical to this endeavor. Other than our CEO’s and CFO’s offer letter which include certain limited change of control severance if terminated, and offer letters with certain of our officers that include only basic compensation terms, we have no employment agreements with our management.

The sale of a substantial amount of our common stock, including shares issued upon exercise of outstanding options and warrants in the public market, and the concentration of our equity ownership by a small number of stockholders, could adversely affect the liquidity of Adept securities and the prevailing market price of our common stock.

We had an aggregate of 7,660,602 shares of common stock outstanding in February 2007 shortly before the filing of this Quarterly Report on Form 10-Q. 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. These warrants expire in 2008 and could be exercised at any time. These investors beneficially own a substantial portion of our total outstanding equity securities, and these investors along with a few other stockholders unrelated to these stockholders together hold the substantial majority of our outstanding common stock, which may affect the trading market for our stock, and also the results of the outcome of any matter upon which stockholders must vote or otherwise participate. In June 2006, we also issued 731,251 shares to Crosslink in a private placement, referred to as the 2006 financing. We have registered for resale by the investors the shares of common stock issued, and to be issuable upon exercise of the warrants, in the 2003 financing and Adept’s 2006 financing. The selling security holders from the financings included in the registration statements may offer up to an aggregate of approximately 5.0 million shares of our common stock, including more than 1.1 million shares of which are not currently outstanding but may be in the future. We raised $10.0 million in an equity financing in 2006. Our use of equity to raise additional financing or as consideration in connection with a future acquisition or other transaction could result in the dilution of our stockholders’ equity interest.

Additionally, at December 30, 2006, options to purchase approximately 1,084,713 shares of our common stock were outstanding under our equity compensation plans, and an additional 384,548 shares of common stock were reserved for future grant and issuance under such plans. We also issue shares under our employee stock purchase plan. Shares of common stock issued under these plans generally 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 will significantly increase the number of common shares outstanding, diluting the ownership interests of our existing stockholders. 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, or future options in the public market could adversely affect the prevailing market price of our common stock.

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:

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 claims, securities class action and other litigation as a result of our restatement, 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 and other 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, which are involved in rapidly changing markets, are particularly subject to this risk. We have incurred net operating losses in recent fiscal years and our stock price remains volatile. In September, 2006, Adept announced the restatement of our financial statements for one or more prior interim periods due to material inaccuracies in historical financial statements. In October 2006, Adept filed amended quarterly reports for the first three quarters of fiscal 2006 which reflect such restatements. To date, there has been no litigation commenced with respect to the restatement matters or other matters; however, Crosslink, an investor in Adept, has orally alleged breach of the representations made by Adept with respect to certain financial statements in the purchase agreement for Crosslink’s June 2006 investment in Adept and indicated that it will seek compensation for such breach. Adept cannot estimate the outcome of Adept’s discussions with Crosslink regarding such matters, nor any amount of liability, if any, of Adept that may result therefrom. Additionally, such announcements often result in litigation of varying kinds against the issuer. We may be the target of litigation of this kind in the future. Any securities or other litigation could result in substantial costs, divert management’s attention and resources from our operations, and negatively affect our public image and reputation.

At Adept’s 2006 Annual Meeting of Stockholders, held on November 14, 2006, the stockholders of Adept approved the following actions:

During the quarter ended December 30, 2006, the Board approved guidelines for management’s recommendations with respect to quarterly employee equity awards to be approved by the Compensation Committee or Board as reported on a Current Report on Form 8K, including defining quarterly targets for purposes of recommending equity grants to executives. Quarterly targets were not established for the second quarter and, therefore, no grants have been recommended for executives for that quarter.

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/ Steven L. Moore
		Steven L. Moore
		Vice President, Finance and Chief Financial Officer

By:		/s/ Robert H. Bucher
		Robert H. Bucher
		President and Chief Executive Officer


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)


		Page
PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets December 30, 2006 and June 30, 2006		3

Condensed Consolidated Statements of Operations Six months ended December 30, 2006 and December 31, 2005		4

Condensed Consolidated Statements of Cash Flows Six months ended December 30, 2006 and December 31, 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		22

PART II – OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		25

Item 4. Submission of Matters to a Vote of Security Holders		28

Item 5. Other Information		28

Item 6. Exhibits		29

Signatures		30


	December 30, 2006			June 30, 2006
ASSETS
Current assets:
Cash and cash equivalents		5,939		$	10,062
Short-term investments		5,809			3,995
Accounts receivable, less allowance for doubtful accounts of $583 at December 30, 2006 and $496 at June 30, 2006		9,596			11,591
Inventories, net		11,141			11,600
Other current assets		553			439

Total current assets		33,038			37,687

Property and equipment, net		2,835			2,596
Goodwill		3,176			3,176
Other intangible assets, net		—			34
Other assets		184			199

Total assets	$	39,233		$	43,692

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		4,702			6,952
Accrued payroll and related expenses		1,537			1,719
Accrued warranty expenses		1,429			1,638
Deferred revenue		80			3
Other accrued liabilities		315			258

Total current liabilities		8,063			10,570
Long-term liabilities:
Other long-term liabilities		393			433

Total liabilities		8,456			11,003

Stockholders’ equity:
Common stock, $0.001 par value: 19,000 shares authorized, 7,657 and 7,583 shares issued and outstanding at December 30, 2006 and June 30, 2006, respectively		159,646			158,633
Other cumulative comprehensive loss		473			—
Accumulated deficit		(129,342	)		(125,944	)

Total stockholders’ equity		30,777			32,689

Total liabilities and stockholders’ equity	$	39,233		$	43,692


	Three months ended						Six months Ended
	December 30, 2006			December 31, 2005			December 30, 2006			December 31, 2005
Revenues	$	11,086		$	12,979		$	23,829		$	27,620
Cost of revenues		7,192			6,464			14,011			14,253

Gross margin		3,894			6,515			9,818			13,367
Operating expenses:
Research, development and engineering		1,634			1,737			3,355			3,639
Selling, general and administrative		4,945			4,853			10,193			10,018
Amortization of intangible assets		—			49			33			98

Total operating expenses		6,579			6,639			13,581			13,755

Operating loss		(2,685	)		(124	)		(3,763	)		(388	)

Interest income (expense), net		111			(18	)		247			(46	)
Foreign currency exchange gain (loss)		(41	)		(131	)		125			(190	)

Loss before income taxes		(2,615	)		(273	)		(3,391	)		(624	)
Provision for (reversal of) income taxes		—			(11	)		9			(5	)

Net loss	$	(2,615	)	$	(262	)	$	(3,400	)	$	(619	)

Basic and diluted loss per share	$	(0.34	)	$	(0.04	)	$	(0.45	)	$	(0.10	)


Number of shares used in computing basic and diluted per share amounts		7,627			6,178			7,616			6,158


Comprehensive loss
Net loss		(2,615	)		(262	)		(3,400	)		(619	)
Foreign currency translation adjustment		618			—			473			—

Total comprehensive loss	$	(1,997	)	$	(262	)	$	(2,927	)	$	(619	)


	Six months ended
	December 30, 2006			December 31, 2005
Operating activities
Net loss	$	(3,400	)	$	(619	)
Non-cash adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		643			255
Stock compensation		562			439
Amortization of intangibles		33			98
Non-cash interest expense		—			90
Net changes in operating assets and liabilities:
Accounts receivable, net		2,239			(2,046	)
Inventories, net		579			587
Other current assets		(113	)		103
Other assets		10			(22	)
Accounts payable		(2,272	)		(368	)
Other accrued liabilities and deferred revenues		(271	)		(66	)
Accrued restructuring expenses		—			(28	)
Other long-term liabilities		(40	)		20

Net cash used in operating activities	$	(2,030	)	$	(1,557	)

Investing activities
Purchase of property and equipment		(376	)		(819	)
Capitalized software		(465	)		(130	)
Maturities of short-term investments		12,210			—
Purchase of short-term investments		(14,025	)		—

Net cash used in investing activities	$	(2,656	)	$	(949	)

Financing activities
Proceeds from employee stock incentive program and employee stock purchase plan		453			156

Net cash provided by financing activities		453			156

Effect of exchange rates on cash and cash equivalents		110			—

Net decrease in cash and cash equivalents		(4,123	)		(2,350	)
Cash and cash equivalents, beginning of period		10,062			5,334

Cash and cash equivalents, end of period	$	5,939		$	2,984

Cash paid during the period for:
Interest	$	7		$	2
Taxes	$	21		$	10

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	Three and Six Months Ended December 30, 2006
	Stock Option Plan		Purchase Plan
Average risk free interest rate	3.94	%	4.95	%
Expected life (in years)	2.50		.49
Expected volatility	.56		.63
Dividend yield	0	%	0	%


Options	Shares (in thousands)		Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (years)	Aggregate Intrinsic Value (in thousands)
Outstanding at June 30, 2006	921		$	13.371
Granted	326			9.18
Exercised	(54	)		5.47
Forfeited or Expired	(108	)		13.71

Outstanding at December 30, 2006	1,085		$	12.47	7.86	$	3,838

Vested/Expected to Vest at December 30, 2006	909		$	13.11	.67	$	3,299

Exercisable at December 30, 2006	473		$	17.27	6.21	$	1,815


	December 30, 2006		June 30 2006
	(in thousands)
Cash and cash equivalents:
Cash	$	2,380	$	3,422
Money market funds		3,559		6,640

Total cash and cash equivalents	$	5,939	$	10,062

Short-term investments:
Auction rate securities	$	2,256	$	3,003
Fixed income securities		3,553		992

Total short-term investments	$	5,809	$	3,995


	(in thousands) Six months ended
	December 30, 2006			December 31, 2005
Balance at beginning of period	$	1,638		$	2,040
Provision for warranties issued		530			623
Change in estimated warranty provision including expirations		(161	)		—
Warranty claims		(578	)		(857	)

Balance at end of period	$	1,429		$	1,806


(in thousands)	December 30, 2006		June 30, 2006
Long-lived tangible assets:
United States	$	2,633	$	2,503
All other countries		386		246

Total long-lived tangible assets	$	3,019	$	2,749


	Total		Less Than 1 Year		Years 2 and 3		Years 4 and 5		More than 5 Years
Operating lease obligations	$	8,246	$	1,996	$	3,359	$	2,421	$	470
Capital lease obligations		399		142		242		15		—

Total operating lease and capital lease obligations	$	8,645	$	2,138	$	3,601	$	2,436	$	470


(in thousands)	December 30, 2006			Fair Value
Cash and cash equivalents	$	5,939		$	5,939
Average rate		1.8	%		1.8	%

Short-Term Securities	$	5,809		$	5,809
Average rate		5.3	%		5.3	%


NOMINEE	FOR	WITHHELD
Robert H. Bucher	6,650,622	65,896
Charles H. Finnie	6,652,956	63,562
A. Richard Juelis	6,636,796	79,722
Michael P. Kelly	6,555,874	160,644
Robert J. Majteles	6,282,496	434,022
Herbert J. Martin	6,652,556	63,962
Cary R. Mock	6,185,474	531,044


For	Against	Abstain	Broker Non-Vote
3,977,127	459,666	780	2,278,945


10.1*		Fiscal 2007 Executive Bonus Plan (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 November 20, 2006).

10.2*		Fiscal 2007 Performance Stock Guidelines (incorporated by reference to Exhibit 10.2 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

10.3*		Summary of Executive Officer Compensation (incorporated by reference to Exhibit 10.3 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

10.4*		Amendment of 2004 Director Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

10.5		Amended Performance Option Agreement for Robert H. Bucher (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 October 16, 2006).

14.1		Amendment of Adept Code of Business Conduct, as amended (incorporated by reference to Exhibit 14.1 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

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.


10.1		Fiscal 2007 Executive Bonus Plan (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 November 20, 2006).

10.2		Fiscal 2007 Performance Stock Guidelines (incorporated by reference to Exhibit 10.2 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

10.3		Summary of Executive Officer Compensation (incorporated by reference to Exhibit 10.3 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

10.4		Amendment of 2004 Director Stock Option Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

10.5		Amended Performance Option Agreement for Robert H. Bucher (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 October 16, 2006).

14.1		Amendment of Adept Code of Business Conduct, as amended (incorporated by reference to Exhibit 14.1 to the Registrant’s Current report on Form 8-K filed with the Securities and Exchange Commission on November 20, 2006).

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.