UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_____________________

FORM 10-K/A

(Amendment No. 1)

10-K

(Mark One)

x

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

For the fiscal year ended December 1, 2006

November 27, 2009

OR

o

or

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


For the transition period from to

Commission file number: 0-15175

ADOBE SYSTEMS INCORPORATED

(Exact name of registrant as specified in its charter)

__________________________

Delaware

77-0019522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

345 Park Avenue, San Jose, California  95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, $0.0001 par value per share

The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)

Securities registered pursuant to Section 12(g) of the Act: None

___________________________

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes xNo o

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes oNo x

Indicate by checkmark 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. YesxNo o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YesxNo o
Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer, “accelerated filerfiler” and large accelerated filer”“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer xAccelerated filer oNon-accelerated filer o

(Do not check if a smaller reporting company) Smaller reporting company o

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

The aggregate market value of the registrant’s common stock, $0.0001 par value per share, held by non-affiliates of the registrant on June 2, 2006,May 29, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $14,829,198,488$12,843,687,113 (based on the closing sales price of the registrant’s common stock on that date). Shares of the registrant’s common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of December 29, 2006, 588,456,485January 15, 2010, 524,119,635 shares of the registrant’s common stock, $0.0001 par value per share, were issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 20072010 Annual Meeting of Stockholders (the “Proxy Statement”), to be filed within 120 days of the end of the fiscal year ended December 1, 2006,November 27, 2009, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K/A,10-K, the Proxy Statement is not deemed to be filed as part hereof.




Explanatory Note

Adobe Systems Incorporated is filing this Amendment No.1 to Form 10-K to amend and restate its original Form 10-K that was filed on February 5, 2007 in order to replace the original Form 10-K, which was an incorrect version of the Form 10-K that was filed due to an error by a third-party Edgar filing service provider.



TABLE OF CONTENTS

TABLE OF CONTENTS

Page

No.

PART I

Item 1.

Business

3

Item 1A.

Risk Factors

35

34

Item 1B.

Unresolved Staff Comments

42

45

Item 2.

Properties

42

46

Item 3.

Legal Proceedings

43

47

Item 4.

Submission of Matters to a Vote of Security Holders

44

48

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

44

49

Item 6.

Selected Financial Data

46

52

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

47

53

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

64

72

Item 8.

Financial Statements and Supplementary Data

68

75

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

68

124

Item 9A.

Controls and Procedures

69

124

Item 9B.

Other Information

70

124

PART III

Item 10.

Directors, Executive Officers and Corporate Governance

72

124

Item 11.

Executive Compensation

72

125

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters

72

125

Item 13.

Certain Relationships and Related Transactions, and Director Independence

72

125

Item 14.

Principal Accounting Fees and Services

72

125

PART IV

Item 15.

Exhibits, Financial Statement Schedules

73

125

Signatures

118

126

Summary of Trademarks

120

128

Exhibits

121

130




Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K/A10-K contains forward-looking statements, including statements regarding product plans, future growth and market opportunities which involve risks and uncertainties that could cause actual results to differ materially. materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in this section under “RiskItem 1A, Risk Factors.” You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including the Quarterly Reports on Form 10-Q to be filed in 2007.2010. When used in this report, the words “expects,” “could,” “would”,“would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,”to” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements which speak only as of the date of this Annual Report on Form 10-K/A.10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

PART I

ITEM 1.  BUSINESS

Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of creative, business, Web and mobile software and services used by creative professionals, designers, knowledge workers, high-end consumers, original equipment manufacturers (“OEM”OEMs”), developers and enterprises for creating, managing, delivering, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors, and dealers, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”) and OEMs, direct to end users and through our own Web siteWebsite at www.adobe.com. We also license our technology to hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas;Americas, Europe, Middle East and Africa (“EMEA”); and Asia. Our software runs on personal computers with Microsoft Windows, Apple Mac OS, Linux, UNIX and various non-personal computingnon-PC platforms, depending on the product.

Adobe was originally incorporated in California in October 1983 and was reincorporated in Delaware in May 1997. We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a Web siteWebsite at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC Web siteWebsite at www.sec.gov.

BUSINESS OVERVIEW

Since the early 1980’s,

For more than 27 years, Adobe software and technologies have helped redefine how people engage with ideas and information—anytime, anywhere and through any medium. The impact of our solutions is evident across many industries and is felt by anyone who creates, views and interacts with information.

Today, through the delivery of powerful design, imaging and publishing software for print, Web, mobile and videodynamic media production, and by delivering a ubiquitous technology platform, we help people express, share, manage, optimize and collaborate on their ideas in imaginative and meaningful new ways.

Our strategy is to address the needs of a variety of customers which include creative professionals—graphic designers, Web designers, videographers, photographers and professional publishers; knowledge workers—teams of workers who share and collaborate on high-value information. Our customers also includeinformation; enterprise users—IT managers, Web analysts, marketing executives, line of business managers and executives; high-end consumers—digital imaging and digital video hobbyists and enthusiasts. OEM partners such as enthusiasts; application developers and OEMs—mobile device manufacturers, printer manufacturers, Internet service providers and developers.


We execute against this strategy by delivering products that support industry standards and can be deployed across multiple computing environments. We also leverage the broad reach of our technology platform, which utilizesubiquitous client technologies including our universal Adobe Reader, and our Adobe Flash Platform which enables the development of products and solutions that dramatically improves how businesses and governments engage with their customers, employees and constituents. Our Adobe Flash Platform includes our broadly deployed Adobe Flash Player, software. Our technology platform allowsand our Adobe AIR software which enables developers to build and deploy rich media and Internet applications to client devices.  Together, these client technologies allow users of our products and technologies to ensure reliable, secure and rich application experiences across devices, browsers desktops and devices.

operating systems.



PRODUCTS AND SERVICES OVERVIEW

At the beginning of

In fiscal 2006, coinciding with the completion of our acquisition of Macromedia, Inc. (“Macromedia”),2009, we categorized our products and services into the following businesses: Creative Solutions, Business Productivity Solutions, Platform and Print and Publishing. We further broke our Business Productivity Solutions business into two reported segments: Knowledge Worker and Enterprise. With our acquisition of Omniture, Inc. (“Omniture”) in the fourth quarter of fiscal 2009, we created and added a new segment called Omniture for the purpose of reporting Omniture results.
Effective in the first quarter of fiscal 2010, we modified our segment reporting. Our Creative Solutions segment, our Platform segment, our Print and Publishing segment, and our Omniture segment continue to be reported as they were in fiscal 2009.  Our Business Productivity Solutions business that is reported in two segments (Knowledge Worker and Enterprise), was modified to reflect a change in how we develop, market and sell our Acrobat Connect Pro product family.  Previously, Acrobat Connect Pro results were reported in our Knowledge Worker segment.  In fiscal 2010, Acrobat Connect Pro results will be reported as part of our Enterprise segment.
Accordingly, our six fiscal 2010 business segments are as follows:  Creative Solutions, Knowledge Worker, Solutions, Enterprise, Omniture, Platform, and Developer Solutions, MobilePrint and Device Solutions, and Other.Publishing. This overview, organized by these segments, combines an explanation of our various market opportunities with a summary of our fiscal 20062009 results and a discussion of our strategies to address our market opportunities in fiscal 20072010 and beyond.

Creative Solutions Segment

Creative Solutions Market Opportunity

Our Creative Solutions segment focuses primarily on the needs of the creative professional customer. Creative professionals include graphic designers, production artists, Web designers and developers, user interface designers, writers, videographers, motion graphic artists, photographers and prepress professionals whoprofessionals. They use and rely on Adobe’s solutions for professional publishing, Web design and development, professional photography, video production, animation and motion graphic production and printing visually rich information.

Our software tools are used by creative professionals to create much of the printed and on-line information people see and read every day, including newspapers, magazines, Web sites,Websites, Rich Internet Applications (“RIAs”), catalogs, advertisements, brochures, product documentation, books, memos, reports and banners. Our tools are also used to create and enhance visually rich content, including video, animation and mobile content, that is created by multimedia, film, television, audio and video producers who work in advertising, Web design, music, entertainment, corporate and marketing communications, product design, user interface design, sales training, printing, architecture and fine arts. Knowledge workers, educators, hobbyists and high end consumers are also attracted to our creative products to create and deliver content that is of creative professional quality.

Our offerings in the Creative Solutions market extend to real-time rich media solutions which give business users the control to upload, manage, enhance and publish dynamic rich content with minimal IT support. Our offerings also extend to the delivery of rich media through streaming media and a flexible development environment for creating and delivering innovative, interactive media applications.  Our media products and services enable broadcasters, events organizers and marketers to reach the broadest possible audience via our rich Flash Platform.
As technology continues to change and improve, the market dynamics for these creative professionals continue to evolve. Due to the everconstantly changing ways in which people choose to receive information, creative professionals look to their software tools as a means to make their information impactful and to repurpose content across a variety of media, applications and applications.systems. They desire greater efficiency from the software they use to streamline their publishing and content creation workflows and to effectively manage their assets. They also look for new and innovative ways to deliver their content and information to hand-held devices such as mobile handsets and consumer electronic devices.

Adobe’s brand and customer loyalty in this market continues to be strong.

Creative professional customers license upgradeupgrades and new unitsversions of our Creative Solutions products due to the high degree of innovative new features and significant productivity gained through their use. They also frequently purchase license upgradeupgrades and new unitsversions of these products when they buy new computers, or migrate to new or updated operating systems.

In addition, knowledge workers at workin enterprises, educators and students in schools and universities, and hobbyists at home license our Creative Solutions products.  Knowledge workers desire professional-quality products to accomplish tasks such as
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creating visually-rich sales presentations, engineering or architectural proposals, real estate flyers and school year books. Educators utilize our solutions to educate future creative professionals, as well as create their course content and online eLearning-based lessons.  Hobbyists use our tools to create


distinctive communication,online communications and photo albums, community newsletters, Web blogs, animations, videos and web sitesWebsites for family, friends or community organizations.

The businesses of creative professionals are sensitive to the economy as they derive their revenue mainly from corporate marketing, product marketing and ad spending in corporations. In difficult economic times, corporations tend to reduce marketing spending and the businesses of creative professionals often may decline. Conversely, in an environment where the economy is stable or improving, corporations tend to increase their marketing spending, which leads to stable or improved business conditions for creative professionals. Thus, depending on economic conditions and the status of their businesses, these users adjust their spending on items such as hardware and software, and the staffing levels within their company. Due to this correlation, our Creative Solutions opportunity is closely linked to the performance of the economy in each of the countries in which we do business.

With the increasing use of the Web as a means for marketing and advertising, we believe a key driver of our Creative Solutions business will also be the growing amount of Web site and mobile deviceWebsite content created by our customers to deliver impactful and compelling Web-based experiences for their constituents.

constituents across multiple screens, including PCs, mobile devices, and Internet-connected living room electronics such as televisions (“TVs”). We also believe those who manage Websites will want to utilize Web analytic data and other Web usage metrics to optimize their Websites and content to improve the overall experience of their sites.

Another driver of our Creative Solutions business is the growth in the use of digital devices such as digital cameras, digital video cameras, multimedia-enabled computers, DVD players, scanners, Web-capable image and video-enabled handheld devices, cellular phones, gaming consoles and other non-PC Internet-connected devices. In addition, faster Internet broadband adoption makesspeeds have made the Web a viable platform for the delivery of rich media, especially digital video. In turn, the growth in the use of high definition TVs (“HD”HD TVs”) televisions and video is driving the need for HD-enhanced video tools to produce HD content for movies and cablecommercial television, as well as the need to deliver or repurpose this content to be viewed on the Web across PC and commercial television.

non-PC based devices.

As the use of digital photography and digital videography grows, we believe creative professionals and professional photographers throughout the world will continue to require software solutions to edit, enhance and manage their digital photographs and digital videos.  Increasingly, we expect these users to desire software solutions which leverage the Web as a platform to deliver the capabilities of some or all of the features they desire in desktop software. In addition, we believe creative professionals and Web developers are increasing their use of digital video streams over the Web to create more compelling Web sites that leverage the adoption of broadband.Websites. We believe professional videographers are upgrading their systems to support HD video content creation, enhancement and delivery. We also believe hobbyists will use, with more frequency, digital imaging and digital video software and online hosted software services as they purchase more affordable digital SLR cameras and digital video cameras.

Creative Solutions Business Summary

In fiscal 2006,2009, our creative business was adversely affected by the global economic recession and the weak general macro-economic environment. This caused revenue for our Creative Suite 4 (“CS4”) family of products to be more than 20 percent weaker than revenue achieved with the prior version for a comparable period of time since release. Despite this economy-driven weakness, we maintained our focus on driving adoption of our creative products during the year—particularly ourwith large media companies and enterprise customers. Our CS4 family of products, which first shipped in fiscal 2008, incorporate Adobe Creative Suite products, our Macromedia Studio product, and software bundles containing variations of both. Available in two options (Standard and Premium), the Adobe Creative Suite incorporates several of our technologies used by creative professionals into one product and is a complete design solution that provides efficiency through improved product integration and integrated workflow capabilities.

After achieving combined record revenue for our Adobesix Creative Suite editions and Macromedia Studiothirteen individual creative products, providing offerings for the various creative disciplines our customers desire. These disciplines include end-user markets such as interactive design for print and Web, as well as rich media and digital video creation. After significant weakness in the first quarter of fiscal 2006, we began to experience a decline in revenue with these products starting in our second quartertwo months of the fiscal year. We attributed this decline to awareness by ouryear, licensing of CS4 products remained stable through the remainder of the year despite the uncertain global economic conditions in end-user creative professional customers of new versions of the products that are expected to ship in fiscal 2007. We also attributed customer deferral of purchase of Creative Suite products to our customers’ desire to have new support in Adobe applications for the Apple hardware platform which includes Intel-based processors—something we publicly stated would not be available until the next release of the Creative Suite family of products.

markets.

In fiscal 2006, we also continued to focus on driving adoption of our dynamic media and digital video-based technologies. In the first quarter of fiscal 2006, we released new versions of our digital video products, including Adobe Premiere Pro version 2.0 software for video editing, Adobe After Effects version 7.0 software for adding special effects to video, Adobe Audition version 2.0 software for audio editing and Adobe Encore version 2.0 software for DVD creation. Along with these individual digital video products, we also delivered a new suite containing these technologies called Adobe Production Studio.

In addition to various new features and ease-of-use improvements found in each of the new releases, we added enhanced support for Flash Video output to our family of digital video products to leverage the broad, increased adoption of Flash Video on the Web as a means to deliver compelling video content. These new features combined with the enhanced Flash Video support helped drive record revenue and more than 45 percent year-over-year growth for our digital video business in fiscal 2006. Adobe also won a prestigious Technical and Engineering Emmy Award from the National Academy of Television Arts and Sciences for its Flash Video technology, in recognition of the software’s pivotal role in bringing television content to the Internet.

In addition to licensing our technologies as bundles or as suites during fiscal 2006, we also continued to focus on adoption of our standalone products such as Adobe After Effects Professional, Adobe InDesign, Adobe Illustrator, Adobe Photoshop, Adobe Premiere Pro, Macromedia Dreamweaver, and Macromedia Flash.

In the professional page layout market, we continued to drive market share gains during

During the year, with our Adobe InDesign product. In addition to success with the standalone desktop version, we also saw the InDesign ecosystem grow in fiscal 2006—our software and systems integrator partners successfully deployed new innovative workflow solutions based on InDesign and InDesign Server within enterprise-class newspaper, magazine and book publishing systems. Our success in these areas contributed to a second consecutive year of record revenue in this product category.

We also maintained our focus during the year on meeting the digital imaging and video software needs of professional photographers, professional videographers, business users and hobbyists. Adobe Photoshop is an essential tool in these customers’ workflows and they rely on Adobe’s digital imaging and video editing solutions to create and enhance many of the pictures and video we see everyday in print, on television, in movies and on the Web.

  Despite maintaining strong market share for our professional Photoshop products during the year, revenue decreased significantly on a year-over-year basis due to the macro-economic environment.

In the first quarterdynamic media market, which includes users who require new and advanced digital video and animation technologies, we continued to focus on driving adoption of fiscal 2006, weour new digital video-based technologies. We released a new beta version of Adobe Photoshop Lightroom. Photoshop Lightroom is an all-new digital imaging solution targeted at professional photographers that delivers an efficient, powerful way to import, select, develop and showcase large volumes of digital images.

In addition, duringFlash Media Server 3.5 (“FMS”) in the fourth quarter of fiscal 2006,2009 which provides improved dynamic streaming and HTTP delivery capabilities, performance improvements and enhanced digital rights management capabilities for H.264 video and digital video recorder functionality. The launch of FMS, which is licensed either directly by our customers or licensed through our Flash Video Streaming Service via Content Delivery Network (“CDN”) partners such as Akamai and Limelight, helped to maintain the broad adoption of Flash Video (“FLV”),  the video file format compatible with Adobe Flash Player as

5

the preferred format for delivery of digital video via the Web. Because of the broad reach and ubiquity of our Flash client technologies, the growing adoption of our authoring tools and our video delivery capabilities via our Flash Player, it is estimated by the research agency comScore that more than 75% of worldwide video watched online is now in FLV format.
To further the monetization capabilities of video content owners who wish to deliver engaging experiences utilizing their video assets, we also delivered Open Source Media Framework (“OSMF”), a new framework for media player development that can be used to create and deliver custom online media players. OSMF enables developers using Flash technologies to quickly and easily add rich functionality such as advertising, user measurement and tracking, and social network integration into new custom video players that can be branded for individual content owners.
In the professional page layout market, despite the downturn in the economy and the financial pressure facing traditional print media companies, we continued to focus on gaining market share during the year with our Adobe InDesign product.  Similarly, in the Web layout and Web development markets, and in the illustration market, while our revenues were adversely affected due to the economy, we focused on maintaining market share leadership with our Adobe Dreamweaver and Adobe Illustrator products.
Our Scene7 business, which provides businesses with an easy-to-use Web-based system to upload, manage, enhance and publish dynamic rich content, achieved year-over-year growth in fiscal 2009 based on accelerated customer adoption of our solution. During the year, we updated the capabilities of our Scene7 hosted cross media platform with new features for e-commerce and multichannel marketing companies to create improved, high-impact customer experiences. New Adobe Scene7 capabilities include more design control and enhanced workflow efficiencies with new features such as mixed media set publishing and viewing capabilities; video authoring and viewing capabilities that synchronize merchandising videos with specific call-to-action links, as well as improved integration with Adobe Creative Suite.
During the fourth quarter of fiscal 2009, we released version 5.08 of our Adobe Photoshop Elements software which is our digital imaging application targeted for amateur photographers and digital imaging hobbyists. In the same quarter, we released version 3.08 of Adobe Premiere Elements software which is our video editing software that can be used by hobbyists to enhance and share their digital video memories on DVDs. We also released a software bundle that includes the new versions of Adobe Photoshop Elements and Adobe Premiere Elements to target hobbyists who desire both applications in one affordable package. TheseDespite success with these new hobbyist product releases, helped to generate recordoverall revenue in this productthe hobbyist category duringdeclined year-over-year due to the year, and contributed year-over-year revenue growth to our overall creative business.

economy.

Creative Solutions Business Strategy

In fiscal 2007,2010, our Creative Solutions strategy will continue to focus on driving revenue growth and increasing market share of our products through the delivery of comprehensive software platformssolutions that meet the evolving needs of our customers. To help drive this strategy, we plan towill deliver Creative


Suite version 3, which will contain improved integrationnew versions of our Creative SolutionsSuite family of products to enhance product functionality and to enableduring the year with a focus on improved integration between our products, more efficient collaboration and workflows.

In addition, theworkflow capabilities, and enhanced functionality – particularly in areas related to interactivity and rich media use related to Adobe Flash content creation, mobile and alternative device content creation, and enhancement of digital video and motion graphics by creative professionals, and opportunities to improve user workflow andhosted cloud-based services which will augment the delivery of this content to the Web and to mobile and other non-PC related devices, represent an emerging opportunity we intend to address as partcapabilities of our Creative Solution offerings.

desktop products. We will also utilize hardware improvements such as 64-bit computing support and graphics processor unit acceleration to significantly improve the performance of our products.

We believe that, while many of our customers have made or will make the switch to our Creative Suite productseditions from individual applications over time,creative products, there continuesstill remains a large opportunity to exist an opportunity of upgrading existingmigrate customers from individual application users to newer versions of these individual applications. In addition, we will market the benefits of newer versions of the Creative Suite to existing Creative Suite and Macromedia Studio users to drive Creative Suiteproducts to Creative Suite editions – particularly in emerging markets and Studio toother large geographic markets outside the United States where our Creative Suite upgrades.penetration is lower. We also believe many customers who did not migrate to newer CS4 releases during 2009 due to economic factors could upgrade to new versions of our products in 2010, due to new and enhanced features, improved productivity gains, support for the latest Microsoft and Apple operating systems that are being adopted by our customers, new hardware purchases by our customers which could cause them to update old versions of creative software, and the addition of features in some of our creative products which will provide better integration with our Omniture Web analytics and business optimization products.
To increase the addressable market for our Creative Solutions business, and to address the needs of customers creating interactive content and applications for both PC and non-PC based environments, we intend to add Adobe Flash Catalyst and Adobe Flash Builder to some of our Creative Suite configurations in 2010.  We believe interactive designers, Web developers and other creative professionals will benefit from the added features and integration of these Platform Business Unit products with the other creative products they regularly use to new users of creative applications—those who aspireprovide innovative ways to be creative professionals, or those at home or at work who wish to use the professional-level capabilities of our solutions, but are not trained creative professionals.

deliver improved Web-based content, applications and experiences for both PC screens and non-PC screens such as mobile device and TV screens.

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We intend to continue our efforts to be the recognized market leader in the professional page layout, and Web layout and illustration software markets. In page layout, we intend towill continue to add new features to our InDesign product with a focus on cross-media publishing workflows, as well as continue to enhance its integration with other products print professionals utilize in their workflows. In Web layout, we strive to continue to redefine the Web experience by offering the most feature-rich, market-leading solutions for Website design and development with our Dreamweaver and Flash offerings.

In illustration, we will continue to innovate and develop new capabilities which we believe will preserve our Illustrator product as a leading graphics creation solution.

We plan to continue to enhancework on enhancements for our Photoshop family of product offerings to meet the evolving needs of professional photographers, and creative professional customers including(including graphic designers, Web designers and video producersproducers) and imaging enthusiasts to drive upgrades and new user adoption. We also plan to release version 1.0 ofadd new capabilities to Adobe Photoshop Lightroom, which will improve integratedour digital photography workflowsworkflow tool for professional photographers.photographers and hobbyists. In addition, as we have seen during the past three fiscal years, wecontinue to believe many customers will continue to license the Photoshop product capabilities via our Creative Suite productseditions as opposed to licensing the standalone version.

individual Photoshop products.

With our set of professional digital video and motion graphic products, we strive to provide the strongest, market-leading, end-to-end digital video, motion graphic and animation authoring platform for our customers. To grow this business, we will continue to market the advanced features, the cross-platform and cross-device capabilities, and the workflow benefits of this platform to creative professionals and videographers in the film, broadcast, corporate and event videography market segments,segments.  We are also enhancing our FMS solution to deliver the highest quality video streaming capability and we are working with partners to deliver integrated video systems.systems and video delivery services. With broad adoption of Adobe Flash Player and its high-quality video playback features, we will continue to work to provide aon advancing our seamless video authoring-to-playback workflow capability for those wishing to provide a rich video experience on the Web.

Web and to mobile devices.  We will also work to integrate analytics and optimization capabilities into our video solutions, leveraging our OSMF effort and the capabilities of our Omniture offerings.

To further our initiatives in digital video and motion graphics, we intend to extend our leadership position in Web video by continuing to support and drive the improvement of industry standards, as well as innovate and deliver advanced content creation, protection, delivery and monetization capabilities in our dynamic media streaming products, the Adobe Flash Player, our OSMF effort and our Omniture solutions.  By focusing on the end-to-end video workflow needs and monetization goals of our customers, we believe we are uniquely positioned to provide the best solution for the creation and delivery of high-quality Web video content. In addition, as the number of imaging and video hobbyists desiring easy-to-use video editing solutions grows, we intend to enhance the video editing and DVD creation capabilities of our Adobe Premiere Elements product for the sharing of digital video memories. We also plan to continue to target the imaging and video hobbyist markets with an integrated offering of our Photoshop Elements and Premiere Elements products.

With our set of professional digital video and motion graphic products, we strive to provide the strongest, market-leading digital video, motion graphic and animation authoring platform for our customers. To grow this business, we will continue to market the benefits of this platform to creative professionals and videographers in the film, broadcast, corporate and event videography market segments, and we are working with partners to deliver integrated video systems. With broad adoption of Adobe Flash Player and its high-quality video playback features, we will work to provide a seamless video authoring-to-playback capability for those wishing to provide a rich video experience on the Web. In addition, as the


number of hobbyists desiring easy-to-use video editing solutions grows, we intend to enhance the video editing and DVD creation capabilities of our Adobe Premiere Elements product for the sharing of digital video memories.

With our Scene7 solutions, we intend to market their capabilities to help customers automate the production and availability of rich media experiences, including zoom, dynamic sizing, personalization and interactive dynamic product catalogs. In addition, we believe our Scene7 solutions will help Adobe build a more robust Internet infrastructure for the delivery of software as a service (“SaaS”), allowing us to further develop the brand-name customer list for our Scene7 solutions and accelerate the online availability of Adobe technologies used by millions of creative professional and hobbyist users.
Creative Solutions Products

Adobe After Effects—professional Effects Professional—software used to create sophisticated animation, motion graphics and visual effects found in television broadcast, film, DVD authoring and the Web; available in two versions: After Effects Standard provides basic 2D and 3D compositing, animation and visual effects tools; After Effects Professional addstools, as well as advanced features such as motion tracking and stabilization, advanced keying and warping tools, more than 30 additional visual effects and additional audio effects.

Adobe Audition—a professional audio editing environment designed for demanding audio and video professionals; provides advanced audio mixing, editing and effects processing capabilities.

Adobe Creative Suite Premium Edition—Design Premium—an integrated software solution that creative professionals can use as a platform to modify and enhance digital images, create graphics, produce professional-quality printed publications, create and maintain dynamic Web sites, author visually rich content for wireless Web devices, and share content reliably for print, Web and screen display. The suitemobile content publishing; combines Adobe Acrobat Professional,Pro, Adobe GoLive,Dreamweaver, Adobe Flash Professional, Adobe Illustrator, Adobe InDesign and Adobe Photoshop Extended technologies with file management and integration technology called Version Cue, and a navigationalfile management and control center called Adobe Bridge.

Bridge, a tool used to produce innovative and compelling content for a broad range of mobile phones and consumer electronics devices called Adobe Device Central, and Adobe Acrobat Connect Web conferencing software that enables users to instantly communicate and collaborate through easy-to-use, easy-to-access online personal meeting rooms.

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Adobe Creative Suite Standard Edition—Design Standard—an integrated software solution that creative professionals can use as a platform to modifyutilize for professional design and enhance digital images, create graphics,print production, page layout, image editing, illustration and produce professional-quality printed publications. The suiteAdobe PDF workflows; combines Adobe Acrobat Pro, Adobe Illustrator, Adobe InDesign and Adobe Photoshop technologies, with file management and integration technology called Version Cue, Adobe Bridge, Adobe Device Central and a navigational control center called Adobe Bridge.

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Acrobat Connect Web conferencing software.


Adobe Creative Suite Master Collection—an integrated software solution which provides all the tools creative professionals require to create content for every design discipline in one offering; provides capabilities for professional page layout, image editing, vector illustration, print production, Website design/development, rich interactive content creation, visual effects and motion graphics, video capture/editing/production, DVD titling and digital audio production; includes Adobe Acrobat Pro, Adobe After Effects Professional, Adobe Contribute, Adobe Dreamweaver, Adobe Encore, DVD—Adobe Fireworks, Adobe Flash Professional, Adobe Illustrator, Adobe InDesign, Adobe Photoshop Extended, Adobe Premiere Pro and Adobe Soundbooth technologies, Version Cue, Adobe Bridge, Adobe Device Central, Adobe Acrobat Connect and Adobe Dynamic Link which enables intermediate rendering for a smoother workflow between video production tools.
Adobe Creative Suite Production Premium—an integrated software solution that provides creative professionals a complete post-production solution consisting of video, audio and design tools that can be utilized to create and deliver content to film, video, DVD, Blu-ray Disc, the Web and mobile devices; combines Adobe After Effects Professional, Adobe Encore, Adobe Flash Professional, Adobe Illustrator, Adobe Photoshop Extended, Adobe Premiere Pro and Adobe Soundbooth technologies, Version Cue, Adobe Bridge, Adobe Device Central, Adobe Acrobat Connect Web conferencing software and Adobe Dynamic Link.
Adobe Creative Suite Web Premium—an integrated software solution that provides creative professionals a complete solution for creating interactive Websites, applications, user interfaces, presentations, mobile device content and other digital experiences; allows users to prototype Web projects, design Website assets, build Web experiences and efficiently maintain and update Web content; combines Adobe Acrobat Pro, Adobe Contribute, Adobe Dreamweaver, Adobe Fireworks, Adobe Flash Professional, Adobe Illustrator and Adobe Photoshop Extended technologies, Version Cue, Adobe Bridge, Adobe Device Central, Adobe Acrobat Connect Web conferencing software and Adobe Dynamic Link.
Adobe Creative Suite Web Standard—an integrated software solution that provides a basic toolkit for Web designers and developers to prototype, design, develop and maintain Websites, Web applications, interactive Web experiences and mobile content; combines Adobe Contribute, Adobe Dreamweaver, Adobe Fireworks and Adobe Flash Professional technologies, Version Cue, Adobe Bridge, Adobe Device Central and Adobe Acrobat Connect Web conferencing software.
Adobe Dreamweaver—a professional software development application used by designers and developers to create a broad range of Web solutions for publishing online commerce, customer service and online educational content; includes capabilities for visually designing HTML pages, coding HTML and application logic and working with application server technologies.
Adobe Encore—professional DVD authoring and creation software; provides a comprehensive set of design tools and integration with other Adobe software to create a streamlined DVD creation workflow; provides ability to output projects to recordable DVD formats including Blu-ray, ensuring a wide degree of playback compatibility.

Adobe GoLive—Fireworks—a professional graphics design tool that allows users to rapidly prototype and design Websites and Web designapplication interfaces while giving professional designers and publishing softwaredevelopers tools for creating images that can be deployed to Web browsers, Adobe Flash Player and Adobe AIR; integrates with Adobe Dreamweaver, Adobe Flash and Adobe Photoshop, and supports Adobe AIR application development.
Adobe Flash Access—a scalable, flexible content protection solution that enables the distribution and monetization of premium video content delivered online; previously known as Adobe Flash Media Rights Management Server.
Adobe Flash Media Interactive Server—a configuration of our streaming media capabilities to deliver secure, high-quality video on demand, video blogging and messaging, Web conferencing and live video capabilities that can be viewed via Adobe Flash Player and Adobe AIR; provides innovative toolsa flexible development environment for creating and delivering interactive media applications; utilized by many industries, including media and entertainment, telecommunications, advertising, government and education.
Adobe Flash Media Streaming Server—a lower-cost version of our streaming media capabilities that Web authors use to design, layout, produce and maintain content for Web sites and wireless Web devices without the need for complex multi­media programming.

Adobe Graphics Server—imaging server softwarecan be used to createdeliver live streaming and maintain digitalvideo-on-demand streaming; configured for lower volume streaming of content that is suitable for small- and medium- size streaming needs.

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Adobe Flash Professional—provides an advanced development environment for creating Internet applications which integrate animations, motion graphics, sound, text and images on frequently updated data-driven content, such asadditional video functionality; solutions built with Adobe Flash Professional are deployed via the Web sitesto browsers and printed catalogs, by automating the creation and the reuse of images; integrates with content management and e-commerce systems to automate workflows, and eliminates the tedious manual tasks of refining and reformatting images for specific purposes.

devices that run Adobe Flash Player.

Adobe Illustrator—a vector-based illustration design tool used to create compelling graphic artwork for print publications, Websites and the Web.

video production.

Adobe InCopy—an editorial tool for collaboration between writers, editors and copy-fitters; Adobe InCopy is a companion to Adobe InDesign.

Adobe InDesign—a page-layout application for publishing professionals; based on an open, object-oriented architecture itthat enables Adobe and its industry part­ners to deliver powerful publishing solutions for magazine, newspaper and other publishing applications.

Adobe InDesign Server—technology for third-party systems integrators and developers to use for building design-driven, server-based publishing solutions; brings the innovative design and typography features of InDesign software to the server platform and enables Adobe partners to provide new levels of automation and efficiency in high-end editorial workflows, collateral creation, variable data publishing and Web-based design solutions.

Adobe Photoshop—provides photo design, enhancement and editing capabilities for print, the Web and multi-media; used by graphic designers, professional photographers, Web designers, professional publishers and video professionals, as well as amateur photographers and digital imaging hobbyists.

Adobe Photoshop Album—offers easy-to-use interface to find, organize, share and edit digital photographs; designed for consumers to manage their collections of digital photographs, easily share photos via e-mail and the Web, create digital slide shows and photo albums, and get their photographs printed via on-line photo finishing services.

Adobe Photoshop Album Starter Edition—a limited-feature version of Photoshop Album available for free; lets consumers find photos fast, fix common flaws and easily share images with others.

Adobe Photoshop Elements—offers powerful yet easy-to-use photo editing functionality plus intuitive organizing, printing and sharing capabilities for amateur photographers and hobbyists who want to create professional-quality images for print and the Web.

Adobe Photoshop Extended—provides the capabilities of Adobe Photoshop, plus additional tools for editing 3D and motion-based content and performing image analysis; targeted for:  film, video and multimedia professionals;  graphic and Web designers using 3D and motion; manufacturing professionals; medical professionals; architects and engineers; and scientific researchers.
Adobe Photoshop Lightroom—a new productsoftware designed for professional photographers and photo hobbyists, it addresses their unique photography workflow needs by providing more efficient and powerful ways to import, select, develop and showcase large volumes of digital images.

Adobe Premiere Elements—a powerful yet easy-to-use video-editing software for home video editing; provides tools for hobbyists to quickly edit and enhance video footage with fun effects and transitions and create custom DVDs for sharing video with friends and family.


Adobe Premiere Express—video remix and video editing software licensed to media portals such as MTV.com, Photobucket and YouTube to provide consumers with embedded access to industry leading Adobe video editing and enhancement technologies.
Adobe Premiere Pro—professional digital video-editing software used to create broadcast-quality content for video, film, DVD, multimedia and streaming over the Web.

Adobe Production Studio Premium Edition—a suite of integrated application products that provides a complete digital video post-production environment and allows users to produce professional-quality video, film and DVDs; includes Adobe After Effects Professional Edition, Adobe Audition, Adobe Encore DVD, Adobe Illustrator, Adobe Photoshop and Adobe Premiere Pro, along with Creative Suite 2 features for timesaving workflow features such as Adobe Dynamic Link and Adobe Bridge.

Adobe Production Studio Standard Edition—a suite of integrated application products that provides a digital video post-production environment and allows users to produce professional-quality video; includes Adobe After Effects Standard Edition, Adobe Photoshop and Adobe Premiere Pro, along with Creative Suite 2 features for timesaving workflow features such as Adobe Dynamic Link and Adobe Bridge.

Adobe Soundbooth—a newan application that provides video editors, designers and others who do not specialize in audio with the tools that they need to accomplish audio-based tasks in their everyday work, such as removing noise from recordings, polishing voiceovers and customizing music to fit a video or animation production.

Adobe Stock Photos—Story—new online collaborative script development tool currently in beta release and made available as a service that allows usershosted service; can be used to begin the planning and preproduction phase of video workflows and will be integrated with other Adobe products, including future versions of the Adobe Creative Suite productsproduct family; developed to purchase stock photography from leading stock photography agencies directly from within their applications.

create more efficient video production workflows while reducing production costs, Adobe Story automatically turns content in scripts into relevant metadata that can be used throughout the Adobe digital video workflow.

Adobe Visual Communicator—software used to create newscast-style video presentations that can be delivered via email, CD/,e-mail, CD, DVD, PowerPoint or live over the Internet.

DV Rack HD—direct-to-disk recording

Business Catalyst—hosted software service which provides an all-in-one capability to develop, maintain, and monitoring software which helps generate superior quality video from an SD or HD camera connectedrun a Website to a laptop computer.

implement marketing campaigns and sell products online.

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Flash Video Streaming Service—either through direct sales, or together with leading content delivery network (CDN) providers,via CDN partners, Adobe offers hosted services for streaming on-demand video for the Adobe Flash Player runtime across high-performance networks; built with Adobe Flash Media Server, Flash Video Streaming Service provides an effective way to deliver Flash VideoFLV to large audiences without the overhead of setting up and maintaining streaming server hardware and network.

Macromedia Dreamweaver—a professional software

Open Source Media Framework (OSMF)—new framework for media player development application used by designers and developers to create a broad range of Web solutions for publishing online commerce, customer service and online educational content; includes capabilities for visually designing HTML pages, coding HTML and application logic and working with application server technologies.

Macromedia Fireworks—a professional graphics design tool for building interactive Web graphics; gives professional designers and developers tools for creating images that can be deployedused to Web browserscreate and the Adobedeliver custom online media players for content owners; enables developers using Flash Player; integrates with Adobe Flashtechnologies to quickly and Macromedia Dreamweaver.

Macromedia Flash Basic—a software development application for creating interneteasily add rich functionality such as advertising, user measurement and rich interactive applications which integrate animations, motion graphics, sound, texttracking, and social network integration into new custom video functionality; solutions built with Macromedia Flash are deployed via the Web to browsers and to devices that run the Adobe Flash Player.

Macromedia Flash Media Server—offers streaming media capabilities to deliver video on demand, video blogging and messaging, Web conferencing, and live video capabilitiesplayers that can be viewed via the Flash Player; provides a flexible development environmentbranded for creating and delivering interactive media applications; utilized by many industries, including media and entertainment, telecommunications, advertising, government, and education.

Macromedia Flash Professional—provides an advanced development environment for creating internet applications which integrate animations, motion graphics, sound, text and additional video

individual content owners.

functionality; solutions built with Macromedia Flash Professional are deployed via the Web to browsers and to devices that run Adobe Flash Player.

Macromedia Studio—an advanced suite of integrated application tools for developers and experienced designers who develop internet and mobile solutions, and require additional video capabilities when developing Flash content; includes Macromedia Dreamweaver, Macromedia Flash Professional, Macromedia Fireworks, Macromedia Contribute and Adobe Flash Player.

Ovation—software which allows users to enhance Microsoft PowerPoint slides into a richer visual experience to help deliver more impactful information, presentations and messages.

Ultra—software

Photoshop.com—an online hosted service that provides customers with the ability to view, enhance and share their photos; also provides photo backup services, the ability to obtain seasonal artwork and other inspiring ideas that can be utilized to enhance the photo viewing and sharing experience.
Scene7 On-Demand—provides an easy-to-use, Web-based system to upload, manage, enhance and publish dynamic rich content; used by many leading online retail Websites to transform digital videoautomate the production and HD keyingavailability of rich media experiences, including zoom, dynamic sizing, personalization and interactive dynamic product catalogs.
Business Productivity Solutions
The focus of our Business Productivity Solutions business is to provide solutions which meet the needs of enterprises and governments to improve their productivity, help automate business processes, improve collaboration and reduce time-to-market and costs. We believe there are several macro trends and specific growth drivers that are creating opportunities for our Business Productivity Solutions business:
·
Paper-to-digital—eliminating paper and moving to automated forms-based workflows continue to be key challenges in the enterprise. Paper remains prevalent throughout industries and governments, and there are goals to drive down operational costs related to paper use and workflows involving paper-based documents. During the past decade, there has been considerable progress made towards moving away from paper-based workflows.  However, we believe there still remains a significant opportunity to deliver solutions which focus on this opportunity.
·
Collaboration—the nature of business continues to become more social and collaborative, and enterprises and governments are being forced to become more transparent.  Customers and government constituents desire that their online interactions be friendly and effective. As such, we believe weaving social, real-time interaction into every customer interaction is becoming a key market opportunity, as well as a differentiation in the marketplace.
·
Transforming customer interactions—as businesses increasingly move their customer service and new customer acquisition activities online, they are facing a completely different customer interaction model.  We believe more than half of the transactions in our Adobe LiveCycle enterprise business during the past year relate to solutions oriented around transforming business processes such that organizations can more easily and cost-effectively acquire, service, and ultimately retain their customers/constituents.
Given these market trends and growth drivers, we categorize our opportunities and our results into a practical daily production tool for all types of video professionals users.

Vlog It!—software which allows users to easily create dynamic video blogs containing photos, audio, video clips and narration.

two distinct businesses within our Business Productivity Solutions: Knowledge Worker Solutions Segment

and Enterprise. Both businesses utilize industry standards and leverage our client platforms that include Adobe Reader, Adobe Flash Player and Adobe AIR.

Knowledge Worker Solutions Market Opportunity

Our Knowledge Worker

As part of our Business Productivity Solutions Segment focuses onfocus, we address the needs of the knowledge worker customer whowhom we define as someone working in document intensive industries, focused on creating and disseminating high-value information as part of their job on a regular basis. Knowledge workers include a wide variety of job functions—such as accountants, administrative assistants, executives,attorneys, architects, educators, engineers, graphic designers, insurance underwriters software developers and stock analysts—just to name a few.analysts. These jobs typically require the sharing of information either in an information dissemination (one-way) format,as a static, published document or inas a collaborative, (multi-way) format.

interactive document.

Knowledge workers must create information and content from a variety of sources and software applications, and be able to exchange this information within a reliable and ubiquitous format that ensures coworkers and constituents can reliably and securely access the information. When appropriate, this information often needs to be protected or securely managed.

Collaborationmanaged and controlled.

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Document-based collaboration among knowledge workers can occur through face-to-face meetings, via phone calls, through e-mail or through Web conferencing technologies. Knowledge workers thatwho participate in collaborations with their colleagues may be located in offices next door to each other, or in different parts of the world. These team members may change with every project and either be part of an organization’s employee base, or be an external consultant or third partythird-party partner.

We believe there to beis a significant opportunity to provide solutions which enable knowledge workers to communicate and collaborate across technical, geographical and social boundaries, both inside and outside of their companies. We believe that with such solutions, users can collaborate and efficiently manage feedback from their colleagues in both real time and on-demand, and control how, when and by whom information is accessed.

For more than ten years,

Since the early 1990s, our Acrobat family of products has provided for the reliable creation and exchange of electronic documents, regardless of platform or application source type. Users can collaborate on documents with electronic comments and tailor the security of a file in order to distribute reliable Adobe PDF documents that can be viewed, printed or interacted with utilizing the free Adobe Reader. Available in different versions which target a variety of user needs, Adobe Acrobat provides essential electronic document capabilities and services to help knowledge workers accomplish a wide range of ad hoc tasks involving digital documents ranging from simple publications to forms to mission critical engineering and architectural plans. Although Acrobat has achieved strong market adoption in document-intensive industries such as government, financial services, pharmaceutical, legal, aerospace, insurance


and technical publishing, we believe there are tens of millions of users who requireneed capabilities such as those provided by Acrobat who have not yet licensed an AcrobatAcrobat- based solution.

Our Acrobat.com service provides centralized online file sharing and storage capabilities, as well as simple PDF creation, an online word processor, spreadsheet and presentation authoring capabilities, and personal Web conferencing services with Adobe ConnectNow that is based on our Acrobat Connect Pro Web conferencing solution.  In addition to sharing and collaborating on documents reliably across disparate platforms withcomplementing our Acrobat we believe there isdesktop solutions, Acrobat.com also serves as an adjacent market opportunity wherebyintroductory service for knowledge workers will increasinglywho wish to utilize Web conferencing solutions to more effectively collaboratePDF-creation capabilities and consult with their colleagues, partners, and customers. We also believe businesses will increasingly utilize Web conferencing to improve how they train, market, sell, and support their products and solutions to their customers.

We have recently announced and released a new product called Adobe Acrobat Connect, which was formerly known as Macromedia Breeze. Acrobat Connect provides capabilities via the Adobe Flash Player for live Web conferencing, as well as delivering on-demand rich presentations. By integrating accessibility to the functionality ofReader, but have not yet licensed an Acrobat Connect from Acrobat and the free Adobe Reader, we believe we can extend adoption of Web conferencing to a broader potential market and grow the use of such technology with an easy-to-adopt business model.

desktop solution.

Knowledge Worker Solutions Business Summary

Our Knowledge Worker business achieved solid year-over-year growth and record revenue in

In fiscal 2006. The largest component of2009, our Knowledge Worker business was adversely affected by the recession and the weak general macro-economic environment. This caused revenue generated byfor our Knowledge Worker products to be approximately 23% weaker than revenue achieved in fiscal 2008. Despite this economy-driven weakness, we maintained our focus on driving adoption of our Acrobat products during the year—particularly with enterprise and government customers.
Our Acrobat 9 family of products. In fiscal 2006, successproducts, which first shipped in this business was driven by continued adoptionAugust of Adobe Acrobat version 7.0 throughout the year, as well as the launch of Adobe Acrobat version 8 which began shipping in the later part of our fourth quarter and helped to achieve record quarterly revenue in the fourth quarter for this business.

The updated version 8 product family2008, offers enhanced features that allow workgroups to manage a range of essential business activities such as assembling documents from multiple sources, controlling security and access to sensitive information, enabling the creation and filling out of intelligent electronic forms and more effectively collaborating on documents and projects. In addition, the new Acrobat 89 family of products providesallows users to unify a new user interfacewide range of content into a PDF Portfolio. Users can assemble documents, drawings, e-mail, spreadsheets and additional functionalityrich media—including audio, video, 3D and maps — in a single, compressed PDF Portfolio.  Other version 9 features and enhancements included the ability to: create interactive, on-demand presentations using Adobe Presenter software; easily share video in PDF using FLV; improved security to address specific customer workflow issueshelp protect and control access to PDF documents; permanently remove sensitive information through the use of redaction tools to black out sensitive text, illustrations, or other information; easily create and manage electronic forms; and enable anyone using the free Adobe Reader to digitally sign documents, participate in vertical markets such as architecture, engineering, construction, manufacturing, education, governmentshared document reviews and financial services.save forms locally. These enhanced capabilities helped to continue the increase of our penetration of Acrobat desktop licenses in enterprises, thereby helpingenterprises.

During the year, continued adoption of our businessCreative Suite products has also contributed to grow.

To supplement our vertical market focus withbroader adoption of Acrobat we also shippedin the creative professional market. Acrobat Pro is included in four of the six Creative Suite editions and utilization of Acrobat prepress, printing and collaboration functionality is a new product called Adobecritical component of creative customer workflows. As such, adoption of Acrobat 3Dthrough the Creative Suite family of products has resulted in a material amount of Acrobat revenue being reported in our Creative Solutions Segment during the year.

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We also continued to grow the usage of Acrobat.com during fiscal 2009. Since it was first introduced in 2008, more than five million users have created accounts to use Acrobat.com to create and share documents, communicate in real time, and simplify working with others. In the fourth quarter of fiscal 2006. Acrobat 3D extends document-based three dimensional (“3D”) design collaboration2009, we enhanced its capabilities to virtually anyone inwith easier file sharing, improved remote access including mobile device access, and the design supply chain—from engineers to manufacturers. Acrobat 3D utilizes Adobe PDF as a cross-platform standard to share complex 2Daddition of new spreadsheet and 3D content withoutpresentation authoring capabilities. We believe this compelling subscription-based service will enhance the need for using proprietary viewing technology for recipients receiving such content.

Overgrowth capabilities of the course of fiscal 2006, we also focused on the Web conferencing market opportunity with our Macromedia Breeze product line, which is licensed by customers as server-based software, or licensed as a hosted service that we provide. This business model focuses on charging meeting organizers for the ability to host meetings, and allows for participants to join meetings for free utilizing the ubiquitous Adobe Flash player. With the release of Acrobat version 8, we re-launched Macromedia Breeze as Adobe Acrobat Connect and integrated the ability to start an online Web conference from within the new Acrobat family of products as well as throughin the new version (free) of Adobe Reader.

Finally, as a supplement to our knowledge worker desktop products, we introduced a new hosted service that provides the ability to protect and secure PDF documents for a monthly fee.

coming years.

Knowledge Worker Solutions Business Strategy

In fiscal 2007,2010, we plan to continue to market the benefits of our Knowledge Workerknowledge worker solutions to small and medium-sized businesses, large enterprises and government institutions around the world. With our Acrobat family of products, we intend to continue to increase our seat penetration in these markets through the utilization of our corporate and volume licensing programs. We also intend to increase our focus on marketing and licensing Acrobat in targeted vertical markets such as education, financial services, telecommunications and government, manufacturing,as well as expanding into emerging markets.
We also plan to deliver a new version of the Acrobat family of products later in the fiscal year. This new release will provide enhanced collaboration features as well as add additional capabilities to transform how Acrobat users create and deliver more dynamic experiences within PDF files. We believe this new version will help to accelerate adoption of Acrobat in targeted markets when compared to adoption and upgrade rates we experienced during fiscal 2009, which were adversely affected by the architecture, engineering, and construction markets.

With our Acrobat Connect product,macro-economic downturn. In addition, we intend to increase awarenessupdate the capabilities of our solution in targeted horizontal markets such as traininghosted service, Acrobat.com, to increase the value of the service to existing and marketing,new users. As the use of Acrobat.com grows, we intend to target users of the free aspects of the service with paid-for functionality that will enhance their use of the overall solution.

Knowledge Worker Products
Adobe Acrobat.com—provides centralized online file sharing and storage capabilities, as well as targeted vertical marketssimple PDF creation, an online word processor called Buzzword, an online spreadsheet authoring tool called Tables, an online presentation creation tool called Presentations, and personal Web conferencing services with Adobe ConnectNow.
Adobe Acrobat Standard—creates secure, reliable and compact Adobe PDF documents from desktop authoring applications such as manufacturing, financial servicesMicrosoft Office software, graphics applications and telecommunications. We also intendmore; supports automated collaborative workflows with a rich set of commenting tools and review tracking features; includes everything needed to market the benefits of how our Acrobatcreate and Acrobat Connect solutionsdistribute rich electronic documents that can be used together to meetviewed easily within leading Web browsers or on computer desktops via the synchronous and asynchronous collaboration needs in the marketplace. With the broad distribution and reach of our free Adobe Reader, we also intendReader.
Adobe Acrobat Pro—in addition to exposeall the capabilities of Acrobat ConnectStandard, Acrobat Pro delivers specialized capabilities for creative professional and engineering users, such as pre-flighting, color separation and measuring tools; also allows users to potentially new users with a simple-to-adopt business model based on monthlyinsert FLV or annual subscription fees.

Knowledge Worker Solutions Products

H.264 video for direct playback in Adobe Acrobat 3D—and Adobe Reader, create dynamic XML forms with Adobe LiveCycle Designer ES and create PDF documents that enable Adobe Reader users to digitally sign PDF documents.

Adobe Acrobat Pro Extended—in addition to all the capabilities of Acrobat Pro, Acrobat Pro Extended enables collaboration between extended teams of designers and engineers to more securely and reliably communicate, visualize and document architectural and manufacturing designs using 3D data; allows users to insert and publish 3D designs from major CAD applications in Adobe PDF documents that can easily be shared with suppliers, partners and customers using the free Adobe Reader software.

software; Acrobat Pro Extended also:  allows users to easily add audio, video and quizzes to PowerPoint slides to create rich, interactive presentations with Adobe Presenter; enables conversion of a variety of video formats to FLV for playback in PDF; and enables the creation of  PDF maps through the importing geospatial files that can retain metadata and coordinates.  Acrobat 9 Pro Extended includes Adobe LiveCycle Designer ES, Adobe Presenter, Adobe 3D Reviewer and Adobe 3D Capture Utility for UNIX.

Adobe Document Center—a hosted service that enables businesses to secure and manage Adobe PDF documents and other common business document files such as those in Microsoft Office formats.
Create Adobe PDF Online—a Web-based subscription service that provides for the easy conversion of Microsoft Office documents and other application files to Adobe PDF for the secure and reliable sharing of rich electronic documents that can be viewed easily within leading Web browsers or on computer desktops via the free Adobe Reader.
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Enterprise Market Opportunity
Enterprises are under increasing pressure to save money, offer improved customer service, adhere to regulatory requirements and leverage existing investments in core systems. As a means to address these issues, a critical component of an organization’s business processes is the need to interact with data stored in enterprise applications. As this need expands beyond the core users of those applications, adapting systems to accommodate a diverse group of users—including those within and those external to the organization – has become an expensive and time-consuming endeavor. The outcome is a proliferation of manual workarounds that result in process inefficiencies, delays and poor quality of information.
In addition, enterprises have built Web applications which enjoy the reach of the Web but often fail to deliver a user interface with the ease of use and richness that users expect. This impedes utilization of these applications and increases training costs, and reduces the overall return on investment (“ROI”) that enterprises expect. Organizations are now looking to RIAs to boost their ROI for these Web applications by combining a rich graphical application interface with the universal reach of the Web.
We believe significant opportunities exist to help enterprises address these issues by making their business processes more efficient and their Web applications more engaging. We also believe forward-thinking enterprises are actively investing in disruptive processes to engage more meaningfully with customers, and the employees and partners who serve them.  Enterprises want to leverage these dynamic human interactions to create a more effective customer interaction model which accelerates acquisition and retention.
To address these opportunities, we offer a platform for enterprises and governments to build Customer Interaction Solutions (“CIS”) utilizing our Adobe LiveCycle Enterprise Suite (“ES”) solutions to securely extend the reach of information, processes and services to engage with customers and constituents. Our CIS solutions leverage our Adobe Reader and the Adobe Flash Platform which help businesses and government agencies inspire commitment in their customers and constituents by engaging them — anywhere, anytime and in any medium through our universal clients and application solutions.
Our Adobe Flash Platform enables reliable, secure and rich application experiences across browsers, desktops and devices. The platform provides developers with an RIA programming model to integrate and optimize workflows and a server software framework to simplify integration and leverage existing enterprise infrastructures. We also offer CIS services and other software components to accelerate the creation of compelling, relevant and actionable applications, either through RIAs or through intelligent electronic documents based on Adobe PDF.
To improve their collaboration and communication capabilities, we believe enterprises will increasingly utilize real-time communication to improve how they train, market, sell and support their products and solutions to their customers.  For this reason, we now include our Adobe Acrobat Connect (formerly Macromedia Breeze)—Pro product line as part of our CIS offerings.  Connect Pro provides capabilities via Adobe Flash Player for live Web conferencing, as well as delivering on-demand rich presentations through an on-premise server or as a hosted service. By also offering Web conferencing services as part of our LiveCycle family of products, we believe we can extend adoption of Web conferencing to a broader potential market and grow the use of such technology with an easy-to-adopt business model.
Although our solutions address the needs of a diverse set of enterprise customers, we focus primarily on two key vertical industries: financial services and government. To a lesser extent, we also target vertical markets such as media and entertainment, manufacturing, telecommunications and healthcare.  For all these customers, we offer comprehensive, scalable, secure and reliable server products and tools to develop applications tailored to their specific information and business process requirements.
Enterprise Business Summary
In fiscal 2009, revenue performance for our Enterprise products was better than Adobe’s overall business. Despite the negative macro-economic backdrop, overall LiveCycle revenue declined only slightly on a year-over-year basis.  A contributing factor to the year-over-year decline in our LiveCycle revenue was our strategic decision to focus less on consulting services as a component of overall LiveCycle revenue during the year.  With increased consulting support by systems integrators such as Cognizant, Deloitte and Tata Consulting, we downsized our consulting organization and the revenue aspirations associated with it as we entered fiscal 2009—and focused our revenue generation primarily on the licensing of our LiveCycle solutions.
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The overall performance of our enterprise business benefitted from the release of new versions of products during the year. In the fourth quarter of fiscal 2009, we delivered Adobe LiveCycle Enterprise Suite 2 (“ES2”), which enables businesses and governments to deliver personalized experiences to improve employee productivity and the overall experience of their customers and constituents.
LiveCycle ES2 is an integrated J2EE server solution that blends data capture, process management, information security, document generation and content services to help create and deliver rich and engaging applications that reduce paperwork, accelerate decision-making and help ensure regulatory compliance. It provides developers the ability to build applications that improve interactions with customers and constituents across devices and channels. Delivering significant productivity improvements to IT and line-of-business managers, LiveCycle ES2 also provides an RIA framework for building customizable RIA workspaces, mobile and desktop access to critical applications, and deployment as hosted services.
New features and enhancements to LiveCycle ES2 include expanded client and Web browser support. We believe the extended mobile and desktop access to LiveCycle ES2 will help organizations save time and costs by providing seamless end-user access to processes and services that help them complete their work faster. As part of LiveCycle ES2, we offer new capabilities such as LiveCycle Workspace ES2 Mobile—which enables access to LiveCycle ES2 from smartphones including iPhone, Blackberry and Windows mobile devices, thereby increasing user productivity by allowing access to tasks when users are away from their desks. We also offer LiveCycle Launchpad ES2, which is an Adobe AIR application that provides easy access on the desktop to initiate LiveCycle ES services such as PDF creation.
Additional LiveCycle ES2 capabilities included expanded RIA data services. Through closer integration with the Adobe Flash Platform, LiveCycle ES2 enables Adobe Flex and LiveCycle developers to create user-centric applications that are unique to particular business needs. The new LiveCycle Mosaic ES2 capability is an RIA framework for rapidly assembling and engaging activity-centric enterprise applications, and provides knowledge workers with real-time, contextual information from multiple sources in a single, personalized view. Developers can extend existing applications by exposing their business logic and user interfaces into application tiles that can be assembled to create unified views.
In addition, we provide LiveCycle Collaboration Service, which is a new hosted service that provides developers and enterprises with a scalable solution to easily build real-time, multi-user collaboration into existing or new RIAs. LiveCycle ES2 also provides the option to deploy LiveCycle capabilities in the cloud, hosted in the Amazon Web Services cloud computing environment. We believe these capabilities provide organizations with a faster deployment path and lower total cost of ownership. It also allows developers to stage multiple applications before going live in production.
To make it easy for enterprise designers and developers to automate enterprise business processes, we provide tight integration of Adobe tools and solutions such as LiveCycle ES2 Solution Accelerators—which help organizations launch project planning and prototyping, and decrease development time. New LiveCycle ES2 Solution Accelerators include human capital management, eSubmissions, correspondence management, new account enrollment and services and benefits delivery. We also provide LiveCycle Workbench ES2, which is an integrated development environment (“IDE”) that allows developers, designers, and business analysts to work together collaboratively.
These LiveCycle ES2 capabilities build upon advancements we have made with LiveCycle ES that provided common services software for functionality such as forms automation, PDF document creation, document security and process management.
In fiscal 2009, we also increased our focus on the Web conferencing market opportunity with our Acrobat Connect Pro product line, which is licensed by customers as on-premise server-based software or as a hosted service. Revenue grew by more than 20% in fiscal 2009 due to our increased focus on marketing and licensing the product, as well as overall growth in the market opportunity.
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Enterprise Strategy
In fiscal 2010, we will continue to focus on offering more complete enterprise server-based solutions targeting the needs of governments and enterprises worldwide. We wish to help these customers develop and deliver self-service and assisted-service Web-based applications that blend rich user interfaces and documents with data capture, document collaboration, process management and document generation capabilities that are easy to use. We strive to provide solutions which are customer-centric and help the constituents of our customers work together on complex processes and bridge the digital and paper-based environments, and do so by providing capabilities that are accessible by anyone. We intend to provide such solutions directly through our field organization, as well as together with global and regional systems integrators we partner with that deliver comprehensive solutions to their customers.
We will continue to focus our go-to-market efforts on vertical markets such as financial services and government. We intend to continue to build out our go-to-market model to leverage sales and consulting delivery through systems integrator partners. We will also work to enhance our solutions offerings through investments in new SaaS, or on-demand, capabilities for our enterprise server product family.
With our Connect Pro product, we intend to increase awareness of our solution in markets such as government and other regulated industries. We also intend to expand our go-to-market opportunity by working with Conferencing Service Providers, and we plan to deliver capabilities which allow developers to build collaboration-enabled business processes utilizing Connect Pro functionality and services.
Enterprise Products
Collaboration
Adobe Acrobat Connect Pro—a rich Web-based communication system which enables organizations to reduce the costs of travel and increase the effectiveness of online training, marketing events, sales meetings and collaborative Web conferencing solutions which are instantly accessible by customers, partners and employees using Adobe Flash Player; consists of a core Connect Events Server or hosted service, and modules that provide specific application functionality, including Connect Training and Connect Events; can be deployed with either some or all of these components together; Connect Training allows organizations to build a complete online training system with Microsoft PowerPoint presentations that include surveys, analysis, course administration and content management; Connect Events allows users to provide seminar and training sessions as well as to conduct business presentations through the Web.

Adobe Acrobat Elements—desktop software that enables enterprises to extend the value of their Microsoft Office investment by standardizing on Adobe PDF for reliable document distribution; provides for the easy conversion of Microsoft Office documents to Adobe PDF, preserving document integrity for reliable viewing and printing on other operating systems and hardware platforms inside and outside the enterprise’s IT firewall.

Adobe Acrobat Messenger—software that works with a scanner or digital copier and is designed for workgroups and departments to transform paper documents into electronic Adobe PDF files and deliver them via e-mail, Web or fax; allows users to preview their documents on-screen, crop or rotate pages, and add electronic annotations.

Adobe Acrobat Standard—creates secure, reliable and compact Adobe PDF files from desktop authoring applications such as Microsoft Office software, graphics applications and more. Supports automated collaborative workflows with a rich set of commenting tools and review tracking features; includes everything needed to create and distribute rich electronic documents that can be viewed easily within leading Web browsers or on computer desktops via the free Adobe Reader.

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Adobe Acrobat Professional—in addition to all the capabilities of Acrobat Standard, Acrobat Professional delivers specialized capabilities for creative professional and engineering users, such as pre-flighting, color separation and measuring tools.

Adobe Document Center—a hosted service that enables businesses to secure and mange Adobe PDF files and other common business document files such as those in Microsoft Office formats.

Create Adobe PDF Online—a Web-based subscription service that provides for the easy conversion of Microsoft Office documents and other application files to Adobe PDF for the secure and reliable sharing of rich electronic documents that can be viewed easily within leading Web browsers or on computer desktops via the free Adobe Reader.

Enterprise and Developer Solutions Segment

Enterprise and Developer Solutions Market Opportunity

Enterprises are under increasing pressure to save money, offer improved customer service, adhere to regulatory requirements and leverage existing investments in core systems. As a means to address these issues, a critical component of an organization’s business processes is the need to interact with data stored in enterprise applications. As this need expands beyond the core users of those applications, adapting systems to accommodate a diverse group of users has become an expensive and time-consuming endeavor. The outcome is a proliferation of manual workarounds that result in process inefficiencies, delays and poor quality of information.

In addition, enterprises have built Web applications which enjoy the reach of the Web but often fail to deliver a user interface with the ease of use and richness that users expect. This impedes utilization of these applications and increases training costs, reducing the overall return on investment (“ROI”) that enterprises expect. Organizations are now looking to Rich Internet Applications (“RIA”) to boost their ROI for these Web applications by combining a rich graphical application interface with the universal reach of the Web.

We believe significant opportunities exist to help enterprises address these issues by making their business processes more efficient and their Web applications more engaging. To address these opportunities, we offer Adobe Enterprise and Developer Solutions to securely extend the reach of information, processes and services to engage with customers and constituents. Our solutions leverage our technology platform, which helps businesses and government agencies inspire commitment in their customers and constituents by engaging them—anywhere, any time, and in any medium through our universal clients and application solutions.

Our technology platform utilizes our universal Adobe Reader and Adobe Flash Player software, which ensure reliable, secure and rich application experiences across browsers, desktops and devices. The technology platform provides developers with an RIA programming model to integrate and optimize workflows, and a server software framework to simplify integration and leverage existing enterprise infrastructures. We also offer services and other software components to accelerate the creation of compelling, relevant and actionable applications, either through RIAs or through intelligent electronic documents.

We believe our technology platform revolutionizes how enterprises and government agencies present, deliver, consume and interact with information and content. By providing an integrated client-server framework and toolset for developers, designers and IT organizations, we believe our Enterprise and Developer Solutions allow our customers to:

·                    Engage their constituents with compelling experiences and intelligent documents—providing them with the ability to act upon information or tasks presented to them for improved and effective collaboration;


·                    Streamline and accelerate document-based processes so more work gets done;

·                    Simplify the creation and deployment of compelling, relevant and actionable applications;

·                    Augment existing enterprise infrastructures to deliver the next level of engagement with their stakeholders;

·                    Scale these solutions needs regardless of the size of their constituent populations; and

·                    Leverage the ubiquitous Adobe Reader and Adobe Flash Player clients to reach people inside and outside of their organizations, and across all desktops and devices.

Although our Enterprise and Developer Solutions address the needs of a diverse set of enterprise customers, we focus primarily on key vertical industries such as financial services, telecommunications, media and publishing, education, manufacturing, government and life sciences. For these customers, we offer comprehensive, scalable, secure and reliable server products and tools to develop applications tailored to their specific information and business process requirements.

Our Enterprise and Developer Solutions currently offer several families of products that we market to these customers:

·                    Adobe LiveCycle—provides process management services to automate paper-based processes, leveraging the ubiquitous Adobe Reader for viewing, printing and interaction with information provided in Adobe PDF-based documents;

·                    ColdFusion MX—provides a server-scripting environment and a set of features used by organizations for building database-driven applications that are accessible through Web browsers and the Adobe Flash Player; and

·                    Adobe Flex—provides a standards-based programming framework for building and deploying enterprise-class RIAs; an Eclipse-based Integrated Development Environment (IDE); and a powerful set of server-side services for connecting with Enterprise infrastructure.

These solution sets are built on a common server architecture based on J2EE and XML, allowing for easy integration into enterprise infrastructures.

Our Adobe Flex solutions utilize the Flash file format and leverage our widely-used Flash Player technology. With Flex, developers are able to combine the rich user interface of desktop software with the reach and ease of deployment of the Web, and the processing power of desktop computers and mobile devices. This combination enables the delivery of more complex interactions than are currently supported by the Web browser model. Flex applications extend the server-based object model to client systems, improving interactivity by eliminating the constant page refreshes and context switches that users frequently experience. As a result, Flex applications enable organizations to provide users with a dramatically improved experience that supports the manipulation of data and information in ways that are impractical in a traditional browser-based environment.

Sample uses of Adobe Flex applications to build RIAs include the following:

·                    Guided selling—Adobe Flex can aid the design and development of product-oriented applications, such as configurators, selectors, comparison engines and shopping carts. Such applications can provide customers with an integrated experience from initial inquiry to final purchase. By reducing customer search time and leading customers directly to the items they want, guided selling can increase conversion rates, drive larger sales and reduce shopping cart abandonment;


·Data dashboards—Adobe Flex can provide charting, graphing and drill-down capabilities that make it easy to consolidate data from disparate systems without slow page refreshes. Businesses can benefit from faster decision cycles and improved access to information; and

·                    Process and data integration—With Flex, businesses can consolidate data and information, and align processes to meet the unique needs of internal and external users. Automated process and data integration can increase accuracy, improve efficiency and enhance customer service through faster response times.

To build and deliver enterprise-class RIAs, the following components are required:

·                    Adobe Flex Data Services—Our Flex Data Services is an application that acts as the application and services intermediary between Flex applications and the existing enterprise environment. Flex Data Services easily integrates with existing enterprise application servers, and leverages existing resources and policies for functions such as deployment, session management and security;

·                    Industry-standard IDE—Flex applications can be built and tested using Adobe Flex Builder or a third-party IDE such as Borland JBuilder, Microsoft Visual Studio and others; and

·                    Adobe Flash Player client—The ubiquitous Adobe Flash Player client runtime application provides the user interface to Flex applications.

Our Capture

Adobe LiveCycle solutions utilize Adobe PDF documents which interact with core business applications and integrate information contained in those documents into business processes. In addition to being reliable electronic replicas, Adobe PDF documents are “intelligent” - they retain the best characteristics of paper documents, such as a familiar look, but add powerful business logic capabilities such as data validation and automated routing instructions. In addition, arbitrary data (including XML-based data) can be embedded inside of intelligent PDF documents for use or access later on in a business process. These features allow for more efficient interaction with enterprise applications while still providing the ability for people to manually access and interact with the data when necessary.

Our LiveCycle products leverage our Adobe Reader software—with more than 500 million distributed copies of Adobe Reader, we have created a ubiquitous platform for accessing and interacting with intelligent electronic documents. Adobe Reader is available on the most common operating system platforms free of charge, including Microsoft Windows, Apple Macintosh, Linux, various Unix-based platforms, and portable device systems such as Palm OS, Pocket PC and the Symbian operating system for cellular phones. As a universal client, Adobe Reader enables users inside and outside the firewall to interact with intelligent PDF documents on most platforms, including desktops, laptops, PDAs, mobile phones and kiosks, regardless of the application used to author the document.

To address the specific needs of our customers, we offer “process management services.” These are services are sets of technologies that create, integrate and manage intelligent documents, and leverage the use of our Adobe Reader software for our customers’ constituents to interact with data within the document. Process management services that we currently provide include:

·                    Process Automation—products and solutions which allow organizations to automate form-based workflows deploying intelligent data capture systems and rules-based process management to automate business transactions;

·                    Information Assurance—products and solutions to control document access and usage, enable the use of digital signatures as a replacement for paper and pen-based signatures and certify document authenticity; and


·                    Document Generation—products and solution which enables users to generate high-quality documents in real time and via batch processes. This can be done from desktop applications or dynamically from core systems. These products and solutions dynamically generate personalized, customer-facing documents from enterprise applications for enhanced customer communications.

Our ColdFusion products provide fast and easy ways to build and deploy powerful Internet applications. Developers can extend or integrate ColdFusion with Java or .NET applications, connect to enterprise data and applications, create and interact via Web services, or interface with SMS on mobile devices or Instant messaging clients. ColdFusion can also be used for business reporting, rich-forms generation, printable document generation, full-text search, and graphing and charting—enabling customers to more fully engage their constituents with better Web experiences.

Enterprise and Developer Solutions Business Summary

Through the combination of Adobe and Macromedia technologies and execution against our go-to-market strategy in fiscal year 2006, we achieved strong year-over-year growth in our Enterprise and Developer business during the year. Our LiveCycle family of server products and technologies achieved record revenue in fiscal 2006, driven by strong adoption in targeted markets such as government and financial services. Our integration with other software vendors’ platforms, such as those from SAP AG, helped to further drive adoption during the year—as did adoption of Adobe PDF and Adobe server technologies in markets like insurance.

With our Adobe Flex solutions, we also achieved strong revenue growth and adoption in key targeted markets during fiscal 2006. Our Macromedia ColdFusion business also continued to perform well due to revenue generated from its existing customer base that benefits from a large and active developer community. This business was also enhanced based on the delivery of an updated ColdFusion release during fiscal 2006 which added strong integration capabilities with Adobe Flex.

Enterprise and Developer Solutions Strategy

In fiscal 2007, we intend to focus on offering more complete enterprise server-based solutions targeting the document and rich internet application needs of governments and enterprises. We wish to help these customers develop and deliver self-service and assisted-service Web-based applications that blend rich user interfaces, documents and collaboration capabilities that are easy to use. We strive to provide solutions which are customer-centric and help the constituents of our customers work together on complex processes and bridge the digital and paper-based environments, and do so by providing capabilities that are accessible by anyone, anywhere, and on any Web-connected device. We intend to provide such solutions directly through our consulting services organization, as well as together with software partners such as SAP AG, and through global systems integrators we partner with that deliver comprehensive solutions to their customers.

We will focus our go-to-market efforts on markets such as financial services, government, manufacturing, and life sciences.

Enterprise and Developer Solutions Products

Adobe Acrobat Capture—enables conversion of legacy paper-based documents into indexed, searchable, platform-independent electronic PDF files for archiving and distribution purposes.

Adobe Central Pro Output Server—a server-based software application for document generation that allows organizations to create personalized, customer-facing documents from any data source—including legacy, line-of-business, ERP, or CRM applications; merges data with an electronic document template using a powerful processing engine to dynamically generate electronic documents such as purchase orders,


invoices, statements and checks for delivery via Adobe PDF, the Web, e-mail, fax, or print; works with Adobe Output Designer, which is a companion tool used to create sophisticated document templates.

Adobe Flex SDK—The developer tools for developing RIAs with Flex. Developers use the SDK to compile and debug MXML and ActionScript files into the SWF format that executes in the Flash Player. The Flex SDK is licensed at no charge, providing a commercial grade RIA development which competes with free open source alternatives.

Adobe Flex Builder—an integrated development environment tool that can be used by designers and enterprise developers for visually architecting and developing RIAs. Tightly integrated with the Flex SDK, Flex Builder provides features for quickly prototyping, coding, debugging and deploying Flash based RIAs. Flex Builder is a commercial product based on the open source Eclipse toolkit, the emerging industry standard for enterprise development tools.

Adobe Flex Data Services—provides enterprise connectivity and data management capabilities for advanced Flex RIAs. Flex Data Services runs on J2EE application servers and provides messaging, high performance data connectivity, and advanced data management that integrate Flex based RIAs into enterprise infrastructure including Web services, remote Java objects and real-time data and messaging systems.

Adobe LiveCycle Assembler—a server-based software application for the creation, manipulation and assembly of customized Adobe PDF documents; XML-based data can be inserted into templates to create complex, content-rich documents for more targeted and effective customer communications; integrates with leading enterprise applications as well as custom systems.

Adobe LiveCycle Designer—a desktop software application which simplifies the creation and maintenance of intelligent XML form templates for deployment as Adobe PDF forms or HTML applications; provides an intuitive, graphical design tool for creating XML templates that look exactly as the author intended, and previewing them before deployment. It also simplifies adding intelligence to documents, such as calculations and validations, and binding form fields to arbitrary XML schemes for seamless integration with enterprise applications.

Adobe LiveCycle Form Manager—a Barcoded Forms ES2—server-based software application which simplifies form management and increases user satisfaction by centralizing the management of all forms, regardless of file type, into a single point of access via a Web-based portal; allows administrators to manage form publication, version control and user access, as well as establish ebXML relationships with business partners and customers inside and outside the enterprise.

Adobe LiveCycle Forms—offers a range of solutions for deploying intelligent forms that can be completed online or offline, across diverse platforms and devices; identifies a user’s environment to deliver the richest form-filling capabilities supported and integrates with enterprise applications to pre-populate form fields, save captured data, and initiate data-driven workflows.

Adobe LiveCycle Barcoded Forms—enables organizations to accurately capture user-supplied information from fill-and-print paper forms by usingthat uses proven and dynamic 2D barcodes;barcode technology online and offline to automate the extraction of data from paper forms and deliver it to core systems for processing; dramatically reduces costs, errors and time compared to manual data entry and solutions based on optical character recognition; barcodes are initially set up through creation of the form with Adobe’s Designer application; after the form is printed, signed and returned by users of the form, the barcode on the form is scanned and decoded, and form data obtained from the barcode is routed to the appropriate enterprise application through Adobe’s LiveCycle server products.

Adobe LiveCycle Document Security—Data Services ES2—high-performance, scalable and flexible framework that streamlines the development of RIAs using Adobe Flex and Adobe AIR; abstracts the complexity required to create server push–based applications and supports a rich set of features to create real-time solutions; utilizes powerful data services and simplifies data management problems such as tracking changes, synchronization, paging and conflict resolution; deployed as a standard J2EE Web application, which enables customers to leverage their existing infrastructure.
Adobe LiveCycle Forms ES2—server-based software application that organizations can use to cost-effectively and securely extend their core business processes beyond their enterprise system; enables customers to create and deploy XML-based form templates as PDF, SWF, or HTML for use with Adobe Reader or Adobe Flash Player software, or with Web browsers; provides for the capture of data from submitted forms and the transfer of the data directly into an organization’s core business systems, thereby streamlining form-driven business processes and improving data accuracy.
Adobe LiveCycle Reader Extensions ES2—server-based software application which lets enterprises easily share interactive Adobe PDF documents with external parties without requiring recipients of the documents to purchase Acrobat software that normally would be necessary to interact with the Adobe PDF documents they receive; unlocks features on an individual Adobe PDF document by  document basis so that  when such a file is opened in the free Adobe Reader, users have
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access to tools that normally would not be available in Adobe Reader, such as reviewing and commenting functions, digital signatures to electronically sign PDF documents, embedding file attachments, enabling database and Web service capabilities, and the ability to fill in form data, submit and save electronic documents locally.
Information Assurance
Adobe LiveCycle Digital Signatures ES2—server-based software application that helps organizations automate the processing of electronic documents by providing batch-based capabilities to digitally sign and certify Adobe PDF files,documents, validate digital signatures and encrypt/decrypt Adobe PDF documents; safeguards information when it leaves a company’s network and integrates with existing public key infrastructures.


Adobe LiveCycle Policy Server—a Rights Management ES2—server-based software application that helps organizations manage information access securely with dynamic, persistent document control; allows for theaccess control and monitoringauditing of Adobe PDF, Microsoft Word, Microsoft Excel, Microsoft PowerPoint, PTC Pro/ENGINEER, Dassault CATIA and CATIALattice XVL CAD document usage inside or outside the firewall, online or offline and across multiple document platforms; lets organizations know when a document has been viewed, printed or altered and restricts access so that only intended recipients can open, use and forward a document; allows for previously granted document permissions and access to be revoked; leverages Adobe Acrobat and Adobe Reader and other client plug-in software to author and view protected documents.

Document Output
Adobe LiveCycle Reader Extensions—a Output ES2—server-based solution which supports on-demand document processes including the generation of documents such as correspondence, confirmations, bids, or shipping labels; provides capabilities to merge XML data from back-end systems with Adobe LiveCycle Designer ES templates to generate documents in PDF, PDF/A, PostScript, PCL, or Zebra label formats; customers can customize electronic document packages by combining newly generated PDF documents with existing files from document repositories; customers can also convert PDF documents to print or image file formats and then route them automatically to support direct server-based printing or archiving operations.
Adobe LiveCycle PDF Generator ES2—server-based software application which lets enterprises easily createautomates the creation, assembly, distribution and share interactivearchival of PDF documents in combination with critical business processes; converts a wide range of native and standard file formats, and can combine newly created PDF documents with existing files with external parties who must interact with these documents—without requiring recipients of theor pages to assemble customized PDF packages; supports direct server-based PDF printing or can convert PDF documents to acquire Acrobata wide variety of formats, including image formats and PDF/A.
Adobe LiveCycle PDF Generator 3D ES2—server-based software that normally would be necessary to interactwhich extends Adobe LiveCycle PDF Generator ES with support for the PDF files they receive. On an individualconversion and integration of complex 2D and 3D CAD design and engineering product data into a single PDF document it unlocks features so that when such a file is opened in the free Adobe Reader, users have access to functionality that normally would not be available in Adobe Reader. Examples of document collaboration features that can be enabled inshared using the Adobe Reader software without requiring a CAD application or viewer.
Adobe LiveCycle Production Print ES2—server-based solution that performs high-volume jobs through efficient batch processes, generating documents such as statements, invoices, contracts, or welcome kits; merges XML, ASCII or other data types from back-end systems with Adobe LiveCycle Designer ES templates to generate documents in a broad range of print or electronic formats to support high volume production requirements; enables customers to print document packages by this server product includecollecting multiple jobs over time and then grouping them to minimize mailing costs.
Process Management
Adobe LiveCycle Business Activity Monitoring ES2—software that allows administrators and process participants to quickly identify bottlenecks, check progress and view other process information related to business transactions; comes in two versions:  Adobe LiveCycle Business Activity Monitoring (“BAM”) ES Standard, which allows for the usemonitoring of digital signatures to electronically sign PDF documents,all LiveCycle processes with 16 out-of-the-box dashboards and, Adobe LiveCycle BAM ES Extended, which adds the ability to ability to fill in, submit, and save electronic documents locally, and the ability to fill-in form information.

extend Adobe LiveCycle PDF Generator—BAM ES to other enterprise business systems so that users can monitor business processes inside and outside the next-generation replacement for Acrobat Distiller Server and Acrobat Elements Server that offers server-based conversion of native PostScript, text, image formats, standard office formats, and technical drawing formats into PDF files. LiveCycle PDF Generator integrates with other LiveCycle products that apply digital rights management, document assembly, and process management to converted documents in an automated fashion. The product can generate PDF files that comply with the new PDF/A specification for long term document archives.

environment.

Adobe LiveCycle Workflow Server—a Process Management ES2—server-based process management application that allows for the design, deploymentorganizations to orchestrate people, systems, content and business rules into streamlined, end-to-end processes that are accessible to process participants through engaging user interfaces, online or offline; provides out-of-box dashboards to help users gain insights into business operations in real time and management tools to fix day-to-day operational problems and make long-term process improvements.
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Content Services
Adobe LiveCycle Content Services ES2—offers a library of forms-basedservices that can be used with other LiveCycle solution components to create content-rich engagement applications whereby end users can share and collaborate on content development in content spaces as part of a company’s business processesprocesses; supports check-in/check-out capabilities, keeps a complete audit history of all document actions and provides a fully integrated set of content services ranging from an enterprise content repository to improve organizational agilitysocial collaboration tools such as enterprise forums; also includes team collaboration capabilities such as forums and productivity; uses discussions, and provides Microsoft Office plug-ins that enable users to interact with the process engine and content repository using Microsoft Word and Microsoft Excel.
Adobe LiveCycle ES Connectors for ECM—solutions which enable Adobe LiveCycle customers to connect their LiveCycle applications with other industry-leading enterprise content management systems, such as EMC Documentum, IBM FileNet and IBM Content Manager.
Other Knowledge Worker and Enterprise Related Products
Adobe Central Pro Output Server—a rules-and roles-basedserver-based software application for document generation that allows organizations to create personalized, customer-facing documents from any data source—including legacy, line-of-business, ERP or CRM applications; merges data with an electronic document template using a powerful processing engine to dynamically generate electronic documents such as purchase orders, invoices, statements and checks for delivery via Adobe PDF, the Web, e-mail, fax or print; works with Adobe Output Designer which is a companion tool used to create sophisticated document templates.
Adobe LiveCycle Designer ES2—desktop software application which simplifies the creation and maintenance of intelligent XML based forms for deployment as Adobe PDF forms, HTML applications and Flash based RIAs; provides an intuitive, graphical design tool for creating XML templates that defines business rules a process must follow, as welllook exactly as the roles of each individual involved in the process.

author intended and previewing them before deployment; it also simplifies adding intelligence to documents, such as business and routing logic, and binding form fields to arbitrary XML schemes for seamless integration with enterprise applications.

Adobe Output Designer—a design tool that allows users to create electronic document templates for use with Adobe solutions for document generation; aids in the creation of electronic documents that exactly replicate existing paper documents.

Adobe Output Pak for mySAP.com—ana SAP-certified server-based software application for document generation that enables organizations to optimize their investment in their SAP solution by creating personalized, professional-looking, customer-facing documents; provides an easy, fast and cost-effective way to create and maintain documents for the SAP environment; integrates directly with an SAP system to extract information which is merged with a document template that defines the layout and formatting of the document; output can be in a variety of formats, including Adobe PDF, print, fax, e-mail and the Web.

Adobe Web Output Pak—a server-based software application for document generation; creates documents in PDF and HTML for presentation on the Web, and in Wireless Markup Language (“WML”) for presentation to a wireless device; allows users to personalize and control the look of documents based on the data the documents contain.

Macromedia ColdFusion—provides a server-scripting environment and a set of features used by organizations for building database-driven scalable applications that are accessible through Web browsers and the Adobe Flash Player; built on an open Java technology architecture and can be deployed on third-party Java application servers that support the J2EE specification.

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Mobile and Device Solutions Segment

Mobile and Device Solutions Market Opportunity

As hundreds of millions of people around the world adopt internet-connected hand-held phones and devices as a means to communicate, collaborate and entertain, as well as consumer electronic devices such as digital cameras, game consoles, music players, and electronic educational toys, we believe a significant opportunity exists to offer solutions for these devices which provide for the creation and delivery of rich content, user interfaces, and data services which allow users to engage with information more easily and effectively.

Our strategy in addressing the Mobile and Device Solutions market is to license Adobe mobile solutions, including Adobe Flash Player, Adobe Reader LE, and Macromedia FlashCast, to device manufacturers and telecommunications carriers that embed our technology on their platforms, enabling them to provide multimedia content, documents and services to their customers. As Flash Player and Adobe Reader technology penetrates digital devices and platforms, millions of developers will be able to use our content creation products to create engaging consumer content and rich mobile business applications.

To support the delivery of content and services in these millions of devices, we offer client-server solutions which leverage the broad deployment of our Flash Player and Adobe Reader technologies. FlashCast, the first of these service delivery solutions, consists of client software built upon Macromedia Flash Lite runtime technology, as well as server technology that manages the content being delivered to the mobile phone. Just as other Adobe solutions such as Acrobat Connect are built upon our technology platform, we see market opportunities to bring similar solutions to the mobile and device ecosystems.

Mobile and Device Solutions Business Summary

In fiscal 2006, despite the loss of deferred revenue due to purchase accounting adjustments made with the integration of Macromedia at the beginning of the year, we achieved solid revenue results and strong unit adoption of our client software on mobile and consumer electronic devices. As of September 30, 2006, our Flash Lite client has been installed on more than 150 million devices worldwide – on over 150 different mobile handset models and over 250 different device models. This success has been driven by key hardware OEM relationships with companies such as Nokia, Sony/Ericsson, LG Electronics, BenQ Mobile, Motorola, and Samsung.

In addition to the key OEM relationships we have established, we achieved a milestone in the United States market with the launch of Flash Lite for Qualcomm BREW on the Verizon network. This relationship signals the start of the creation of a Flash Lite ecosystem in the United States, driven initially by the ability for Verizon subscribers to view Flash-based content on their BREW enabled handsets.

We also achieved strong unit adoption of our Flash Lite client on consumer electronics devices during the fiscal year. Key customers such as Sony have licensed our Flash Lite for distribution on devices such as the Sony PlayStation Portable and the Sony PlayStation 3.

In addition to client-based revenue, we have increased traction with our server-based solution FlashCast, which provides data-based services that major wireless carriers such as NTT DoCoMo offer their subscribers. In Japan, more than 7 million DoCoMo subscribers have signed up for an Adobe FlashCast based service in its first year of availability. We also announced a relationship with Verizon to deliver Flash based services with Verizon to their millions of subscribers in North America.


Mobile and Device Solutions Strategy

In fiscal 2007, we intend to continue our focus on client-based OEM revenue from our mobile and device hardware customers to drive revenue growth in our business. We also intend to work closely with carriers in key ecosystems to enable our authoring and content delivery solutions, and to leverage and extend our current offerings to them. Geographically, we look to expand our presence in markets such as Europe, Japan, China, and the United States. Our expansion will be driven by our own efforts, as well as those of key systems integration, distribution, and content partners that we have already signed agreements with, or those who we intend to partner with.

Mobile and Device Solutions Products

Adobe Reader LE—a version of the Adobe Reader specifically developed for mobile phones that renders PDF documents on small-sized devices.

Macromedia Flash Lite—a version of the Adobe Flash Player specifically developed for many devices ranging from smart phones to feature phones, and for other consumer electronic devices; designed to require fewer device resources and can therefore operate on many devices from feature phones to TVs and digital video recorders on many devices from smart phones and feature phones.

Macromedia Flash SDK—a software development kit specifically developed for bringing Flash based content to consumer electronic devices; designed to require fewer device resources and can therefore operate on many devices from game devices to TVs and digital video recorders.

Macromedia FlashCast—an end-to-end, client-server solution that is designed to effectively create, deliver and use rich data services which are viewed as “channels” of information on mobile handsets; consists of the FlashCast client software which is embedded on mobile devices such as mobile phones and is built based on the Flash Lite runtime engine, and FlashCast server software which manages subscriber accounts, aggregates and delivers FlashCast channel updates to subscribers, and generates billing transactions for fulfillment.

Other Business Segment

Our Other Business segment contains several of our products and services which address market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses, to new strategic opportunities such as OEM revenue generated from our technology platform – which includes the ubiquitous Adobe Reader and Adobe Flash Player clients. These opportunities, and the products we offer to address them, are reviewed below in the following categories:  Platform, OEM PostScript, and Print and Classic Publishing.

Platform Opportunities

As previously discussed, central to our long term strategy is our technology platform which enables the development of products and solutions that dramatically improves how businesses engage with their customers. While our technology platform encompasses products and technologies created across all of Adobe’s segments, the Platform Business Unit focuses on the development and delivery of our technology platform client technologies, including Adobe Reader and Adobe Flash Player software. These solutions ensure reliable, secure and rich application experiences across the broadest range of browsers, operating systems and devices.

Based on how these solutions allow consumers, enterprises and government agencies to present, deliver, consume and interact with information and content, there exists an opportunity to monetize the use of our Reader and Flash Player software. While typically provided for free, the widely used nature of


both Flash Player and Reader has created new opportunities with partners whereby we can generate revenue based on the deployment of partner technology as part of our technology platform products.

In fiscal 2007, we will continue to explore monetization opportunities for our technology platform solutions, as well as focus on the long-term strategic goal of developing a new cross-platform client (code named “Apollo”) based on the Flash, PDF and HTML client technologies that will enable the creation of Web-enabled desktop applications.

Platform Products

Adobe Reader—software for reliable reviewing and printing of Adobe PDF filesdocuments on a variety of hardware and operating system platforms; when used with certain Adobe PDF filesdocuments created with Adobe LiveCycle Reader Extensions Server, Adobe Acrobat Professional,Pro or Adobe Acrobat 3D,Pro Extended, Adobe Reader also can be used to enable collaborative workflows through the addition of collaboration features built into the Adobe PDF file; these features include review and markup tools that normally are not present in the standard Adobe Reader product.

Adobe Web Output Pak—a server-based software application for document generation; creates documents in PDF and HTML for presentation on the Web and in Wireless Markup Language for presentation to a wireless device; allows users to personalize and control the look of documents based on the data the documents contain.
Omniture Segment
Omniture Market Opportunity
Our Omniture Business segment provides Web analytics and online business optimization products and services, which we deliver through our Omniture line of products and our Omniture Online Marketing Suite. Customers use our Omniture products and services to manage and enhance online, offline and multi-channel business initiatives.
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Customers who use our Omniture solutions include marketing professionals such as marketing managers, online marketing managers, search engine marketers, media managers, media buyers, marketing research analysts and the chief marketing officer. Customers also include Web content editors, Web analysts and Web production managers. These customers often are involved in workflows which utilize other Adobe products, such as our creative professional tools and our Adobe Flash Platform client technologies.
We believe there are several key market trends creating opportunities for our Omniture business:
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Broad commercial utilization of the Internet — The Internet has fundamentally altered the way businesses and consumers purchase and consumer goods and services. It has also redefined many business processes and has created opportunities for new online businesses, as well as for existing offline businesses seeking to capitalize on online initiatives. Because of this, businesses are investing in innovative online initiatives to increase sales, improve customer service, enhance brand awareness, decrease time-to-market for their offerings, reduce fulfillment costs and increase operational efficiency.  We expect that the scope and scale of commercial Internet usage will continue to increase. The roll-out of broadband networks and mobile networks, particularly in emerging geographic markets, will contribute to the growth of Internet usage. Internet commerce should also continue to grow. Proliferation of online marketing and customer response channels—such as mobile, online video, and social networks—will continue to generate interactions that need to be measured and analyzed across channels.
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Need to measure and automate online business — In order to make informed decisions about priorities and investments in online marketing and other commercial initiatives, we believe businesses require timely and accurate measurement of customer behavior. The proliferation of Internet usage and the fact that nearly every user interaction on a Website (or other digital medium such as mobile phone applications, set-top boxes, kiosks, point of sale systems or any IP connected device) can be captured by the owner of the Website, or other digital medium, have resulted in the creation of an unprecedented amount of data about how a business’ customers interact and transact business with it. Businesses are increasingly realizing the benefit of using information gained from online and other digital customer interactions to improve functional areas, such as sales, customer service, product development, marketing, pricing, manufacturing and inventory management. The interactive and measurable nature of Internet activity also enables businesses to determine how customers arrived at their online destinations, such as Web and mobile sites, and to what extent the costs they incur to increase site traffic are generating sales.
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Opportunity to optimize online business — Measuring online behavior and automating the capture and analysis of data are important for making informed business decisions. Businesses also need to leverage data to optimize the results of their online business activities. For example, businesses have historically measured the success of their online marketing programs by simple click-through rates or conversion rates, the latter being the percentage of click-through users who make a purchase or otherwise engage in the desired customer action during the online session. However, the effectiveness of online marketing can be optimized by analyzing and acting on deeper information, such as repeat visits, transactions generated, registrations, traffic pathways (various paths of online visitor traffic flow), time spent and quality of interaction (engagement), eventual conversion (desired customer action taken in subsequent visits) or success over time (lifetime value of customer) as well as comparing the relative effectiveness of different marketing channels (attribution). Business success metrics can also vary based on the industry or vertical market – for example, media companies optimize subscriptions and online advertising revenue, whereas retailers and ecommerce companies focus on registrations and online purchases.  Online businesses utilize a large and growing number of complex and diverse communication channels to market to customers, including display advertising, paid and natural search advertising, e-mail, social media marketing, affiliate marketing, blogs, podcasts, video, RIAs and comparison shopping engines, as well as traditional offline initiatives. The emergence of multi-channel marketing initiatives, which combine traditional offline marketing initiatives such as television, print, magazine, newspapers, radio and catalog with online marketing initiatives, makes the measurement and analysis of online behavior more challenging, but presents additional opportunities to optimize results. For example, businesses want to measure and understand the impact of their advertising initiatives across all these channels, not only to determine how much credit should be given to a particular channel and to understand cross-promotional effectiveness, but more importantly to optimize search spending, make adjustments in the way channels are utilized and align the amount of resources that are allocated to each of them.
For many years, Adobe has provided creative tools and ubiquitous clients via the Adobe Flash Platform to help customers create and deliver engaging content and experiences.  Given the market trends described above, we believe the combination of our tools and clients with Omniture’s capabilities will help customers to more efficiently and effectively measure,  analyze and optimize those experiences—creating a complete feedback loop.  With this broad platform,  we believe
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there is a unique opportunity for Adobe to deliver an end-to-end workflow that will allow customers to create, deliver, monetize, and optimize the impact and business results of their content and assets.
Omniture Business Summary
We acquired Omniture on October 23, 2009.  As one of the largest businesses in the SaaS industry, our Omniture business segment processed over one trillion transactions during the period of Adobe’s fourth quarter in a hosted environment for approximately 5,000 customers around the world.
Like the rest of our business segments, Omniture revenue was adversely affected during 2009 and growth rates slowed compared to those achieved in 2008. However, in a trend that began before our acquisition of Omniture in October 2009, the Omniture business appeared to stabilize during the fourth quarter with the improvement in the general economy, as indicated by an increase in the transaction volume on our network.  In addition, our customer retention rates began stabilizing and we experienced an increase in sales of additional subscription services into our existing customer base.
Omniture’s flagship product, SiteCatalyst, anchors our analytics business, and represented 56% of the Omniture revenue reported in the fourth quarter of fiscal 2009. This compares to revenue of 62% in the comparable year-ago period, and reflects success against our effort to provide additional types of services beyond analytics which integrate into our Online Marketing Suite. These additional services represented 32% of Omniture’s revenue in the fourth quarter of fiscal 2009, and compares to 27% in the comparable year-ago period. Our Omniture professional services, including training and consulting services, comprised the remaining 12% of Omniture’s  revenue in the fourth quarter of fiscal 2009.
Omniture Strategy
In the coming year, we hope to build upon the momentum Omniture achieved over the past several years by enabling our customers to capture, store and analyze information generated by their Websites and other sources and to gain critical business insights into the performance and efficiency of marketing and sales initiatives and other business processes. We intend to help our customers utilize this information to automate the targeting and delivery of content and marketing offers on a Website, as well as the broader Internet, and test site design and navigational elements to optimize the user experience and revenue opportunities for our customers. We also intend to enhance our services by providing customers with real-time access to online business information, the ability to integrate that information with a broad set of other data sources, and generate flexible reports using real-time and historical data and the ability to measure, automate and optimize critical online processes.
With the acquisition of Omniture in fiscal 2009, we believe we can help customers create a complete feedback loop of creation, delivery, analysis, and optimization around their creative and enterprise workflows. We expect to add capabilities to many of our content creation and developer tools to enable improved trackability of content in such workflows.
We also believe we can accelerate the growth of our Omniture business by expanding the Omniture go-to-market strategy to include new geographies and vertical markets where Adobe has a strong presence.
Omniture Products
We offer the Omniture Online Marketing Suite, our suite of products and services used to manage and enhance online, offline and multi-channel business initiatives, which we host and deliver to our customers on-demand and also provide as an on-premise solution for some products. Our Online Marketing Suite consists of an open business analytics platform and an integrated set of optimization applications for visitor acquisition, conversion, online analytics and multi-channel analytics.  These components and services are accessed primarily by a Web browser, and are built on a scalable and flexible computing architecture. As such, these components and services reduce the need for our customers to make upfront investments in technology, implementation services or additional IT personnel, thereby increasing customers’ flexibility in allocating their IT capital investments.
The components of our Online Marketing Suite, are described in more detail below and are organized by four main components of our offering: Visitor Acquisition, Conversion, Online Analytics and Multi-channel Analytics.
Omniture Visitor Acquisition
Omniture SearchCenter—hosted software which simplifies search marketing by providing a common interface to manage search campaigns across multiple search engines, integrate campaign metrics with web analytics, and optimize across marketing programs; enables search marketing to occur in the context of a broader marketing plan such that users such as online marketers can improve brand engagement and online conversions.
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Omniture Conversion
Omniture Test&Target—hosted software which provides users such as marketers the capabilities to make their online content and offers more relevant to their customers, yielding the potential for greater customer conversion; provides an intuitive interface for rapidly designing and executing tests, creating audience segments and targeting content.
Omniture Survey—hosted software which helps organizations design, create and implement online surveys to measure audience sentiment.
Omniture SiteSearch—hosted software which gives users such as marketers the ability to control and optimize the search results on their sites; enables control over the search experience with presentation and navigation features designed to help guide visitors to the most relevant information; integrated with Omniture SiteCatalyst, SiteSearch dynamically promotes the most successful products, services and content to the top of search results using analytics-derived metrics such as revenue, conversion rates and page views.
Omniture Recommendations—hosted software which enables businesses to promote products and content online; utilizes flexible data and behavioral driven algorithms, allowing customers to increase conversions on their Websites by ensuring relevant choices are automatically presented to customers, either on Websites or through email campaigns.
Omniture Merchandising—hosted software which enables retailers to implement online merchandising strategies that optimize marketing effectiveness through increased conversions and average order value; helps retailers grow their online business by improving shoppers’ ability to find and select products, as well as promoting products based on business goals and metrics.
Omniture Publish—an on-demand Web content management solution that enables business users to easily create, manage and update Web content without the need of IT or Web developers; enables content owners to easily publish and maintain content on their Websites.
Omniture Online Analytics
Omniture SiteCatalyst—hosted software which provides customers and users such as marketers the ability to capture, store and analyze information generated by their Websites and other sources and to gain real-time business insights into the performance and efficiency of marketing and sales initiatives and other business processes; built on a scalable and flexible computing architecture.
Omniture Discover—hosted software which provides users such as Web analysts and online marketers with real-time visitor information and insight; enables businesses to understand a comprehensive, multi-dimensional view of their customers through accurate and timely information such that they can make informed decisions to improve the performance of their business.
Omniture Multi-Channel Analytics
Omniture Insight—on-premise software which enables organizations to quickly analyze large volumes of rapidly evolving data in real-time; provides users with visualization capabilities to assist them with making quick business decisions that can improve overall business performance; accepts data from any source, including data warehouses and business intelligence tools.
Omniture Insight for Retail—on-premise software which provides organizations with rapid customer insights using real-time analysis of large volumes of continuously changing point-of-sale, kiosk and inventory data; helps users correlate data to online interactions for a deeper understanding of customer responses across multiple channels.
Omniture Open Business Analytics Platform
Omniture DataWarehouse—contains the information captured by Omniture SiteCatalyst, our core Omniture product offering, and other Omniture applications.
Omniture Genesis—contains application programming interfaces to integrate and augment analytics data with relevant data from Internet and enterprise applications and data from a growing number of online and offline channels to enable business optimization.
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Platform Segment
Central to our long-term strategy is our Adobe Flash Platform which enables the development and delivery of applications, content and video which dramatically improve how businesses engage with their customers and constituents. The Adobe Flash Platform includes client technologies such as Adobe Flash Player, Adobe Flash Lite and Adobe AIR.  It also includes developer tools and technologies such as Adobe Flash Professional, Adobe Flash Builder (formerly Flex Builder), Adobe Flash Catalyst, Adobe Flash Platform Services and Adobe Flex.  In addition, server technologies such as Adobe FMS and Adobe LiveCycle Data Services round out our Flash Platform offerings.  Of these products and services, Flash Professional, FMS and LiveCycle Data services are managed and delivered in other Adobe business units, yet they remain core components of our Flash Platform.
Platform Market Opportunity, Business Summary and Strategy
Our Platform Business Unit focuses on the development, marketing and licensing of our Adobe Flash Platform technologies.  We have achieved penetration of Adobe Flash Player on more than 98% of Web-connected PCs – making it the most widely distributed rich client software in the world. In addition, Adobe Flash Lite, which is licensed by mobile handset and consumer electronic device manufacturers, has been distributed on more than 1.2 billion devices as of the Fall of 2009.
The broad reach and rapid adoption of the newest versions of these Adobe Flash Platform technologies allows us to rapidly innovate with our desktop and enterprise server software which utilize these technologies – enabling our customers to deliver new and more engaging experiences to their constituents that leverage the latest advancements in operating systems, hardware and rich media technologies.
Our most recent major release of Adobe Flash Player for personal computers, version 10, was delivered in the fall of 2008. Within ten months of availability, more than 93% of Web-connected PCs in mature markets had this latest version installed, the fastest adoption ever for a new version of our Flash Player.  Building upon the success of Flash Player 10, we released a beta version of Flash Player 10.1 in November of 2009.  In concert with the availability of new versions of our Flash server products, the newest Flash Player adds improved video capabilities such as HTTP streaming, content protection, peer-to-peer support, and enhanced digital video recorder capabilities such as pause, instant replay, and slow motion.
Due to the success and frequent electronic downloads of client technologies such as Flash Player, we generate revenue through OEM relationships with companies such as Google, where we include their technologies as part of the download offerings of our client technologies. In fiscal 2009, this download revenue grew by more than 40% when compared to fiscal 2008, and represented a significant part of the overall revenue we reported in our Platform segment.
As hundreds of millions of people around the world adopt Internet-connected hand-held phones and devices as a means to communicate, collaborate and entertain, as well as consumer electronic devices such as digital cameras, game consoles, music players and electronic educational toys, we believe a significant opportunity exists to offer our Adobe Flash Platform technologies for these devices to provide for the creation and delivery of rich content, user interfaces and data services which allow users to engage with information more easily and effectively.  This trend equally applies to categories such as Netbooks and Internet-connected televisions, and the explosion in adoption of such devices is creating a challenge for content owners and application developers to deliver consistent experiences across multiple devices, operating systems, Web browsers and screen sizes.
To address this opportunity, we participate in the Open Screen Project (“OSP”), which enables designer and developers to seamlessly publish content and applications across connected devices that utilize Adobe Flash and AIR as a technology foundation. Initially started in May 2008 with approximately twenty other participating companies, momentum for OSP grew significantly in fiscal 2009 as the number of member companies supporting OSP grew to approximately fifty by October of 2009.  Newest OSP members include Google, RIM and Palm, who join many other hardware manufacturers, mobile and television technology providers and media companies.
Essential to the momentum of OSP was our decision to eliminate licensing fees with our Flash client technology, as well as progress towards our goal of delivering the full Flash Player that currently runs on PCs to the smartphone platform. The removal of Flash licensing fees due to OSP resulted in an expected decline in Flash Lite mobile client revenue, with revenue in fiscal 2009 decreasing by more than fifty percent when compared to revenue achieved in fiscal 2008.
To address the opportunity of explosive growth in smartphone adoption, we made significant technological progress during the year with the conversion of Flash Player to run on non-PC devices. New Flash Player improvements include improved graphics acceleration,  audio/video decoding, battery optimization,  improved rendering speed and reduced memory
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consumption.  In addition, new features include developer support for multi-touch and gesture user interfaces, accelerometer support and screen orientation adjustments, and mobile text input mechanisms. Based on this progress, in October of 2009 we demonstrated initial versions of the new Flash Player running on smartphones systems using operating systems such as Google Android and Windows Mobile.  We expect to deliver beta versions of this software to handset manufacturers using these operating systems as well as Palm WebOS, Nokia S60 and RIM.  We further expect handset manufacturers using these platforms to begin shipping phones with Flash Player 10.1 installed on them starting in the first half of 2010.
With the delivery of Flash Player 10.1 in fiscal 2010 to OSP members, we believe nineteen of the top twenty handset manufacturers have now committed to utilizing Adobe Flash technologies for Web browsing, application creation and the delivery of rich, consistent Internet experiences on their devices. Over time, we expect this broad community to adopt Flash Player 10.1, increasing the need for Adobe’s designer and developer tools used to create content and applications, as well as broadening our Omniture and LiveCycle opportunities as Web and IT developers extend the reach of their solutions to include mobile handsets as enterprise clients.
Another major focus of our Platform business unit is to broaden the reach and capabilities of the Adobe Flash Platform through the delivery of our newest cross-platform client named Adobe AIR. Based on Flash, PDF and HTML technologies, Adobe AIR enables the creation and delivery of Web-enabled desktop applications that run outside of a Web browser.  Adobe AIR-based applications extend today’s Web browser-based applications to have the power and utility of desktop applications with capabilities such as access to the local file system, alerts and notifications, and the ability to work offline and then synchronize data when the application has online access again.  Developers of Adobe AIR applications are able to create persistent, branded desktop experiences which can be developed using standard Web technologies such as HTML, Ajax, Flash and PDF, as well as common audio and video formats.
Adoption of Adobe AIR has been substantial since first being made available in fiscal 2008. As of October 2009, there were more than 250 million AIR downloads, along with more than one million downloads of the AIR developer tools used to create these applications. Companies such as eBay, DirecTV, The NASDAQ Stock Market, FOX News, Salesforce.com, The New York Times, AOL, Atlantic Records and the BBC have already deployed commercial applications based on Adobe AIR.
As the adoption of our Flash Platform grows, our Platform team also focuses on the development and delivery of our developer solutions such as Flash Builder and Flash Catalyst to leverage the latest innovations adopted by Flash Player users. These solutions ensure reliable, secure and rich application experiences across the broadest range of browsers, operating systems and devices. In fiscal 2010, we expect to deliver new versions of Flash Builder and Flash Catalyst as standalone products, as well as part of our Creative Suite family of products to address the needs of designers and developers creating content and applications for both PC and non-PC environments.
We also anticipate that growth in sales of Internet-connected televisions from vendors like Samsung and Vizio will continue to increase. Participation by these partners and potentially others will extend our opportunity for Flash Player distribution from mobile devices to Internet-connected consumer electronic devices in the digital home. We expect this in turn will increase the need for designer and developer solutions – ranging from our Creative Suite family of products to previously mentioned developer tools and technologies which make up the Adobe Flash Platform.
Our ColdFusion product line also provides fast and easy ways to build and deploy powerful Internet applications. Developers can extend or integrate ColdFusion with Java or .NET applications, connect to enterprise data and applications, create and interact via Web services, or interface with SMS on mobile devices or instant messaging clients. ColdFusion can also be used for business reporting, rich-forms generation, printable document generation, full-text search and graphing and charting—enabling customers to more fully engage their constituents with better Web experiences.  Although our ColdFusion business was affected by the economy in fiscal 2009, we continued to innovate and provide ColdFusion developers with enhanced capabilities to support their evolving needs.
Platform Products
Adobe AIR—desktop client software which allows developers to use existing Web development skills (e.g. HTML, Ajax, Flash and Flex) to build and deploy RIAs on the desktop and on non-PC devices.
Adobe ColdFusion—provides a server-scripting environment and a set of features used by organizations for building database-driven scalable applications that are accessible through Web browsers, Adobe Flash Player and Adobe AIR; built on an open Java technology architecture and can be deployed on third-party Java application servers that support the J2EE specification.
Adobe ColdFusion Builder—new development tool for building ColdFusion applications; provides a unified, customizable and extensible development environment to code applications, manage servers and deploy projects.
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Adobe ColdFusion in the Cloud—new hosted service available in beta release; enables developers to build ColdFusion applications through the Amazon Web Services environment with access to the capabilities of ColdFusion as a hosted service.
Adobe Flash Catalyst—an interaction design tool for prototyping RIAs and enabling design and development workflows throughout the application development cycle.
Adobe Flash Lite—client software used in a wide range of non-PC devices including mobile phones and consumer electronic devices; provides a subset of Adobe Flash Player functionality for viewing and interacting with content designed for mobile handsets, televisions and other types of devices.
Adobe Flash Builder—an Eclipse-based IDE for developing RIAs with the Adobe Flex framework for either Adobe Flash Player or Adobe AIR; developers utilize Flash Builder to quickly build and deploy applications that are expressive, intuitive and rich in interactivity.
Adobe Flash Player—the most widely distributed rich client software on PCs and consumer electronic devices, theAdobe Flash Player provides a runtime environment for text, graphics, animations, sound, video, application forms and two-way communications.

Adobe Shockwave Player—Flash Platform Services—new developer services that enable advertisers and content publishers to promote, measure and monetize applications across social networks, desktops and mobile devices.
Adobe Flex—a rich media player usedfree, open source framework, compiler and debugger for deploying multimedia content fordeveloping RIAs targeting the Adobe Flash Platform; developers use Flex to compile and debug MXML and ActionScript files into the SWF format that executes in internet solutions including education, training, gamesAdobe Flash Player and commerce.

Adobe AIR.

Print and Publishing Segment
Our Print and Publishing business segment contains several of our products and services which address market opportunities ranging from the diverse publishing needs of technical and business publishing to our legacy type and OEM printing businesses.  These opportunities and the products we offer to address them, are reviewed below in the following OEM PostScript Opportunities

and Print and Publishing categories.

OEM PostScript Opportunity and Strategy
Graphics professionals and professional publishers require quality, reliability and efficiency in production printing, and we believe our printing technology provides advanced functional­ity to meet the sophisticated requirements of this marketplace. As high-end printing systems evolve and transition to fully digital, composite workflows, we believe we are uniquely positioned to be a supplier of software and technology based on the Adobe PostScript and Adobe PDF standards for use by hardware manufacturers in this industry. We generate revenuesrevenue by licensing our technology to OEMs that manufacture workflow software, printers and other output devices.

In fiscal 2009, we maintained our OEM PostScript revenue through continued innovation with PostScript technologies.  In 2010, we plan to continue to enhance PostScript as well as utilize PDF enhancements to maintain these formats as standards in publishing and printing work flows.
OEM PostScript Products

Adobe PostScript—a printing and imaging page description language that delivers high quality output, cross-platform compatibility and top performance for graphically-rich printing output from corporate desktop printers to high-end publishing printers; gives users the power to create and print visually rich documents with total precision; licensed to printing equipment and workflow software manufacturers for integration into their printing products.

Adobe PDF Print Engine—a new, next-generation printing platform that enables complete, end-to-end PDF-based workflows using common PDF technology to generate, preview and print PDF files;documents; allows PDF filesdocuments to be rendered natively throughout a workflow, providing performance benefits such aswhich include eliminating the need to flatten transparent artwork.

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Print and Classic Publishing Opportunities

Market Opportunity and Strategy

In addition to the market opportunities and our businesses discussed previously, we offer a variety of products and solutions which address many different and unique publishing market needs. Our Print and Classic Publishing Business Unit focuses on these solutions which address the diverse customer needs in markets such as:as technical document publishing and communication, business document publishing, CD-ROM publishing, e-learningeLearning solutions, on-line help systems technical document publishing and typography.


In fiscal 2009, we released version 11.5 of our Adobe Director software targeted at game developers, multimedia authors, and e-learning professionals. The updated release includes new features for creating immersive gaming and multimedia applications, support for a new audio engine, HD video and advanced 3-D features.
In fiscal 2010, we will continue to support these offerings to meet the diverse needs of each product’s user base.  In addition, we believe there to be an opportunity to enhance some of our offerings, particularly in the technical communication and eLearning markets, through a comprehensive offering of several of our products to provide a complete end-to-end solution.
Print and Classic Publishing Products

Adobe Authorware—a legacy rich media authoring tool used to develop caption based eLearning on Windows and Macintosh based platforms; use of the product ranges from creating Web-based tutorials to simulations incorporating audio and video; applications developed with Adobe Authorware can be delivered on the Web, over corporate networks or on CD-ROM.
Adobe Captivate—enables users to rapidly create interactive demonstrationsprofessional and engaging eLearning content –  including software simulationssimulation, quizzes, animation and multi-media—and deliver the content in Adobe Flash and other formats; the Flash file format; records users’ actions incontent can be created without any applicationprogramming or multi-media skills and instantly creates Flash simulations with visiblecan be published to CD/DVDs and audible mouse movements; the small file size and high resolution make Adobe Captivate simulations and demonstrations easy to publish online or burn onto a CD for useLearning Management Systems used in training, sales, marketing or user support;and  customer support applications; often used in combination with Acrobat Connect, Adobe Captivate provides a robust technology solution to bring understanding and retention to the end users of rapid training and e-learningeLearning solutions.

Adobe Contribute—an easy wayeasy-to-use tool to update add and publish Web content;content, designed for non-technical business users canwho need to make minor changes to intranet and internetInternet Websites while automatically maintaining site standards forthat conform to the structure, style, layout and code; assite standards setup by a server application, Adobe ContributeWebsite administrator; streamlines the Web content maintenance process and provides Website administrators with a Web publishing system which enables IT professionalsset of simple content management functionality to manage and administer Websites; also provides bloggers with a simple tool to create and update their blogs.
Adobe Director—a tool for creating professional multimedia content that combines images, text, audio and video into presentations, interactive experiences and prototypes; for Websites, it provides users with the ability to deliver multimedia content that supports three dimensional content and permissions as partanimations for use in various markets, including education, games and commerce; also enables the creation of fixed-media content for CD titles and DVD titles in the Web publishing process; also content providersentertainment, education and Web professionals to save time and streamline the Web-content maintenance process.

corporate training markets.

Adobe Font Folio OpenType Edition—contains more than 2,200 typefaces from the Adobe Type Library in OpenType format, offering a complete type solution for print, the Web, digital video or electronic documents.

Adobe FrameMaker—an application for authoring and publishing long, structured, content-rich docu­ments including books, documentation, technical manuals and reports; provides users a way to publish their content to multiple output formats, including print, Adobe PDF, HTML, XML and Microsoft Word.

Adobe JRun—a legacy application server solution based on the J2EE specification; integrates with our development tool offerings and is used to deploy applications for functions such as online banking and customer service.
Adobe PageMaker—software used to create high-quality documents simply and reliably with robust page layout tools, templates and stock art.

Adobe RoboHelp—an easy-to-use authoring tool used by developers and technical writers to create professional help systems and documentation for desktop and Web-based applications; utilizes support for XML,HTML, PDF import/export, content management, distributed workforces, team authoring capabilities, as well as JavaHelp.

Adobe Shockwave Player—a rich media player used for deploying multimedia content for use in Internet solutions including education, training, games and commerce.
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Adobe Technical Communication Suite—includes Adobe Acrobat Pro Extended, Adobe Captivate, Adobe FrameMaker and Adobe RoboHelp technologies; helps customers improve their workflows, especially technical communicators who want a single solution to meet their content creation and publishing needs.
Adobe Type Library—includes Adobe’s best-selling typefaces, plus Adobe Type Manager; makes it easy to create beautiful text for print, Web and video projects.

Adobe Type Classics for Learning—a low-cost, introductory font library designed for students and educators.

Adobe Type Manager—provides powerful, easy management of all PostScript Type 1, OpenType and TrueType fonts.

Adobe Type Sets—various Collectioncollection packages of Adobe’s best-selling typefaces; makes it easy to create beautiful text for print, Web and video projects.

Macromedia Authorware—a rich media authoring tool used to develop caption based e-learning on Windows and Macintosh based platforms; use of the product ranges from creating Web-based tutorials to simulations incorporating audio and video; applications developed with Macromedia Authorware can be delivered on the Web, over corporate networks or on CD-ROM.

Macromedia Director—a tool for creating professional multimedia content that combines images, text, audio and video into presentations and interactive experiences; for Websites, it provides users with the ability to deliver multimedia content that supports three dimensional images and animations for use in various markets, including education, games and commerce; also enables the creation of fixed-media content for CD titles and DVD titles in the entertainment, education and corporate training markets.


Macromedia

FreeHand MX—a professional vector graphics tool designers and illustrators use to create high quality images that can be scaled; supports developing images for print, the Web and the Adobe Flash Player.

Macromedia JRun—an application server based on the J2EE specification; integrates

See Note 20 of our Notes to Consolidated Financial Statements for further information regarding our industry segments and geographic information. See risk factor “We are subject to risks associated with global operations that may harm our development tool offerings and is usedbusiness” in Item 1A of this report for a discussion of risks related to deploy applications for functions such as online banking and customer service.

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our foreign operations.


COMPETITION

The markets for our products are characterized by intense competition, evolving industry standards and business models, rapiddisruptive software and hardware technology developments, and frequent new product introductions.introductions, short product life cycles, price cutting with resulting downward pressure on gross margins and price sensitivity on the part of consumers. Our future success will depend on our ability to enhance our existing products, introduce new products on a timely and cost-effective basis, meet changing customer needs, extend our core technology into new applications and anticipate and respond to emerging standards, business models, software delivery methods and other technological changes.

Creative Solutions

In our Creative Solutions segment, we offer the Adobe Creative Suite in two versions,multiple editions which consist of combinations of several of our technologies.  The AdobeIn addition to offering the technologies within the Creative Suite Standard Edition combines the capabilities of Adobe InDesign, Adobe Illustrator and Adobe Photoshop, as well as file management and integration technology called Version Cue, and Adobe Bridge which provides a simple interface to easily organize, browse and locate files. The Adobe Creative Suite Premium Edition adds to this the capabilities of Adobe Acrobat Professional and Adobe GoLive. Similarly,editions, we offer Macromedia Studio, which is a product that combines the capabilities of Macromedia Dreamweaver, Macromedia Flash Professional, Macromedia Fireworks, Macromedia Contribute and Macromedia FlashPaper. We also offer various bundles for customers who desire some of these applications in one affordable package.

Our Creative Solutionsthem as individual software applications. These products compete with those from many companies, including Apple, Corel, Avid, Corel, Google,Quark, Microsoft and Quark, as they increase their presence in the creative software and solutions markets,others, as well as from various open source initiatives.

With respect to Microsoft, it announced a new suite of products, calledtheir Expression Studio which will competecompetes with our Adobe Creative Suite and Macromedia Studiofamily of products andas well as individual Creative Solutions segment products. Expected to ship in the second quarter of 2007, Expression Studio includes Microsoft Expression Design (formerly Microsoft Expression Graphic Designer) which will competecompetes with our Adobe Illustrator, Adobe Photoshop, Adobe Photoshop Lightroom and MacromediaAdobe Fireworks products; Microsoft Expression Blend (formerly Microsoft Expression Interactive Designer), which will competecompetes with our MacromediaAdobe Flash product line;Professional product; Microsoft Expression Web (formerly Microsoft Expression Web Designer), which will competecompetes with our MacromediaAdobe Dreamweaver and Adobe GoLive products;product; and Microsoft Expression Media which provides digital asset management, basic image editing and video encoding/compression capabilities and will potentially competecompetes with some aspects of our creativevideo and hobbyist-focused products. Microsoft’s new operating system, Windows Vista, also includes new features in its Presentation Foundation thatTo compete with Macromedia Flash.

Adobe Flash, Microsoft markets its Silverlight product and technology which provides capabilities for the creation of media experiences and interactive applications for the Web that incorporate video, animation, interactivity and user interfaces.

We believe our Adobe Creative Suite family of products and our Macromedia Studio product competecompetes favor­ably on the basis of features and functionality, ease of use, product reliability, price and performance characteristics. The individual technologies within the Creative Suite and Studio productseditions also work well together, providing broader functionality and shortened product training time for the individual who uses multiple appli­cations to complete a project.

In addition to

We also believe our Adobe Creative Suite and Macromedia Studio products, we offer the technologies within them as individual software applications. The competitive nature for these individual Creative Solutions products iscompete favorably against those offered by our competitors, as discussed below.

Drawing and illustration products are characterized by feature-rich competition, brand awareness and price sensitivity. In addition to competition with Microsoft’s Expression Design product, our Adobe Illustrator and Macromedia FreeHand products faceproduct faces competition from companies such as ACDsee, Autodesk, Corel, Deneba, Mediascape, Xara and the open source product called Karbon14. We believe our products compete favorably due to high customer awareness of their rich features, especially the drawing and


illustration functionalities, the technical capabilities of the product and our ability to leverage core technologies from our other established products.

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The demand for Web page layout and Web content creation tools is constantly evolving and highly volatile. In addition to competition with Microsoft’s Expression Blend and Web products, we believe Adobe GoLive, Macromedia Dreamweaver and MacromediaAdobe Flash Professional face direct and indirect competition from desktop software companies such as Bare Bones Software and various proprietary and open source Web authoring tools. We also face competition from AJAXAjax and Microsoft Visual Studio products, and other integrated development environments that enable developers to create Web applications from companies such as BEA Systems (a subsidiary of Oracle), Borland and IBM. We believe our products compare favorably to these applications; however, our market share may be constrained by Microsoft’s ability to target its Web software to users in markets they dominate, includingit dominates. These target customers include users of Microsoft Office, Microsoft Windows operating system, the Microsoft Internet Explorer Web browser and Microsoft Visual Studio.

The needs of digital imaging and video editing software users are constantly evolving due to rapid technology and hardware advancements in digital cameras, digital video cameras, printers, personal computers, cellular phones and other new devices. Our software offerings, including Adobe Photoshop, Adobe Photoshop Extended, Adobe Photoshop Elements, Adobe Photoshop Lightroom, Adobe After Effects, Adobe Audition, Adobe Soundbooth, Adobe Encore, DVD, Adobe Premiere Elements and Adobe Premiere Pro, face competition from companies offering similar products. We also continue to face competition from new emerging products, including online based services and thosewhich compete directly with our Photoshop.com offering, as well as any new competitive products coming from the open source movement.

Our mid-range consumerother digital imaging and video editing offerings, including Adobe Photoshop Elements and Adobe Premiere Elements, are subject to intense competition, including customer price sensitivity, competitor brand awareness and competitor strength in OEM bundling and retail distribution. We face direct and indirect competition from a number of companies that market software which competes with ours, including ACD Systems, AI Soft (Japan), Apple, ArcSoft, Corel, i4 (Japan), Google, Kodak, Nova Development, Magix, Microsoft, Paessler GmbH (Germany), Pegasus Imaging Company, Phase One, Photodex Corporation, Sonic, Pinnacle, Sony and Ulead Systems.Yahoo. In addition, we face competition from device, hardware and camera manufacturers such as Apple, Canon, Dell, Hewlett-Packard, Nikon, Sony and others as they try to differentiate their offerings by bundling, for free, their own digital imaging software, or those of our competitors. Similarly, we face potential competition from operating system manufacturers such as Apple and Microsoft as they integrate hobbyist-level digital imaging and image management features into their operating systems. Finally, we face potential competition from open source products, including Gimp for Linux.

We believe we compete favorably against other mid-range digital imaging, digital video and consumer-focused image management software applications with our Adobe Photoshop Elements and Adobe Premiere Elements and Adobe Photoshop Album products due to strong consumer awareness of our brand in digital imaging and digital video, our relationships with significant OEMs, positive recommendations for our products by market influencers, our increased focus on the retail software channel and strong feature sets.

In professional digital imaging, software applications compete based on product features, brand awareness and price sensitivity. In addition to competition with Apple’s Aperture product and Microsoft’s Expression Design product, our Adobe Photoshop and Adobe Photoshop Lightroom products face direct and indirect competition from a number of companies including Apple and Corel. Our Adobe Photoshop product competesproducts compete favorably due to high customer awareness of the Photoshop brand in digital imaging, the positive recommendations for our Photoshop product by market influencers, the features and technical capabilities of the product and our ability to leverage core features from our other established products.

Our Adobe InDesign product, used for professional page layout, faces significant competition. The main competitor, Quark, has a competitive product, Quark XPress, which has maintained a historically strong market share in the professional page layout market. Quark also benefits from an established industry infrastructure that has been built around the use of their XPress product in print shops and


service bureaus, and through the development of third partythird-party plug-in products. Barriers to the adoption of Adobe InDesign by Quark XPress customers include this infrastructure, as well as the cost of conversion, training and software/hardware procurement required to switch to InDesign. We have seen an increase in the adoption of InDesign software and we believe we will continue to see market share gains going forward due to a product offering that contains new innovative features, improved integration with our other products, our strong brand among users, positive reviews by industry experts, adoption of InDesign by major accounts which are influencers in their industries and improved infrastructure support by the industry for our overall solution.

Applications for digital video editing, motion graphics, special effects, audio creation and DVD authoring face increasing competition as video professionals and hobbyists migrate away from analog video and audio tools towards the use of digital camcorders and digital video production on their computers and DVD systems for rich media playback. Our Adobe After Effects, Adobe Audition, Adobe Encore,  DVDAdobe Premiere Pro and Adobe Premiere ProSoundbooth software products, as well as the
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Adobe Production Studio which contains these products, face competition from companies such as Apple, Avid, Canopus, Discreet, Sonic and Sony. Our Adobe Premiere Elements software product which is targeted for use by hobbyists, faces competition from companies such as Aist, Apple, ArcSoft, Avid, Broderbund, Corel, Cyberlink, Magix, Microsoft, Muvee and Muvee.

Sony – as well as video editing capabilities found in operating systems and other video editing solutions bundled by video camcorder manufacturers with their hardware offerings.

Adobe After Effects is a leader in professional compositing and visual effects due to its strong feature set and its integration with our other products that helps create a broad video editing platform for our customers. In professional digital video editing, we are an industry leader on the Microsoft Windows platform with Adobe Premiere Pro and compete favorably due to our strong feature set, our OEM relationships and the integration with our other products to create a broad digital video publishing platform for our customers.

Knowledge Worker

Business Productivity Solutions

With our Adobe Acrobat business, we are seeing an increase incontinue to face competition from Microsoft. Microsoft has announced its new, next generationTheir Windows operating system called Windows Vista, which started shipping in late 2006. Windows Vista includes a proprietary digital rights management technology and a new document format, called XML Paper Specification (“XPS”), which competes with Adobe PDF. In addition, Microsoft recently released the next version of itsMicrosoft’s widely used Office product which offers a feature to save Microsoft Office documents as PDF files through a freely distributed plug-in.documents. This new PDF feature in Office competes with Adobe Acrobat.  Given Microsoft’s market dominance, XPS, the PDF feature in Office and any other competitive Microsoft product or technology that is bundled as part of its Office product or operating system or made freely available, could harm our overall Knowledge Worker SolutionsAdobe Acrobat market opportunity.

Our Adobe Acrobat product family also faces competition in the PDF file creation market from many clone products marketed by companies such as AdLib, Active PDF, Ansyr Technology, Apple, Global Graphics, Nuance, Software995, Sourcenext and others. In addition, other PDF creation solutions can be found at a low cost, or for free, on the Web.

For customers that use Adobe Acrobat Standard and Adobe Acrobat Professional as part of document collaboration and document process management solutions, where electronic document delivery, exchange, collaboration, security and archival needs exist, our Acrobat product family faces compe­tition from entrenched office applications such as Microsoft Office.Office and its integration with their SharePoint product. In the higher end of the electronic document market, Acrobat Professional providesPro and Acrobat Pro Extended provide features which compete with other creative professional PDF tool providers, such as Enfocus, Dalim TeamPDF and Zinio. In addition, we are targeting the architecture, engineering and construction electronic document collaboration market with our Acrobat Professional product market. The capabilities of our product in this market compete with some aspects of Autodesk’s solution.

Pro Extended product.

To address the threats from Microsoft and others, we are working to ensure our Adobe Acrobat applications stay at the forefront of innovation in emerging opportunities such as PDF document generation, document collaboration and document process management.

Our Web conferencing solution, Adobe Acrobat Connect (formerly Macromedia Breeze)Pro, faces competition from many Web conferencing vendors, including Cisco WebEx, and Microsoft Office Live Meeting.Meeting, IBM Lotus Sametime and Citrix GoToMeeting. Cisco WebEx is a market share leader and Microsoft has steadily increased its marketing of Microsoft Office Live Meeting. To address the threats from Microsoftthese and othersother smaller competitors in the Web conferencing space, we focus on providing a differentiated and enhanced user experience through our ubiquitous Adobe Flash Player.

Mobile and Device Solutions

The markets we address with our Mobile and Device solutions are influenced by evolving industry standards, rapid software and hardware technology developments, and frequent new product and technology introductions by companies or open-source initiatives targeting similar opportunities. Technologies and products which could compete with Macromedia Flash Lite include Java, Brew, SVG, WAP and Microsoft Windows Mobile, as well as solutions from the open source movement and vendors supplying clone versions of these products and technologies.

We believe our Macromedia Flash Lite solution competes favorably against these technologies and solutions due to the ubiquitous distribution of Adobe Flash Player technology on a broad set of platforms, including PCs, cellular phones, and consumer electronic devices.  We also believe our robust programming model and developer tools used to create Flash content, and the large Flash developer community and ecosystem which utilize our tools, are key assets in our ability to effectively compete in this market.  Further, the rich expressiveness of Flash, which provides the capability to deliver audio, video, motion graphics, vector graphics and visual effects, and results in rich user experiences and interfaces on mobile devices, is a key differentiation when compared to the capabilities of alternate solutions.

Enterprise and Developer Solutions

The markets we address with our Macromedia ColdFusion, Adobe LiveCycle and Adobe Flex productsEnterprise Suite are influenced by evolving industry standards, rapid software and hardware technology developments, and new product introductions from competitors such as Microsoft and IBM.

Microsoft has already brought to market new products and technologies to address many of the emerging market needs we focus on with our Adobe LiveCycle family of products. In the Professional versionMicrosoft continues to offer its eForms solution called InfoPath in certain versions of Microsoft Office 2003, it introduced a new information gathering program calledand has added Office Forms Services which extends their forms to users as MS Outlook e-mail messages or to Web browsers rather than the InfoPath 2003.client.  They also introducedcontinue to offer their Windows Rights Management Services in their Windows Server 2003 product which is designed to allow corporate networks to manage and enforce restrictions built into documents.

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As discussed previously, Microsoft has recently started shipping its next generation operating system, calledmarkets Windows Vista. Windows Vista includesand Office which include a new document format called XPS which competes with Adobe PDF. Certain Windows Vistaoperating systems also contains a proprietary digital rights management technology which competes with Adobe LiveCycle Policy Server.Rights Management ES. In addition, Microsoft’s newmost recent version of Office includes an updated version of its SharePoint product which competes with certain aspects of our Adobe LiveCycle products. Microsoft has also recently delivered technology called Windows Presentation Foundation as part of the Windows Vista release in late 2006.  Windows Presentation Foundationand Silverlight which offers an alternative to building RIA applications within the Microsoft .NET framework.

In the electronic forms solution market, in addition to competition from Microsoft Infopath based solutions, we face competition from IBM through their acquisition of an eForms solution company called PureEdge and their acquisition of FileNET’s electronic form solutions.recently rebranded as Lotus Workplace Forms. Similarly, we face competition for


document process management solutions from workflow solution vendors such as MetaStorm,PegaSystems, Lombardi, Nuance and Ultimus.

We believe that our Adobe LiveCycle server product family competes favorably against these companies and formats in terms of the combined benefits of superior functionality, cross-platform visual page fidelity/reliability, multi-platform capability, file compression, printing and security of documents expressed using Adobe PDF. We also believe that Adobe PDF and its integration with XML, combined with the broad distribution of Adobe Reader on all leading hardware platforms, provide a ubiquitous universal multi-platform solution that is more compelling than our competitors’ offerings.

As

Omniture
In our Omniture segment, we broaden the scope of productscompete primarily with Web analytics and solutions offeredbusiness optimization vendors whose software is provided on demand to customers, generally through a Web browser. We also compete to a limited extent with vendors whose software is installed by customers directly on their servers. In addition, we compete at times with our Enterprisecustomers’ or potential customers’ internally developed applications.
Our current principal competitors include companies such as Coremetrics, Google, Microsoft, Nedstat, Yahoo! and Developer SolutionsWebTrends that offer on-demand services.  We also compete with software vendors, such as Infor (which owns Epiphany), Nielsen/NetRatings, a part of the Nielsen Online Unit of the Nielsen Company, Unica Corporation (which acquired Sane Solutions) and SAS Institute.  In addition, we also compete with online marketing service providers, such as Microsoft Advertising (formerly aQuantive when acquired by Microsoft), DoubleClick (owned by Google) and 24/7 Real Media (acquired by WPP).
Our Omniture Test&Target products also compete with multivariate testing providers, such as Optimost (owned by Autonomy), Memetrics (acquired by Accenture), Kefta (acquired by Acxiom Digital) and [x + 1].  Our Omniture SiteSearch products compete with intra-site search vendors, such as Autonomy, Endeca Technologies, FAST Search and Transfer ASA (acquired by Microsoft) and Google.  Our Omniture Merchandising product competes with merchandising solutions providers such as Endeca (ThanxMedia), Celebros, SLI Systems, Nextopia Software and Fredhopper.  Our Omniture InSight products compete with channel analytics providers, such as Truviso, Clickfox, Qliktech and AsterData.  Our Omniture Recommendations product competes with product recommendations providers, such as Aggregate Knowledge, Baynote, Certona, Rich Relevance and Amadesa.  Finally, our Omniture Survey product competes with survey providers such as OpinionLab, iPerceptions and Foresee Results.
Many of the companies that offer Web analytics software offer other products or services and as a result could also bundle their products or services, which may result in these companies effectively selling their products or services at or below market prices.
In addition, large software, Internet and database management companies may enter the market or enhance their Web analytics capabilities, either by developing competing services or by acquiring existing competitors or strategic partners of ours, and compete against us effectively as a result of their significant resources and preexisting relationships with our current and potential customers. For example, Google offers a Web analytics service free of charge, and acquired DoubleClick, one of our strategic partners, in 2008. Also, Microsoft offers a Web analytics service free of charge, and offers Microsoft Advertising, which is based on their 2007 acquisition of aQuantive. In addition, Yahoo! also offers a Web analytics service based on its acquisition of IndexTools.
We believe competitive factors in our markets include the proven performance, security, scalability, flexibility and reliability of services; the strategic relationships and integration with third-party applications; the intuitiveness and visual appeal of services’ user interfaces; the low total cost of ownership and demonstrable cost-effective benefits to customers; the ability of services to provide N-dimensional segmentation of information;  pricing;  the flexibility and adaptability of services
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to match changing business demands; enterprise-level customer service and training; perceived market leadership; the usability of services, including services being easy to learn and remember, efficient and visually compelling; the real-time availability of data and reporting; independence from portals and search engines; the ability to deploy the services globally and to provide multi-currency, multi-language and multi-character support and to have a local presence in international markets; and success in educating customers in how to utilize services effectively.
We believe that we face increased competition from entrenched office applications, emerging products/technologiescompete favorably with our competitors on the basis of these factors. However, if we are not able to compete successfully against our current and potentially, enterprise collaboration system providers. Additionally, current office applicationsfuture competitors, it will be difficult to acquire and content creation/management tools that use HTML, Microsoft Word, Tagged Information File Format (“TIFF”) and various XML-based formats for electronic document distribution provide alternate solutions toretain customers, and indirectly compete withwe may experience revenue declines, reduced operating margins, loss of market share and diminished value in our enterprise server products and the use of Adobe PDF.

services.

Platform
Our Adobe Flex server product provides a solution for developers and IT departments wanting to deploy enterprise class, Rich Internet Applications and leveragesFlash Platform technologies, including Adobe Flash Player technology. Beyond the competitiveand Adobe AIR, face competition from Microsoft threats previously discussed, vendors such as Tibco, JackBe, Backbase, and NexaWeb offer competitive solutions in the RIA market that we target with Flex. In addition, new open source technologies including AJAX techniques provide alternative methods for creating RIAs. Numerous open source groups,Silverlight, as well as a number of commercial software vendors are workingalternative approaches to build toolsbuilding RIAs – including Google Gears and frameworks that make AJAX competitive with Flex.

JavaFX.  Our MacromediaAdobe ColdFusion product family and our Adobe Flash Builder developer tool products face competition from major vendors including Microsoft, IBM, BEA (a subsidiary of Oracle) and Sun. In addition,Our ColdFusion competesproducts also compete with several technologies available today at no cost including the PHP and PERL programming environments that are available for the Apache Web server.

Beyond the competitive threats from Microsoft previously discussed, vendors such as Tibco, JackBe, Backbase and NexaWeb offer potentially competitive solutions in the RIA market that we target with our open source Adobe Flex solution.  We also believe RIAs will make use of both open source Ajax frameworks and the open source Flex framework to create hybrid RIAs in the browser, and we anticipate increased adoption of AIR as a development platform for Ajax developers. With our FMS solution, we face competition from Microsoft with their Windows Media Server for Windows Media and Silverlight, as well as Move Networks, Real Networks, Apple and others.
Version 5 of the Web markup language HTML (“HTML5”) is being developed by an industry consortium that includes Adobe and leading browser manufacturers such as Apple, Google and Microsoft.  HTML5 will contain new features which will compete with some of the features of Flash Player, such as the ability to play video natively within the browser.  We will work to implement support for HTML5 in our Web authoring solutions.  Yet, we believe the competing interests of the browser developers, and the potential for inconsistency in how each major browser implements HTML5 will create a continuing demand for solutions such as Flash that provide a consistent presentation capability that works across browsers, operating systems and devices.
Our mobile and device solutions are influenced by evolving industry standards, rapid software and hardware technology developments and frequent new product and technology introductions by companies or open-source initiatives targeting similar opportunities. Technologies and products which compete with our Adobe Flash Platform clients and solutions include Java, Brew, Scalable Vector Graphics, Wireless Application Protocol, Apple Mac OS utilized on the Apple iPhone, Microsoft Windows Mobile, as well as solutions from the open source movement, vendors supplying clone versions of these products and technologies and vendors which choose to exclude the use of our solutions and technologies on their devices.  With respect to the Apple iPhone, although our desire is to work closely with Apple to deliver Adobe Flash Platform technologies on their device similar to our approach with other mobile vendors, we are prohibited from making advancements towards this goal until we have Apple’s cooperation to do so.
We believe our Adobe Flash Platform solution competes favorably against these technologies and solutions due to the distribution of Adobe Flash Player technology on a broad set of platforms, including PCs, mobile phones and consumer electronic devices.  We also believe our robust programming model and developer tools used to create video output for the Flash Player, the large Flash developer community and ecosystem which utilize our tools, and the growth of companies who have joined the OSP to utilize the Flash Platform as a basis for rich content and application delivery are key assets in our ability to effectively compete in this market.  Further, the rich expressiveness of Flash which provides the capability to deliver audio, video, motion graphics, vector graphics and visual effects resulting in rich user experiences and interfaces on mobile devices, is a key differentiation when compared to the capabilities of alternate solutions.
In the past year, the mobile industry experienced many announcements and introductions of new mobile devices and platforms—and we expect innovation and new announcements such as those seen in 2009 to continue in 2010.  We view these ongoing developments from major mobile companies such as Google, Nokia, Palm, Rim and others as opportunities to deploy our technologies and solutions.  Just as we maintain a philosophy of cross-platform support in the personal computer desktop world for operating systems such as Microsoft Windows, Apple Mac OS, Unix and Linux, we expect to continue to enhance our support for a wide variety of mobile and consumer electronic platforms, and we intend to make our products and services available on viable, new entrant platforms as well.
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Print and Publishing
Our Print and Publishing product line targets many markets. In technical authoring and publishing, our Adobe FrameMaker product faces competition from large-scale electronic publishing systems, XML-based publishing companies such as PTC, (via their acquisition of Arbortext), as well as lower-end desktop publishing products such as Microsoft Word. Competition is based on the quality and features of products, the level of customization and integration with other publishing system components, the number of hard­ware platforms supported, service and price. We believe we can successfully compete based upon the quality and features of the Adobe FrameMaker product and our extensive application programming interface.

In desktop publishing, our Adobe PageMaker product faces competition from other software products, including Microsoft Publisher. Competition is based on the quality and features of products, ease-of-use, printer service support and price. We believe we have a strong product and can successfully compete with these types of applications based upon the quality and features of the Adobe PageMaker product, its strong brand among users and its widespread adoption among printer service bureaus.

In printing technologies, we believe the principal competitive factors for OEMs in selecting a page description language or a printing technology are product capabilities, market leadership, reliability, price, support and engi­neering development assistance. We believe that our competitive advantages include our technology competency, OEM customer relationships and our intellectual property portfolio. Adobe PostScript faces competition from Hewlett-Packard’s proprietary PCL page description language and from developers of other page description languages based on the Post­Script language standard, including Global Graphics and Xionics.Zoran. In addition, as previously discussed, Microsoft has recently shipped its next


generation operating system called Windows Vista. It includes a newMicrosoft’s XPS document format called XPS, which competes with Adobe PDF. Certain aspects of XPS also compete withPDF and our Adobe PostScript technologies and solutions.

In e-learning contentthe rapid eLearning authoring our Authorware product faces competition from vertically focused e-learning content authoring solutions. Competition is based on the quality and features of products, ease-of-use and price. We believe we have a strong product and can successfully compete based upon the quality and features of the Macromedia Authorware product and its strong brand among users, and its widespread adoption among e-learning content publishers.

In interactive simulations/e-learning,market, our Adobe Captivate product faces competition from general content development tools such as Microsoft PowerPoint, screen recording tools such as Techsmith’s Camtasia and more advanced e-learningeLearning and software simulation solutions such as Firefly, or OnDemand.Lectora and Articulate. Competition in this market is based on speed of development and completeness of the features of products, ease-of-use and price. We believe we have a strongour product and can successfully compete based upon the quality andstrength of its broad range of features, of the Adobe Captivate product, its strong brand among users and its widespread adoption among training developers.

In Web content management, our Adobe Contribute product faces competition from solutions that provide for the simple creation of blogs and “Wikis”,“Wikis,” as well as basic content publishing products such as Microsoft Word, Microsoft FrontPage, Microsoft Notepad, basic HTML editors like ezHTMLArea and ekTron, content management tools like Microsoft SharePoint and, large-scale Web content management systems from companies such as Interwoven, Vignette, IBM and Oracle. Competition in this market is based on the usability, quality and features of products, the level of customization and integration with other Web content management components, the integration with Web design tools, the number of hardware platforms supported, service and price. We believe we can successfully compete based upon the usability and price of the Adobe Contribute, product,its strong brand among users and integration with other Web content management components.

In multimedia content authoring, our Adobe Director product faces competition from a variety of multimedia content authoring tools. Competition is based on the quality and features of products, ease-of-use and price. We believe we have a strong product and can successfully compete based upon the quality and features of the MacromediaAdobe Director product, its strong brand among users, and its widespread adoption among content developers and publishers.

publishers and the widespread proliferation of the Shockwave Player.

In technical Web authoring and publishing, our Adobe RoboHelp product faces competition from large-scale Web publishing systems, XML-based Web publishing companies, as well as lower-end publishing products such as Microsoft Word. Competition is based on the quality and features of products, the level of customization and integration with other publishing system components, the number of hardware platforms supported, service and price. We believe we can successfully compete based upon the quality and features of the Adobe RoboHelp product.

Our Macromedia JRun product competes with large Java application server vendors as well as products available at no cost including the Tomcat Java Servlet Engine provided by the Apache Foundation.

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OPERATIONS

Marketing and Sales

We market and distribute our products through sales channels, which include distributors, retailers, software developers, systems integrators, ISVs and VARs, as well as through OEM and hardware bundle customers. We also market and license our products directly using our sales force and through our own Web siteWebsite at www.adobe.com.

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We support our worldwide distribution network and end user customers with international offices around the world, including locations in Australia, Austria, Belgium, Brazil, Canada, China, Czech Republic, Denmark, England,Dubai, Finland, France, Germany, India, Ireland, Italy, Japan, Korea, Mexico, Moldova, the Netherlands, Norway, Poland, Portugal, Romania, Russia,  Scotland, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey and Taiwan.

the United Kingdom.

We also license software with maintenance and support, which includes rights to upgrades, when and if available, support, updates and enhancements.

For information regarding

The table below lists our market and business segment revenue, geographic areas and significant customers, please refer to Note 17as a percentage of net revenue for fiscal 2009, 2008 and 2007. As listed, our Notes to Consolidated Financial Statements.

significant customers are distributors who sell products across our various segments.

  2009  2008  2007 
Ingram Micro  15%  18%  21%
Tech Data  8%  9%  10%

We have multiple non-exclusive, independently negotiated distribution agreements with Ingram Micro and Tech Data and their subsidiaries covering our arrangements in specified countries and regions. Each of these contracts has an independent duration, is independent of any other agreement (such as a master distribution agreement) and any termination of one agreement does not affect the status of any of the other agreements.

Receivables from our significant distributors, as a percentage of gross trade receivables for fiscal 2009 and 2008 were as follows:
  2009  2008 
Ingram Micro  16%  18%
Tech Data
  6%  8%
Order Fulfillment

for Physical Distribution

The procurement of the various components of packaged products, including CDs and printed materials, and the assembly of packages for retail and other applications products is controlled by our Global Supply Chain Management operations.Operations organization. We outsource our orderproduction, inventory and fulfillment activities to third parties in the United States, Europe, Asia and Asia.

Japan.

To date, we have not experienced significant difficulties in obtaining raw materials for the manufacture of our products or in the replication of CDs, printing and assembly of components, although an interruption in production by a supplier could result in a delay in shipmentcomponents.
The backlog of orders from customers is comprised of unfulfilled orders, excluding those associated with new product releases, those pending credit review and those not shipped due to the application of our products.global inventory policy. The backlog of orders from customers, as of January 19, 200715, 2010 and January 20, 2006, was16, 2009, were approximately $15.1$5.4 million and $30.9$6.4 million, respectively.

Services and Support

We provide professional services, technical support and customer service to a wide variety of customers including consumers, creative professionals and business users. Our service and support revenue consists primarily of consulting fees, software maintenance and support fees and training fees.

Services

We have a global Adobe ConsultingProfessional Services team dedicated to developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our solution partners. The Adobe ConsultingProfessional Services team uses a comprehensive, customer-focused methodology to develop high quality solutions, which in turn deliver a competitive advantage to our enterprise customers. A portfolio of technical training courses is also available for desktop and server-based products to meet the needs of our enterprise customers and solution partners.

Support

A significant portion of our support revenue is composed of our extended enterprise maintenance and support offerings, which entitles customers to the right to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year. Regional Support


Centers are charged with providing timely, high quality technical expertise on Enterprise and Knowledge Worker Solutions products and solutions to meet the growing needs of our customers.

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Our support revenue also includes support for our desktop products. We offer a range of support programs, from fee-based incidents to annual support contracts. Additionally, we provide extensive self-help and online technical support capabilities via the Web which allows customers quick and easy access to possible solutions. We provide product support through a combination of outsourced vendors and internal support centers.

We also offer Developer Support to partners and developer organizations. The Adobe Solution Network DeveloperPartner Connection Program focuses on providing developers with high-quality tools, software development kits, information and services.

As a registered owner of the current version of an Adobe desktop product, customers are eligible to receive complimentary person-to-personGetting Started support on certain matters. Support for some products and in some countries may vary.

Training

We inform customers about the use of our products through on-line informational services on our Web siteWebsite (www.adobe.com) and through a growing series of how to books published by Adobe Press pursuant to a joint publishing agreement with Peachpit Press. In addition, we develop tests to certify independent trainers who teach Adobe software classes. We sponsor workshops, work with professional associations and user groups, and conduct regular beta testing programs.

Investments

We own a limited partnership interestsinterest in three venture capital limited partnerships, Adobe Ventures L.P., Adobe Ventures III, L.P. and Adobe Ventures IV L.P. (collectively “Adobe(“Adobe Ventures”), that havehas invested in early stage companies with innovative technologies. We also make direct investments in privately heldprivately-held companies. We enter into these investments with the intent of securing financial returns as well as for strategic purposes as they often increase our knowledge of emerging markets and technologies, as well as expand our opportunities to provide Adobe products and services. The partnerships areAdobe Ventures is managed by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.

We intend to continue direct investments in new technologies and plan to invest approximately $100 million in venture capital over

PRODUCT DEVELOPMENT
As the next three to five years in companies leveraging our platform technologies.

PRODUCT DEVELOPMENT

Since the personal computer and enterprise software industries areindustry is characterized by rapid technological change, a continuous high level of investment is required for the enhancement of existing products and services and the development of new products.products and services. We primarily develop our software internally. We occasionallyinternally as well as acquire products or technology developed by others by purchasing the stock or assets of the business entity that held ownership rights to the technology. In other instances, we have licensed or purchased the intellectual property ownership rights of programs developed by others with license or technology transfer agreements that may obligate us to pay a flat license fee or royalties, typically based on a dollar amount per unit shipped or a percentage of the revenuesrevenue generated by those programs.

During fiscal years ended December 1, 2006, December 2, 2005,November 27, 2009, November 28, 2008 and December 3, 2004,November 30, 2007, our research and development expenses including costs related to contract development, were $539.7$565.1 million, $365.3$662.1 million and $311.3$613.2 million, respectively.


During fiscal 2006, we acquired Macromedia, Inc., a provider of software technologies that enable the development of a wide range of internet and mobile application solutions. For further information regarding this acquisition, see Note 2 of our Notes to Consolidated Financial Statements.

During fiscal 2005, we acquired OKYZ S.A., a privately held company, which provided three dimensional technology and expertise to our Intelligent Document platform.

During fiscal 2004, we acquired Q-Link Technologies, Inc, a privately-held company, which provided Java-based workflow technology that was integrated with our enterprise server products to enable customers to integrate document process management with core applications.

PRODUCT PROTECTION

We regard our software as proprietary and protect it under the laws of copyrights, patents, trademarks and trade secrets. We protect the source code of our software programs as trade secrets and make source code available to third parties only under limited circumstances and specific security and confidentiality constraints.

Our products are generally licensed to end users on a “right to use” basis pursuant to a license that restricts the use of the products to a designated number of devices. We also rely on copyright laws and on “shrink wrap” and electronic licenses that are not physically signed by the end user. Copyright protection may be unavailable under the laws of certain countries and the enforceability of “shrink wrap” and electronic licenses has not been conclusively determined in all jurisdictions. We have obtainedalso offer many patents and have registered numerous copyrights, trademarks, domain names and logos in the United States and foreign countries.

products under a SaaS or on-demand model, where software is provided on demand to customers, generally through a Web browser.  The use of these products is generally governed by terms of use associated with these products.

Policing unauthorized use of computer software is difficult and software piracy is a persistent problem for the software industry. This problem is particularly acute in international markets. We conduct vigorous anti piracyanti-piracy programs directly and through certain external software associations. Although our products generally do not contain copy protection or network copy detection features,In addition, we have recently included activation technology in certain products to guard against illegal use and will continue to do so in certain future products.

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EMPLOYEES  TABLE OF CONTENTS


EMPLOYEES
As of January 19, 2007,November 27, 2009, we employed 6,0828,660 people. We have not experienced work stoppages and believe our employee relations are good. Competition in recruiting personnel in the software industry, especially highly skilled engineers, is intense. We believe our future success will depend in part on our continued ability to recruit and retain highly skilled technical, management and sales and marketing personnel.

AVAILABLE INFORMATION

Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on our Investor Relations Web siteWebsite at www.adobe.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information posted on our Web siteWebsite is not incorporated into this Annual Report on Form 10-K/A.

report.

EXECUTIVE OFFICERS

Adobe’s executive officers as of January 19, 200715, 2010 are as follows:

Name

Age

Age

Positions

Bruce R. Chizen

Shantanu Narayen

51

46

President and Chief Executive Officer and acting

Mark Garrett
52Executive Vice President, Chief Financial Officer

Karen O. Cottle

57

60

Senior Vice President, General Counsel and Corporate Secretary

Shantanu Narayen

Joshua G. James

43

36

Senior Vice President, and Chief Operating Officer

Omniture Business Unit

Johnny Loiacono
48Senior Vice President, Creative Solutions Business Unit
Kevin Lynch
43Senior Vice President, Chief Technology Officer
Rob Tarkoff
41Senior Vice President, Business Productivity Business Unit
Matthew Thompson

48

51

Senior Vice President, Worldwide Field Operations

Richard T. Rowley

51

53

Vice President, Principal Accounting Officer

Mr. Chizen joined Adobe upon the closing of the acquisition of Aldus in August 1994Narayen currently serves as ViceAdobe’s President and General Manager, Consumer Products Division. In December 1997, he was promoted to Senior Vice President and General Manager, Graphic Products Division and in August 1998, Mr. Chizen was promoted to Executive Vice President, Products and Marketing. In April 2000, Mr. Chizen was promoted to President of Adobe and in December 2000, he also became Adobe’s Chief Executive Officer and joined the Adobe Board of Directors in December 2000. In January 2005, Mr. Chizen relinquished the title of President, but remains as Adobe’s Chief Executive Officer and a member of Adobe’s Board of Directors. Mr. Chizen was also appointed as Adobe’s acting Chief Financial Officer in November 2006. Mr. Chizen is a member of the Board of Directors of Synopsys, Inc.  

Ms. Cottle joined Adobe in February 2002 as Senior Vice President, General Counsel and Secretary. Prior to joining Adobe, Ms. Cottle served as General Counsel for Vitria Technology, Inc., a service-oriented business application software company from February 2000 to February 2002. From 1996 to 1999, Ms. Cottle served as Vice President, General Counsel and Secretary of Raychem Corporation.

Officer. Mr. Narayen joined Adobe in January 1998 as Vice President and General Manager of Adobe’s engineering technology group. In January 1999, he was promoted to Senior Vice President, Worldwide Products and in March 2001 he was promoted to Executive Vice President, Worldwide Product Marketing and Development. In January 2005, Mr. Narayen was promoted to President and Chief Operating Officer and in December 2007, he was appointed Chief Executive Officer of Adobe.Adobe and joined the Adobe Board of Directors. Prior to joining Adobe, Mr. Narayen co-founded Pictra Inc., a digital photo sharing software company, in 1996. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. and held various senior manager positions at Apple Inc. before founding Pictra.

Mr. Narayen is also a director of Dell Inc.

Mr. Garrett joined Adobe in February 2007 as Executive Vice President and Chief Financial Officer. Mr. Garrett served as Senior Vice President and Chief Financial Officer of the Software Group of EMC Corporation, a products, services and solutions provider for information management and storage, from June 2004 to January 2007, his most recent position since EMC’s acquisition of Documentum, Inc., an enterprise content management company, in December 2003. Mr. Garrett first joined Documentum as Executive Vice President and Chief Financial Officer in 1997, holding that position through October 1999 and then re-joining Documentum as Executive Vice President and Chief Financial Officer in 2002. Mr. Garrett is also a director of Informatica Corporation.
Ms. Cottle joined Adobe in February 2002 as Senior Vice President, General Counsel and Secretary. Prior to joining Adobe, Ms. Cottle served as General Counsel for Vitria Technology, Inc., a service-oriented business application software company from February 2000 to February 2002.  From 1996 to 1999, Ms. Cottle served as Vice President, General Counsel and Secretary of Raychem Corporation.
Mr. James joined Adobe upon the closing of the acquisition of Omniture in October 2009 as Senior Vice President of the Omniture Business Unit. Prior to joining Adobe, Mr. James was one of the founders of Omniture and served as a director
33
of Omniture from 1998 to October 2009 and as its Chief Executive Officer or President from 1996 to October 2009. From 1996 to 1998, Mr. James co-founded and co-managed several entities that were Omniture predecessors. Mr. James also served on the Brigham Young University eBusiness Advisory Board and is a Platinum Founder of the BYU Center for Entrepreneurship. He has lectured for numerous university classes and served on several other industry, advisory and private company boards.
Mr. Loiacono joined Adobe in April 2006 as Senior Vice President and General Manager of the Creative Solutions Business Unit.  Prior to joining Adobe, Mr. Loiacono served as Executive Vice President of software at Sun Microsystems, Inc., which he joined in 1987. During Mr. Loiacono's 19 year tenure, he also served as General Manager of Sun Microsystems’s operating platform group, as well as Chief Marketing Officer.
Mr. Lynch currently serves as Adobe’s Chief Technology Officer and Senior Vice President of the Experience & Technology Organization.  Mr. Lynch joined Adobe as Chief Software Architect and Senior Vice President for Adobe’s Platform Business Unit through our acquisition of Macromedia, Inc. in December 2005.  At Macromedia, Mr. Lynch served as Chief Software Architect and President of Product Development, where he led Macromedia in advancing Web software including managing the initial development of Macromedia Dreamweaver and guiding Flash to its current widespread adoption across the Web. Prior to Macromedia, Mr. Lynch participated in a variety of technical and management roles in startups including Frame Technology and General Magic.
Mr. Tarkoff currently serves as Adobe’s Senior Vice President of the Business Productivity Business Unit.  Mr. Tarkoff joined Adobe in April 2007 as Senior Vice President of Corporate Development.  Prior to joining Adobe, Mr. Tarkoff was Senior Vice President and General Manager of the Captiva Software Division and Senior Vice President of Business Development and Channels for the Software Group of EMC Corporation, a products, services and solutions provider for information management and storage, from December 2003 to April 2007.  Previously, Mr. Tarkoff was Executive Vice President and Chief Strategy Officer for Documentum, Inc., an enterprise content management company and Senior Vice President of Worldwide Business Development at Commerce One, a provider of business-to-business e-commerce solutions.
Mr. Thompson joined Adobe in January 2006 as Senior Vice President, Worldwide Field Operations. Prior to joining Adobe, Mr. Thompson served as Senior Vice President of Worldwide Sales at Borland Software Corporation, a software delivery optimization solutions provider, from October 2003 to December 2006. Prior to joining Borland, Mr. Thompson was Vice President of Worldwide Sales and Field Operations for Marimba, Inc., a provider of products and services for software change and configuration management, from February 2001 to January 2003. From July 2000 to January 2001, Mr. Thompson was Vice President of Worldwide Sales for Calico Commerce, Inc., a provider of eBusiness applications. Prior to joining Calico, Mr. Thompson spent six years at Cadence Design Systems, Inc., a provider of electronicselectronic design technologies. While at Cadence, from January 1998 to June 2000, Mr. Thompson served as Senior Vice President, Worldwide Sales and Field Operations and from April 1994 to January 1998 as Vice President, Worldwide Professional Services.

Mr. Rowley joined Adobe in November 2006 as Vice President, Corporate Controller and Principal Accounting Officer. Prior to joining Adobe, Mr. Rowley served as Vice President, Corporate Controller, Treasurer and Principal Accounting Officer at Synopsys, Inc., a semiconductor design software company,


from December 2002 to September 2005 and from 1999 to December 2002, Mr. Rowley served as Vice President, Corporate Controller and Principal Accounting Officer. From 1994 to 1999, Mr. Rowley served in several finance-related positions at Synopsys. Mr. Rowley is a certified public accountant.

ITEM 1A.  RISK FACTORS

As previously discussed, our actual results could differ materially from our forward lookingforward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition.

Delays

The ongoing economic downturn and continued uncertainty in developmentthe financial markets and other adverse changes in general economic or shipmentpolitical conditions in any of the major countries in which we do business could adversely affect our operating results.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. Uncertainty about future economic and political conditions makes it difficult for us to forecast operating results and to make decisions about future investments. For example, the direction and relative strength of the global economy continues to be uncertain due to softness in the real estate and mortgage markets, volatility in
34
fuel and other energy costs, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties, increasing unemployment and other macro-economic factors affecting spending behavior. If economic growth in the U.S. and other countries continues to be slow and does not improve, many customers may delay or reduce technology purchases, advertising spending or marketing spending. This could result in continued reductions in sales of our products and services, longer sales cycles, slower adoption of new technologies and increased price competition.
    The current global financial crisis affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of business have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and increased volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis on our business, including insolvency of certain of our key distributors, resellers, OEMs, retailers and systems integrators, ISVs and VARs (collectively referred to as “distributors”), which could impair our distribution channels, inability of customers, including our distributors, to obtain credit to finance purchases of our products and services, and failure of derivative counterparties and other financial institutions, which could negatively impact our treasury operations. Other income and expense could also vary from expectations depending on gains or losses realized on the sale or exchange of financial instruments, impairment charges related to investment securities as well as equity and other investments, interest rates, cash balances, and changes in fair value of derivative instruments. Any of these events would likely harm our business, results of operations and financial condition.
Political instability in any of the major countries we do business in would also likely harm our business, results of operations and financial condition.
If we cannot continue to develop, market and distribute new versions ofproducts and services or upgrades or enhancements to existing products and services that meet customer requirements, our operating results could cause a decline in our revenue.

Any delays or failures insuffer.


The process of developing and marketing our products, including upgrades of currentnew high technology products and the integration of Macromediaservices and enhancing existing products intoand services is complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological trends accurately could significantly harm our product line, may have a harmful impact on ourmarket share and results of operations. We may have particular difficultymust make long-term investments, develop or obtain appropriate intellectual property and delays developing products that integrate Adobe and Macromedia products, sincecommit significant resources before knowing whether our predictions will accurately reflect customer demand for our products are highly complex, have been designed independently and were designed without regard to such integration.services. Our inability to extend our core technologies into new applications and new platforms, including the mobile and embedded devices market, and to anticipate or respond to technological changes could affect continued market acceptance of our products and services and our ability to develop new products. Delaysproducts and services. Additionally, any delay in the development, production, marketing or distribution of a new product or service or upgrade introductionsor enhancement to an existing product or service could cause a decline in our revenue, earnings or stock price.price and could harm our competitive position.  We cannot determinemaintain strategic relationships with third parties with respect to the ultimate effectdistribution of certain of our technologies.  If we are unsuccessful in establishing or maintaining our strategic relationships with these delaysthird parties, our ability to compete in the marketplace or to grow our revenues would be impaired and our operating results would suffer.
We offer our desktop application-based products primarily on Windows and Macintosh platforms. We generally offer our server-based products on the introductionLinux platform as well as the Windows and UNIX platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platform or in general, or to the extent that significant demand arises for our products or competitive products on other platforms before we choose and are able to offer our products on these platforms our business could be harmed. Additionally, to the extent that we have difficulty transitioning product or version releases to new Windows and Macintosh operating systems, or to the extent new releases of operating systems or other third-party products make it more difficult for our products to perform, our business could be harmed.

Introduction of new products, or upgrades will have on our revenue or results of operations.

Introduction of new productsservices and business models by existing and new competitors could harm our competitive position and results of operations.

The end markets for our products and services are characterized by intense competition, evolving industry standards and business models, disruptive software and hardware technology developments, frequent new product and service introductions, short product and service life cycles, price cutting, with resulting downward pressure on gross margins, and price sensitivity on the part of consumers. Our future success will depend on our ability to enhance our existing products are intensely and increasingly competitive,services, introduce new products and are significantly affected by product introductionsservices on a timely and market activitiescost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate and respond to emerging standards, business models, software delivery
35
methods and other technological changes.  For example, certain versions of industry competitors, including Microsoft’s announced introduction of its new VistaMicrosoft Windows operating system which containssystems  contain a new fixed document format, XPS, which will competecompetes with Adobe PDF, and its introductionPDF. Additionally, certain versions of Microsoft Office 12 which offersoffer a feature to save Microsoft Office documents as PDF files, through a freely distributed plug-in, which competes with Adobe PDF creation. Microsoft Expression Studio competes with our Adobe Creative Suite family of products and Microsoft Silverlight and Visual Studio, Web development tools for RIAs, compete with Adobe Flash, Adobe Flex and Adobe AIR. Google Gears and Sun’s JavaFX, alternative approaches to deploying RIAs, compete with Adobe Flash and Adobe AIR. Additionally, HTML5 specifies scripting application programming interfaces which if broadly implemented in browsers could compete with Adobe Flash. Companies, such as Google, Sun, Apple and Microsoft, may introduce competing software offerings for free or open source vendors may introduce competitive products. In addition, recent advances in computing and communications technologies have made the SaaS, or on-demand, business model viable. SaaS allows companies to provide applications, data and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. We are developing and deploying our own SaaS strategies through various business units, including our Omniture business unit, but there are significant competitors in this area as well.  For instance, our Omniture Online Marketing Suite competes with Google Analytics, which Google offers free of charge, and other competitive SaaS offerings from companies such as Coremetrics, Yahoo! and WebTrends.  If theseany competing products or services in these areas achieve widespread acceptance, our operating results could suffer. In addition, consolidation has occurred among some of the competitors in our markets.  Any further consolidations among our competitors may result in stronger competitors and may therefore harm our results of operations. For additional information regarding our competition and the risks arising out of the competitive environment in which we operate, see the section entitled “Competition” contained in Item 1 of this Annual Report.

report.

If we fail to successfully manage transitions to new business models and markets, our results of operations could be negatively impacted.
We plan to release numerous new product and service offerings and employ new software delivery methods in connection with our transition to new business models. It is uncertain whether these strategies will prove successful or that we will be able to develop the infrastructure and business models as quickly as our competitors. Market acceptance of these new product and service offerings will be dependent on our ability to include functionality and usability in such releases that address certain customer requirements with which we have limited prior experience and operating history. Some of these new product and service offerings could subject us to increased risk of legal liability related to the provision of services as well as cause us to incur significant technical, legal or other costs. For example, with our introduction of on-demand services, we are entering a market that is at an early stage of development. Market acceptance of such services is affected by a variety of factors, including security reliability of on-demand services, customers concerns with entrusting a third party to store and manage their data, public concerns regarding privacy and the enactment of laws or regulations that restrict our ability to provide such services to customers in the U.S. or internationally. As our business continues to transition to new business models that may be more highly regulated for privacy and data security, and to countries outside the U.S. that have more strict data protection laws, our liability exposure, compliance requirements and costs may increase. In addition, laws in the areas of privacy and behavioral tracking and advertising are likely to be passed in the future, which could result in significant limitations on or changes to the ways in which we can collect, use, store or transmit the personal information of our customers or employees, communicate with our customers, and deliver products and services.  Further, any perception of our practices as an invasion of privacy, whether or not illegal, may subject us to public criticism.  Existing and potential future privacy laws, increased risks related to unauthorized data disclosures and increasing sensitivity of consumers to use of personal information may create negative public relations related to our business practices.
Additionally, customer requirements for open standards or open source products could impact adoption or use with respect to some of our products or services. To the extent we incorrectly estimate customer requirements for such products or services or if there is a delay in market acceptance of such products or services, our business could be harmed.
From time to time we open source certain of our technology initiatives, provide broader open access to certain of our technology, such as our OSP, and release selected technology for industry standardization. These changes may have negative revenue implications and make it easier for our competitors to produce products or services similar to ours. If we are unable to respond to these competitive threats, our business could be harmed.
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We are also devoting significant resources to the development of technologies and service offerings in markets where we have a limited operating history, including the enterprise, and government markets and the mobile and device markets. In the enterprise and government markets, we intend to increase our focus on vertical markets such as education, financial services, manufacturing, and the architecture, engineering and construction markets. With our Adobe Acrobat Connect product line, we intend to increase awareness in targetedmarkets and horizontal markets such as training and marketing and vertical markets such as manufacturing, financial services and telecommunications.marketing. These new offerings and markets require a considerable investment of technical, financial and sales resources, and a scaleablescalable organization. Many of our competitors may have advantages over us due to their larger presence, larger developer network, deeper experience in the enterprise, and government markets and the mobile and device markets, and greater sales


and marketing resources. In the mobile and device markets, our intent is to license our technology topartner with device makers, manufacturers and telecommunications carriers thatto embed our technology on their platforms, and in the enterprise and government market our intent is to form strategic alliances with leading enterprise and government solutions and service providers to provide additional resources to further enable penetration of such markets. If we are unable to successfully enter into strategic alliances with device makers, manufacturers, telecommunication carriers and leading enterprise and government solutions and service providers, or if they are not as productive as we anticipate, our market penetration may not proceed as rapidly as we anticipate and our results of operations could be negatively impacted. Another development is the software-as-a-service business model, by which companies provide applications, data and related services over the Internet. Providers use primarily advertising or subscription-based revenue models. Recent advances in computing and communications technologies have made this model viable and could enable the rapid growth of some of our competitors. We are exploring the development of our own software-as-a-service strategies. It is uncertain whether these strategies will prove successful. Additionally, customer requirements for “open standards” or “open source” products could impact adoption or use with respect to some of our products.

Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.

If the economy worsens in any geographic areas where we do business, it would likely cause our future results to vary materially from our targets. A slower economy also may adversely affect our ability to grow. Political instability in any of the major countries in which we do business also may adversely affect our business.

Revenues


Revenue from our new businesses may be difficult to predict.

As previously discussed, we are devoting significant resources to the development of product and service offerings where we have a limited operating history. This makes it difficult to predict revenues.revenue and revenue may decline quicker than anticipated. Additionally, we intend to expand the use of our Mobile and Device Solutions by licensing our products for use in mobile phones, set-top boxes, game devices, personal digital assistants, hand-held computers and other consumer electronic devices; however, we have a limited history of licensing products and offering services in thesecertain markets such as the government and enterprise market and may experience a number of factors that will make our revenue less predictable, including longer than expected sales and implementation cycles, decision to open source certain of our technology initiatives, potential deferral of revenue due to multiple-element revenue arrangements and alternate licensing arrangements.

If any of our assumptions about revenue from our new businesses prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.

For instance, the SaaS business model we failutilize in our Omniture business unit typically involves selling services on a subscription basis pursuant to anticipateservice agreements that are generally one to three years in length. Although many of our service agreements contain automatic renewal terms, our customers have no obligation to renew their subscriptions for our services after the expiration of their initial subscription period upon providing timely notice of non-renewal and develop new productswe cannot provide assurance that these subscriptions will be renewed at the same or higher level of service, if at all. Moreover, under some circumstances, some of our customers have the right to cancel their service agreements prior to the expiration of the terms of their agreements. We cannot be assured that we will be able to accurately predict future customer renewal rates. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including their satisfaction or dissatisfaction with our services, the prices of our services, the prices of services offered by our competitors, mergers and acquisitions affecting our customer base, reductions in responseour customers’ spending levels, or declines in consumer Internet activity as a result of economic downturns or uncertainty in financial markets. If our customers do not renew their subscriptions for our services or if they renew on less favorable terms to changes in demand for application software, computers, printers,us, our revenues may decline.
We may not realize the anticipated benefits of past or other non PC-devicesfuture acquisitions, and integration of these acquisitions may disrupt our business could be harmed.

Any failure to anticipate changing customer requirements and developmanagement.

We have in the past and deploy newmay in the future acquire additional companies, products in response to changing market conditions may have a material impact on our results of operations. As previously discussed,or technologies. Most recently, we plan to release numerous new product offerings and upgrade versions of our current products in connection with our transition to new business models andcompleted the acquisition of Macromedia. Market acceptanceOmniture in October 2009. We may not realize the anticipated benefits of our newan acquisition and each acquisition has numerous risks. These risks include:
·difficulty in assimilating the operations and personnel of the acquired company;
·difficulty in effectively integrating the acquired technologies, products or services with our current  technologies, products or services;
·difficulty in maintaining controls, procedures and policies during the transition and integration;
·entry into markets in which we have no or limited direct prior experience and where competitors in such markets have stronger market positions;
37
·disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges;
·difficulty integrating the acquired company’s accounting, management information, human resources and other administrative systems;
·inability to retain key technical and managerial personnel of the acquired business;

·inability to retain key customers, distributors, vendors and other business partners of the acquired business;
·inability to achieve the financial and strategic goals for the acquired and combined businesses;
·inability to take advantage of anticipated tax benefits as a result of unforeseen difficulties in our integration activities;
·incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;
·potential additional exposure to fluctuations in currency exchange rates;
·potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of our technologies, products or services;
·potential failure of the due diligence processes to identify significant problems, liabilities or other shortcomings or challenges of an acquired company or technology, including but not limited to, issues with the acquired company’s intellectual property, product quality or product architecture, data back-up and security, revenue recognition or other accounting practices, employee, customer or partner issues or legal and financial contingencies;
·exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to, claims from terminated employees, customers, former stockholders or other third-parties;
·incurring significant exit charges if products or services acquired in business combinations are unsuccessful;
·potential inability to assert that internal controls over financial reporting are effective;
·potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions;
·potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product and service offerings; and
·potential incompatibility of business cultures.
Mergers and acquisitions of high technology companies are inherently risky, and ultimately, if we do not complete an announced acquisition transaction or version releases will be dependent on our ability to include functionalityintegrate an acquired business successfully and usability in such releases that addressa timely manner, we may not realize the requirementsbenefits of customer demographics with which we have limited prior experience. To the extent we incorrectly estimate customer requirements for such products and version releases or if there is a delay in market acceptance of such products and version releases, our business could be harmed.

We offer our Creative Solutions and Knowledge Worker Solutions application-based products primarily on Windows and Macintosh platforms and on some UNIX platforms. We generally offer our server-based products, but not desktop application products, on the Linux platform as well as the Windows and UNIX platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platform or in general, oracquisition to the extent that significant demand arises

anticipated.

for our products or competitive products on the Linux desktop platform before we choose and are able to offer our products on this platform, our business could be harmed. Additionally, to the extent that we have difficulty transitioning product or version releases to new Windows and Macintosh operating systems, e.g., porting our applications to the “Mactel” platform, or to the extent new releases of operating systems or other third party products make it more difficult for our products to perform, our business could be harmed.

We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.

In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights, or disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation are typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. We may incur significant costs in acquiring the necessary third party intellectual property rights for use in our products. Third partyThird-party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on less favorableunfavorable terms, prevent us from manufacturing or licensing certain of our products or offering certain of our services, subject us to injunctions restricting our sale of products or services, cause severe disruptions to our operations or the markets in which we compete, or require us to satisfy indemnification commitments with our customers including contractual
38
provisions under various license arrangements any oneand service agreements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products. Any of whichthese could seriously harm our business.

We may not be able to protect our intellectual property rights, including our source code, from third-party infringers, or unauthorized copying, use disclosure or malicious attack.

disclosure.

Although we defend our intellectual property rights and combat unlicensed copying and use of software and intellectual property rights through a variety of techniques, preventing unauthorized use or infringement of our rights is inherently difficult. We actively pursue software pirates as part of our enforcement of our intellectual property rights, but we nonetheless lose significant revenue due to illegal use of our software. If piracy activities increase, it may further harm our business.

Additionally, we take significant measures to protect the secrecy of our confidential information and trade secrets, including our source code (the detailed program commands for our software programs).code. If unauthorized disclosure of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third partiesthird-parties to compete with our products by copying functionality, which could adversely affect our revenue and operating margins. We also seek to protect our confidential information and trade secrets through the use of non-disclosure agreements with our customers, contractors, vendors, and partners. However there is a risk that our confidential information and trade secrets may be disclosed or published without our authorization, and in these situations it may be difficult and and/or costly for us to enforce our rights.

We also devote significant resources

Security vulnerabilities in our products and systems could lead to maintainingreduced revenues or to liability claims.    
Maintaining the security of computers and computer networks is a critical issue for us and our products from malicious hackers whocustomers. Hackers develop and deploy viruses, worms, and other malicious software programs that attack our products and systems. Although this is an industry-wide problem that affects computers and products across all platforms, it affects our products in particular because hackers tend to focus their efforts on the most popular operating systems and programs and we expect them to continue to do so. Critical vulnerabilities have been identified in certain of our products. Nevertheless,These vulnerabilities could cause the application to crash and could potentially allow an attacker to take control of the affected system.
We devote significant resources to address security vulnerabilities through engineering more secure products, enhancing security and reliability features in our products and systems, code hardening, deploying security updates to address security vulnerabilities and improving our incident response time. The cost of these steps could reduce our operating margins. Despite these efforts, actual or perceived security vulnerabilities in our products couldand systems may lead to claims against us and harm our reputation, and could lead some customers to seek to return products, to stop using certain services, to reduce or delay future purchases of products or services, or to use competitivecompeting products or to make claims against us. Also, with the introduction of hosted services with some of our product offerings, our customersservices. Customers may use such services to share confidential and sensitive information. If a breach of security occursalso increase their expenditures on these hostedprotecting their existing computer systems we could be held liable to our customers. Additionally, such breaches could lead to interruptions, delays and data loss and protection concerns as well as harm to our reputation.

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We may not realize the anticipated benefits of past or future acquisitions, and integration of these acquisitions may disrupt our business and management.

We have in the past and may in the future acquire additional companies, products or technologies. We may not realize the anticipated benefits of an acquisition and each acquisition has numerous risks. These risks include:

·       difficulty in assimilating the operations and personnel of the acquired company;

·       difficulty in effectively integrating the acquired technologies or products with our current products and technologies;

·       difficulty in maintaining controls, procedures and policies during the transition and integration;

·       disruption of our ongoing business and distraction of our management and employees from other opportunities and challenges due to integration issues;

·       difficulty integrating the acquired company's accounting, management information, human resources and other administrative systems;

·       inability to retain key technical and managerial personnel of the acquired business;

·       inability to retain key customers, distributors, vendors and other business partners of the acquired business;

·       inability to achieve the financial and strategic goals for the acquired and combined businesses;

·       incurring acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

·       potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of technology or products;

·       potential failure of the due diligence processes to identify significant issues with product quality, architecture and development, or legal and financial contingencies, among other things;

·       incurring significant exit charges if products acquired in business combinations are unsuccessful;

·       potential inability to assert that internal controls over financial reporting are effective;

·       potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities,attack, which could delay or prevent such acquisitions; and

·       potential delay in customer and distributor purchasing decisions due to uncertainty about the directionadoption of our product offerings

Mergers and acquisitionsnew technologies. Any of high technology companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, whichthese actions by customers could adversely affect our business, financial condition or resultsrevenue.


Some of operations.

Weour businesses rely on distributorsus or third-party service providers to sell our productshost and deliver services, and any adverse changeinterruptions or delays in our relationshipservice or service from these third parties, security or privacy breaches, or failures in data collection could expose us to liability and harm our business and reputation.


Some of our businesses, including our Omniture business unit, rely on hosted services from us or third parties. Because we hold large amounts of customer data and host certain of  such data in third-party facilities, a security incident may compromise the integrity or availability of customer data, or customer data may be exposed to unauthorized access. Unauthorized access to customer data may be obtained through break-ins, breach of our secure network by an unauthorized party, employee theft or misuse, or other misconduct. It is also possible that unauthorized access to customer data may be obtained through inadequate use of security controls by customers. While strong password controls, IP restriction and account controls are provided and supported, their use is controlled by the customer. For example, this could allow accounts to be created with weak passwords, which could result in allowing an attacker to gain access to customer data. Additionally, failure by customers to remove accounts of their own employees, or granting of accounts by the customer in an uncontrolled manner, may allow for access by former or unauthorized customer employees. If there were ever an inadvertent disclosure of personally identifiable information, or if a third party were to gain unauthorized access to the personally identifiable information we possess, our operations could be disrupted, our reputation could be harmed and we could be subject to claims
39
or other liabilities. In addition, such perceived or actual unauthorized disclosure of the information we collect or breach of our security could result in the loss of customers and harm our business.
Because of the large amount of data that we collect and manage on behalf of our customers, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Furthermore, our ability to collect and report data may be delayed or interrupted by a number of factors, including access to the Internet, the failure of our network or software systems, security breaches or significant variability in visitor traffic on customer Websites. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. We may also find, on occasion, that we cannot deliver data and reports to our customers in near real time because of a number of factors, including significant spikes in consumer activity on their Websites or failures of our network or software. We may be liable to our customers for damages they may incur resulting from these events, such as loss of business, loss of future revenues, breach of contract or for the loss of goodwill to their business. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to capture, store and supply information in near real time or at all, our reputation could be harmed and we could lose customers.
On behalf of certain of our customers using our services, including those using services offered by our Omniture business unit, we collect and use information derived from the activities of Website visitors, which may include anonymous and/or personal information. This enables us to provide such customers with reports on aggregated anonymous or personal information from and about the visitors to their Websites in the manner specifically directed by such customers. Federal, state and foreign government bodies and agencies have adopted or are considering adopting laws regarding the collection, use and disclosure of this information. Therefore, our compliance with privacy laws and regulations and our reputation among the public body of Website visitors depend on such customers’ adherence to privacy laws and regulations and their use of our services in ways consistent with such visitors’ expectations. We also rely on representations made to us by customers that their own use of our services and the information we provide to them via our services do not violate any applicable privacy laws, rules and regulations or their own privacy policies. We ask customers to represent to us that they provide their Website visitors the opportunity to “opt-out” of the information collection associated with our distributorsservices, as applicable. We do not formally audit such customers to confirm compliance with these representations. If these representations are false or if such customers do not otherwise comply with applicable privacy laws, we could face potentially adverse publicity and possible legal or other regulatory action.
Failure to manage our sales and distribution channels and third-party customer service and technical support providers effectively could result in a loss of revenue and harm to our business.

We distribute our application products primarily through distributors, resellers, retailers and increasingly systems integrators, ISVs and VARs (collectively referred to as “distributors”).

A significant amount of our revenue for application products is from two distributors, Ingram Micro, Inc. and Tech Data Corporation.Corporation, which represented 15% and 8% of our net revenue for fiscal 2009, respectively. We have multiple non-exclusive, independently negotiated distribution agreements with Ingram Micro and Tech Data and their subsidiaries covering our arrangements in specified countries and regions. Each of these contracts has an independent duration, is independent of any other agreement (such as a master distribution agreement) and any termination of one agreement does not affect the status of any of the other agreements. In addition,fiscal 2009, no single agreement with these distributors was responsible for over 10% of our total net revenue. If any one of our agreements with these distributors were terminated, we believe we could make arrangements with new or existing distributors to distribute our products without a substantial disruption to our business; however, any prolonged delay in securing a replacement distributor could have a negative short-term impact on our results of operations.
Successfully managing our indirect channel efforts to reach various potential customer segments for our products and services is a complex process. Our distributors are independent businesses that we do not control. Notwithstanding the independence of our channel program focusespartners, we face potential legal risk from the activities of these third parties including, but not limited to, export control violations, corruption and anti-competitive behavior. Although we have undertaken efforts to reduce these third-party risks, they remain present. We cannot be certain that our efforts on larger distributors, which has resulted indistribution channel will continue to market or sell our dependence on a relatively small number of distributors licensing a large amount of our

products effectively. If we are not successful, we may lose sales opportunities, customers and revenues.

products.

Our distributors also sell our competitors’ products, and if they favor our competitors’ products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. We also distribute some products through our OEM channel, and if our OEMs decide not to bundle our applications on their devices, our results could suffer.
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In addition, the financial health of theseour distributors and our continuing relationships with them are important to our success. Some of these distributors may be unable to withstand adverse changes in business conditions.current economic conditions, which could result in insolvency of certain of our distributors and/or the inability of our distributors to obtain credit to finance purchases of our products. In addition, weakness in the end-user market could further negatively affect the cash flow of our distributors who could, in turn, delay paying their obligations to us, which would increase our credit risk exposure. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.

weakens and we were unable to timely secure replacement distributors.


We also sell certain of our products and services through our direct sales force. Risks associated with this sales channel include a longer sales cycle associated with direct sales efforts, difficulty in hiring, retaining and motivating our direct sales force, and substantial amounts of training for sales representatives, including regular updates to cover new and upgraded products and services. Moreover, our recent hires and sales personnel added through our recent business acquisitions may not become as productive as we would like, as in most cases it takes a significant period of time before they achieve full productivity. Our business could be seriously harmed if these expansion efforts do not generate a corresponding significant increase in revenues and we are unable to achieve the efficiencies we anticipate.
We also provide products and services, directly and indirectly, to a variety of governmental entities, both domestically and internationally. The licensing and sale of products and services to governmental entities  may require adherence to complex specific procurement regulations and other requirements.  While we believe we have adequate controls in this area, failure to effectively manage this complexity and satisfy these requirements could result in the potential assessment of penalties and fines, harm to our reputation and lost sales opportunities to such governmental entities.
We outsource a substantial portion of our customer service and technical support activities to third-party service providers. We rely heavily on these third-party customer service and technical support representatives working on our behalf and we expect to continue to rely heavily on third parties in the future. This strategy provides us with lower operating costs and greater flexibility, but also presents risks to our business, including the possibilities that we may not be able to impact the quality of support that we provide as directly as we would be able to do in our own company-run call centers, and that our customers may react negatively to providing information to, and receiving support from, third-party organizations, especially if based overseas. If we encounter problems with our third-party customer service and technical support providers, our reputation may be harmed and our revenue may be adversely affected.
Catastrophic events may disrupt our business.

We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our Website for our development, marketing, operational, support, hosted services and sales activities. In addition, some of our businesses rely on third-party hosted services and we do not control the operation of third-party data center facilities serving our customers from around the world, which increases our vulnerability. A disruption, infiltration or failure of these systems or third party hosted services in the event of a major earthquake, fire, power loss, telecommunications failure, cyber-attack,cyber attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, loss of intellectual property, delays in our product development, lengthy interruptions in our services, breaches of data security and loss of critical data and could prevent us from fulfilling our customers’ orders. Our corporate headquarters, a significant portion of our research and development activities, certain of our data centers, and certain other critical business operations are located in San Jose, California, which is near major earthquake faults. We believe we have developed sufficientcertain disaster recovery plans and certain backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.

We rely on turnkey assemblers and any adverse change in our relationship with our turnkey assemblers could result in a loss

Net revenue, margin or earnings shortfalls or the volatility of revenue and harm our business.

We currently rely on six turnkey assemblers of our products, with at least two turnkeys located in each major region we serve. If any significant turnkey assembler terminates its relationship with us, or if our supply from any significant turnkey assembler is interrupted or terminated for any other reason, wethe market generally may not have enough time or be able to replace the supply of products replicatedby that turnkey assembler to avoid serious harm to our business.

Our future operating results are difficult to predict and are likely to fluctuate substantially from quarter to quarter and as a resultcause the market price of our stock to decline.

The market price for our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price for our common stock may be volatile and our stock price could decline.

As a result of a variety of factors discussed herein, our quarterly revenues and operating results for a particular period are difficult to predict. Our revenues may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. Additionally, we periodically provide operating model targets. These targets reflectaffected by a number of assumptions,factors, including assumptions about product pricing and demand, economic and seasonal trends, competitive factors, manufacturing costs and volumes, the mix of shrink-wrap and licensingshortfalls in our net revenue, full and upgrade products, distribution channels and geographic markets. If one or more of these assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.

Due to the factors noted above, our future earnings and stock price may be subject to volatility, particularly on a quarterly basis. Shortfalls in revenue ormargins, earnings or delays in the release of products or upgrades compared to analysts’ or investors’ expectations have caused and could cause in the future an immediate and significant decline in the trading price of our common stock. Additionally, we may not learn of such shortfalls or delays until late in the fiscal quarter, which could result in an even more immediate and greater decline in the trading price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us,key performance metrics, changes in analysts’ earnings estimates foror recommendations by securities analysts; the announcement of new products,  product enhancements or service introductions by us or our industry, and factors affecting the corporate environment, our industry, or the securities markets in general, have resulted, and may competitors,  seasonal variations

41

in the future result,demand for our products and services and the implementation cycles for our new customers, the loss of a large customer or our inability to increase sales to existing customers and attract new customers, quarterly variations in volatilityour or our competitors’ results of operations, developments in our common stock price.

industry; unusual events such as significant acquisitions, divestitures and litigation, general socio-economic, regulatory, political or market conditions and other factors, including factors unrelated to our operating performance.

We are subject to risks associated with internationalglobal operations which may harm our business.

We typically generateare a global business that generates over 50% of our total revenue from sales to customers outside of the Americas. Sales to these customers subjectThis subjects us to a number of risks, including (i) foreign currency fluctuations, (ii) changes in government preferences for software procurement, (iii) international economic and political conditions, (iv) unexpected changes in, or impositions of, international legislative or regulatory requirements, (v) inadequate local infrastructure, (vi) delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, (vii) transportation delays, (viii) the burdens of complying with a variety of foreign laws, including more stringent consumer and data protection laws, and other factors beyond our control, including terrorism, war, natural disasters and diseases. including:
·foreign currency fluctuations;
·changes in government preferences for software procurement;
·international economic, political and labor conditions;
·tax laws (including U.S. taxes on foreign subsidiaries);
·increased financial accounting and reporting burdens and complexities;
·unexpected changes in, or impositions of, legislative or regulatory requirements;
·failure of laws to protect our intellectual property rights adequately;
·inadequate local infrastructure and difficulties in managing and staffing international operations;
·delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;
·transportation delays;
·operating in locations with a higher incidence of corruption and fraudulent business practices; and
·other factors beyond our control, including terrorism, war, natural disasters and diseases.
If sales to any of our customers outside of the Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.
In addition, approximately 42% of our employees are located outside the U.S. This means we have exposure to changes in foreign laws governing our relationships with our employees, including wage and hour laws and regulations, fair labor standards, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our operating costs. We also intend to continue expansion of our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. We may be unable to scale our infrastructure effectively, or as quickly as our competitors, in these markets and our revenues may not increase to offset these expected increases in costs and operating expenses, which would cause our results to suffer.
Moreover, as a global company, we are subject to varied and complex laws, regulations and customs domestically and internationally. These laws and regulations relate to a number of aspects of our business, including trade protection, import and export control, data and transaction processing security, records management, gift policies, employment and labor relations laws, securities regulations and other regulatory requirements affecting trade and investment.  The application of these laws and regulations to our business is often unclear and may at times conflict. Compliance with these laws and regulations may involve significant costs or require changes in our business practices that result in reduced revenue and profitability. Non-compliance could also result in fines, damages, criminal sanctions against us, our officers, or our employees,  prohibitions on the conduct of our business, and damage to our reputation.  We incur additional legal compliance
42

costs associated with our global operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the U.S. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by U.S. regulations applicable to us such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such U.S. laws may be customary, will not take actions in violation of our internal policies. Any such violation, even if prohibited by our internal policies, could have an adverse effect on our business.
We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

Our operating results are subject to fluctuations in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to partially hedge our exposure to foreign currency exchange rate fluctuations primarily for the Japanese yenYen and the euro.Euro. We regularly review our hedging program and will make adjustments as necessary based on the judgment factors discussed above. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

Changes in, or interpretations of, accounting principles could result in unfavorable accounting charges.

We prepare our consolidated financial statements in conformityaccordance with U.S.accounting principles generally accepted accounting principles.in the United States of America (“GAAP”). These principles are subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting principles that recently have been or may be affected by changes in the accounting principles are as follows:

·       software revenue recognition;

·

·software and subscription revenue recognition;
·accounting for stock-based compensation;
·accounting for income taxes; and
·accounting for business combinations and related goodwill.
In December 2007, the Financial Accounting Standards Board (“FASB”) issued revised standards for stock-based compensation;

·       accounting for income taxes; and

·business combinations, which changes the accounting for business combinations including timing of the measurement of acquirer shares issued in consideration for a business combination, the timing of recognition and amount of contingent consideration, the accounting for pre-acquisition gain and loss contingencies, the recognition of capitalized in-process research and development, the accounting for acquisition related goodwill

In particular,restructuring liabilities, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. The revised standards for business combinations is effective for financial statements issued for fiscal years beginning after December 15, 2008. The revised standards for business combinations are effective for us beginning the first quarter of fiscal 2006, we adopted SFAS 123R which requires the measurement of all stock-based compensation to employees, including grants of employee stock options, using a fair-value-based method and the recording of such expense in our consolidated statements of income. The adoption of SFAS 123R had a significant adverse effect on our reported financial results. It will continue to significantly adversely affect our reported financial results and may impact the way in which we conduct our business. Please refer to Notes 1 and 11 of our Notes to Consolidated Financial Statements for further information regarding2010. We currently believe that the adoption of SFAS 123R.

the revised standards for business combinations will result in the recognition of certain types of expenses in our results of operations that we currently capitalize pursuant to existing accounting standards.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

Under generally accepted accounting principles,GAAP, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets


may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, resulting in an impact on our results of operations.

For example, our Mobile and Device Solutions business, which is reported


as part of our Platform segment in fiscal 2009, is in an emerging market with high growth potential. In May 2008, we announced the OSP. As part of the project, we will be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices. Revenue from this segment has begun to decrease. Although we would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, hosted services and applications, if future revenue or revenue forecasts for our Platform segment do not meet our expectations, we may be required to record a charge to earnings reflecting an impairment of recorded goodwill or intangible assets.
Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

We are a U.S. based multinational company subject to tax in multiple U.S. and foreign tax jurisdictions. Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in, tax laws or the interpretation of, tax laws,rules and regulations in the jurisdictions in which we do business, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities.
In addition, we are subject to the continual examination of our income tax returns by the Internal Revenue ServiceIRS and other domestic and foreign tax authorities, including a current examination by the Internal Revenue Service forIRS of our fiscal 2001, 20022005, 2006 and 20032007 tax returns, primarily relatedreturns. These examinations are expected to focus on our intercompany transfer pricing.pricing practices as well as other matters. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examination. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

If we are unable to recruit and retain key personnel our business may be harmed.

Much of our future success depends on the continued service and availability of our senior management, including our Chief Executive Officer and other members of our executive team.management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the Silicon Valley,Bay Area, where the majoritymany of our employees are located. We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accountingAccounting regulations requiring the expensing of equity compensation may impair our ability to provide these incentives without incurring significant compensation costs. Additionally, the recent significant adverse volatility in our stock price has resulted in many employees’ stock option exercise prices exceeding the underlying stock’s market value as well as deterioration in the value of employees’ restricted stock units granted, thus lessening the effectiveness of retaining employees through stock-based awards. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.

Effective succession planning is also a key factor for our long-term success. Our failure to enable the effective transfer of knowledge and facilitate smooth transitions with regards to our key employees could adversely affect our long-term strategic planning and execution.


We believe that a critical contributor to our success to date has been our corporate culture, which we believe fosters innovation and teamwork. As we grow, including from the integration of employees and businesses acquired in connection with our previous or future acquisitions, we may find it difficult to maintain important aspects of our corporate culture which could negatively affect our ability to retain and recruit personnel and otherwise adversely affect our future success.

Our investment portfolio may become impaired by deterioration of the capital markets.
Our cash equivalent and short-term investment portfolio as of November 27, 2009 consisted of US treasury securities, bonds of government agencies, obligations of foreign governments, corporate bonds and taxable money market mutual funds. We follow an established investment policy and set of guidelines to monitor and help mitigate our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
As a result of current adverse financial market conditions, investments in some financial instruments may pose risks arising from recent market liquidity and credit concerns. As of November 27, 2009, we had no material impairment charges associated with our short-term investment portfolio relating to such adverse financial market conditions. Although we believe
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our current investment portfolio has very little risk of material impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain materially unimpaired.
We may suffer losses from our equity investments which could harm our business.

We hold equity investments in public companies that have experienced significant declines in market value. We also have investments and plan to continue to make future investments in privately held companies, many of which are considered in the start-up or development stages. These investments are inherently risky, as the market for the technologies or products these companies have under development is typically in the early stages and may never materialize. Our investment activities can impact our net income. Future price fluctuations in these securities and any significant long-term declines in value of any of our investments could reduce our net income in future periods.

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We rely on turnkey assemblers and any adverse change in our relationship with our turnkey assemblers could result in a loss of revenue and harm our business.
We currently rely on seven turnkey assemblers of our products, with at least two turnkeys located in each major region we serve.  If any significant turnkey assembler terminates its relationship with us, or if our supply from any significant turnkey assembler is interrupted or terminated for any other reason, we may not have enough time or be able to replace the supply of products replicated by that turnkey assembler to avoid serious harm to our business.

ITEM 1B.  UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.  PROPERTIES                PROPERTIES

The following table sets forth the location, approximate square footage and use of each of the principal properties used by Adobe during fiscal 2006.2009. We lease or sublease all of these properties with the exception of our property in India, where we own the building and lease the land, and San Francisco on Townsend and Waltham where we own the building and land. All properties are leased under operating leases. Such leases expire at various times through 2025,2028, with the exception of the land lease that expires in 2091. The annual base rent expense (including operating expenses, property taxes and assessments, as applicable) for all facilities is currently approximately $69.1$84.8 million and is subject to annual adjustments as well as changes in interest rates.

Location

Approximate
Square
Footage

Use

North America:

345 Park Avenue
San Jose, CA 95110, USA

378,000

Research, product development, sales and marketing,

and administration

321 Park Avenue
San Jose, CA 95110, USA

321,000

Research, product development, sales and marketing

151 Almaden Boulevard
San Jose, CA 95110, USA

267,000

Administration, productProduct development, sales and sales

administration

601 and 625 Townsend
Street
San Francisco, CA 94103, USA

263,000

272,000

*

Research, product development, administration, sales, marketing and marketing

administration

801 N. 34th Street-Waterfront
Seattle, WA 98103, USA

255,000

182,000

Product development, sales, technical support and administration

1-3 Riverside Center
275 Grove Street
Newton, MA 02466, USA

81,000

*

Sales, marketing, research, product development

333 Preston Street
Ottawa, Ontario K1S 1N4

550 East Timpanagos Circle
Orem, UT 84097, USA

122,000

135,000

Research, product development, sales, marketing and administration

India:

10182 Telesis Court
San Diego, CA 92121, USA
61,000**Product development, sales and marketing
21 Hickory Drive
Waltham, MA 02451, USA
108,000
Research, product development, sales and marketing
1-3 Riverside Center
275 Grove Street
Newton, MA 02466, USA
63,000***Research, product development, sales and marketing
250 Brannan Street
San Francisco, CA 94107, USA
35,000Product development, sales and marketing
13450 Sunrise Valley Drive
Herndon, VA 20171,USA
29,000Product development, sales and marketing
343 Preston Street
Ottawa, Ontario K1S 5N4, Canada
122,000Research, product development, sales, marketing and administration
India:
Adobe Towers, 1-1A, Sector 25A
Noida, U.P. 201301

200,000

191,000

Product development

Adobe Towers, Plot #6, Sector
127 Expressway, Noida, U.P.
65,000Product development
Salapuria Infinity, 3rd Floor
#5, Bannerghatta Road
Bangalore 560029

56,000

94,000

Product

Research and product development

46
Location

Approximate
Square
Footage
Use
Japan:

Japan:

Gate City Ohsaki East Tower
1-11-2 Ohsaki,Osaki, Shinagawa-ku
Tokyo 141-0032

57,000

56,000

Sales,Product development, sales and marketing

China:
Block A, SP Tower, 21st & 22nd Floor
Block D, SP Tower, 10th Floor
Tsinghua Science Park, Yard 1
Zhongguancun Donglu, Haidian District
Beijing
77,000Research and product development
Germany:
Grosse Elbstrasse 27
Hamburg 22767
36,000Research and product development
Romania:
26 Z Timisoara Blvd, Anchor Plaza
Lujerului, Sector 6
Bucharest
44,000Research and product development
UK:
3 Roundwood Avenue
Stockley Park, Heathrow
22,000Product development, sales, marketing and product developmentadministration

*

Germany:

Grobe Elbstrable 27
Hamburg 22767

27,000

Product development

The total square footage is 346,000, of which we occupy 272,000 square feet, or approximately 79% of this facility; 74,000 square feet is unoccupied basement space.

UK:

**

3 Roundwood Avenue
Stockley Park, Uxbridge, UB11 1AY

The total square footage is 61,000, of which we occupy 21,000

Sales, marketing, product development, and administration

square feet, or approximately 34% of this facility.  The remaining square footage is subleased.

*                    The total square footage is 348,000, of which we occupy 81,000 square feet, or approximately 23% of this facility.

***The total square footage is 63,000, of which we occupy 49,000 square feet, or approximately 78% of this facility.  The remaining square footage is subleased.
In general, all facilities are in good condition and are operating at an average capacity of approximately 80%

In addition to the facilities listed above, we also lease other office space in the United States and various other countries under operating leases. We have one leased set of offices in San Jose, California that was vacated in connection with the restructuring program implemented in fiscal 1998. We have subleased the offices but still have a commitment under the lease agreement until mid 2007.

.

ITEM 3.  LEGAL PROCEEDINGS

On September 6, 2002, Plaintiff Fred B. Dufresne23, 2009, Richard Miner on behalf of himself and all similarly situated stockholders of Omniture, Inc. filed suita class action lawsuit captioned Miner v. Omniture, Inc.,  et. al., Case No. 090403559 (the “Miner Lawsuit”) against Adobe, Microsoft Corporation, Macromedia, Inc.Omniture, the members of Omniture’s board of directors (collectively, the “Omniture Defendants”) and Trellix CorporationAdobe in the U.S.United States Fourth Judicial District Court for Utah County, Provo Department, State of Utah seeking to enjoin the proposed acquisition between Omniture and Adobe.  In the event the acquisition is consummated, the plaintiff seeks to recover an unspecified amount of damages. The plaintiff alleges that the members of Omniture’s board of directors breached their fiduciary duties to Omniture’s stockholders by failing to seek the highest possible price for Omniture and that Adobe induced or aided and abetted in the alleged breach of such fiduciary duties. Also on September 23, 2009, Christopher R. Barrell filed a substantially similar lawsuit to the Miner Lawsuit in the United States Fourth Judicial District Court for Utah County, Provo Department, State of Massachusetts, alleging infringement of U.S. PatentUtah, captioned Barrell v. Omniture, Inc. et. al., Case No. 5,835,712, entitled “Client-Server System Using Embedded Hypertext Tags090403560 (the “Barrell Lawsuit”). The Barrell Lawsuit names the same defendants as the Miner Lawsuit, and also names Snowbird Acquisition Corporation as an additional defendant. Subsequently, on September 24, 2009, the plaintiff in the Barrell Lawsuit filed an amended complaint, which added allegations that the Schedule 14D-9 Solicitation/Recommendation Statement filed by Omniture on September 24, 2009 contained inadequate disclosures and was materially misleading.  On September 25, 2009, the Omniture Defendants filed a motion requesting that the court consolidate the Barrell Lawsuit, Miner Lawsuit and a substantially similar
47

lawsuit captioned Lodhia v. Omniture, Inc. et al., Case No. 090403499 (the “Lodhia Lawsuit”) in which the Omniture Defendants, but not Adobe, were named. Additionally, on September 30, 2009, the plaintiff in the Lodhia Lawsuit filed a response to defendants’ motion to consolidate, agreeing consolidation is appropriate, and also filed a motion seeking appointment as lead plaintiff in the consolidated action.   Omniture moved for Application and Database Development.”an order consolidating all three lawsuits.  The Plaintiff’s complaint asserts that “defendants have infringed, and continue to infringe, one or more claimsplaintiffs in the three lawsuits filed a joint motion seeking preliminary injunction barring the consummation of the ‘712 patentproposed acquisition and requiring additional disclosures by making, using, selling and/or offeringOmniture in its Schedule 14D-9.  At a hearing on October 20, 2009, the court granted Omniture’s motion to consolidate the three cases and denied the plaintiffs’ motion for sale, inter alia, products supporting Microsoft Active Server Pages technology.” Plaintiff seeks unspecified compensatory damages,a preliminary and permanent injunctive relief, trebling of damages for “willful infringement,” and fees and costs. We believeinjunction. On December 30, 2009, the action has no merit and are vigorously defending against it.

On October 13, 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R. Chizen, et al was filed in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and directors, and against Adobe as a nominal defendant. The complaint asserts that stock option grants to executives were priced retroactively by Adobe and were improperly accounted for, and alleges various causes of action based on that assertion. The complaint seeks payment byplaintiffs served the defendants with a consolidated amended complaint. Adobe intends to Adobe of damages allegedly suffered by it and disgorgement of profits, as well as injunctive relief.defend the lawsuits vigorously. 

In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local law and have recently increased in frequency, especially in Latin American countries.laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.

From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims investigations and proceedingsinvestigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with U.S. generally accepted accounting principles,GAAP, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated


financial position, cash flows or results of operations could be negatively affected by thean unfavorable resolution of one or more of such contingencies.

proceedings, claims or investigations.

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

No matters were submitted to a vote of security holders during the quarter ended December 1, 2006.

November 27, 2009.

48

PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

(a)  

Our common stock is traded on the NASDAQ Global Select Market under the symbol “ADBE.” On January 19, 2007,According to the records of our transfer agent, there were 1,8271,709 holders of record of our common stock.stock  on January 15, 2010. Because many of such shares are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
We did not declare or pay any cash dividends on our common stock during fiscal 2009 or fiscal 2008. Under the terms of our credit agreement and lease agreements, we are not prohibited from paying cash dividends unless payment would trigger an event of default or one currently exists. We do not anticipate paying any cash dividends in the foreseeable future. The following table sets forth the high and low sales price per share of our common stock and the cash dividends paid per share, for the periods indicated. All per share amounts in the following table have been adjusted to reflect the two-for-one stock split in the form
    Price Range 
   High   Low 
Fiscal 2009:        
First Quarter $24.29  $16.70 
Second Quarter $28.18  $15.98 
Third Quarter $33.43  $26.34 
Fourth Quarter $36.90  $31.00 
Fiscal Year $36.90  $15.98 
         
Fiscal 2008:        
First Quarter $44.62  $32.62 
Second Quarter $44.06  $30.79 
Third Quarter $45.89  $38.23 
Fourth Quarter $43.14  $20.75 
Fiscal Year $45.89  $20.75 
49
Issuer Purchases of a stock dividend effected May 23, 2005.

Equity Securities

 

 

Price Range

 

 

Cash
Dividend

 

 

 

 

High

 

Low

 

 

Per Share

 

 

Fiscal 2006:

 

 

 

 

 

 

 

 

 

First Quarter

 

$

40.51

 

$

34.52

 

 

—

 

 

Second Quarter

 

39.45

 

28.35

 

 

—

 

 

Third Quarter

 

34.07

 

26.47

 

 

—

 

 

Fourth Quarter

 

42.55

 

31.50

 

 

—

 

 

Fiscal Year

 

42.55

 

26.47

 

 

—

 

 

Fiscal 2005:

 

 

 

 

 

 

 

 

 

First Quarter

 

$

32.56

 

$

27.40

 

 

$

0.00625

 

 

Second Quarter

 

34.48

 

26.57

 

 

—

 

 

Third Quarter

 

32.92

 

25.80

 

 

—

 

 

Fourth Quarter

 

35.68

 

26.67

 

 

—

 

 

Fiscal Year

 

35.68

 

25.80

 

 

0.00625

 

 

Under the terms of our lease agreements for our San Jose headquarters, we are not prohibited from paying cash dividends unless an event of default occurs. We discontinued our quarterly cash dividend after the payment of the dividend for the first quarter of fiscal 2005. We intend to use the cash previously used to pay the quarterly dividend for our ongoing stock repurchase programs.

For information on our equity compensation plans, refer to Note 11 in our Notes to Consolidated Financial Statements.

(c)  

Below is a summary of stock repurchases for the quarter ended December 1, 2006 (in thousands, except average price per share). November 27, 2009. See Note 1214 of our Notes to Consolidated Financial Statements for information regarding our stock repurchase programs.
Plan/Period(1)
  
Shares
Repurchased(2)
 
Average
Price Per
Share
 
Maximum Number
of Shares that May
Yet be Purchased
Under the Plan
   
Stock Repurchase Program I         
Beginning shares available to be repurchased as of August 28, 2009      131,855,184  (3) 
August 29—September 25, 2009          
Structured repurchases
  1,842,160 $31.62      
September 26—October 23, 2009            
Structured repurchases
  1,770,314 $32.73      
October 24—November 27, 2009            
From employees(4) 
  10 $34.78      
Structured repurchases
  1,705,926 $33.88      
Adjustments to repurchase authority for net dilution
  —     5,840,221  (5) 
Total shares repurchased
  5,318,410     (5,318,410)  
Ending shares available to be repurchased under Program I as of November 27, 2009        132,376,995  (6) 


Plan/Period

 

 

 

Shares
Repurchased(1)

 

Average
Price Per
Share

 

Maximum
Number of Shares
that May Yet be
Purchased

 

Stock Repurchase Program I

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning shares available to be repurchased as of September 1, 2006

 

 

 

 

 

 

 

 

 

 

147,609,017

 

 

September 2 - 29, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

From employees(2)

 

 

1,388

 

 

 

$

36.92

 

 

 

 

 

 

Structured repurchases

 

 

471,879

 

 

 

33.33

 

 

 

 

 

 

September 30 - October 27, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

From employees(2)

 

 

1,443

 

 

 

38.59

 

 

 

 

 

 

Structured repurchases

 

 

593,946

 

 

 

36.89

 

 

 

 

 

 

October 28 - December 1, 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

From employees(2)

 

 

1,346

 

 

 

41.47

 

 

 

 

 

 

Structured repurchases

 

 

1,160,105

 

 

 

38.06

 

 

 

 

 

 

Total shares repurchased

 

 

2,230,107

 

 

 

 

 

 

 

(2,230,107

)

 

Adjustments to repurchase authority for net dilution

 

 

 

 

 

 

 

 

 

 

10,471,889

(3)

 

Ending shares available to be repurchased as of December 1, 2006

 

 

 

 

 

 

 

 

 

 

155,850,799

(4)

 

(1)
In December 1997, our Board of Directors authorized Stock Repurchase Program I which is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time.
(2)All shares were purchased as part of publicly announced plans.
(3)Additional 109.0 million shares were issued for the acquisition of Macromedia which accounted for the majority of the repurchase authorization.
(4)The repurchases from employees represent shares cancelled when surrendered in lieu of cash payments for withholding taxes due.
(5)Adjustment of authority to reflect changes in the dilution from outstanding shares and options.
(6)The remaining authorization for the ongoing stock repurchase program is determined by combining all stock issuances, net of any cancelled, surrendered or exchanged shares less all stock repurchases under the ongoing plan, beginning in the first quarter of fiscal 1998.
50

(1)TABLE OF CONTENTS          All shares were purchased as part

Stock Performance Graph(*)
Five-Year Stockholder Return Comparison
The line graph below compares the cumulative stockholder return on our common stock with the cumulative total return of publicly announced plans.

(2)          The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for withholding taxes due.

(3)          Adjustment of authority to reflect changes in the dilution from outstanding sharesStandard & Poor’s 500 Index (“S&P 500”) and options.

(4)          The remaining authorizationthe S&P 500 Software & Services Index for the ongoingfive fiscal year periods ending November 27, 2009. The stock repurchase programprice information shown on the graph below is determined by combining allnot necessarily indicative of future price performance.

The following table and graph assume that $100.00 was invested on December 3, 2004 in our common stock, issuances, netthe S&P 500 Index and the S&P 500 Software & Services Index, with reinvestment of any canceled, surrendered or exchanged shares less all stock repurchases underdividends. For each reported year, our reported dates are the ongoing plan, beginning inlast trading dates of our fiscal year which ends on the first quarter of fiscal 1998.Friday closest to November 30.
   2004   2005   2006   2007   2008   2009 
Adobe Systems
 $100.00  $111.13  $125.05  $133.91  $73.60  $112.43 
S&P 500 Index
 $100.00  $108.16  $121.69  $131.45  $81.83  $101.64 
S&P 500 Software & Services Index $100.00  $102.94  $107.51  $122.76  $70.42  $106.79 

45

(*)The material in this report is not deemed “filed” with the SEC and is not to be incorporated by reference into any of our filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filings.
51


ITEM 6.  SELECTED FINANCIAL DATA

The following selected consolidated financial data (presented in thousands, except per share amounts and employee data) areis derived from our consolidated financial statements. This data should be read in conjunction with the consolidated financial statements and notes thereto, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations. All per share amounts referred to in the table below have been adjusted to reflect the two-for-one stock split in the form of stock dividends effected May 23, 2005.
��   Fiscal Years 
   2009   2008   2007   2006   2005 
Operations:                    
Revenue
 $2,945,853  $3,579,889  $3,157,881  $2,575,300  $1,966,321 
Gross profit
 $2,649,121  $3,217,259  $2,803,187  $2,282,843  $1,853,743 
Income before income taxes
 $701,520  $1,078,508  $947,190  $679,727  $765,776 
Net income(1) 
 $386,508  $871,814  $723,807  $505,809  $602,839 
Net income per share(1), (2)
                    
Basic
 $0.74  $1.62  $1.24  $0.85  $1.23 
Diluted
 $0.73  $1.59  $1.21  $0.83  $1.19 
Cash dividends declared per common share $—  $—  $—  $—  $0.00625 
                     
Financial position:(3)
                    
Cash, cash equivalents and short-term investments $1,904,473  $2,019,202  $1,993,854  $2,280,879  $1,700,834 
Working capital
 $1,629,071  $1,972,504  $1,720,441  $2,208,688  $1,528,915 
Total assets
 $7,282,237  $5,821,598  $5,713,679  $5,962,548  $2,440,315 
Long-term debt
 $1,000,000  $350,000  $—  $—  $— 
Stockholders’ equity
 $4,890,568  $4,410,354  $4,649,982  $5,151,876  $1,865,164 
                     
Additional data:                    
Worldwide employees
  8,660   7,544   6,794   6,068   4,285 

 

Fiscal Years

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

Operations:

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

2,575,300

 

$

1,966,321

 

$

1,666,581

 

$

1,294,749

 

$

1,164,788

 

Gross profit

 

2,282,843

 

1,853,743

 

1,562,203

 

1,201,727

 

1,060,500

 

Income before income taxes

 

679,727

 

765,776

 

608,645

 

380,492

 

284,689

 

Net income(*)

 

505,809

 

602,839

 

450,398

 

266,344

 

191,399

 

Net income per share(*)

 

 

 

 

 

 

 

 

 

 

 

Basic

 

0.85

 

1.23

 

0.94

 

0.57

 

0.41

 

Diluted

 

0.83

 

1.19

 

0.91

 

0.55

 

0.40

 

Cash dividends declared per common share

 

—

 

0.00625

 

0.025

 

0.025

 

0.025

 

Financial position:

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments

 

2,280,879

 

1,700,834

 

1,313,221

 

1,096,533

 

617,737

 

Working capital

 

2,207,122

 

1,528,183

 

1,107,142

 

892,498

 

436,883

 

Total assets

 

5,962,548

 

2,440,315

 

1,958,632

 

1,555,045

 

1,051,610

 

Stockholders’ equity

 

5,151,876

 

1,864,326

 

1,423,477

 

1,100,800

 

674,321

 

Additional data:

 

 

 

 

 

 

 

 

 

 

 

Worldwide employees

 

6,068

 

4,285

 

3,848

 

3,515

 

3,319

 

(1)
In fiscal 2009, 2008, 2007 and 2006, net income and net income per share includes the impact of stock-based compensation charges as well as the integration of Macromedia into our operations in fiscal 2006, neither of which were present in fiscal year 2005. Fiscal 2009, also includes the integration of Omniture into our operations which was not present in the prior years. See Notes 2 and 13 of our Notes to Consolidated Financial Statements for information regarding our Omniture and Macromedia acquisitions and stock-based compensation, respectively.
(2)On March 16, 2005, our Board of Directors approved a two-for-one stock split, in the form of a stock dividend, of our common stock payable on May 23, 2005 to stockholders of record as of May 2, 2005. Per share data, for all periods presented, have been adjusted to give effect to this stock split.
(3)Information associated with our financial position is as of the Friday closest to November 30 for the five fiscal periods through 2009.
52

*TABLE OF CONTENTS                    In fiscal 2006, net income and net income per share includes the impact of SFAS 123R stock-based compensation charges as well as the integration of Macromedia into our operations, neither of which were present in prior years. Refer to Notes 2 and 11 of our Notes to Consolidated Financial Statements.


ITEM 7.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion (presented in millions) should be read in conjunction with our consolidated financial statements and notes thereto. The share and per share data below have been adjusted to give effect to our stock split as of May 23, 2005.

In addition to historical information, this Annual Report on Form 10-K/A10-K contains forward-looking statements, including statements regarding product plans, future growth and market opportunities which involve risks and uncertainties that could cause actual results to differ materially. materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Business - Risk Factors.”“Risk Factors” in Part 1, Item 1A of this report. You should carefully review the risks described herein and in other documents we file from time to time with the SEC, including the Quarterly Reports on Form 10-Q to be filed in 2007.fiscal 2010. When used in this report, the words “expects,” “could,” “would”,“would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “targets,” “estimates,” “looks for,” “looks to,”to” and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K/A.10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

ACQUISITION OF MACROMEDIA

On December 3, 2005, we completed the acquisition of Macromedia for approximately $3.5 billion. We expect our revenues, cost of revenues and operating expenses to increase in the future, but we also anticipate cost saving synergies. We incurred restructuring charges of $19.7 million during fiscal 2006. Coinciding with the integration of Macromedia and the start of our 2006 fiscal year, we changed the reporting of our segments to be aligned with our market opportunities and how we manage our various businesses. The discussions in this section of the Annual Report on Form 10-K/A, as well as the financial statements contained herein, reflect the impact of the acquisition. See Note 2 for further information regarding this acquisition.

BUSINESS OVERVIEW

Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of creative, business, Web and mobile software and services used by high-end consumers, creative professionals, designers, knowledge workers, OEM partners,consumers, OEMs, developers and enterprises for creating, managing, delivering, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors, and dealers, VARs, systems integrators, ISVs and OEMs;OEMs, direct to end users;users and through our own Web siteWebsite at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, Europe, EMEA and Asia. Our software runs on personal computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-personal computernon-PC platforms, depending on the product.

ACQUISITION OF OMNITURE
On October 23, 2009, we completed the acquisition of Omniture, an industry leader in Web analytics and online business optimization based in Orem, Utah, for approximately $1.8 billion. Accordingly, we have included the results of the business operations acquired from Omniture in our consolidated results of operations beginning on October 24, 2009. We expect the acquisition to have a significant impact on our consolidated financial position, results of operations and cash flows. We expect our revenues, cost of revenues and operating expenses to increase in the future, but we also anticipate both revenue and cost saving synergies. Coinciding with the integration of Omniture, we created a new reportable segment for financial reporting purposes. See Note 2 of our Notes to Consolidated Financial Statements for further information regarding this acquisition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that can have a significant impact onaffect the reported amounts reported in our consolidated financial statements.of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and


estimates involved in the accounting for revenue recognition, stock-based compensation, business combinations, goodwill impairment and income taxes have the greatest potential impact on our consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, see Note 1 of our Notes to Consolidated Financial Statements.

53

Revenue Recognition

We recognize revenue in accordance with current U.S. generally accepted accounting principles thatwhen all four revenue recognition criteria have been prescribedmet: persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable. Determining whether and when some of these criteria have been satisfied often involves assumptions and judgments that can have a significant impact on the timing and amount of revenue we report. For example, for multiple element arrangements, we must: (1) determine whether and when each element has been delivered; (2) determine whether undelivered products or services are essential to the functionality of the delivered products and services; (3) determine whether vendor-specific objective evidence (“VSOE”) of fair value exists for each undelivered element; and (4) allocate the total price among the various elements we must deliver. Changes in assumptions or judgments or changes to the elements in a software industry. Revenue recognition requirementsarrangement could cause a material increase or decrease in the software industry are very complex and are subject to change. In applying ouramount of revenue recognition policythat we must determine which portions of our revenue are recognized currently and which portions, if any, must be deferred. In order to determine current and deferred revenue, we make judgments and estimates with regard to future deliverable products and services and the appropriate pricing for those products and services. report in a particular period.
In addition, we must estimate certain royalty revenue amounts due to the timing of securing information from our customers. OurWhile we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, our assumptions and judgments regarding future products and services as well as our estimates of royalty revenuesrevenue could differ from actual events, thus materially impacting our financial position and results of operations.

Product revenue is recognized when the above criteria are met. We have to estimate provisionsreduce the revenue recognized for estimated future returns, which are recorded against our revenues.price protection and rebates at the time the related revenue is recorded. In determining our estimate for returns and in accordance with our internal policy regarding global channel inventory which is used to determine the level of product held by our distributors on which we have recognized revenue, we rely upon historical data, the estimated amount of product inventory in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. MoreProduct returns may be more or less product may be returned fromthan what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell through for product in the channel could be different than what actually occurs. There could be a delay in the release of our products. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual returns, thus materially impacting our financial position and results of operations.

Stock-based Compensation

operations.

We adoptedoffer price protection to our distributors that allows for the provisionsright to a credit if we permanently reduce the price of a software product. When evaluating the adequacy of the price protection allowance, we analyze historical returns, current sell-through of distributor and accountretailer inventory of our products, changes in customer demand and acceptance of our products and other related factors. In addition, we monitor the volume of sales to our channel partners and their inventories. Changes to these assumptions or in the economic environment could result in higher returns or higher price protection costs in subsequent periods.
In the future, actual returns and price protection may materially exceed our estimates as unsold products in the distribution channels are exposed to rapid changes in consumer preferences, market conditions or technological obsolescence due to new platforms, product updates or competing products. While we believe we can make reliable estimates regarding these matters, these estimates are inherently subjective. Accordingly, if our estimates change, our returns and price protection reserves would change, which would impact the total net revenue we report.
We recognize revenues for stock-based compensationhosting services that are based on a committed number of transactions, including implementation and set-up fees, ratably beginning on the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with Statementcontract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Our consulting revenue is primarily recognized using the proportionate performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Accordingly, our estimates of Financial Accounting Standard (“SFAS”) 123R during the first quarterconsulting revenue could differ from actual events and may materially impact our financial position and results of fiscal 2006. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition provisions of this statement, stock-basedoperations.
Stock-based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.

54

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricingoption pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, the risk-free interest rate, estimated forfeitures and expected dividends.

We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. As permitted by Staff Accounting Bulletin (“SAB”) 107, weWe estimate the


volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option pricing model on zero-coupon yields implied from U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option pricing model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All share based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

If factors change and we employuse different assumptions for estimating stock-based compensation expense in future periods or if we decide to use a different valuation model,actual forfeitures differ materially from our estimated forfeitures, the future periods may differ significantly from what we have recordedchange in the current period andour stock-based compensation expense could materially affect our operating income, net income and net income per share.

Business Combinations
    We allocate the purchase price of acquired companies to the tangible and intangible assets acquired and liabilities assumed as well as to in-process research and development based upon their estimated fair values at the acquisition date. The Black-Scholes option-pricing model waspurchase price allocation process requires management to make significant estimates and assumptions, especially at acquisition date with respect to intangible assets and deferred revenue obligations assumed.
    Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Examples of critical estimates in valuing certain of the intangible assets we have acquired or may acquire in the future include but are not limited to:
·future expected cash flows from software license sales, subscriptions, support agreements, consulting contracts and acquired developed technologies and patents;
·expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed;
·the acquired company’s trade name and trademarks as well as assumptions about the period of time the acquired trade name and trademarks will continue to be used in the combined company’s product portfolio; and
·discount rates.
    In connection with the purchase price allocations for use in estimatingour acquisitions, we estimate the fair value of traded options that have no vesting restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measuresdeferred revenue obligations assumed. The estimated fair value of the support obligations is determined utilizing a cost build-up approach. The cost build-up approach determines fair values of our stock-based compensation. Consequently, there isvalue by estimating the costs related to fulfilling the obligations plus a risk that our estimates ofnormal profit margin. The estimated costs to fulfill the fair values of our stock-based compensation awardsobligations are based on the grant dateshistorical costs related to fulfilling the obligations.
    Unanticipated events and circumstances may bear little resemblance to the actual values realized upon the exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options,occur which may expire worthless or otherwise result in zero intrinsic value as compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and adjust the estimates to actual values.

The guidance in SFAS 123R and SAB 107 is relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models in the future. This may result in a lack of consistency in future periods and materially affect the fair value estimateaccuracy or validity of stock-based payments. It may also result in a lack of comparability with other companies that use different models, methods and assumptions.

See Note 11 of our Consolidated Financial Statements for further information regarding the SFAS 123R disclosures.

such assumptions, estimates or actual results.


Goodwill Impairment

We performcomplete our goodwill impairment teststest on an annual basis, during the second quarter of our fiscal year, or more frequently, if changes in facts and circumstances warrant a review. We make judgments about goodwill whenever events or changes in circumstances indicate that an impairment in the value of goodwill recorded on our balance sheet may exist.  The timing of an impairment test may result in charges to our statements of income in our current reporting period that could not have been reasonably foreseen in prior periods. In order to estimate the fair value of goodwill,  we typically make various assumptions about theestimate future prospects the asset relates to,revenue, consider market factors
55

and estimate our future cash flows. Based on these key assumptions, judgments and estimates, we determine whether we need to record an impairment charge to reduce the


value of the asset carried on our balance sheet to its estimated fair value. Assumptions, judgments and estimates about future values are complex and often subjective. They can be affected by a variety of factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy andor our internal forecasts. Although we believe the assumptions, judgments and estimates we have made in the past have been reasonable and appropriate, different assumptions, judgments and estimates could materially affect our reported financial results. More conservative assumptions

We completed our annual impairment test in the second quarter of the anticipatedfiscal 2009 and determined there was no impairment. We currently believe that there is no significant risk of future benefits could resultmaterial goodwill impairment in impairment charges, which would decrease net income and result in lower asset values onany of our balance sheet. Conversely, less conservative assumptions could result in smaller or no impairment charges, higher net income and higher asset values.

reporting units.

Accounting for Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset.

Our assumptions, judgments assumptions and estimates relative to the current provision for income taxtaxes take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. We have established reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities. WeIn addition, we are currently undersubject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities, including a current examination by the Internal Revenue ServiceIRS for our fiscal 2001, 20022005, 2006 and 20032007 tax returns, primarily relatedreturns. These examinations are expected to focus on our intercompany transfer pricing.pricing practices as well as other matters. Although we believe our assumptions, judgments assumptions and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements.

Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income, such as income from operations or capital gains income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.

RESULTS OF OPERATIONS

Overview of 2006

2009

Effective in the first quarter of fiscal 2009, our former Mobile and Devices Solutions segment, which was integrated into our Platform business unit to better align our engineering and marketing efforts, is now reported as part of the Platform segment. Prior year information has been updated to reflect the integration of these business units.
During fiscal 2006, we continued to focus on delivering market-leading technologies2009, our business was broadly impacted by the global economic recession and software that are redefining business, entertainment, and personal communications. Our solutions, which utilize industry standards for producing and delivering content that allow people to engage with information virtually anywhere at anytime, drove stronggenerally weak macro-economic environment.  This resulted in a significant year-over-year decline in our revenue and earnings growth in the year.

results.

In our Creative SolutionSolutions segment, we generated strong year-over-year growth based on the addition of Macromedia productsrevenue decreased by 18% during fiscal 2009 as compared to our product portfolio and the performancefiscal 2008. We attribute this decline to reduced adoption of our Creative SuiteCS4 family of products family. In addition, to capitalize onduring the broad adoption of digital video onyear, as the Web, we introduced Production Studio 1.0 - a suite of video products - including Adobe Premiere Pro 2.0, Adobe After Effects 7.0, Adobe Audition 2.0, and Adobe Encore 2.0. This new release drove strong year-over-year growthglobal financial crisis significantly affected demand in the digital video categorycreative professional end user market.  All major creative product categories declined on a year-over-year basis.
Our Business Productivity Solutions business declined 19% in fiscal 2009 when compared to fiscal 2008.  A decline in demand primarily due to the macro-economic environment with our Acrobat product family – which makes up the majority of our creative business.

50



In the fourth quarter, we introduced new versions of our Adobe Photoshop Elements and Adobe Premiere Elements hobbyist products, which target consumers who desire professional-like capabilities with an easy-to-use interface for enhancing and sharing their memoriesrevenue in the form of images and video. These products contributed strong year-over-year growth in this category of our Creative Solutions segment.

In our Knowledge Worker segment we introduced Adobe Acrobat 3D 7.0– was the primary factor for this decline.  In our Enterprise business, our LiveCycle revenue declined 7% when compared to revenue achieved in fiscal 2008. We attribute this smaller percentage decline in comparison to our other segments to focused execution by our sales teams and the first quarterlarge market opportunities these product solutions address.

56

In our Platform segment, revenue declined 22% on a year-over-year basis primarily due to address the needsimpact of the engineeringOSP. The removal of license fees associated with our Flash technologies on mobile devices commenced in fiscal 2009, and manufacturing markets, where complex documents are createdas such, OEM revenue from device manufacturers began to decline from rates of revenue we achieved in fiscal 2008.  We continue to expect this decline to be offset over time by an increased demand for tooling products, server technologies, services and shared across diverse user basesapplications in many of our other business segments.
In our Print and platforms. In addition, we deliveredPublishing segment, revenue was also impacted by the Acrobat 8 family of productsglobal macroeconomic environment, resulting in a 16% year-over-year decline.
The Omniture business appeared to stabilize during the fourth quarter of fiscal 2006. Acrobat 8 has numerous new features to help drive increased adoption by users in enterprises, governments and specialized vertical markets such as architecture, engineering and construction. In combination with the delivery of Acrobat 8, we introduced Acrobat Connect, a rebranded and new version of the former Macromedia Breeze product, which provides real-time collaboration via the Web. Together, these product introductions and our execution against the opportunities we forecastimprovement in the knowledge worker business helped us to achieve strong year-over-year growth in this business.

Our Enterprise and Developer segment also achieved solid results in 2006, generating record revenue and gaining broad market acceptancegeneral economy, as indicated by an increase in the categoriestransaction volume on our network.  In addition, customer retention rates began stabilizing and we experienced an increase in the number of Document Services and Rich Internet Applications withsubscription services provided to our LiveCycle and Flex technologies.

existing customers.   

Revenue (dollars in millions)
   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Product
 $2,759.4  (19)% $3,396.5  12% $3,019.5 
Percentage of total revenue
  94%     95%     96%
Services and support
  186.5  2%  183.4  33%  138.4 
Percentage of total revenue
  6%     5%     4%
Total revenue
 $2,945.9  (18)% $3,579.9  13% $3,157.9 

In fiscal 2009, we categorized our Other segments, we achieved solid growth through the monetization of our platform technologies, as well as new releases of existing products such as Adobe Captivate 2 and Adobe Contribute 4 (which were former Macromedia products). Our Postscript printing technology, a key part of our Other segments revenue, also generated year-over-year growth.

Revenue

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Product

 

$

2,484.7

 

 

29

%

 

$

1,923.3

 

 

18

%

 

$

1,634.0

 

Percentage of total revenues

 

96

%

 

 

 

 

98

%

 

 

 

 

98

%

Services and support

 

90.6

 

 

111

%

 

43.0

 

 

32

%

 

32.6

 

Percentage of total revenues

 

4

%

 

 

 

 

2

%

 

 

 

 

2

%

Total revenues

 

$

2,575.3

 

 

31

%

 

$

1,966.3

 

 

18

%

 

$

1,666.6

 

Coinciding with the integration of Macromedia and the start of fiscal 2006, we changed the reporting of our segments to be aligned with our market opportunities and how we manage our combined businesses. For comparability, the prior fiscal period’s results have been reclassified to reflect the realignment of the segments.

We haveinto the following segments: Creative Solutions, Knowledge Worker, Solutions, Enterprise, Platform, Print and Developer Solutions, MobilePublishing and Device Solutions, and Other. Omniture products.

Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and developer tasks to an extended set of customers. This segment combines most of the products of our prior Creative Professional and Digital Imaging and Video segments, along with the creative professional-focused products and solutions that we obtained through our acquisition of Macromedia. TheOur Knowledge Worker Solutions segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them reliably share information and collaborate effectively. This segment contains revenue generated by the Adobe Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions that automate people-centric processes. The segmentprocesses and contains revenue generated by our LiveCycle ColdFusion and Flex linesline of products. The MobilePlatform segment provides developer solutions and Device


Solutions segment providestechnologies, including Adobe Flash Player, Adobe AIR and Flash Builder which are used to build rich application experiences in addition to solutions that create compelling experiences through rich content, user interfaces and data services on mobile and non-PC devices such as cellular phones, consumer devices and internetInternet connected hand-held devices. Finally, Other contains several of our productsThe Print and services which addressPublishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses,businesses. Finally, our Omniture segment provides Web analytics and online business optimization products and services.

We will adjust our reporting segments at the beginning of fiscal 2010 to reflect changes in how we manage our business as we enter the new strategic opportunities such as OEM revenue generatedfiscal year. Specifically, we are moving responsibility for our Adobe Connect Pro product line from our free software downloads, which include Adobe Reader and Adobe Flash Player applications.

Knowledge Worker segment to our Enterprise segment.

Our services and support revenue is composed of consulting, training and maintenance and support, primarily related to the licensing of our Enterpriseenterprise, developer and Developer Solutionsplatform products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our consulting revenue is recognized using the proportionate performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Our maintenance and support offerings which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, isare recognized ratably over the term of the arrangement.

Segment  Information

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Creative Solutions

 

$

1,424.9

 

 

26

%

 

$

1,128.3

 

 

14

%

 

$

987.8

 

Percentage of total revenues

 

55

%

 

 

 

 

57

%

 

 

 

 

59

%

Knowledge Worker Solutions

 

671.0

 

 

13

%

 

593.5

 

 

35

%

 

439.4

 

Percentage of total revenues

 

26

%

 

 

 

 

30

%

 

 

 

 

27

%

Enterprise and Developer Solutions

 

189.2

 

 

67

%

 

113.0

 

 

10

%

 

102.5

 

Percentage of total revenues

 

7

%

 

 

 

 

6

%

 

 

 

 

6

%

Mobile and Device Solutions

 

37.7

 

 

*

%

 

—

 

 

*

%

 

—

 

Percentage of total revenues

 

2

%

 

 

 

 

—

 

 

 

 

 

—

 

Other*

 

252.5

 

 

92

%

 

$

131.5

 

 

(4

)%

 

136.9

 

Percentage of total revenues

 

10

%

 

 

 

 

7

%

 

 

 

 

8

%

Total Revenues

 

$

2,575.3

 

 

 

 

 

$

1,966.3

 

 

 

 

 

$

1,666.6

 

57

*TABLE OF CONTENTS                    Other segment revenue includes platform revenue of $37.2 million and $0.4 million for fiscal 2006 and 2005, respectively, or 1% and 0% of total revenues, respectively. We did not have platform revenue

Segment Information (dollars in fiscal 2004.millions)
   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Creative Solutions $1,702.1  (18)% $2,072.8  9% $1,899.0 
Percentage of total revenue  58%     58%     60%
Knowledge Worker  623.0  (23)%  810.9  11%  728.5 
Percentage of total revenue  21%     23%     23%
Enterprise  235.5  (7)%  253.0  32%  191.3 
Percentage of total revenue  8%     7%     6%
Platform  181.0  (22)%  231.6  74%  133.4 
Percentage of total revenue  6%     6%     4%
 Print and Publishing  178.0  (16)%  211.6  3%  205.7 
Percentage of total revenue  6%     6%     7%
Omniture  26.3  *%  —  —%  — 
Percentage of total revenue  1%     —%     —%
Total revenue $2,945.9  (18)% $3,579.9  13% $3,157.9 

*Percentage is not meaningful.
Fiscal 20062009 Revenue Compared to Fiscal 20052008 Revenue

Revenue from our Creative Solutions segment decreased $370.7 million during fiscal 2009 as compared to fiscal 2008 primarily due to reduced adoption of our CS family of products because of the global recession and generally weak macro-economic environment. The decrease was driven largely by a 15% decline in Creative Suites related revenue and a decline of 27% in Photoshop point product revenue. Also contributing to the decrease was an overall decline in the number of units licensed. Average unit selling prices have remained relatively consistent.
Revenue in our Knowledge Worker segment decreased $187.9 million during fiscal 2009 as compared to fiscal 2008 for similar reasons as Creative Solutions in addition to a decrease in the licensing of our Acrobat family of products. We attribute the decline in revenue to lower volume licensing by our enterprise customers, as well as a decrease in the number of units sold through our shrink-wrap distribution channel. Average unit selling prices have remained relatively consistent.
Revenue from our Enterprise segment decreased $17.5 million during fiscal 2009 as compared to fiscal 2008 primarily due to the economic impact which resulted in reduced spending by our enterprise customers.
Revenue from our Platform segment decreased by $50.6 million during fiscal 2009 as compared to fiscal 2008 due to the impact of the OSP which we announced on May 1, 2008, and involves the removal of certain licensing fees of our Flash Lite client with OEMs.
Revenue in our Print and Publishing business decreased by $33.6 million during fiscal 2009 as compared to fiscal 2008 due to reduced demand because of the global macro-economic downturn.
We acquired Omniture in the fourth quarter of fiscal 2009, and as such, there is no prior fiscal 2008 period with which to compare Omniture fiscal 2009 revenue.
Fiscal 2008 Revenue Compared to Fiscal 2007 Revenue
Revenue from our Creative Solutions segment increased $173.8 million during fiscal 20062008 as compared to fiscal 20052007 primarily due to ongoing adoption of our CS3 family of products, as well as the addition ofnewlaunch of our CS4 family of products in the fourth quarter of fiscal 2008. We also achieved solid growth in our Scene7 business and with our hobbyist products. The increase was also driven by a 7% increase in Creative Suites related revenue and an increase of 5% in Photoshop point product revenue. Also contributing to the acquisition of Macromedia. We had an approximately 45% increase in revenue fromfiscal 2008 as compared to fiscal 2007 was an increase in certain unit average selling prices. Units sold remained relatively stable.
Revenue in our Digital Video software productsKnowledge Worker segment increased $82.4 million during fiscal 2008 as compared to fiscal 2007 primarily due to an increase in the release of the Adobe Production Studio and the new versionslicensing of our videoAcrobat 8 and new Acrobat 9 family of products. RevenueAn increase in the number of units sold as well as a slight increase in certain unit average selling prices also increased 9% in our creative products duecontributed to continued growth inhigher revenue from our Adobe Creative Suite product and the introduction of new software bundles. These increases were partially offset by a decrease in revenues of 2% from our Digital Imaging software products dueas compared to product lifecycle timing and the success of our suites and bundles.

fiscal 2007.

58

Revenue from our Knowledge Worker SolutionsEnterprise segment increased $61.7 million during fiscal 20062008 as compared to fiscal 20052007 primarily due to an increased adoption of our LiveCycle family of products and a larger number of enterprise solution transactions at a higher average transaction size.
Revenue from our Platform segment increased by $98.2 million during fiscal 2008 as compared to fiscal 2007 due to continued adoption of our Acrobat family of productsFlash Lite by mobile and non-PC device manufacturers, as well as increased revenue related to Flash Player and the launch of


Acrobat 8 during the fourth quarter of fiscal 2006, as well as the addition of new products related to the acquisition of Macromedia. There were no notable decreases for fiscal 2006.

Revenue Adobe AIR which resulted in increased revenue from our Enterprisedeveloper tools.

Revenue in our Print and Developer Solutions segmentPublishing business increased by $5.9 million during fiscal 20062008 as compared to fiscal 2005 primarily due to the addition of new products related to the acquisition of Macromedia. Revenue from this segment also grew due to increases in revenue from our LiveCycle products of 23% as a result of increased licensing and server support revenue, as we continue to successfully focus on both the government sector and financial services. There were no notable decreases for fiscal 2006.

Revenue from our Mobile and Device Solutions segment increased during fiscal 2006 as compared fiscal 2005, wholly due to the addition of new products related to the acquisition of Macromedia.

Revenue from our Other segments increased during fiscal 2006 as compared to fiscal 2005, primarily due to increased revenue from PostScript licensing and to the addition of new products related to the acquisition of Macromedia. There were no notable decreases for fiscal 2006.

Fiscal 2005 Revenue Compared to Fiscal 2004 Revenue

Revenue from our Creative Solutions segment grew during fiscal 2005 as compared to fiscal 2004. The growth in the segment was due to a 32% increase in revenues from the new versions2007, driven by ongoing adoption of our Adobe Creative Suite products which were released during the second quarter of fiscal 2005. Additionally, there was a 3% increase in revenues from our digital imaging software products as a result of new releases of our Adobe Photoshop Elements producteLearning solutions as well as the new software bundle that combinessome of our Adobe Photoshop Elementslegacy print and Adobe Premiere Elementspublishing products. There were no notable decreases for fiscal 2005.

Revenue from our Knowledge Worker segment increased during fiscal 2005 as compared to fiscal 2004 primarily due to a 36% increase in revenues from our Acrobat desktop products. The increase in revenues from our Acrobat desktop products is due to continued adoption of Acrobat desktop products by enterprises and technical professionals, as well as the release of Acrobat 7 during the first quarter of fiscal 2005.

Revenue from our Enterprise Solutions segment increased during fiscal 2005 as compared to fiscal 2004 primarily due to our LiveCycle products. There was approximately a 10% increase in revenue during fiscal 2005 due to increased licensing and server support revenue, as we continued our focus on both the government sector and financial services. Additionally, revenue from our Enterprise Solutions segment increased during fiscal 2005 due to an increase in consulting revenues. There were no notable decreases for fiscal 2005.

Revenue from our Other segments decreased slightly during fiscal 2005 as compared to fiscal 2004 primarily due to a decrease in revenues from our Classic Publishing software products.

Geographic Information

(dollars in millions)

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Americas

 

$

1,266.7

 

 

35

%

 

$

939.7

 

 

22

%

 

$

770.6

 

Percentage of total revenues

 

49

%

 

 

 

 

48

%

 

 

 

 

46

%

EMEA

 

770.1

 

 

26

%

 

612.7

 

 

13

%

 

541.5

 

Percentage of total revenues

 

30

%

 

 

 

 

31

%

 

 

 

 

33

%

Asia

 

538.5

 

 

30

%

 

413.9

 

 

17

%

 

354.5

 

Percentage of total revenues

 

21

%

 

 

 

 

21

%

 

 

 

 

21

%

Total revenues

 

$

2,575.3

 

 

31

%

 

$

1,966.3

 

 

18

%

 

$

1,666.6

 

   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Americas $1,382.6  (15)% $1,632.8  8% $1,508.9 
Percentage of total revenue  46%     46%     48%
EMEA  928.9  (24)%  1,229.2  20%  1,026.4 
Percentage of total revenue  32%     34%     32%
Asia  634.4  (12)%  717.9  15%  622.6 
Percentage of total revenue
  22%     20%     20%
Total revenue $2,945.9  (18)% $3,579.9  13% $3,157.9 

Fiscal 20062009 Revenue by Geography Compared to Fiscal 20052008 Revenue by Geography

Overall revenuesrevenue in each of the geographic segments for fiscal 2006 increased comparatively2009 decreased compared to fiscal 20052008 primarily due to the acquisitionglobal economic recession, which resulted in reduced adoption of Macromedia.

many of our major products.

Included in the overall decrease in revenue were impacts associated with foreign currency. Revenue in the Americas and EMEA increased during fiscal 2006 as compared to fiscal 2005measured in U.S. dollars decreased approximately $47.1 million, due to the strength of our Creative Solutions, Enterprise Solutions, Knowledge Worker Solutions and Other segments.

Revenue in Asia increased during fiscal 2006the U.S. dollar against the Euro, as compared to fiscal 20052008. Our currency hedging program is used to mitigate a portion of the foreign currency impact to revenue. During fiscal 2009, our currency hedging program related to the Euro resulted in hedging gains of $25.8 million. Revenue in Asia measured in U.S. dollars was favorably impacted by approximately $32.8 million due to the strength of our Creative Solutions, Enterprise Solutions, Mobile and Device Solutions, and Other segments.

Additionally, due to the weakening ofYen against the euro and the yen, revenues in EMEA and Asia measured in U.S. dollars were lower by approximately $13.8 million and $21.2 million, respectively in fiscal 2006dollar as compared to fiscal 2005.

2008. During fiscal 2009, our currency hedging program related to the Yen resulted in hedging gains of $1.2 million.

Fiscal 20052008 Revenue by Geography Compared to Fiscal 20042007 Revenue by Geography

Overall revenue in each of the geographic segments for fiscal 2008 increased compared to fiscal 2007 primarily due to the ongoing adoption of our CS3 family of products during the first half of the year, the launch of our CS4 family of products in the fourth quarter of the year, the launch of our Acrobat 9 family of products in the third quarter of the year and strong growth in our enterprise business.
Included in the overall increase in revenue were impacts associated with foreign currency. Revenue in the Americas increasedEMEA measured in U.S. dollars was favorably impacted by approximately $69.3 million during fiscal 20052008 as compared to fiscal 2004 due to the strength of our Creative Solutions and Enterprise Solutions segments.

Revenue in EMEA and Asia increased during fiscal 2005 as compared to fiscal 2004 due to the strength of our Creative Solutions, Knowledge Worker Solutions and Enterprise Solutions segments.

Additionally,2007 primarily due to the strength of the euro andEuro against the yen, revenuesU.S. dollar. Additionally, during fiscal 2008 we had a hedging gain of $13.2 million. Revenue in EMEA and Asia measured in U.S. dollars were higherwas favorably impacted by approximately $15.0$39.6 million and $3.0 million, respectively, induring fiscal 20052008 as compared to fiscal 2004.

Inventory Information

At2007 primarily due to the endstrength of fiscal 2006 our overall channel inventory position was within our global inventory policy which allows up to an estimated 4.5 weeks of anticipated total product supply at our distributors.

the Yen against the U.S. dollar.

See Item 7A, Quantitative and Qualitative Disclosures About Market Risk regarding foreign currency risks.
Product Backlog
With regard to our product backlog, our experience is that the actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects. For example, prior to the finalization and release of new products, we may have significant levels of orders for new product releases. Our backlogBacklog is comprised of unfulfilled orders, at the end of fiscal 2006, other thanexcluding those associated with new product releases, those pending credit review and those not shipped due to the application of our global distributor inventory policy,policy. Our backlog for the fourth quarter of fiscal 2009 was approximately 2%9% of fourth quarter fiscal 20062009 revenue compared with approximately 2% of third quarter fiscal 2009 revenue. The comparableWe had minimal backlog at the end of thirdthe fourth quarter of fiscal 2006 was an insignificant percentage of third quarter fiscal 2006 revenue.

2008.

59

Cost of Revenues

Revenue (dollars in millions)

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Product

 

$

226.5

 

 

152

%

 

$

90.0

 

 

4

%

 

$

86.6

 

Percentage of total revenues

 

9

%

 

 

 

 

5

%

 

 

 

 

5

%

Services and support

 

66.0

 

 

192

%

 

22.6

 

 

27

%

 

17.8

 

Percentage of total revenues

 

3

%

 

 

 

 

1

%

 

 

 

 

1

%

Total cost of revenues

 

$

292.5

 

 

160

%

 

$

112.6

 

 

8

%

 

$

104.4

 

   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Product $228.9  (14)% $266.4  (2)% $270.8 
Percentage of total revenue  8%     7%     9%
Services and support  67.8  (30)%  96.2  15%  83.9 
Percentage of total revenue
  2%     3%     3%
Total cost of revenue $296.7  (18)% $362.6  2% $354.7 

Product

Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired technologiesrights to use technology and the costs associated with the manufacturing of our products.

Cost of product revenue fluctuateddecreased due to the following:
  
% Change
2009 to 2008
 
% Change
2008 to 2007
Amortization of acquired rights to use technology  (8)%  6%
Amortization of purchased intangibles  (10)  (10)
Royalty cost  (1)  3 
Hosted services  9   3 
Various individually insignificant items  (4)  (4)
Total change  (14)%  (2)%

The decrease in amortization of acquired rights to use technology primarily relates to a charge for historical use of licensing rights associated with certain technology licensing arrangements entered into in fiscal 2008 that did not recur in fiscal 2009. Amortization of acquired rights to use technology increased in fiscal 2008 as compared to fiscal 2007, primarily due to the acquisitionfact that we entered into certain technology licensing arrangements totaling $100.4 million and $60.0 million during fiscal 2008 and fiscal 2007, respectively. Of this cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal 2007, respectively, was related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to fifteen years. Of the remaining costs, we estimated that approximately $27.2 million and $15.2 million was related to historical use of Macromedialicensing rights which was expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was expensed as general and administrative costs.  In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the following areas:

future. 

 

% Change
2006 to 2005

 

% Change
2005 to 2004

 

Increased (decreased) amortization of purchased technology

 

 

151

%

 

 

(8

)%

 

Increased cost of sales due to shrink-wrap revenue

 

 

3

 

 

 

5

 

 

Decreased localization costs related to our product launches

 

 

(3

)

 

 

—

 

 

Increased royalties for licensed technologies

 

 

1

 

 

 

2

 

 

(Decreased) increased excess and obsolete inventory

 

 

(2

)

 

 

1

 

 

Increased localization costs related to our product launches

 

 

—

 

 

 

3

 

 

Various individually insignificant items

 

 

2

 

 

 

1

 

 

 

 

 

 

 

 

Total change

 

 

152

%

 

 

4

%

 

 

 

 

 

 

 

Amortization of purchased intangibles decreased during fiscal 2009 as compared to fiscal 2008 and decreased during fiscal 2008 as compared to fiscal 2007, due to a decrease in amortization primarily associated with intangible assets purchased through the Macromedia acquisition which were fully amortized during fiscal 2009.
The increase in hosted service costs was primarily related to the amortization of our investment in capitalized infrastructure costs related to our SaaS business in fiscal 2009 as compared to fiscal 2008.
Services and Support

Cost of services and support revenue is composed primarily comprised of employee-related costs and relatedassociated costs incurred to provide consulting services, training and product support.

Cost of services and support revenue decreased during fiscal 2009 as compared to fiscal 2008, due to decreases in compensation and related benefits driven by headcount reductions as well as increased consulting support provided by third- party systems integrators resulting in the downsizing of our consulting organization.
Cost of services and support revenue increased during fiscal 20062008 as compared to fiscal 2005, due to compensation and related benefits and travel expenses as a result of higher headcount related to increases in services and support activities. Included in compensation costs for fiscal 2006 are compensation and related benefits, including amortization of deferred compensation, for former Macromedia employees and stock-based compensation costs as a result of adopting SFAS 123R at the beginning of fiscal 2006. See Note 11 of our Consolidated Financial Statements for further information regarding the impact of SFAS 123R. Cost of services and support revenue also increased due to costs associated with our Expert Support program.

Cost of services and support revenue increased during fiscal 2005 as compared to fiscal 2004 2007, primarily due to increases in headcount related expenses, including higher compensation and related benefits as well as outsourceddriven by increases in headcount related to product support and utilization by customers of our consulting fees.

services.

60

Operating Expenses

(dollars in millions)

Research and Development,

Sales and Marketing and General and Administrative Expenses

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Expenses

 

$

539.9

 

 

48

%

 

$

365.3

 

 

17

%

 

$

311.3

 

Percentage of total revenues

 

21

%

 

 

 

 

19

%

 

 

 

 

19

%

The decrease in research and development, sales and marketing and general and administrative expenses in fiscal 2009 was primarily driven by decreases in compensation expense and a decrease in the costs associated with acquired rights to use technology. The decrease in compensation costs during fiscal 2009 as compared to fiscal 2008 was primarily due to lower profit sharing and employee bonuses based on company performance. The increase in compensation costs during fiscal 2008 as compared to fiscal 2007 related to increases in headcount and stock-based compensation offset by decreases in profit sharing and employee bonuses based on company performance.
Research and Development
   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Expenses
 $565.1  (15)% $662.1  8% $613.2 
Percentage of total revenue
  19%     18%     19%

Research and development expenses consist primarily of salary and benefit expenses for software developers, contracted development efforts, related facilities costs and expenses associated with computer equipment used in software development.

55



Research and development expenses fluctuateddecreased due to the following:

 

 

% Change
2006 to 2005

 

% Change
2005 to 2004

 

Increased compensation and related benefits associated with headcount growth related to the Macromedia acquisition, higher incentive compensation, amortization of deferred stock compensation related to the acquisition of Macromedia and stock-based compensation costs as a result of adopting SFAS 123R at the beginning of fiscal 2006

 

 

37

%

 

 

—

 

 

Compensation and related benefits associated with headcount growth and higher incentive compensation

 

 

—

 

 

 

10

%

 

Increased facility costs related to acquisition of Macromedia

 

 

5

 

 

 

—

 

 

Increased use of contractors

 

 

1

 

 

 

1

 

 

Increased repairs and maintenance

 

 

1

 

 

 

—

 

 

Increased purchases of equipment and software licenses

 

 

1

 

 

 

2

 

 

Various individually insignificant items

 

 

3

 

 

 

4

 

 

Total change

 

 

48

%

 

 

17

%

 

  
% Change
2009 to 2008
 
% Change
2008 to 2007
Compensation and related benefits associated with headcount growth  1%  7%
Compensation associated with incentive compensation and stock-based compensation  (13)  — 
Various individually insignificant items  (3)  1 
Total change  (15)%  8%

We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remainremaining competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products.

Sales and Marketing

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

 

Expenses

 

$

867.1

 

 

46

%

 

$

593.3

 

 

14

%

 

$

521.1

 

 

Percentage of total revenues

 

34

%

 

 

 

 

30

%

 

 

 

 

31

%

 

   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Expenses $981.9  (10)% $1,089.3  11% $984.4 
Percentage of total revenue  33%     30%     31%
Sales and marketing expenses consist primarily includeof salary and benefit expenses, sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.


Sales and marketing expenses fluctuateddecreased due to the following:

 

 

% Change
2006 to 2005

 

% Change
2005 to 2004

 

Increased compensation and related benefits associated with headcount growth related to the Macromedia acquisition, higher incentive compensation, amortization of deferred stock compensation related to the acquisition of Macromedia and stock-based compensation costs as a result of adopting SFAS 123R at the beginning of fiscal 2006

 

 

33

%

 

 

—

 

 

Compensation and related benefits associated with headcount growth and higher incentive compensation

 

 

—

 

 

 

7

%

 

Increased contractor costs

 

 

3

 

 

 

—

 

 

Increased professional fees

 

 

3

 

 

 

—

 

 

Increased facility costs related to acquisition of Macromedia

 

 

3

 

 

 

—

 

 

Increased marketing spending related to product launches and overall marketing efforts to further increase revenues

 

 

4

 

 

 

4

 

 

Various individually insignificant items

 

 

—

 

 

 

3

 

 

Total change

 

 

46

%

 

 

14

%

 

  
% Change
2009 to 2008
 
% Change
2008 to 2007
Compensation and related benefits associated with headcount growth  2%  5%
Compensation associated with incentive compensation and stock-based compensation  (8)  1 
Marketing spending related to product launches and overall marketing efforts to further increase revenue  (1)  4 
Various individually insignificant items
  (3)  1 
Total change
  (10)%  11%
61

General and Administrative

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Expenses

 

$

235.1

 

 

41

%

 

$

166.7

 

 

21

%

 

$

138.0

 

Percentage of total revenues

 

9

%

 

 

 

 

8

%

 

 

 

 

8

%

   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Expenses $298.7  (11)% $337.3  23% $275.0 
Percentage of total revenue  10%     9%     9%
General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.

General and administrative expenses decreased due to the following:
  
% Change
2009 to 2008
 
% Change
2008 to 2007
Allocation of costs associated with acquired rights to use technology  (5)%  6%
Compensation and related benefits associated with headcount growth  2   4 
Compensation associated with incentive compensation and stock-based compensation  (8)  2 
Charitable contributions                                                                                                   (3)  4 
Professional and consulting fees  1   2 
Provision for bad debt
  —   2 
Depreciation and amortization  1   1 
Various individually insignificant items  1   2 
Total change  (11)%  23%

General and administrative expenses fluctuated

The decrease in allocation of costs associated with acquired rights to use technology in fiscal 2009 as compared to fiscal 2008 primarily relates to the historical use of licensing rights associated with certain technology licensing arrangements entered into in fiscal 2008 that did not recur in fiscal 2009. Allocation of costs associated with acquired rights to use technology increased in fiscal 2008 as compared to fiscal 2007 primarily due to the following:fact that we entered into certain technology licensing arrangements totaling $100.4 million and $60.0 million during fiscal 2008 and fiscal 2007, respectively. Of this cost, an estimated $56.4 million and $44.8 million during fiscal 2008 and fiscal 2007, respectively, was related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to fifteen years. Of the remaining costs, we estimated that approximately $27.2 million and $15.2 million during fiscal 2008 and fiscal 2007, respectively, was related to historical use of licensing rights which was expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future. 
Charitable contributions represent funding of the Adobe Foundation which is a private foundation created to leverage human, technological and financial resources to drive social change and improve the communities in which we live and work. The decrease in charitable contributions during fiscal 2009 as compared to fiscal 2008 and increase in fiscal 2008 as compared to fiscal 2007 reflects a change in the timing of contributions to the Adobe Foundation.
Restructuring Charges
   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
   
Fiscal
2007
 
Expenses $41.3  29% $32.1  *%  $0.6 
Percentage of total revenue  1%     1%     *%

 

 

% Change
2006 to 2005

 

% Change
2005 to 2004

 

Increased compensation and related benefits associated with headcount growth related to the Macromedia acquisition, higher incentive compensation, amortization of deferred stock compensation related to the acquisition of Macromedia and stock-based compensation costs as a result of adopting SFAS 123R at the beginning of fiscal 2006

 

 

21

%

 

 

—

 

 

Compensation and related benefits associated with headcount growth and higher incentive compensation

 

 

—

 

 

 

9

%

 

Increased (decreased) legal fees

 

 

6

 

 

 

(2

)

 

Increased professional fees

 

 

—

 

 

 

6

 

 

Increased depreciation and amortization

 

 

5

 

 

 

3

 

 

Increased repairs and maintenance

 

 

4

 

 

 

2

 

 

Increased contractor fees

 

 

4

 

 

 

—

 

 

Increased provision for bad debt

 

 

1

 

 

 

—

 

 

Various individually insignificant items

 

 

—

 

 

 

3

 

 

Total change

 

 

41

%

 

 

21

%

 

*Percentage is not meaningful.
Fiscal 2009 Restructuring and Other Charges

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Expenses

 

$

19.7

 

 

*%

 

 

 

$

—

 

 

 

—

%

 

 

$

—

 

 

Percentage of total revenues

 

1

%

 

 

 

 

 

—

 

 

 

 

 

 

 

—

 

 


On November 10, 2009, we initiated a restructuring plan to appropriately align our costs in connection with our fiscal 2010 operating plan impacting up to approximately 630 full-time positions worldwide. In connection with this restructuring plan, in the fourth quarter of fiscal 2009, we recorded restructuring charges of approximately $25.5 million related to ongoing

62

*Percentage


termination benefits for the elimination of approximately 340 of these full-time positions worldwide. As of November 27, 2009, approximately $2.5 million was paid. The remaining accrual associated with these ongoing termination benefits is not meaningful.

Inexpected to be paid during fiscal 2010. The restructuring activities related to this program affect only those employees and facilities that were associated with Adobe prior to the acquisition of Omniture on October 23, 2009.


Beginning in the first quarter of fiscal 2006, pursuant2010, we expect to Boardrecord additional restructuring charges of Directors’ approval,approximately $15 million to $18 million primarily related to the consolidation of leased facilities and up to approximately $26 million related to employee severance arrangements for the elimination of the remaining full-time positions worldwide. We expect to accrue the facility related liabilities beginning in the first quarter of fiscal 2010 and pay these liabilities through fiscal 2021 based on current lease terms. Substantially all of these charges will result in cash expenditures.

Omniture Restructuring Charges
    We completed our acquisition of Omniture on October 23, 2009.  In the fourth quarter of fiscal 2009, we implementedinitiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with this restructuring plan, to eliminate 313 positions, held by Adobe employees worldwide and which impacted all functional areas. The reductionwe accrued a total of approximately $10.6 million in force was completed in fiscal 2006. The restructuring plan, which is estimated to be completed in fiscal 2007, also includes costs related to termination benefits for the world-wide consolidationelimination of facilities,approximately 100 regular positions and for the closure of duplicative facilities. We also accrued approximately $0.2 million in costs related to the cancellation of certain contracts and the write-off of fixed assets located at facilities that will be vacated. During fiscal 2006, the total restructuring charges of $19.7 million included severance and related charges associated with the reductionwind-down of subsidiaries and other service contracts held by Omniture. These costs were recorded as a part of the purchase price allocation, as discussed in forceNote 2 of our Notes to Consolidated Financial Statements, and have been accrued for as of November 27, 2009. We expect to pay the termination benefits and facility related liabilities through fiscal 2010 and fiscal 2013, respectively.
Additionally, approximately $1.5 million of restructuring costs related to facilities were included in the liabilities assumed by us upon our acquisition of Omniture on October 23, 2009.
Fiscal 2008 Restructuring Charges
In the fourth quarter of fiscal 2008, we initiated a restructuring program, consisting of reductions in workforce of approximately 560 full-time positions globally and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with this restructuring program, we recorded restructuring charges totaling $29.2 million related to ongoing termination benefits for the elimination of approximately 460 of the 560 full-time positions globally. As of November 28, 2008, $0.4 million was paid.
During fiscal 2009, we continued to implement restructuring activities under this program. We vacated approximately 89,000 square feet of research and development and sales facilities in the U.S., the United Kingdom and Canada. We accrued $8.5 million for the fair value of our future contractual obligations under these operating leases using our credit-adjusted risk-free interest rate, estimated at approximately 6% as of the date we ceased to use the leased properties. This amount is net of the fair value of future estimated sublease income of approximately $4.4 million. We also recorded additional charges of $6.7 million for termination benefits for the elimination of substantially all of the remaining 100 full-time positions expected to be terminated.
We have paid substantially all of the accrued termination benefits during fiscal 2009 and expect to pay the remaining amounts in fiscal 2010. We expect to pay facilities-related liabilities through fiscal 2013.
Macromedia Restructuring Charges
We completed our acquisition of Macromedia on December 3, 2005. In connection with this acquisition, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. We also recognized costs related to the closure of duplicative facilities and the cancellation of certain contracts.

We did not incur any restructuringcontracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia.  Costs for termination benefits and contract cancellations were completed during fiscal 2007. Total costs incurred were $27.0 million and $3.2 million, respectively.

63

As of November 27, 2009, accrued restructuring charges inrelated to the 2009 restructuring program, 2008 restructuring program, Omniture acquisition, and Macromedia acquisition totaled approximately $23.0 million, $4.4 million, $12.3 million, and $5.0 million respectively. We expect to pay the liabilities associated with the 2009 and 2008 restructuring programs through fiscal 20052021 and 2004.

2013, respectively. We expect to pay the restructuring liabilities associated with the Omniture and Macromedia acquisitions through fiscal 2013 and fiscal 2012, respectively.

See Note 11 of our Notes to Consolidated Financial Statements for further information regarding our restructuring charges.
Amortization of Purchased Intangibles and Incomplete Technology

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Expenses

 

$

69.9

 

 

—

%

 

 

$

—

 

 

 

*

%

 

 

$

—

 

 

Percentage of total revenues

 

3

%

 

 

 

 

 

—

 

 

 

 

 

 

 

—

 

 

   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Expenses $71.6  5% $68.2  (6)% $72.4 
Percentage of total revenue  2%     2%     2%

As a result of acquiring Macromedia,our acquisition of Omniture in fiscal 2009, we acquired purchased intangibles which will beare amortized over their estimated useful lives of one to twelve years. In addition, as a result of our acquisition of Macromedia in fiscal 2006, we acquired purchased intangibles which are amortized over their estimated useful lives of two to four years. See Note 2During fiscal 2009, we completed one business combination, in addition to Omniture. During fiscal 2008 we completed one business combination and during fiscal 2007, we completed two business combinations and one asset acquisition. We acquired purchased intangibles through these acquisitions which are amortized over their estimated useful lives.
Amortization expense increased during fiscal 2009 as compared to fiscal 2008, primarily due to amortization expense associated with intangibles assets purchased through the acquisition of NotesOmniture.
Amortization expense decreased during fiscal 2008 as compared to Consolidated Financial Statementsfiscal 2007, due to a decrease in amortization expense associated with intangible assets purchased through the Macromedia acquisition.
Non-Operating Income (Expense) (dollars in millions)
   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Interest and other income, net $31.4  (28)% $43.8  (47)% $82.7 
Percentage of total revenue  1%     1%     3%
Interest expense  (3.4) 66%  (10.0) *   (0.2)
Percentage of total revenue  *      *      * 
Investment gains (losses), net  (17.0) (204)%  16.4  131%  7.1 
Percentage of total revenue  (1)%     *%     * 
Total non-operating income (expense), net $11.0  (78)% $50.2  (44)% $89.6 

*Percentage is not meaningful.
Interest and Other Income, Net
Interest and other income, net, consists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income, net also includes foreign exchange gains and losses, including those from hedging revenue transactions primarily denominated in Euro and Japanese Yen currencies.
Interest and other income, net, decreased during fiscal 2009 as compared to fiscal 2008 primarily due to lower interest rates, partially offset by lower average invested balances, realized gains on sales of fixed income securities and lower foreign exchange losses.
    Interest and other income, net, decreased during fiscal 2008 as compared to fiscal 2007 primarily as a result of lower average invested balances due to cash used for further information regarding these purchased intangibles.

our share repurchase programs, lower interest rates and increased hedging costs. Additionally, during fiscal 2008, interest and other income, net included losses on fixed income investments associated with a write-down for an other-than-temporary impairment totaling approximately $1.3 million during the second quarter of fiscal 2008.

Non-operating Income

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

 

Investment gain (loss)

 

$

61.2

 

 

*

%

 

$

(1.3

)

 

*

%

 

$

2.5

 

 

Percentage of total revenues

 

2

%

 

 

 

 

*

%

 

 

 

 

*

%

 

Interest and other income

 

67.2

 

 

74

%

 

38.6

 

 

*

%

 

14.3

 

 

Percentage of total revenues

 

3

%

 

 

 

 

2

%

 

 

 

 

1

%

 

Total non-operating income

 

$

128.4

 

 

244

%

 

$

37.3

 

 

*

%

 

$

16.8

 

 

64

*Percentage


Interest Expense
Interest expense for fiscal 2009 and 2008, primarily represents interest associated with our credit facility. The outstanding balance as of November 27, 2009 was $1.0 billion. Interest due under the credit facility is not meaningful.

paid upon expiration of the London interbank offered rate (“LIBOR”) contract or at a minimum, quarterly. The decline in interest expense was primarily due to lower interest rates.

Investment Gain (Loss)

Gains (Losses), Net

Investment gain (loss)gains (losses), net, consists principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable and non-marketable equity securities, unrealized holding gains and losses associated with our deferred compensation plan assets (classified as trading securities), and gains and losses of Adobe Ventures.
Investment gains and (losses), net fluctuated due to the following (in millions):
   2009   2008   2007 
             
Net gains (losses) related to our investments in Adobe Ventures and cost method investments $(16.7) $15.9  $6.9 
Gains from sale of equity investments  —   5.4   0.2 
Write-downs due to other-than-temporary declines in value of our marketable equity securities  (0.3)  (4.9)  — 
Total investment gains (losses), net $(17.0) $16.4  $7.1 

During fiscal 2009, investment gains (losses), net decreased as compared to fiscal 2008 primarily due to net unrealized losses related to our Adobe Ventures and other direct investments.

 

 

2006

 

2005

 

2004

 

 

 

 

 

 

 

 

 

 

 

Net losses related to our investments in Adobe Ventures and cost method investments

 

$(6.5

)

$(1.0

)

$(0.1

)

 

Write-downs due to other-than-temporary declines in value of our marketable equity securities

 

—

 

(0.6

)

—

 

 

Gains from sale of short-term investments

 

—

 

0.1

 

2.5

 

 

Gains from sale of equity investments

 

67.9

 

—

 

—

 

 

Gains (losses) on stock warrants

 

(0.2

)

0.2

 

0.1

 

 

Total investment gain (loss)

 

$61.2

 

$(1.3

)

$2.5

 

 

The increase in our

During fiscal 2008, investment gain from fiscal 2005gains (losses), net increased as compared to fiscal 2006 is2007 due primarily dueto investment gains from our direct and Adobe Ventures investments.  Additionally, during fiscal 2008, we received cash and recognized a gain resulting from the expiration of the escrow period related to the sale of our investment in Atom Entertainment, Inc. that occurred during the fourth quarter of fiscal 2006. We are uncertain of future investment gains or losses as they are primarily dependent upon market conditions and the operations of the underlying investee companies.

Interest and Other Income

The largest component of interest and other income is interest earned on cash, cash equivalents and short-term fixed income investments, but also includes gains and losses on the sale of fixed income investments, foreign exchange transactions including hedging gains and losses, and interest expense.

Interest and other income increased during fiscal 2006 compared to fiscal 2005 due to higher levels of cash and short term investments and higher rates of return during fiscal 2006. These gains were partially offset by increased costs of our foreign currency hedging program.

Interest and other income increased in fiscal 2005 compared to fiscal 2004 primarily due to higher interest income as a result of higher levels of cash and higher interest rates during fiscal 2005, as well as higher gains on our foreign currency hedging program.


Provision for Income Tax Provision

es (dollars in millions)

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

 

Provision

 

$

173.9

 

 

7

%

 

$

162.9

 

 

3

%

 

$

158.2

 

 

Percentage of total revenues

 

7

%

 

 

 

 

8

%

 

 

 

 

10

%

 

Effective tax rate

 

26

%

 

 

 

 

21

%

 

 

 

 

26

%

 

   
Fiscal
2009
  
% Change
2009 to 2008
  
Fiscal
2008
  
% Change
2008 to 2007
  
Fiscal
2007
 
Provision $315.0  52% $206.7  (7)% $223.4 
Percentage of total revenue  11%     6%     7%
Effective tax rate  45%     19%     24%

Our effective tax rate increased approximately twenty-six percentage points during fiscal 2009 as compared to fiscal 2008. The increase was primarily due to a one-time charge that was related to our acquisition of Omniture.  The charge was the tax cost of inter-company transactions necessary to license certain Omniture assets to Adobe’s trading companies, so that Omniture’s services can be offered to customers from Adobe companies.
Our effective tax rate decreased approximately five percentage points during fiscal 20062008 as compared to fiscal 2005.2007. The netdecrease was primarily related to the completion in the third quarter of fiscal 2008 of a U.S. income tax examination covering our fiscal years 2001 through 2004, a refund of foreign taxes from our fiscal years 2000 through 2002 following a foreign tax court judgment and stronger international profits for fiscal 2008 offset in part by an increase is primarily due to the expirationtax benefit for the reinstatement of the federal research and development tax credit on December 31, 2005 and because the 2005 effective tax rate included a tax benefit recognized in connection with the repatriation of certain foreign earnings. In December 2006, after the end of Adobe’s fiscal year, the federal research and development tax credit was retroactively extended from January 1, 2006 until December 31, 2007 which includes an 11 month period in Adobe’s 2006 fiscal year. The impact of this new tax law will be reflected in our fiscal 2007 results including an approximately $12 million discrete item in our first quarter fiscal 2007 results for the credit relating to fiscal 2006.

Our effective tax rate decreased four percentage points during2006 in the first quarter of fiscal 2005 as compared to fiscal 2004 primarily due to a tax benefit recognized as a result of the release of certain deferred tax liabilities in connection with the repatriation of certain foreign earnings. In addition, our effective tax rate decreased one percentage point due to a variety of factors, including higher profits earned by our international trading company which are taxed at a lower statutory rate and a reduction of a valuation allowance against certain deferred tax assets.

2007.

65

LIQUIDITY AND CAPITAL RESOURCES
This data should be read in conjunction with the Consolidated Statements of Cash Flows.
(in millions)  
Fiscal
2009
   
Fiscal
2008
 
Cash, cash equivalents and short-term investments
 $1,904.5  $2,019.2 
Working capital
 $1,629.1  $1,972.5 
Stockholders’ equity
 $4,890.6  $4,410.4 

    Summary of our cash flows is as follows (in millions):

 

 

Fiscal
2006

 

% Change
2006 to 2005

 

Fiscal
2005

 

% Change
2005 to 2004

 

Fiscal
2004

 

Cash, cash equivalents and short-term investments

 

$

2,280.9

 

 

34

%

 

$

1,700.8

 

 

30

%

 

$

1,313.2

 

Working capital

 

2,207.1

 

 

44

%

 

1,528.2

 

 

38

%

 

1,107.1

 

Stockholders’ equity

 

$

5,151.9

 

 

176

%

 

$

1,864.3

 

 

31

%

 

$

1,423.5

 

   
Fiscal
2009
   
Fiscal
2008
   
Fiscal
2007
 
Net cash provided by operating activities
 $1,117.7  $1,280.7  $1,441.1 
Net cash (used for) provided by investing activities
  (1,497.1)  (304.7)  81.5 
Net cash provided by (used for) financing activities
  477.7   (1,021.6)  (1,350.4)
Effect of foreign currency exchange rates on cash and cash equivalents  14.7   (14.4)  1.7 
Net increase (decrease) in cash and cash equivalents
 $113.0  $(60.0) $173.9 
Our primary source of cash is receipts from revenue. The primary uses of cash are payroll (salaries, bonuses, and benefits),related expenses; general operating expenses (marketing,including marketing, travel and office rent)rent; and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and anotherparticipation in the employee stock purchase plan (“ESPP”). Another use of cash is our stock repurchase program, which is detaileddescribed below.

Cash flows from operating activities
Net cash provided by operating activities of $1.1 billion for fiscal 2006, of $927.2 million,2009, was primarily comprised of net income plus the net effect of non-cash related expenses. The primary working capital sourcesources of cash was a decreasewere net income coupled with decreases in trade receivables, prepaid expenses and other current assets and increases in income taxes payablepayable. Trade receivables decreased primarily from CS4 revenue that was shipped in the latter half of the fourth quarter of fiscal 2008 and deferred revenue. Income taxes payable increased primarily duecollected during the first quarter of fiscal 2009, in addition to higher current tax liabilities related tolower overall increased taxable income. Deferredgross revenue increased primarily due to increased maintenance and support obligations. Workingimproved collections.

The primary working capital uses of cash included an increase in trade receivables andwere decreases in accrued expenses, deferred revenue, trade payables and accrued restructuring. Our trade receivables increased due to an increase in revenue. As compared to the same period last year, our days sales outstanding in trade receivables (“DSO”) increased from 31 days to 48 days. The increase in DSO was due to an increase in revenue in the latter part of the year due to timing of product shipments and an increase in certain receivables from the Macromedia acquisition which have longer payment terms. Accrued expenses decreased becauseprimarily due to payments for employee bonuses and commissions related to fiscal 2008. Decreases in deferred revenue related primarily to deferred revenue that was recognized in the first quarter of compensation related costsfiscal 2009 associated with our free of charge upgrades for CS4 and other expenses.Adobe Photoshop Lightroom products, as well as declines in maintenance and support orders. Accrued restructuring decreased becauseprimarily due to payments related to the 2008 restructuring program that was initiated in the fourth quarter of payments made during fiscal 2006; please refer2008, offset in part by new charges related to Note 9our 2009 restructuring program and acquisition of the Notes to Consolidated Financial Statements for more information.

Omniture.

Cash

Net cash provided by operating activities of $1.3 billion for fiscal 2005, of $758.4 million,2008, was primarily comprised of net income plus the net effect of non-cash related expenses. WorkingThe primary working capital sources of cash were increases in net income, deferred revenue, accrued expenses, income taxes payablerestructuring and trade payables. Increases in deferred revenue. Accrued expenses increased primarily due to compensation related costs and marketing expenses. Income taxes payable increased as a result of higher current tax liabilitiesrevenue related to repatriation of certain foreign earnings and overall increased taxable income. Deferred revenue increased primarily due to increased maintenance and support obligations. Workingand free of charge upgrade plan purchases which offset in part, decreases in deferred revenue related to royalties. Accrued restructuring costs increased due to the restructuring program initiated in the fourth quarter of fiscal 2008 offset in part by payments of facility costs during fiscal 2008 associated with the Macromedia acquisition. See Note 11 of our Notes to Consolidated Financial Statements for information regarding our restructuring charges.
The primary working capital uses of cash includedwere increases in trade receivables and prepaid expenses and other current assets. Our accounts receivableassets coupled with decreases in income taxes payable and accrued expenses. Trade receivables increased primarily as a result of high sales of our CS4 family of products at the end of fiscal 2008.  Income taxes payable decreased primarily due to higher revenue duringpayments made as the period. As comparedresult of the completion of a U.S. income tax examination covering our fiscal years 2001 through 2004. Accrued expenses decreased primarily due to fiscal 2004, our DSO was 31 days, one day higher than fiscal 2004.

Cashpayments for employee bonuses and profit sharing offset in part by increases in royalty accruals and charitable contributions.

Net cash provided by operating activities of $1.4 billion for fiscal 2004, of $704.8, million2007, was primarily comprised of net income, net of non-cash related expenses. Working
66

The primary working capital sources of cash for fiscal 2007 were increases in net income, accrued expenses, income taxes payable, deferred revenue and trade payables coupled with decreases in trade receivables and prepaid expenses and other current assets. Net changes in accrued expenses was primarily attributable to increases in accrued bonuses and accrued localization costs related to the localization of our CS3 family of products during fiscal 2007. Income taxes payable increased due to overall increased taxable income. Increases to deferred revenue related primarily to deferred maintenance and service revenue due to strong upgrade plan sales in the fourth quarter of fiscal 2007 for our CS3 family of products and related individual creative products. The decrease in trade receivables was due to collections in the first quarter of fiscal 2007 related to high Acrobat 8 sales at the end of fiscal 2006 and strong collections during the third quarter of fiscal 2007 resulting from shipments of our CS3 family of products.
The primary working capital use of cash in fiscal 2007 was a decrease in accounts receivable. Accrued expenses increasedaccrued restructuring costs which was primarily due to compensation related costs. Deferred revenue increased primarily due to increased maintenancepayments for facility and support obligations. Our accounts receivable decreased due to increased levels of cash collections. Working capital uses of cash included a decrease in income taxes payable due to tax payments madeseverance costs for both agreed and disputed tax assessments.

Net cash provided byfiscal 2007.

Cash flows from investing activities in fiscal 2006 of $195.2 million increased from net cash used in fiscal 2005 of $348.4 million due to the net cash acquired with Macromedia and due to the sale of our minority equity investment in Atom Entertainment, Inc. These proceeds were partially offset by purchases of long term investments and acquisitions of property, plant, and equipment as well as net purchases of short-term investments in fiscal 2006.

Net cash used for investing activities inof $1.5 billion for fiscal 20052009, was primarily due to the acquisition of $348.4 million decreased from net cash used in fiscal 2004 of $351.3 million because there was not an investment in a lease receivable (related to our corporate headquarter office buildings) as there was in 2004. This was partially offset by higher netOmniture, purchases of short-term investments and paymentsproperty and equipment, offset in part by maturities and sales of short-term investments. Purchases of long-term investments and other assets during fiscal 2009 were less than fiscal 2008 primarily due to $56.0 million paid in the third quarter of fiscal 2008 for acquisition costsfuture licensing rights acquired through certain technology licensing arrangements which did not recur in fiscal 2005.

2009.

Net cash from investing activities changed from cash provided for fiscal 2007 of $81.5 million to cash used in fiscal 2008 of $304.7 million primarily due to purchases of short-term investments offset in part by maturities and sales of short-term investments. Other uses of cash during fiscal 2008 represented purchases of property and equipment, long-term investments and other assets and one business combination offset in part by proceeds from the sale of other investments in equity securities. The uses associated with the purchase of long-term investments and other assets related primarily to cash paid for future licensing rights acquired through certain technology licensing arrangements totaling $56.0 million in fiscal 2008.
The primary sources of cash from investment activities during fiscal 2007 were sales and maturities of short-term investments offset in part by purchases of short-term investments. The proceeds from the sales of short-term investments were primarily used for stock repurchases. Uses of cash during fiscal 2007 included purchases of property and equipment, purchases of long-term investments and other assets which related primarily to the technology licensing arrangements that occurred during the second quarter of fiscal 2007, the completion of two business combinations and one asset acquisition in fiscal 2007, and the purchase of a portion of the lease receivable totaling $80.4 million associated with our lease extension for the Almaden tower lease.  See Note 17 of our Notes to Consolidated Financial Statements for further information regarding this lease extension.
Cash flows from financing activities
Net cash from financing activities changed from cash used in fiscal 2008 of $1.0 billion to cash provided for fiscal 2009 of $477.7 million, primarily due to additional borrowing under our credit agreement of $650.0 million and lower purchases of treasury stock, offset in part by proceeds related to the issuance of treasury stock (See sections entitled “Stock Repurchase Program I” and “Stock Repurchase Program II” discussed below).
Net cash used for financing activities decreased $328.8 million for a total of $1.0 billion in fiscal 2006 of $774.7 million increased from net cash used in2008 as compared to fiscal 2005 of $246.6 million2007, primarily due to thenet borrowings under our credit agreement of $350.0 million. Additionally, we had lower purchases of treasury stock. Cash used during fiscal 2006 was partially stock when compared to the prior year (See sections entitled “Stock Repurchase Program I” and “Stock Repurchase Program II” discussed below), offset in part by thelower proceeds related to the issuance of the treasury stock from exercises of employee stock options. Cash used for stock repurchases during fiscal 2006 increased from the prior year due to a higher average cost per share, a higher number of shares being repurchased, and remaining prepayments related to stock repurchase agreements (see section titled “Stock Repurchase Program—On-Going Dilution).

Net cash used for financing activities in fiscal 2005 of $246.6 million increased from cash used in fiscal 2004 of $224.5 million primarily due to a decrease in proceeds received from the re-issuance of treasury stock as a result of a lower number of options being exercised.

We discontinued our quarterly cash dividend after the payment of the dividend for the first quarter of fiscal 2005. We intend to use the cash previously used to pay the quarterly dividend for our ongoing stock repurchase programs. Under the terms of our lease agreements for our San Jose headquarters, we are not prohibited from paying cash dividends unless an event of default occurs.

In fiscal 2006, we entered into various agreements with San Jose Water Corporation and certain of its affiliates to acquire land and a building in downtown San Jose for $36.5 million. The building and certain parking areas were used by the San Jose Water Company and will be leased back to San Jose Water Corporation until mid 2008. Additionally, the Board of Directors has approved a facilities expansion plan for our operations in India, which may include the purchase of land and buildings. We are also in the process of extending our lease for the Almaden Tower for a five year term with an additional five years at our option. We have received Board approval to purchase a portion of the lease receivable of the lessor as

stock.

we have done with the East and West Towers. We expect a cash outlay of approximately $90 million when the transaction closes sometime during the first quarter of fiscal 2007.

We expect to continue our investing activities, including investments in short-term and long-term investments, venture capital, facilities expansion and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase programs and strategically acquire software companies, products or technologies that are complementary to our business. In addition,The Board of Directors has approved a facilities expansion for our operations in India, which may include the purchase of land and buildings.
67

Acquisition of Omniture
    On October 23, 2009, we completed the acquisition of Omniture, an industry leader in Web analytics and online business optimization based in Orem, Utah for approximately $1.8 billion. Under the terms of the agreement, we completed our tender offer to acquire all of the outstanding shares of Omniture common stock at a price of $21.50 per share, net to the seller in cash, without interest. We expect to incur significant incremental costs, such as direct costs related to the acquisition and costs associated with restructuring our operations. We believe that our existing cash and cash equivalents, short-term investments and cash generated from operations will be sufficient to meet these cash outlays.

Restructuring

On November 10, 2009, we initiated a restructuring plan to investappropriately align our costs in connection with our fiscal 2010 operating plan impacting up to approximately $100630 full-time positions worldwide. In connection with this restructuring plan, in the fourth quarter of fiscal 2009, we recorded restructuring charges of approximately $25.5 million related to ongoing termination benefits for the elimination of approximately 340 of these full-time positions worldwide. As of November 27, 2009, approximately $2.5 million was paid. The remaining accrual associated with these ongoing termination benefits is expected to be paid during fiscal 2010. The restructuring activities related to this program are only to those employees and facilities that were associated with Adobe prior to the acquisition of Omniture on October 23, 2009.

Beginning in the first quarter of fiscal 2010, we expect to record approximately $15 million to $18 million primarily related to the consolidation of leased facilities and up to approximately $26 million related to employee severance arrangements for the elimination of the remaining full-time positions worldwide. We expect to accrue the facility related liabilities beginning in the first quarter of fiscal 2010 and pay these liabilities through fiscal 2021 based on current lease terms. Substantially all of these charges will result in cash expenditures.
    We completed our acquisition of Omniture on October 23, 2009.  In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with this restructuring plan, we accrued a total of approximately $10.6 million in venture capital overcosts related to termination benefits for the next threeelimination of approximately 100 regular positions and for the closure of duplicative facilities. We also accrued approximately $0.2 million in costs related to five yearsthe cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Omniture. These costs were recorded as a part of the purchase price allocation, as discussed in Companies leveraging our platform technologies.

Adobe uses professional investment management firms to manage mostNote 2 of our invested cash. External investment firms managed,Notes to Consolidated Financial Statements, and have been accrued for as of November 27, 2009. We expect to pay the termination benefits and facility related liabilities through fiscal 2010 and fiscal 2013, respectively.

Additionally, approximately $1.5 million of restructuring costs related to facilities were included in the liabilities assumed by us upon acquisition of Omniture on average, 77%October 23, 2009.

In the fourth quarter of Adobe’s invested balances during fiscal 2006. Within2008, we initiated a restructuring program, consisting of reductions in workforce of approximately 560 full-time positions globally and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with this restructuring program, we recorded restructuring charges in the fourth quarter of fiscal 2008 totaling $29.2 million related to termination benefits for the elimination of approximately 460 of the 560 full-time positions globally.
During fiscal 2009, we continued to implement restructuring activities under this program. We vacated approximately 89,000 square feet of research and development and sales facilities in the U.S., the fixed income portfolio is primarily invested in municipal bonds. OutsideUnited Kingdom and Canada.  We accrued $8.5 million for the fair value of our future contractual obligations under these operating leases using our credit-adjusted risk-free interest rate, estimated at approximately 6% as of the U.S., our fixed income portfoliodate we ceased to use the leased properties. This amount is primarily invested in U.S. Treasury notes and highly rated corporate notes. The balancenet of the fixedfair value of future estimated sublease income portfolio is managed internally and invested primarily in money market and enhanced money market fundsof approximately $4.4 million. We also recorded charges of $6.7 million for working capital purposes. Asongoing termination benefits for the elimination of December 1, 2006, $182.3 millionsubstantially all of the securities now classified asremaining 100 full-time positions expected to be terminated. We have paid substantially all of the accrued termination benefits during fiscal 2009 with and expect to pay the remaining amounts in fiscal 2010. We expect to pay facilities-related liabilities through fiscal 2013.
    We believe that our existing cash and cash equivalents, short-term investments have structural features that allow usand cash generated from operations will be sufficient to sellmeet the securities at par within 90 dayscash outlays for the restructuring changes described above.
68

Other Liquidity and thus retain similar liquidity characteristics as cash equivalents. All investments are made according to policies approved by the Board of Directors.

Capital Resources Considerations                                                                                                

Our existing cash, cash equivalents and investment balances may further decline during fiscal 20072010 in the event of a further weakening of the economy or changes in our planned cash outlay.outlay, including changes in incremental costs such as direct and integration costs related to the acquisition. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part I, Item 1A titled “Risk Factors.” However, based on our current business plan and revenue prospects, we believe that our existing balances together withand our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. In addition,At November 27, 2009, our existing credit facility is $1.0 billion and we have received Board approvalborrowed against the entire amount. See Note 18 of our Notes to executeConsolidated Financial Statements for further information regarding our credit agreement.
We use professional investment management firms to manage a $500 million credit facility which is expected to be finalized inlarge portion of our invested cash. External investment firms managed, on average, 50% of our consolidated invested balances during the firstfourth quarter of fiscal 2007. This credit facility will provide backup liquidity2009. Within the U.S., the portfolio is invested primarily in money market funds for general corporate purposes for a periodworking capital purposes. Outside of up to 5 years. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailedU.S., our fixed income portfolio is primarily invested in Item 1A, “Risk Factors.”

U.S. Treasury securities.

Stock Repurchase Program—On-going Dilution Coverage

Program I


To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and from time to timealso enter into structured stock repurchase agreementsrepurchases with third parties.

third-parties.

Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time. Refer to Part II, Item 5(c) in this Annual Report for share repurchases during the quarter ended December 1, 2006.

As part of this program, on April 17, 2005, the Board of Directors approved the use of an additional $1.0 billion for stock repurchase commencing upon the close of the Macromedia acquisition. This additional $1.0 billion in stock repurchases was completed by the third quarter of fiscal 2006.

During fiscal 20062009, 2008 and 2005,2007 we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $1.3$350.0 million, $525.0 million and $1.1 billion, and $600 million, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the volume weighted average priceVolume Weighted Average Price (“VWAP”) of our common stock.stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

62



The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval, and the average VWAP of our stock during the interval less the agreed upon discount.

During fiscal 2009, we repurchased approximately 15.2 million shares at an average price per share of $27.89 through structured repurchase agreements entered into during fiscal 2008 and fiscal 2009. During fiscal 2008, we repurchased 22.4 million shares at an average price of $36.26 through structured repurchase agreements which included prepayments from fiscal 2007. During fiscal 2007, we repurchased 22.0 million shares at an average price of $40.04 through structured repurchase agreements which included prepayments from fiscal 2006.

During fiscal 2008, we also repurchased 3.6 million shares at an average price of $36.41 in open market transactions.
For fiscal 2006,2009, 2008 and 2007, the $1.3 billion prepayment wasprepayments were classified as treasury stock on our balance sheetConsolidated Balance Sheets at the payment date, though only shares physically delivered to us by December 1, 2006 areNovember 27, 2009, November 28, 2008 and November 30, 2007 were excluded from the denominator in the computation of earnings per share. All outstandingAs of November 27, 2009 and November 28, 2008, approximately $59.9 million and $134.7 million, respectively, of up-front payments remained under the agreements.
See Item 5, Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, for share repurchases during the quarter ended November 27, 2009.
Stock Repurchase Program II
Under this stock repurchase program, we had authorization to repurchase an aggregate of 50.0 million shares of our common stock. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements asto large financial institutions. During the third quarter of December 1, 2006 will expire on or before July 19, 2007. Asfiscal 2008, the remaining authorized number of December 1, 2006shares were repurchased.
69

During fiscal 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. During fiscal 2007, we provided prepayments of $850.0 million under structured share repurchase agreements to large financial institutions. During fiscal 2007, we repurchased 17.7 million shares under these structured agreements at an average price of $40.50 and approximately $204.0$133.7 million of up-front payments remained under the agreements.

At the beginningthese agreements as of November 30, 2007.

During fiscal 2007,2008, we entered intoalso repurchased 0.5 million shares at an additional structured repurchase agreement with a large financial institution, whereupon we provided the financial institution with a prepaymentaverage price of $300.0 million which will be classified as treasury stock on our balance sheet.

$39.79 in open market transactions.


Summary of Stock Repurchases for fiscal 2006, 20052009, 2008 and 2004

2007

(in thousands, except average amounts)

Board Approval

 

Repurchases

 

2006

 

2005

 

2004

 

Date

 

Under the Plan

 

Shares

 

Average

 

Shares

 

Average

 

Shares

 

Average

 

December 1997

 

From employees(1)

 

134

 

$

37.10

 

7

 

$

29.16

 

10

 

$

25.65

 

 

 

Open market

 

1,650

 

36.04

 

—

 

—

 

12,414

 

20.82

 

 

 

Structured repurchases(2)

 

36,792

 

34.00

 

18,708

 

30.61

 

9,532

 

23.33

 

Total shares

 

 

 

38,576

 

34.10

 

18,715

 

$

30.61

 

21,956

 

$

21.91

 

Total cost

 

 

 

$

1,315,317

 

 

 

$

572,930

 

 

 

$

481,075

 

 

 

Board Approval Repurchases   2009   2008   2007 
Date Under the Plan  Shares   Average  Shares   Average  Shares   Average 
December 1997 
From employees(1)
  1  $24.00  5  $34.89  39  $39.24 
  Open market  —  $—  3,554  $36.41  —  $— 
  
Structured repurchases(2)
  15,231  $27.89  22,418  $36.26  22,012  $40.04 
April 2007 
Structured repurchases(2)
  —  $—  31,859  $37.15  17,684  $40.50 
  Open market  —  $—  456  $39.79  —  $— 
Total shares    15,232  $27.89  58,292  $36.79  39,735  $40.25 
Total cost   $424,851     $2,144,400     $1,599,214     

(1)          The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for the option exercise price or withholding taxes due.

(2)          Stock repurchase agreements executed with large financial institutions. See “Stock Repurchase Program I—On-going Dilution Coverage” above.

(1)The repurchases from employees represent shares cancelled when surrendered in lieu of cash payments for the option exercise price or withholding taxes due.
(2)Stock repurchase agreements executed with large financial institutions. See “Stock Repurchase Program I” and “Stock Repurchase Program II” above.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of December 1, 2006,November 27, 2009, consist of obligations under operating leases, royalty agreements and various service agreements. We expect to fulfill all of the following commitments from our working capital.

Lease Commitments

The two lease agreements discussed inSee Note 1517 of our Notes to Consolidated Financial Statements for additional information regarding our contractual commitments.

Contractual Obligations
The following table summarizes our contractual obligations as of November 27, 2009 (in millions):

    Payment Due by Period 
   Total   
Less than
1 year
   1-3 years   3-5 years   
More than
5 years
 
Operating leases $249.3  $53.2  $74.7  $44.8  $76.6 
Purchase obligations   210.5   165.5   26.0   6.0   13.0 
Debt  1,000.0   —   —   1,000.0   — 
Total                                                       $1,459.8  $218.7  $100.7  $1,050.8  $89.6 

As of November 27, 2009, the principal outstanding under the credit agreement was $1.0 billion which is due in full no later than February 16, 2013. Interest associated with this agreement cannot be estimated with certainty by period throughout the term since it is based on a fluctuating interest rate calculation. Our credit facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio.
Our leases for the East and West Towers and the Almaden Tower are both subject to standard covenants including certain financial covenants.ratios as defined in the lease agreements that are reported to the lessors quarterly. As of December 1, 2006November 27, 2009, we were in compliance with all of our financial covenants. We expect to remain within compliance in the next 12 months. We are comfortable withbelieve these limitations and believe theycovenants will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan.
Under the terms of our credit agreement and lease agreements, we are not prohibited from paying cash dividends unless payment would trigger an event of default or one currently exists.

The gross liability for unrecognized tax benefits at November 27, 2009 was $218.0 million, exclusive of interest and penalties. The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. We believe that before the end of fiscal 2010, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits equal to $0 to approximately $10.0 million.  These amounts would decrease income tax expense under accounting for income taxes and as a result of the revised accounting guidance for business combinations in fiscal 2010. See Note 151 of our Notes to Consolidated Financial StatementsStatements. Under the revised accounting guidance for further information regarding our lease commitments.

The following table summarizes our contractual commitments as of December 1, 2006:

 

 

Total

 

Less than
1 year

 

1-3 years

 

3-5 years

 

Over
5 years

 

Total non-cancelable operating leases, net of sublease income*

 

$

201.4

 

 

$

47.2

 

 

 

$

73.9

 

 

 

$

26.4

 

 

 

$

53.9

 

 

business combinations, adjustments to acquired income tax liabilities (including adjustments for acquisitions completed prior to the effective date) that are recorded subsequent to the acquisition date will be recognized in income from continuing operations, with certain exceptions, if such changes occur after the measurement period.

*                    These amounts are net of sublease income. See Note 15 of Notes to Consolidated Statements for further detail regarding our future commitments under these non-cancelable operating leases.


Royalties

Royalties

We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.

Guarantees

The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, theThe fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet.Consolidated Balance Sheets. As such, we recognized a $5.2 million liabilityand $3.0 million in liabilities, related to the extended East and West towers lease that was extended in August 2004. This liability isTowers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statementour Consolidated Statements of Income over the life of the lease.leases. As of December 1, 2006,November 27, 2009, the unamortized portion of the fair value of the residual value guaranteeguarantees remaining in other long-term liabilities and prepaid rent was $2.8$1.3 million.

Indemnifications

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third partiesthird-parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our officersdirectors and directorsofficers for certain events or occurrences while the officerdirector or directorofficer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’sdirector’s or director’sofficer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduceslimits our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships.partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.

Recent Accounting Pronouncements
See Note 1 of our Notes to Consolidated Financial Statements for information regarding the effect of new accounting pronouncements on our financial statements.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

All market risk sensitive instruments were entered into for non-trading purposes.

Foreign Currency Risk
Foreign Currency Hedging Instruments

We

In countries outside the U.S., we transact business, in foreign countries, in U.S. dollars and in various foreignother currencies. In Europe and Japan, transactions that are denominated in euro or yenEuro and Yen, respectively, are subject us to exposure from movements in exchange rates. We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. This exposure is primarily related to yen-denominated product and support revenue in Japan and euro-denominated product and support revenue in certain European countries.We may use foreign exchange option or forward contracts for Euro- or Yen-denominated revenue.
    In fiscal 2006, 20052009, 2008 and 2004,2007, our revenue exposures were 32.8 billion yen, 26.4 billion yen,504.3 million Euros, 628.2 million Euros and 24.1 billion yen,595.5 million Euros, respectively. In fiscal 2006, 20052009, 2008 and 2004,2007, our revenue exposures were 504.7 million euros, 411.4 million euros,30.3 billion Yen, 36.8 billion Yen and 375.4 million euros,35.5 billion Yen, respectively.


Our Japanese operating expenses are in yen and our European operating expenses are primarily in euro,Euro and our Japanese operating expenses are in Yen, which mitigates a portion of the exposure related to yenEuro and euroYen denominated product revenue. In addition, we hedge firmly committed transactions using forward contracts. These contracts do subject us to risk of accounting gains and losses; however, the gains and losses on these contracts largely offset gains and losses on the assets, liabilities and transactions being hedged. We also hedge a percentage of forecasted international revenue with forwardpurchased option contracts and purchased optionforward contracts. Our revenue hedging policy is intended to neutralizehelp mitigate the impact on our forecasted revenue due to foreign currency exchange rate movements. At December 1, 2006,As of November 27, 2009, total outstanding contracts were $646.8$510.4 million which included the notional equivalent of $434.7$283.9 million in euro, $176.1Euro, 182.1 million in yen,Yen and $36.0$44.4 million in other foreign currencies. These hedges are foreign currency forward exchange contracts which hedged our balance sheet exposures. In addition, we had the notional equivalent of $419.0 million inexposures and purchased put option contracts which hedged our forecasted revenue. As of December 1, 2006,November 27, 2009, all contracts were set to expire at various times through July 2007.2010. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties with specificwho meet our minimum rating requirements.requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty.

In addition, we also have long termlong-term investment exposures consisting of the capitalization and retained earnings in our non-USD functional currency foreign subsidiaries. For the fiscal years ending December 1, 2006As of November 27, 2009 and December 2, 2005November 28, 2008, this long termlong-term investment exposure totaled a notional equivalent of $85.9$228.8 million and $56.7$149.1 million, respectively. At this time, we do not hedge these long termlong-term investment exposures.

Economic Hedging—Hedges of Forecasted Transactions

We may use foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. These foreign exchange option contracts, carried at fair value, may have maturities between one and twelve months. Such cash flow exposures result from portions of our forecasted revenuesrevenue denominated in currencies other than the U.S. dollar, primarily the Japanese yenEuro and the euro.Japanese Yen. We enter into these foreign exchange option contracts to hedge forecasted product licensing revenue in the normal course of business and accordingly, they are not speculative in nature.

We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income, (loss), until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income, (loss)net on the consolidated statementour Consolidated Statements of incomeIncome at that time. For the fiscal year ended December 1, 2006,November 27, 2009, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.

See also Note 16 in5 of our Notes to Consolidated Financial Statements.

Statements for information regarding our hedging activities.

Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities

We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with

changes in the fair value recorded as interest and other income, (loss).net. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At December 1, 2006,November 27, 2009, the outstanding balance sheet hedging derivatives had maturities of 15090 days or less.


A sensitivity analysis was performed on all of our foreign exchange derivatives as of December 1, 2006.November 27, 2009. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value resulting from a 10% and 15% shift in the value of exchange rates relative to the U.S. dollar. For option contracts, the Black-Scholes equation model was used. For forward contracts, duration modeling was used where hypothetical changes are made to the spot rates of the currency. A 10% and 15% increase in the value of the U.S. dollar (and a corresponding decrease in the value of the hedged foreign currency asset) would lead to an increase in the fair value of our financial hedging instruments by $39.9 million and $66.6 million, respectively.$22.2 million. Conversely, a 10% and 15% decrease in the value of the U.S. dollar would result in a decrease in the fair value of these financial instruments by $18.8 million and $27.4 million, respectively.

$12.9 million.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates.

As a general rule, we do not use financial instruments to hedge local currency denominated operating expenses in countries where a natural hedge exists. For example, in many countries, revenue from the local currency product licenses substantially offsets the local currency denominated operating expenses. We assess the need to utilize financial instruments to hedge currency exposures, primarily related to operating expenses, on an ongoing basis.

We regularly review our hedging program and may as part of this review determine at any time to change our hedging program.

See also Note 16 in5 of our Notes to Consolidated Financial Statements.

Statements for information regarding our hedging activities.

Interest Rate Risk
Short-Term Investments and Fixed Income Securities
At November 27, 2009, we had debt securities classified as short-term investments of $900.0 million. Changes in interest rates could adversely affect the market value of these investments. The following table separates these investments, based on stated maturities, to show the approximate exposure to interest rates (in millions):
Due within one year $387.6 
Due within two years  249.9 
Due within three years  218.6 
Due after three years  43.9 
Total $900.0 

A sensitivity analysis was performed on our investment portfolio as of November 27, 2009. The analysis is based on an estimate of the hypothetical changes in market value of the portfolio that would result from an immediate parallel shift in the yield curve of various magnitudes.

The following tables present the hypothetical fair values of our debt securities classified as short-term investments assuming immediate parallel shifts in the yield curve of 50 basis points (“BPS”), 100 BPS and 150 BPS.  The analysis is shown as of November 27, 2009 and November 28, 2008 (dollars in millions):

 -150 BPS -100 BPS -50 BPSFair Value 11/27/2009 +50 BPS +100 BPS +150 BPS
910.8909.2905.4900.0893.9888.0882.2
       
 -150 BPS -100 BPS -50 BPSFair Value 11/28/2008 +50 BPS +100 BPS +150 BPS
1,145.81,142.31,136.41,129.71,123.01,116.41,109.9

Other Market Risk
Privately Held Long-Term Investments
    The privately held companies in which we invest, can still be considered in the start-up or development stages which are inherently risky. The technologies or products these companies have under development are typically in the early stages and may never materialize, which could result in a loss of a substantial part of our initial investment in these companies. The evaluation of privately held companies is based on information that we request from these companies which is not subject to the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and accuracy of the data received from these companies.
See Note 4 and Note 8 of our Notes to Consolidated Financial Statements for information regarding our limited partnership interest in Adobe Ventures.
Short-Term Investments and Marketable Equity Investments

Securities

We are exposed to equity price risk on our portfolio of marketable equity securities. As of December 1, 2006,November 27, 2009, our total equity holdings in publicly traded companies were valued at $11.9$5.0 million compared to $1.8$3.0 million at December 2, 2005.November 28, 2008. The increase was primarily due to distributions from Adobe Ventures ofthe change in the fair value of two previously private companies that went public during fiscal 2006. The investments were reclassified from long-term to short-term. We believe that it is reasonably possible that the fair values of these securities could adversely change in the near term. We have a policy in place to review our equity holdings on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each company’s cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other-than-temporary decline in value exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related write-down in our consolidated statements of income.

during fiscal 2009.

The following table represents the potential decrease in fair values of our marketable equity securities as of November 27, 2009, that are sensitive to changes in the stock market. Fair value deteriorations of 50%, 35% and 15% were selected for illustrative purposes because none is more likely to occur than another.

 

 

50%

 

35%

 

15%

 

Marketable equity securities

 

$

(5.9

)

$

(4.2

)

$

(1.8

)

Fixed Income Investments

At December 1, 2006, we had an investment portfolio of fixed income securities, including those classified as cash equivalents, of $2,220.0 million compared to $1,657.3 million at December 2, 2005, an increase of 34%. Changes in interest rates could adversely affect the market value of our fixed income investments. The table below separates the remaining maturities of our fixed income securities into segments, based on stated maturities, to show the approximate exposure to interest rates. A significant


proportion of securities classified as “due after three years,” based on the stated maturity, have structural features that allow us to sell the securities, at par, in less than three years.

Due within one year

 

$

1,505.0

 

Due within two years

 

409.7

 

Due within three years

 

175.3

 

Due after three years

 

130.0

 

Total

 

$

2,220.0

 

A sensitivity analysis was performed on our investment portfolio as of December 1, 2006. This sensitivity analysis was based on a modeling technique that measures the hypothetical market value changes that would result from a parallel shift in the yield curve of plus 50, 100, or 150 basis points over six-month and twelve-month time horizons. The following table represents the potential decrease to the value of our fixed income securities given a negative shift in the yield curve used in our sensitivity analysis.

 

 

0.5%

 

1.0%

 

1.5%

 

6 month horizon

 

$

(5.5

)

$

(11.1

)

$

(16.6

)

12 month horizon

 

$

(2.9

)

$

(5.9

)

$

(8.8

)

We limit our exposure to interest rate and credit risk by establishing and monitoring clear policies and guidelines for our fixed income portfolios. Our investment policy limits the maximum weighted average duration of all invested funds to 2.5 years. The guidelines also establish credit quality standards, limits on exposure to any one security issue, limits on exposure to any one issuer and limits on exposure to the type of instrument.

Privately Held Investments

We have direct investments, as well as indirect investments through Adobe Ventures, in several privately held companies, many of which can still be considered in the start-up or development stages. These investments are inherently risky, as the technologies or products these companies have under development are typically in the early stages and may never materialize, and we could lose a substantial part of our initial investment in these companies.

It is our policy to review privately-held investments on a regular basis to evaluate the carrying amount and economic viability of these companies. This policy includes, but is not limited to, reviewing each of the companies’ cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. The evaluation process is based on information that we request from these privately-held companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies.

See also Note 1 in our Notes to Consolidated Financial Statements.

67

(in millions)  50%   35%   15% 
Marketable equity securities
 $(2.5) $(1.7) $(0.8)


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Our

Page
Consolidated Balance Sheets
76
Consolidated Statements of Income
77
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
78
Consolidated Statements of Cash Flows
79
Notes to Consolidated Financial Statements
80
Report of KPMG LLP, Independent Registered Public Accounting Firm
122
All financial statementsstatement schedules have been omitted, since the required by this item are submitted as a separate sectioninformation is not applicable or is not present in amounts sufficient to require submission of this Form 10-K/A. See Item 15 (a)(1) for a listing of financial statements providedthe schedule, or because the information required is included in the section titled “FinancialConsolidated Financial Statements and Notes thereto.

ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)

   November 27,   November 28, 
   2009   2008 
ASSETS        
Current assets:        
Cash and cash equivalents $999,487  $886,450 
Short-term investments  904,986   1,132,752 
Trade receivables, net of allowances for doubtful accounts of $15,225 and $4,128, respectively  410,879   467,234 
Deferred income taxes  77,417   110,713 
Prepaid expenses and other current assets  80,855   137,954 
Total current assets  2,473,624   2,735,103 
Property and equipment, net  388,132   313,037 
Goodwill  3,494,589   2,134,730 
Purchased and other intangibles, net  527,388   214,960 
Investment in lease receivable  207,239   207,239 
Other assets  191,265   216,529 
Total assets                                                                                                      $7,282,237  $5,821,598 
         
LIABILITIES AND STOCKHOLDERS’ EQUITY        
Current liabilities:        
Trade payables $58,904  $55,840 
Accrued expenses  419,646   399,969 
Accrued restructuring  37,793   35,690 
Income taxes payable  46,634   27,136 
Deferred revenue  281,576   243,964 
Total current liabilities  844,553   762,599 
Long-term liabilities:        
Debt  1,000,000   350,000 
Deferred revenue  36,717   31,356 
Accrued restructuring  6,921   6,214 
Income taxes payable  223,528   123,182 
Deferred income taxes  252,486   117,328 
Other liabilities  27,464   20,565 
Total liabilities  2,391,669   1,411,244 
Commitments and contingencies        
Stockholders’ equity:        
Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued  —   — 
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 522,657 and 526,111shares outstanding, respectively  61   61 
Additional paid-in-capital  2,390,061   2,396,819 
Retained earnings  5,299,914   4,913,406 
Accumulated other comprehensive income  24,446   57,222 
Treasury stock, at cost (78,177 and 74,723 shares, respectively), net of re-issuances  (2,823,914)  (2,957,154)
Total stockholders’ equity  4,890,568   4,410,354 
Total liabilities and stockholders’ equity                                                                                                      $7,282,237  $5,821,598 

See accompanying Notes to Consolidated Financial Statements.”


76
SUPPLEMENTARY DATATABLE OF CONTENTS


The following tables (presented inADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts) set forth supplementary data for each of the quarters (unaudited) in the two-year period ended December 1, 2006. The share and per share data below have been adjusted to give effect to our stock split as of May 23, 2005.

 

 

2006

 

 

 

Quarter Ended

 

Year Ended

 

 

 

March 3

 

June 2

 

September 1

 

December 1

 

December 1

 

Revenue

 

$

655,478

 

$

635,456

 

 

$

602,191

 

 

 

$

682,175

 

 

$

2,575,300

 

Gross profit

 

577,732

 

569,849

 

 

532,712

 

 

 

602,550

 

 

2,282,843

 

Income before income taxes

 

144,257

 

164,497

 

 

123,012

 

 

 

247,961

 

 

679,727

 

Net income*

 

105,072

 

123,097

 

 

94,396

 

 

 

183,244

 

 

505,809

 

Basic net income per share*

 

0.18

 

0.21

 

 

0.16

 

 

 

0.31

 

 

0.85

 

Shares used in computing basic net income per share

 

598,451

 

595,284

 

 

586,433

 

 

 

584,798

 

 

593,750

 

Diluted net income per share

 

0.17

 

0.20

 

 

0.16

 

 

 

0.30

 

 

0.83

 

Shares used in computing diluted net income per share

 

621,839

 

613,804

 

 

600,882

 

 

 

602,175

 

 

612,222

 

 

 

2005

 

 

 

Quarter Ended

 

Year Ended

 

 

 

March 4

 

June 3

 

September 2

 

December 2

 

December 2

 

Revenue

 

$

472,882

 

$

496,029

 

 

$

487,039

 

 

 

$

510,371

 

 

$

1,966,321

 

Gross profit

 

445,913

 

468,595

 

 

459,559

 

 

 

479,676

 

 

1,853,743

 

Income before income taxes

 

176,785

 

187,808

 

 

193,964

 

 

 

207,219

 

 

765,776

 

Net income

 

151,894

 

149,778

 

 

144,916

 

 

 

156,251

 

 

602,839

 

Basic net income per share

 

0.31

 

0.31

 

 

0.29

 

 

 

0.32

 

 

1.23

 

Shares used in computing basic net income per share

 

486,260

 

488,765

 

 

491,710

 

 

 

492,517

 

 

489,921

 

Diluted net income per share

 

0.30

 

0.29

 

 

0.29

 

 

 

0.31

 

 

1.19

 

Shares used in computing diluted net income per share

 

506,182

 

508,156

 

 

507,821

 

 

 

508,562

 

 

508,070

 

data)

*                    In fiscal 2006, net income and net income per share includes the impact of SFAS 123R stock-based compensation charges as well as the integration of Macromedia into our operations, neither of which were present during fiscal 2005. Refer to Notes 2 and 11 of our

    Years Ended 
   
November 27,
2009
   
November 28,
2008
   
November 30,
2007
 
Revenue:            
Products
 $2,759,391  $3,396,542  $3,019,524 
Services and support  186,462   183,347   138,357 
Total revenue
  2,945,853   3,579,889   3,157,881 
             
Cost of revenue:            
Products
  228,897   266,389   270,818 
Services and support
  67,835   96,241   83,876 
Total cost of revenue
  296,732   362,630   354,694 
             
Gross profit
  2,649,121   3,217,259   2,803,187 
             
Operating expenses:            
Research and development
  565,141   662,057   613,242 
Sales and marketing
  981,903   1,089,341   984,388 
General and administrative
  298,749   337,291   274,982 
Restructuring charges
  41,260   32,053   555 
Amortization of purchased intangibles and incomplete technology  71,555   68,246   72,435 
Total operating expenses
  1,958,608   2,188,988   1,945,602 
             
Operating income
  690,513   1,028,271   857,585 
             
Non-operating income (expense):            
Interest and other income, net
  31,380   43,847   82,724 
Interest expense
  (3,407)  (10,019)  (253)
Investment gains (losses), net
  (16,966)  16,409   7,134 
Total non-operating income (expense), net
  11,007   50,237   89,605 
Income before income taxes
  701,520   1,078,508   947,190 
Provision for income taxes
  315,012   206,694   223,383 
Net income
 $386,508  $871,814  $723,807 
Basic net income per share $0.74  $1.62  $1.24 
Shares used in computing basic income per share
  524,470   539,373   584,203 
Diluted net income per share
 $0.73  $1.59  $1.21 
Shares used in computing diluted income per share
  530,610   548,553   598,775 



See accompanying Notes to Consolidated Financial Statements.


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ITEM 9.TABLE OF CONTENTS                CHANGES IN

ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND DISAGREEMENTS WITH ACCOUNTANTS ONCOMPREHENSIVE INCOME
 (In thousands)
 Common Stock 
Additional
Paid-In
 Retained  
Accumulated
Other
Comprehensive
 Treasury Stock    
 Shares Amount Capital Earnings  Income Shares  Amount  Total 
Balances at December 1, 2006600,834$61$2,451,610 $3,317,785 $6,344 (13,608)$(623,924)$5,151,876 
Comprehensive income:                    
Net income
— — —  723,807  — —  —  723,807 
Other comprehensive income,
 net of taxes
— — —  —  21,604 —  —  21,604 
Total comprehensive income,
 net of taxes
— — —  —  — —  —  745,411 
Re-issuance of treasury stock under stock compensation plans— — (298,776) —  — 23,918  814,863  516,087 
Tax benefit from employee stock option plans— — 66,966  —  — —  —  66,966 
Purchase of treasury stock— — —  —  — (39,735) (1,951,527) (1,951,527)
Stock-based compensation— — 149,987  —  — —  —  149,987 
Adjustment to the valuation of Macromedia assumed options— — (28,818) —  — —  —  (28,818)
Balances at November 30, 2007600,834$61$2,340,969 $4,041,592 $27,948 (29,425)$(1,760,588)$4,649,982 
Comprehensive income:                    
Net income
— — —  871,814  — —  —  871,814 
Other comprehensive income,
net of taxes
— — —  —  29,274 —  —  29,274 
Total comprehensive income,
net of taxes
— — —  —  — —  —  901,088 
Re-issuance of treasury stock under stock compensation plans— — (206,984) —  — 12,994  526,149  319,165 
Tax benefit from employee stock option plans— — 90,360  —  — —  —  90,360 
Purchase of treasury stock— — —  —  — (58,292) (1,722,715) (1,722,715)
Stock-based compensation— — 172,474  —  — —  —  172,474 
Balances at November 28, 2008600,834$61$2,396,819 $4,913,406 $57,222 (74,723)$(2,957,154)$4,410,354 
Comprehensive income:                    
Net income
— — —  386,508  — —  —  386,508 
Other comprehensive income,
net of taxes
— — —  —  (32,776) —  —  (32,776) 
Total comprehensive income, net of taxes— — —  —  — —  —  353,732 
Re-issuance of treasury stock under stock compensation plans— — (303,688) —  — 11,777  483,254  179,566 
Tax benefit from employee stock option plans— — 44,381  —  — —  —  44,381 
Purchase of treasury stock— — —  —  — (15,231) (350,014) (350,014)
Equity awards assumed for acquisition— — 84,968  —  — —  —  84,968 
Stock-based compensation— — 167,581  —  — —  —  167,581 
Balances at November 27, 2009600,834$61$2,390,061 $5,299,914 $24,446 (78,177)$(2,823,914)$4,890,568 




See accompanying Notes to Consolidated Financial Statements.


ADOBE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

    Years Ended 
   November 27, 2009   November 28, 2008   November 30, 2007 
Cash flows from operating activities:            
Net income $386,508  $871,814  $723,807 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation, amortization and accretion  282,423   270,269   315,464 
Stock-based compensation  167,581   172,474   149,987 
Deferred income taxes  49,590   46,584   58,385 
Unrealized losses (gains) on investments  11,623   (17,377)  (6,776)
Tax benefit from employee stock option plans  44,381   90,360   55,074 
Other non-cash items  4,434   4,784   (176)
Excess tax benefits from stock-based compensation  (11,980)  (31,983)  (85,050)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:            
Trade receivables, net  172,287   (153,386)  46,332 
Prepaid expenses and other current assets  21,814   (5,584)  6,418 
Trade payables  (13,601)  14,078   3,518 
Accrued expenses  (53,320)  (13,904)  83,281 
Accrued restructuring  (8,446)  24,330   (13,796)
Income taxes payable  109,620   (57,656)  61,448 
Deferred revenue  (45,142)  65,879   43,137 
Net cash provided by operating activities  1,117,772   1,280,682   1,441,053 
Cash flows from investing activities:            
Purchases of short-term investments  (1,307,366)  (2,381,533)  (2,503,147)
Maturities of short-term investments  464,031   1,568,874   516,839 
Proceeds from sales of short-term investments  1,057,176   717,076   2,457,347 
Purchases of property and equipment  (119,592)  (111,792)  (132,075)
Acquisitions, net of cash acquired  (1,582,669)  (3,584)  (75,528)
Purchases of long-term investments and other assets  (29,143)  (124,469)  (111,939)
Investment in lease receivable  —   —   (80,439)
Issuance costs for credit facility                                                                                      —   —   (856)
Proceeds from sale of long-term investments                                                                                      17,696   30,747   11,342 
Other  2,771   —   — 
Net cash (used for) provided by investing activities  (1,497,096)  (304,681)  81,544 
Cash flows from financing activities:            
Purchases of treasury stock  (350,013)  (1,722,715)  (1,951,527)
Proceeds from issuance of treasury stock  179,566   319,165   516,087 
Excess tax benefits from stock-based compensation  11,980   31,983   85,050 
Proceeds from borrowings on credit facility  650,000   800,000   — 
Repayments of borrowings on credit facility  —   (450,000)  — 
Repayments of acquired debt  (13,875)  —   — 
Net cash provided by (used for) financing activities  477,658   (1,021,567)  (1,350,390)
Effect of foreign currency exchange rates on cash and cash equivalents  14,703   (14,406)  1,715 
Net increase (decrease) in cash and cash equivalents  113,037   (59,972)  173,922 
Cash and cash equivalents at beginning of year  886,450   946,422   772,500 
Cash and cash equivalents at end of year $999,487  $886,450  $946,422 
Supplemental disclosures:            
Cash paid for income taxes, net of refunds $105,158  $126,299  $55,236 
Cash paid for interest $2,088  $9,604  $— 
Non-cash investing activities:            
Issuance of common stock and stock awards assumed in business acquisitions $84,968  $—  $— 

See accompanying Notes to Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.   SIGNIFICANT ACCOUNTING ANDPOLICIES
Operations
Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of creative, business, Web and mobile software and services used by creative professionals, knowledge workers, consumers, original equipment manufacturers (“OEMs”), developers and enterprises for creating, managing, delivering, optimizing and engaging with compelling content and experiences across multiple operating systems, devices and media. We distribute our products through a network of distributors, value-added resellers (“VARs”), systems integrators, independent software vendors (“ISVs”) and OEMs, direct to end users and through our own Website at www.adobe.com. We also license our technology to hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, Europe, Middle East and Africa (“EMEA”) and Asia. Our software runs on personal computers with Microsoft Windows, Apple Mac OS, Linux, UNIX and various non-PC platforms, depending on the product.
Basis of Presentation
The accompanying Consolidated Financial Statements include those of Adobe and its subsidiaries, after elimination of all intercompany accounts and transactions. We have prepared the accompanying Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).
Use of Estimates
In preparation of consolidated financial statements and related disclosures in conformity with GAAP and pursuant to the rules and regulations of the SEC, we must  make estimates and judgments that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Estimates are used for, but not limited to sales allowances and programs, bad debts, stock-based compensation, allocation of purchase price allocations, excess inventory and purchase commitments, restructuring costs, facilities lease losses, impairment of goodwill and intangible assets, litigation, income taxes and investments. Actual results may differ materially from these estimates.
Fiscal Year
Our fiscal year is a 52- or 53-week year that ends on the Friday closest to November 30. Fiscal years 2009, 2008 and 2007 were all 52 weeks.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation in the Consolidated Statements of Cash Flows. The previously reported classifications of net cash provided by (used for) operating activities, investing activities and financing activities for any period presented were not affected by these reclassifications.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts which reflects our best estimate of potentially uncollectible trade receivables. We regularly review our trade receivables allowances by considering such factors as historical experience, credit-worthiness, the age of the trade receivable balances and current economic conditions that may affect a customer’s ability to pay and we specifically reserve for those deemed uncollectible.

(in thousands)  2009   2008   2007 
Beginning balance $4,128  $4,398  $6,798 
Increase due to acquisition
  9,421   —   — 
Charged (credited) to operating expenses
  2,841   4,414   (1,367)
Preference claim, credited to operating expense  (1,000)  (2,000)  — 
Deductions(*)
  (165)  (2,684)  (1,033)
Ending balance $15,225  $4,128  $4,398 
_________________________________________
(*)Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance, less recoveries.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL DISCLOSURE

None.

STATEMENTS (Continued)

Foreign Currency Translation
We translate assets and liabilities of foreign subsidiaries, whose functional currency is their local currency, at exchange rates in effect at the balance sheet date. We translate revenue and expenses at the monthly average exchange rates. We include accumulated net translation adjustments in stockholders’ equity as a component of accumulated other comprehensive income.
Property and Equipment
We record property and equipment at cost less accumulated depreciation and amortization. Property and equipment are depreciated using the straight-line method over their estimated useful lives ranging from 1 to 5 years for computers and equipment, 1 to 6 years for furniture and fixtures and up to 35 years for buildings. Leasehold improvements are amortized using the straight-line method over the lesser of the remaining respective lease term or useful lives.
Goodwill, Purchased Intangibles and Other Long-Lived Assets
We review our goodwill for impairment annually, or more frequently, if facts and circumstances warrant a review. We completed our annual impairment test in the second quarter of fiscal 2009 and determined that there was no impairment.
Goodwill is assigned to one or more reporting segments on the date of acquisition. We evaluate goodwill for impairment by comparing the fair value of each of our reporting segments to its carrying value, including the associated goodwill. To determine the fair values, we use the market approach based on comparable publicly traded companies in similar lines of businesses and the income approach based on estimated discounted future cash flows. Our cash flow assumptions consider historical and forecasted revenue, operating costs and other relevant factors.
We amortize intangible assets with finite lives over their estimated useful lives and review them for impairment whenever an impairment indicator exists. We continually monitor events and changes in circumstances that could indicate carrying amounts of our long-lived assets, including our intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess recoverability by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of these assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize any intangible asset impairment charges in fiscal 2009, 2008 or 2007.
Our intangible assets are amortized over their estimated useful lives of 1 to 13 years as shown in the table below. Amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed.
Weighted Average Useful Life (years)
Purchased technology7
Localization1
Trademarks7
Customer contracts and relationships10
Other intangibles2

Software Development Costs
Capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the establishment of technological feasibility, which is generally the completion of a working prototype that has been certified as having no critical bugs and is a release candidate. Amortization begins once the software is ready for its intended use, generally based on the pattern in which the economic benefits will be consumed. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material.
Revenue Recognition
Our revenue is derived from the licensing of software products, consulting, hosting services and maintenance and support. Primarily, we recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of software, upgrades, hosting services, maintenance and support, and consulting (multiple-element arrangements). When vendor specific objective evidence (“VSOE”) of fair value does not exist for all delivered elements, we allocate and defer revenue for the undelivered items based on VSOE of fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as license revenue.
VSOE of fair value for each element is based on the price for which the element is sold separately. We determine the VSOE of fair value of each element based on historical evidence of our stand-alone sales of these elements to third-parties or from the stated renewal rate for the elements contained in the initial software license arrangement. When VSOE of fair value does not exist for any undelivered element, revenue is deferred until the earlier of the point at which such VSOE of fair value exists or until all elements of the arrangement have been delivered. The only exception to this guidance is when the only undelivered element is maintenance and support or other services, then the entire arrangement fee is recognized ratably over the performance period.
Product Revenue
We recognize our product revenue upon shipment, provided all other revenue recognition criteria have been met. Our desktop application products’ revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Our direct sales and OEM sales are also subject to limited rights of return. Accordingly, we reduce revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other related factors.
We record the estimated costs of providing free technical phone support to customers for our software products.
We recognize OEM licensing revenue, primarily royalties, when OEMs ship products incorporating our software, provided collection of such revenue is deemed probable. For certain OEM customers, we must estimate royalty revenue due to the timing of securing customer information. This estimate is based on a combination of our generated forecasts and actual historical reporting by our OEM customers. To substantiate our ability to estimate revenue, we review license royalty revenue reports ultimately received from our significant OEM customers in comparison to the amounts estimated in the prior period.
Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the specified free upgrade expires.
Services and Support Revenue
Our services and support revenue is composed of consulting, training and maintenance and support, primarily related to the licensing of our Enterprise and Mobile and Device Solutions products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.
We recognize revenue for hosting services that are based on a committed number of transactions, including implementation and set-up fees, ratably beginning on the date the customer commences use of our services and continuing through the end of the customer term. Over-usage fees, and fees billed based on the actual number of transactions from which we capture data, are billed in accordance with contract terms as these fees are incurred. We record amounts that have been invoiced in accounts receivable and in deferred revenue or revenue, depending on whether the revenue recognition criteria have been met.
Our consulting revenue is primarily recognized using the proportionate performance method and is measured monthly based on input measures, such as hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones when applicable. Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, are recognized ratably over the performance period of the arrangement.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Rights of Return, Rebates and Price Protection
As discussed above, we offer limited rights of return, rebates and price protection of our products under various policies and programs with our distributors, resellers and/or end-user customers. We estimate and record reserves for these programs as an offset to revenue. Below is a summary of each of the general provisions in our contracts:
·Distributors are allowed limited rights of return of products purchased during the previous quarter. In addition, distributors are allowed to return products that have reached the end of their lives and products that are being replaced by new versions.
·We offer rebates to our distributors, resellers and/or end user customers. The amount of revenue that is reduced for distributor and reseller rebates is based on actual performance against objectives set forth by us for a particular reporting period (volume, timely reporting, etc.). If mail-in or other promotional rebates are offered, the amount of revenue reduced is based on the dollar amount of the rebate, taking into consideration an estimated redemption rate calculated using historical trends.
·From time to time, we may offer price protection to our distributors that allow for the right to a credit if we permanently reduce the price of a software product. The amount of revenue that is reduced for price protection is calculated as the difference between the old and new price of a software product on inventory held by the distributor prior to the effective date of the decrease.
Although our subscription contracts are generally non-cancelable, a limited number of customers have the right to cancel their contracts by providing prior written notice to us of their intent to cancel the remainder of the contract term. In the event a customer cancels its contract, they are not entitled to a refund for prior services we have provided to them.
On a quarterly basis, the amount of revenue that is reserved for future returns is calculated based on our historical trends and data specific to each reporting period. We review the actual returns evidenced in prior quarters as a percent of revenue to determine a historical returns rate. We then apply the historical rate to the current period revenue as a basis for estimating future returns. When necessary, we also provide a specific returns reserve for product in the distribution channel in excess of estimated requirements. This estimate can be affected by the amount of a particular product in the channel, the rate of sell-through, product plans and other factors.
Revenue Reserve
Revenue reserve rollforward (in thousands):
   2009   2008   2007 
Beginning balance $50,943  $43,532  $55,526 
Increase due to acquisition  6,566   —   — 
Amount charged to revenue  113,009   153,129   156,761 
Actual returns  (136,117)  (145,718)  (168,755)
Ending balance $34,401  $50,943  $43,532 

Deferred Revenue
Deferred revenue consist of billings or payments received in advance of revenue recognition for our products and services described above. We recognize deferred revenue as revenue only when the revenue recognition criteria are met.
Taxes Collected from Customers
We net taxes collected from customers against those remitted to government authorities in our financial statements. Accordingly, taxes collected from customers are not reported as revenue.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses for fiscal 2009, 2008 and 2007 were $67.0 million, $67.1 million and $45.3 million, respectively.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Foreign Currency and Other Hedging Instruments
In countries outside the United States (“U.S.”), we transact business in U.S. dollars and in various other currencies. In Europe and Japan, transactions that are denominated in Euro and Yen are subject to exposure from movements in exchange rates. We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. We use foreign exchange option and forward contracts for Euro- and Yen-denominated revenue.
We account for our derivative instruments as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.  Derivatives that do not qualify for hedge accounting are adjusted to fair value through earnings. See Note 5 for information regarding our hedging activities.
Gains and losses from foreign exchange forward contracts which hedge certain balance sheet positions, primarily non-functional currency denominated assets and liabilities (e.g., trade receivables and accounts payable) are recorded each period as a component of interest and other income, net in our Consolidated Statements of Income. Foreign exchange forward and option contracts hedging forecasted non-functional currency product licensing revenue, are designated as cash flow hedges under accounting for derivative instruments and hedging activities, with gains and losses recorded net of tax, as a component of other comprehensive income in stockholders’ equity and reclassified into revenue at the time the forecasted transactions occur.
Income Taxes
We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assets and liabilities are recognized for expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.
Recent Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (“FASB”) issued new revenue recognition standards for arrangements with multiple deliverables, where certain of those deliverables are non-software related. The new standards permit entities to initially use management’s best estimate of selling price to value individual deliverables when those deliverables do not have VSOE of fair value or when third-party evidence is not available. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are effective for annual periods ending after June 15, 2010 and are effective for us beginning in the first quarter of fiscal 2011, however early adoption is permitted. We are currently evaluating the impact of adopting these new standards on our consolidated financial position, results of operations and cash flows, including possible early adoption.

In June 2009, the FASB issued the FASB Accounting Standards Codification (the “Codification”) for financial statements issued for interim and annual periods ending after September 15, 2009, which was effective for us beginning in the fourth quarter of fiscal 2009. The Codification became the single authoritative source for GAAP. Accordingly, previous references to GAAP accounting standards are no longer used in our disclosures, including these Notes to the Consolidated Financial Statements. The Codification does not affect our consolidated financial position, cash flows, or results of operations.
In June 2009, the FASB issued amended standards for determining whether to consolidate a variable interest entity. These new standards  amend  the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of the new standards are effective for annual reporting periods beginning after November 15, 2009 and interim periods within those fiscal years. These standards will be effective for us beginning in the first quarter of fiscal 2010. The adoption of the new standards will not have an impact on our consolidated financial position, results of operations and cash flows.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

In May 2009, the FASB issued new standards for subsequent events, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new standards are effective for interim and annual reporting periods ending after June 15, 2009. We adopted the new standards during the third quarter of fiscal 2009 and, as the pronouncement only requires additional disclosures, the adoption did not have an impact on our consolidated financial position, results of operations or cash flows. We have evaluated subsequent events through January 22, 2010, the date that these financial statements were issued.
    In April 2009, the FASB issued new standards for the recognition and measurement of other-than-temporary impairments for debt securities which replaced the pre-existing “intent and ability” indicator. These new standards specify that if the fair value of a debt security is less than its amortized cost basis, an other-than-temporary impairment is triggered in  circumstances where (1) an entity has an intent to sell the security, (2) it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis, or (3) the entity does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). Other-than-temporary impairments are separated into amounts representing credit losses which are recognized in earnings and amounts related to all other factors which are recognized in other comprehensive income (loss). We adopted these standards in the third quarter of fiscal 2009 and they did not have a material effect on our consolidated financial position, results of operations or cash flows.
    In April 2009, the FASB issued new standards which provide guidance on how to determine the fair value of assets and liabilities when the volume and level of activity for the asset or liability has significantly decreased. These new standards also provide guidance on identifying circumstances that indicate a transaction is not orderly. In addition, we are required to disclose in interim as well as annual reporting periods the inputs and valuation techniques used to measure fair value and discussion of changes in valuation techniques. We adopted these standards in the third quarter of fiscal 2009 and they did not have a material effect on our consolidated financial position, results of operations or cash flows.
    In September 2008, the FASB issued additional guidance which requires additional disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments.  This new guidance also amends previous guidance related to accounting for guarantees to require additional disclosure about the current status of the payment/performance risk of a guarantee.  These new provisions are effective for reporting periods ending after November 15, 2008. These provisions further clarify the effective date of new disclosure requirements regarding derivative instruments and hedging activities. We adopted these disclosures requirements in the first quarter of fiscal 2009. Since the new guidance only required additional disclosures, the adoption did not impact our consolidated financial position, results of operations or cash flows.
In April 2008, the FASB issued new standards which provided guidance on how to determine the useful life of intangible assets by amending the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets. This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. These standards are effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years and is effective for us beginning in the first quarter of fiscal 2010. Early adoption is not permitted. As this guidance is to be applied prospectively, on adoption, there will be no impact to our current consolidated financial statements.
In March 2008, the FASB issued new standards which requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. We adopted these new standards in the first quarter of fiscal 2009. Since the new standards only required additional disclosure, the adoption did not impact our consolidated financial position, results of operations or cash flows. See Note 5 for further information regarding derivative instruments and related hedged items.
In December 2007, the FASB revised their guidance for business combinations and non-controlling interests. The new standards will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. The changes also impact the accounting and reporting for minority interests, which will be recharacterized as non-controlling interests and classified as a component of equity. The new standards are effective for us beginning in the first quarter of fiscal 2010. Early adoption is not permitted. We are currently evaluating the impact the new standards will have on our consolidated financial statements however, we currently believe that depending on the size and frequency of acquisitions, the adoption of these standards may have a material effect on our future consolidated financial statements as more costs associated with acquisitions will be required to be expensed rather than accounted for as part of the purchase price.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2.  ACQUISITIONS
Fiscal 2009 Acquisitions
On October 23, 2009, we completed the acquisition of Omniture, Inc. (“Omniture”), an industry leader in Web analytics and online business optimization based in Orem, Utah, for approximately $1.8 billion. Under the terms of the agreement, we completed our tender offer to acquire all of the outstanding shares of Omniture common stock at a price of $21.50 per share, net to the seller in cash, without interest. Acquiring Omniture accelerates our strategy of delivering more effective solutions for assembling, delivering, targeting and optimizing Web content and applications. The transaction was accounted for using the purchase method of accounting. We have included the financial results of Omniture in our Consolidated Financial Statements beginning on the acquisition date. Following the closing, we integrated Omniture as a new reportable segment for financial reporting purposes.
    Assets acquired and liabilities assumed were recorded at their fair values as of October 23, 2009. The total $1.8 billion purchase price was comprised of the following (in thousands):
Acquisition of approximately 79 million shares of outstanding common stock of Omniture at $21.50   per share in cash $1,698,926 
Estimated fair value of earned stock options and restricted stock units assumed and converted  84,968 
Estimated direct transaction costs
  13,964 
Total purchase price
 $1,797,858 

In connection with the acquisition, each Omniture stock option that was outstanding and unexercised was assumed and converted into an option to purchase Adobe common stock based on one of two conversion ratios, dependent on which plan the award was granted under. The conversion ratio was either 0.6182, which was calculated as the consideration price of $21.50 divided by the closing price on the date of acquisition, or 0.6083 calculated as the consideration price of $21.50 divided by the average closing price from October 16, 2009 to October 22, 2009. We assumed the stock options in accordance with the terms of the applicable Omniture stock option plan and terms of the stock option agreement relating to that Omniture stock option. Based on Omniture’s stock options outstanding at October 23, 2009, we converted options to purchase approximately 8.9 million shares of Omniture common stock into options to purchase approximately 5.5 million shares of Adobe common stock. We also assumed and converted approximately 2.5 million shares of outstanding Omniture restricted stock units into approximately 1.6 million shares of Adobe restricted stock units, using the same conversion ratios stated above. The estimated value of the stock options and restricted stock units assumed and converted that is included in the preliminary purchase price equals the fair value of the options to purchase approximately 5.5 million of Adobe common stock and the 1.6 million shares of Adobe restricted stock units, reduced by the portion of the respective values considered unearned compensation.
The estimated fair value of the stock options assumed was determined to be approximately $97.1 million using a Binomial option valuation model with the following assumptions: volatility of 33.6-35.4%; weighted average risk-free interest rate of 0.20-3.64%; dividend yield of 0%; early exercise threshold of $14.20; and post vesting cancellation rate of 1.89%. The underlying stock price used in valuing the options was $34.33, which was the average of closing prices for a range of trading days from September 11, 2009 through September 17, 2009, comprising two days before through two days after the date the acquisition was announced. The value of stock options considered unearned compensation was determined to be approximately $34.9 million, net of estimated forfeitures, also using a Binomial option valuation model with the following assumptions: volatility of 36.5-37.0%; weighted average risk-free interest rate of 0.24%-3.25%; dividend yield of 0%; early exercise threshold of $14.20; and post vesting cancellation rate of 1.89%. The underlying stock price used in valuing the options for which a portion was considered unearned compensation was $34.78, which was the closing price on October 23, 2009. The fair value of the converted restricted stock units was determined to be approximately $55.6 million based on Adobe’s average stock price of $34.33, as discussed above. This amount was reduced by the fair value of the restricted stock units considered unearned compensation of approximately $32.8 million, net of estimated forfeitures, based on the $34.78 stock price referred to above. $67.7 million in unearned compensation will be recorded as an expense on a straight-line basis over the remaining service periods of the respective awards. The recognition of expense associated with the portion of the assumed and converted stock options and restricted stock units that are subject to future service requirements, which are not included in the purchase accounting,  have not been included in the pro forma statements of income.
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Direct transaction costs of approximately $14.0 million include estimated investment banking, legal and accounting fees, and other external costs directly related to the acquisition. As of November 27, 2009, substantially all costs for accounting, legal, and other professional services have been paid.

Preliminary Purchase Price Allocation
Under the purchase accounting method, the total preliminary purchase price was allocated to Omniture’s net tangible and intangible assets based upon their estimated fair values as of October 23, 2009. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill.
The table below represents the allocation of the preliminary purchase price to the acquired net assets of Omniture based on their estimated fair values as of October 23, 2009 and the associated estimated useful lives at that date. The preliminary allocation of the purchase price was based upon a preliminary valuation and our estimates and assumptions are subject to change within the purchase price allocation period  as valuations are finalized.

(in thousands)  Amount  
Weighted Average
Useful Life
(years)
 
Net tangible assets $31,138   N/A 
Identifiable intangible assets:        
Existing technology  176,100   6 
Customer contracts and relationships  167,900   11 
Contract backlog  52,100   2 
Non-competition agreements  900   2 
Trademarks  41,000   8 
In-process research and development  4,600   N/A 
Goodwill  1,334,980   N/A 
Restructuring liability  (10,860)  N/A 
Total estimated purchase price allocation $1,797,858     
    Net tangible assets—Omniture’s tangible assets and liabilities as of October 23, 2009 were reviewed and adjusted to their fair value as necessary. Among the net tangible assets assumed were $137.4 million in cash and cash equivalents, $119.1 million in trade receivables, $40.9 million in property, plant and equipment, $46.0 million in accrued expenses and $110.9 million in deferred tax liabilities.
    Deferred revenue—Included in net tangible assets is Omniture’s deferred revenue which represents advance payments from customers related to subscription contracts and professional services. We estimated our obligation related to the deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to supporting the obligation plus an assumed profit. The sum of the costs and assumed profit approximates, in theory, the amount that we would be required to pay a third party to assume the obligation. The estimated costs to fulfill the obligation were based on the near-term projected cost structure for subscription and professional services. As a result, we recorded an adjustment to reduce Omniture’s carrying value of deferred revenue by $39.7 million to $87.4 million, which represents our estimate of the fair value of the contractual obligations assumed based on a preliminary valuation.
    Identifiable intangible assets—Existing technology acquired primarily consists of Omniture’s SiteCatalyst Web analytics, Omniture Test & Target, and HBX subscription service offerings and also consists of Omniture SiteSearch, Omniture Merchandising and Omniture Insight products and subscription services.  The preliminary estimated fair value of the existing technology was determined based on the present value of the expected cash flows to be generated by each existing technology.  Customer relationships consist of Omniture’s contractual relationships and customer loyalty related to their enterprise and mid-market customers as well as partner customers that resell Omniture’s services to end users. Contract backlog relates to subscription contracts and professional services. We will amortize the fair value of the contract backlog based on the pattern in  which the economic benefits will be consumed.  Trademarks include the Omniture trade name as well

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as SiteCatalyst, Omniture SearchCenter, Omniture Discover, Omniture Genesis, and HBX product names. Non-compete agreements include agreements with key Omniture employees that preclude them from competing against Omniture for a period of two years.  With the exception of contract backlog, we expect to amortize the fair value of these intangible assets on a straight-line basis over their respective estimated useful lives.
    In-process research and development—In-process research and development (“IPR&D”) was expensed to amortization of purchased intangibles and incomplete technology in our Consolidated Statements of Income upon acquisition as it represents incomplete Omniture research and development projects that had not reached technological feasibility and had no alternative future use as of the date of the acquisition. Technological feasibility is established when an enterprise has completed all planning, designing, coding, and testing activities that are necessary to establish that a product can be produced to meet its design specifications including functions, features, and technical performance requirements. The estimated fair value of $4.6 million was determined by estimating the net cash flows expected to be generated from the project and discounting the net cash flows to their present value.
    Goodwill—Approximately $1.3 billion has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented workforce, and cost savings opportunities. The preliminary goodwill recorded in connection with Omniture has been allocated to the Omniture and Creative Solutions reportable segments of $1.1 billion and $0.2 billion, respectively, based on expected revenue and cost synergies to be gained as a result of the acquisition.
    Restructuring—$10.9 million in restructuring related primarily to costs for severance and associated benefits, outplacement services, and cost of redundant facilities. See Note 11 for further details of the amounts accrued during 2009.
    Taxes—As part of our accounting for the Omniture acquisition, a portion of the overall purchase price was allocated to goodwill and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $174.4 million, included in the net tangible assets, was established as a deferred tax liability for the future amortization of the intangible assets.
    Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.

Pro Forma Results
    The financial information in the table below summarizes the combined results of operations of Adobe and Omniture, on a pro forma basis, as though the companies had been combined as of the beginning of the periods presented. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on November 29, 2008 and December 1, 2007 or of results that may occur in the future.
    The following pro forma financial information for fiscal 2009 and 2008 combines the historical results for Adobe for the years ended November 27, 2009 and November 28, 2008 and the historical results of Omniture for the period January 1, 2009 through October 23, 2009  and the year ended December 31, 2008 (in thousands):

   2009   2008 
Net revenues
 $3,168,731  $3,835,799 
Net income
 $308,904  $742,749 
Basic net income per share
 $0.59  $1.38 
Shares used in computing basic net income per share  524,470   539,373 
Diluted net income per share $0.58  $1.35 
Shares used in computing diluted net income per share  531,293   549,883 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    In addition to the acquisition of Omniture, we acquired one other company during fiscal 2009 for cash consideration of approximately $35.3 million. The impact of this acquisition was not material to our consolidated balance sheets and results of operations.
Fiscal 2008 Acquisition
During fiscal 2008, we completed one business combination for cash consideration of approximately $4.3 million. This acquisition was not material to our consolidated balance sheets and results of operations.
Fiscal 2007 Acquisitions
During fiscal 2007, we completed two business combinations and one asset acquisition for cash consideration of $77.0 million. Both individually and in the aggregate, these acquisitions were not material to our consolidated balance sheets and results of operations. See Note 7 for information regarding goodwill and purchased and other intangibles.

ITEM 9A.        CONTROLS

NOTE 3.  CASH, CASH EQUIVALENTS AND PROCEDURES

(a)          Disclosure ControlsSHORT-TERM INVESTMENTS

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and Procedures

Basedshort-term investments as “available-for-sale.” These investments are free of trading restrictions. We carry these investments at fair value, based on his evaluationquoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets. Gains are recognized when realized in our Consolidated Statements of Income. Losses are recognized as realized. When we have determined that an other-than-temporary decline in fair value has occurred the amount of the decline that is related to a credit loss is recognized in earnings. Gains and losses are determined using the specific identification method.

Cash, cash equivalents and short-term investments consisted of the following as of DecemberNovember 27, 2009 (in thousands):

   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
Current assets:            
Cash $75,110  $—  $—  $75,110 
Cash equivalents:                
Money market mutual funds  884,240   —   —   884,240 
Bank deposits  40,137   —   —   40,137 
Total cash equivalents  924,377   —   —   924,377 
Total cash and cash equivalents  999,487   —   —   999,487 
Short-term investments:                
United States treasury notes  373,180   3,199   (1)  376,378 
United States government agency bonds  59,447   273   —   59,720 
Government guaranteed bonds   221,730   3,409   (1)  225,138 
Corporate bonds  185,735   4,702   —   190,437 
Obligations of foreign governments  23,022   397   —   23,419 
Bonds of multi-lateral government agencies  24,598   269   —   24,867 
Subtotal  887,712   12,249   (2)  899,959 
Other marketable equity securities  2,527   2,500   —   5,027 
Total short-term investments  890,239   14,749   (2)  904,986 
Total cash, cash equivalents and short-term investments $1,889,726  $14,749  $(2) $1,904,473 
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Cash, cash equivalents and short-term investments consisted of the following as of November 28, 2008 (in thousands):

   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Estimated
Fair Value
 
Current assets:            
Cash $117,681  $—  $—  $117,681 
Cash equivalents:                
Money market mutual funds  682,148   —   —   682,148 
Bank deposits  40,594   —   —   40,594 
United States treasury notes  35,992   7   —   35,999 
Corporate bonds  10,028   —   —   10,028 
Total cash equivalents  768,762   7   —   768,769 
Total cash and cash equivalents  886,443   7   —   886,450 
Short-term investments:                
United States treasury notes  863,772   14,384   (1)  878,155 
Corporate bonds  109,415   219   (997)  108,637 
Obligations of foreign governments  115,316   811   (33)  116,094 
Bonds of multi-lateral government agencies  26,559   260   —   26,819 
Subtotal  1,115,062   15,674   (1,031)  1,129,705 
Other marketable equity securities  2,773   274   —   3,047 
Total short-term investments  1,117,835   15,948   (1,031)  1,132,752 
Total cash, cash equivalents and short-term investments $2,004,278  $15,955  $(1,031) $2,019,202 

See Note 4 for further information regarding the fair value of our financial instruments.
    The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at November 27, 2009 (in thousands):
    Less Than 12 Months    Total 
   Fair Value   
Gross
Unrealized
Losses
   Fair Value   
Gross
Unrealized
Losses
 
United States treasury notes and agency bonds $11,179  $(1) $11,179  $(1)
Government guaranteed bonds  5,041   (1)  5,041   (1)
Total $16,220  $(2) $16,220  $(2)

As of November 27, 2009, there were no securities in a continuous unrealized loss position for more than twelve months. There were 4 securities that were in an unrealized loss position at November 27, 2009.
The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at November 28, 2008 (in thousands):

    Less Than 12 Months    Total 
   Fair Value   
Gross
Unrealized
Losses
   Fair Value   
Gross
Unrealized
Losses
 
United States treasury notes $37,400  $(1) $37,400  $(1)
Corporate bonds  67,606   (997)  67,606   (997)
Obligations of foreign governments  28,033   (33)  28,033   (33)
Total $133,039  $(1,031) $133,039  $(1,031)

As of November 28, 2008, there were no securities in a continuous unrealized loss position for more than twelve months. There were 33 securities that were in an unrealized loss position at November 28, 2008.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes the cost and estimated fair value of debt securities classified as short-term investments based on stated maturities as of November 27, 2009 (in thousands):

   
Amortized
Cost
   
Estimated
Fair Value
 
Due within one year
 $385,828  $387,572 
Due within two years
  246,169   249,882 
Due within three years
  214,108   218,621 
Due after three years
  41,607   43,884 
Total
 $887,712  $899,959 

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. For debt securities, the portion of the write-down related to credit loss would be recorded to interest and other income, net in our Consolidated Statements of Income. Any portion not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity in our Consolidated Balance Sheets. For equity securities, the write-down would be recorded to investment gains (losses), net in our Consolidated Statements of Income. As of November 27, 2009, we do not consider any of our investments to be other-than-temporarily impaired.
NOTE 4. FAIR VALUE MEASUREMENTS
We measure certain financial assets and liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs at November 27, 2009 (in thousands):
    Fair Value Measurements at Reporting Date Using 
       
Quoted Prices in
Active Markets for
Identical Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
 
   Total   (Level 1)   (Level 2)   (Level 3) 
Current assets:                
Money market funds and overnight deposits(1)
 $924,378  $924,378  $—  $— 
Fixed income available-for-sale securities(2)
  899,960   —   899,960   — 
Available-for-sale equity securities(3) 
  5,026   5,026   —   — 
Total current assets  1,829,364   929,404   899,960   — 
Non-current assets:                
Investments of limited partnership(4) 
  37,121   —   —   37,121 
Foreign currency derivatives(5) 
  4,307   —   4,307   — 
Deferred compensation plan assets(4): 
                
Money market funds
  717   717   —   — 
Equity and fixed income mutual funds  8,328   —   8,328   — 
Subtotal for deferred compensation plan assets  9,045   717   8,328   — 
Total non-current assets  50,473   717   12,635   37,121 
Total assets
 $1,879,837  $930,121  $912,595  $37,121 
Liabilities:                
Foreign currency derivatives(6) 
 $1,589  $—  $1,589  $— 
Total liabilities
 $1,589  $—  $1,589  $— 
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    The fair value of these financial assets and liabilities was determined using the following inputs at November 28, 2008 (in thousands):
    Fair Value Measurements at Reporting Date Using 
       
Quoted Prices in
Active Markets for
Identical Assets
   
Significant
Other
Observable
Inputs
   
Significant
Unobservable
Inputs
 
   Total   (Level 1)   (Level 2)   (Level 3) 
Current assets:                
Money market funds and overnight deposits(1)
 $722,742  $722,742  $—  $— 
Fixed income available-for-sale securities(2)
  1,175,732   —   1,175,732   — 
Available-for-sale equity securities(3) 
  3,047   3,047   —   — 
Total current assets  1,901,521   725,789   1,175,732   — 
Non-current assets:                
Investments of limited partnership(4) 
  39,004   251   —   38,753 
Foreign currency derivatives(5) 
  49,848   —   49,848   — 
Deferred compensation plan assets(4):
                
Money market funds
  704   704   —   — 
Equity and fixed income mutual funds  6,856   —   6,856   — 
Subtotal for deferred compensation plan assets  7,560   704   6,856   — 
Total non-current assets  96,412   955   56,704   38,753 
Total assets
 $1,997,933  $726,744  $1,232,436  $38,753 
Liabilities:                
Foreign currency derivatives(6) 
 $1,739  $—  $1,739  $— 
Total liabilities
 $1,739  $—  $1,739  $— 

(1)Included in cash and cash equivalents on our Consolidated Balance Sheets.
(2)Included in either cash and cash equivalents or short-term investments on our Consolidated Balance Sheets.
(3)Included in short-term investments on our Consolidated Balance Sheets.
(4)Included in other assets on our Consolidated Balance Sheets.
(5)Included in prepaid expenses and other current assets on our Consolidated Balance Sheets.
(6)Included in accrued expenses on our Consolidated Balance Sheets.
See Note 3 for further information regarding the fair value of our financial instruments.
Fixed income available-for-sale securities include U.S. treasury securities, Agency or U.S. government guaranteed securities (70% of total), corporate bonds (21% of total), obligations of foreign governments and their agencies (6% of total), and obligations of multi-lateral government agencies (3% of total) at November 27, 2009 and U.S. treasury securities, Agency or U.S. government guaranteed securities (78% of total), corporate bonds (10% of total), obligations of foreign governments and their agencies (10% of total), and obligations of multi-lateral government agencies (2% of total) at November 28, 2008. These are all high quality, investment grade securities with a minimum credit rating of A- and a weighted average credit rating better than AA+. We value these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 2006,inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosurefixed income available-for-sale securities as having Level 2 inputs. Our procedures include controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. (“Adobe Ventures”), which are consolidated in our Consolidated Financial Statements. The Level 1 investments of limited partnership relate to investments in publicly-traded companies and the information required to be disclosed by usLevel 3 investments consist of investments in this Annual Report on Form 10-K/A was recorded, processed, summarized and reported within the time periods specifiedprivately-held companies. These investments are remeasured at fair value each period with any gains or losses recognized in the SEC’s rules and instructions for Form 10-K/A.

Our management, includinginvestment gains (losses), net in our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectivesConsolidated Statements of Income. We estimated fair value of the control system are met. Further, the designLevel 3 investments by considering available information such as pricing in recent rounds of a control system must reflect the fact that there are resource constraintsfinancing, current cash positions, earnings and the benefits of controls must be considered relative to their costs. Becausecash flow forecasts, recent operational performance and any other readily available market data.

A reconciliation of the inherent limitationsbeginning and ending balances for investments of limited partnership using significant unobservable inputs (Level 3) as of November 27, 2009 and November 28, 2008 was as follows (in thousands):
Balance as of November 30, 2007
 $30,647 
Purchases and sales of investments, net
  363 
Unrealized net investment gains included in earnings
  7,743 
Balance as of November 28, 2008
  38,753 
Purchases and sales of investments, net
  1,921 
Unrealized net investment losses included in earnings
  (3,553)
Balance as of November 27, 2009
 $37,121 

We also have direct investments in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.

(b)          Management’s Report on Internal Control over Financial Reporting

Our management is responsibleprivately-held companies accounted for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our managementcost method, which are periodically assessed for other-than-temporary impairment.  If we determine that an other-than-temporary impairment has occurred, we write-down the effectivenessinvestment to its fair value. We estimated fair value of our internal control over financial reportingcost method investments considering available information such as pricing in recent rounds of December 1, 2006. In making this assessment,financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. During fiscal 2009, we determined that certain of our management usedcost method investments were other-than-temporarily impaired which resulted in a charge of $13.9 million, included in investment gains (losses), net in our Consolidated Statements of Income.  The fair value of cost method investments that were impaired was estimated using Level 3 inputs.

See Note 8 for further information regarding our limited partnership interest in Adobe Ventures and our cost method investments.
NOTE 5. FINANCIAL INSTRUMENTS
Hedge Accounting
We recognize derivative instruments and hedging activities as either assets or liabilities in our Consolidated Balance Sheets and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the criteria set forth by the Committee of Sponsoring Organizationsuse of the Treadway Commission (“COSO”)derivative and whether it is designated and qualifies for hedge accounting.
Economic Hedging—Hedges of Forecasted Transactions
In countries outside the U.S., we transact business in Internal Control-Integrated Framework. Our management has concludedU.S. dollars and in various other currencies. In Europe and Japan, transactions that as of December 1, 2006, our internal control over financial reporting is effective based on these criteria. Our independent registered public accounting firm, KPMG LLP, have issued an audit report on our assessment of our internal control over financial reporting, which is included herein.

(c)           Changesare denominated in Internal Control over Financial Reporting

There were no changes in our internal controls over financial reporting during the quarter ended December 1, 2006 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

(d)          Report of Independent Registered Public Accounting

The Board of DirectorsEuro and Stockholders
Adobe Systems Incorporated:

We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control over Financial Reporting appearing under Item 9A(b), that Adobe Systems Incorporated maintained effective internal control over financial reporting as of December 1, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management of Adobe Systems Incorporated is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the internal control over financial reporting of Adobe Systems Incorporated based on our audit.


We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periodsYen are subject to the risk that controlsexposure from movements in exchange rates. We may become inadequate because ofuse foreign exchange option contracts or forward contracts to hedge certain operational (“cash flow”) exposures resulting from changes in conditions, or thatforeign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any contract is twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the degreenormal course of compliance withbusiness and accordingly, they are not speculative in nature.

To receive hedge accounting treatment, all hedging relationships are formally documented at the policies or procedures may deteriorate.

In our opinion, management’s assessment that Adobe Systems Incorporated maintained effective internal control over financial reporting as of December 1, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control—Integrated Framework issued by COSO. Also, in our opinion, Adobe Systems Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 1, 2006, based on the criteria established in Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standardsinception of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of December 1, 2006 and December 2, 2005,hedge, and the related consolidated statements of income, stockholders’ equity, andhedges must be highly effective in offsetting changes to future cash flows for each of the yearson hedged transactions. We record changes in the three-year period ended December 1, 2006, andintrinsic value of these cash flow hedges in accumulated other comprehensive income in our report dated February 5, 2007, expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
Mountain View, California
February 5, 2007

ITEM 9B.       OTHER INFORMATION

Attached as Exhibit 100 to this Annual Report on Form 10-K/A are the following materials, formatted in Extensible Business Reporting Language (“XBRL”): (i) the information contained in Item 7 of Part II, (ii) the Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue.  In the event the underlying forecasted  transaction does not occur, or it becomes probable

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net in our Consolidated Statements of Income at December 1, 2006that time. For fiscal 2009, 2008 and December 2, 2005, (iii)2007 there were no such gains or losses recognized in interest and other income, net relating to hedges of forecasted transactions that did not occur.
We evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and record any ineffective portion of the hedging instruments in interest and other income, net on our Consolidated Statements of Income. The net gain (loss) recognized in interest and other income, net for cash flow hedges due to hedge ineffectiveness was insignificant for fiscal 2009, 2008 and 2007. The time value of purchased derivative instruments is recorded in interest and other income, net in our Consolidated Statements of Income.
The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges in our Consolidated Statements of Income for fiscal 2009 was as follows (in thousands):

    2009 
   
Foreign
Exchange
 Option
Contracts
   
Foreign
Exchange
Forward
Contracts
 
Derivatives in cash flow hedging relationships:      
Net gain (loss) recognized in OCI, net of tax(1) 
 $(14,618) $— 
Net gain (loss) reclassified from accumulated OCI into income, net of tax(2)
 $27,138  $— 
Net gain (loss) recognized in income(3) 
 $(18,027) $— 
         
Derivatives not designated as hedging relationships:        
Net gain (loss) recognized in income(4) 
 $—  $(14,407)

(1)Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2)Effective portion classified as revenue.
(3)Ineffective portion and amount excluded from effectiveness testing classified in interest and other income, net.
(4)Classified in interest and other income, net.
Balance Sheet Hedging - Hedging of Foreign Currency Assets and Liabilities
We also hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the years ended December 1, 2006, December 2, 2005,risk that our earnings and December 3, 2004cash flows will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and (iv)liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income, net in our Consolidated Statements of Stockholders’ Equity for the years ended December 1, 2006, December 2, 2005,Income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and December 3, 2004losses on these derivatives are intended to offset gains and (v) the Consolidated Statements of Cash Flows for the years


ended December 1, 2006, December 2, 2005, and December 3, 2004. The financial information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Registrant. The purpose of submitting these XBRL documents is to test the related format and technology and, as a result, investors should continue to relylosses on the official filed versionassets and liabilities being hedged. As of the furnished documents and not rely on this information in making investment decisions.

The information in Exhibit 100 attached hereto shall not be deemed “filed” for purposesNovember 27, 2009, total notional amounts of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.

Subsequent to the filing of our Form 8K on December 14, 2006,outstanding contracts were $154.9 million which included the notional equivalent of $87.6 million in Euro, $22.9 million in Yen and $44.4 million in other foreign currencies. At November 27, 2009, the outstanding balance sheet hedging derivatives had maturities of 90 days or less.

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The fair value of derivative instruments in our press release containingConsolidated Balance Sheets as of November 27, 2009 were as follows (in thousands):
 Fair Values of Derivative Instruments 
 Asset Derivatives Liability Derivatives 
 
Balance Sheet
Location
  
 
Fair Value
 
Balance Sheet
Location
  
 
Fair Value
 
Derivatives designated as hedging instruments:          
Foreign exchange option contracts(*) 
Prepaid expense
and other
current assets
 $4,175 
Accrued
expenses
 $— 
Derivatives not designated as hedging instruments:          
Foreign exchange forward contracts
Prepaid expense
and other
current assets
  132 
Accrued
expenses
   1,589 
Total derivatives
  $4,307   $1,589 

(*)        Hedging effectiveness expected to be recognized to income within the next twelve months.
    Net gains (losses) recognized in interest and other income, net relating to balance sheet hedging for fiscal 2009, 2008 and 2007 were as follows (in thousands):
   2009   2008   2007 
Gain (loss) on foreign currency assets and liabilities:            
Net realized gain (loss) recognized in other income $25,384  $(7,738) $13,388 
Net unrealized (loss) gain recognized in other income related to instruments outstanding  (6,390)  5,223   (4,035)
   18,994   (2,515)  9,353 
(Loss) gain on hedges of foreign currency assets and liabilities:            
Net realized loss recognized in other income  (11,872)  (3,255)  (8,394)
Net unrealized (loss) gain recognized in other income
  (2,535)  3,920   1,887 
   (14,407)  665   (6,507)
 Net gain (loss) recognized in other income $4,587  $(1,850) $2,846 

Concentration of Risk
Financial instruments that potentially subject us to concentrations of credit risk are short-term investments, primarily fixed-income securities, structured repurchase transactions, derivatives, hedging foreign currency and interest rate risk and trade receivables.
Our investment portfolio consists of investment-grade securities diversified among security types, industries and issuers. Our cash and investments are held and managed by recognized financial institutions that follow our December 1, 2006 unaudited financial statements,investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer and we have made immaterial adjustments to our fiscal 2006 financial statements which had the effectbelieve no significant concentration of increasing net income by approximately $1.4 million. These adjustments are not material to either the annual or fourth quarter financial statements for the period ended December 1, 2006.

We received a letter dated January 31, 2007 from the Staff of the Division of Corporate Finance of the Securities and Exchange Commissioncredit risk exists with respect to our Quarterly Report on Form 10-Q filed for the quarterly period ended September 1, 2006. The Staff noted our disclosurethese investments.

We mitigate concentration of risk related to stock-based compensation errors foundforeign currency hedges through a policy that establishes counterparty limits. The bank counterparties in these contracts expose us to credit-related losses in the event of their nonperformance. However, to mitigate that risk, we only contract with counterparties who meet our minimum requirements under our counterparty risk assessment process. In addition, our hedging policy establishes maximum limits for each counterparty. We monitor ratings, credit spreads and potential downgrades on at least a quarterly basis. Based on our on-going assessment of counterparty risk, we will adjust our exposure to various counterparties.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The aggregate fair value of derivative instruments in net asset positions as of November 27, 2009 was $4.3 million. This amount represents the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $1.6 million of liabilities included in master netting arrangements with those same counterparties.
Credit risk in receivables is limited to OEMs, dealers and distributors of hardware and software products to the retail market, and to customers to whom we license software directly. A credit review is completed for our reviewnew distributors, dealers and OEMs. We also perform ongoing credit evaluations of employee option grant practicesour customers’ financial condition and require letters of credit or other guarantees, whenever deemed necessary. The credit limit given to the applicationcustomer is based on our risk assessment of Staff Accounting Bulletin (SAB) No. 108 thereto. The Staff requestedtheir ability to pay, country risk and other factors and is not contingent on the resale of the product or on the collection of payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign markets where we believe it is warranted. If we license our software to a response regardingcustomer where we have a reason to believe the required materiality analysis under SAB 108 with respectcustomer’s ability to these errors, including both qualitative and quantitative factors.pay is not probable, due to country risk or credit risk, we will not recognize the revenue. We will be respondingrevert to recognizing the Staff's comments, but as disclosed inrevenue on a cash basis, assuming all other criteria for revenue recognition has been met. See Note 120 for information regarding our significant customers.
We derive a significant portion of our NotesOEM PostScript and Other licensing revenue from a small number of OEMs. Our OEMs on occasion seek to Consolidated Financial Statements, we concluded that the impact of the stock-based compensation errors was immaterial for all fiscal periods ending prior to the fiscal year ended December 1, 2006 but was materialrenegotiate their royalty arrangements. We evaluate these requests on a cumulative basiscase-by-case basis. If an agreement is not reached, a customer may decide to our fiscal 2006 financial statements, and therefore we recorded an adjustment to our opening retained earnings balancepursue other options, which could result in the amount of $26.6 million as provided under the provisions of SAB 108.

lower licensing revenue for us.

PART III

ITEM 10.         DIRECTORS, EXECUTIVE OFFICERS

NOTE 6.   PROPERTY AND CORPORATE GOVERNANCEEQUIPMENT
Property and equipment, net consisted of the following as of November 27, 2009 and November 28, 2008 (in thousands):
   2009   2008 
Computers and equipment $409,595  $331,235 
Furniture and fixtures  62,786   56,253 
Capital projects in-progress  19,931   7,273 
Leasehold improvements  152,200   133,571 
Land  86,493   74,835 
Buildings  99,845   62,464 
Total  830,850   665,631 
Less accumulated depreciation and amortization.  (442,718)  (352,594)
Property and equipment, net. $388,132  $313,037 
Depreciation and amortization expense of property and equipment for fiscal 2009, 2008 and 2007 was $95.9 million, $83.3 million and $73.2 million, respectively.
NOTE 7.   GOODWILL AND PURCHASED AND OTHER INTANGIBLES
Goodwill by reportable segment, as of November 27, 2009 was as follows (in thousands):
   2008   Acquisitions   
Other(*)
   2009 
Creative Solutions
 $956,011  $253,463  $1,126  $1,210,600 
Knowledge Worker
  408,318   —   2,255   410,573 
Enterprise
  298,039   —   (4,310)  293,729 
Platform
  265,518   —   (398)  265,120 
Print and Publishing
  206,844   —   (311)  206,533 
Omniture
  —   1,108,034   —   1,108,034 
Goodwill
 $2,134,730  $1,361,497  $(1,638) $3,494,589 

(*)Includes net reductions in goodwill of $5.2 million for tax related obligations associated with our acquisitions of Macromedia and Accelio in addition to a facility lease obligation adjustment of $1.7 million related to Macromedia, offset in part by foreign currency translation adjustments and other individually insignificant tax items.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    See Note 2 for further information regarding our Directors, Codeacquisitions.
    Purchased and other intangible assets, net by reportable segment as of EthicsNovember 27, 2009 and compliance with Section 16(a)November 28, 2008 were as follows (in thousands):
   2009   2008 
Creative Solutions $124,178  $107,526 
Knowledge Worker  23,041   48,851 
Enterprise  6,588   13,146 
Platform  9,159   26,248 
Print and Publishing  6,218   19,189 
Omniture  358,204   — 
Purchased and other intangible assets, net $527,388  $214,960 
    Purchased and other intangible assets subject to amortization as of November 27, 2009 were as follows (in thousands):
   Cost   
Accumulated
Amortization
   Net 
Purchased technology
 $586,952  $(387,731) $199,221 
Localization
 $20,284  $(15,222) $5,062 
Trademarks
  172,030   (104,953)  67,077 
Customer contracts and relationships
  363,922   (159,450)  204,472 
Other intangibles
  54,535   (2,979)  51,556 
Total other intangible assets
 $610,771  $(282,604) $328,167 
Purchased and other intangible assets
 $1,197,723  $(670,335) $527,388 

Purchased and other intangible assets subject to amortization as of November 28, 2008 were as follows (in thousands):
   Cost   
Accumulated
Amortization
   Net 
Purchased technology
 $411,408  $(338,608) $72,800 
Localization
 $23,751  $(6,156) $17,595 
Trademarks
  130,925   (78,181)  52,744 
Customer contracts and relationships
  198,891   (127,520)  71,371 
Other intangibles
  800   (350)  450 
Total other intangible assets
 $354,367  $(212,207) $142,160 
Purchased and other intangible assets
 $765,775  $(550,815) $214,960 

Amortization expense related to purchased and other intangible assets was $151.3 million, $184.4 million and $216.3 million for fiscal 2009, 2008 and 2007, respectively. Of these amounts, for fiscal 2009, 2008 and 2007, $88.3 million, $116.1 million and $145.4 million, respectively, was included in cost of sales.
Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 13 years. As of November 27, 2009, we expect amortization expense in future periods to be as follows (in thousands):
Fiscal Year   
Purchased
Technology
   
Other Intangible
Assets
 
2010 $35,830  $100,403 
2011  32,446   58,494 
2012  30,840   22,068 
2013  26,867   21,447 
2014  25,110   21,046 
Thereafter  48,128   104,709 
Total expected amortization expense $199,221  $328,167 

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8.   OTHER ASSETS
Other assets as of November 27, 2009 and November 28, 2008 consisted of the Securities Exchange Actfollowing (in thousands):
   2009   2008 
Acquired rights to use technology
 $84,313  $90,643 
Investments
  63,526   76,589 
Security and other deposits
  11,692   16,087 
Prepaid royalties
  12,059   9,026 
Deferred compensation plan assets
  9,045   7,560 
Restricted cash
  4,650   7,361 
Prepaid land lease
  3,209   3,185 
Prepaid rent
  1,377   2,658 
Other
  1,394   3,420 
Other assets
 $191,265  $216,529 

Acquired rights to use technology purchased during fiscal 2009 and fiscal 2008 was $6.0 million and $100.4 million, respectively. Of the cost for fiscal 2008, an estimated $56.4 million was related to future licensing rights and has been capitalized and is being amortized on a straight-line basis over the estimated useful lives up to fifteen years. Of the remaining costs for fiscal 2008, we estimated that $27.2 million was related to historical use of 1934,licensing rights which was expensed as cost of sales and the residual of $16.8 million for fiscal 2008 was expensed as general and administrative costs. In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the future.  See Note 17 for further information regarding our contractual commitments.
In general, acquired rights to use technology are amortized over their estimated useful lives of 3 to 15 years.
Included in investments are our indirect investments through our limited partnership interest in Adobe Ventures of approximately $37.1 million and $39.0 million as of November 27, 2009 and November 28, 2008, respectively, which is consolidated in accordance with the provisions for consolidating variable interest entities. The partnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. We are the primary beneficiary of Adobe Ventures and bear virtually all of the risks and rewards related to our ownership. Our investment in Adobe Ventures does not have a significant impact on our consolidated financial position, results of operations or cash flows.
Adobe Ventures carries its investments in equity securities at estimated fair value and investment gains and losses are included in our Consolidated Statements of Income. Substantially all of the investments held by Adobe Ventures at November 27, 2009 and November 28, 2008 are not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates of current market value made by Granite Ventures. It is our policy to evaluate the fair value of these investments held by Adobe Ventures, as well as our direct youinvestments, on a regular basis. This evaluation includes, but is not limited to, reviewing each company’s cash position, financing needs, earnings and revenue outlook, operational performance, management and ownership changes and competition. In the case of privately-held companies, this evaluation is based on information that we request from these companies. This information is not subject to the sections entitled “Proposal 1—Electionsame disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracy of Directors,” “Corporate Governance—the data received from these companies. See Note 4 for further information regarding Adobe Ventures.
Also included in investments are our direct investments in privately-held companies of approximately $26.4 million and $37.6 million as of November 27, 2009 and November 28, 2008, respectively, which are accounted for based on the cost method.  We assess these investments for impairment in value as circumstances dictate. See Note 4 for further information regarding our cost method investments.
We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We purchased the property upon completion of construction of an office building shell and core, parking structure, and site improvements. The purchase price for the property was $44.7 million and closed on June 16, 2009. We made an initial deposit of $7.0 million which was included in security and other deposits as of November 28, 2008 and the remaining balance was paid at closing. This deposit was held in escrow until closing and then applied to the purchase price.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Other assets include the fair value, at inception, of the residual value guarantee associated with our leases on the buildings we occupy as part of our corporate headquarters. The lease agreements for our corporate headquarters provide for residual value guarantees. The fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our Consolidated Balance Sheets. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance is being amortized to the Consolidated Statements of Income over the life of the leases. As of November 27, 2009 and November 28, 2008, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $1.3 million and $2.6 million, respectively.
NOTE 9.   ACCRUED EXPENSES
Accrued expenses as of November 27, 2009 and November 28, 2008 consisted of the following (in thousands):
   2009   2008 
Accrued compensation and benefits $164,352  $177,760 
Taxes payable  11,879   21,760 
Sales and marketing allowances  32,774   28,127 
Other  210,641   172,322 
Accrued expenses $419,646  $399,969 
Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on the credit facility.
NOTE 10.   INCOME TAXES
Income before income taxes includes income from foreign operations of $422.4 million, $740.3 million and $453.2 million for fiscal 2009, 2008 and 2007, respectively.
The provision for income taxes for fiscal 2009, 2008 and 2007 consisted of the following (in thousands):
   2009   2008   2007(*) 
Current:            
United States federal
 $152,840  $24,179  $36,614 
Foreign
  36,794   27,680   55,536 
State and local
  25,427   6,972   4,100 
Total current
  215,061   58,831   96,250 
Deferred:            
United States federal
  50,376   41,678   50,640 
Foreign
  559   (9,693)  (13,480)
State and local
  4,635   25,518   23,007 
Total deferred
  55,570   57,503   60,167 
Tax expense attributable to employee stock plans
  44,381   90,360   66,966 
Provision for income taxes
 $315,012  $206,694  $223,383 

(*)
Certain employee stock plan benefits in fiscal 2007 associated with the acquisition of Macromedia reduced goodwill. See Note 7 for further information regarding our goodwill.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total income tax expense differs from the expected tax expense (computed by multiplying the U.S. federal statutory rate of 35% by income before income taxes) as a result of the following (in thousands):
   2009   2008     2007 
Computed “expected” tax expense $245,532  $377,478  $ 331,516 
State tax expense, net of federal benefit  7,799   12,700    8,938 
Tax-exempt income  —   (342)   (11,123)
Tax credits  (14,127)  (12,873)  (23,341)
Differences between statutory rate and foreign effective tax rate  (91,262)  (132,470)  (84,740)
Change in deferred tax asset valuation allowance  2,759   (1,105)  1,694 
Stock-based compensation (net of tax deduction)  6,085   5,457   2,587 
Resolution of U.S. income tax exam for fiscal 2001 - 2004 years  —   (20,712)  — 
Foreign tax refund for fiscal 2000 - 2002  —   (16,351)  — 
Domestic manufacturing deduction benefit  (7,525)  (6,300)  (4,419)
Tax charge for licensing Omniture’s technology to foreign subsidiaries  161,701   —   — 
Other, net  4,050   1,212   2,271 
Provision for income taxes $315,012  $206,694  $223,383 
Deferred Tax Assets and Liabilities
The tax effects of the temporary differences that gave rise to significant portions of the deferred tax assets and liabilities as of November 28, 2008 and November 27, 2009 are presented below (in thousands):
   2009   2008 
Deferred tax assets:        
Acquired technology
 $937  $4,497 
Reserves and accruals
  68,472   71,174 
Deferred revenue
  17,441   46,200 
Unrealized losses on investments
  15,263   10,350 
Stock-based compensation
  56,541   50,329 
Net operating loss of acquired companies
  56,138   7,621 
Credits
  12,205   19,130 
Capitalized expenses
  5,701   5,688 
Other
  11,603   3,538 
Total gross deferred tax assets
  244,301   218,527 
Deferred tax asset valuation allowance
  (4,283)  (1,524)
Total deferred tax assets
  240,018   217,003 
Deferred tax liabilities:        
Depreciation and amortization
  (11,975)  (3,113)
Undistributed earnings of foreign subsidiaries
  (210,619)  (167,760)
Acquired intangible assets
  (192,493)  (52,745)
Total deferred tax liabilities
  (415,087)  (223,618)
Net deferred tax (liabilities) assets
 $(175,069) $(6,615)
The deferred tax assets and liabilities for fiscal 2009 and fiscal 2008 include amounts related to various acquisitions.  The total change in deferred tax assets and liabilities in fiscal 2009 includes changes that are recorded to other comprehensive income, additional paid-in capital, goodwill and retained earnings.
We provide U.S. income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the U.S. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related U.S. tax liability may be reduced by any foreign income taxes paid on these earnings.  As of November 27, 2009, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $1.5 billion. The unrecognized deferred tax liability for these earnings is approximately $420.9 million.
100
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As of November 27, 2009, we have net operating loss carryforward assets of approximately $135.0 million for federal, $56.2 million for state and $1.6 million related to foreign net operating losses. We also have federal and state tax credit carryforwards of approximately $2.9 million and $13.8 million, respectively. The net operating loss carryforward assets, federal tax credits and foreign tax credits will expire in various years from fiscal 2014 through 2029. The state tax credit carryforwards can be carried forward indefinitely.  The net operating loss carryforward assets and certain credits are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized.
In addition, we have been tracking certain deferred tax attributes of Ethics,” “Executive Compensation—Section 16(a) Beneficial Ownership Reporting Compliance,” and “Certain Relationships and Related Transactions” respectively,$82.8 million which have not been recorded in the Proxy Statementfinancial statements pursuant to accounting standards related to stock-based compensation. These amounts are no longer included in our gross or net deferred tax assets. Pursuant to these standards, the benefit of these deferred tax assets will be recorded to equity when they reduce taxes payable.
A valuation allowance has been established for certain deferred tax assets related to the impairment of investments. At the end of fiscal 2009, our valuation allowance was $4.3 million.
Accounting for Uncertainty in Income Taxes
On December 1, 2007, we adopted new standards related to how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in the financial statements. These standards also specify how liabilities for uncertain tax positions should be classified on the balance sheet. The adoption of these standards resulted in an increase of $3.9 million to both assets and unrecognized tax benefits in our Consolidated Balance Sheets as of the beginning of fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits at December 1, 2007 was $218.4 million, exclusive of interest and penalties.
Prior to the adoption of this new accounting standard, we presented our estimated liability for unrecognized tax benefits as a current liability. These new standards require liabilities for unrecognized tax benefits to be classified based on whether a payment is expected to be made within the next 12 months. That is, amounts expected to be paid within the next 12 months are to be classified as a current liability and all other amounts are to be classified as a non-current liability. As a result of adopting these standards, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable, including accrued interest in our Consolidated Balance Sheets.
Prior to the adoption of this new accounting standard, we presented our estimated state, local and interest liabilities net of the estimated benefit we expect to receive from deducting such payments on future tax returns (i.e., on a “net” basis). These standards require this estimated benefit to be classified as a deferred tax asset instead of a reduction of the overall liability (i.e., on a “gross” basis). Accordingly, we recognized additional deferred income tax assets of $3.9 million to present the unrecognized tax benefits as gross amounts in our Consolidated Balance Sheets.
We classify interest and penalties on unrecognized tax benefits as income tax expense. As of December 1, 2007, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $42.8 million.
During fiscal 2009 and 2008, our aggregate changes in our total gross amount of unrecognized tax benefits are summarized as follows (in thousands):
   2009   2008 
Beginning balance
 $139,549  $201,808 
Gross increases in unrecognized tax benefits – prior year tax positions
  43,173   14,009 
Gross increases in unrecognized tax benefits – current year tax positions
  42,422   11,350 
Settlements with taxing authorities
  (429)  (81,213)
Lapse of statute of limitations
  (12,585)  (3,512)
Foreign exchange gains and losses
  5,910   (2,893)
Ending balance
 $218,040  $139,549 

As of November 27, 2009, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $16.6 million.
101
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the IRS and other domestic and foreign tax authorities. Our major tax jurisdictions are the U.S., Ireland and California. For California, Ireland and the U.S., the earliest fiscal years open for examination are 2001, 2004 and 2005, respectively. We regularly assess the likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examination. We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will delivernot have an adverse effect on our operating results and financial position.
The timing of the resolution of income tax examinations is highly uncertain as are the amounts and timing of tax payments that are part of any audit settlement process. These events could cause large fluctuations in the balance sheet classification of current and non-current assets and liabilities. The Company believes that before the end of fiscal 2010, it is reasonably possible that either certain audits will conclude or statutes of limitations on certain income tax examination periods will expire, or both. Given the uncertainties described above, we can only determine a range of estimated potential decreases in underlying unrecognized tax benefits equal to $0 to approximately $10 million.  These amounts would decrease income tax expense under current GAAP related to income taxes and as a result of our stockholdersadoption of new accounting standards related to business combinations in fiscal 2010 (see Note 1).  Under the new guidance related to business combinations, adjustments to acquired income tax liabilities (including adjustments for acquisitions completed prior to the effective date) that are recorded subsequent to the acquisition date will be recognized in income from continuing operations, with certain exceptions, if such changes occur after the measurement period.
NOTE 11.  RESTRUCTURING
2009 Restructuring Plan Charges

On November 10, 2009, we initiated a restructuring plan to appropriately align our costs in connection with our Annual Meetingfiscal 2010 operating plan impacting up to approximately 630 full-time positions worldwide. In connection with this restructuring plan, in the fourth quarter of Stockholdersfiscal 2009, we recorded restructuring charges of approximately $25.5 million related to ongoing termination benefits for the elimination of approximately 340 of these full-time positions worldwide. As of November 27, 2009, approximately $2.5 million was paid. The remaining accrual associated with these ongoing termination benefits is expected to be paid during fiscal 2010. The restructuring activities related to this program affect only those employees that were associated with Adobe prior to the acquisition of Omniture, Inc. on October 23, 2009.

Beginning in the first quarter of fiscal 2010, we expect to incur up to approximately $18 million related to the consolidation of leased facilities.
The following table sets forth a summary of Adobe restructuring activities during fiscal 2009 (in thousands):
   
November 28,
2008
   
Costs
Incurred
   
Cash
Payments
   
Other
Adjustments
   
November 27,
2009
 
Termination benefits
 $—  $25,521  $(2,537) $—  $22,984 

Accrued restructuring charges of approximately $23.0 million at November 27, 2009 is recorded in accrued restructuring, current in our Consolidated Balance Sheets.
Omniture Restructuring Charges
    We completed our acquisition of Omniture on October 23, 2009.  In the fourth quarter of fiscal 2009, we initiated a plan to restructure the pre-merger operations of Omniture to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with this restructuring plan, we accrued a total of approximately $10.6 million in costs related to termination benefits for the elimination of approximately 100 regular positions and for the closure of duplicative facilities. We also accrued approximately $0.2 million in costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Omniture. Restructuring charges related to the Omniture acquisition were recorded as a part of the purchase price allocation, as discussed in Note 2 and have been accrued for as of November 27, 2009.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table sets forth a summary of preliminary restructuring activities during fiscal 2009 (in thousands):
   
November 28,
2008
   
Costs
Recorded
   
Cash
Payments
   
Other
Adjustments
   
November 27,
2009
 
Termination benefits
 $—  $6,704  $—  $8  $6,712 
Cost of closing redundant facilities  —    3,914   —   19   3,933 
Contract termination
  —   242   —   —   242 
Total
 $—  $10,860  $—  $27  $10,887 

Accrued restructuring charges of approximately $10.9 million at November 27, 2009 include $8.6 million recorded in accrued restructuring, current and $2.3 million related to long-term facilities obligations recorded in accrued restructuring, non-current in our Consolidated Balance Sheets. We expect to pay accrued termination benefits during fiscal 2010. We expect to pay facilities-related liabilities through fiscal 2013. Included in the other adjustments column are foreign currency translation adjustments.
Additionally, approximately $1.5 million of restructuring costs related to facilities were included in the liabilities assumed by us upon acquisition of Omniture on April 5, 2007. Information regardingOctober 23, 2009 for which subsequent payments of $0.1 million were made during the fourth quarter of fiscal 2009. Restructuring costs related to these facilities were approximately $1.4 million at November 27, 2009 with $1.2 million recorded in accrued restructuring, current and $0.2 million related to long-term facilities obligations recorded in accrued restructuring, non-current in our Executive Officers is containedConsolidated Balance Sheets. We expect to pay these facilities-related liabilities through fiscal 2013.
2008 Restructuring Plan Charges

In the fourth quarter of fiscal 2008, we initiated a restructuring program, consisting of reductions in workforce of approximately 560 full-time positions globally and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with this reportrestructuring program, we recorded restructuring charges in Part I, Item 1 titled “Business.”the fourth quarter of fiscal 2008 totaling $29.2 million related to ongoing termination benefits for the elimination of approximately 460 of the 560 full-time positions globally. As of November 28, 2008, $0.4 million was paid.
During fiscal 2009, we continued to implement restructuring activities under this program. We are incorporatingvacated approximately 89,000 square feet of research and development and sales facilities in the information contained in those sectionsU.S., the United Kingdom and Canada. We accrued $8.5 million for the fair value of our Proxy Statement here by reference.

ITEM 11.         EXECUTIVE COMPENSATION

For information regardingfuture contractual obligations under these operating leases using our Executive Compensation, Compensation Committee Interlockscredit-adjusted risk-free interest rate, estimated at approximately 6% as of the date we ceased to use the leased properties. This amount is net of the fair value of future estimated sublease income of approximately $4.4 million. We also recorded additional charges of $6.7 million for termination benefits for the elimination of substantially all of the remaining 100 full-time positions expected to be terminated.

The following table sets forth a summary of Adobe restructuring activities during fiscal 2009 (in thousands):
   
November 28,
2008
   
Costs
Incurred
   
Cash
Payments
   
Other
Adjustments
   
November 27,
2009
 
Termination benefits
 $28,759  $6,722  $(34,191) $(233) $1,057 
Cost of closing redundant facilities  —    8,514   (5,380)  248   3,382 
Total
 $28,759  $15,236  $(39,571) $15  $4,439 
Accrued restructuring charges of approximately $4.4 million at November 27, 2009 include $1.9 million recorded in accrued restructuring, current and Insider Participation,$2.5 million related to long-term facilities obligations recorded in accrued restructuring, non-current in our Consolidated Balance Sheets. Total costs incurred to date and expected to be incurred for closing redundant facilities are $44.5 million and $44.7 million, respectively. We have substantially paid all of the accrued termination benefits during fiscal 2009. We expect to pay facilities-related liabilities through fiscal 2013.
Included in the other adjustments column are foreign currency translation adjustments of $0.6 million and small changes to previous estimates.
103
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Macromedia Merger Restructuring Charges
We completed our Compensation Committee Report,acquisition of Macromedia on December 3, 2005. In connection with this acquisition, we direct youinitiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. We also recognized costs related to the section entitled “Executive Compensation,” “Compensation Committee Interlockscancellation of certain contracts associated with the wind-down of subsidiaries and Insider Participation,”other service contracts held by Macromedia. Costs for termination benefits and “Reportcontract terminations were completed during fiscal 2007. Total costs incurred were $27.0 million and $3.2 million, respectively.

The following table sets forth a summary of Macromedia restructuring activities during fiscal 2009 (in thousands):
   
November 28,
2008
   
Cash
Payments
   
Other
Adjustments
   
November 27,
2009
 
Cost of closing redundant facilities $12,168  $(6,675) $(487) $5,006 
Other  977   (889)  (80)  8 
Total $13,145  $(7,564) $(567) $5,014 
Accrued restructuring charges of approximately $5.0 million at November 27, 2009 related to facilities obligations include $3.1 million recorded in accrued restructuring, current and $1.9 million recorded in accrued restructuring, non-current in our Consolidated Balance Sheets. We expect to pay these liabilities through fiscal 2012.
Included in the other adjustments column is a change to previous estimates of $0.6 million offset in part by small foreign currency translation adjustments. Included in the change in previous estimates of $0.6 million is an adjustment of $1.7 million associated with an accrual for a leased facility that was included in the purchase price of Macromedia as an assumed liability. During the third quarter of fiscal 2009, adjustments were made to the liability for this lease facility that were recorded as a reduction to Macromedia goodwill. Accordingly, during fiscal 2009, $1.1 million represents adjustments recorded as an increase to restructuring charges.

The following table sets forth a summary of Macromedia restructuring activities during fiscal 2008 (in thousands):
   
November 30,
2007
   
Cash
Payments
   
Other
Adjustments
   
November 28,
2008
 
Cost of closing redundant facilities $16,283  $(7,187) $3,072  $12,168 
Other  1,435   (147)  (311)  977 
Total $17,718  $(7,334) $2,761  $13,145 

Accrued restructuring charges of $13.1 million at November 28, 2008 includes $6.9 million recorded in accrued restructuring, current and $6.2 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in our Consolidated Balance Sheets. Included in the other adjustments column is a change to previous estimates, recorded as a current period expense, associated with closing redundant facilities as a result of the ExecutiveMacromedia acquisition as well as the net effect of foreign currency changes.
NOTE 12.   BENEFIT PLANS
Retirement Savings Plan
In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a retirement savings plan covering substantially all of our U.S. employees, now referred to as the Adobe 401(k) Retirement Savings Plan. Under the plan, eligible employees may contribute up to 65% of their pretax or after-tax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2009, we matched 50% of the first 6% of the employee’s eligible compensation. We contributed $15.1 million, $16.6 million and $14.5 million in fiscal 2009, 2008 and 2007, respectively. We can terminate matching contributions at our discretion.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Profit Sharing Plan
We have a profit sharing plan that provides for profit sharing payments to all eligible employees following each quarter in which we achieve at least 75% of our budgeted earnings for the quarter for fiscal 2009 and 80% of our budgeted earnings for the quarter for fiscal years 2008 and 2007. The plan, as well as the annual operating budget on which the plan is based, is approved by our Board of Directors. We contributed $13.3 million, $73.8 million and $67.6 million to the plan in fiscal 2009, 2008 and 2007, respectively. The profit sharing plan has been discontinued effective for fiscal 2010.
Deferred Compensation Committee”Plan
On September 21, 2006, the Board of Directors approved the Adobe Systems Incorporated Deferred Compensation Plan, effective December 2, 2006 (the “Deferred Compensation Plan”). The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives and members of the Board of Directors are able to defer a portion of their annual compensation. Participants may elect to contribute up to 75% of their base salary and 100% of other specified compensation, including commissions, bonuses, performance-based and time-based restricted stock units, and directors’ fees. Participants are able to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which the election is made in the Proxy Statement weform of a lump sum or annual installments over five, ten or fifteen years. Upon termination of a participant’s employment with Adobe, such participant will deliverreceive a distribution in the form of a lump sum payment. All distributions will be made in cash, except for deferred performance-based and time-based restricted stock units which will be settled in stock. As of November 27, 2009 and November 28, 2008, the invested amounts under the Deferred Compensation Plan total $9.0 million and $7.6 million, respectively and were recorded as other assets on our Consolidated Balance Sheets. As of November 27, 2009 and November 28, 2008, $9.0 million and $7.6 million, respectively, was recorded as long-term liabilities to our stockholders in connection with our Annual Meeting of Stockholdersrecognize undistributed deferred compensation due to be held on April 5, 2007. We are incorporating the information contained in that section of our Proxy Statement here by reference.

employees.

NOTE 13.  STOCK-BASED COMPENSATION
ITEM 12.    We have the following stock-based compensation plans and programs:         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

You will find this information

Stock Option Plans
    Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from the (i) 2003 Equity Incentive Plan, as amended (“2003 Plan”), and the 2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”). These plans are collectively referred to in the section captioned “Security Ownershipfollowing discussion as “the Plans.” Under the Plans, options can be granted to all employees, including executive officers, outside consultants and non-employee directors. The Plans will continue until the earlier of Certain Beneficial Owners(i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and Management”restrictions on issued shares have lapsed. Option vesting periods are generally four years for all of the Plans. Options granted under the Plans generally expire seven years from the effective date of grant.
    As of November 27, 2009, we had reserved 110.3 million and “Equity4.0 million shares of common stock for issuance under our 2003 Plan and 2005 Assumption Plan, respectively. As of November 27, 2009, we had 42.7 million and 2.9 million shares available for grant under our 2003 Plan and 2005 Assumption Plan, respectively.
Employee Stock Purchase Plan
Our 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower. The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.
As of November 27, 2009, we had reserved 76.0 million shares of our common stock for issuance under the ESPP and approximately 12.3 million shares remain available for future issuance.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Restricted Stock Plan
We grant restricted stock awards and performance awards to officers and key employees under our Amended 1994 Performance and Restricted Stock Plan (“Restricted Stock Plan”). We can also grant restricted stock units to all eligible employees under the Restricted Stock Plan and the 2003 Plan. Restricted stock awards issued under these plans vest annually over three years. Performance awards and restricted stock units issued under these plans generally vest over four years, the majority of which vest 25% annually; certain other restricted stock units vest 50% on the second anniversary and 25% on each of the third and fourth anniversaries.
As of November 27, 2009, we had reserved 16.0 million shares of our common stock for issuance under the Restricted Stock Plan and approximately 0.3 million shares were available for grant.
Performance Share Programs
Effective January 26, 2009, the Executive Compensation Plan Information”Committee adopted the 2009 Performance Share Program (the “2009 Program”). The purpose of the 2009 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2009 Program is our fiscal 2009 year. All members of our executive management and other key senior leaders are participating in the Proxy Statement2009 Program. Awards granted under the 2009 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining 75% vesting evenly on the following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2009 Program have the ability to receive up to 115% of the target number of shares originally granted.
Issuance of Shares
Upon exercise of stock options, vesting of restricted stock and performance shares, and purchases of shares under the ESPP, we will deliverissue treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the impact of on-going dilution from exercises of stock options and vesting of restricted stock and performance shares, we instituted a stock repurchase program. See Note 14 for information regarding our stock repurchase programs.
Valuation of Stock-Based Compensation
Stock-based compensation cost is measured at the grant date based on the fair value of the award. We currently use the Black-Scholes option pricing model to determine the fair value of stock options and ESPP shares. The determination of the fair value of stock-based payment awards on the date of grant using an option pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the expected term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.
We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest.
The assumptions used to value our option grants were as follows:
  Fiscal Years 
  2009  2008  2007 
Expected term (in years)  3.0 – 4.1   2.3 – 4.7   3.5 – 4.8 
Volatility
  34 – 57%  32 – 60%  30 – 39%
Risk-free interest rate  1.16 – 2.24%  1.70 – 3.50%  3.60 – 5.10%

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The expected term of ESPP shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights were as follows:
  Fiscal Years 
  2009  2008  2007 
Expected term (in years)  0.5 – 2.0   0.5 – 2.0   0.5 – 2.0 
Volatility  40 – 57%  30 – 36%  30 – 33%
Risk-free interest rate
  0.27 – 1.05%  2.12 – 3.29%  4.79 – 5.11%
We recognize the estimated compensation cost of restricted stock awards and restricted stock units, net of estimated forfeitures, over the vesting term. The estimated compensation cost is based on the fair value of our common stock on the date of grant.
We recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The awards are earned upon attainment of identified performance goals, some of which contain discretionary metrics. As such, these awards are re-valued based on our traded stock price at the end of each reporting period. If the discretion is removed, the award will be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date the award becomes fixed. The awards will be subsequently amortized over the remaining performance period.
Summary of Stock Options
Option activity under our stock option program for fiscal years 2009, 2008 and 2007 was as follows (shares in thousands):
   Outstanding Options 
   
Number of
Shares
   
Weighted
Average
Exercise
Price
 
December 1, 2006  61,731  $24.19 
Granted  10,084   40.36 
Exercised  (21,368)  21.18 
Cancelled  (2,705)  33.18 
November 30, 2007  47,742  $28.47 
Granted  5,462   35.08 
Exercised  (9,983)  25.45 
Cancelled
  (2,517)  35.34 
November 28, 2008  40,704  $29.67 
Granted  5,758   22.90 
Exercised  (7,560)  17.15 
Cancelled  (3,160)  33.57 
Increase due to acquisition  5,509   20.15 
November 27, 2009  41,251  $29.45 
The weighted average fair values of options granted during fiscal 2009, 2008 and 2007 were $8.39, $10.32 and $12.37, respectively.
The total intrinsic value of options exercised during fiscal 2009, 2008 and 2007 was $91.8 million, $142.4 million and $463.6 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Information regarding the stock options outstanding at November 27, 2009, November 28, 2008 and November 30, 2007 is summarized below:  

   
 
 
 
 
Number of
Shares
(thousands)
   
 
 
 
Weighted
Average
Exercise
Price
   
Weighted
Average
Remaining
Contractual
Life
(years)
   
 
Aggregate
Intrinsic
 Value(*)
(millions)
 
As of November 27, 2009                
Options outstanding                                                     41,251  $29.45   4.33  $295.8 
Options vested and expected to vest  39,322  $29.54   4.24  $279.1 
Options exercisable                                                     26,677  $29.85   3.54  $181.7 
                 
As of November 28, 2008                
Options outstanding                                                     40,704  $29.67   4.00  $76.1 
Options vested and expected to vest  38,975  $29.36   3.87  $76.1 
Options exercisable                                                     28,034  $26.61   3.28  $76.1 
                 
As of November 30, 2007                
Options outstanding  47,742  $28.47   4.36  $654.2 
Options vested and expected to vest  43,067  $27.68   4.19  $623.8 
Options exercisable  29,387  $23.77   3.38  $539.8 

(*)The intrinsic value is calculated as the difference between the market value as of end of the fiscal year and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of November 27, 2009, November 28, 2008 and November 30, 2007 were $35.38, $23.16 and $42.14, respectively.
All stock options granted to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors.
Summary of Employee Stock Purchase Plan Shares
The weighted average subscription date fair value of shares under the ESPP during fiscal 2009, 2008 and 2007 were $5.43, $9.56 and $12.03, respectively. Employees purchased 3.2 million shares at an average price of $19.04, 2.4 million shares at an average price of $30.40, and 2.6 million shares at an average price of $25.24, respectively, for fiscal 2009, 2008 and 2007. The intrinsic value of shares purchased during fiscal 2009, 2008 and 2007 was $21.7 million, $25.0 million and $39.8 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.
Summary of Restricted Stock
Restricted stock award activity for fiscal 2009, 2008 and 2007 was as follows (shares in thousands):
    2009    2008    2007 
   
 
 
Non-vested
Shares
   
Weighted
Average
Grant Date
Fair Value
   
 
 
Non-vested
Shares
   
Weighted
Average
Grant Date
Fair Value
   
 
 
Non-vested
Shares
   
Weighted
Average
Grant Date
Fair Value
 
Beginning outstanding balance  4  $39.31   21  $36.41   501  $9.17 
Awarded
  —   —   —   —   5   40.03 
Released
  (1)  38.22   (15)  34.94   (92)  29.32 
Forfeited
  —   —   (2)  39.95   (393)  4.77 
Ending outstanding balance  3  $40.01   4  $39.31   21  $36.41 

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ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The total fair value of restricted stock awards vested during fiscal 2009, 2008 and 2007 was $39.4 thousand, $0.5 million and $0.7 million, respectively.
Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to dividends and voting rights. Unvested restricted stock awards are not considered outstanding in the computation of basic earnings per share.
Restricted stock unit activity for fiscal years 2009, 2008 and 2007 was as follows (in thousands):
  
 
2009
  
 
 
2008
  
 
 
2007
 
Beginning outstanding balance
  4,261   1,701   — 
Awarded
  6,176   3,177   1,771 
Released
  (1,162)  (422)  — 
Forfeited
  (401)  (195)  (70)
Increase due to acquisition
  1,559   —   — 
Ending outstanding  balance
  10,433   4,261   1,701 
The weighted average grant date fair values of restricted stock units granted during fiscal 2009, 2008 and 2007 were $27.74, $33.55 and $39.67, respectively.The total fair value of restricted stock units vested during fiscal 2009 and 2008 was $27.1 million and $14.4 million, respectively.
Information regarding restricted stock units outstanding at the end of fiscal 2009, 2008 and 2007 is summarized below:
  
Number of
Shares
(thousands)
  
Weighted
Average
Remaining
Contractual
Life
(years)
  
Aggregate
Intrinsic
Value(*)
(millions)
 
2009            
Restricted stock units outstanding                                                                          10,433   1.82  $369.1 
Restricted stock units vested and expected to vest  8,078   1.63  $285.7 
             
2008            
Restricted stock units outstanding                                                                          4,261   1.73  $98.7 
Restricted stock units vested and expected to vest  3,351   1.52  $77.6 
             
2007            
Restricted stock units outstanding  1,701   1.88  $71.7 
Restricted stock units vested and expected to vest  1,309   1.65  $55.2 

(*)The intrinsic value is calculated as the market value as of end of the fiscal year. As reported by the NASDAQ Global Select Market, the market values as of November 27, 2009, November 28, 2008 and November 30, 2007 were $35.38, $23.16 and $42.14, respectively.
109
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Summary of Performance Shares
The following table sets forth the summary of performance share activity under our 2009 Program for fiscal 2009 (in thousands):
  
Shares
Granted
  
Maximum
Shares
Eligible
to Receive
 
Beginning outstanding balance
  —   — 
Awarded
  559   643 
Forfeited
  (7)  (8)
Ending outstanding balance
  552   635 
However, the performance metrics under the 2009 program were not achieved and therefore no shares will be awarded under the grants noted above.
In the first quarter of fiscal 2009, the Executive Compensation Committee certified the actual performance achievement of participants in the 2008 Performance Share Program (the “2008 Program”). Based upon the achievement of goals outlined in the 2008 Program, participants had the ability to receive up to 200% of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 124% of target or approximately 1.0 million shares for the 2008 Program. Shares under the 2008 Program vested 25% in the first quarter of fiscal 2009, and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe.
    The following table sets forth the summary of performance share activity under our 2006 through 2008 programs, based upon share awards actually achieved, for fiscal 2009 and fiscal 2008 (in thousands):
  2009  2008 
Beginning outstanding balance  383   — 
Achieved  1,022   993 
Released  (382)  (480)
Forfeited  (73)  (130)
Ending outstanding balance  950   383 
The total fair value of performance awards vested during fiscal 2009 and 2008 was $7.7 million and $16.7 million, respectively.
Information regarding performance shares outstanding at November 27, 2009 and November 28, 2008 is summarized below:

  
Number of
Shares
(thousands)
  
Weighted
Average
Remaining
Contractual
Life
(years)
  
Aggregate
Intrinsic
Value(*)
(millions)
 
2009            
Performance shares outstanding                                                                            950   1.05  $33.6 
Performance shares vested and expected to vest  818   0.97  $28.8 
             
2008            
Performance shares outstanding
  383   1.20  $8.9 
Performance shares vested and expected to vest  323   1.10  $7.4 


110
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(*)The intrinsic value is calculated as the market value as of end of the fiscal year. As reported by the NASDAQ Global Select Market, the market value as of November 27, 2009 and November 28, 2008 was $35.38 and $23.16, respectively.
Grants to Non-Employee Directors
The Directors Plan (and starting in fiscal 2008, the 2003 Plan) provides for the granting of nonqualified stock options to non-employee directors. Prior to fiscal 2009, option grants were limited to 25,000 shares per person in each fiscal year, except for a new non-employee director to whom 50,000 shares were granted upon election as a director. Options granted before November 29, 2008 vest over four years: 25% on the day preceding each of our next four annual meetings and have a ten-year term. Starting in fiscal 2009, the initial equity grant to a new non-employee director is a restricted stock unit award having an aggregate value of $0.5 million as based on the average stock price over the 30 calendar days ending on the day before the date of grant. The initial equity award vests over 2 years, 50% on the day preceding each of our next 2 annual meetings. For the annual equity grant, a non-employee director can elect to receive 100% options, 100% restricted stock units or 50% of each and shall have an aggregate value of $0.2 million as based on the average stock price over the 30 calendar days ending on the day before the date of grant. The target grant value of restricted stock units to stock options will be based on a 3:1 conversion ratio. Annual equity awards granted on or after November 29, 2008 vest 100% on the day preceding the next annual meeting. Options granted on or after November 29, 2008 have a seven-year term. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant.
Options granted to directors for fiscal 2009, 2008 and 2007 are as follows (shares in thousands):
   2009   2008   2007 
Options granted to existing directors  175   250   250 
Exercise price $23.28  $37.09  $42.61 
Restricted stock units granted to directors for fiscal 2009 are as follows (shares in thousands):
2009
Restricted stock units granted to existing directors27
Restricted stock units granted to new directors20

Compensation Costs
With the exception of performance shares, stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the entire award, which is generally the vesting period. For performance shares, expense is recognized on a straight-line basis over the requisite service period for each vesting portion of the award.
As of November 27, 2009, there was $305.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.4 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
111
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Total stock-based compensation costs that have been included in our Consolidated Statements of Income for fiscal 2009, 2008 and 2007 were as follows (in thousands):
    Income Statement Classifications 
   
Cost of
Revenue –
Services and
Support
   Research and Development   
Sales and
Marketing
   General and Administrative   
 
 
 
 
Total
 
                     
Option Grants and Stock Purchase Rights(*)
                    
Fiscal 2009
 $1,906  $45,535  $38,790  $24,595  $110,826 
Fiscal 2008
 $3,728  $55,653  $41,326  $24,521  $125,228 
Fiscal 2007
 $5,152  $58,579  $41,801  $24,467  $129,999 
                     
Restricted Stock and Performance Share Awards(*)
                    
Fiscal 2009
 $639  $27,931  $19,818  $9,274  $57,662 
Fiscal 2008
 $570  $20,835  $17,928  $10,810  $50,143 
Fiscal 2007
 $346  $9,518  $6,084  $4,040  $19,988 

(*)During fiscal 2009 and 2008, we recorded $0.9 million and $2.9 million, respectively, associated with cash recoveries of fringe benefit tax from employees in India.
NOTE 14.   STOCKHOLDERS’ EQUITY
Stockholder Rights Plan
Our Stockholder Rights Plan is intended to protect stockholders from unfair or coercive takeover practices. In accordance with this plan, the Board of Directors declared a dividend distribution of one common stock purchase right on each outstanding share of our common stock held as of July 24, 1990 and on each share of common stock issued by Adobe thereafter. In July 2000, the Stockholder Rights Plan was amended to extend it for ten years so that each right entitles the holder to purchase one unit of Series A Preferred Stock, which is equal to 1/1000 share of Series A Preferred Stock, par value $0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 and 2005 stock splits each in the form of a dividend, each share of common stock now entitles the holder to one-quarter of such a purchase right. Each whole right still entitles the registered holder to purchase from Adobe a unit of preferred stock at $700. The rights become exercisable in certain circumstances, including upon an entity’s acquiring or announcing the intention to acquire beneficial ownership of 15% or more of our common stock without the approval of the Board of Directors or upon our being acquired by any person in a merger or business combination transaction. The rights are redeemable by Adobe prior to exercise at $0.01 per right and expire on July 23, 2010.
Stock Repurchase Program I
To facilitate our stock repurchase program, designed to return value to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 5, 2007. We are incorporating the information contained in that section here by reference.

ITEM 13.         CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

You will find this informationand minimize dilution from stock issuances, we repurchase shares in the section captioned “Certain Relationshipsopen market and Related Transactions”also enter into structured repurchases with third-parties.

Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and “Proposal 1—Electionis subject to business conditions and cash flow requirements as determined by our Board of Directors—IndependenceDirectors from time to time.
    During fiscal 2009, 2008 and 2007 we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of Directors”$350.0 million, $525.0 million and $1.1 billion, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.
112
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the Proxy Statementcontract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During fiscal 2009, we will deliverrepurchased approximately 15.2 million shares at an average price per share of $27.89 through structured repurchase agreements entered into during fiscal 2008 and fiscal 2009. During fiscal 2008, we repurchased 22.4 million shares at an average price of $36.26 through structured repurchase agreements which included prepayments from fiscal 2007. During fiscal 2007, we repurchased 22.0 million shares at an average price of $40.04 through structured repurchase agreements which included prepayments from fiscal 2006.
During fiscal 2008, we also repurchased 3.6 million shares at an average price of $36.41 in open market transactions.
For fiscal 2009, 2008 and 2007, the prepayments were classified as treasury stock on our Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by November 27, 2009, November 28, 2008 and November 30, 2007 were excluded from the denominator in the computation of earnings per share. As of November 27, 2009 and November 28, 2008, approximately $59.9 million and $134.7 million, respectively, of up-front payments remained under the agreements.
Stock Repurchase Program II
Under this stock repurchase program, we had authorization to repurchase an aggregate of 50.0 million shares of our stockholderscommon stock. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements to large financial institutions. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased.
During fiscal 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. During fiscal 2007, we provided prepayments of $850.0 million under structured share repurchase agreements to large financial institutions. During fiscal 2007, we repurchased 17.7 million shares under these structured agreements at an average price of $40.50 and approximately $133.7 million of up-front payments remained under these agreements as of November 30, 2007.
During fiscal 2008, we also repurchased 0.5 million shares at an average price of $39.79 in connection with our Annual Meeting of Stockholders to be held on April 5, 2007. We are incorporating the information contained in that section here by reference.

open market transactions.

NOTE 15.   COMPREHENSIVE INCOME
ITEM 14.         PRINCIPAL ACCOUNTING FEES AND SERVICES

You will find this information inThe following table sets forth the section captioned “Principal Accounting Fees and Services,” in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 5, 2007. We are incorporating the information contained in that section here by reference.

72



PART IV

ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)           Documents filed as part of this report

 

 

 

Page

1.

 

Financial statements

 

 

 

 

·   Report of Independent Registered Public Accounting Firm

 

74

 

 

·   Consolidated Balance Sheets December 1, 2006 and December 2, 2005

 

75

 

 

·   Consolidated Statements of Income Years Ended December 1, 2006, December 2, 2005 and December 3, 2004

 

76

 

 

·   Consolidated Statements of Stockholders’ Equity Years Ended December 1, 2006, December 2, 2005 and December 3, 2004

 

77

 

 

·   Consolidated Statements of Cash Flows Years Ended December 1, 2006, December 2, 2005 and December 3, 2004

 

78

 

 

·   Notes to Consolidated Financial Statements

 

79

2.

 

Exhibits

 

121

The exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this report.

73



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Adobe Systems Incorporated:

We have audited the accompanying consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of December 1, 2006 and December 2, 2005, and the related consolidated statements of income, stockholders’ equity, and cash flowsactivity for each component of comprehensive income, net of related taxes, for fiscal 2009, 2008 and 2007 (in thousands):

   2009   2008   2007 
Net income
 $386,508  $871,814  $723,807 
Other comprehensive income (loss):            
Available-for-sale securities:            
Unrealized gains (losses) on available-for-sale securities, net of taxes  6,661   (3,102)  14,570 
Reclassification adjustment for (gains) losses on available-for-sale securities recognized during the period  (8,752)  1,559   2,000 
Subtotal available-for-sale securities                                                              (2,091)  (1,543)  16,570 
Derivative instruments:            
Unrealized (losses) gains on derivative instruments  (14,618)  54,967   4,974 
Reclassification adjustment for gains on derivative instruments recognized during
the period                                                             
  (27,138)  (13,248)  (5,510)
Subtotal derivative instruments                                                              (41,756)  41,719   (536)
Foreign currency translation adjustments                                                                     11,071   (10,902)  5,570 
Other comprehensive income (loss)  (32,776)  29,274   21,604 
Total comprehensive income, net of taxes $353,732  $901,088  $745,411 

113
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    The following table sets forth the years in the three-year period ended December 1, 2006. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of December 1, 2006 and December 2, 2005, and the results of their operations and their cash flowstaxes related for each component of other comprehensive income for fiscal 2009, 2008 and 2007 (in thousands):

  2009   2008   2007
Available-for-sale securities                                                                       $ 931  $(988) $2,382
Foreign currency translation adjustments                                                                       $ 1,411  $(4,860) $3,699
Taxes related to derivative instruments were zero for all fiscal years.
           The following table sets forth the years incomponents of accumulated other comprehensive income, net of related taxes, for fiscal 2009 and 2008 (in thousands):
   2009   2008 
Net unrealized gains on available-for-sale securities:        
Unrealized gains on available-for-sale securities $13,818  $16,062 
Unrealized losses on available-for-sale securities  (2)  (155)
Total net unrealized gains on available-for-sale securities  13,816   15,907 
Net unrealized gains on derivative instruments  (5)  41,750 
Cumulative foreign currency translation adjustments  10,635   (435)
Total accumulated other comprehensive income, net of taxes $24,446  $57,222 

The following table sets forth the three-yearcomponents of foreign currency translation adjustments for fiscal 2009, 2008 and 2007 (in thousands):
   2009   2008   2007 
Beginning balance $ (431) $ 10,471  $ 4,901 
Foreign currency translation adjustments
  17,343   (19,461)  9,269 
Income tax effect relating to translation adjustments for undistributed foreign earnings  (6,272)  8,559   (3,699)
Ending balance
 $10,640  $(431) $10,471 
NOTE 16.   NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of common shares outstanding for the period, ended December 1, 2006, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 toexcluding unvested restricted stock. Diluted net income per share is based upon the Consolidated Financial Statements, effective December 3, 2005,weighted average common shares outstanding for the Company adoptedperiod plus dilutive potential common shares, including unvested restricted stock and stock options using the provisiontreasury stock method.

    The following table sets forth the computation of Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment,basic and Securitiesdiluted net income per share for fiscal 2009, 2008 and Exchange Commission Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Adobe Systems Incorporated’s internal control over financial reporting as of December 1, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 5, 2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal control over financial reporting.

/s/ KPMG LLP

Mountain View, California

February 5, 2007

74



ADOBE SYSTEMS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In(in thousands, except per share data):

   2009   2008   2007 
Net income
 $386,508  $871,814  $723,807 
Shares used to compute basic net income per share  524,470   539,373   584,203 
Dilutive potential common shares:            
Unvested restricted stock and performance share awards  2,130   1,107   13 
    Stock options  4,010   8,073   14,559 
Shares used to compute diluted net income per share
  530,610   548,553   598,775 
Basic net income per share
 $0.74  $1.62  $1.24 
Diluted net income per share
 $0.73  $1.59  $1.21 
114

 

 

December 1,

 

December 2,

 

 

 

2006

 

2005

 

ASSETS

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

772,500

 

$

420,818

 

Short-term investments

 

1,508,379

 

1,280,016

 

Trade receivables, net of allowances for doubtful accounts of $6,798 and $5,376, respectively

 

356,815

 

173,245

 

Other receivables

 

51,851

 

31,504

 

Deferred income taxes

 

155,613

 

58,710

 

Prepaid expenses and other assets

 

39,311

 

44,285

 

Total current assets

 

2,884,469

 

2,008,578

 

Property and equipment, net

 

227,197

 

103,549

 

Goodwill

 

2,149,494

 

118,683

 

Purchased and other intangibles, net

 

506,405

 

16,477

 

Investment in lease receivable

 

126,800

 

126,800

 

Other assets

 

68,183

 

66,228

 

 

 

$

5,962,548

 

$

2,440,315

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

Current liabilities:

 

 

 

 

 

Trade and other payables

 

$

55,031

 

$

41,042

 

Accrued expenses

 

303,550

 

226,915

 

Accrued restructuring

 

10,088

 

70

 

Income taxes payable

 

178,368

 

154,529

 

Deferred revenue

 

130,310

 

57,839

 

Total current liabilities

 

677,347

 

480,395

 

Long-term liabilities:

 

 

 

 

 

Deferred revenue

 

32,644

 

9,731

 

Deferred income taxes

 

70,715

 

78,800

 

Accrued restructuring

 

21,984

 

—

 

Other liabilities

 

7,982

 

7,063

 

Total liabilities

 

810,672

 

575,989

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued

 

—

 

—

 

Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 and 591,528 shares issued and outstanding, respectively

 

61

 

60

 

Additional paid-in-capital

 

2,451,610

 

1,350,692

 

Retained earnings

 

3,317,785

 

2,838,560

 

Accumulated other comprehensive income (loss)

 

6,344

 

(914

)

Treasury stock, at cost (13,608 and 102,799 shares, respectively), net of re-issuances

 

(623,924

)

(2,324,072

)

Total stockholders’ equity

 

5,151,876

 

1,864,326

 

 

 

$

5,962,548

 

$

2,440,315

 

See accompanying Notes to Consolidated Financial Statements.

75



ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)

 

Years Ended

 

 

 

December 1,
2006

 

December 2,
2005

 

December 3,
2004

 

Revenue:

 

 

 

 

 

 

 

Products

 

$

2,484,710

 

$

1,923,278

 

$

1,633,959

 

Services and support

 

90,590

 

43,043

 

32,622

 

Total revenue

 

2,575,300

 

1,966,321

 

1,666,581

 

Costs of revenue:

 

 

 

 

 

 

 

Products

 

226,506

 

89,942

 

86,572

 

Services and support

 

65,951

 

22,636

 

17,806

 

Total cost of revenue

 

292,457

 

112,578

 

104,378

 

Gross profit

 

2,282,843

 

1,853,743

 

1,562,203

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

539,684

 

365,328

 

311,296

 

Sales and marketing

 

867,145

 

593,323

 

521,143

 

General and administrative

 

235,115

 

166,658

 

137,970

 

Restructuring and other charges

 

19,733

 

—

 

—

 

Amortization of purchased intangibles

 

69,873

 

—

 

—

 

Total operating expenses

 

1,731,550

 

1,125,309

 

970,409

 

Operating income

 

551,293

 

728,434

 

591,794

 

Non-operating income:

 

 

 

 

 

 

 

Investment gain (loss), net

 

61,249

 

(1,301

)

2,506

 

Interest and other income, net

 

67,185

 

38,643

 

14,345

 

Total non-operating income

 

128,434

 

37,342

 

16,851

 

Income before income taxes

 

679,727

 

765,776

 

608,645

 

Provision for income taxes

 

173,918

 

162,937

 

158,247

 

Net income

 

$

505,809

 

$

602,839

 

$

450,398

 

Basic net income per share

 

$

0.85

 

$

1.23

 

$

0.94

 

Shares used in computing basic income per share

 

593,750

 

489,921

 

477,658

 

Diluted net income per share

 

$

0.83

 

$

1.19

 

$

0.91

 

Shares used in computing diluted income per share

 

612,222

 

508,070

 

495,626

 

Cash dividends declared per share

 

—

 

$

0.00625

 

$

0.025

 

See accompanying Notes to Consolidated Financial Statements.

76



ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 (In thousands)

 

 

Common Stock

 

Additional
Paid-In

 

Retained

 

Accumulated
Other
Comprehensive

 

Treasury Stock

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Earnings

 

(Loss)

 

Shares

 

Amount

 

Total

 

Balances at November 28, 2003

 

591,528

 

 

$

30

 

 

 

$

903,672

 

 

$

1,800,398

 

 

$

(999

)

 

(114,928

)

$

(1,602,301

)

$

1,100,800

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

 

—

 

 

 

—

 

 

450,398

 

 

—

 

 

—

 

—

 

450,398

 

Other comprehensive loss, net of taxes

 

—

 

 

—

 

 

 

—

 

 

—

 

 

(1,290

)

 

—

 

—

 

(1,290

)

Total comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

449,108

 

Tax benefit from employee stock option plans

 

—

 

 

—

 

 

 

97,794

 

 

—

 

 

—

 

 

—

 

—

 

97,794

 

Issuance of compensatory stock

 

—

 

 

—

 

 

 

225

 

 

—

 

 

—

 

 

20

 

115

 

340

 

Dividends declared

 

—

 

 

—

 

 

 

—

 

 

(11,989

)

 

—

 

 

—

 

—

 

(11,989

)

Purchase of treasury stock

 

—

 

 

—

 

 

 

—

 

 

—

 

 

—

 

 

(21,956

)

(608,681

)

(608,681

)

Re-issuance of treasury stock under employee stock purchase and stock option plans

 

—

 

 

—

 

 

 

192,498

 

 

—

 

 

—

 

 

29,710

 

203,607

 

396,105

 

Balances at December 3, 2004

 

591,528

 

 

$

30

 

 

 

$

1,194,189

 

 

$

2,238,807

 

 

$

(2,289

)

 

(107,154

)

$

(2,007,260

)

$

1,423,477

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

 

—

 

 

 

—

 

 

602,839

 

 

—

 

 

—

 

—

 

602,839

 

Other comprehensive income, net of taxes

 

—

 

 

—

 

 

 

—

 

 

—

 

 

1,375

 

 

—

 

—

 

1,375

 

Total comprehensive income, net of taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

604,214

 

Tax benefit from employee stock option plans

 

—

 

 

—

 

 

 

82,852

 

 

—

 

 

—

 

 

—

 

—

 

82,852

 

Issuance of compensatory stock

 

—

 

 

—

 

 

 

189

 

 

—

 

 

—

 

 

16

 

202

 

391

 

Dividends declared

 

—

 

 

—

 

 

 

—

 

 

(3,056

)

 

—

 

 

—

 

—

 

(3,056

)

Purchase of treasury stock

 

—

 

 

—

 

 

 

—

 

 

—

 

 

—

 

 

(18,715

)

(600,099

)

(600,099

)

Re-issuance of treasury stock under employee stock purchase and stock option plans

 

—

 

 

—

 

 

 

73,462

 

 

—

 

 

—

 

 

23,054

 

283,085

 

356,547

 

Stock dividend

 

—

 

 

30

 

 

 

—

 

 

(30

)

 

—

 

 

—

 

—

 

—

 

Balances at December 2, 2005

 

591,528

 

 

$

60

 

 

 

$

1,350,692

 

 

$

2,838,560

 

 

$

(914

)

 

(102,799

)

$

(2,324,072

)

$

1,864,326

 

Cumulative effect of adjustments from the adoption of SAB No. 108, net of taxes

 

—

 

 

—

 

 

 

27,422

 

 

(26,584

)

 

—

 

 

—

 

—

 

838

 

Adjusted balances as of December 2, 2005

 

591,528

 

 

$

60

 

 

 

$

1,378,114

 

 

$

2,811,976

 

 

$

(914

)

 

(102,799

)

(2,324,072

)

1,865,164

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

—

 

 

—

 

 

 

—

 

 

505,809

 

 

—

 

 

—

 

—

 

505,809

 

Other comprehensive income, net of taxes

 

—

 

 

—

 

 

 

—

 

 

—

 

 

7,258

 

 

—

 

—

 

7,258

 

Total comprehensive income, net of taxes

 

—

 

 

—

 

 

 

—

 

 

—

 

 

—

 

 

—

 

—

 

513,067

 

Issuance of common stock and re-issuance of treasury stock under stock compensation plans

 

3,058

 

 

—

 

 

 

(385,618

)

 

—

 

 

—

 

 

24,972

 

895,430

 

509,812

 

Tax benefit from employee stock option plans

 

—

 

 

—

 

 

 

143,118

 

 

—

 

 

—

 

 

—

 

—

 

143,118

 

Purchase of treasury stock

 

—

 

 

—

 

 

 

—

 

 

—

 

 

—

 

 

(38,576

)

(1,364,412

)

(1,364,412

)

Stock-based compensation

 

 

 

 

 

 

 

 

170,534

 

 

—

 

 

—

 

 

—

 

—

 

170,534

 

Issuance of common stock, re-issuance of treasury stock and stock options assumed for acquisition

 

6,248

 

 

1

 

 

 

1,145,462

 

 

—

 

 

—

 

 

102,795

 

2,169,130

 

3,314,593

 

Balances at December 1, 2006

 

600,834

 

 

$

61

 

 

 

$

2,451,610

 

 

$

3,317,785

 

 

$

6,344

 

 

(13,608

)

$

(623,924

)

$

5,151,876

 

See accompanying Notes to Consolidated Financial Statements.

77



ADOBE SYSTEMS INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

 

 

Years Ended

 

 

 

December 1,
2006

 

December 2,
2005

 

December 3,
2004

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net income

 

$

505,809

 

$

602,839

 

$

450,398

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

307,822

 

82,775

 

81,867

 

Stock-based compensation expense

 

170,534

 

391

 

340

 

Deferred income taxes

 

(4,264

)

(7,068

)

46,270

 

Provision for (recovery of) losses on receivables

 

1,107

 

394

 

(443

)

Tax benefit from employee stock option plans

 

143,118

 

82,852

 

97,794

 

Excess tax benefits from stock-based compensation

 

(80,230

)

—

 

—

 

Retirements of property and equipment

 

767

 

1,093

 

804

 

Net (gains) losses on sales and impairments of investments

 

(63,593

)

1,322

 

(2,506

)

Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:

 

 

 

 

 

 

 

Trade and other receivables

 

(112,844

)

(36,091

)

9,221

 

Prepaid expenses and other current assets

 

12,430

 

(10,585

)

4,908

 

Trade and other payables

 

11,794

 

(2,456

)

5,755

 

Accrued expenses

 

(31,057

)

26,278

 

44,896

 

Accrued restructuring

 

(41,091

)

—

 

(871

)

Income taxes payable

 

27,247

 

8,616

 

(47,571

)

Deferred revenue

 

79,690

 

8,029

 

13,941

 

Net cash provided by operating activities

 

927,239

 

758,389

 

704,803

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of short-term investments

 

(1,596,442

)

(1,849,862

)

(1,866,740

)

Maturities of short-term investments

 

357,775

 

309,202

 

94,756

 

Sales of short-term investments

 

1,010,284

 

1,291,131

 

1,655,596

 

Purchases of long-term investments and other assets

 

(23,094

)

(32,196

)

(35,286

)

Acquisitions of property and equipment

 

(83,250

)

(48,875

)

(63,226

)

Net cash received from (paid for) acquisitions

 

439,120

 

(19,137

)

(15,545

)

Investment in lease receivable

 

—

 

—

 

(126,800

)

Proceeds from sale of equity securities and other assets

 

90,793

 

1,338

 

5,933

 

Net cash provided by (used for) investing activities

 

195,186

 

(348,399

)

(351,312

)

Cash flows from financing activities:

 

 

 

 

 

 

 

Purchase of treasury stock

 

(1,364,412

)

(600,099

)

(608,681

)

Proceeds from re-issuance of treasury stock

 

509,506

 

356,547

 

396,105

 

Excess tax benefits from stock-based compensation

 

80,230

 

—

 

—

 

Payment of dividends.

 

—

 

(3,044

)

(11,942

)

Net cash used for financing activities

 

(774,676

)

(246,596

)

(224,518

)

Effect of exchange rates on cash and cash equivalents

 

3,933

 

(1,637

)

3,566

 

Net increase in cash and cash equivalents

 

351,682

 

161,757

 

132,539

 

Cash and cash equivalents at beginning of year

 

420,818

 

259,061

 

126,522

 

Cash and cash equivalents at end of year

 

$

772,500

 

$

420,818

 

$

259,061

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for income taxes, net of refunds

 

$

36,632

 

$

78,633

 

$

61,423

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

Cash dividends declared but not paid

 

$

—

 

$

—

 

$

3,027

 

Unrealized losses on available-for-sale securities, net of taxes

 

$

(5,480

)

$

(2,306

)

$

(7,345

)

Common and treasury stock issued and stock options assumed for acquisition of Macromedia

 

$

3,436,725

 

$

—

 

$

—

 

See accompanying Notes to Consolidated Financial Statements.

78



ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share (Continued)


For fiscal 2009, 2008 and per share data)

2007, options to purchase approximately 27.0 million, 16.5 million and 10.4 million shares, respectively, of common stock with exercise prices greater than the annual average fair market value of our stock of $27.30, $37.07 and $41.77, respectively, were not included in the calculation because the effect would have been anti-dilutive.

Note 1.   Significant Accounting Policies

Operations

Founded in 1982, Adobe Systems Incorporated offers a line

NOTE 17.   COMMITMENTS AND CONTINGENCIES
Lease Commitments
We lease certain of creative, businessour facilities and mobile software and services used by high-end consumers, creative professionals, designers, knowledge workers, OEM partners, developers and enterprises for creating, managing, delivering and engaging with compelling content and experiences across multiplesome of our equipment under non-cancellable operating systems, devices and media. We distribute our productslease arrangements that expire at various dates through a network of distributors and dealers, VARs, systems integrators, ISVs and OEMs; direct to end users; and through our own Web site at www.adobe.com.2028. We also licensehave one land lease that expires in 2091. Rent expense includes base contractual rent and variable costs such as building expenses, utilities, taxes, insurance and equipment rental. Rent expense and sublease income for these leases for fiscal 2007 through fiscal 2009 were as follows (in thousands):
   2009   2008   2007 
Rent expense $93,921  $101,202  $90,553 
Less: sublease income  5,563   11,421   9,406 
Net rent expense                                                                          $88,358  $89,781  $81,147 
We occupy three office buildings in San Jose, California where our technologycorporate headquarters are located. We reference these office buildings as the Almaden Tower and the East and West Towers.
In August 2004, we extended the lease agreement for our East and West Towers for an additional five years with an option to major hardware manufacturers, software developers and service providers andextend for an additional five years solely at our election. In June 2009, we offer integrated software solutionssubmitted notice to businesses of all sizes. We have operationsthe lessor that we intended to exercise our option to renew this agreement for an additional five years effective August 2009. As stated in the Americas, EMEAoriginal lease agreement, in conjunction with the lease renewal, we were required to obtain a standby letter of credit for approximately $16.5 million which enabled us to secure a lower interest rate and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX and various non-personal computer platforms, depending onreduce the product.

Basisnumber of Presentation

The accompanying consolidated financial statements include those of Adobe and our subsidiaries, after elimination of all intercompany accounts and transactions. Adobe has prepared the accompanying consolidated financial statements in conformity with accounting principles generally acceptedcovenants. As defined in the United Stateslease agreement, the standby letter of America.

Usecredit primarily represents the lease investment balance equity which is callable in the event of Estimatesdefault. In March 2007, the Almaden Tower lease was extended for five years, with a renewal option for an additional five years solely at our election. As part of the lease extensions, we purchased the lease receivable from the lessor of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower for $80.4 million, both of which are recorded as investments in lease receivables on our Consolidated Balance Sheets. This purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West Towers and the agreement for the Almaden Tower, we have the option to purchase the buildings at anytime during the lease term for approximately $143.2 million and $103.6 million, respectively. The residual value guarantees under the East and West Towers and the Almaden Tower obligations are $126.8 million and $89.4 million, respectively.

These two leases are both subject to standard covenants including certain financial ratios that are reported to the lessors quarterly. As of November 27, 2009, we were in compliance with all covenants. In the preparationcase of financial statementsa default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in conformity with accounting principles generally accepted in the United States of America, we must make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities,order to access bank-provided funding at the datemost favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term, purchase the buildings for the lease balance, sheet,remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and reported amountswill be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the residual value guarantee amount.
115
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following are our future minimum lease payments under non-cancellable operating leases and future minimum sublease income under non-cancellable subleases for each of revenuesthe next five years and expenses during the reporting period. Actual results could differ from those estimates.

thereafter as of November 27, 2009 (in thousands):

Fiscal Year   
Future
Minimum
Lease
Payments
   
Future
Minimum
Sublease
Income
 
2010
 $53,244  $3,970 
2011
  41,328   3,323 
2012
  33,391   2,008 
2013
  24,780   404 
2014
  19,964   — 
Thereafter
  76,548   — 
Total
 $249,255  $9,705 
Fiscal Year

Our fiscal year is a 52/53-week year ending on the Friday closestThe table above includes commitments related to November 30.

Stock Dividend

On March 16, 2005, our Board of Directors approved a two-for-one stock split, in the formrestructured facilities. See Note 11 for information regarding our restructuring charges.

Guarantees
The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. The fair value of a stock dividend, ofresidual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our common stock payable on May 23, 2005 to stockholders of record as of May 2, 2005. ShareConsolidated Balance Sheets. As such, we recognized $5.2 million and per share data, for all periods presented, have been adjusted to give effect to this stock split.

Reclassification

Certain amounts$3.0 million in fiscal 2005 and 2004 as reported in the Consolidated Statements of Cash Flows have been revised. Specifically in fiscal 2005, approximately $9.6 million of prepaid expensesliabilities, related to the Macromedia acquisitionextended East and $18.4 million of expense relatedWest Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the amortization of premium on available for sale securities have been reclassified from Net Cash Provided by Operating Activities to Net Cash Provided By (Used For) Investing Activities. In fiscal 2004, $21.0 million of expense related to the amortization of premium on available for sale securities has been reclassified from Net Cash Provided By Operating Activities to Net Cash Provided By (Used For) Investing Activities.


Cash Equivalents and Short-term Investments

Cash equivalents consist of instruments with remaining maturities of three months or less at the time of purchase.

We classify all of our cash equivalents and short-term investments that are free of trading restrictions or become free of trading restrictions within one year as “available-for-sale.” We carry these investments at fair value, based on quoted market prices. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity. Gains are recognized when realized in our consolidated statements of income. Losses are recognized as realized or when we have determined that an other-than-temporary decline in fair value has occurred.

It is our policy to review our marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing the cash position, earnings/revenue outlook, stock price performancestatement over the past six months, liquidity and management/ownership of each company we invest in. If we believe that an other-than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related write-down as an investment loss on our consolidated statements of income.

Allowance for doubtful accounts

We also maintain an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. We review our trade receivable by aging category to identify significant customers with known disputes or collection issues. For accounts not specifically identified, we provide reserves based on the agelife of the receivable. In determiningleases. As of November 27, 2009 and November 28, 2008, the reserve, we make judgments about the credit-worthinessunamortized portion of significant customers based on ongoing credit evaluations. We also consider our historical level of credit losses and current economic trends that might impact the level of future credit losses.

 

 

Beginning
Balance

 

Due to
Acquisition

 

Charged/
(Credited) to
Operating
Expenses

 

Deductions(*)

 

Ending
Balance

 

Allowance for doubtful accounts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 1, 2006

 

 

$

5,376

 

 

 

$

2,105

 

 

 

$

1,107

 

 

 

$

(1,790

)

 

$

6,798

 

December 2, 2005

 

 

6,191

 

 

 

—

 

 

 

394

 

 

 

(1,209

)

 

5,376

 

December 3, 2004

 

 

7,903

 

 

 

—

 

 

 

(443

)

 

 

(1,269

)

 

6,191

 

(*)          Deductions related to the allowance for doubtful accounts represent amounts written off against the allowance, less recoveries.

Foreign Currency Translation

We translate assets and liabilities of foreign subsidiaries, whose functional currency is the local currency, at exchange rates in effect at the balance sheet date. We translate revenues and expenses at the monthly average rates of exchange prevailing during the year. We include the adjustment resulting from translating the financial statements of such foreign subsidiaries in accumulated other comprehensive income (loss), which is reflected as a separate component of stockholders’ equity.


Property and Equipment

We record property and equipment at cost. Depreciation and amortization are calculated using the straight-line method over the shorter of the estimated useful lives (thirty-five years for buildings; two to seven years for furniture and equipment) or shorter of lease terms or estimated useful lives (five to ten years for leasehold improvements) of the respective assets. Additionally, it is our policy to capitalize certain costs for internal-use software incurred during the application development stage, in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” Amortization begins once the software is ready for its intended use.

Goodwill and Purchased and Other Intangibles

In accordance with Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” we review our goodwill for impairment annually, or more frequently, if facts and circumstances warrant a review. The provisions of SFAS 142 require that a two-step test be performed to assess goodwill for impairment. First, the fair value of the reportingresidual value guarantees, for both leases, remaining in other long-term liabilities and prepaid rent was $1.3 million and $2.6 million, respectively.

Royalties
We have royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under our cost of products revenue on our Consolidated Statements of Income, was approximately $43.0 million, $47.8 million and $37.4 million in fiscal 2009, 2008 and 2007, respectively.
Indemnifications
In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third-parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.
To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, comparedor was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to its carrying value. Ifmake under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the fair value exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The impliedestimated fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. In determining the fair value of our reporting units, we relied upon the Income Approach and the Market Approach. Under the Income Approach, the fair value of a business is based on the cash flows it can be expected to generate over its remaining life. The estimated cash flows are converted to their present value equivalent using an appropriate rate of return. The Market Approach utilizes a market comparable method whereby similar publicly traded companies are valued using Market Value of Invested Capital (“MVIC”) multiples (i.e., MVIC to revenue, MVIC to earnings before interest and taxes, MVIC to cash flow, etc.) and then these MVIC multiples are applied to a company’s operating results to arrive at an estimate of value.

We completed our annual goodwill impairment test during the second quarter of fiscal 2006 and determined that the carrying amount of goodwill was not impaired.

SFAS 142 also requires that intangible assets with definite lives be amortized over their estimated useful life and reviewed for impairment whenever an impairment indicator exists. We continually monitor events and changesindemnification agreements in circumstances that could indicate carrying amounts of our intangible assets may not be recoverable. When such events or changes in circumstances occur, we assess the recoverability of intangible assets by determining whether the carrying value of such assets will be recovered through the undiscounted expected future cash flows. If the future undiscounted cash flows are less than the carrying amount of the intangible assets, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. We did not recognize intangible asset impairment charges in fiscal 2006, 2005 or 2004.

We are currently amortizing acquired intangible assets with definite lives. Purchased technologyapplicable insurance coverage is amortized over its useful life, which is generally three years and other intangibles assets are amortized over estimated useful lives ranging from 1 to 13 years. Generally, amortization is based on the pattern in which the economic benefits of the intangible asset will be consumed. The amortization expense is related to acquired technology and contracts is classified as cost of product revenue in our consolidated statements of income. Amortization expense related to all other intangible assets is classified in operating expense.

Software Development Costs

Capitalization of software development costs for software to be sold, leased, or otherwise marketed begins upon the establishment of technological feasibility, which is generally the completion of a working

minimal.

prototype that has been certified as having no critical bugs and is a release candidate or when alternative future use exists. To date, software development costs incurred between completion of a working prototype and general availability of the related product have not been material and have not been capitalized.

Other Assets

Other assets include long-term investments, security deposits and a land deposit. Other assets also include the fair value, at inception, of the residual value guarantee associated with our lease on two buildings we occupy as

As part of our headquarters, in accordance with FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Our long-term investments include investments in privately held companies that we make either directly or indirectly through venture capital limited partnerships. We own limited partnership interests in three venture capital limited partnerships—Adobe Ventures, L.P., Adobe Ventures III, L.P. and Adobe Ventures IV, L.P. (collectively “Adobe Ventures”)—that invest in early stage companies with innovative technologies. The partnerships are managed bywe have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.

Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.

116
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Legal Proceedings
On September 23, 2009, Richard Miner on behalf of himself and all similarly situated stockholders of Omniture, Inc. filed a class action lawsuit captioned Miner v. Omniture, Inc.,  et. al., Case No. 090403559 (the “Miner Lawsuit”) against Omniture, the members of Omniture’s board of directors (collectively, the “Omniture Defendants”) and Adobe in the United States Fourth Judicial District Court for Utah County, Provo Department, State of Utah seeking to enjoin the proposed acquisition between Omniture and Adobe.  In the event the acquisition is consummated, the plaintiff seeks to recover an unspecified amount of damages. The investmentsplaintiff alleges that the members of Omniture’s board of directors breached their fiduciary duties to Omniture’s stockholders by failing to seek the highest possible price for Omniture and that Adobe induced or aided and abetted in the alleged breach of such fiduciary duties. Also on September 23, 2009, Christopher R. Barrell filed a substantially similar lawsuit to the Miner Lawsuit in the United States Fourth Judicial District Court for Utah County, Provo Department, State of Utah, captioned Barrell v. Omniture, Inc. et. al., Case No. 090403560 (the “Barrell Lawsuit”). The Barrell Lawsuit names the same defendants as the Miner Lawsuit, and also names Snowbird Acquisition Corporation as an additional defendant. Subsequently, on September 24, 2009, the plaintiff in the Barrell Lawsuit filed an amended complaint, which added allegations that the Schedule 14D-9 Solicitation/Recommendation Statement filed by Omniture on September 24, 2009 contained inadequate disclosures and was materially misleading. On September 25, 2009, the Omniture Defendants filed a motion requesting that the court consolidate the Barrell Lawsuit, Miner Lawsuit and a substantially similar lawsuit captioned Lodhia v. Omniture, Inc. et al., Case No. 090403499 (the “Lodhia Lawsuit”) in which the Omniture Defendants, but not Adobe, Ventureswere named. Additionally, on September 30, 2009, the plaintiff in the Lodhia Lawsuit filed a response to defendants’ motion to consolidate, agreeing consolidation is appropriate, and also filed a motion seeking appointment as lead plaintiff in the consolidated action.   Omniture moved for an order consolidating all three lawsuits.  The plaintiffs in the three lawsuits filed a joint motion seeking preliminary injunction barring the consummation of the proposed acquisition and requiring additional disclosures by Omniture in its Schedule 14D-9.  At a hearing on October 20, 2009, the court granted Omniture’s motion to consolidate the three cases and denied the plaintiffs’ motion for a preliminary injunction. On December 30, 2009, the plaintiffs served the defendants with a consolidated amended complaint. Adobe intends to defend the lawsuits vigorously. As of November 27, 2009, no amounts have been accrued as a loss is not probable.
In connection with our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.
From time to time, Adobe is subject to legal proceedings, claims and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated in accordance with FASB Interpretation No. 46R (“FIN 46R”) a revisionfinancial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.
NOTE 18.  CREDIT AGREEMENT
In August 2007, we entered into the Amendment to FASB Interpretation No. 46 (“FIN 46”our Credit Agreement dated February 2007 (the “Amendment”), “Consolidationwhich increased the total senior unsecured revolving facility from $500.0 million to $1.0 billion. The Amendment also permits us to request one-year extensions effective on each anniversary of Variable Interest Entities.” Adobe Ventures carry their investmentsthe closing date of the original agreement, subject to the majority consent of the lenders. We also retain an option to request an additional $500.0 million in equity securitiescommitments, for a maximum aggregate facility of $1.5 billion.
In February 2008, we entered into the Second Amendment to the Credit Agreement dated February 26, 2008, which extended the maturity date of the facility by one year to February 16, 2013. The facility would terminate at estimated fair market valuethis date if no additional extensions have been requested and unrealized gainsgranted. All other terms and lossesconditions remain the same.
117
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio. At our option, borrowings under the facility accrue interest based on either the London interbank offered rate (“LIBOR”) for one, two, three or six months, or longer periods with bank consent, plus a margin according to a pricing grid tied to this financial covenant, or a base rate. The margin is set at rates between 0.20% and 0.475%. Commitment fees are payable on the facility at rates between 0.05% and 0.15% per year based on the same pricing grid. The facility is available to provide loans to us and certain of our subsidiaries for general corporate purposes. As of November 28, 2008, the amount outstanding under this credit facility was $350.0 million. On September 22, 2009 we borrowed an additional $650.0 million under the credit facility. As of November 27, 2009, the amount outstanding under this credit facility was $1.0 billion which is included in investment gain (loss)long-term liabilities on our consolidated statements of income.Consolidated Balance Sheets. The stock of a number of technology investments held by Adobe Ventures at December 1, 2006 and December 2, 2005 is not publicly traded and, therefore, there is no established market for these securities. In order to determine the fair market value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates of current market value made by Granite Ventures. It is our policy to review the fair value of these investments held by Adobe Ventures, as well as our direct investments, on a regular basis to evaluate the carrying value of the investmentsoutstanding liability approximates fair value. As of November 27, 2009, we were in these companies. This evaluation includes, but is not limited to, reviewing each company’s cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes and competition. In the case of privately held companies, this evaluation is based on information that we request from these companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies and as such, the basis for these evaluations is subject to the timing and the accuracycompliance with all of the data received from these companies. Ifcovenants.
NOTE 19.  NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) for fiscal 2009, 2008 and 2007 included the following (in thousands):
   2009   2008   2007 
Interest and other income, net:            
Interest income
 $34,978  $57,588  $92,794 
Foreign exchange losses
  (13,420)  (17,494)  (9,264)
Realized gains on fixed income investment
  8,753   3,161   934 
Realized losses on fixed income investment
  (1)  (1,501)  (3,510)
Other
  1,070   2,093   1,770 
Interest and other income, net
 $31,380  $43,847  $82,724 
Interest expense
 $(3,407) $(10,019) $(253)
Investment gains (losses), net:            
Realized investment gains
 $52  $18,398  $9,308 
Unrealized investment gains(*) 
  7,950   7,803   5,265 
Realized investment losses
  (9,019)  (1,417)  (2,236)
Unrealized investment losses
  (15,949)  (8,375)  (5,203)
Investment gains (losses), net
 $(16,966) $16,409  $7,134 
Non-operating income (expense), net
 $11,007  $50,237  $89,605 

(*)During fiscal 2009, we recorded $3.0 million in unrealized holding gains and losses associated with our deferred compensation plan assets (classified as trading securities).
NOTE 20.  INDUSTRY SEGMENT, GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
For substantially all of fiscal 2009, we believehad the carrying valuefollowing reportable segments: Creative Solutions, Knowledge Worker, Enterprise, Platform and Print and Publishing. Coinciding with the integration of a company is in excess of fair value, it is our policy to write-down the investments to reduce its carrying value to fair value.

Revenue Recognition

Our revenue is derived from the licensing of software products, consulting, and maintenance and support. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.

Product revenue

We recognize our product revenue upon shipment, provided collection is determined to be probable and no significant obligations remain. Our desktop application products revenue from distributors is subject to agreements allowing limited rights of return, rebates and price protection. Our direct sales and OEM sales are also subject to limited rights of return. Accordingly we reduce revenue recognized for estimated future returns, price protection and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levelsOmniture in the distribution channel and other related factors.


We record the estimated costs of providing free technical phone support to customers for our software products.

We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe software, provided collection of such revenue is deemed probable. For certain OEM customers, we must estimate royalty revenue due to the timing of securing customer information.

Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the specified free upgrade expires.

Services and support revenue

Our services and support revenue is composed of consulting, training, and maintenance and support, primarily related to the licensing of our Enterprise and Developer Solutions and Mobile and Device Solutions products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products.

Our consulting revenue is recognized using the proportionate performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones when applicable. Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, are recognized ratably over the term of the arrangement.

Multiple element arrangements

We enter into revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, and consulting (multiple-element arrangements). When vendor-specific objective evidence (“VSOE”) of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For maintenance and support, VSOE of fair value is established by renewal rates. For arrangements where VSOE of fair value exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.

Advertising Expenses

We expense all advertising costs as incurred and classify these costs under sales and marketing expense. Advertising expenses for fiscal 2006, 2005 and 2004 were $27.8 million, $39.0 million, and $31.9 million, respectively.

Stock-based Compensation

During the firstfourth quarter of fiscal 2006,2009, we adopted the provisionscreated a new reportable segment for financial reporting purposes. Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and account for stock-based compensation in accordance with, the Financial Accounting Standards Board’s (“FASB”) Statementdeveloper tasks to an extended set of Financial Accounting Standards No. 123—revised 2004 (“SFAS 123R”), “Share-Based Payment” which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to


Employees.” Under the fair value recognition provisions of this statement, stock-based compensation cost is measured at the grant date basedcustomers. The Knowledge Worker segment focuses on the fair valueneeds of the awardknowledge worker customers, providing essential applications and is recognizedservices to help them share information and collaborate. This segment contains revenue generated by Acrobat Connect and our Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions that automate people-centric processes and contains revenue generated by our LiveCycle line of products. The Platform segment includes client and developer technologies, such as expense on a straight-line basis over the requisite service period, which is the vesting period. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes.Adobe Flash Player, Adobe Flash Lite, Adobe AIR, Adobe Flex and Adobe Flash Builder, and also encompasses products and technologies created and managed in other Adobe segments. The valuation provisions of SFAS 123R apply to new grantsPrint and to grants that were outstanding prior to the effective date and are subsequently modified. Estimated compensation for grants that were outstanding as of the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS 123 pro forma disclosures.

The adoption of SFAS 123R had and will have a material impact on our consolidated financial position and results of operations. See Note 11 for further information regarding our stock-based compensation assumptions and expenses, including pro forma disclosures for prior periods as if we had recorded stock-based compensation expense.

Upon exercise of stock options or vesting of restricted stock and performance shares, we will issue treasury stock. If treasury stock is not available, common stock will be issued. In order to minimize the impact of on-going dilution from exercises of stock options and vesting of restricted stock and performance shares, we instituted a stock repurchase program. See Note 12 for information regarding our stock repurchase program.

Foreign Currency and Other Hedging Instruments

We transact business in foreign countries, in U.S. dollars and in various foreign currencies. In Europe and Japan, transactions that are denominated in euro and yen subject us to exposure from movements in foreign currency exchange rates. We hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. We use foreign exchange option and forward contracts to reduce our exposure to foreign currency rate changes on non-functional currency denominated forecasted product licensing revenue, primarily yen-denominated and euro-denominated revenue.

Adobe accounts for its derivative instruments as either assets or liabilities on the balance sheet and measures them at fair value. Derivatives that are not defined as hedges in Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities,” must be adjusted to fair value through earnings. As described in Note 16, gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

Gains and lossesPublishing segment addresses market opportunities ranging from the foreign exchange forward contracts hedging certain balance sheet positions, primarily non-functional currency denominated assets, such as trade receivables,diverse publishing needs of technical and liabilities, such as accounts payable, are recorded each period in other income (expense) in the consolidated statements of operations. Foreign exchange forward contracts hedging forecasted non-functional currency denominated forecasted product licensing revenue, are designated as cash flow hedges under SFAS 133, with gainsbusiness publishing, to our legacy type and losses recorded net of tax, as a component of other comprehensive income in stockholders’ equityOEM printing businesses. Finally, our Omniture segment provides web analytics and reclassified into revenue at the time the forecasted transactions occur.

Income Taxes

We use the assetonline business optimization products and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year. In addition, deferred tax assetsservices to manage and liabilities are recognized for expected future tax consequences of temporary differences between the financial reportingenhance online, offline and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not.

84

multi-channel business initiatives.
118
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)


Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements,” which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We are currently evaluating the impact of SFAS 157, but do not expect the adoption of SFAS 157 to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—An Amendment of FASB No. 87, 88, 106 and 132(R)” (“SFAS 158”). SFAS 158 requires that the funded status of defined benefit postretirement plans be recognized on the company’s balance sheet, and changes in the funded status be reflected in comprehensive income, effective fiscal years ending after December 15, 2006. The standard also requires companies to measure the funded status of the plan as of the date of its fiscal year-end, effective for fiscal years ending after December 15, 2008. We do not expect the adoption of SFAS 158 to have a material impact on our consolidated financial position, results of operations or cash flows.

In July 2006, the FASB issued Financial Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109” (“FIN 48”), which is a change in accounting for income taxes. FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized, measured, and derecognized in financial statements; requires certain disclosures of uncertain tax matters; specifies how reserves for uncertain tax positions should be classified on the balance sheet; and provides transition and interim period guidance, among other provisions. FIN 48 is effective for fiscal years beginning after December 15, 2006 and as a result, is effective for AdobeEffective in the first quarter of fiscal 2008. We are currently evaluating the impact of FIN 48 on2009, our consolidated financial position, results of operations,former Mobile and cash flows.

In February 2006, the FASB issued Statement of Financial Accounting Standards No. 155 (“SFAS 155”), “Accounting for Certain Hybrid Financial Instruments” which amends Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative InstrumentsDevices Solutions segment, was integrated into our Platform business unit to better align our engineering and Hedging Activities”marketing efforts and Statement of Financial Accounting Standards No. 140 (“SFAS 140”), “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivatives embedded in other financial instruments by allowing them to be accounted foris now reported as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the company has not yet issued financial statements, including for interim periods, for that fiscal year. We will adopt SFAS 155 in the first quarter of fiscal 2007. We do not expect the adoption of SFAS 155 to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2006, the SEC (“SEC”) issued SAB No. 108 “Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements”, which provides interpretive guidance on how registrants should quantify financial statement misstatements. Under SAB 108 registrants are required to consider both a “rollover” method which focuses primarily on the income statement impact of misstatements and the “iron curtain” method which focuses primarily on the balance sheet impact of misstatements. The transition provisions of SAB 108 permit a registrant to adjust retained


earnings for the cumulative effect of immaterial errors relating to prior years. We were required to adopt SAB 108 in our current fiscal year.

In the second quarter of fiscal 2006, the Company concluded a voluntary review of its executive officer grants from 1997 to 2006 and uncovered no improper grants to executive officers.  In the fourth quarter of fiscal 2006, we concluded a second voluntary review, focused principally on grants to non-executive employees from 1997 to 2006. Preliminary results of this internal review suggested that certain annual grants may have had improper grant dates. The Board of Directors formed a Special Committee of outside Directors to undertake a broader review of these annual non-executive employee option grants. The Special Committee enlisted the assistance of independent legal counsel and an independent accounting firm. The Special Committee uncovered no fraud or intentional wrongdoing. The Special Committee did find certain instances relating to grants made to employees where the list of employees and/or shares allocated to them was not sufficiently definitive for the grant to be deemed final aspart of the reported grant date. In other instances, the Special Committee found that adjustments were made to some employee grants after the grant date without a corresponding change to the measurement date. These errors resulted in an understatement of stock-based compensation in 1998 through 2005.

Historically, we have evaluated uncorrected differences utilizing the rollover approach. We believe the impact of these stock-based compensation errors were immaterial to prior fiscal years under the rollover method. However, under SAB 108, which we were required to adopt for thePlatform segment. Prior year ended December 1, 2006, we must assess materiality using both the rollover method and the iron-curtain method. Under the iron-curtain method, the cumulative stock option errors are material to our fiscal 2006 financial statements and, therefore, we have recorded an adjustment to our opening fiscal 2006 retained earnings balance in the amount of $26.6 million in accordance with the implementation guidance in SAB 108. The total cumulative impact is as follows:

Retained Earnings

 

$

(26,584

)

Deferred Income Taxes

 

838

 

Additional Paid in Capital

 

27,422

 

The impact on retained earnings is comprised of the following amounts:

Retained Earnings

 

 

 

1998-2001

 

2002

 

2003

 

2004

 

2005

 

Total

 

Stock compensation expense

 

$

(10,324

)

$

(11,476

)

$

(10,420

)

$

(2,959

)

$

(230

)

$

(35,409

)

Tax effect

 

2,628

 

2,856

 

2,558

 

726

 

57

 

8,825

 

Total, net of tax

 

$

(7,696

)

$

(8,620

)

$

(7,862

)

$

(2,233

)

$

(173

)

$

(26,584

)

Income before taxes

 

$

1,292,791

 

$

284,689

 

$

380,492

 

$

608,645

 

$

765,776

 

 

 

Percent of income before taxes.

 

(1%

)

(4%

)

(3%

)

0%

 

0%

 

 

 

Note   2. Acquisitions

On December 3, 2005, we completed the acquisition of Macromedia, a provider of software technologies that enable the development of a wide range of internet and mobile application solutions, for approximately $3.5 billion. Acquiring Macromedia accelerates our strategy of delivering an industry-defining technology platform that provides more powerful solutions for engaging people with digital information. The transaction was accounted for using the purchase method of accounting in accordance with Statement of Financial Accounting Standards No. 141 (“SFAS 141”), “Business Combinations.” The results of operations of Macromedia have been included in the Consolidated Statements of Income beginning on December 3, 2005.


Assets acquired and liabilities assumed were recorded at their fair values as of December 3, 2005. The total $3.5 billion purchase price is comprised of the following:

Value of Adobe stock issued

 

$

3,209,121

 

Fair value of stock options assumed

 

227,604

 

Direct transaction costs

 

29,060

 

Restructuring costs

 

72,728

 

Total estimated purchase price

 

$

3,538,513

 

As a result of the acquisition, we issued approximately 109.0 million shares of Adobe common stock based on an exchange ratio of 1.38 shares of Adobe common stock for each outstanding share of Macromedia common stock as of December 3, 2005. This fixed exchange ratio gives effect to the two-for-one stock split in the form of a stock dividend paid on May 23, 2005 to the stockholders of Adobe. The average market price per share of Adobe common stock of $29.43 used to determine the fair value the stock issued was based on the average of the closing prices for a range of trading days (April 14, 2005 through April 20, 2005) around the announcement date (April 18, 2005) of the proposed transaction.

Under the terms of the merger agreement, each Macromedia stock option that was outstanding and unexercised was converted into an option to purchase Adobe common stock and we assumed that stock option in accordance with the terms of the applicable Macromedia stock option plan and terms of the stock option agreement relating to that Macromedia stock option. Based on Macromedia’s stock options outstanding at December 3, 2005, we converted options to purchase approximately 11.0 million shares of Macromedia common stock into options to purchase approximately 15.1 million shares of Adobe common stock. The fair value of options assumed of $227.6 million was determined using the Black Scholes valuation model. The stock price used in the valuation was $29.43, which was the average of closing prices for a range of trading days (April 14, 2005 through April 20, 2005) around the announcement date (April 18, 2005) of the proposed transaction. The risk-free interest rate used in the valuation was the zero-coupon yield implied from U.S. Treasury securities with equivalent remaining terms. We do not anticipate paying any cash dividends in the foreseeable future and therefore an expected dividend yield of zero was used in the valuation. For fully vested options, the expected term used was one year. We estimated the expected term of unvested options by taking the average of the vesting term remaining and the contractual term of the option, as illustrated in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB 107”). The implied volatility of Adobe traded stock options was used for volatility.

Direct transaction costs of $29.1 million include investment banking, legal and accounting fees, and other external costs directly related to the acquisition. As of December 1, 2006, substantially all costs for accounting, legal, and other professional services have been paid.

Restructuring costs of $72.7 million relate primarily to costs for severance, associated benefits, outplacement services, and excess facilities. See Note 9 for further details of the amounts accrued and payments made during 2006.

Purchase Price Allocation

In accordance with SFAS No. 141the total preliminary purchase price was allocated to Macromedia’s net tangible and intangible assets based upon their estimated fair values as of December 3, 2005. The excess purchase price over the value of the net tangible and identifiable intangible assets was recorded as goodwill. The fair values assigned to tangible and intangible assets acquired and liabilities assumed are based on estimates and assumptions of management. During the fourth quarter of fiscal 2006, we revised our estimate of certain costs associated with our acquisition of Macromedia, resulting in a decrease to goodwill of approximately $0.2 million. The adjustment primarily reflected costs related to closing redundant facilities.


The following represents the allocation of the purchase price to the acquired net assets of Macromedia and the associated estimated useful lives:

 

 

Amount

 

Estimated
Useful Life

 

Net tangible assets

 

$

713,164

 

N/A

 

Identifiable intangible assets:

 

 

 

 

 

Acquired product rights

 

365,500

 

4 years

 

Customer contracts and relationships

 

183,800

 

6 years

 

Non-competition agreements

 

500

 

2 years

 

Trademarks

 

130,700

 

5 years

 

Goodwill

 

2,022,715

 

N/A

 

Deferred stock-based compensation

 

122,134

 

2.18 years†

 

Total preliminary estimated purchase price

 

$

3,538,513

 

 

 

†                     Estimated weighted-average remaining vesting period.

Net tangible assets—Macromedia’s tangible assets and liabilities as of December 3, 2005 were reviewed and adjusted to their fair value as necessary, including an increase to market value of $18.4 million related to owned land and a building, $11.5 million related to an investment, and $21.5 million for receivables related to future payments from existing customers. We also assumed $488.4 million in cash and cash equivalents, $109.8 million in property, plant, and equipment, $103.2 million in accrued expenses, and $186.9 million in deferred tax liabilities.

Deferred revenues—Macromedia’s deferred revenue was derived from licenses, maintenance and support, hosting, and consulting contracts. We estimated our obligation related to the deferred revenue using the cost build-up approach. The cost build-up approach determines fair value by estimating the costs relating to fulfilling the obligation plus a normal profit margin. The sum of the costs and operating profit approximates, in theory, the amount that we would be required to pay a third party to assume the support obligation. The estimated costs to fulfill the support obligation were based on the historical direct costs related to providing the support. As a result, we recorded an adjustment to reduce Macromedia’s carrying value of deferred revenue by $49.1 million to $14.9 million, which represents our estimate of the fair value of the contractual obligations assumed.

Identifiable intangible assets—Acquired product rights include developed and core technology and patents. Developed technology relates to Macromedia products across all of their product lines that have reached technological feasibility. Core technology and patents represent a combination of Macromedia’s processes, patents and trade secrets developed through years of experience in design and development of its products. We will amortize the fair value of the acquired product rights based on the pattern in which the economic benefits of the intangible asset will be consumed.

Customer contracts and relationships represent existing contracts and the underlying customer relationships. We will amortize the fair value of these assets based on the pattern in which the economic benefits of the intangible asset will be consumed.

Trademarks primarily relate to the Flash trade name and other product names, which will be amortized based on the pattern in which the economic benefits of the intangible asset will be consumed.

In-process research and development—As of the acquisition date, no amounts were allocated to in-process research and development. In-process research and development is dependent on the status of new projects on the date the acquisition is consummated. Prior to the acquisition date, Macromedia had released new versions of its software products. Accordingly, there were no substantive research and development projects in process on the date the acquisition was consummated.

88



Goodwill—Approximately $2.0 billion has been allocated to goodwill. Goodwill represents the excess of the purchase price over the fair value of the underlying acquired net tangible and intangible assets. In accordance with SFAS 142, goodwill will not be amortized but instead will be tested for impairment at least annually (more frequently if certain indicators are present). The factors that contributed to the recognition of goodwill included securing buyer-specific synergies that increase revenue and profits and are not otherwise available to a marketplace participant, acquiring a talented workforce, and significant cost savings opportunities.

Taxes—As part of our accounting for the Macromedia acquisition, a portion of the overall purchase price was allocated to goodwill and acquired intangible assets. Amortization expense associated with acquired intangible assets is not deductible for tax purposes. Thus, approximately $186.9 million was established as a deferred tax liability for the future amortization of the intangible assets. In accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” the valuation allowance on Macromedia’s financial statements as of December 3, 2005 was reduced by $237.8 million to $16.1 million, to the extent the deferred tax assets are more likely than not realizable.

Any impairment charges made in the future associated with goodwill will not be tax deductible and will result in an increased effective income tax rate in the quarter the impairment is recorded.

Deferred stock-based compensation—Deferred stock-based compensation represents the estimated fair value, measured as of December 3, 2005, of unvested Macromedia stock options and restricted stock assumed. The fair value of unvested options assumed was $117.3 million using the Black Scholes valuation model. The stock price used in the valuation is $34.97, which was the closing price of Adobe shares on December 2, 2005, the last trading day before the close of the acquisition. The risk-free interest rate was the zero coupon yield on December 2, 2005 implied from U.S. Treasury securities with equivalent remaining terms. We do not anticipate paying any cash dividends in the foreseeable future and therefore used an expected dividend yield of zero. We estimate the expected term by taking the average of the vesting term remaining and the contractual term of the option, as illustrated in SAB 107. The implied volatility of Adobe traded stock options as of December 2, 2005 was used for volatility. The fair value of the unvested restricted stock of $4.8 million was based on the fair value of the underlying shares on the acquisition date.

The assumptions used to value unvested Macromedia stock options are as follows:

2006

Expected term (in years)

0.17—6.67

Volatility

32.9—35.2

%

Risk free interest rate

3.97—4.48

%

Total deferred stock-based compensation, of $122.1 million, is being amortized to expenses over the remaining vesting periods of the underlying options or restricted stock. See Note 11 for the amortization of deferred stock-based compensation during fiscal 2006.


Pro Forma Results

The unaudited financial information in the table below summarizeshas been reclassified to reflect the combined resultsintegration of operations of Adobethese business units.

To better align our marketing efforts and Macromedia, on a pro forma basis, as thoughgo-to-market strategies, in fiscal 2010 we plan to move responsibility for the companies had been combined as ofConnect Solutions product line from our Knowledge Worker segment to our Enterprise segment. We will adjust our reportable segments at the beginning of fiscal 2010 to reflect changes for how we manage our business as we enter the period presented.new fiscal year.
We report segment information based on the “management” approach. The pro forma financialmanagement approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.
Our chief operating decision maker reviews revenue and gross margin information for each of our reportable segments. Operating expenses are not reviewed on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.
Our segment results for fiscal 2009, 2008 and 2007 were as follows (dollars in thousands):

   
Creative
Solutions
   
Knowledge
Worker
   Enterprise   
Platform(1)
   
Print and
Publishing
   
Omniture(2)
   Total 
Fiscal 2009                            
Revenue
 $1,702,110  $622,970  $235,498  $181,033  $177,970  $26,272  $2,945,853 
Cost of revenue
  152,909   40,155   47,991   21,174   18,674   15,829   296,732 
Gross profit
 $1,549,201  $582,815  $187,507  $159,859  $159,296  $10,443  $2,649,121 
Gross profit as a percentage of revenue  91%  94%  80%  88%  90%  40%  90%
                             
Fiscal 2008                            
Revenue
 $2,072,835  $810,883  $252,976  $231,558  $211,637  $—  $3,579,889 
Cost of revenue
  160,560   53,282   75,539   44,344   28,905   —   362,630 
Gross profit
 $1,912,275  $757,601  $177,437  $187,214  $182,732  $—  $3,217,259 
Gross profit as a percentage of revenue  92%  93%  70%  81%  86%  —   90%
                             
Fiscal 2007                            
Revenue
 $1,898,924  $728,528  $191,317  $133,380  $205,732  $—  $3,157,881 
Cost of revenue
  147,161   57,683   68,932   44,087   36,831   —   354,694 
Gross profit
 $1,751,763  $670,845  $122,385  $89,293  $168,901  $—  $2,803,187 
Gross profit as a percentage of revenue  92%  92%  64%  67%  82%  —   89%

(1)Platform revenue includes revenue related to our Mobile client products of $51.3 million, $113.1 million and $52.5 million for fiscal 2009, 2008 and 2007, respectively, or 28%, 49% and 39% of Platform revenues, respectively.

(2)Fiscal 2009 includes the integration of Omniture as a new reportable segment in the fourth quarter. Fiscal 2008 and 2007 do not include the impact of our acquisition of Omniture.
119
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
    The tables below list our revenue and property and equipment, net, by geographic area for fiscal 2009, 2008 and 2007 (in thousands). With the exception of property and equipment, we do not identify or allocate our assets by geographic area.
Revenue   2009   2008   2007 
Americas:            
United States $1,244,631  $1,473,319  $1,379,028 
Other  137,940   159,507   129,776 
Total Americas  1,382,571   1,632,826   1,508,804 
EMEA  928,857   1,229,161   1,026,455 
Asia:            
Japan                                                                     410,055   450,799   407,344 
Other  224,370   267,103   215,278 
Total Asia                                                                     634,425   717,902   622,622 
Revenue $2,945,853  $3,579,889  $3,157,881 
Property and Equipment   2009   2008 
Americas:        
United States $336,303  $252,434 
Other  5,806   9,154 
Total Americas  342,109   261,588 
EMEA  23,729   29,887 
Asia:        
India  14,625   15,242 
Other  7,669   6,320 
Total Asia                                                                                              22,294   21,562 
Property and equipment, net                                                                                                  $388,132  $313,037 
Significant Customers
As listed, our significant customers are distributors who sell products across our various segments. Our significant customers, as a percentage of net revenue for fiscal 2009, 2008 and 2007 were as follows:
  2009 2008 2007
Ingram Micro
  15%  18%  21%
Tech Data
  8%  9%  10%
Receivables from our significant customers, as a percentage of gross trade receivables for fiscal 2009 and 2008 were as follows:
  2009 2008
Ingram Micro
  16%  18%
Tech Data  6%  8%
120
ADOBE SYSTEMS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21.  SELECTED QUARTERLY FINANCIAL DATA (unaudited)
    2009 
(in thousands, except per share data)   Quarter Ended 
   February 27   May 29   August 28   November 27 
Revenue $786,390  $704,673  $697,507  $757,283 
Gross profit $709,037  $632,665  $632,460  $674,959 
Income before income taxes $203,162  $163,730  $174,416  $160,212 
Net income (loss) $156,435  $126,071  $136,045  $(32,043)
Basic net income (loss) per share $0.30  $0.24  $0.26  $(0.06)
Diluted net income (loss) per share $0.30  $0.24  $0.26  $(0.06)

    2008 
(in thousands, except per share data)   Quarter Ended 
   February 29   May 30   August 29   November 28 
Revenue $890,445  $886,886  $887,257  $915,301 
Gross profit $807,970  $804,020  $776,406  $828,863 
Income before income taxes $295,644  $278,006  $228,514  $276,344 
Net income $219,379  $214,910  $191,608  $245,917 
Basic net income per share $0.39  $0.40  $0.36  $0.47 
Diluted net income per share $0.38  $0.40  $0.35  $0.46 

Our fiscal year is presented for informational purposes only and is not indicativea 52- or 53-week year. Each of the resultsfiscal quarters presented were comprised of operations that would13 weeks.


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Adobe Systems Incorporated:

We have been achieved ifaudited the acquisition had taken place on December 4, 2004 oraccompanying consolidated balance sheets of results that may occurAdobe Systems Incorporated and subsidiaries as of November 27, 2009 and November 28, 2008, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the years in the future. The pro formathree-year period ended November 27, 2009. We have also audited Adobe Systems Incorporated’s internal control over financial informationreporting as of November 27, 2009, based on criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Adobe System Incorporated’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on Adobe Systems Incorporated’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Adobe Systems Incorporated acquired Omniture, Inc. during fiscal 2005 includes2009, and management excluded from its assessment of the following items:

 

 

Fiscal 2005

 

Amortization of intangible assets

 

 

$

204,678

 

 

Amortization of deferred stock-based compensation

 

 

63,686

 

 

Restructuring costs

 

 

19,733

 

 

Business combination accounting effect on historical support revenue

 

 

39,504

 

 

The unaudited pro formaeffectiveness of Adobe Systems Incorporated’s internal control over financial information for fiscal 2005 combinesreporting as of November 27, 2009, Omniture, Inc.’s internal control over financial reporting associated with total assets of $195.5 million and total revenues of $26.3 million included in the historical results forconsolidated financial statements of Adobe Systems Incorporated and subsidiaries as of and for the year ended December 2, 2005November 27, 2009. Our audit of internal control over financial reporting of Adobe Systems Incorporated also excluded an evaluation of the internal control over financial reporting of Omniture, Inc.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adobe Systems Incorporated and subsidiaries as of November 27, 2009 and November 28, 2008, and the historical results of their operations and their cash flows for Macromedia foreach of the yearyears in the three-year period ended September 30, 2005.

November 27, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Adobe Systems Incorporated maintained, in all material respects, effective internal control over financial reporting as of November 27, 2009, based on criteria established in Internal Control – Integrated Framework, issued by COSO.

 

 

Fiscal 2005

 

Net revenues

 

$

2,353,168

 

Net income

 

400,853

 

Basic net income per share

 

0.68

 

Shares used in computing basic net income per share

 

592,110

 

Diluted net income per share

 

0.65

 

Shares used in computing diluted net income per share

 

619,270

 

In addition


As discussed in Note 10 to the acquisitionconsolidated financial statements, Adobe Systems Incorporated changed its method of Macromedia, Adobe acquired other companies duringaccounting for uncertainty in income taxes in fiscal 2006 for a total aggregated purchase price of $46.9 million. The impact of these acquisitions are considered immaterial to our financial statements. Refer to Note 5 of the Notes to Consolidated Financial Statements for any impact to Goodwill and Purchased and Other Intangibles due to these acquisitions.

During fiscal 2005, we acquired OKYZ S.A., a privately held company, which provided three dimensional technology and expertise to our Intelligent Document platform.

During fiscal 2004, we acquired Q-Link Technologies, Inc, a privately-held company, which provided Java-based workflow technology that was integrated with our enterprise server products to enable customers to integrate document process management with core applications.


Note 3. Cash, cash equivalents and short-term investments

Cash, cash equivalents and short-term investments consisted of the following as of December 1, 2006:

 

Carrying 
Value

 

Unrealized
Gains

 

Unrealized
Losses

 

Estimated
Fair Value

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

48,869

 

 

$

—

 

 

 

$

—

 

 

$

48,869

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

642,942

 

 

—

 

 

 

—

 

 

642,942

 

Bank time deposits

 

33,972

 

 

—

 

 

 

—

 

 

33,972

 

State and municipal bonds and notes

 

2,004

 

 

—

 

 

 

—

 

 

2,004

 

Corporate bonds

 

44,713

 

 

—

 

 

 

—

 

 

44,713

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents

 

723,631

 

 

—

 

 

 

—

 

 

723,631

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

772,500

 

 

—

 

 

 

—

 

 

772,500

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal bonds

 

1,231,327

 

 

1,079

 

 

 

(3,100

)

 

1,229,306

 

United States Treasury notes

 

163,110

 

 

274

 

 

 

(87

)

 

163,297

 

Corporate bonds

 

51,601

 

 

67

 

 

 

—

 

 

51,668

 

Obligations of foreign sovereigns

 

23,896

 

 

27

 

 

 

(6

)

 

23,917

 

Bonds of multi-lateral government agencies

 

28,124

 

 

40

 

 

 

—

 

 

28,164

 

Marketable equity securities

 

6,734

 

 

5,293

 

 

 

—

 

 

12,027

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

1,504,792

 

 

6,780

 

 

 

(3,193

)

 

1,508,379

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

$

2,277,292

 

 

$

6,780

 

 

 

$

(3,193

)

 

$

2,280,879

 

 

 

 

 

 

 

 

 

 

 

Cash, cash equivalents and short-term investments consisted of the following as of December 2, 2005:

 

Carrying 
Value

 

Unrealized
Gains

 

Unrealized
Losses

 

Estimated
Fair Value

 

Classified as current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

41,682

 

 

$

—

 

 

 

$

—

 

 

$

41,682

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market mutual funds

 

334,933

 

 

—

 

 

 

—

 

 

334,933

 

Bank time deposits

 

24,339

 

 

—

 

 

 

—

 

 

24,339

 

Corporate bonds

 

19,864

 

 

—

 

 

 

—

 

 

19,864

 

 

 

 

 

 

 

 

 

 

 

Total cash equivalents

 

379,136

 

 

—

 

 

 

—

 

 

379,136

 

 

 

 

 

 

 

 

 

 

 

Total cash and cash equivalents

 

420,818

 

 

—

 

 

 

—

 

 

420,818

 

 

 

 

 

 

 

 

 

 

 

Short-term investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

State and municipal bonds

 

1,091,538

 

 

22

 

 

 

(8,168

)

 

1,083,392

 

United States Treasury notes

 

112,093

 

 

—

 

 

 

(614

)

 

111,479

 

Corporate bonds

 

74,449

 

 

101

 

 

 

(240

)

 

74,310

 

Obligations of foreign sovereigns

 

9,004

 

 

—

 

 

 

(25

)

 

8,979

 

Marketable equity securities*

 

131

 

 

1,725

 

 

 

—

 

 

1,856

 

 

 

 

 

 

 

 

 

 

 

Total short-term investments

 

1,287,215

 

 

1,848

 

 

 

(9,047

)

 

1,280,016

 

 

 

 

 

 

 

 

 

 

 

Total cash, cash equivalents, and short-term investments

 

$

1,708,034

 

 

$

1,848

 

 

 

$

(9,047

)

 

$

1,700,834

 

 

 

 

 

 

 

 

 

 

 

*             The carrying value of marketable equity securities has been reduced by other-than-temporary declines in the fair value of these securities.


Interest income for fiscal 2006, 2005, and 2004 was $74.9 million, $42.1 million, and $22.3 million, respectively.

In accordance with FASB Staff Position (“FSP”) FAS115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,”the following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 1, 2006:

 

Less Than 12 Months

 

12 Months or More

 

Total

 

 

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

Fair Value

 

Gross
Unrealized
Losses

 

State and municipal bonds

 

$

311,847

 

 

$

(399

)

 

$

402,032

 

 

$

(2,701

)

 

$

713,879

 

 

$

(3,100

)

 

United States Treasury notes

 

69,563

 

 

(53

)

 

1,977

 

 

(34

)

 

71,540

 

 

(87

)

 

Corporate bonds

 

30,698

 

 

—

 

 

—

 

 

—

 

 

30,698

 

 

—

 

 

Obligations of foreign sovereigns

 

9,997

 

 

(6

)

 

—

 

 

—

 

 

9,997

 

 

(6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

422,105

 

 

$

(458

)

 

$

404,009

 

 

$

(2,735

)

 

$

826,114

 

 

$

(3,193

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Market values were determined for each individual security in the investment portfolio. There were 278 securities in total which had market values less than amortized cost. These securities were comprised primarily of state or municipal bonds.

In determining whether the decline in the value of these securities was temporary we considered the following factors:

·       The length of time and the extent to which the market value has been less than cost;

·       The financial condition and near-term prospects of the issuer;

·       Adobe’s intent and ability to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in market value.

Our analysis led to the following conclusions:

·       The magnitude of the unrealized losses is such that they could be reversed with a modest change in interest rates.

·       The probability that any of the issuers of these securities would be unable to meet its obligations to meet principal or interest payments is negligible.

·       Based on both the length of time and the extent to which the market value has been less than cost and the financial condition and near-term prospects of the issuer, we concluded that none of the unrealized losses at December 1, 2006 constituted other-than-temporary impairment.

See Note 1 for our policy on recording other-than-temporary declines in our marketable equity securities. We recognize realized gains and losses upon sale of investments using the specific identification method. See Note 6 for net realized gains2008 resulting from the saleadoption of our short-term investments and losses related to other-than-temporary declines in the fair value of our marketable equity securities.

92

new accounting pronouncements.

/s/KPMG LLP
Mountain View, California
January 22, 2010


The following table summarizes the cost and estimated fair value of current debt securities and money market mutual funds, classified by the stated maturity of the security. A significant proportion of securities classified as “due after three years,” based on the stated maturity, have structural features that allow us to sell the securities, at par, in less than three years.

 

 

Cost

 

Estimated
Fair Value

 

Due within one year

 

$

1,506,167

 

$

1,505,007

 

Due within two years

 

410,184

 

409,656

 

Due within three years

 

175,658

 

175,281

 

Due after three years

 

129,680

 

130,038

 

Total

 

$

2,221,689

 

$

2,219,982

 

Note 4. PropertyITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.  CONTROLS AND PROCEDURES
Disclosure Controls and Equipment

PropertyProcedures

Our management has evaluated, under the supervision and equipment consistedwith the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of November 27, 2009. Based on their evaluation as of November 27, 2009, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were effective at the reasonable assurance level to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the followingcontrol system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. 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 Adobe have been detected.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal control over financial reporting as of December 1, 2006 and December 2, 2005:

 

 

2006

 

2005

 

Computers and equipment.

 

$

237,480

 

$

196,912

 

Furniture and fixtures.

 

50,008

 

37,604

 

Capital projects in-progress.

 

2,363

 

565

 

Leasehold improvements.

 

93,910

 

68,100

 

Land

 

35,350

 

—

 

Buildings

 

62,461

 

9,611

 

 

 

481,572

 

312,792

 

Less accumulated depreciation and amortization.

 

(254,375

)

(209,243

)

Property and equipment, net.

 

$

227,197

 

$

103,549

 

The increaseNovember 27, 2009. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in property and equipmentInternal Control-Integrated Framework. Our management has concluded that, as of November 27, 2009, our internal control over financial reporting is effective based on these criteria.

Our management’s evaluation excluded Omniture, from fiscal 2006 to fiscal 2005 is primarily due to our acquisition of Macromedia.

Depreciation expense for fiscal 2006, 2005 and 2004 was $67.7 million, $43.9which we acquired certain assets on October 23, 2009. At November 27, 2009, Omniture had $ 195.5 million and $39.8$40.4 million respectively.

Note 5. Goodwillof total assets and Purchased and Other Intangibles

Asnet assets, respectively. For the year ended November 27, 2009, our Consolidated Statement of December 1, 2006,Income included total revenue associated with Omniture of $26.3 million. In accordance with guidance issued by the goodwill balance relatesSEC, companies are allowed to ourexclude acquisitions from their assessment of Macromedia, Accelio, Q-Link, Syntrillium, OKYZ, GoLive Systems, Inc and GoLive Systems GmbH and Co. KG (together “GoLive”), Serious Magic, Interakt, and Inscriber Technology Corporation.

Below is our goodwill reported by business segment, as of December 1, 2006:

 

 

2006

 

2005

 

Creative Solutions

 

$

782,717

 

$

18,763

 

Knowledge Worker Solutions

 

429,036

 

8,395

 

Enterprise and Developer Solutions

 

382,911

 

91,525

 

Mobile and Device Solutions

 

321,323

 

—

 

Other*

 

233,507

 

—

 

Total goodwill

 

$

2,149,494

 

$

118,683

 

*All goodwill in our Other segments relates to our platform business..


During fiscal 2006, our goodwill increased by $2.2 billion. Of this amount, $2.0 billion is related to our acquisition of Macromedia. Refer to Note 2 for further information. This goodwill was reduced by $26.9 million primarily forinternal controls over financial reporting during the realization of tax benefits for deductions resulting from the exercise of stock options and disqualifying dispositions of vested options assumed and for adjustments made to deferred and current tax balances upon filing the final Macromedia U.S. income tax returns in August 2006. In addition, goodwill also increased by $35.0 million duefirst year subsequent to the acquisition of TTFwhile integrating the acquired operations.

KPMG LLP, the independent registered public accounting firm that audited our financial statements included in the second quarter of fiscal 2006 and Serious Magic and Interaktthis Annual Report on Form 10-K, has issued an attestation report on our internal control over financial reporting, which is included herein.
Changes in the fourth quarter of fiscal 2006.

Purchased and other intangible assets, subject to amortization,Internal Control over Financial Reporting

There were as follows as of December 1, 2006:

 

 

Cost

 

Accumulated
Amortization

 

Net

 

Purchased technology

 

$

397,098

 

 

$

(147,376

)

 

$

249,722

 

Localization

 

$

9,060

 

 

$

(2,261

)

 

$

6,799

 

Trademarks

 

130,925

 

 

$

(26,857

)

 

104,068

 

Other intangibles

 

189,001

 

 

$

(43,185

)

 

145,816

 

Total other intangible assets

 

$

328,986

 

 

$

(72,303

)

 

$

256,683

 

Total purchased and other intangible assets

 

$

726,084

 

 

$

(219,679

)

 

$

506,405

 

Purchased and other intangible assets, subject to amortization, were as follows as of December 2, 2005:

 

 


Cost

 

Accumulated
Amortization

 


Net

 

Purchased technology

 

$

18,785

 

 

$

(11,153

)

 

$

7,632

 

Localization

 

$

20,512

 

 

$

(11,901

)

 

$

8,611

 

Trademarks

 

225

 

 

(82

)

 

143

 

Other intangibles

 

301

 

 

$

(210

)

 

91

 

Total other intangible assets

 

$

21,038

 

 

$

(12,193

)

 

$

8,845

 

Total purchased and other intangible assets

 

$

39,823

 

 

$

(23,346

)

 

$

16,477

 

Amortization expense related to identifiable intangible assets was $221.6 million, $20.4 million, and $21.1 million for fiscal 2006, 2005 and 2004, respectively. Of the total amortization expense for fiscal 2006, $137.5 million was charged to cost of sales. There was no amortization charge to cost of sales for fiscal 2005 and 2004. The increase in amortization expense from fiscal 2005 to fiscal 2006 is primarily due to our acquisition of Macromedia. Amortization expense, as of December 1, 2006, is expected to be as follows:

Fiscal Year

 

 

 

Purchased
Technology

 

Other Intangible
Assets

 

2007

 

 

$

114,180

 

 

 

$

74,985

 

 

2008

 

 

81,592

 

 

 

66,512

 

 

2009

 

 

50,310

 

 

 

57,652

 

 

2010

 

 

649

 

 

 

47,015

 

 

2011

 

 

536

 

 

 

10,481

 

 

Thereafter

 

 

2,455

 

 

 

38

 

 

Total expected amortization expense

 

 

$

249,722

 

 

 

$

256,683

 

 


Note 6. Other Assets

Other assets consisted of the following as of December 1, 2006 and December 2, 2005:      

 

 

2006

 

2005

 

Investments

 

$

46,273

 

$

51,707

 

Security deposits and other

 

13,304

 

7,419

 

Prepaid land lease

 

3,263

 

3,301

 

Prepaid rent

 

2,943

 

3,801

 

Unbilled receivables

 

2,400

 

—

 

Total other assets

 

$

68,183

 

$

66,228

 

Included in investments are our limited partnership interests in Adobe Ventures which are consolidated in accordance with FASB Interpretation No. 46R a revision to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” The partnerships are controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. Investments also include our direct investments which are accounted for under the cost method.

The following table summarizes the net realized gains and losses from our investments for fiscal 2006, 2005, and 2004.

 

 

2006

 

2005

 

2004

 

Net losses related to our investments in Adobe Ventures and cost method investments

 

$

(6,487

)

$

(1,021

)

$

(81

)

Write-downs due to other-than-temporary declines in value of our marketable equity securities

 

—

 

(558

)

—

 

Gains from sale of short-term investments

 

—

 

104

 

2,493

 

Gains (losses) on stock warrants

 

(226

)

153

 

94

 

Other investment gains

 

67,962

 

21

 

—

 

Total investment gain (loss)

 

$

61,249

 

$

(1,301

)

$

2,506

 

The increasechanges in our investment gain from fiscal 2005 to fiscal 2006 is due to our sale of our investment in Atom Entertainment, Inc.internal control over financial reporting during the fourth quarter of fiscal 2006. As a result of the sale, we received $82.3 million in cash. Our carrying value was $13.2 million at the date of sale.

During fiscal 2004, we restructured the lease for two ofended November 27, 2009 that have materially affected, or are reasonably likely to materially affect our headquarter office buildings. See Note 15 for additional information. The lease agreement provides for a residual value guarantee. In accordance with FIN 45, we recognized the fair value of the residual value guarantee of $5.2 million as a long-term liability on our balance sheet with the offsetting entry to prepaid rent in other assets. The balance will be amortized to the income statementinternal control over five years, the life of the lease. As of December 1, 2006, the unamortized portion of the fair value of the residual value guarantee remaining in prepaid rent was $2.8 million.

Note 7. Trade Payables and Accrued Expenses

Trade and other payables consisted of the following as of December 1, 2006 and December 2, 2005:

 

 

2006

 

2005

 

Trade payables

 

$

37,915

 

$

27,467

 

Other

 

17,116

 

13,575

 

Total trade and other payables

 

$

55,031

 

$

41,042

 

95



Accrued expenses consisted of the following as of December 1, 2006 and December 2, 2005:

 

 

2006

 

2005

 

Accrued compensation and benefits

 

$

148,000

 

$

112,362

 

Sales and marketing allowances

 

20,361

 

16,306

 

Other

 

135,189

 

98,247

 

Total accrued expenses

 

$

303,550

 

$

226,915

 

Note 8. Income Taxes

Income before income taxes includes income from foreign operations of approximately $293.7 million, $348.7 million and $298.0 million for fiscal 2006, 2005 and 2004, respectively.

The provision for income taxes consisted of the following for fiscal 2006, 2005, and 2004: 

 

 

2006

 

2005

 

2004

 

Current:

 

 

 

 

 

 

 

United States federal

 

$

12,419

 

$

63,932

 

$

1,769

 

Foreign

 

34,762

 

18,550

 

11,728

 

State and local

 

3,623

 

4,671

 

1,638

 

Total current

 

50,804

 

87,153

 

15,135

 

Deferred:

 

 

 

 

 

 

 

United States federal

 

(19,843

)

(7,653

)

56,641

 

Foreign

 

2,198

 

93

 

(970

)

State and local

 

(5,383

)

492

 

(10,353

)

Total deferred

 

(23,028

)

(7,068

)

45,318

 

Charge in lieu of taxes attributable to employee stock plans

 

146,142

 

82,852

 

97,794

 

 

 

$

173,918

 

$

162,937

 

$

158,247

 

Certain employee stock plan benefits in 2006 associated with the acquisition of Macromedia reduced goodwill. See Note 5 for further information.

Total income tax expense differs from the expected tax expense (computed by multiplying the United States federal statutory rate of 35% by income before income taxes) as a result of the following:

 

 

2006

 

2005

 

2004

 

Computed “expected” tax expense

 

$

237,905

 

$

268,022

 

$

213,026

 

State tax expense, net of federal benefit

 

8,768

 

9,878

 

6,826

 

Tax-exempt income

 

(12,637

)

(7,196

)

(4,284

)

Tax credits

 

(1,204

)

(8,977

)

(9,500

)

Differences between statutory rate and foreign effective tax rate

 

(61,067

)

(62,561

)

(47,622

)

Change in deferred tax asset valuation allowance

 

(7,539

)

(5,836

)

(1,238

)

FAS 123R Stock Compensation (net of tax deduction)

 

3,320

 

—

 

—

 

Tax benefit for repatriation of certain foreign earnings under theAJCA

 

—

 

(29,271

)

—

 

Other, net

 

6,372

 

(1,122

)

1,039

 

 

 

$

173,918

 

$

162,937

 

$

158,247

 

During fiscal 2005, the American Jobs Creation Act (“AJCA”) introduced a limited time 85% dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided


certain criteria are met. We made a determination for a planned repatriation of $558.3 million of certain foreign earnings, of which $500.0 million qualifies for the 85% dividends received deduction. We completed the repatriation of $558.3 million of certain foreign earnings during fiscal 2005.

The total income tax provision of $162.9 million, for fiscal 2005, includes a tax provision of $43.5 million for the repatriation of certain foreign earnings. Additionally, it includes a reversal of $72.8 million for income taxes on certain foreign earnings for which a deferred tax liability had been previously accrued. As a result, a net income tax benefit of $29.3 million was recognized for the difference between income taxes previously provided on certain foreign earnings at the federal statutory tax rate and income taxes at the lower rate under the repatriation provisions of the AJCA.

The tax effects of the temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of December 1, 2006 and December 2, 2005 are presented below:

 

 

2006

 

2005

 

Deferred tax assets:

 

 

 

 

 

Acquired technology.

 

$

6,715

 

$

9,048

 

Reserves.

 

55,662

 

29,716

 

Deferred revenue.

 

24,533

 

11,409

 

Unrealized losses on investments.

 

19,072

 

8,238

 

FAS 123R stock compensation

 

28,716

 

—

 

Net operating loss of acquired companies

 

134,440

 

—

 

Credits.

 

47,360

 

24,899

 

Other

 

9,216

 

—

 

Total gross deferred tax assets

 

325,714

 

83,310

 

Deferred tax asset valuation allowance

 

(1,243

)

(8,238

)

Total deferred tax assets

 

324,471

 

75,072

 

Deferred tax liabilities:

 

 

 

 

 

Depreciation and amortization

 

(1,420

)

(22,650

)

Undistributed earnings of foreign subsidiaries.

 

(112,084

)

(71,373

)

Acquired intangible assets

 

(126,069

)

—

 

Other.

 

—

 

(1,139

)

Total deferred tax liabilities.

 

(239,573

)

(95,162

)

Net deferred tax assets (liabilities)

 

$

84,898

 

$

(20,090

)

The deferred tax assets and liabilities for fiscal 2006 include amounts related to the acquisition of Macromedia. We provide United States income taxes on the earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered permanently reinvested outside the United States. To the extent that the foreign earnings previously treated as permanently reinvested are repatriated, the related United States tax liability may be reduced by any foreign income taxes paid on these earnings. As of December 1, 2006, the cumulative amount of earnings upon which U.S. income taxes have not been provided is approximately $400.7 million. The unrecognized deferred tax liability for these earnings is approximately $134.5 million. As of December 1, 2006, we have net operating loss carryforwards attributable to various acquired companies of approximately $134 million, which, if not used, will expire between fiscal 2013 and 2019. These net operating loss carryforwards are subject to an annual limitation under Internal Revenue Code Section 382, but are expected to be fully realized.

For financial reporting purposes, a valuation allowance has been established for certain deferred tax assets related to the write-down of investments. At the end of fiscal 2006, our valuation allowance was $1.2 million.

reporting.

We are currently under examination by the Internal Revenue Service for our fiscal 2001, 2002, and 2003 tax returns. Although we believe our judgments, assumptions and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of the current and any future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Although the ultimate outcome is unknown, we have reserved for potential adjustments that may result from the current examination and we believe that the final outcome will not have a material effect on our results of operations.

At the end of fiscal 2006, we had federal and state tax credit carry-forwards of approximately $2 million and $45 million, respectively. The state tax credit carry-forwards can be carried forward indefinitely.

Below is a summary of our income tax payable activity for fiscal 2006 and 2005:

 

 

2006

 

2005

 

Beginning balance.

 

$

154,529

 

$

145,913

 

Current year liability.

 

50,804

 

87,153

 

Macromedia acquisition.

 

22,972

 

—

 

Payments and reclassifications.

 

(49,937

)

(78,537

)

Ending balance.

 

$

178,368

 

$

154,529

 

Note 9. Restructuring

In the first quarter of fiscal 2006, pursuant to Board of Directors’ approval, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. We also recognized costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia.

Macromedia Merger Restructuring Charges

A summary of preliminary restructuring activities follows:

 

Initial
Restructuring
Charges

 

Cash Payments

 

Adjustments

 

Balance at
December 1,
2006

 

Termination Benefits

 

 

$

26,608

 

 

 

$

(26,459

)

 

 

$

853

 

 

 

$

1,002

 

 

Cost of closing redundant facilities

 

 

32,083

 

 

 

(10,547

)

 

 

7,398

 

 

 

28,934

 

 

Cost of contract termination

 

 

3,969

 

 

 

(3,224

)

 

 

(699

)

 

 

46

 

 

Other

 

 

2,500

 

 

 

(1,072

)

 

 

16

 

 

 

1,444

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

65,160

 

 

 

$

(41,302

)

 

 

$

7,568

 

 

 

$

31,426

 

 

 

 

 

 

 

 

 

 

 

 

We completed our acquisition of Macromedia on December 3, 2005. Pursuant to Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination,”  all restructuring charges related to the Macromedia acquisition are recognized as a part of the purchase price allocation, as discussed in Note 2 and have been accrued for as of December 1, 2006.

Accrued restructuring charges of $31.4 million at December 1, 2006 includes $9.8 million recorded in accrued restructuring, current and $21.6 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets. We expect to pay these liabilities through the third quarter of fiscal 2007.


Adobe Restructuring Charges

In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for former Adobe employees whose positions were eliminated and for the closure of Adobe facilities. We also recognized costs related to the cancellation of certain contracts held by Adobe. In addition, costs related to the write-off of fixed assets located at facilities that will no longer be used will be recognized in the periods that the respective offices are vacated. We expect to pay these liabilities through the first quarter of fiscal 2007.

A summary of exit costs follows:

 

Initial
Restructuring
Charges

 

Cash Payments

 

Adjustments

 

Balance at
December 1,
2006

 

Termination Benefits

 

 

$

18,879

 

 

 

$

(18,597

)

 

 

$

(103

)

 

 

$

179

 

 

Cost of closing redundant facilities

 

 

—

 

 

 

(479

)

 

 

946

 

 

 

467

 

 

Cost of contract termination

 

 

105

 

 

 

(11

)

 

 

(94

)

 

 

—

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

18,984

 

 

 

$

(19,087

)

 

 

$

749

 

 

 

$

646

 

 

 

 

 

 

 

 

 

 

 

 

Pursuant to FASB’s Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” all facility related charges related to the pre-merger operations are expensed and accrued for based upon the cease use date. As of December 1, 2006, accrued restructuring charges of $0.6 million at December 1, 2006 includes $0.3 million recorded in accrued restructuring, current and $0.3 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets.

Note 10. Benefit Plans

Pretax Savings Plan

In 1987, we adopted an Employee Investment Plan, qualified under Section 401(k) of the Internal Revenue Code, which is a pretax savings plan covering substantially all of our United States employees. Under the plan, eligible employees may contribute up to 65% of their pretax salary, subject to the Internal Revenue Service annual contribution limits. In fiscal 2006, we matched 50% of the first 6% of the employee’s contribution. We contributed approximately $11.2 million, $8.9 million and $6.5 million in fiscal 2006, 2005 and 2004, respectively. We can terminate matching contributions at our discretion.

Profit Sharing Plan

We have a profit sharing plan that provides for profit sharing payments to all eligible employees following each quarter in which we achieve at least 80% of our budgeted earnings for the quarter. The plan, as well as the annual operating budget on which the plan is based, is approved by our Board of Directors. We contributed approximately $51.9 million, $45.7 million and $42.6 million to the plan in fiscal 2006, 2005 and 2004, respectively.

Note 11.  Stock-based CompensationITEM 9B.  OTHER INFORMATION

None.
PART III
Stock OptionsITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our stock option program

The information required by Item 10 of Form 10-K with respect to Item 401 of Regulation S-K regarding our directors is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We considerincorporated herein by reference from the information contained in the section entitled “Proposal 1 – Election of Directors” in our option programs criticaldefinitive Proxy Statement we will deliver to our operation and productivity. Currently, we grant options from the 1) 2003 Equity Incentive Plan (“2003 Plan”), under which options couldstockholders in connection with our Annual Meeting of Stockholders to be grantedheld on April 16, 2010. For information with respect to all employees, includingour executive officers, and outside consultants and 2) the 1996 Outside Directors Stock Option Plan (“Directors Plan”), as amended, under which options are granted automatically under a pre-


determined formula to non-employee directors. In addition, our stock option program includes the 2005 Equity Incentive Assumption Plan (“2005 Assumption Plan”), from which we currently do not grant options, but may do so in the future. The plans listed above are collectively referred to in the following discussion as “the Plans.” Option vesting periods are generally three to four years for all of the Plans.

As of December 1, 2006, we had reserved 53.9 million, 5.2 million and 1.3 million shares of common stock for issuance under our 2003 Plan, Directors Plan and 2005 Assumption Plan, respectively. As of December 1, 2006, we had 14.2 million, 1.0 million and 1.3 million shares available for grant under our 2003 Plan, Directors Plan and 2005 Assumption Plan, respectively.

The following table sets forth the summary of option activity under our stock option program for fiscal years 2006, 2005 and 2004:

 

 

 

Outstanding Options

 

 

 

Options
Available for
Grant

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

November 28, 2003

 

 

25,907

 

 

 

84,939

 

 

 

$

16.40

 

 

Granted

 

 

(20,760

)

 

 

20,760

 

 

 

21.07

 

 

Exercised

 

 

—

 

 

 

(26,587

)

 

 

13.55

 

 

Canceled

 

 

2,578

 

 

 

(2,578

)

 

 

20.46

 

 

Expired

 

 

(19

)

 

 

—

 

 

 

—

 

 

Increased authorization

 

 

9,000

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

December 3, 2004

 

 

16,706

 

 

 

76,534

 

 

 

18.52

 

 

Granted

 

 

(11,418

)

 

 

11,418

 

 

 

31.88

 

 

Exercised

 

 

—

 

 

 

(20,495

)

 

 

15.32

 

 

Canceled

 

 

2,206

 

 

 

(2,206

)

 

 

21.52

 

 

Increased authorization

 

 

16,800

 

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

December 2, 2005

 

 

24,294

 

 

 

65,251

 

 

 

$

21.76

 

 

Granted

 

 

(12,221

)

 

 

12,017

 

 

 

28.71

 

 

Exercised

 

 

—

 

 

 

(25,873

)

 

 

17.73

 

 

Canceled

 

 

4,807

 

 

 

(4,807

)

 

 

25.33

 

 

Forfeited

 

 

(1,600

)

 

 

—

 

 

 

15.32

 

 

Due to acquisition

 

 

1,324

 

 

 

15,143

 

 

 

—

 

 

 

 

 

 

 

 

 

 

December 1, 2006

 

 

16,604

 

 

 

61,731

 

 

 

$

24.19

 

 

 

 

 

 

 

 

 

 

The weighted average fair values of options granted during fiscal 2006, 2005 and 2004 are as follows:

 

 

2006

 

2005

 

2004

 

Weighted average fair value

 

$

10.79

 

$

9.08

 

$

5.63

 

The difference in shares granted under options available for grant and number of options outstanding is due to performance share grants. See below for information regarding the performance shares.

The total intrinsic value of options exercised during fiscal 2006 was $440.0 million. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.

100



Information regarding the stock options outstanding at December 1, 2006 is summarized below:

Range of Exercise Prices

 

 

 

Number
Outstanding

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Number
Exercisable

 

Weighted
Average
Exercise
Price

 

$0.81 - 13.24

 

 

6,402

 

 

3.83 years

 

 

$

11.57

 

 

 

6,153

 

 

 

$

11.57

 

 

$13.38 - 14.33

 

 

6,229

 

 

2.96 years

 

 

13.74

 

 

 

5,992

 

 

 

13.73

 

 

$14.38 - 19.55

 

 

9,491

 

 

2.60 years

 

 

18.38

 

 

 

8,981

 

 

 

18.36

 

 

$19.64 - 21.78

 

 

8,261

 

 

4.63 years

 

 

21.42

 

 

 

5,863

 

 

 

21.33

 

 

$21.97 - 28.01

 

 

6,224

 

 

4.33 years

 

 

26.16

 

 

 

4,292

 

 

 

26.50

 

 

$28.03 - 30.60

 

 

2,126

 

 

6.28 years

 

 

29.03

 

 

 

699

 

 

 

29.00

 

 

$30.79 - 30.79

 

 

6,752

 

 

6.56 years

 

 

30.79

 

 

 

625

 

 

 

30.79

 

 

$30.80 - 32.30

 

 

4,890

 

 

3.62 years

 

 

31.90

 

 

 

3,591

 

 

 

31.96

 

 

$32.42 - 32.42

 

 

6,287

 

 

5.48 years

 

 

32.42

 

 

 

2,246

 

 

 

32.42

 

 

$32.67 - 68.43

 

 

5,069

 

 

6.19 years

 

 

37.51

 

 

 

502

 

 

 

34.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61,731

 

 

4.44 years

 

 

$

24.19

 

 

 

38,944

 

 

 

$

20.58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The aggregate intrinsic value of options outstanding and options exercisable as of December 1, 2006 was $936.8 million and $731.0 million, respectively. The intrinsic value is calculated as the difference between the market value as of December 1, 2006 and the exercise price of the shares. The market value as of December 1, 2006 was $39.35 as reported by the NASDAQ Global Select Market.

All stock option grants to current executive officers are made after a review by and with the approval of the Executive Compensation Committee of the Board of Directors. All members of the Executive Compensation Committee are independent directors, as defined in the rules applicable to issuers traded on the Nasdaq Global Select Market.

The Directors Plan provides for the granting of nonqualified stock options to non-employee directors. Option grants are limited to 25,000 shares per person in each fiscal year, except for a new non-employee director to whom 50,000 shares are granted upon election as a director. Options granted prior to March 28, 2006 have a ten-year term and are exercisable and vest over three years: 25% on the day preceding each of Adobe’s next two annual meetings of stockholders and 50% on the day preceding Adobe’s third annual meeting of stockholders after the grant of the option. However, options granted on or after March 28, 2006 have a seven-year term and vest over four years: 25% on the day preceding each of Adobe’s next four annual meetings. The exercise price of the options that are issued is equal to the fair market value of our common stock on the date of grant.

Options granted to directors for fiscal 2006, 2005 and 2004 are as follows:

 

2006

 

2005

 

2004

 

Options granted to existing directors

 

200

 

400

 

350

 

Exercise price

 

$

35.95

 

$

29.74

 

$

20.83

 

Options granted to new directors

 

50

 

50

 

100

 

Exercise price

 

$

35.25

 

$

26.83

 

$

21.05

 

As of December 1, 2006, approximately 2.0 million shares were reserved for issuance upon exercise of outstanding options under the Directors Plan. The Directors Plan will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued and restrictions on issued shares have lapsed.


Employee Stock Purchase Plan

Our 1997 Employee Stock Purchase Plan (the “ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of twenty-four-month offering periods with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.

As of December 1, 2006, we had reserved 76.0 million shares of our common stock for issuance under the ESPP and approximately 20.6 million shares remain available for future issuance.

The weighted average fair values of employee stock purchase rights granted during fiscal 2006, 2005 and 2004 are as follows:

 

 

2006

 

2005

 

2004

 

Weighted average fair value

 

$

8.09

 

$

9.08

 

$

6.27

 

The ESPP will continue until the earlier of (i) termination by the Board or (ii) the date on which all of the shares available for issuance under the plan have been issued.

Restricted Stock

We grant restricted shares and performance awards to employees under our Amended 1994 Performance and Restricted Stock Plan (“Restricted Stock Plan”) and our 2003 Equity Incentive Plan. These plans provide for the granting of restricted stock and/or performance awards to officers and key employees. Restricted stock issued under these plans generally vest annually over two to three years but are considered outstanding at the time of grant, as the stockholders are entitled to dividends and voting rights. As of December 1, 2006, we had reserved 16.0 million shares of our common stock for issuance under the Restricted Stock Plan and approximately 5.2 shares were available for grant.

Restricted stock activity for fiscal 2006, 2005 and 2004 are as follows:

Restricted Stock

 

 

 

Non-vested
Shares

 

Weighted
Average
Grant Date
Fair Value

 

November 28, 2003

 

 

443

 

 

 

$

6.30

 

 

Awarded

 

 

14

 

 

 

21.44

 

 

Released

 

 

(42

)

 

 

18.85

 

 

Forfeited

 

 

(1

)

 

 

14.80

 

 

 

 

 

 

 

 

December 3, 2004

 

 

414

 

 

 

5.51

 

 

Awarded

 

 

26

 

 

 

30.86

 

 

Released

 

 

(12

)

 

 

18.39

 

 

 

 

 

 

 

 

 

 

December 2, 2005

 

 

428

 

 

 

6.68

 

 

Awarded

 

 

9

 

 

 

39.47

 

 

Released

 

 

(302

)

 

 

22.03

 

 

Forfeited

 

 

(48

)

 

 

25.53

 

 

Due to acquisition

 

 

414

 

 

 

22.35

 

 

 

 

 

 

 

 

 

 

December 1, 2006

 

 

501

 

 

 

$

9.17

 

 

 

 

 

 

 

 

 

 

Performance Shares

Effective February 2, 2006, the Executive Compensation Committee adopted the 2006 Performance Share Program (the “Program”). The Executive Compensation Committee established the Program to


align the new leadership team to achieve key integration milestones and create stockholder value and to retain key executives. All members of Adobe’s executive management team and other key members of senior management are participating in the Program which runs through the end of our fiscal 2007. Awards under the Program were granted in the form of performance shares pursuant to the terms of our 2003 Plan or Restricted Stock Plan. Performance shares granted entitle the recipient to receive fully-vested shares of Adobe common stock upon completion of the performance period subject to attaining identified performance goals, some of which contain discretionary metrics.

During fiscal 2006, we granted performance shares under the Program as shown in the table below. Upon achievement of performance goals, the recipients may be eligible to receive up to 504,000 shares. These shares will be issued out of our 2003 Plan and our Restricted Stock Plan.

Performance Shares

 

 

 

Shares
Granted

 

Maximum
Shares
Eligible to
Receive

 

December 2, 2005

 

 

—

 

 

 

—

 

 

Awarded

 

 

360

 

 

 

540

 

 

Forfeited

 

 

(24

)

 

 

(36

)

 

 

 

 

 

 

 

December 1, 2006

 

 

336

 

 

 

504

 

 

 

 

 

 

 

 

Stock-Based Compensation

Beginning with our first quarter of fiscal 2006, we adopted SFAS 123R. See Note 1 for a description of our adoption of SFAS 123R. We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.

We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. As permitted by SAB 107, we estimate the volatility of our common stock by using implied volatility in market traded options. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

The expected term of employee stock purchase plan shares is the average of the remaining purchase periods under each offering period.

Prior to the adoption of SFAS 123R, we recognized the estimated compensation cost of restricted stock over the vesting term. The estimated compensation cost is based on the fair value of Adobe’s common stock on the date of grant. We will continue to recognize the compensation cost, net of estimated forfeitures, over the vesting term.


In accordance with SFAS 123R, we will recognize the estimated compensation cost of performance shares, net of estimated forfeitures. The awards are earned upon attainment of identified performance goals, some of which contain discretionary metrics, and are accounted for based upon the fair value of the award at each reporting date. As such, these awards are re-valued based on Adobe’s traded stock pricesee “Executive Officers” at the end of each reporting period. IfPart I, Item 1 of this report.


The information required by Item 10 of Form 10-K with respect to Item 405 of Regulation S-K regarding section 16(a) beneficial ownership compliance is incorporated by reference from the discretion is removed, then the treatment stops and the award will be classified as a fixed equity award. The fair value of the awards will be based on the measurement date, which is the date the award becomes fixed. The awards will be subsequently amortized over the remaining performance period.

In addition to estimating expense for grants to Adobe employees, we also estimated deferred  stock-based compensation related to unvested options assumedinformation contained in the acquisition of Macromedia (see Note 2 for further information). In accordance with SFAS 123R, deferred compensation expense is classified by functional area onsection entitled “Section 16(a) Beneficial Ownership Reporting Compliance” in our consolidated statement of income.

The assumptions used to value the option grants are as follows:

 

Fiscal Years

 

 

 

2006

 

2005

 

2004

 

Expected life (in years)

 

3.7

 

3.0—3.9

 

2.5

 

Volatility

 

30.29—36.95

%

30—37

%

34—40

%

Risk free interest rate

 

4.30—5.15

%

3.38—4.49

%

2.18—3.11

%

Dividend yield

 

—

 

—

 

0.093—0.125

%

The assumptions used to value employee stock purchase rights are as follows:

 

Fiscal Years

 

 

 

2006

 

2005

 

2004

 

Expected life (in years)

 

1.25

 

1.25

 

1.25

 

Volatility

 

30.30—35.02

%

32—37

%

34—40

%

Risk free interest rate

 

4.32—5.26

%

3.03—3.58

%

1.24—1.76

%

Dividend yield

 

—

 

—

 

0.093—0.125

%

See Note 2 for the assumptions used to value Macromedia deferred compensation. As of December 1, 2006, there was $57.4 million of unamortized deferred compensation, related to the acquisition of Macromedia, whichdefinitive Proxy Statement we will be recognized over a weighted average period of 1.22 years.

Total stock-based compensation recognized on our consolidated statement of income for fiscal 2006 is as follows:

Income Statement Classifications

 

 

 

Option Grants
and Stock
Purchase Rights

 

Restricted
Stock and
Performance
Shares

 

Macromedi
Deferred
Stock-Base
Compensation

 

Cost of revenue—services and support

 

 

$

2,499

 

 

 

$

—

 

 

 

$

5,681

 

 

Research and development

 

 

45,635

 

 

 

1,678

 

 

 

18,315

 

 

Sales and marketing

 

 

34,309

 

 

 

1,500

 

 

 

32,483

 

 

General and administrative

 

 

19,913

 

 

 

1,313

 

 

 

7,208

 

 

 

 

 

 

 

 

 

 

Total

 

 

$

102,356

 

 

 

$

4,491

 

 

 

$

63,687

 

 

 

 

 

 

 

 

 

 

104



The following table sets forth the pro forma amounts of net income and net income per share, for fiscal  2005 and 2004, that would have resulted if we had accounted for our employee stock plans under the fair value recognition provisions of SFAS 123:

 

 

2005

 

2004

 

Net income:

 

 

 

 

 

As reported

 

$

602,839

 

$

450,398

 

Add: Stock-based compensation expense for employees included in reported net income, net of related tax effects

 

255

 

221

 

Less: Total stock-based compensation expense for employees determined under the fair value based method, net of related tax effects

 

(88,603

)

(105,883

)

Pro forma

 

$

514,491

 

$

344,736

 

Basic net income per share:

 

 

 

 

 

As reported

 

$

1.23

 

$

0.94

 

Pro forma

 

$

1.05

 

$

0.72

 

Diluted net income per share:

 

 

 

 

 

As reported

 

$

1.19

 

$

0.91

 

Pro forma

 

$

1.01

 

$

0.70

 

Prior to the adoption of SFAS 123R, we presented all tax benefits for deductions resulting from the exercise of stock options and disqualifying dispositions as operating cash flows on our consolidated statement of cash flows. SFAS 123R requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules.

Pursuant to the income tax provisions included in SFAS 123R, we have elected the “long method” of computing our hypothetical APIC pool. As of December 1, 2006, there was $134.2 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based payments granted to Adobe employees. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Note 12. Stockholders’ Equity

Stockholder Rights Plan

Our Stockholder Rights Plan is intended to protect stockholders from unfair or coercive takeover practices. In accordance with this plan, the Board of Directors declared a dividend distribution of one common stock purchase right on each outstanding share of our common stock held as of July 24, 1990 and on each share of common stock issued by Adobe thereafter. In July 2000, the Stockholder Rights Plan was amended to extend it for ten years so that each right entitles the holder to purchase one unit of Series A Preferred Stock, which is equal to 1/1000 share of Series A Preferred Stock, par value $0.0001 per share, at a price of $700 per unit. As adjusted for our 2000 and 2005 stock splits each in the form of a dividend, each share of common stock now entitles the holder to one-quarter of such a purchase right. Each whole right still entitles the registered holder to purchase from Adobe a unit of preferred stock at $700. The rights become exercisable in certain circumstances, including upon an entity’s acquiring or announcing the intention to acquire beneficial ownership of 15% or more of our common stock without the approval of the


Board of Directors or upon our being acquired by any person in a merger or business combination transaction. The rights are redeemable by Adobe prior to exercise at $0.01 per right and expire on July 23, 2010.

Stock Repurchase Program—On-going Dilution Coverage

To facilitate our stock repurchase program, designed to return valuedeliver to our stockholders and minimize dilutionin connection with our Annual Meeting of Stockholders to be held on April 16, 2010.

The information required by Item 10 of Form 10-K with respect to Item 406 of Regulation S-K regarding code of ethics is incorporated by reference from stock issuances, we repurchase sharesthe information contained in the open market and from timesection entitled “Code of Ethics” in our definitive Proxy Statement we will deliver to time enter into structured repurchase agreementsour stockholders in connection with third parties.

Authorizationour Annual Meeting of Stockholders to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time.

As part of this program,be held on April 17, 2005,16, 2010.

The information required by Item 10 of Form 10-K with respect to Item 407(c)(3), 407(d)(4) and 407(d)(5) is incorporated by reference from the Boardinformation contained in the sections entitled “Proposal 1- Election of Directors approved the use of an additional $1.0 billion for stock repurchase commencing upon the closeDirectors” and report of the Macromedia acquisition. This additional $1.0 billion“Audit Committee” in stock repurchases was completed by the third quarterour definitive Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of fiscal 2006.

During fiscal 2006 and 2005, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $1.3 billion and $600 million, respectively. We entered into these agreements in orderStockholders to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our stock. We only enter into such transactions when the discount that we receive is higher than the foregone returnbe held on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval, and the average VWAP of our stock during the interval less the agreed upon discount. During the fiscal 2006, we repurchased 1.7 million shares at an average price of $36.04 through open market repurchases and 36.8 million shares at an average price of $34.00 through structured repurchase agreements which included prepayments from fiscal 2005. During fiscal 2005, we repurchased 18.7 million shares at an average price of $30.61 through structured repurchase agreements which included prepayments remaining from fiscal 2004.

For fiscal 2006, the $1.3 billion in prepayments was classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by December 1, 2006 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of December 1, 2006 will expire on or before July 19, 2007. As of December 1, 2006 and December 2, 2005, approximately $204.0 million and $154.9 million respectively, of up-front payments remained under the agreements.

April 16, 2010.

Note 13. Comprehensive IncomeITEM 11.  EXECUTIVE COMPENSATION

Statement of Financial Accounting Standards No. 130 (“SFAS 130”), “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components

You will find this information in the financial statements. Itemssections captioned “Compensation Discussion and Analysis,” “Executive Compensation Committee Report,” “Executive Compensation,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of comprehensive incomeStockholders to be held on April 16, 2010. We are incorporating the information contained in that we currently report are unrealized gains and losses on marketable securities categorized as available-for-sale and foreign currency translation adjustments. We also report unrealized gains and losses on derivative instruments qualifying as cash flow hedges.


The following table sets forth the components of other comprehensive income for fiscal 2006, 2005, and 2004:

 

 

Unrealized Gain
(Loss) on

 

 

 

 

 

 

 

Available
-for-Sale
Securities

 

Derivative
Instruments

 

Foreign
Currency
Translation

 


Total

 

Balance at November 28, 2003

 

 

$

2,451

 

 

 

$

(2,489

)

 

 

$

(961

)

 

$

(999

)

Unrealized gain (loss)

 

 

(6,696

)

 

 

3,097

 

 

 

—

 

 

(3,599

)

Reclassification adjustment for (gains) losses recognized during the period

 

 

(3,283

)

 

 

405

 

 

 

—

 

 

(2,878

)

Tax effect of above

 

 

2,634

 

 

 

(1,013

)

 

 

—

 

 

1,621

 

Translation adjustments

 

 

—

 

 

 

—

 

 

 

3,566

 

 

3,566

 

Other comprehensive income (loss)

 

 

(7,345

)

 

 

2,489

 

 

 

3,566

 

 

(1,290

)

Balance at December 3, 2004

 

 

(4,894

)

 

 

—

 

 

 

2,605

 

 

(2,289

)

Unrealized gain (loss), net of tax

 

 

(4,529

)

 

 

12,771

 

 

 

—

 

 

8,242

 

Reclassification adjustment for (gains) losses recognized during the period, net of tax

 

 

2,223

 

 

 

(7,453

)

 

 

—

 

 

(5,230

)

Translation adjustments

 

 

—

 

 

 

—

 

 

 

(1,637

)

 

(1,637

)

Other comprehensive income (loss)

 

 

(2,306

)

 

 

5,318

 

 

 

(1,637

)

 

1,375

 

Balance at December 2, 2005

 

 

(7,200

)

 

 

5,318

 

 

 

968

 

 

(914

)

Unrealized gain, net of tax

 

 

7,210

 

 

 

285

 

 

 

—

 

 

7,495

 

Reclassification adjustment for (gains) losses recognized during the period, net of tax

 

 

865

 

 

 

(5,035

)

 

 

—

 

 

(4,170

)

Translation adjustments

 

 

—

 

 

 

—

 

 

 

3,933

 

 

3,933

 

Other comprehensive income (loss)

 

 

8,075

 

 

 

(4,750

)

 

 

3,933

 

 

7,258

 

Balance at December 1, 2006

 

 

$

875

 

 

 

$

568

 

 

 

$

4,901

 

 

$

6,344

 

Note 14. Net Income Per Share

Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted common stock and stock options using the treasury stock method.


The following table sets forth the computation of basic and diluted net income per share for fiscal 2006, 2005 and 2004.

 

 

2006

 

2005

 

2004

 

Net income

 

$505,809

 

$

602,839

 

$

450,398

 

Shares used to compute basic net income per share

 

593,750

 

489,921

 

477,658

 

Dilutive potential common shares:

 

 

 

 

 

 

 

Unvested restricted stock

 

85

 

35

 

22

 

Stock options

 

18,387

 

18,114

 

17,946

 

Shares used to compute diluted net income per share

 

612,222

 

508,070

 

495,626

 

Basic net income per share

 

$

0.85

 

$

1.23

 

$

0.94

 

Diluted net income per share

 

$

0.83

 

$

1.19

 

$

0.91

 

For the fiscal 2006, 2005 and 2004, options to purchase approximately 17.7 million, 11.6 million, and 14.0 million shares, respectively, of common stock with exercise prices greater than the annual average fair market valuesection of our stock of $35.32, $30.33, and $22.23, respectively, were not includedProxy Statement here by reference.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
You will find this information in the calculation becausesections captioned “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Information” in the effect would have been anti-dilutive.

Proxy Statement we will deliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 16, 2010. We are incorporating the information contained in that section here by reference.

Note 15. Commitments and ContingenciesITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Lease Commitments

We lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2025. We also have one land lease that expires in 2091. Rent expense and sublease income for these leases for fiscal 2004 through fiscal 2006 were as follows:

 

 

2006

 

2005

 

2004

 

Rent expense

 

$

74,629

 

$

58,215

 

$

55,333

 

Sublease income

 

3,556

 

4,995

 

5,681

 

Net rent expense

 

$

71,073

 

$

53,220

 

$

49,652

 

We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the “Almaden tower” and the “East and West towers.”

In December 2003, upon completion of construction, we began a five year lease agreement for the Almaden tower. Under the agreement, we have the option to purchase the building at any time during the lease term for the lease balance, which is approximately $103.0 million. The maximum recourse amount (“residual value guarantee”) under

You will find this obligation is $90.8 million.we have put in place for the East and West Towers.

In August 2004, we extended the lease agreement for our East and West towers for an additional five years with an option to extend for an additional five years solely at Adobe’s election. As part of the lease extension, we purchased a portion of the lease receivable of the lessor for $126.8 million, which is recorded as an investment in lease receivable on our consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West towers, we have the option to purchase the buildings at any time during the lease term for the lease balance, which is approximately $143.2 million. The maximum recourse amount (“residual value guarantee”) under this obligation is $126.8 million.

108



These two leases are both subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessors quarterly. As of December 1, 2006, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in order to access bank-provided funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term (for the East and West towers lease only), purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the maximum recourse amount.

As of December 1, 2006, future minimum lease payments undernon-cancelable operating leases and future minimum sublease income under non-cancelable subleases followinformation in the table below. The table includes commitments relatedsections captioned “Transactions with Related Persons” and “Proposal 1—Election of Directors—Independence of Directors” in the Proxy Statement we will deliver to our restructured facilities. Refer to Note 9 for more information regarding our restructurings.

Fiscal Year

 

 

 

Future
Minimum
Lease
Payments

 

Future
Minimum

Sublease
Income

 

2007

 

$

57,013

 

 

$

9,781

 

 

2008

 

50,001

 

 

9,191

 

 

2009

 

42,377

 

 

9,304

 

 

2010

 

23,553

 

 

6,025

 

 

2011

 

10,034

 

 

1,116

 

 

Thereafter

 

53,916

 

 

80

 

 

Total

 

$

236,894

 

 

$

35,497

 

 

Guarantees

The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guaranteestockholders in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. As such, we recognized a $5.2 million liability related to the East and West tower lease that was extended in August 2004. This liability is recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the lease. As of December 1, 2006, the unamortized portion of the fair value of the residual value guarantee remaining in other long-term liabilities and prepaid rent was $2.8 million.

Royalties

We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue. Royalty expense, which was recorded under our cost of products revenue on our consolidated statements of income, was approximately $19.1 million, $17.8 million, and $15.9 million in fiscal 2006, 2005, and 2004, respectively.

Indemnifications

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products.


Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

To the extent permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’s or director’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.

Legal Proceedings

On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc. and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled “Client-Server System Using Embedded Hypertext Tags for Application and Database Development.” The Plaintiff’s complaint asserts that “defendants have infringed, and continue to infringe, one or more claims of the ‘712 patent by making, using, selling and/or offering for sale, inter alia, products supporting Microsoft Active Server Pages technology.” Plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for “willful infringement,” and fees and costs. We believe the action has no merit and are vigorously defending against it. As of December 1, 2006, we do not believe that a loss is probable or estimable.

On October 13, 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R. Chizen, et al was filed in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and directors, and against Adobe as a nominal defendant. The complaint asserts that stock option grants to executives were priced retroactively by Adobe and were improperly accounted for, and alleges various causes of action based on that assertion. The complaint seeks payment by the defendants to Adobe of damages allegedly suffered by it and disgorgement of profits, as well as injunctive relief. As of December 1, 2006, we do not believe that a loss is probable or estimable.

In connection with our anti-piracy efforts, conducted both internally and throughAnnual Meeting of Stockholders to be held on April 16, 2010. We are incorporating the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local law and have recently increasedinformation contained in frequency, especially in Latin American countries. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular periodsection here by the resolution of one or more of these counter-claims.

From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedingsreference.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES
You will find this information in the ordinary coursesections captioned “Principal Accounting Fees and Services” and “Audit Committee Pre-Approval of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with U.S. generally accepted accounting principles, Adobe makes a provision for a liability


when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affectedServices Performed by the resolution of one or more of such contingencies.

Note 16. Financial Instruments

In accordance with Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities” we recognize derivative instruments and hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

Economic Hedging—Hedges of Forecasted Transactions

We use foreign exchange option contracts to hedge certain operational (“cash flow”) exposures resulting from changes in foreign currency exchange rates. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than the U.S. dollar, primarily the Japanese yen and the Euro. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. The maximum original duration of any option contract is twelve months. We enter into these foreign exchange contracts to hedge forecasted product licensing revenueOur Independent Registered Public Accountants” in the normal course of business, and accordingly, they are not speculative in nature.

To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss) until the forecasted transaction occurs.

The following is a summary of the existing gains that are currently included in accumulated other comprehensive income. These amounts represent the fair value of our cash flow hedge contracts that were still open as of the periods below.

Gain (Loss) on Hedges of Forecasted Transactions:

Balance Sheet

 

 

 

Accumulated
Other Comprehensive
Income (Loss)

 

 

 

December 1,

 

December 2,

 

 

 

2006

 

2005

 

Recognized but Unrealized—Open Transactions:

 

 

 

 

 

 

 

 

 

Net unrealized gain remaining in other accumulated comprehensive income, net of tax

 

 

$

566.8

 

 

 

$

5,317.1

 

 

When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, the related hedge gains and losses on the cash flow hedge are reclassified from accumulated other comprehensive income (loss) to interest and other income (loss) on the consolidated statement of income at that time. For fiscal 2006 and 2005, there were no such gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.


Pursuant to SFAS 133, we evaluate hedge effectiveness at the inception of the hedge prospectively as well as retrospectively and record any ineffective portion of the hedging instruments in other income (loss) on the consolidated income statement. The net gain (loss) recognized in other income for cash flow hedges due to hedge ineffectiveness was insignificant for fiscal 2006 and 2005. The time value of purchased derivative instruments is recorded in other income (loss).

A summary of the amounts included on the consolidated income statement due to occurrence of the hedged transaction and or time value degradation on open hedge transactions is as follows:

Income Statement

 

Years Ended

 

 

 

December 1, 2006

 

December 2, 2005

 

December 3, 2004

 

 

 

Revenue

 

Other
Income
(Loss)

 

Revenue

 

Other
Income
(Loss)

 

Revenue

 

Other
Income
(Loss)

 

Gain (loss) on completed hedge transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized gain (loss) reclassified from other accumulated comprehensive income to revenue

 

 

$

5,035

 

 

$

—

 

 

$

7,453

 

 

$

—

 

 

$

(405

)

 

$

—

 

Net realized loss from the cost of purchased options

 

 

—

 

 

(8,873

)

 

—

 

 

(6,624

)

 

—

 

 

(6,829

)

Gain (loss) on open hedge transactions:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net unrealized gain (loss) from time value degradation on open cash flow hedge transactions

 

 

—

 

 

(3,913

)

 

—

 

 

2,648

 

 

—

 

 

(2,602

)

 

 

 

$

5,035

 

 

$

(12,786

)

 

$

7,453

 

 

$

(3,976

)

 

$

(405

)

 

$

(9,431

)

Balance Sheet Hedging - Hedging of Foreign Currency Assets and Liabilities

We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as other income (loss). These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged. At December 1, 2006, the outstanding balance sheet hedging derivatives had maturities of 150 days or less.


Net gains (losses) recognized in other income (loss) relating to balance sheet hedging for fiscal 2006, 2005, 2004 were as follows:

 

 

2006

 

2005

 

2004

 

Gain (loss) on foreign currency assets and liabilities:

 

 

 

 

 

 

 

Net realized gain (loss) recognized in other income (loss)

 

$

11,046

 

$

(9,604

)

$

4,586

 

Net unrealized gain (loss) recognized in other income (loss)

 

4,721

 

(4,088

)

3,949

 

 

 

15,767

 

(13,692

)

8,535

 

Gain (loss) on hedges of foreign currency assets and liabilities:

 

 

 

 

 

 

 

Net realized gain (loss) recognized in other income (loss)

 

(4,179

)

9,893

 

(11,123

)

Net unrealized gain (loss) recognized in other income (loss)

 

(6,879

)

5,747

 

3,150

 

 

 

(11,058

)

15,640

 

(7,973

)

Net gain recognized in other income

 

$

4,709

 

$

1,948

 

$

562

 

Fair Value Hedges—Hedging of Foreign Currency Denominated Available for Sale Securities

During fiscal 2004, a portion of our investment portfolio was invested in euro denominated securities. In order to mitigate the currency risk of those euro denominated securities, we entered into forward currency contracts designated as fair value hedges. During fiscal 2005 we did not invest in euro denominated securities.

Net gains recognized in other income relating to fair value hedges for fiscal 2004 were as follows:

 

 

2004

 

Gain on foreign currency assets and liabilities:

 

 

 

Net realized gain recognized in other income

 

$

2,234

 

Net unrealized loss recognized in other income

 

(1,935

)

 

 

299

 

Loss on hedges of foreign currency assets and liabilities:

 

 

 

Net realized gain recognized in other income

 

3,026

 

Net unrealized loss recognized in other income

 

(3,482

)

 

 

(456

)

Net loss recognized in other income

 

$

(157

)

Concentration of Risk

Financial instruments that potentially subject us to concentrations of credit risk are short-term investments, primarily fixed-income securities, derivatives, hedging foreign currency and interest rate risk, and accounts receivable.

Our investment portfolio consists of investment-grade securities diversified among security types, industries, and issuers. Our cash and investments are held and managed by recognized financial institutions that follow Adobe’s investment policy. Our policy limits the amount of credit exposure to any one security issue or issuer, and we believe no significant concentration of credit risk exists with respect to these investments.

113



We mitigate concentration of risk related to foreign currency hedges as well as interest rate hedges through a policy that establishes counterparty limits. We also have minimum rating requirements for all bank counterparties.

Credit risk in receivables is limited to OEM partners, dealers and distributors of hardware and software products to the retail market, and to customers whereby we license software directly. Management believes that any risk of loss is reduced due to the diversity of our customers and geographic sales areas. A credit review is completed for our new distributors, dealers, and OEM partners. We also perform ongoing credit evaluations of our customers’ financial condition and require letters of credit or other guarantees, whenever deemed necessary. The credit limit given to the customer is based on our risk assessment of their ability to pay, country risk, and other factors and is not contingent on the resale of the product or on the collection of payments from their customers. We also purchase credit insurance to mitigate credit risk in some foreign markets where we believe it is warranted. If we license our software to a customer where we have a reason to believe the customer’s ability to pay is not probable, due to country risk or credit risk,Proxy Statement we will not recognizedeliver to our stockholders in connection with our Annual Meeting of Stockholders to be held on April 16, 2010. We are incorporating the revenue. We will revert to recognizing the revenue on a cash basis, assuming all other criteria for revenue recognition has been met. For discussion of significant customers as of December 1, 2006, see Note 17.

We derive a significant portion of our OEM PostScript and Other licensing revenue from a small number of OEM partners. Our OEM partners on occasion seek to renegotiate their royalty arrangements. We evaluate these requests on a case-by-case basis. If an agreement is not reached, a customer may decide to pursue other options, which could resultinformation contained in lower licensing revenue for us.

that section here by reference.
PART IV

Note 17. Industry Segment, Geographic Information, and Significant CustomersITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Coinciding with the integration of Macromedia and the start of fiscal 2006, we changed the reporting of our segments to be aligned with our market opportunities and how we manage our combined businesses. For comparability, the prior fiscal period’s results have been reclassified to reflect the realignment of the segments and do not include the impact of our acquisition of Macromedia.

We have the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise and Developer Solutions, Mobile and Device Solutions, and Other, which includes the Print and Classic Publishing and Platform segments. Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and developer tasks to an extended set of customers. This segment combines most of the products of our prior Creative Professional and Digital Imaging and Video business segments, along with the creative professional-focused products and solutions that we obtained through our acquisition of Macromedia. The Knowledge Worker Solutions segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them share information and collaborate. This segment contains revenue generated by Adobe Acrobat Connect and our Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions that automate people-centric processes. The segment contains revenue generated by our LiveCycle, ColdFusion and Flex lines of products. The Mobile and Device Solutions segment provides solutions that create compelling experiences through rich content, user interfaces, and data services on mobile and non-PC devices such as cellular phones, consumer devices and internet connected hand-held devices. Finally, Other contains several of our products and services which address market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEM printing businesses, to new strategic opportunities such as OEM revenue generated from our desktop technology platform—which includes Adobe Reader and Adobe Flash Player applications.

The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. With the exception of goodwill, we do not identify or allocate our assets by the operating segments.


Our results for fiscal years 2006, 2005, and 2004 are reported by operating units below:

 

 

Creative
Solutions

 

Knowledge
Worker
Solutions

 

Enterprise
and
Developer
Solutions

 

Mobile and
Device
Solutions

 


Other*

 


Total

 

Fiscal 2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,424,851

 

 

$

670,945

 

 

$

189,272

 

 

$

37,771

 

 

$

252,461

 

$

2,575,300

 

Cost of revenue

 

135,149

 

 

36,997

 

 

68,088

 

 

22,268

 

 

29,955

 

292,457

 

Gross profit

 

$

1,289,702

 

 

$

633,948

 

 

$

121,184

 

 

$

15,503

 

 

$

222,506

 

$

2,282,843

 

Gross profit as a percentage of revenues

 

91

%

 

94

%

 

64

%

 

41

%

 

88

%

89

%

Fiscal 2005

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

1,128,339

 

 

$

593,520

 

 

$

113,002

 

 

$

—

 

 

$

131,460

 

$

1,966,321

 

Cost of revenue

 

55,321

 

 

22,192

 

 

24,161

 

 

—

 

 

10,904

 

112,578

 

Gross profit

 

$

1,073,018

 

 

$

571,328

 

 

$

88,841

 

 

$

—

 

 

$

120,556

 

$

1,853,743

 

Gross profit as a percentage of revenues

 

95

%

 

96

%

 

79

%

 

—

 

 

92

%

94

%

Fiscal 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

987,781

 

 

$

439,404

 

 

$

102,495

 

 

$

—

 

 

$

136,901

 

$

1,666,581

 

Cost of revenue

 

56,690

 

 

19,664

 

 

18,658

 

 

—

 

 

9,366

 

104,378

 

Gross profit

 

$

931,091

 

 

$

419,740

 

 

$

83,837

 

 

$

—

 

 

$

127,535

 

$

1,562,203

 

Gross profit as a percentage of revenues

 

94

%

 

96

%

 

82

%

 

—

 

 

93

%

94

%

1.  Financial Statements.  See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.
2.  Exhibits. The exhibits listed in the accompanying “Index to Exhibits” are filed or incorporated by reference as part of this Form 10-K.
125

*                    Other segments revenue includes platform revenue of $37.2 million and $0.4 million for fiscal 2006 and 2005, respectively. We did not have platform revenue in fiscal 2004. Costs of revenue related to our platform segment are insignificant for each period. Gross margins for our platform segment are $37.2 million and $0.4 million for fiscal 2006 and 2005, or 1% and 0% of total revenues, respectively.

A reconciliation of the totals reported for the operating units to the applicable line items in the consolidated financial statements for fiscal 2006, 2005, and 2004 is as follows:

 

 

2006

 

2005

 

2004

 

Total gross profit from operating units above

 

$

2,282,843

 

$

1,853,743

 

$

1,562,203

 

Total operating expenses *

 

1,731,550

 

1,125,309

 

970,409

 

Total operating income

 

551,293

 

728,434

 

591,494

 

Non-operating income

 

128,434

 

37,342

 

16,851

 

Income before income taxes

 

$

679,727

 

$

765,776

 

$

608,645

 

*                    Total operating expenses include research and development, sales and marketing and general and administrative. For fiscal 2006, operating expenses also included restructuring and other charges and the amortization of purchased intangibles and incomplete technology.


For fiscal 2006, 2005, and 2004, our revenues and property and equipment, net of accumulated depreciation, are presented below by geographic area. With the exception of property and equipment, we do not identify or allocate our assets by operating unit.

Revenue

 

 

 

2006

 

2005

 

2004

 

Americas:

 

 

 

 

 

 

 

United States

 

$

1,157,708

 

$

864,274

 

$

706,064

 

Other

 

109,068

 

75,443

 

64,500

 

Total Americas

 

1,266,776

 

939,717

 

770,564

 

EMEA

 

770,060

 

612,721

 

541,528

 

Asia:

 

 

 

 

 

 

 

Japan

 

354,029

 

284,528

 

262,685

 

Other

 

184,435

 

129,355

 

91,804

 

Total Asia

 

538,464

 

413,883

 

354,489

 

Total revenue

 

$

2,575,300

 

$

1,966,321

 

$

1,666,581

 

Property and Equipment

 

 

 

2006

 

2005

 

2004

 

Americas:

 

 

 

 

 

 

 

United States

 

$

178,893

 

$

65,351

 

$

72,857

 

Other

 

11,900

 

4,060

 

4,771

 

Total Americas

 

190,793

 

69,411

 

77,628

 

EMEA

 

17,896

 

19,891

 

10,543

 

Asia:

 

 

 

 

 

 

 

India

 

13,534

 

13,060

 

10,306

 

Other

 

4,974

 

1,187

 

1,198

 

Total Asia

 

18,508

 

14,247

 

11,504

 

Total property and equipment

 

$

227,197

 

$

103,549

 

$

99,675

 

Significant Customers

The table below lists our significant customers for fiscal 2004 through 2006. As listed, our significant customers are distributors and thus impact each of our reporting segments. The amounts listed below are a percentage of our net revenues.

 

 

2006

 

2005

 

2004

 

Ingram Micro

 

 

24

%

 

 

26

%

 

 

23

%

 

Tech Data

 

 

10

%

 

 

11

%

 

 

13

%

 

The amounts listed below are receivables, from our significant customers, as a percentage of our gross trade receivables for fiscal 2006 and 2005.

 

 

2006

 

2005

 

Ingram Micro

 

 

25

%

 

 

26

%

 

Tech Data

 

 

11

%

 

 

10

%

 


Note 18. Subsequent EventsTABLE OF CONTENTS

Purchase of Land in San Jose

In fiscal 2006, we entered into various agreements with San Jose Water Corporation and certain of its affiliates to acquire land and a building in downtown San Jose for $36.5 million. The building and certain parking areas were used by the San Jose Water Company and will be leased back to San Jose Water Corporation until mid 2008.

Execution of Credit Facility

We have received Board approval to execute a $500 million credit facility which is expected to be finalized in the first quarter of fiscal 2007. This credit facility will provide backup liquidity for general corporate purposes for a period of up to 5 years.

Structured Stock Repurchase Agreements

In December 2006, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with pre-payments of $300.0 million. The $300.0 million will be classified as treasury stock on our balance sheet. See Note 12 for further information regarding our structured stock repurchase agreements.

117



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on February 5, 2007.

January 22, 2010.

ADOBE SYSTEMS INCORPORATED

By:

/s/ BRUCE R. CHIZEN

By:

Bruce R. Chizen,
Chief

/s/ Mark Garrett
Mark Garrett,
Executive OfficerVice President and
Chief Financial Officer (Principal Executive Officer and
(Principal Financial Officer)


POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Shantanu Narayen and Mark Garrett, and each or any one of them, his or her lawful attorneys-in-fact and agents, for such person in any and all capacities, to sign any and all amendments to this report and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that either of said attorneys-in-fact and agent, or substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicatedand on the 5th day of February, 2007.

dates indicated.

Signature

Title

Date

/s/ JOHN E. WARNOCK

/s/ John E. Warnock

January 22, 2010
John E. WarnockChairman of the Board of Directors

/s/ CHARLES M. GESCHKE

/s/ Charles M. Geschke

January 22, 2010
Charles M. GeschkeChairman of the Board of Directors

/s/ BRUCE R. CHIZEN

Bruce R. Chizen

/s/ Shantanu narayen

January 22, 2010
Shantanu Narayen
Director, President and Chief Executive Officer
(Principal Executive Officer)
/s/ Mark Garrett
January 22, 2010
Mark Garrett
Executive Vice President and Chief Financial Officer
(Principal Executive Officer (Principal Financial Officer)
/s/ Richard T. Rowley
January 22, 2010
Richard T. RowleyVice President and Principal
Financial Officer)

Accounting Officer

/s/ EDWARD W. BARNHOLT

/s/ Edward W. Barnholt

Director

January 22, 2010

/s/ ROBERT K. BURGESS

Edward W. Barnholt

Director

/s/ Robert K. Burgess

Director

January 22, 2010

/s/ MICHAEL R. CANNON

Robert K. Burgess

Director

SignatureTitleDate

/s/ Michael R. Cannon

Director

January 22, 2010

/s/ JAMES E. DALEY

Michael R. Cannon

Director

s/ James E. Daley

Director

January 22, 2010

/s/ CAROL MILLS

James E. Daley

Director

Carol Mills

Director

/s/ COLLEEN M. POULIOT

s/ Carol Mills

January 22, 2010

Co lleen M. Pouliot

Carol Mills

Director

/s/ Daniel L. Rosensweig
January 22, 2010
Daniel L. RosensweigDirector
/s/ Robert Sedgewick
January 22, 2010
Robert SedgewickDirector


Signature

Title

/s/ ROBERT SEDGEWICK

Robert Sedgewick

Director

/s/ DELBERT W. YOCAM

Delbert W. Yocam

Director

/s/ RICHARD T. ROWLEY

Richard T. Rowley

Vice President an d Principal Accounting Officer

119

127


SUMMARY OF TRADEMARKS

The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in the United States and/or other countries, are referenced in this Form 10-K/A:

10-K:

Adobe
Acrobat
Acrobat Capture
Acrobat Connect
Acrobat Messenger
Action Script
ActionScript
Adobe AIR
Adobe Audition
Adobe Encore
Adobe LiveCycle
Adobe Premiere
Adobe Type Manager
After Effects
AIR
Authorware
Breeze
BusinessCatalyst
Buzzword
Captivate
ColdFusion
ColdFusion Builder
Contribute
Creative Suite
Director
Distiller
Dreamweaver
DV Rack
Encore
Fireworks
Flash
FlashCast
Flash Access
Flash Builder
Flash Cast
Flash Catalyst
Flash Lite
FlashPaper
Flex
Flex Builder
Font Folio
FrameMaker
FreeHand
GoLive
HBX
Illustrator
InCopy
InDesign
JRun
Lightroom
LiveCycle
Macromedia
MXML
Omniture
Omniture DataWarehouse
Omniture Discover
Omniture Genesis
Omniture Insight
Omniture SearchCenter
Open Screen Project
Ovation
PageMaker
Photoshop
PostScript
Reader
RoboHelp
Scene7
Shockwave
SiteCatalyst
Soundbooth
Ultra
Version Cue

SUMMARY OF TRADEMARKS (Continued)
Visual Communicator
Vlog It!

All other trademarks are the property of their respective owners.

120



EXHIBITS

As required under Item 15, Exhibits and Financial Statement Schedules, the exhibits filed as part of this report are provided in this separate section. The exhibits includped in this section are as follows:

Exhibit

 

 

 

Incorporated by Reference**

 

Filed

Number

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

3.1

 

Amended and Restated Bylaws

 

8-K

 

9/23/05

 

3.1

 

 

3.2

 

Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01

 

10-Q

 

7/16/01

 

3.6

 

 

3.2.1

 

Certificate of Correction of Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware

 

10-Q

 

4/11/03

 

3.6.1

 

 

3.3

 

Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated

 

10-Q

 

7/8/03

 

3.3

 

 

4.1

 

Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC

 

8-K

 

7/3/00

 

1

 

 

4.1.1

 

Amendment No. 1 to Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC

 

8-A/2G/A

 

5/23/03

 

7

 

 

10.1

 

1984 Stock Option Plan, as amended*

 

10-Q

 

7/02/93

 

10.1.6

 

 

10.2

 

Amended 1994 Performance and Restricted Stock Plan*

 

 

 

 

 

 

 

X

10.3

 

Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*

 

10-Q

 

10/7/04

 

10.7

 

 

10.4

 

1994 Stock Option Plan, as amended*

 

S-8

 

5/30/97

 

10.40

 

 

10.5

 

1997 Employee Stock Purchase Plan, as amended*

 

10-K

 

12/1/00

 

10.70

 

 

10.6

 

1996 Outside Directors Stock Option Plan, as amended*

 

10-Q

 

4/12/06

 

10.6

 

 

10.7

 

Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan*

 

S-8

 

6/16/00

 

4.8

 

 

10.8

 

1999 Nonstatutory Stock Option Plan, as amended*

 

S-8

 

10/29/01

 

4.6

 

 

10.9

 

1999 Equity Incentive Plan, as amended*

 

10-K

 

2/26/03

 

10.37

 

 

10.10

 

2003 Equity Incentive Plan, as amended*

 

DEF 14A

 

3/14/05

 

Appendix A

 

 


Exhibit

 

 

 

Incorporated by Reference**

 

Filed

Number

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

10.11

 

Forms of Stock Option and Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan*

 

10-Q

 

10/7/04

 

10.11

 

 

10.12

 

Form of Indemnity Agreement*

 

10-Q

 

5/30/97

 

10.25.1

 

 

10.13

 

Forms of Retention Agreement*

 

10-K

 

11/28/97

 

10.44

 

 

10.14

 

Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated

 

10-Q

 

10/7/04

 

10.14

 

 

10.15

 

Lease agreement between Adobe Systems and Selco Service Corporation

 

10-K

 

2/21/02

 

10.77

 

 

10.16

 

Participation agreement among Adobe Systems, Selco Service Corporation, et al.

 

10-K

 

2/21/02

 

10.78

 

 

10.17

 

Amendment No.1 to Lease Agreement between Adobe and Selco Services Corporation

 

10-K

 

2/26/03

 

10.81

 

 

10.18

 

Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated November 23, 1999

 

10-K

 

3/30/00

 

10.23

 

 

10.19

 

First Amendment to Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated May 31, 2000

 

10-Q

 

8/14/00

 

10.3

 

 

10.20

 

Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*

 

 

 

 

 

 

 

X

10.21

 

Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan*

 

 

 

 

 

 

 

X

10.22

 

Adobe Systems Incorporated 2004 Annual Executive Incentive Plan*

 

8-K

 

1/13/05

 

10.1

 

 

10.23

 

Adobe Systems Incorporated 2005 Annual Executive Incentive Plan*

 

8-K

 

1/13/05

 

10.2

 

 

10.24

 

Description of 2005 Director Compensation*

 

10-K

 

2/2/05

 

10.21

 

 

10.25

 

Description of 2006 Director Compensation*

 

8-K

 

9/23/05

 

10.1

 

 

10.26

 

Adobe Systems Incorporated 2006 Management Team Annual Incentive Plan *

 

8-K

 

1/13/06

 

10.1

 

 

10.27

 

2005 Equity Incentive Assumption Plan*

 

8-K

 

12/07/05

 

10.2

 

 



EXHIBITS

Exhibit

 

 

 

Incorporated by Reference**

 

Filed

Number

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

10.28

 

Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan*

 

8-K

 

12/07/05

 

10.3

 

 

10.29

 

Allaire Corporation 1997 Stock Incentive Plan*

 

S-8

 

03/27/01

 

4.06

 

 

10.30

 

Allaire Corporation 1998 Stock Incentive Plan*

 

S-8

 

03/27/01

 

4.07

 

 

10.31

 

Allaire Corporation 2000 Stock Incentive Plan*

 

S-8

 

03/27/01

 

4.08

 

 

10.32

 

Andromedia, Inc. 1996 Stock Option Plan*

 

S-8

 

12/07/99

 

4.07

 

 

10.33

 

Andromedia, Inc. 1997 Stock Option Plan*

 

S-8

 

12/07/99

 

4.08

 

 

10.34

 

Andromedia, Inc. 1999 Stock Plan*

 

S-8

 

12/07/99

 

4.09

 

 

10.35

 

ESI Software, Inc. 1996 Equity Incentive Plan*

 

S-8

 

10/18/99

 

4.08

 

 

10.36

 

eHelp Corporation 1999 Equity Incentive Plan*

 

S-8

 

12/29/03

 

4.08

 

 

10.37

 

Blue Sky Software Corporation 1996 Stock Option Plan*

 

S-8

 

12/29/03

 

4.07

 

 

10.38

 

Bright Tiger Technologies, Inc. 1996 Stock Option Plan*

 

S-8

 

03/27/01

 

4.11

 

 

10.39

 

Live Software, Inc. 1999 Stock Option/Stock Issuance Plan*

 

S-8

 

03/27/01

 

4.10

 

 

10.40

 

Macromedia, Inc. 1999 Stock Option Plan*

 

S-8

 

08/17/00

 

4.07

 

 

10.41

 

Macromedia, Inc. 1993 Directors Stock Option Plan*

 

10-Q

 

08/03/01

 

10.02

 

 

10.42

 

Macromedia, Inc. 1992 Equity Incentive Plan*

 

10-Q

 

08/03/01

 

10.01

 

 

10.43

 

Macromedia, Inc. 2002 Equity Incentive Plan*

 

S-8

 

08/10/05

 

4.08

 

 

10.44

 

Form of Macromedia, Inc. Stock Option Agreement*

 

S-8

 

08/10/05

 

4.09

 

 

10.45

 

Middlesoft, Inc. 1999 Stock Option Plan*

 

S-8

 

08/17/00

 

4.09

 

 

10.46

 

Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement*

 

S-8

 

11/23/04

 

4.10

 

 

10.47

 

Form of Macromedia, Inc. Restricted Stock Purchase Agreement*

 

10-Q

 

2/8/05

 

10.01

 

 


Exhibit

 

 

 

Incorporated by Reference**

 

Filed

Number

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

10.48

 

Restricted Stock Purchase Agreement between Macromedia, Inc. and Stephen Elop, dated January 24, 2005*

 

10-Q

 

2/8/05

 

10.02

 

 

10.49

 

Restricted Stock Purchase Agreement between Macromedia, Inc. and Robert Burgess, dated January 24, 2005*

 

10-Q

 

2/8/05

 

10.03

 

 

10.50

 

Amended and Restated Employment Agreement by and between Robert K. Burgess, dated January 21, 2005*

 

8-K

 

1/21/05

 

10.01

 

 

10.51

 

Amendment to Employment Agreement by and between Adobe Systems Incorporated, Adobe Macromedia Software LLC and Robert K. Burgess, dated December 7, 2005*

 

8-K

 

12/12/05

 

10.2

 

 

10.52

 

Amended and Restated Employment Agreement between Adobe Systems Incorporated and Stephen Elop, dated May 23, 2005*

 

S-4

 

6/28/05

 

10.1

 

 

10.54

 

Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

 

8-K

 

2/3/06

 

10.1

 

 

10.55

 

Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan*

 

8-K

 

2/3/06

 

10.2

 

 

10.56

 

Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

 

8-K

 

2/3/06

 

10.3

 

 

10.57

 

Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

 

8-K

 

2/3/06

 

10.4

 

 

10.57

 

Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan*

 

8-K

 

2/3/06

 

10.4

 

 


Exhibit   Incorporated by Reference** Filed
Number Exhibit Description Form Date Number Herewith
           
3.1 Amended and Restated Bylaws 8-K 1/13/09 3.1  
           
3.2 Restated Certificate of Incorporation of Adobe Systems Incorporated 10-Q 7/16/01 3.6  
           
3.2.1 Certificate of Correction of Restated Certificate of Incorporation of Adobe Systems Incorporated 10-Q 4/11/03 3.6.1  
           
3.3 Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated 10-Q 7/08/03 3.3  
           
4.1 Fourth Amended and Restated Rights Agreement between Adobe Systems Incorporated and Computershare Investor Services, LLC 8-K 7/03/00 1  
           
4.1.1 Amendment No. 1 to Fourth Amended and Restated Rights Agreement between Adobe Systems Incorporated and Computershare Investor Services, LLC  8-A/2G/A 5/23/03 7  
           
4.2 Specimen Common Stock Certificate   S-3   1/15/2010   4.3  
           
10.1 Amended 1994 Performance and Restricted Stock Plan* 10-Q 4/4/08 10.2  
           
10.2 Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-K 1/23/09 10.3  
           
10.3 1997 Employee Stock Purchase Plan, as amended* 10-K 1/24/08 10.5  
           
10.4 1996 Outside Directors Stock Option Plan, as amended* 10-Q 4/12/06 10.6  

Exhibit

 

 

 

Incorporated by Reference**

 

Filed

Number

 

Exhibit Description

 

Form

 

Date

 

Number

 

Herewith

10.58

 

Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan*

 

8-K

 

2/3/06

 

10.5

 

 

10.59

 

Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan*

 

8-K

 

2/3/06

 

10.6

 

 

10.60

 

Adobe Systems Incorporated Executive Cash Bonus Plan

 

DEF 14A

 

2/24/06

 

Appendix B

 

 

10.61

 

Employment Transition Agreement between Adobe Systems Incorporated and Murray J. Demo, dated March 21, 2006*

 

8-K

 

3/22/06

 

10.1

 

 

10.62

 

Employment offer letter between Adobe Systems Incorporated and Randy Furr, dated May 16, 2006*

 

8-K

 

5/22/06

 

10.1

 

 

10.63

 

Adobe Systems Incorporated Deferred Compensation Plan*

 

8-K

 

9/26/06

 

10.1

 

 

10.64

 

Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control*

 

8-K

 

11/16/06

 

10.2

 

 

10.65

 

Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006*

 

8-K

 

11/16/06

 

10.1

 

 

10.66

 

Confidential Resignation Agreement and General Release of Claims between Adobe Systems Incorporated and Peg Wynn, dated January 22, 2007*

 

 

 

 

 

 

 

X

21

 

Subsidiaries of the Registrant

 

 

 

 

 

 

 

X

23.1

 

Consent of Independent Registered Public Accounting Firm, KPMG LLP

 

 

 

 

 

 

 

X

31.1

 

Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934

 

 

 

 

 

 

 

X

Exhibit

Incorporated by Reference**

Filed

Number

Exhibit Description

Form

Date

Number

Herewith

           
10.5 Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan* S-8 6/16/00 4.8  
           
10.6 1999 Nonstatutory Stock Option Plan, as amended* S-8 10/29/01 4.6  
           
10.7 1999 Equity Incentive Plan, as amended* 10-K 2/26/03 10.37  
           
10.8 2003 Equity Incentive Plan, as amended and restated* DEF 14A 2/20/09 Appendix A  
           
10.9 Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 4/4/08 10.11  
           
10.10 Form of Indemnity Agreement* 10-Q 6/26/09 10.12  
           
10.11 Forms of Retention Agreement* 10-K 11/28/97 10.44  
           
10.12 Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated 10-Q 10/07/04 10.14  
           
10.13 Lease between Adobe Systems Incorporated and Selco Service Corporation, dated March 26, 2007 8-K 3/28/07 10.1  
           
10.14 Participation Agreement among Adobe Systems Incorporated, Selco Service Corporation, et al. dated March 26, 2007 8-K 3/28/07 10.2  
           
10.15 Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-K 1/23/09 10.19  
ExhibitIncorporated by Reference**Filed

32.1

Number

CertificationExhibit Description

FormDateNumberHerewith
           
10.16 Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.20  
           
10.17 Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 10/07/04 10.11  
           
10.18 2008 Executive Officer Annual Incentive Plan* 8-K 1/30/08 10.4  
           
10.19 2005 Equity Incentive Assumption Plan, as amended and restated*       X
           
10.20 Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* 10-Q 4/4/08 10.24  
           
10.21 Allaire Corporation 1997 Stock Incentive Plan* S-8 03/27/01 4.06  
           
10.22 Allaire Corporation 1998 Stock Incentive Plan* S-8 03/27/01 4.07  
           
10.23 Allaire Corporation 2000 Stock Incentive Plan* S-8 03/27/01 4.08  
           
10.24 Andromedia, Inc. 1999 Stock Plan* S-8 12/07/99 4.09  
           
10.25 Blue Sky Software Corporation 1996 Stock Option Plan* S-8 12/29/03 4.07  
           
10.26 Macromedia, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.07  
           
10.27 Macromedia, Inc. 1992 Equity Incentive Plan* 10-Q 08/03/01 10.01  
           
10.28 Macromedia, Inc. 2002 Equity Incentive Plan* S-8 08/10/05 4.08  
           
10.29 Form of Macromedia, Inc. Stock Option Agreement* S-8 08/10/05 4.09  
           
10.30 Middlesoft, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.09  
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.31 Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* S-8 11/23/04 4.10  
           
10.32 Form of Macromedia, Inc. Restricted Stock Purchase Agreement* 10-Q 2/08/05 10.01  
           
10.33 Adobe Systems Incorporated Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.1  
           
10.34 Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Systems Incorporated 2008 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.2  
           
10.35 2008 Award Calculation Methodology Exhibit A to the 2008 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.3  
           
10.36 Adobe Systems Incorporated Deferred Compensation Plan* 10-K 1/24/08 10.52  
           
10.37 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/07 10.1  
           
10.38 Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/07 10.2  
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.39 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.3  
           
10.40 Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.4  
           
10.41 Adobe Systems Incorporated Executive Cash Bonus Plan* DEF 14A 2/24/06 Appendix B  
           
10.42 First Amendment to Retention Agreement between Adobe Systems Incorporated and Shantanu Narayen, effective as of February 11, 2008* 8-K 2/13/08 10.1  
           
10.43 Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control* 8-K 2/13/08 10.2  
           
10.44 Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006* 8-K 11/16/06 10.1  
           
10.45 Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007* 8-K 1/26/07 10.1  
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.46 Credit Agreement, dated as of February 16, 2007, among Adobe Systems Incorporated and Certain Subsidiaries as Borrowers; BNP Paribas, Keybank National Association, and UBS Loan Finance LLC as Co-Documentation Agents; JPMorgan Chase Bank, N.A. as Syndication Agent; Bank of America, N.A. as Administrative Agent and Swing Line Lender; the Other Lenders Party Thereto; and Banc of America Securities LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Managers 8-K 8/16/07 10.1  
           
10.47 Amendment to Credit Agreement, dated as of August 13, 2007, among Adobe Systems Incorporated, as Borrower; each Lender from time to time party to the Credit Agreement; and Bank of America, N.A. as Administrative Agent 8-K 8/16/07 10.2  
           
10.48 Second Amendment to Credit Agreement, dated as of February 26, 2008, among Adobe Systems Incorporated, as Borrower; each Lender from time to time party to the Credit Agreement; and Bank of America, N.A. as Administrative Agent 8-K 2/29/08 10.1  
           
10.49 Purchase and Sale Agreement, by and between NP Normandy Overlook, LLC, as Seller and Adobe Systems Incorporated as Buyer, effective as of May 12, 2008 8-K 5/15/08 10.1  
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.50 Form of Director Annual Grant Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.60  
           
10.51 Form of Director Initial Grant Restricted Stock Unit Agreement in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.61  
           
10.52 Form of Director Annual Grant Restricted Stock Unit Agreement in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.62  
           
10.53 Description of 2009 Director Compensation* 10-K 1/23/09 10.63  
           
10.54 2009 Performance Share Program Award Calculation Methodology* 8-K 1/29/09 10.3  
           
10.55 2009 Executive Annual Incentive Plan* 8-K 1/29/09 10.4  
           
10.56 Omniture, Inc. 1999 Equity Incentive Plan, as amended (the “Omniture 1999 Plan”)* S-1 4/4/06 10.2A  
           
10.57 Forms of Stock Option Agreement under the Omniture 1999 Plan* S-1 4/4/06 10.2B  
           
10.58 Form of Stock Option Agreement under the Omniture 1999 Plan used for Named Executive Officers and Non-Employee Directors* S-1 6/9/06 10.2C  
           
10.59 Omniture, Inc. 2006 Equity Incentive Plan and related forms* 10-Q 08/06/09 10.3  
           
10.60 Omniture, Inc. 2007 Equity Incentive Plan and related forms* 10-K 2/27/09 10.9  
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.61 Omniture, Inc. 2008 Equity Incentive Plan and related forms* 10-K 2/27/09 10.10  
           
10.62 Visual Sciences, Inc. (formerly, WebSideStory, Inc.) Amended and Restated 2000 Equity Incentive Plan* 10-K 2/29/08 10.5  
           
10.63 Visual Sciences, Inc. (formerly, WebSideStory, Inc.) 2004 Equity Incentive Award Plan (the “VS 2004 Plan”) and Form of Option Grant Agreement* 10-K 2/29/08 10.6  
           
10.64 Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement under the VS 2004 Plan* 10-K 2/29/08 10.6A  
           
10.65 Visual Sciences, Inc. (formerly, WebSideStory, Inc.) 2006 Employment Commencement Equity Incentive Award Plan and Form of Option Grant Agreement* 10-K 2/29/08 10.8  
           
10.66 Avivo Corporation 1999 Equity Incentive Plan and Form of Option Grant Agreement* 10-K 2/29/08 10.7  
           
10.67 The Touch Clarity Limited Enterprise Management Incentives Share Option Plan 2002* S-8 3/16/07 99.5  
           
10.68 Forms of Agreements under The Touch Clarity Limited Enterprise Management Incentives Share Option Plan 2002* S-8 3/16/07 99.6  
           
10.69 Touch Clarity Limited 2006 U.S. Stock Plan* S-8 3/16/07 99.7  
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.70 Form of Stock Option Agreement under Touch Clarity Limited 2006 U.S. Stock Plan* S-8 3/16/07 99.8  
           
10.71 Description of 2010 Director Compensation*       X
           
21 Subsidiaries of the Registrant       X
           
23.1 Consent of Independent Registered Public Accounting Firm, KPMG LLP       X
           
24.1 Power of Attorney (set forth on the signature page to this Annual Report on Form 10-K)       X
           
31.1 Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934       X
           
31.2 Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934       X
           
32.1 Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†       X
           
32.2 Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†       X
           
101.INS XBRL Instance††       X
           
101.SCH XBRL Taxonomy Extension Schema††       X
           
101.CAL XBRL Taxonomy Extension Calculation††       X
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
101.LABXBRL Taxonomy Extension Labels††X
101.PREXBRL Taxonomy Extension Presentation††X
101.DEFXBRL Taxonomy Extension Definition††X

*Compensatory plan or arrangement.
**References to Exhibits 10.21 through 10.32 are to filings made by Macromedia, Inc.
***References to Exhibits 10.56 through 10.70 are to filings made by Omniture, Inc.

†
The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Chief Executive Officer,Adobe Systems Incorporated under the Securities Act of 1933, as required by Rule 13a-14(b) ofamended, or the Securities Exchange Act of 1934†

X

32.2

Certification1934, as amended, whether made before or after the date of Chief Financial Officer, as required by Rule 13a-14(b)this Form 10-K, irrespective of the Securities Exchange Act of 1934†

X

100.INS

XBRL Instance††

X

100.SCH

XBRL Taxonomy Extension Schema††

X

100.CAL

XBRL Taxonomy Extension††

X

100.LAB

XBRL Taxonomy Extension Labels††

X

100.PRE

XBRL Taxonomy Extension††

X

any general incorporation language contained in such filing.
††Furnished, not filed.
139

*                    Compensatory plan or arrangement

**             References to Exhibits 10.18 and 10.19 are to filings made by the Allaire Corporation. References to Exhibits 10.29 through 10.50 are to filings made by Macromedia, Inc.

†                    The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K/A, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Systems Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-K/A, irrespective of any general incorporation language contained in such filing.

††    Furnished  not filed as stated in Part II, Item 9B.

126