UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
_________________________

FORM 10-Q
_________________________

(Mark One)

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended August 29, 200828, 2009
 
 ORor
 
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
(State or other jurisdiction of
incorporation or organization)
77-0019522
(I.R.S. Employer
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)
_________________________
 
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 (the “Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).    Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as definedcompany. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Act).Exchange Act.
 
Large accelerated filer x
Accelerated filer o
Non-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 o  No x

The number of shares outstanding of the registrant’s common stock as of September 26, 200825, 2009 was 530,956,085.523,760,118.


 
 
 


ADOBE SYSTEMS INCORPORATED
FORM 10-Q
 
TABLE OF CONTENTS
 
   Page No.
PART I—FINANCIAL INFORMATION
 
Item 1.
Condensed Consolidated Financial StatementsStatements::
3
  3
 
 
Condensed Consolidated Balance Sheets
August 29, 200828, 2009 and November 30, 200728, 2008
3
  3
 
 
Condensed Consolidated Statements of Income
Three and Nine Months Ended August 29, 200828, 2009 and August 31, 200729, 2008
4
  4
 
 
Condensed Consolidated Statements of Cash Flows
Nine Months Ended August 29, 200828, 2009 and August 31, 200729, 2008
5
  5
 
 
Notes to Condensed Consolidated Financial Statements
6
  6 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
29
  23 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
40
  35 
Item 4.
Controls and Procedures
3540
  
PART II—OTHER INFORMATION 
Item 1.
Legal Proceedings
40
  35 
Item 1A.
Risk Factors
40
  35 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
4349
Item 5.
Other Information
  44 
Item 6.
Exhibits
49
 44 
Signature
58
 51 
Summary of Trademarks
5259

2

PART I—FINANCIAL INFORMATION
 
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
ADOBE SYSTEMS INCORPORATED
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands, except per share data)par value)
 
(Unaudited)
 
 
August 29,
2008
  
November 30,
2007
  
August 28,
2009
  
November 28,
2008
 
ASSETS
Current assets:            
Cash and cash equivalents $1,134,263  $946,422  $1,132,144  $886,450 
Short-term investments  866,641   1,047,432   1,424,317   1,132,752 
Trade receivables, net of allowances for doubtful accounts of $6,264 and $4,398, respectively  327,970   318,145 
Other receivables  33,687   44,666 
Trade receivables, net of allowances for doubtful accounts of $6,153 and $4,128, respectively  281,807   467,234 
Deferred income taxes  94,500   171,472   72,163   110,713 
Prepaid expenses and other assets  60,059   44,714 
Prepaid expenses and other current assets
  80,503   137,954 
Total current assets  2,517,120   2,572,851   2,990,934   2,735,103 
Property and equipment, net  317,071   289,758   335,752   313,037 
Goodwill  2,134,032   2,148,102   2,125,946   2,134,730 
Purchased and other intangibles, net  246,401   367,644   117,384   214,960 
Investment in lease receivable  207,239   207,239   207,239   207,239 
Other assets  216,887   128,085   184,705   216,529 
Total assets $5,638,750  $5,713,679  $5,961,960  $5,821,598 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:                
Trade and other payables $56,254  $66,867 
Trade payables
 $48,416  $55,840 
Accrued expenses  356,408   383,436   349,077   399,969 
Accrued restructuring  6,862   3,731   8,230   35,690 
Income taxes payable  37,546   215,058   20,332   27,136 
Deferred revenue  204,593   183,318   188,328   243,964 
Total current liabilities  661,663   852,410   614,383   762,599 
Long-term liabilities:                
Debt  350,000   —   350,000   350,000 
Deferred revenue  27,838   25,950   29,866   31,356 
Accrued restructuring  8,096   13,987   4,967   6,214 
Income taxes payable  99,636   —   137,296   123,182 
Deferred income taxes  96,827   148,943   105,597   117,328 
Other liabilities  23,248   22,407   25,293   20,565 
Total liabilities  1,267,308   1,063,697   1,267,402   1,411,244 
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; 531,475 and 571,409 shares outstanding, respectively  61   61 
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 524,665 and 526,111 shares outstanding, respectively  61   61 
Additional paid-in-capital  2,369,689   2,340,969   2,303,342   2,396,819 
Retained earnings  4,667,489   4,041,592   5,331,957   4,913,406 
Accumulated other comprehensive income  23,439   27,948   21,728   57,222 
Treasury stock, at cost (69,359 and 29,425 shares, respectively), net of reissuances  (2,689,236)  (1,760,588)
Treasury stock, at cost (76,169 and 74,723 shares, respectively), net of reissuances  (2,962,530)  (2,957,154)
Total stockholders’ equity  4,371,442   4,649,982   4,694,558   4,410,354 
Total liabilities and stockholders’ equity $5,638,750  $5,713,679  $5,961,960  $5,821,598 
 
See accompanying Notes to Condensed Consolidated Financial Statements.

3

ADOBE SYSTEMS INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(In thousands, except per share data)
 
(Unaudited)
 
 Three Months  Nine Months  Three Months Ended  Nine Months Ended 
 
August 29,
2008
  
August 31,
2007
  
August 29,
2008
  
August 31,
2007
  
August 28,
 2009
  
August 29,
 2008
  
August 28,
 2009
  
August 29,
 2008
 
Revenue:                        
Products $838,813  $813,382  $2,532,076  $2,147,149  $649,865  $838,813  $2,052,119  $2,532,076 
Services and support  48,444   38,304   132,512   99,521   47,642   48,444   136,451   132,512 
Total revenue  887,257   851,686   2,664,588   2,246,670   697,507   887,257   2,188,570   2,664,588 
Total cost of revenue:                
Cost of revenue:                
Products  84,623   69,002   202,657   193,532   49,365   84,623   164,041   202,657 
Services and support  26,228   23,619   73,535   62,566   15,682   26,228   50,367   73,535 
Total cost of revenue  110,851   92,621   276,192   256,098   65,047   110,851   214,408   276,192 
Gross profit  776,406   759,065   2,388,396   1,990,572   632,460   776,406   1,974,162   2,388,396 
Operating expenses:                                
Research and development  170,124   163,217   508,909   450,395   138,902   170,124   427,289   508,909 
Sales and marketing  271,439   251,243   813,399   702,323   231,320   271,439   724,020   813,399 
General and administrative  97,156   71,132   257,163   201,004   79,593   97,156   224,462   257,163 
Restructuring and other charges  1,194   555   2,625   555 
Amortization of purchased intangibles and incomplete technology  17,024   17,893   51,222   54,542 
Restructuring charges
  65   1,194   15,866   2,625 
Amortization of purchased intangibles
  14,978   17,024   45,654   51,222 
Total operating expenses  556,937   504,040   1,633,318   1,408,819   464,858   556,937   1,437,291   1,633,318 
Operating income  219,469   255,025   755,078   581,753   167,602   219,469   536,871   755,078 
Non-operating income (expense):
                                
Interest and other income, net  9,338   22,733   34,778   65,866   6,667   9,338   24,753   34,778 
Interest expense  (2,390)  (69)  (8,027)  (175)  (460)  (2,390)  (1,872)  (8,027)
Investment gains (loss)  2,097   (694)  20,335   9,069 
Total non-operating income, net  9,045   21,970   47,086   74,760 
Investment gains (losses), net
  607   2,097   (18,444)  20,335 
Total non-operating income (expense), net
  6,814   9,045   4,437   47,086 
Income before income taxes  228,514   276,995   802,164   656,513   174,416   228,514   541,308   802,164 
Provision for income taxes  36,906   71,752   176,267   154,914   38,371   36,906   122,757   176,267 
Net income $191,608  $205,243  $625,897  $501,599  $136,045  $191,608  $418,551  $625,897 
Basic net income per share $0.36  $0.35  $1.15  $0.85  $0.26  $0.36  $0.79  $1.15 
Shares used in computing basic net income per share  531,060   583,670   542,624   587,141   525,911   531,060   528,015   542,624 
Diluted net income per share $0.35  $0.34  $1.13  $0. 83  $0.26  $0.35  $0.79  $1.13 
Shares used in computing diluted net income per share  541,311   597,334   552,739   602,263   531,809   541,311   532,846   552,739 

 

 

 
See accompanying Notes to Condensed Consolidated Financial Statements.

4

ADOBE SYSTEMS INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
(Unaudited)
 
 Nine Months Ended  Nine Months Ended 
 
August 29,
2008
  
August 31,
2007
  
August 28,
2009
  
August 29,
2008
 
Cash flows from operating activities:            
Net income $625,897  $501,599  $418,551  $625,897 
Adjustments to reconcile net income to net cash provided by operating activities:                
Depreciation, amortization and accretion  200,537   237,274   197,386   202,841 
Stock-based compensation  137,613   110,196   126,231   137,613 
Provision for estimated returns  93,683   132,871 
Deferred income taxes
  22,671   34,336 
Unrealized losses (gains) on investments
  13,308   (9,690)
Retirements of property and equipment
  3,435   185 
Tax benefit from employee stock option plans  83,740   75,878   2,711   83,740 
Deferred income taxes  34,336   (20,405)
Provision for losses on trade receivables
  3,049   3,870 
Other non-cash items  6,764   (1,028)  2,464   2,709 
Gains on sales of investments, net of impairments  (9,690)  (10,834)
Excess tax benefits from stock-based compensation  (23,635)  (54,396)  (84)  (23,635)
Changes in operating assets and liabilities, net of acquired assets and liabilities:        
Receivables  (96,399)  (37,968)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:        
Trade receivables
  182,377   (13,695)
Prepaid expenses and other current assets  (6,202)  (16,135)  15,663   2,044 
Trade and other payables  (10,613)  9,052 
Trade payables
  (7,424)  (3,574)
Accrued expenses  (36,957)  34,919   (44,351)  (43,996)
Accrued restructuring  (5,418)  (10,547)  (27,527)  (5,418)
Income taxes payable  (73,957)  64,746   12,619   (73,957)
Deferred revenue  23,163   25,971   (57,126)  23,163 
Net cash provided by operating activities  942,862   1,041,193   863,953   942,433 
Cash flows from investing activities:                
Purchases of short-term investments  (840,782)  (1,755,079)  (1,142,015)  (840,782)
Maturities of short-term investments  520,784   335,895   333,219   520,784 
Sales of short-term investments  486,904   1,531,651 
Proceeds from sales of short-term investments
  504,958   486,904 
Purchases of property and equipment  (88,481)  (103,944)  (84,659)  (88,481)
Acquisitions, net of cash acquired
  —   485 
Purchases of long-term investments and other assets  (102,029)  (85,173)  (24,891)  (102,085)
Investment in lease receivable  —   (80,439)
Cash received from acquisitions  —   1,507 
Cash paid for acquisitions   —   (68,237)
Issuance costs for credit facility  —   (838)
Proceeds from sale of equity securities  18,085   11,310 
Proceeds from sale of long-term investments
  4,909   18,085 
Other
  3,271   — 
Net cash used for investing activities  (5,519)  (213,347)  (405,208)  (5,090)
Cash flows from financing activities:                
Purchases of treasury stock  (1,422,735)  (1,451,525)  (350,013)  (1,422,735)
Proceeds from issuance of treasury stock  301,454   354,546   122,219   301,454 
Excess tax benefits from stock-based compensation  23,635   54,396   84   23,635 
Proceeds from borrowings under credit facility  450,000   —   —   450,000 
Repayments of borrowings under credit facility  (100,000)  —   —   (100,000)
Net cash used for financing activities  (747,646)  (1,042,583)  (227,710)  (747,646)
Effect of foreign currency exchange rates on cash and cash equivalents  (1,856)  1,520   14,659   (1,856)
Net increase (decrease) in cash and cash equivalents  187,841   (213,217)
Net increase in cash and cash equivalents
  245,694   187,841 
Cash and cash equivalents at beginning of period  946,422   772,500   886,450   946,422 
Cash and cash equivalents at end of period $1,134,263  $559,283  $1,132,144  $1,134,263 
Supplemental disclosures:                
Cash paid for income taxes, net of refunds $129,320  $38,434  $78,635  $129,320 
Cash paid for interest
 $453  $2,311 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
(In thousands, except share and per share data)
(Unaudited)


NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
We have prepared the accompanying unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 30, 200728, 2008 on file with the SEC.
 
There have been no material changes in our significant accounting policies, except for the adoption of the Financial Accounting Standards Board (“FASB”) Financial Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”, on December 1, 2007 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007.
Reclassification
Certain prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, there was a reclassification totaling $35.0 million from purchased intangibles to long-term and short-term other assets.  See Notes 3 and 4 for additional information regarding this reclassification.28, 2008.
 
Recent Accounting Pronouncements
 
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended August 29, 2008,28, 2009, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended November 30, 2007,28, 2008, that are of significance, or potential significance, to us.
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of GAAP, a replacement of SFAS No. 162” (“SFAS 168”). SFAS 168 will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will be effective for us beginning in the fourth quarter of fiscal 2009. On the effective date of SFAS 168, it will supersede all then-existing non-SEC accounting and reporting standards. As SFAS 168 is not intended to change or alter existing GAAP, it is not expected to have any impact on our consolidated financial statements and will only impact references for accounting guidance.
In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No. 46(R)” (“SFAS 167”), which amends 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 SFAS 167 are effective for interim and annual reporting periods ending after November 15, 2009 and will be effective for us beginning in the fourth quarter of fiscal 2009. We are currently evaluating the impact of adopting SFAS 167 on our consolidated financial position, results of operations and cash flows.
In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), 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 provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. We adopted SFAS 165 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 October 1, 2009, the date that these financial statements were issued.
In April 2009, the FASB issued three related FASB Staff Positions (“FSP”): (i) FSP Financial Accounting Standard (“FAS”) No. 115-2 and FAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4), which are effective for interim and annual reporting periods ending after June 15, 2009. FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in GAAP for  debt  securities to  modify the requirement for recognizing other-than-temporary impairments, change the existing
6
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


impairment model, and modify the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). We adopted these FSPs during 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 FASB Staff Position (“FSP”)FSP FAS No. 133-1 and FIN No. 45-4, (“FSP FAS 133-1 and FIN 45-4”), “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB StatementSFAS No. 133 and FASB InterpretationFIN No. 45; and Clarification of the Effective Date of FASB StatementSFAS No. 161” (“FSP FAS 133-1 and FIN 45-4”).  FSP FAS 133-1 and FIN 45-4 amends FASB StatementSFAS No. 133, (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”, (“SFAS 133”) to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also amend FASB InterpretationFIN No. 45, (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”Others, an interpretation of SFAS No. 5, 57, and 107 and rescission of  FIN No. 34” (“FIN 45”), to require additional disclosure about the current status of the payment/performance risk of a guarantee.  The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the effective date in FASB StatementSFAS No. 161, (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities”Activities, an amendment of SFAS 133” (“SFAS 161”). DisclosuresWe adopted the disclosures required by SFAS 161 are effective for financial statements issued forin the first quarter of fiscal years and interim periods beginning after November 15, 2008. Because2009. Since FSP FAS 133-1 and FIN 45-4 only requirerequired additional disclosures, the adoption willdid not impact our consolidated financial position, results of operations or cash flows.

6
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)


In April 2008, the FASB issued FSP FAS No. 142-3, (“FSP 142-3”), “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB StatementSFAS No. 142, “Goodwill and Other Intangible Assets”.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. FSP FAS 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.2008 and interim periods within those fiscal years. FSP FAS 142-3 is effective for us beginning in the first quarter of fiscal 2010. Early adoption is prohibited.  Sincenot permitted. As this guidance willis to be applied prospectively, on adoption, there will beis no impact to our current consolidated financial statements.
 
In March 2008, the FASB issued SFAS 161 which requires companies with derivative instruments to disclose information that should enable financial-statementfinancial statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133 and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. We adopted SFAS 161 is effective for financial statements issued forin the first quarter of fiscal years and interim periods beginning after November 15, 2008. Because2009. Since SFAS 161 only requiresrequired additional disclosure, the adoption willdid not impact our consolidated financial position, results of operations or cash flows.
 
In June 2007, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 07-1 (“SOP 07-1”), “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies”. SOP 07-1 defines investment companies for purposes of applying the related AICPA Audit and Accounting Guide. SOP 07-1 provides guidance on whether an investment company’s parent or equity-method investor should retain investment-company accounting in its financial statements. SOP 07-1 would have been effective beginning in the first quarter of fiscal 2009; however, in February 2008, the FASB issued FSP SOP 07-1-1 which indefinitely delayed the effective date of SOP 07-1.
In FebruaryDecember 2007, the FASB issued FASB StatementSFAS No. 159141 (revised 2007), “Business Combinations” (“SFAS 159”141R”), “The Fair Value Option and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (“ARB”) No. 51” (“SFAS 160”). SFAS 141R will change how business acquisitions are accounted for Financial Assets and Financial Liabilities”. Underwill impact financial statements both on the acquisition date and in subsequent periods. SFAS 159, companies may elect to measure certain financial instruments160 will change the accounting and certain other items at fair value. The standard requires that unrealized gainsreporting for minority interests, which will be recharacterized as noncontrolling interests and losses on items for which the fair value option has been elected be reported in earningsclassified as a component of equity. SFAS 141R and disclosed. SFAS 159 was160 are effective for us beginning in the first quarter of fiscal 2008.2010. Early adoption is not permitted. We are currently do notevaluating the impact that SFAS 141R and SFAS 160 will have any instruments for which we have elected the fair value option under SFAS 159. Therefore, the adoption of SFAS 159 has not impactedon our consolidated financial position, results of operations or cash flows.statements.
 
In September 2006, the FASB issued FASB Statement No.SFAS 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 and is effective for fiscal years beginning after November 15, 2007. In FebruaryEffective November 29, 2008, the FASB issued FASB FSP 157-2 which delays the effective date ofwe adopted SFAS 157 for all nonfinancial assets and nonfinancial liabilities except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. These nonfinancial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Effective December 1, 2007, we adopted SFAS 157 for financial assets and liabilities recognized at fair value on a recurringnon-recurring basis. Examples include goodwill, intangibles, and other long-lived assets. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows.See Note 2 for information and related disclosures regarding our fair value measurements.
 
In July 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Additionally, in May 2007, the FASB published FSP No. FIN 48-1 (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation No. 48”. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 and FSP FIN 48-1 resulted in an increase to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008. See Note 6 for additional information regarding income taxes, including the effects of adoption of FIN 48 and FSP FIN 48-1 on our condensed consolidated financial statements.

7
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


NOTE 2. CASH, CASH EQUIVALENTS AND SHORT-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 short-term investments as “available-for-sale.” These investments are free of trading restrictions or become free of trading restrictions within one year. We carry these investments at fair value, based on quoted 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. Gains are recognized when realized in our Condensed 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. Gains and losses are determined using the specific identification method.
 Cash, cash equivalents and short-term investments consisted of the following as of August 28, 2009 (in thousands):
  
Carrying 
Value
  
Unrealized
Gains
  
Unrealized
Losses
  
Estimated
Fair Value
 
Current assets:            
Cash $33,923  $—  $—  $33,923 
Cash equivalents:                
Money market mutual funds  1,043,750   —   —   1,043,750 
Bank deposits  49,451   —   —   49,451 
United States treasury notes  5,021   —   (1)  5,020 
Total cash equivalents  1,098,222   —   (1)  1,098,221 
Total cash and cash equivalents  1,132,145   —   (1)  1,132,144 
Short-term investments:                
United States treasury notes  749,616   5,164   (10)  754,770 
United States government agency bonds  133,164   127   (21)  133,270 
Government guaranteed bonds   265,448   1,724   (73)  267,099 
Corporate bonds  204,126   3,626   (2)  207,750 
Obligations of foreign governments  28,222   488   —   28,710 
Bonds of multi-lateral government agencies  27,434   340   —   27,774 
Subtotal  1,408,010   11,469   (106)  1,419,373 
Other marketable equity securities  2,504   2,440   —   4,944 
Total short-term investments  1,410,514   13,909   (106)  1,424,317 
Total cash, cash equivalents and short-term investments $2,542,659  $13,909  $(107) $2,556,461 

8
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of November 28, 2008 (in thousands):
  
Carrying 
Value
  
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 3 for further information regarding 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 August 28, 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 $108,878  $(32) $108,878  $(32)
Government guaranteed bonds  23,084   (73)  23,084   (73)
Corporate bonds  3,473   (2)  3,473   (2)
Total $135,435  $(107) $135,435  $(107)
As of August 28, 2009, there were no securities in a continuous loss position for more than twelve months. There were 18 securities that were in an unrealized loss position at August 28, 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)

9
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

As of November 28, 2008, there were no securities in a continuous loss position for more than twelve months. There were 33 securities that were in an unrealized loss position at November 28, 2008.
The following table summarizes the cost and estimated fair value of debt securities classified as short-term investments based on stated maturities as of August 28, 2009 (in thousands):
  Cost  
Estimated
Fair Value
 
Due within one year
 $772,898  $775,869 
Due within two years
  317,246   320,399 
Due within three years
  241,150   243,434 
Due after three years
  76,716   79,671 
Total
 $1,408,010  $1,419,373 
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. The portion of the write-down related to credit loss would be recorded to investment gains (losses), net on our Condensed Consolidated Statements of Income for equity securities and to interest and other income, net for debt securities. Any portion of the other-than-temporary decline not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity on our Condensed Consolidated Balance Sheets.  As of August 28, 2009, we do not consider any of our investments to be other-than-temporarily impaired.
NOTE 2.3. FINANCIAL INSTRUMENTS
 
We measure certain financial assets and liabilities at fair value on a recurring basis, including cash equivalents, available-for-sale fixed income and equity securities, other equity securities and foreign currency derivatives.basis. The fair value of these financial assets and liabilities was determined using the following inputs at August 29, 2008:28, 2009 (in thousands):
 
 Fair Value Measurements at Reporting Date Using  Fair Value Measurements at Reporting Date Using 
    
Quoted Prices in
Active Markets for
Identical Assets
  
Significant
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
     
Quoted Prices in
Active Markets for
Identical Assets
  
Significant
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
 
 Total  (Level 1)  (Level 2)  (Level 3)  Total  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Current assets:            
Money market funds and overnight deposits(1)
 $939,329  $939,329  $—  $—  $1,093,201  $1,093,201  $—  $— 
Fixed income available-for-sale securities(2)
  902,996   —   902,996   —   1,424,393   —   1,424,393   — 
Equity available-for-sale securities(3)
  7,163   7,163   —   — 
Available-for-sale equity securities(3)
  4,944   4,944   —   — 
Total current assets  2,522,538   1,098,145   1,424,393   — 
Non-current assets:                
Investments of limited partnership(4)
  37,934   503   —   37,431   34,705   —   —   34,705 
Foreign currency derivatives(5)
  22,639   —   22,639   —   4,688   —   4,688   — 
Total $1,910,061  $946,995  $925,635  $37,431 
Deferred compensation plan assets(4):
                
Money market funds
  770   770   —   — 
Equity and fixed income mutual funds  7,754   —   7,754   — 
Subtotal for deferred compensation plan assets  8,524   770   7,754   — 
Total non-current assets  47,917   770   12,442   34,705 
Total assets
 $2,570,455  $1,098,915  $1,436,835  $34,705 
Liabilities:                                
Foreign currency derivatives(6)
  1,124   —   1,124   —  $729  $—  $729  $— 
Total $1,124  $—  $1,124  $— 
Total liabilities
 $729  $—  $729  $— 
10
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

     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 condensed consolidated balance sheet.
(1)Included in cash and cash equivalents on our Condensed Consolidated Balance Sheets.
 
(2)           Included in either cash and cash equivalents or short-term investments on our condensed consolidated balance sheet.
(2)Included in either cash and cash equivalents or short-term investments on our Condensed Consolidated Balance Sheets.
 
(3)           Included in short-term investments on our condensed consolidated balance sheet.
(3)Included in short-term investments on our Condensed Consolidated Balance Sheets.
 
(4)           Included in other assets on our condensed consolidated balance sheet.
(4)Included in other assets on our Condensed Consolidated Balance Sheets.
 
(5)           Included in prepaid expenses and other assets on our condensed consolidated balance sheet.
(5)Included in prepaid expenses and other current assets on our Condensed Consolidated Balance Sheets.
 
(6)
(6)Included in accrued expenses on our Condensed Consolidated Balance Sheets.
See Note 2 for further information regarding our condensed consolidated balance sheet.financial instruments.
 
Fixed income available-for-sale securities include United States (“U.S.”) treasury securities, (81%Agency or U.S. government guaranteed securities (75% of total), corporate bonds (4%(15% of total) and, obligations of foreign governments and their agencies (15%(8% of total), and obligations of multi-lateral government agencies (2% of total) at August 28, 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 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 fixed income available-for-sale securities as having Level 2 inputs. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.
 
11
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. (“Adobe Ventures”), which was $37.9 million and $30.6 million as of August 29, 2008 and November 30, 2007, respectively.are consolidated in our Condensed Consolidated Financial Statements. The levelLevel 1 investments of limited partnership relate to investments in publicly-traded companies and the levelLevel 3 investments relate toconsist of investments in privately-held companies. Our estimation ofThese investments are remeasured at fair value foreach period with any gains or losses recognized in investment gains (losses), net in our levelCondensed Consolidated Statements of Income. We estimated fair value of the Level 3 investments includes, but is not limited to, reviewing each company’sby considering available information such as pricing in recent rounds of financing, current cash position, financing needs,positions, earnings and revenue outlook,cash flow forecasts, recent operational performance management and ownership changesany other readily available market data.
A reconciliation of the beginning and competition. The changeending balances for investments of limited partnership using significant unobservable inputs (Level 3) as of August 28, 2009 and November 28, 2008 was as follows (in thousands):
Balance as of November 28, 2008
 $38,753 
Purchases and sales of investments, net
  966 
Unrealized net investment losses included in earnings
  (5,014)
Balance as of August 28, 2009
 $34,705 
We also have direct investments in this asset balance relates primarilyprivately-held companies accounted for under the cost 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 investment to investment gains includedits fair value. We estimated fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings duringand cash flow forecasts, recent operational performance and any other readily available market data. During the three and nine months ended August 29, 2008. All other activity28, 2009, we determined that certain of our cost method investments were other-than-temporarily impaired which resulted in a charge of $13.9 million, included in investment gains (losses), net in our Condensed Consolidated Statements of Income.  The fair value of cost method investments that were impaired was estimated using Level 3 inputs. We did not have any other-than-temporary impairments of our cost method investments during the quarter was insignificant both individually and in the aggregate. three months ended August 28, 2009.
See Note 46 for further information regarding our limited partnership interest in Adobe Ventures and related accounting policies.our cost method investments.
 
ForeignIn countries outside the 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 may use foreign exchange option contracts or forward contracts to hedge operational (“cash flow”) exposures resulting from changes in these foreign currency derivatives include option and forwardexchange rates. These foreign exchange contracts, primarilycarried at fair value, may have maturities between one and twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.

In accordance with SFAS 133, 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 Japanese Yenuse of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the Euro.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 on our Condensed 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 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 on our Condensed Consolidated Statements of Income at that time.

We also 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.  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 to interest and other income, net on our Condensed Consolidated Statements of Income. 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.

812
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


We mitigate concentration of risk related to foreign 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.

The aggregate fair value of derivative instruments in net asset positions as of August 28, 2009 was $4.7 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 $0.7 million of liabilities included in master netting arrangements with those same counterparties.
The fair value of derivative instruments in our Condensed Consolidated Balance Sheets as of August 28, 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
 $4,507 
Accrued
expenses
 $— 
 
Derivatives not designated as hedging instruments:
          
Foreign exchange forward contracts
Prepaid expense
and other
current assets
  181 
Accrued
expenses
   729 
Total derivatives
  $4,688   $729 

(*)           Hedging effectiveness expected to be recognized to income within the next twelve months.

 The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges on our Condensed Consolidated Statements of Income for the three and nine months ended August 28, 2009 were as follows (in thousands):

  Three Months  Nine Months 
  
Foreign
Exchange
Option
Contracts
  
Foreign
 Exchange
Forward
Contracts
  
Foreign
Exchange
Option
Contracts
  
Foreign
Exchange
Forward
Contracts
 
Derivatives in cash flow hedging relationships:            
Net gain (loss) recognized in OCI(1) 
 $(329) $—  $(14,516) $— 
Net gain (loss) reclassified from accumulated OCI into income(2) 
 $749  $—  $27,138  $— 
Net gain (loss) recognized in income(3) 
 $(3,734) $—  $(12,782) $— 
                 
Derivatives not designated as hedging relationships:                
Net gain (loss) recognized in income(4) 
 $—  $(1,650) $—  $(10,200)

(1)Net change in the fair value of the effective portion classified in other comprehensive income (“OCI”).
(2)Effective portion classified as revenue.

13
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

(3)Ineffective portion and amount excluded from effectiveness testing classified in interest and other income, net.
(4)Classified in interest and other income, net.

NOTE 4. ACQUISTIONS
On August 13, 2009, we entered into a definitive agreement related to a potential business combination. We completed this business combination subsequent to our quarter ended August 28, 2009 for cash consideration of approximately $35.3 million. This acquisition was not material to our consolidated balance sheets and results of operations. See Note 18 for further discussion of this transaction and for a discussion of the planned acquisition of Omniture, Inc. ("Omniture").

NOTE 3.5. GOODWILL AND PURCHASED AND OTHER INTANGIBLES
 
Goodwill as of August 29, 200828, 2009 and November 30, 200728, 2008 was $2.134$2.126 billion and $2.148$2.135 billion, respectively. The change includes net reductions in goodwill of $9.6 million related to deferred tax assets associated with our acquisition of Scene7 and $4.2$7.5 million related to the release of tax reservereserves associated with the acquisitionacquisitions of Accelio and Macromedia in addition to a facility lease obligation adjustment of $1.7 million related to Macromedia, offset in part by small foreign currency changes.
Certain amounts as of November 30, 2007 have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, we reclassified $55.5 million of cost and $20.5 million of accumulated amortization ($35.0 million, net) from purchased intangibles to long-term and short-term other assets associated with certain technology license arrangements.translation adjustments.
 
Purchased and other intangible assets subject to amortization as of August 28, 2009 were as follows as of August 29, 2008:(in thousands):
 
 Cost  
Accumulated
Amortization
  Net  Cost  
Accumulated
Amortization
  Net 
Purchased technology $411,408  $(316,637) $94,771  $405,830  $(375,412) $30,418 
Localization $18,342  $(6,536) $11,806  $24,441  $(16,567) $7,874 
Trademarks  130,925   (71,709)  59,216   130,925   (97,940)  32,985 
Customer contracts and relationships  197,220   (117,022)  80,198   196,617   (150,754)  45,863 
Other intangibles  800   (390)  410   800   (556)  244 
Total other intangible assets $347,287  $(195,657) $151,630  $352,783  $(265,817) $86,966 
Total purchased and other intangible assets $758,695  $(512,294) $246,401  $758,613  $(641,229) $117,384 
 
Purchased and other intangible assets subject to amortization as of November 28, 2008 were as follows as of November 30, 2007:(in thousands):
 
 Cost  
Accumulated
Amortization
  Net  Cost  
Accumulated
Amortization
  Net 
Purchased technology $409,110  $(250,721) $158,389  $411,408  $(338,608) $72,800 
Localization $45,854  $(27,676) $18,178  $23,751  $(6,156) $17,595 
Trademarks  131,225   (52,443)  78,782   130,925   (78,181)  52,744 
Customer contracts and relationships  197,220   (85,529)  111,691   198,891   (127,520)  71,371 
Other intangibles  800   (196)  604   800   (350)  450 
Total other intangible assets $375,099  $(165,844) $209,255  $354,367  $(212,207) $142,160 
Total purchased and other intangible assets $784,209  $(416,565) $367,644  $765,775  $(550,815) $214,960 
 
Amortization expense related to purchased and other intangible assets was $34.4 million and $109.7 million for the three and nine months ended August 28, 2009, respectively. Comparatively, amortization expense was $43.2 million and $140.7 million for the three and nine months ended August 29, 2008, respectively. Comparatively, amortization expense was $60.5Of these amounts, $19.4 million and $157.7$64.1 million were included in cost of sales for the three and nine months ended August 31, 2007, respectively. Of these amounts,28, 2009, respectively, and $26.2 million and $89.5 million were included in cost of sales for the three and nine months ended August 29, 2008, respectively, and $42.6 million and $104.6 million were included in cost of sales for the three and nine months August 31, 2007, respectively.
 


914
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 13 years. As of August 29, 2008,28, 2009, we expect amortization expense in future periods to be as follows:
follows (in thousands):
 
Fiscal year 
Purchased
Technology
  
Other Intangible
Assets
   
Purchased
Technology
  
Other Intangible
Assets
 
Remainder of 2008 $22,133  $21,282 
2009  56,328   67,633 
Remainder of 2009
Remainder of 2009
 $13,736  $20,133 
2010  8,244   48,611 
2010
  8,301   52,202 
2011  4,679   11,917 
2011
  4,994   12,444 
2012  3,387   1,009 
2012
  3,387   1,009 
2013
2013
  —   789 
Thereafter  —   1,178 
Thereafter
  —   389 
Total expected amortization expense $94,771  $151,630 
Total expected amortization expense
 $30,418  $86,966 

NOTE 4.6. OTHER ASSETS
 
Other assets as of August 28, 2009 and November 28, 2008 consisted of the following as of August 29, 2008 and November 30, 2007:(in thousands):
 
 2008  2007  2009  2008 
Acquired rights to use technology $93,527  $41,642  $87,806  $90,643 
Investments  70,469   52,830   61,110   76,589 
Security and other deposits  15,478   6,650   8,655   16,087 
Deferred compensation plan assets
  8,524   7,560 
Prepaid royalties  12,216   6,748   8,191   9,026 
Deferred compensation plan assets  9,209   3,145 
Restricted cash  7,364   7,367   4,089   7,361 
Prepaid land lease  3,195   3,224   3,156   3,185 
Prepaid rent  3,065   4,285   1,524   2,658 
Other  2,364   2,194   1,650   3,420 
Total other assets $216,887  $128,085  $184,705  $216,529 

Acquired rights to use technology includes $100.0 million associated with certain technology licensing arrangements entered into during the third quarter of fiscal 2008. An estimated $56.0 million of this cost is 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 nine years. Of the remaining costs, we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million 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 13 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.
Certain prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, there was a reclassification associated with certain technology licensing arrangements totaling $35.0 million, net from purchased intangibles of which $28.7 million and $4.7 million were reclassified to acquired rights to use technology and long-term prepaid royalties, respectively. The remaining amount was reclassified to short-term prepaid royalty.
Included in investments isare our indirect investments through our limited partnership interest in Adobe Ventures of approximately $34.7 million and $39.0 million as of August 28, 2009 and November 28, 2008, respectively, which is consolidated in accordance with FASB InterpretationFIN No. 46R, a revision to FASB InterpretationFIN No. 46, “Consolidation of Variable Interest Entities”.Entities, an interpretation of ARB No. 51.” The partnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. Investments alsoWe 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 condensed consolidated financial position, results of operations or cash flows. See Note 3 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 August 28, 2009 and November 28, 2008, respectively, which wereare accounted for underbased on the cost method.

10
We assess these investments for impairment in value as circumstances dictate. Table of ContentsSee Note 3 for further information regarding our cost method investments.
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)


The increase in security and other deposits relates primarily to the purchase of real property in Massachusetts. We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We will purchasepurchased the property subject toupon completion of construction of an office building shell and core, parking structure, and site improvements. The purchase price for the property will bewas $44.7 million.million and closed on June 16, 2009. We made an initial deposit of $7.0 million to bewhich 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. Closing is expected to occur in May 2009 and the remaining balance is due at such time.
 
15
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


NOTE 5. TRADE AND OTHER PAYABLES AND7. ACCRUED EXPENSES
 
TradeAccrued expenses as of August 28, 2009 and other payablesNovember 28, 2008 consisted of the following as of August 29, 2008 and November 30, 2007:(in thousands):
 
  2008  2007 
Trade payables $38,150  $41,724 
Sales and use tax and other payables  18,104   25,143 
Total trade and other payables $56,254  $66,867 
Accrued expenses consisted of the following as of August 29, 2008 and November 30, 2007:
 2008  2007  2009  2008 
Accrued compensation and benefits $173,199  $205,018  $141,814  $177,760 
Taxes payable
  7,924   21,760 
Sales and marketing allowances  23,707   21,231   22,888   28,127 
Other  159,502   157,187   176,451   172,322 
Total accrued expenses $356,408  $383,436  $349,077  $399,969 
 
Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, charitable contributions 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 6. INCOME TAXES
We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 resulted in an increase of $3.9 million to both assets and liabilities in our condensed consolidated balance sheet 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. The total amount of gross FIN 48 liabilities includes $57.7 million that relates to certain tax attributes from acquired companies, including Macromedia. These liabilities from acquired companies are not recorded on our balance sheet because they are related to positions that have not yet been claimed on our income tax returns. If the total FIN 48 gross liability for unrecognized tax benefits at December 1, 2007 were recognized in the future, the following amounts, net of an estimated $22.2 million benefit related to deducting such payments on future tax returns, would result: $99.0 million of unrecognized tax benefits would decrease the effective tax rate, $82.8 million would decrease goodwill and $14.4 million would increase additional paid-in-capital.
We have historically presented our estimated liability for unrecognized tax benefits as a current liability. FIN 48 requires 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 FIN 48 in the first quarter of fiscal 2008, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable, including accrued interest on the balance.
We have historically 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). FIN 48 requires 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). Thus, we recognized additional deferred income tax assets of $3.9 million to present the unrecognized tax benefits as gross amounts on our condensed consolidated balance sheet.

11
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)


Our policy to classify interest and penalties on unrecognized tax benefits as income tax expense did not change upon the adoption of FIN 48. 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.
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 Internal Revenue Service (“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, 2002 and 2005, respectively.
During the nine months ended August 29, 2008, the gross liability for unrecognized tax benefits significantly changed from the balance at November, 30, 2007.  In August 2008, a U.S. income tax examination covering our fiscal years 2001 through 2004 was completed.  Our accrued tax and interest related to these years was $100.0 million and was previously reported in long-term income taxes payable.  In conjunction with this resolution, we requested and received approval from the IRS to repatriate certain foreign earnings in a tax-free manner, which resulted in a reduction of our long-term deferred income tax liability of $57.8 million.  Together, these liabilities on our balance sheet decreased by $157.8 million.  Also in August 2008, we paid $80.0 million in conjunction with the aforementioned resolution, credited additional paid-in-capital for $41.3 million due to our use of certain tax attributes related to stock option deductions, including a portion of certain deferred tax assets not recorded in our financial statements pursuant to SFAS 123R, and made other individually immaterial adjustments to our tax balances totaling $15.8 million.  A net income statement tax benefit in the third quarter of fiscal 2008 of $20.7 million resulted.  All other movements in the deferred tax asset and liability accounts are the result of our normal 2008 tax provision.
The gross liability for unrecognized tax benefits at August 29, 2008 was $155.8 million, exclusive of interest and penalties. If the total FIN 48 gross liability for unrecognized tax benefits at August 29, 2008 were recognized in the future, the following amounts, net of an estimated $18.1 million benefit related to deducting such payments on future tax returns, would result: $54.7 million of unrecognized tax benefits would decrease the effective tax rate and $83.0 million would decrease goodwill.
As of August 29, 2008, 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 $14.3 million.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements.
NOTE 7.8. STOCK-BASED COMPENSATION
 
The assumptions used to value option grants restricted stock units and performance shares during the three and nine months ended August 28, 2009 and August 29, 2008 and August 31, 2007 arewere as follows:
 
 Three Months Ended  Nine Months Ended  Three Months  Nine Months 
 2008  2007  2008  2007  2009  2008  2009  2008 
Expected life (in years)  3.5 – 3.6   3.6 – 3.7   2.3 – 4.7   3.5 – 4.8   3.7 – 3.8   3.5 – 3.6   3.0 – 3.8   2.3 – 4.7 
Volatility  34 – 37%  30 – 34%  32 – 39%  30 – 34%  37 – 43%  34 – 37%  37 – 57%  32 – 39%
Risk free interest rate  2.79 – 3.50%  4.34 – 5.14%  1.70 – 3.50%  4.34 – 5.14%  1.93 – 2.24%  2.79 – 3.50%  1.16 – 2.24%  1.70 – 3.50%


12
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)


The expected term of employee stock purchase plan (“ESPP”) shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three and nine months ended August 28, 2009 and August 29, 2008 and August 31, 2007 arewere as follows:

  Three Months Ended  Nine Months Ended 
  2008  2007  2008  2007 
Expected life (in years)  0.5 – 2.0   0.5 – 2.0   0.5 – 2.0   0.5 – 2.0 
Volatility  34 – 36%  30 – 31%  30 – 36%  30 – 33%
Risk free interest rate  2.12 – 2.66%  4.87 – 4.93%  2.12 – 3.29%  4.79 – 5.11%

Effective April 1, 2007, the government of India implemented a new fringe benefit tax that applies to equity awards granted to our employees in India. We incur a fringe benefit tax liability at the time the award is exercised or released. In accordance with the laws in India, we have elected to recover, from the employee, the fringe benefit tax paid in connection with the applicable award. Recovery of the fringe benefit tax from the employee is treated as a component of the exercise price and as such, impacts the fair value of the awards and the related stock-based compensation. We have elected to use a Black-Scholes option pricing model that incorporates a binomial options pricing model to calculate the fair value of stock-based awards issued in India under amended equity award agreements. The assumptions used in the valuation of equity awards in India are the same as those used for all of our equity awards as noted above. The recovery of fringe benefit tax is recorded as stock-based compensation cost in our consolidated statements of income.
  Three Months  Nine Months 
  2009  2008  2009  2008 
Expected life (in years)
  0.5 – 2.0   0.5 – 2.0   0.5 – 2.0   0.5 – 2.0 
Volatility
  40%  34 – 36%  40 – 57%  30 – 36%
Risk free interest rate
  0.33 – 1.05%  2.12 – 2.66%  0.27 – 1.05%  2.12 – 3.29%
 
Summary of Stock Options
Option activity for the nine months ended August 28, 2009 and the fiscal year ended November 28, 2008 was as follows (in thousands):
  2009  2008 
Beginning outstanding balance
  40,704   47,742 
Granted
  4,914   5,462 
Exercised
  (4,370)  (9,983)
Cancelled
  (2,699)  (2,517)
Ending outstanding balance
  38,549   40,704 

16
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

 
Information regarding stock options outstanding at August 28, 2009 and August 29, 2008 and August 31, 2007 is summarized below.below:
 
 
Number of
Shares
(thousands)
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Remaining
Contractual
Life
(years)
  
Aggregate
Intrinsic
Value(*)
(millions)
 
2009            
Options outstanding
  38,549  $29.75   3.92  $176.9 
Options vested and expected to vest
  36,986  $29.78   3.84  $168.5 
Options exercisable
  26,573  $29.21   3.23  $127.8 
 
Number of
Shares
  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value*
(millions)
                 
2008                          
Options outstanding  42,070  $29.67 4.16 years $554.5   42,070  $29.67   4.16  $554.5 
Options vested and expected to vest  39,936  $29.29 4.07 years $541.2   39,936  $29.29   4.07  $541.2 
Options exercisable  27,252  $25.94 3.35 years $460.3   27,252  $25.94   3.35  $460.3 
             
2007             
Options outstanding  54,744  $27.59 3.93 years $830.1 
Options vested and expected to vest  51,832  $27.10 3.84 years $811.4 
Options exercisable  34,252  $22.95 3.06 years $678.1 

 
*(*)The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 28, 2009 and August 29, 2008 were $31.73 and August 31, 2007 were $42.83, and $42.75, respectively.
Summary of Employee Stock Purchase Plan Shares
The weighted average subscription date fair value of shares under the ESPP during the nine months ended August 28, 2009 and August 29, 2008 was $5.40 and $9.03, respectively. Employees purchased 3.2 million shares at an average price of $19.04 and 2.4 million shares at an average price of $30.40 for the nine months ended August 28, 2009 and August 29, 2008, respectively. The intrinsic value of shares purchased during the nine months ended August 28, 2009 and August 29, 2008 was $21.7 million and $25.0 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 Units
 
Restricted stock unit activity for the nine months ended August 29,28, 2009 and the fiscal year ended November 28, 2008 and August 31, 2007 iswas as follows:follows (in thousands):
 
 2008  2007  2009  2008 
Beginning balance  1,701   — 
Beginning outstanding balance
  4,261   1,701 
Awarded  2,823   1,458   3,333   3,177 
Released  (353)  —   (984)  (422)
Forfeited  (146)  (47)  (291)  (195)
Ending balance  4,025   1,411 
Ending outstanding balance
  6,319   4,261 


1317
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


Information regarding restricted stock units outstanding at August 28, 2009 and August 29, 2008 and August 31, 2007 is summarized below.below:
 
 
Number of
Shares
(thousands)
  
Weighted
Average
Remaining
Contractual
Life
(years)
  
Aggregate
Intrinsic
Value(*)
(millions)
 
2009         
Restricted stock units outstanding
  6,319   1.70  $200.5 
Restricted stock units vested and expected to vest
  4,978   1.52  $157.8 
 
Number of
Shares
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value*
(millions)
             
2008                   
Restricted stock units outstanding  4,025 1.91 years $172.4 
Restricted stock units expected to vest  3,083 1.69 years $132.0 
         
2007         
Restricted stock units outstanding  1,411 2.02 years $60.3 
Restricted stock units expected to vest  981 1.79 years $42.0 
Restricted stock outstanding
  4,025   1.91  $172.4 
Restricted stock units vested and expected to vest
  3,083   1.69  $132.0 

 
*(*)The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares.period. As reported by the NASDAQ Global Select Market, the market values as of August 28, 2009 and August 29, 2008 were $31.73 and August 31, 2007 were $42.83, and $42.75, respectively.
 
Summary of Performance Shares
 
Effective January 24, 2008,26, 2009, the Executive Compensation Committee adopted the 20082009 Performance Share Program (the “2008“2009 Program”). The purpose of the 20082009 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 20082009 Program is our fiscal 20082009 year. All members of our executive management and other key senior leaders are participating in the 20082009 Program. Awards granted under the 20082009 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 20082009 Program have the ability to receive up to 200%115% of the target number of shares originally granted.
 
The following table sets forth the summary of performance share activity under our 20082009 Program for the nine months ended August 29, 2008.28, 2009 (in thousands):
 
 
Shares
Granted
  
Maximum
Shares Eligible
to Receive
  
Shares
Granted
  
Maximum
Shares Eligible
to Receive
 
Beginning balance  —   — 
Beginning outstanding balance
  —   — 
Awarded  931   1,863   558   642 
Forfeited  (74)  (149)  (3)  (4)
Ending balance  857   1,714 
Ending outstanding balance
  555   638 
 
In the first quarter of fiscal 2008,2009, the Executive Compensation Committee certified the actual performance achievement of participants in the 20062008 Performance Share Program (the “2006 Program”) and the 2007 Performance Share Program (the “2007“2008 Program”). Based upon the achievement of goals outlined in the 2006 Program and 20072008 Program, participants had the ability to receive up to 150% and 200%, respectively, of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 105%124% of target or 0.3approximately 1.0 million shares for the 2006 Program and 200% of target or 0.7 million shares for the 20072008 Program. Shares awarded under the 2006 Program vested 100% and were released in the first quarter of fiscal 2008. Shares under the 20072008 Program vested 25% in the first quarter of fiscal 2008,2009, 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.
 

1418
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


The following table sets forth the summary of performance share activity under our 2007 Program,2006 through 2008 programs, based upon share awards actually achieved, for the nine months ended August 28, 2009 and the fiscal year ended November 28, 2008 (in thousands):
  2009  2008 
Beginning outstanding balance
  383   — 
Achieved
  1,022   993 
Released
  (382)  (480)
Forfeited
  (59)  (130)
Ending outstanding balance
  964   383 

Information regarding performance shares outstanding at August 28, 2009 and August 29, 2008:2008 is summarized below:
  
Number of
Shares
(thousands)
  
Weighted
Average
Remaining
Contractual
Life
(years)
  
Aggregate
Intrinsic
Value (*)
(millions)
 
2009         
Performance shares outstanding
  964   1.30  $30.6 
Performance shares vested and expected to vest
  801   1.21  $25.3 
             
2008            
Performance shares outstanding
  454   1.44  $19.4 
Performance shares vested and expected to vest
  369   1.34  $15.8 

 
(*)Shares
Shares achieved718
Released(205)
Forfeited(59)
Ending balance454The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of August 28, 2009 and August 29, 2008 were $31.73 and $42.83, respectively.
 
Compensation Costs
 
As of August 29, 2008,28, 2009, there was $301.8$225.4 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 2.72.5 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
 
19
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


Total stock-based compensation costs that have been included in our consolidated statementsCondensed Consolidated Statements of incomeIncome for the three months ended August 28, 2009 and August 29, 2008 and August 31, 2007 arewere as follows:follows (in thousands):
 
 2008  2007   2009  2008 
Income Statement Classifications 
Option Grants
and Stock
Purchase Rights *
  
Restricted
Stock and
Performance
Share
Awards *
  
Option Grants
and Stock
Purchase Rights
  
Restricted
Stock and
Performance
Share
Awards
   
Option Grants
and Stock
Purchase Rights(*)
  
Restricted
Stock and
Performance
Share
Awards(*)
  
Option Grants
and Stock
Purchase Rights(*)
  
Restricted
Stock and
Performance
Share
Awards(*)
 
Cost of revenue—services and support $1,189  $230  $1,443  $98 Cost of revenue—services and support $437  $190  $1,189  $230 
Research and development  15,612   6,377   16,664   2,230 Research and development  11,922   6,338   15,612   6,377 
Sales and marketing  10,576   5,370   10,414   1,330 Sales and marketing  9,100   4,730   10,576   5,370 
General and administrative  6,113   2,793   5,857   671 General and administrative  4,938   2,087   6,113   2,793 
Total $33,490  $14,770  $34,378  $4,329 Total  $26,397  $13,345  $33,490  $14,770 

*(*)For the three months ended August 28, 2009 and August 29, 2008, we recorded $0.1 million and $2.1 million, respectively, associated with cash recoveries of fringe benefit tax from employees in India.
 

15
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and per share data)
(Unaudited)


Total stock-based compensation costs that have been included in our consolidated statementsCondensed Consolidated Statements of incomeIncome for the nine months ended August 28, 2009 and August 29, 2008 and August 31, 2007 arewere as follows:follows (in thousands):
 
 2008  2007   2009  2008 
Income Statement Classifications 
Option Grants
and Stock
Purchase Rights *
  
Restricted
Stock and
Performance
Share
Awards *
  
Option Grants
and Stock
Purchase Rights
  
Restricted
Stock and
Performance
Share
Awards
   
Option Grants
and Stock
Purchase Rights(*)
  
Restricted
Stock and
Performance
Share
Awards(*)
  
Option Grants
and Stock
Purchase Rights(*)
  
Restricted
Stock and
Performance
Share
Awards(*)
 
Cost of revenue—services and support $2,968  $483  $4,059  $225 Cost of revenue—services and support $1,595  $527  $2,968  $483 
Research and development  43,382   16,380   44,192   5,965 Research and development  35,317   21,271   43,382   16,380 
Sales and marketing  31,701   15,558   31,071   3,954 Sales and marketing  27,681   14,565   31,701   15,558 
General and administrative  18,841   10,368   18,966   1,764 General and administrative  19,220   6,962   18,841   10,368 
Total $96,892  $42,789  $98,288  $11,908 Total  $83,813  $43,325  $96,892  $42,789 

*For the nine months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India.
(*)           For the nine months ended August 28, 2009 and August 29, 2008, we recorded $0.9 million and $2.1 million, respectively, associated with cash recoveries of fringe benefit tax from employees in India.

NOTE 8.9. EMPLOYEE BENEFIT PLAN
 
Deferred Compensation Plan
 
As of August 29, 200828, 2009 and November 30, 2007,28, 2008, the invested amounts under our Deferred Compensation Plan totaled $9.2$8.5 million and $3.1$7.6 million, respectively, and are recorded as long-term other assets on our balance sheet.Condensed Consolidated Balance Sheets. As of August 29, 200828, 2009 and November 30, 2007,28, 2008, we recorded $9.2$8.5 million and $3.1$7.6 million, respectively, as a long-term liability to recognize undistributed deferred compensation due to employees.
 
NOTE 9.10. RESTRUCTURING AND OTHER CHARGES
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 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. Charges associated with these ongoing termination benefits were recorded in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” As of November 28, 2008, $0.4 million was paid.
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ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)


In the first quarter of 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.  In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” 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 charges of $3.4 million for termination benefits for the elimination of approximately 43 of the remaining 100 full-time positions expected to be terminated.
In the second quarter of fiscal 2009, we accrued an additional $3.0 million under this program for termination benefits related to the elimination of approximately 48 of the remaining 57 full-time positions expected to be terminated.
In the third quarter of fiscal 2009, we accrued an additional $0.4 million under this program for termination benefits related to the elimination of substantially all of the remaining full-time positions expected to be terminated.
The following table sets forth a summary of Adobe restructuring activities during the nine months ended August 28, 2009 (in thousands):
  
November 28,
2008
  Costs Incurred  
Cash
Payments
  Other Adjustments  
August 28,
2009
  
Total Costs
Incurred to
Date
  
Total
Costs
Expected
to be
Incurred
 
Termination benefits
 $28,759  $6,722  $(34,042) $174  $1,613  $36,102  $36,121 
Cost of closing redundant facilities  —    8,514   (4,488)  613   4,639   9,127   9,601 
Total
 $28,759  $15,236  $(38,530) $787  $6,252  $45,229  $45,722 

Accrued restructuring charges of approximately $6.3 million at August 28, 2009 include $3.3 million recorded in accrued restructuring, current and $3.0 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets. We expect to pay substantially all of the accrued termination benefits during the remainder of fiscal 2009. We expect to pay facilities-related liabilities through fiscal 2013.
Included in the other adjustments column are foreign currency translation adjustments of $0.5 million and small changes to previous estimates.
 
Macromedia Merger 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 cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia.  Costs for termination benefits and contract 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 the nine months ended August 29, 2008:28, 2009 (in thousands):
 
  
November 28,
2008
  
Cash
Payments
  Other Adjustments  
August 28,
2009
  
Total Costs
Incurred to
Date
  
Total
Costs
Expected
to be
Incurred
 
Cost of closing redundant facilities $12,168  $(3,986) $(1,255) $6,927  $41,060  $41,060 
Other
  977   (879)  (80)  18   2,277   2,277 
Total
 $13,145  $(4,865) $(1,335) $6,945  $43,337  $43,337 
  November 30, 2007  
Cash
Payments
  Adjustments  
August 29,
2008
  
Total Costs
Incurred To
Date
  
Total
Costs
Expected
to be
Incurred
 
Termination benefits $—  $—  $—  $—  $26,976  $26,976 
Cost of closing redundant facilities  16,283   (5,287)  2,969   13,965   28,248   42,213 
Cost of contract termination  —   —   —   —   3,238   3,238 
Other  1,435   (131)  (311)  993   1,363   2,356 
Total $17,718  $(5,418) $2,658  $14,958  $59,825  $74,783 
Included in the adjustments column is a change to previous estimates of sublease income of $2.6 million associated with closing redundant facilities as well as the effect of foreign currency changes. The change to previous estimates of sublease income was included in net income for the nine months ended August 29, 2008. Accrued restructuring charges of $15.0 million at August 29, 2008 included $6.9 million recorded in accrued restructuring, current and $8.1 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 fiscal 2011. At November 30, 2007, accrued restructuring charges

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ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


 
Accrued restructuring charges of $17.7approximately $6.9 million included $3.7at August 28, 2009 related to facilities obligations include $5.0 million recorded in accrued restructuring, current and $14.0$1.9 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. We expect to pay these liabilities through fiscal 2012. At November 28, 2008, accrued restructuring charges of $13.1 million related to long-term facilities obligations included $6.9 million recorded in accrued restructuring, current and $6.2 million recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets.
 
Included in the other adjustments column is a change to previous estimates of $1.3 million and small foreign currency translation adjustments. Included in the change in previous estimates of $1.3 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 the nine months ended August 28, 2009, only $0.4 million represents adjustments recorded as an increase to restructuring charges.
NOTE 10.11.  STOCKHOLDERS’ EQUITY

Stock Repurchase 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 also enter into structured repurchases with third parties.third-parties.
 
During the nine months ended August 29, 200828, 2009 and August 31, 2007,29, 2008, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $325.0$350.0 million and $600.0$325.0 million, 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.
 
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 nine months ended August 28, 2009, we repurchased approximately 9.9 million shares at an average price of $25.31 through structured repurchase agreements, which included prepayments from fiscal 2008 and 2009. During the nine months ended August 29, 2008, we repurchased 19.0 million shares at an average price of $37.12 through structured repurchase agreements, which included prepayments from fiscal 2007.  During the nine months ended August 31, 2007, we repurchased 15.4 million shares at an average price of $39.23 through structured repurchase agreements which included prepayments from fiscal 2006.
During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.
 
As of August 29, 200828, 2009 and November 30, 2007, the28, 2008, prepayments were classified as treasury stock on our balance sheetCondensed Consolidated Balance Sheets at the payment date, though only shares physically delivered to us by August 29, 2008 and November 30, 2007the financial statement date are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements asAs of August 28, 2009 and August 29, 2008, under this program expired on or before September 19, 2008. As of August 29, 2008 and August 31, 2007, approximately $41.0$233.9 million and $200.0$41.0 million, respectively, of up-front payments remained under the agreements.
Subsequent to August 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $200.0 million. This amount will be classified as treasury stock on our balance sheet.
 
Stock Repurchase Program II
 
Under this stock repurchase program, we had authorization to repurchase 50.0 million shares of our common 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 the nine months ended August 29, 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under thesethrough structured share repurchase agreements at an average price of $37.15. As of August 31, 2007, we had provided prepayments of $850.0 million and repurchased 12.9 million shares through structured share repurchase agreements at an average price of $39.94. Approximately $333.4 million of up-front payments remained as of August 31, 2007.29, 2008, there

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ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


were no up-front payments remaining under these agreements. During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.
 
NOTE 11.12.  COMPREHENSIVE INCOME
 
The following table sets forth the componentsactivity for each component of other comprehensive income, net of related taxes (income tax effects were insignificant for all periods presented), for the three and nine months ended August 28, 2009 and August 29, 2008 and August 31, 2007:(in thousands):
 
  Three Months  Nine Months 
  2008  2007  2008  2007 
Net income $191,608  $205,243  $625,897  $501,599 
Other comprehensive income (loss):                
Change in unrealized gain (loss) on available-for-sale securities, net of taxes  (1,998)  700   (11,001)  5,568 
Currency translation adjustments  (6,358)  21   (4,284)  1,746 
Net gain (loss) in derivative instruments, net of taxes  10,494   (3,776)  10,776   42 
Other comprehensive income (loss)  2,138   (3,055)  (4,509)  7,356 
Total comprehensive income, net of taxes $193,746  $202,188  $621,388  $508,955 
  Three Months  Nine Months 
  2009  2008  2009  2008 
Net income
 $136,045  $191,608  $418,551  $625,897 
Other comprehensive income (loss):                
Unrealized gains (losses) on available-for-sale securities  278   (1,954)  1,856   (11,158)
Reclassification adjustment for (gains) losses on available-for-sale securities recognized during the period  (2,449)  (44)  (5,026)  157 
Unrealized (losses) gains on derivative instruments  (329)  10,494   (14,516)  10,776 
Reclassification adjustment for gains on derivative instruments recognized during the period  (749)  —   (27,138)  — 
Foreign currency translation adjustments
  (2,333)  (6,358)  9,330   (4,284)
Other comprehensive (loss) income
  (5,582)  2,138   (35,494)  (4,509)
Total other comprehensive income, net of taxes
 $130,463  $193,746  $383,057  $621,388 
 
The following table sets forth the components of accumulated other comprehensive income, net of related taxes, as of August 28, 2009 and November 28, 2008 (in thousands):
  2009  2008 
Net unrealized gains on available-for-sale securities:      
Unrealized gains on available-for-sale securities
 $12,844  $16,062 
Unrealized losses on available-for-sale securities
  (107)  (155)
Total net unrealized gains on available-for-sale securities
  12,737   15,907 
Net unrealized gains on derivative instruments
  96   41,750 
Cumulative foreign currency translation adjustments
  8,895   (435)
Total accumulated other comprehensive income, net of taxes
 $21,728  $57,222 
NOTE 12.13.  NET INCOME PER SHARE
 
The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended August 28, 2009 and August 29, 2008 and August 31, 2007:(in thousands, except per share data):
 
 Three Months  Nine Months  Three Months  Nine Months 
 2008  2007  2008  2007  2009  2008  2009  2008 
Net income $191,608  $205,243  $625,897  $501,599  $136,045  $191,608  $418,551  $625,897 
Shares used to compute basic net income per share  531,060   583,670   542,624   587,141   525,911   531,060   528,015   542,624 
Dilutive potential common shares:                                
Unvested restricted stock and performance share awards  1,063   11   991   13   1,940   1,063   1,696   991 
Stock options  9,188   13,653   9,124   15,109   3,958   9,188   3,135   9,124 
Shares used to compute diluted net income per share  541,311   597,334   552,739   602,263   531,809   541,311   532,846   552,739 
Basic net income per share $0.36  $0.35  $1.15  $0.85  $0.26  $0.36  $0.79  $1.15 
Diluted net income per share $0.35  $0.34  $1.13  $0.83  $0.26  $0.35  $0.79  $1.13 

23
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

For the three and nine months ended August 28, 2009, options to purchase approximately 24.5 million and 30.6 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $30.40 and $24.99, respectively, were not included in the calculation because the effect would have been anti-dilutive. Comparatively, for the three and nine months ended August 29, 2008, options to purchase approximately 14.4 million and 15.4 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $42.06 and $39.21, respectively, were not included in the calculation because the effect would have been anti-dilutive. Comparatively, for the three and nine months ended August 31, 2007, options to purchase approximately 11.9 million and 11.0 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $41.26 and $40.93, respectively, were not included in the calculation because the effect would have been anti-dilutive.
 
NOTE 13.14.  COMMITMENTS AND CONTINGENCIES
 
Lease Commitments
 
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 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 our election. In June 2009, we submitted notice to the lessor that we intended to exercise our option to renew this agreement for an additional five years effective August 2009.  As stated in the original 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 reduce the number of covenants. As defined in the lease agreement, the standby letter of credit primarily represents the lease investment balance equity which is callable in the event of default.  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
18
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 sheet.Condensed 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.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 any time 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 August 29, 2008,28, 2009, 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 SFAS No. 13, “Accounting for Leases”,Leases,” and, as such, the buildings and the related obligations are not included on our consolidated balance sheet.Condensed Consolidated Balance Sheets. 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, 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 residual value guarantee amount.
 
Contractual Commitments
As discussed in Note 4, during the third quarter of fiscal 2008, we entered into an agreement to license certain technology. This agreement also provides us the ability to acquire rights to intellectual property in the future. Minimum fees associated with this arrangement range between approximately $1.0 million and $1.5 million per year through May 2028 for minimum fees in the aggregate, of approximately $25.0 million.
Guarantees
 
The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under FIN 45, 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 sheet.Condensed Consolidated Balance Sheets. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the 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 will be amortized to the income statement over the life of the leases. As of August 29, 200828, 2009 and November 30, 2007,28, 2008, the unamortized portion of the fair value of the residual value guarantees, for both leases, remaining in other long-term liabilities and prepaid rent was $3.0$1.5 million and $4.2$2.6 million, respectively.

24
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)
 
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.
 
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 directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited;
19
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 interest 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 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.
 
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 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 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, 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. The plaintiff in the Lodhia Lawsuit also filed a motion for preliminary injunction, expedited discovery and expedited proceedings. We have not yet responded to the complaints, but intend to 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 laws. We believe we have valid defenses with
25
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

respect to such counter-claims; however, it is possible that our condensed 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. In accordance with 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, weWe believe that we have valid defenses with respect to the legal matters pending against Adobe. ItAdobe; however, litigation is inherently unpredictable and it is possible nevertheless, that our condensed consolidated financial 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 14.15.  CREDIT AGREEMENT
 
In August 2007, we entered into an Amendment to our Credit Agreement dated February 2007 (the “Amendment”), which 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 the 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 commitments, for a maximum aggregate facility of $1.5 billion.
 
In February 2008, we entered into a 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 this date if no additional extensions have been requested and granted. All other terms and conditions remain the same.
 
The facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio. At the Company’s 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. During the nine months ended August 29, 2008, we borrowed $450.0 million and made repayments of $100.0 million under this facility. As of both August 29, 200828, 2009 and November 30, 2007,28, 2008, the amount outstanding under the credit facility was $350.0 million, and zero, respectively, which is included in long-term liabilities on our condensed consolidated balance sheet.Condensed Consolidated Balance Sheets. As of August 29, 2008,28, 2009, we were in compliance with all of the covenants. Subsequent to August 28, 2009, we borrowed an additional $650.0 million under the credit facility. See Note 18 for further discussion of this transaction. The carrying value of the outstanding liability approximates fair value.
 

2026
ADOBE SYSTEMS INCORPORATED
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 
(In thousands, except share and per share data)
(Unaudited)


NOTE 15.16.  NON-OPERATING INCOME (EXPENSE)
 
Non-operating income (expense) for the three and nine months ended August 28, 2009 and August 29, 2008 and August 31, 2007 includesincluded the following:following (in thousands):
 
 Three Months  Nine Months  Three Months  Nine Months 
 2008  2007  2008  2007 2009  2008  2009  2008 
Interest and other income, net:                       
Interest income $14,407  $22,780  $45,110  $71,268  $7,616  $14,407  $28,655  $45,110 
Foreign exchange gains (losses)  (5,967)  99   (11,901)  (4,172)
Fixed income investment gains (losses)  44   (249)  (156)  (2,636)
Other  854   103   1,725   1,406 
Foreign exchange losses
  (3,545)  (5,967)  (9,621)  (11,901)
Realized gains on fixed income investment
  2,449   85   5,027   1,184 
Realized losses on fixed income investment
  —   (41)  (1)  (1,340)
Other, net
  147   854   693   1,725 
Interest and other income, net $9,338  $22,733  $34,778  $65,866  $6,667  $9,338  $24,753  $34,778 
Interest expense $(2,390) $(69) $(8,027) $(175) $(460) $(2,390) $(1,872) $(8,027)
Investment gains (losses), net:                               
Realized investment gains $2,861  $198  $18,298  $9,308  $—  $2,861  $52  $18,298 
Unrealized investment gains  2,882   —   7,840   5,091   2,019   2,882   3,396   7,840 
Realized investment losses  (353)  (624)  (989)  (1,784)  (1,362)  (353)  (3,347)  (989)
Unrealized investment losses  (3,293)  (268)  (4,814)  (3,546)  (50)  (3,293)  (18,545)  (4,814)
Investment gains (losses), net $2,097  $(694) $20,335  $9,069  $607  $2,097  $(18,444) $20,335 
Total non-operating income, net $9,045  $21,970  $47,086  $74,760 
Total non-operating income (expense), net
 $6,814  $9,045  $4,437  $47,086 

NOTE 17.  SEGMENTS
 
NOTE 16.  INDUSTRY SEGMENTS
We have the following reportable segments: Creative Solutions, Knowledge Worker, Solutions, Enterprise, Solutions, Mobile and Device Solutions, Platform and Print and Publishing. 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. 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 Acrobat Connect and our Acrobat family of products. Our Enterprise Solutions segment provides server-based enterprise interaction solutions that automate people-centric processes and contains revenue generated by our LiveCycle line of products. The Mobile and Device Solutions segment provides solutions that deliver 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. The Platform segment providesincludes client and developer solutions and technologies, includingsuch as Adobe Flash Player, Adobe Flash Lite, Adobe AIR, Adobe Flex and Adobe Flex Builder, which are used to build rich application experiences.and also encompasses products and technologies created and managed in other Adobe segments. Finally, the Print and Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and original equipment manufacturer (“OEM”) printing businesses.
 
Effective in the first quarter of fiscal 2008,2009, our former Mobile and Devices Solutions segment, was integrated into our Platform business unit to better align our engineering and marketing efforts we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment (formerly “Enterprise and Developer Solutions”) to form our new Business Productivity Solutions business unit. However, underis now reported as part of the requirements of SFAS No. 131, (“SFAS 131”), “Disclosures about Segments of an Enterprise and Related Information”, Knowledge Worker Solutions and Enterprise Solutions are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The priorPrior year information in the table below has also been updatedreclassified to reflect this product movement.

21
ADOBE SYSTEMS INCORPORATEDthese business units.
 
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.
 
(In thousands, except share and per share data)
(Unaudited)


Our chief operating decision maker reviews revenue and gross margin information for each of our operatingreportable 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 operatingreportable segments.
 
  
Creative
Solutions
  
Knowledge
Worker
Solutions
  
Enterprise
Solutions
  
Mobile and
Device
Solutions
  Platform  
Print
Publishing
  Total 
Three months ended August 29, 2008                     
Revenue $493,615  $217,988  $65,491  $27,495  $31,582  $51,086  $887,257 
Cost of revenue  53,716   15,762   20,727   6,744   7,393   6,509   110,851 
Gross profit $439,899  $202,226  $44,764  $20,751  $24,189  $44,577  $776,406 
Gross profit as a percentage of revenue  89%  93%  68%  75%  77%  87%  88%
Three months ended August 31, 2007                            
Revenue $545,453  $176,764  $50,628  $12,983  $18,693  $47,165  $851,686 
Cost of revenue  40,114   15,969   18,238   9,521   3,240   5,539   92,621 
Gross profit $505,339  $160,795  $32,390  $3,462  $15,453  $41,626  $759,065 
Gross profit as a percentage of revenue  93%  91%  64%  27%  83%  88%  89%
27
ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 (Unaudited)

  
Creative
Solutions
  
Knowledge
Worker
Solutions
  
Enterprise
Solutions
  
Mobile and
Device
Solutions
  Platform  
Print
Publishing
  Total 
Nine months ended August 29, 2008                     
Revenue $1,564,335  $611,925  $174,011  $64,919  $90,117  $159,281  $2,664,588 
Cost of revenue  124,024   39,476   56,308   19,525   15,821   21,038   276,192 
Gross profit $1,440,311  $572,449  $117,703  $45,394  $74,296  $138,243  $2,388,396 
Gross profit as a percentage of revenue  92%  94%  68%  70%  82%  87%  90%
Nine months ended August 31, 2007                            
Revenue $1,328,463  $536,382  $137,044  $38,999  $53,359  $152,423  $2,246,670 
Cost of revenue  103,023   47,473   53,237   23,206   9,846   19,313   256,098 
Gross profit $1,225,440  $488,909  $83,807  $15,793  $43,513  $133,110  $1,990,572 
Gross profit as a percentage of revenue  92%  91%  61%  40%  82%  87%  89%
 
(in thousands) 
Creative
Solutions
  
Knowledge
Worker
  Enterprise  
Platform(*)
  
Print and
Publishing
  Total 
Three months ended August 28, 2009                  
Revenue
 $400,360  $154,517  $55,488  $44,935  $42,207  $697,507 
Cost of revenue
  34,903   9,870   10,957   4,946   4,371   65,047 
Gross profit
 $365,457  $144,647  $44,531  $39,989  $37,836  $632,460 
Gross profit as a percentage of revenue  91%  94%  80%  89%  90%  91%
                         
Three months ended August 29, 2008                        
Revenue
 $493,615  $217,988  $65,491  $59,077  $51,086  $887,257 
Cost of revenue
  53,716   15,762   20,727   14,137   6,509   110,851 
Gross profit
 $439,899  $202,226  $44,764  $44,940  $44,577  $776,406 
Gross profit as a percentage of revenue  89%  93%  68%  76%  87%  88%

(*)           Platform revenue includes revenue related to our Mobile client products of $8.4 million and $27.5 million for the three months ended August 28, 2009 and August 29, 2008, respectively, or 19% and 47% of Platform revenues, respectively.

(in thousands) 
Creative
Solutions
  
Knowledge
Worker
  Enterprise  
Platform(*)
  
Print and
Publishing
  Total 
Nine months ended August 28, 2009                  
Revenue
 $1,272,837  $473,670  $173,039  $134,053  $134,971  $2,188,570 
Cost of revenue
  117,225   30,088   36,175   16,420   14,500   214,408 
Gross profit
 $1,155,612  $443,582  $136,864  $117,633  $120,471  $1,974,162 
Gross profit as a percentage of revenue  91%  94%  79%  88%  89%  90%
                         
Nine months ended August 29, 2008                        
Revenue
 $1,564,334  $611,925  $174,011  $155,037  $159,281  $2,664,588 
Cost of revenue
  124,024   39,475   56,308   35,347   21,038   276,192 
Gross profit
 $1,440,310  $572,450  $117,703  $119,690  $138,243  $2,388,396 
Gross profit as a percentage of revenue  92%  94%  68%  77%  87%  90%

(*)Platform revenue includes revenue related to our Mobile client products of $42.9 million and $64.9 million for the nine months ended August 28, 2009 and August 29, 2008, respectively, or 32% and 42% of Platform revenues, respectively.
NOTE 17.18.  SUBSEQUENT EVENTS
Stock Repurchase Programs
 
Subsequent to August 29, 2008, as part28, 2009, we completed a business combination for cash consideration of Stock Repurchase Program I,approximately $35.3 million. This acquisition was not material to our consolidated balance sheets and results of operations. See Note 4 for further discussion of this transaction.
In September 2009, we entered into a definitive agreement with Omniture under which we expect to acquire Omniture for approximately $1.8 billion. Under the terms of the agreement, we have commenced a tender offer to acquire all of the outstanding common stock of Omniture for $21.50 per share in cash.  Omniture is an industry leader in Web analytics and online business optimization based in Orem, Utah. The transaction is subject to customary regulatory approvals and closing conditions and is expected to close in the fourth quarter of our fiscal 2009. Following the closing, we intend to integrate Omniture as a new reportable segment for financial reporting purposes.
Subsequent to August 28, 2009, we borrowed an additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments$650.0 million under our credit facility to be used to fund a portion of $200.0 million. This amount will be classified as treasury stock on our balance sheet.pending acquisition of Omniture. See Note 1015 for further discussion of our stock repurchase programs.credit facility.
 

 


ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion (unaudited and presented in millions, except share and per share amounts) should be read in conjunction with the condensed consolidated financial statementsCondensed Consolidated Financial Statements and notesNotes thereto.
 
In addition to historical information, this Quarterly Report on Form 10-Q 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 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 entitled “Risk Factors” in Part II, Item 1A.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,Securities and Exchange Commission (the “SEC”), including the Annual Report on Form 10-K for fiscal 2007 and the other Quarterly Reports on Form 10-Q filed by us in fiscal 2008. When used in this report, the words “expects”, “could”, “would”, “may”, “anticipates”, “intends”, “plans”, “believes”, “seeks”,  “targets”, “estimates”,“expects,” “could,” “would,” “may,” “anticipates,” “intends,” “plans,” “believes,” “seeks,”  “targets,” “estimates,” “looks for”,for,” “looks 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 Quarterly Report on Form 10-Q. 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.
 
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 and mobile software and services used by creative professionals, designers, knowledge workers, high-end consumers, OEMoriginal equipment manufacturers (“OEM”) partners, developers and enterprises for creating, managing, delivering 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 Web site 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, the Middle East and Africa (“EMEA”) and Asia. Our software runs on personal computers with Microsoft Windows, Apple OS, Linux, UNIX and various non-PC platforms, depending on the product.
 
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 site 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 site at www.sec.gov.www.sec.gov.
PENDING ACQUISITION
In September 2009, we entered into a definitive agreement with Omniture, Inc. ("Omniture") under which we expect to acquire Omniture for approximately $1.8 billion. Under the terms of the agreement, we have commenced a tender offer to acquire all of the outstanding common stock of Omniture for $21.50 per share in cash. Omniture is an industry leader in Web analytics and online business optimization based in Orem, Utah. The transaction is subject to customary regulatory approvals and closing conditions and is expected to close in the fourth quarter of our fiscal 2009. Following the closing, we intend to integrate Omniture as a new reportable segment for financial reporting purposes. We expect the acquisition to have a significant impact on our consolidated financial position, results of operations and cash flows. The discussions in this Quarterly Report on Form 10-Q relate to Adobe as a standalone entity and do not reflect the impact of the acquisition.
 
OPERATIONS OVERVIEW
 
Effective in the first quarter of fiscal 2008,2009, our former Mobile and Devices Solutions segment, which was integrated into our Platform business unit to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment to form our new Business Productivity Solutions business unit. However, underis now reported as part of the requirements of SFAS 131, Knowledge Worker Solutions and Enterprise Solutions are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The priorPrior year information has been updated to reflect this product movement.the integration of these business units.
 
During the third quarter of fiscal 2008, we2009, our worldwide business continued to focus on driving revenue growth and increasing market sharebe impacted by the generally weak macro-economic environment. Although we believe our business in the United States (“U.S.”) has stabilized since our first fiscal quarter of this year, overall end-user demand for most of our products, through the continued deliveryparticularly our Adobe Creative Suite family of comprehensive softwareproducts and technology solutions that meet the evolving needs of our customers.
In our Knowledge Worker Solutions segment, we achieved a fourth consecutive quarter of record revenue with ourAdobe Acrobat family of products, in the third quarter ofremains weaker than comparable periods during fiscal 2008. Helping driveDespite this achievement was the successful launch of version 9 ofimpact on our Acrobat family of products in major languages across the world.
In our Enterprise Solutions segment, we also achieved recordoverall revenue and 29% year-over-year growth asachievement, we continued to focus on delivering innovative productsproactively control our costs to deliver earnings per share and solutions for our enterprise customers.profit margin results within the target ranges we publicly provided at the outset of the quarter.
 
In our Creative Solutions segment, revenue declined year-over-year duefor our CS4 family of products continues to fall behind the revenue achieved for the equivalent CS3 products for the comparable period of time. We attribute this weakness to the timing ofeconomic conditions affecting the release of new product versions.  In the third quarter of fiscal 2007, we completed the release of many new versions of our Creative Suite 3 (“CS3”)


family of products.  In the third quarter of fiscal 2008, we began preparing for the next launchbusiness of our creative professional customers. Based on economic predictions and market trends such as marketing and ad spending, we do not expect the market environment for creative products including the pre-release of newer versions of some of these products.  We achieved solid results with our hobbyist
products, Photoshop Elements and Premiere Elements, and we also had strong results with our Scene7 businessto improve materially in the near term.
Our Knowledge Worker segment also continued to be affected by a slow-down in demand, resulting in a year-over-year revenue decline. We attribute this weakness to reduced corporate spending due to the economy. We do not expect the market environment to improve materially in the near term.
In our Enterprise segment, although third quarter fiscal 2009 revenue grew sequentially from the revenue achieved in the second quarter of fiscal 2008.2009, our revenue declined significantly on a year-over-year basis. We attribute this year-over-year decline to the macro impact from the economy which has resulted in reduced spending by our enterprise customers.
 
Our Mobile and Device SolutionsPlatform segment achieved record revenue in the third quarter of fiscal 2008grew sequentially but declined on a year-over-year basis primarily due to the success we have had targetinglower revenue from licensing of our Flash Lite client technologies by mobile operators, handset manufacturersOEM and consumer electronic device manufactures with our Flash Lite and Flash Cast technologies.  Onmanufacturers. We have stated we expect the May 1, 2008 we announcedannouncement of the Open Screen Project.  The project aimsProject to enable a consistent runtime environment that will remove barrierssubstantially reduce our mobile and device revenue this fiscal year due to the removal of licensing fees for developers and designers as they publish content and applications across desktops and consumer devices, including phones, mobile internet devices (“MIDs”) and set top boxes.  As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols.  We will also be removing the license feesOpen Screen Project members on the next major releases of our Adobe Flash Platform technologies. Partially offsetting this revenue decline within our Platform segment is the build out of OEM relationships with companies in which we offer their applications as part of the download of our client technologies such as Adobe Reader, Adobe Flash Player and Adobe AIR for devices.  Accordingly, we expect revenue from Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as well as to continue to decrease following the next major release of these products scheduled for fiscal 2009.  We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, hosted services and applications.Shockwave Player.
 
Our Platform business performed strongly, resultingProduct revenues reported in significant year-over-year revenue growth and our Print and Publishing business segment were also achieved modest year-over-year revenue growth.affected by end-user demand weakness because of economic conditions. We expect end-user demand weakness to continue in the near term.
 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
 
In preparing our condensed consolidated financial statementsCondensed Consolidated Financial Statements in accordance with GAAPaccounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that affect the reported amounts 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. 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, goodwill impairment and income taxes have the greatest potential impact on our condensed consolidated financial statements.Condensed 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. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.
 
With the exception of our adoption of FIN 48, thereThere have been no other significant changes in our critical accounting policies and estimates during the nine months ended August 29, 200828, 2009 as compared to the critical accounting policies and estimates disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007.28, 2008.
 
RESULTS OF OPERATIONS
 
Revenue for the Three and Nine Months Ended August 28, 2009 and August 29, 2008 and August 31, 2007(dollars in millions)
 
 Three Months  Percent  Nine Months  Percent  Three Months  Percent  Nine Months  Percent 
 2008  2007  Change  2008  2007  Change  2009  2008  Change  2009  2008  Change 
Product $838.9  $813.4   3% $2,532.1  $2,147.2   18% $649.9  $838.9   (23)% $2,052.1  $2,532.1   (19)%
Percentage of total revenue  95%  96%      95%  96%      93%  95%      94%  95%    
Services and support  48.4   38.3   26%  132.5   99.5   33%  47.6   48.4   (2)%  136.5   132.5   3%
Percentage of total revenue  5%  4%      5%  4%      7%  5%      6%  5%    
Total revenue $887.3  $851.7   4% $2,664.6  $2,246.7   19% $697.5  $887.3   (21)% $2,188.6  $2,664.6   (18)%

30
 
As described in Note 1617 of our Notes to Condensed Consolidated Financial Statements, we have the following segments: Creative Solutions, Knowledge Worker, Solutions, Enterprise, Solutions, Mobile and Device Solutions, Platform and Print Publishing products.and Publishing.
 

24

Our services and support revenue is comprised of consulting, training, and maintenance and support, primarily related to the licensing of our enterprise, developer and platform products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. 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.
 
Segment Information (dollars in millions)
 
 Three Months  Percent  Nine Months  Percent  Three Months  Percent  Nine Months  Percent 
 2008  2007  Change  2008  2007  Change  2009  2008  Change  2009  2008  Change 
Creative Solutions $493.6  $545.5   (10)% $1,564.3  $1,328.5   18% $400.4  $493.6   (19)% $1,272.8  $1,564.3   (19)%
Percentage of total revenue  56%  64%      59%  59%      57%  56%      58%  59%    
Knowledge Worker Solutions  218.0   176.8   23%  611.9   536.4   14%
Knowledge Worker
  154.5   218.0   (29)%  473.7   612.0   (23)%
Percentage of total revenue  25%  21%      23%  24%      22%  25%      22%  23%    
Enterprise Solutions  65.5   50.6   29%  174.1   137.1   27%
Percentage of total revenue  7%  6%      7%  6%    
Mobile and Device Solutions  27.5   13.0   112%  64.9   39.0   66%
Enterprise
  55.5   65.5   (15)%  173.0   174.0   (1)%
Percentage of total revenue  3%  1%      2%  2%      8%  7%      8%  7%    
Platform  31.6   18.7   69%  90.1   53.4   69%  44.9   59.1   (24)%  134.1   155.0   (13)%
Percentage of total revenue  3%  2%      3%  2%      7%  7%      6%  5%    
Print Publishing  51.1   47.1   8%  159.3   152.3   5%
Print and Publishing
  42.2   51.1   (17)%  135.0   159.3   (15)%
Percentage of total revenue  6%  6%      6%  7%      6%  5%      6%  6%    
Total revenue $887.3  $851.7   4% $2,664.6  $2,246.7   19% $697.5  $887.3   (21)% $2,188.6  $2,664.6   (18)%

Revenue from Creative Solutions decreased $51.9 million during the three months ended August 29, 2008 as compared to the three months ended August 31, 2007. This decrease was driven largely by a 15% decline in Creative Suites related revenue, offset in part by an increase of approximately 10% in Photoshop revenue. Revenue from Creative Solutions increased $235.8 million during the nine months ended August 29, 2008 as compared to the nine months ended August 31, 2007.  This increase resulted from a 15% increase in Creative Suites revenue and a 23% increase in Photoshop revenue.
The year-over-year decrease in Creative Solutions revenue in the third quarter of fiscal 2008 was due primarily to the timing of the release of new product versions.  The year-over-year increase in Creative Solutions revenue during the first three quarters of fiscal 2008 was due to an increase in certain unit average selling prices offset by a slight decrease in the number of units sold as compared to the first three quarters of fiscal 2007.
Revenue from Knowledge Worker Solutions increased $41.2$93.2 million and $75.5$291.5 million during the three and nine months ended August 28, 2009, respectively, as compared to the three and nine months ended August 29, 2008. This decrease during the three and nine months ended August 28, 2009 as compared to the three and nine months ended August 29, 2008 was driven largely by a 15% and 16% decline in Creative Suites related revenue and a decline of 28% and 27% in Photoshop point product revenue, respectively. Also contributing to the decrease during the three and nine months ended August 28, 2009 as compared to the three and nine months ended August 29, 2008 was an overall decline in the number of units licensed. Average unit selling prices have remained relatively consistent.

Revenue from Knowledge Worker decreased $63.5 million and $138.3 million during the three and nine months ended August 28, 2009, respectively, as compared to the three and nine months ended August 29, 2008, primarily due to a decrease in revenue from our Acrobat family of products. We attribute the decline in revenue during the three and nine months ended August 28, 2009 compared to the three and nine months ended August 29, 2008 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 Enterprise decreased $10.0 million during the three months ended August 28, 2009, as compared to the three months ended August 29, 2008. Revenue from Enterprise was relatively consistent during the nine months ended August 28, 2009, as compared to the nine months ended August 29, 2008. The decrease in Enterprise revenue during the three months ended August 28, 2009, as compared to the three months ended August 29, 2008 was primarily due to the economy’s impact on corporate spending in the markets we target with our LiveCycle product line.
Revenue from Platform decreased $14.2 million and $20.9 million during the three and nine months ended August 28, 2009, respectively, compared to the three and nine months ended August 31, 2007,29, 2008. The decrease was primarily due to the successful launch oflower mobile revenue from OEM partners who license our Acrobat 9 family of products in the third quarter of fiscal 2008.  Additionally, revenue increased due to an increase in volume licensing by enterprise customers as well as increases in certain unit average selling prices and in the number of units sold for the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007.Flash Lite product.
 
Revenue from Enterprise Solutions increased $14.9Print and Publishing decreased $8.9 million and $37.0$24.3 million during the three and nine months ended August 29, 2008,28, 2009, respectively, compared to the three and nine months ended August 31, 2007.29, 2008. The increase was primarily due to a larger number of enterprise solution transactions at a higher average transaction size during both the three and nine months ended August 29, 2008 compared with the corresponding periods is in the prior fiscal year.
Revenue from Mobile and Device Solutions increased $14.5 million and $25.9 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from Flash Lite OEM licensing due to continued strong adoption of Flash enabled devices. On May 1, 2008, we announced the Open Screen Project.  The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, MIDs and set top boxes.  As part of the project, we will be removing some restrictions on the use of some of our technology specifications and publishing several technology protocols.  We will also be removing the license fees on the next major releases of Adobe Flash Player and Adobe AIR for devices.  Accordingly, we expect revenue from Mobile and Device Solutions to decrease in the fourth quarter of fiscal 2008 as well as to continue to decrease following the next major release of these products scheduled for fiscal 2009.  We would expect this decrease to be offset in time by an increased demand for tooling products, server technologies, services and applications.

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Revenue from Platform increased $12.9 million and $36.7 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from our Flex Builder, Flash Player and ColdFusion products.
Revenue from Print Publishing increased $4.0 million and $7.0 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase resulted principally from a slight increasedecline in revenue associated with our legacyPostScript products.
 
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Geographical Information (dollars in millions)
 
  Three Months  Percent  Nine Months  Percent 
  2008  2007  Change  2008  2007  Change 
Americas $429.6  $400.7   7% $1,210.3  $1,082.5   12%
Percentage of total revenue  49%  47%      46%  48%    
EMEA  296.0   281.5   5%  914.5   708.1   29%
Percentage of total revenue  33%  33%      34%  32%    
Asia  161.7   169.5   (5)%  539.8   456.1   18%
Percentage of total revenue  18%  20%      20%  20%    
Total revenue $887.3  $851.7   4% $2,664.6  $2,246.7   19%

  Three Months  Percent  Nine Months  Percent 
  2009  2008  Change  2009  2008  Change 
Americas
 $354.6  $429.6   (17)% $998.5  $1,210.3   (18)%
Percentage of total revenue
  51%  49%      46%  46%    
EMEA
  196.2   296.0   (34)%  688.9   914.5   (25)%
Percentage of total revenue
  28%  33%      31%  34%    
Asia
  146.7   161.7   (9)%  501.2   539.8   (7)%
Percentage of total revenue
  21%  18%      23%  20%    
Total revenue
 $697.5  $887.3   (21)% $2,188.6  $2,664.6   (18)%
 
Overall revenue for the three and nine months ended August 29, 2008 increased28, 2009 decreased when compared to the three and nine months ended August 31, 200729, 2008 primarily due to continueda reduction in the adoption of our CS3 and LiveCycle families of products and continued licensing of our Creative Suite and Acrobat familyfamilies of products – including the launch of our new Acrobat 9 products in the third quarter of fiscal 2008. Licensing of our Mobile and Device products and Platform products also contributed to the increase.products.
 
Revenue in the Americas increased $28.9decreased $75.0 million and $127.8$211.8 million during the three and nine months ended August 29, 2008, compared to the three months and nine months ended August 31, 2007, due to solid demand, as well as strong licensing of our products in the education market and the Acrobat 9 product launch in the third quarter of fiscal 2008.
Revenue in EMEA increased $14.5 million and $206.4 million during the three and nine months ended August 29, 2008,28, 2009, respectively, compared to the three and nine months ended August 31, 2007. Additionally, revenue29, 2008, primarily due to economic conditions resulting in weaker demand for our creative and knowledge worker products.
Revenue in EMEA measured in U.S. dollars increased approximately $28.7decreased $99.8 million and $83.2$225.6 million during the three and nine months ended August 29, 2008,28, 2009, respectively, over the same reporting periods last year. Fluctuations in EMEA revenue duringcompared to the three and nine months ended August 29, 2008, as comparedprimarily due to the same periods in fiscal 2007, were primarily attributable to favorable foreign exchange, a decline in CS revenue due primarily to the timing of the release of new product versionsweaker demand with our CS family of productscreative and normal seasonal weakness in Europe during the third quarter of fiscal 2008.knowledge worker products.
 
Revenue in Asia decreased $7.8 million during the three months ended August 29, 2008 compared to the three months ended August 31, 2007, due primarily to the timing of the release of new product versions with our CS family of products and, to a lesser extent, normal seasonal weakness in Asia during the third quarter of fiscal 2008.  Revenue in Asia increased $83.7 million during the nine months ended August 29, 2008 compared to the nine months ended August 31, 2007.  The increase primarily resulted from licensing of our CS family of products, our LiveCycle products, and our Platform products. Additionally, revenue in Asia measured in U.S. dollars increased approximately $10.1$15.0 million and $32.0$38.6 million during the three and nine months ended August 28, 2009, respectively, compared to the three and nine months ended August 29, 2008, primarily due to economic conditions resulting in weaker demand and normal seasonal declines.
Included in the overall decrease in revenue were impacts associated with foreign currency. Revenue in EMEA measured in U.S. dollars decreased approximately $15.1 million and $63.1 million, due to the strength of the U.S. dollar against the Euro, during the three and nine months ended August 28, 2009, respectively, over the same reporting periodsperiod last year. Our currency hedging program is used to mitigate a portion of the foreign currency impact to revenue. During the three and nine months ended August 28, 2009, our currency hedging program resulted in hedging gains of $0.2 million and $25.8 million, respectively. Revenue in Asia measured in U.S. dollars was favorably impacted by approximately $8.0 million and $26.5 million due to the strength of the Yen against the U.S. dollar during the three and nine months ended August 28, 2009, respectively, over the same reporting period last year.
 
Product Backlog
 
With regard to our product backlog, theThe actual amount of product backlog at any particular time may not be a meaningful indicator of future business prospects. Backlog 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 global inventory policy. We had minimalAs of August 28, 2009, our backlog at the endwas approximately 2% of the third quarter of fiscal 2008. The comparable2009 revenue as compared to backlog at the end of the second quarter of fiscal 2008 was approximately 4% of second quarter fiscal 20082009 revenue.
 

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Cost of Revenue for the Three and Nine Months Ended August 28, 2009 and August 29, 2008 and August 31, 2007(dollars in millions)
 
  Three Months  Percent  Nine Months  Percent 
  2008  2007  Change  2008  2007  Change 
Product $84.7  $69.0   23% $202.7  $193.5   5%
Percentage of total revenue  10%  8%      8%  9%    
Services and support  26.2   23.6   11%  73.5   62.6   17%
Percentage of total revenue  3%  3%      3%  3%    
Total cost of revenue $110.9  $92.6   20% $276.2  $256.1   8%
  Three Months  Percent  Nine Months  Percent 
  2009  2008  Change  2009  2008  Change 
Product
 $49.3  $84.7   (42)% $164.0  $202.7   (19)%
Percentage of total revenue
  7%  10%      7%  8%    
Services and support
  15.7   26.2   (40)%  50.4   73.5   (31)%
Percentage of total revenue
  2%  3%      2%  3%    
Total cost of revenue
 $65.0  $110.9   (41)% $214.4  $276.2   (22)%
32
 
Product
 
Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired rights to use technology and the costs associated with the manufacturing of our products.
 
Cost of product revenue increased (decreased) due to the following:
 
 
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
 
Percent Change
2008 to 2009
QTD
  
Percent Change
2008 to 2009
YTD
 
Hosted services
  4%  5%
Royalty cost
  1   3 
Excess and obsolete inventory
  (3)  — 
Amortization of acquired rights to use technology 42% 8%  (31)  (11)
Royalties for licensed technologies 2 4 
Localization costs related to our product launches
  2   (1)
Amortization of purchased intangibles (10) (10)  (10)  (12)
Localization costs related to our product launches (14) 2 
Various individually insignificant items  3   1   (5)  (3)
Total change  23%  5%  (42)%  (19)%

Amortization of acquired rights to use technology increasedThe increase in hosted service costs was primarily duerelated to the fact that we entered into certain technology licensing arrangements totaling $100.0 million during the third quarteramortization of fiscal 2008. An estimated $56.0 million of this cost is 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 nine years. Of the remaininginfrastructure costs we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million 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 13 of our Notes to Condensed Consolidated Financial Statements for further information regarding our contractual commitments.
Amortization expense decreased during the three and nine months ended August 29, 200828, 2009 as compared to the three and nine months ended August 31, 2007,29, 2008.
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 the third quarter of fiscal 2008 that did not recur in the third quarter of fiscal 2009.
Amortization of purchased intangibles decreased during the three and nine months ended August 28, 2009 as compared to the three and nine months ended August 29, 2008, primarily due to a decrease in amortization expense primarily associated with intangible assets purchased through the Macromedia acquisition.
Localization costsacquisition, which are expected to be fully amortized overat the product life cycle, decreased during the three months ended August 29, 2008 as compared to the three months ended August 31, 2007, primarily due to increased localization costs in the third quarterend of fiscal 2007 associated with the release of the localized versions of our CS3 family of products.2009.
 
Services and Support
 
Cost of services and support revenue is primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.
 
Cost of services and support revenue increaseddecreased during the three and nine months ended August 29, 200828, 2009 as compared to the three and nine months ended August 31, 2007,29, 2008, primarily due to increasesdecreases in compensation and related benefits driven by increases in headcount related to product support and utilization by customers of our consulting services.reductions.
 

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Operating Expenses for the Three and Nine Months Ended August 28, 2009 and August 29, 2008 and August 31, 2007(dollars in millions)
 
Research and Development, Sales and Marketing, and General and Administrative Expenses
 
The increase in compensationCompensation costs decreased for the three and nine months ended August 29, 2008 is28, 2009 primarily due to increased headcount in all functions. This increase is offset in part by a decrease inlower profit sharing and employee bonuses based on company performance to date, when compared to the three months ended August 31, 2007.
The increase in compensation costs for theand nine months ended August 29, 2008 related to increases in headcount and stock-based compensation offset by decreases in profit sharing and employee bonuses based on company performance to date, when compared to the nine months ended August 31, 2007.2008.
 
Research and Development
 
 Three Months Percent Nine Months Percent Three Months Percent Nine Months Percent
 2008  2007 Change 2008  2007 Change 2009  2008 Change 2009  2008 Change
Expenses $170.1  $163.2   4% $508.9  $450.4   13% $138.9  $170.1   (18)% $427.3  $508.9   (16)%
Percentage of total revenue  19%  19%      19%  20%      20%  19%      20%  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.
 
33
Research and development expenses increased (decreased)decreased due to the following:
 
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
 
Percent Change
2008 to 2009
QTD
  
Percent Change
2008 to 2009
YTD
 
Compensation and related benefits associated with headcount growth6% 8%
Compensation associated with incentive compensation and stock-based compensation(2) 4   (16)%  (13)%
Various individually insignificant items—   1   (2)  (3)
Total change4%  13%  (18)%  (16)%
 
We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain 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
 
 Three Months Percent Nine Months Percent Three Months Percent Nine Months Percent
 2008  2007 Change 2008  2007 Change 2009  2008 Change 2009  2008 Change
Expenses $271.4  $251.2   8% $813.4  $702.3   16% $231.3  $271.4   (15)% $724.0  $813.4   (11)%
Percentage of total revenue  31%  29%      31%  31%      33%  31%      33%  31%    
 
Sales and marketing expenses consist primarily of 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.
 

28

Sales and marketing expenses increased (decreased)decreased due to the following:
 
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
 
Percent Change
2008 to 2009
QTD
  
Percent Change
2008 to 2009
YTD
 
Compensation and related benefits associated with headcount growth5% 5%
Marketing spending related to product launches and overall marketing efforts to further increase revenue3 5   (3)%  —%
Compensation associated with incentive compensation and stock-based compensation(1) 5   (8)  (7)
Various individually insignificant items1   1   (4)  (4)
Total change8%  16%  (15)%  (11)%
 
General and Administrative
 
 Three Months Percent Nine Months Percent Three Months Percent Nine Months Percent
 2008  2007 Change 2008  2007 Change 2009  2008 Change 2009  2008 Change
Expenses $97.2  $71.1   37% $257.2  $201.0   28% $79.6  $97.2   (18)% $224.5  $257.2   (13)%
Percentage of total revenue  11%  8%      10%  9%      11%  11%      10%  10%    
 
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.
 
34
General and administrative expenses increased (decreased) due to the following:
 
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
 
Percent Change
2008 to 2009
QTD
  
Percent Change
2008 to 2009
YTD
 
Allocation of costs associated with acquired rights to use technology24% 8%
Compensation and related benefits associated with headcount growth5 5 
Provision for bad debts
  (5)%  —%
Facilities and telecommunication
  (2)  (2)
Professional and consulting fees4 2   (18)  (6)
Compensation associated with incentive compensation and stock-based compensation(1) 6   (8)  (8)
Charitable contributions
  10   — 
Various individually insignificant items5   7   5   3 
Total change37%  28%  (18)%  (13)%

Allocation of costs associated with acquired rightsThe decrease in professional and consulting fees during the three and nine months ended August 28, 2009 as compared to use technology increasedthe three and nine months ended August 29, 2008 was primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.0 million duringadditional fees incurred in the third quarter of fiscal 2008. An estimated $56.0 million of this cost is related2008 to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to nine years. Of the remainingavoid litigation costs we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million was expensed as general and administrative costs.  Inin connection with these licensingintellectual property arrangements we havethat did not recur during fiscal 2009.
The increase in charitable contributions during the ability to acquire additional rights to use technologythree months ended August 28, 2009 reflects a change in the future.  See Note 13timing of our Notescontributions to Condensed Consolidated Financial Statements for further information regarding our contractual commitments.the Adobe Foundation.
 
Restructuring and Other Charges
 
 Three Months Percent Nine Months Percent Three Months Percent Nine Months Percent
 2008  2007 Change 2008  2007 Change 2009  2008 Change 2009  2008 Change
Expenses $1.2  $0.6   100% $2.6  $0.6   333% $
—
  $1.2   *  $15.9  $2.6   * 
Percentage of total revenue  *   *       *   *       *   *       1%  *     

 
*Percentage is not meaningful.
 

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 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.
29
In the first quarter of 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.  In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146”), 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 charges of $3.4 million for termination benefits for the elimination of approximately 43 of the remaining 100 full-time positions expected to be terminated.
In the second quarter of fiscal 2009, we accrued an additional $3.0 million under this program for termination benefits related to the elimination of approximately 48 of the remaining 57 full-time positions expected to be terminated.
TableIn the third quarter of Contentsfiscal 2009, we accrued an additional $0.4 million under this program for termination benefits related to the elimination of substantially all of the remaining full-time positions expected to be terminated.

During the nine months ended August 29, 2008, there was an adjustment to previous estimates associated with closing redundant Macromedia facilities that were acquired through the acquisition. As of August 29, 2008,28, 2009, accrued restructuring charges related to the 2008 restructuring program and the Macromedia acquisition totaled $15.0 million.approximately $6.3 million and $6.9 million, respectively. We expect to pay this liabilitythese liabilities through fiscal 2011.2013 and fiscal 2012, respectively.
 
Amortization of Purchased Intangibles and Incomplete Technology
 
 Three Months Percent Nine Months Percent Three Months Percent Nine Months Percent
 2008  2007 Change 2008  2007 Change 2009  2008 Change 2009  2008 Change
Expenses $17.0  $17.9   (5)% $51.2  $54.5   (6)% $15.0  $17.0   (12)% $45.7  $51.2   (11)%
Percentage of total revenue  2%  2%      2%  2%      2%  2%      2%  2%    
35
 
Amortization expense decreased during the three and nine months ended August 29, 200828, 2009 as compared to the three and nine months ended August 31, 2007,29, 2008, due to a decrease in amortization expense associated with intangible assets purchased through the Macromedia acquisition.  Additionally, included in the amortization of purchased intangibles and incomplete technology for the nine months ended August 31, 2007 was $1.5 million related to the write-off of in-process research and development from an acquisition that occurred during the second quarter of fiscal 2007.
 
Non-Operating Income (Expense) for the Three and Nine Months Ended August 28, 2009 and August 29, 2008 and August 31, 2007(dollars in millions)
 
 Three Months  Percent  Nine Months  Percent  Three Months  Percent  Nine Months  Percent 
 2008  2007  Change  2008  2007  Change  2009  2008  Change  2009  2008  Change 
Interest and other income, net $9.3  $22.7   (59)% $34.8  $65.9   (47)% $6.7  $9.3   (28)% $24.8  $34.8   (29)%
Percentage of total revenue  1%  3%      1%  3%      1%  1%      1%  1%    
Interest expense  (2.4)  —   *   (8.0) (0.2)  *   (0.5)  (2.4)  (79)%  (1.9)  (8.0)  (76)%
Percentage of total revenue  *   *       *   *       *   *       *   *     
Investment gains, net  2.1   (0.7)  (400)%  20.3   9.1   123%
Investment gains (losses), net
  0.6   2.1   (71)%  (18.5)  20.3   (191)%
Percentage of total revenue  *   *       1%  *       *   *       (1)%  1%    
Total non-operating income
 $9.0  $22.0   (59)% $47.1  $74.8   (37)%
Total non-operating income, net
 $6.8  $9.0   (24)% $4.4  $47.1   (91)%

 
*Percentage is not meaningful.
 
Interest and Other Income, netNet
 
The largest component of interestInterest and other income, net, wasconsists primarily of interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income, net also includedincludes foreign exchange gains and losses, including those from hedging revenue transactions primarily denominated in Japanese Yen and Euro currencies.
 
Interest and other income, net, decreased during the three and nine months ended August 29, 200828, 2009 as compared to the three and nine months ended August 31, 200729, 2008 primarily as a result of lower average invested balances due to cash used for our share repurchase programs and lower interest rates.  Additionally, during the nine months ended August 29, 2008, interest and other income, net includedrates, partially offset by realized gains and losses on the sale or write-down for other-than-temporary impairmentsales of fixed income investments.securities and lower foreign exchange losses.
 
Interest Expense
 
Interest expense for the three and nine months ended August 29, 2008,28, 2009, primarily represents interest associated with our credit facility. The outstanding balance as of August 29, 200828, 2009 was $350.0 million. Interest due under the credit facility is paid upon expiration of the LIBOR contract or at a minimum, quarterly. The decline in interest expense was primarily due to lower interest rates.
 
Investment Gains net(Losses), Net
 
Investment gains (losses), net, consist 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. InNet investment gains for the three months ended August 28, 2009 were primarily due to unrealized gains related to our Adobe Ventures. Net investment losses for the nine months ended August 28, 2009 were primarily due to unrealized losses related to our Adobe Ventures and direct investments.  Investment gains for the three and nine months ended August 29, 2008 investment gains, net, increased as compared to the three and nine months ended August 31, 2007were principally due primarily to gains from a direct investment. Additionally, during the nine months ended August 29, 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.
 

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Provision for Income Taxes for the Three and Nine Months Ended August 28, 2009 and August 29, 2008 and August 31, 2007(dollars in millions)
 
 Three Months Percent Nine Months Percent Three Months Percent Nine Months Percent
 2008  2007 Change 2008  2007 Change 2009  2008 Change 2009  2008 Change
Provision $36.9  $71.8   (49)% $176.3  $154.9   14% $38.4  $36.9   4% $122.8  $176.3   (30)%
Percentage of total revenue
  4%  8%      7%  7%      6%  4%      6%  7%    
Effective tax rate
  16%  26%      22%  24%      22%  16%      23%  22%    
 
Our effective tax rate decreasedrates increased approximately 10%6% and 2%1% during the three and nine months respectively, ended August 29, 200828, 2009, respectively, as compared to the three and nine months ended August 31, 2007.  The decrease was29, 2008. These increases were primarily related
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to the completion induring the third quarter of fiscal 2008 of a U.S. income tax examination covering our fiscal years 2001 through 2004, partially offset by the availability of the U.S. research and to a lesser extent, stronger forecasted international profits fordevelopment credit during fiscal 2009, which was not in effect during fiscal 2008 and lower foreign taxes on those forecasted profits.until our fourth quarter.
 
Summary of FIN 48
Under FIN No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109” (“FIN 48”), the gross unrecognized tax benefits at August 28, 2009 were $137.3 million, exclusive of interest and penalties. If the total unrecognized tax benefits at August 28, 2009 were recognized in the future, the following amounts, net of an estimated $10.1 million federal benefit related to deducting certain payments on future tax returns, would result: $53.7 million of unrecognized tax benefits would decrease the effective tax rate and $73.5 million would decrease goodwill.
As of August 28, 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 $15.7 million.
The accounting treatment related to certain unrecognized tax benefits from acquired companies, including Macromedia, will change when SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) becomes effective. SFAS 141R will be effective in the first quarter of our fiscal 2010. At such time, any changes to the recognition or measurement of these unrecognized tax benefits will be recorded through income tax expense, where currently the accounting treatment would require any adjustment to be recognized through the purchase price as an adjustment to goodwill.

The timing of the resolution of income tax examinations is highly uncertain and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS and other examinations could be resolved within the next twelve months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements. We do not expect any material settlements in the next twelve months but it is inherently uncertain to determine.
 
LIQUIDITY AND CAPITAL RESOURCES
 
This data should be read in conjunction with the consolidated statementsour Condensed Consolidated Statements of cash flows.Cash Flows.
 
 
August 29,
2008
  
November 30,
2007
 
(in millions) 
August 28,
2009
  
November 28,
2008
 
Cash, cash equivalents and short-term investments $2,000.9  $1,993.9  $2,556.5  $2,019.2 
Working capital $1,855.5  $1,720.4  $2,376.6  $1,972.5 
Stockholders’ equity $4,371.4  $4,650.0  $4,694.6  $4,410.4 
 
Summary of our cash flows:flows (in millions):
 
 
August 29,
2008
  
August 31,
2007
  
August 28,
2009
  
August 29,
2008
 
Net cash provided by operating activities $942.9  $1,041.2  $863.9  $942.4 
Net cash used for investing activities  (5.5)  (213.3)  (405.2)  (5.1)
Net cash used for financing activities  (747.7)  (1,042.6)  (227.7)  (747.6)
Effect of foreign currency exchange rates on cash and cash equivalents  (1.9)  1.5   14.7   (1.9)
Net increase in cash and cash equivalents $187.8  $(213.2) $245.7  $187.8 
 
Our primary source of cash is receipts from revenue. The primary uses of cash are payroll related expenses; general operating expenses including marketing, travel and office rent; and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and participation in the ESPP and another use of cash is ouremployee stock repurchase program, which is detailed below.purchase plan (“ESPP”).
 
Cash Flows from Operating Activities
 
Net cash provided by operating activities of $942.9$863.9 million for the nine months ended August 29, 2008,28, 2009, was primarily comprised of net income plus the net effect of non-cash expenses. The primary working capital sources of cash were increases in net income and deferred revenue. Increases in deferred revenue related to maintenance and support from increased upgrade plans purchased were offset in part bycoupled with decreases in deferredtrade receivables, prepaid expenses and other current assets. Trade receivables
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decreased primarily from CS4 revenue relatedthat was shipped in the latter half of the fourth quarter of fiscal 2008 and collected during the first quarter of fiscal 2009, in addition to royalties.lower overall gross revenue and improved collections.

The primary working capital uses of cash were increases in receivables, prepaid expenses and other current assets coupled with decreases in income taxes payable,deferred revenue, accrued expenses, trade payables and accrued restructuring costs. Accounts receivable increasedand trade payables. Decreases in deferred revenue related primarily as a result ofto deferred revenue that was recognized in the timing of shipments during the thirdfirst quarter of fiscal 2008 compared to the same reporting period2009 associated with our free of charge upgrades for CS4 and Adobe Photoshop Lightroom products, as well as declines in fiscal 2007.  Income taxes payable decreased primarily due to payments made as the result of the completion of a U.S. income tax examination covering our fiscal years 2001 through 2004.maintenance and support orders. Accrued expenses decreased primarily due to payments for employee bonuses profit sharing and an increase in employee stock purchases offset in part by increases in royalty accruals.commissions related to fiscal 2008. Accrued restructuring costs decreased primarily due to payments related to the 2008 restructuring program that was initiated in the fourth quarter of facility costs during the nine months ended August 29, 2008.fiscal 2008, offset in part by new charges.
 

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Cash Flows from Investing Activities
 
Net cash used for investing activities decreased from cash usedof $405.2 million for the nine months ended August 31, 200728, 2009 was primarily due to purchases of $213.3 million to cash usedshort-term investments and property and equipment, offset in the nine months ended August 29, 2008part by maturities and sales of $5.5 million. Usesshort-term investments. Purchases of cashlong-term investments and other assets during the nine months ended August 29,28, 2009 were less than those in the corresponding period of fiscal 2008 primarily represented purchasesdue to $56.0 million paid in the third quarter of short-term investments, property and equipment and long-term investments and other assets. The uses associated with the purchase of long-term investments and other assets related primarily to cash paidfiscal 2008 for future licensing rights acquired through certain technology licensing arrangements totaling $56.0 million. As part of our lease extension for the Almaden Tower lease completed during the second quarter of fiscal 2007, we purchased a portion of the lease receivable totaling $80.4 million. We also completed two acquisitions for cash consideration of approximately $70.0 million during fiscal 2007.
These uses of cash were offset in part by maturities and sales of short-term investments and to a lesser extent, proceeds from the sale of equity securities.arrangements.
 
Cash Flows from Financing Activities
 
Net cash used for financing activities decreased $294.9$519.9 million for a total of $747.7$227.7 million infor the nine months ended August 29, 20082009 as compared to cash used for the same period last year,year. The decrease during the nine months ended August 28, 2009 as compared to the corresponding period in fiscal 2008 was primarily due to lower purchases of treasury stock when comparedoffset in part by proceeds related to the prior yearissuance of treasury stock. (seeSee the sections entitledtitled “Stock Repurchase Program I” and “Stock Repurchase Program II” discussed below),. offset in part by proceeds related to the issuance of the treasury stock. Sources of cash during theThe nine months ended August 29, 2008 also included $450.0 million of proceeds fromnet borrowings under our credit facility offset in part by repayments of $100.0 million on this credit facility.that did not recur during the nine months ended August 28, 2009.
��
We expect to continue our investing activities, including 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 to strategically acquire software companies, products or technologies that are complementary to our business. The Board
In September 2009, we entered into a definitive agreement with Omniture under which we expect to acquire Omniture for approximately $1.8 billion. Under the terms of Directors has approvedthe agreement, we have commenced a facilities expansiontender offer to acquire all of the outstanding common stock of Omniture for $21.50 per share in cash. We expect to finance the acquisition using existing cash, cash equivalents and short term investment balances, and current availability under our operationscredit facility. We believe that these resources in India, which may include the purchase of land and buildings. As previously disclosed, we planaddition to invest $100.0 million directly in venture capital, of which, approximately $27.5 million has already been spent. The remaining balancecash generated from operations will be invested oversufficient to fund the next threeacquisition as well as to five years.continue to provide a supplemental source of near term liquidity. Also, we believe that our banking relationships and good credit should afford us the opportunity to raise additional capital in the private or public markets, if required.
 
OurIn addition, our existing cash, cash equivalents and investment balances may further decline during the fourth quarterremainder of fiscal 2008 and into fiscal 2009 in the event of a further weakening of the economy or significant changes in our planned cash outlay. However, based on our current business planoutlay, including changes in incremental costs such as direct and revenue prospects, we believe that our existing balances, our anticipated cash flows from operations and our available credit facility will be sufficientintegration costs related to meet our working capital and operating resource expenditure requirements for the next twelve months.acquisition. Cash from operations could also be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled “Risk Factors”. During the third quarter of fiscal 2007,Factors.” However, based on our current business plan and revenue prospects, we also increasedbelieve that our existing $500.0 million credit facilitybalances and anticipated cash flows from operations will be sufficient to $1.0 billion. The purpose ofmeet our working capital and operating resource expenditure requirements for the next twelve months. At August 28, 2009, our existing credit facility is currently $1.0 billion of which we had borrowed $350.0 million. Subsequent to provide backup liquidity for general corporate purposes including stock repurchases. In January 2008,August 28, 2009, we drew down $450.0borrowed an additional $650.0 million under this facility,the credit facility. See Note 15 of which $350.0 million was outstanding as of August 29, 2008 and is included in long-term liabilities on our condensed consolidated balance sheet.Notes to Condensed Consolidated Financial Statements for more detailed information.
 
We use professional investment management firms to manage a large portion of our invested cash. External investment firms managed, on average, 43%58% of our consolidated invested balances during the third quarter of fiscal 2008.2009. Within the U.S., the portfolio is invested primarily in money market funds for working capital purposes. Outside of the U.S., our fixed income portfolio is primarily invested in U.S. Treasury securities. All investments are made according to policies approved by the Board of Directors.
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Stock Repurchase 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 also enter into structured repurchases with third parties.
During the nine months ended August 29, 2008,28, 2009, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $325.0$350.0 million. 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
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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.
The prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by August 29, 2008 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 29, 2008 under this program will expire on or before September 19, 2008. As of August 29, 2008 approximately $41.0 million of up-front payments remained under the agreements. During the nine months ended August 29, 2008,28, 2009, we repurchased 19.0approximately 9.9 million shares at an average price per share of $37.12$25.31 through structured repurchase agreements which included prepayments from fiscal 2007.
During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.
Subsequent to August 29, 2008, we entered into additional structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $200.0 million. This amount will be classified as treasury stock on our balance sheet. See Notes 10during fiscal 2008 and 17 of our Notes to Condensed Consolidated Financial Statements for further discussion of our stock repurchase programs.fiscal 2009.
 
Stock Repurchase Program II
 
Under this stock repurchase program, we had authorization to repurchase 50.0 million shares of our common 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 nine months ended August 29,third quarter of fiscal 2008, we provided prepaymentsthe remaining authorized number of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. As of August 31, 2007, we had provided prepayments of $850.0 million and repurchased 12.9 million shares through structured share repurchase agreements at the average price of $39.94. Approximately $333.4 million of up-front payments remained as of August 31, 2007.
During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.were repurchased.
 
Refer to Part II, Item 2 in this report for share repurchases during the quarter ended August 29, 2008.28, 2009.
 
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
 
Our principal commitments as of August 29, 200828, 2009 consist of obligations under operating leases, royalty agreements and various service agreements. See Note 1314 of our Notes to Condensed Consolidated Financial Statements for more detailed information.
 
Contractual CommitmentsFinancial Covenants
 
With the exception of our adoption of FIN 48, borrowings under ourOur credit facility and entering intocontains a financial covenant requiring us not to exceed a certain technology license arrangement, there have been no other significant changesmaximum leverage ratio. Our leases for the East and West Towers and the Almaden Tower are both subject to standard covenants including certain financial ratios as defined in our contractual commitments during the nine months ended August 29, 2008 as comparedlease agreements that are reported to the contractual commitments disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007.
lessors quarterly. As of August 29, 2008, the principal outstanding under the credit facility was $350.0 million which is due in full no later than February 16, 2013. Interest associated with this facility cannot be estimated with certainty by period throughout the term since it is based on a fluctuating interest rate calculation.

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As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable related to unrecognized tax benefits.
The gross liability for unrecognized tax benefits at August 29, 2008 was $155.8 million, exclusive of interest and penalties.  The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues with the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements.
As discussed in Note 4 of our Notes to Condensed Consolidated Financial Statements, during the third quarter of fiscal 2008, we entered into an agreement to license certain technology. This agreement also provides us the ability to acquire rights to intellectual property in the future. Minimum fees associated with this arrangement range between approximately $1.0 million and $1.5 million per year through May 2028 for minimum fees in the aggregate, of approximately $25.0 million.
Lease Commitments
Two of our lease agreements discussed in Note 13 of our Notes to Condensed Consolidated Financial Statements are subject to standard financial covenants. As of August 29, 2008,28, 2009, we were in compliance with all of our financial covenants and we expect to remain in compliance during the next 12 months.covenants. We believe these limitationscovenants will not impact our credit or cash in the coming fiscal year or restrict our ability to execute our business plan.
 
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 No. 45, “Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of SFAS No. 5, 57, and 107 and rescission of FIN No. 34,” 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 sheet.Condensed Consolidated Balance Sheets. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the 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 will be amortized to the income statement over the life of the leases. As of August 29, 2008,28, 2009, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $3.0$1.5 million.
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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 directors and officers for certain events or occurrences while the director or officer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the director’s or officer’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 limits 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 interest 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 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.


ITEM 3.3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
We believe that there have been no significant changes in our market risk exposures for the three and nine months ended August 29, 2008.28, 2009.
 
ITEM 4.  CONTROLS AND PROCEDURES
 
Based on their evaluation as of August 29, 2008,28, 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 quarterly report on Form 10-Q 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.
 
There were no changes in our internal control over financial reporting during the quarter ended August 29, 200828, 2009 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.
 
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 control 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.
 
PART II—OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
See Note 13 “Commitments14 “Commitments and Contingencies” of our Notes to Condensed Consolidated Financial Statements regarding our legal proceedings.
 
ITEM 1A.1A.  RISK FACTORS
 
As previously discussed, our actual results could differ materially from our forward-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.
 
Adverse changes in developmentgeneral 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 has recently been increasingly uncertain due to softness in the real estate and mortgage markets, volatility in fuel and other energy costs, difficulties in the financial services sector and credit markets, continuing geopolitical uncertainties and other macroeconomic factors affecting spending behavior. If economic growth in the U.S. and other countries’ economies is slowed, many customers may delay or reduce technology purchases, advertising spending or marketing spending. This could result in reductions in sales of our products, 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 extreme 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 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 products or upgrades to existing products that meet customer requirements, our operating results could cause a decline in our revenue.suffer.

Any delays or failures inThe process of developing new high technology products or new features forand enhancing existing products or marketingis complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological trends accurately could significantly harm our products may have a harmful impact on ourmarket share and results of operations. We must make long-term investments, develop or obtain appropriate intellectual property and commit significant resources before knowing whether our predictions will accurately reflect customer demand for our products. 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 our ability to develop new products. Delaysproducts and services. Additionally, any delay in the development, production, marketing or distribution of a new product or upgrade introductionsto an existing product could cause a decline in our revenue, earnings or stock price.price and could harm our competitive position.
 
We offer our desktop application-based products primarily on Windows and Macintosh platforms. We generally offer our server-based 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, 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 and business models by existing and new competitors could harm our competitive position and results of operations.
 
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 and services 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. For example,
Microsoft Windows Vista operating system which contains a fixed document format, XPS, competes with Adobe PDF. Additionally, Microsoft Office 2007, which offers a feature to save Microsoft Office documents as PDF files, through a freely distributed plug-in, competes with Adobe PDF creation (Microsoft has announced that it will add support for PDF directly in its Office products beginning in 2009.creation. Microsoft Expression Studio competes with our Adobe Creative Suite family of products and Microsoft Silverlight and Visual Studio,


web Web development tools for rich internet applications,RIAs, compete with Adobe Flash, Adobe Flex and Adobe Flex. Google’s new web browser,AIR. Google Chrome, may end up including technologies thatGears and Sun’s JavaFX, alternative approaches to deploying RIAs compete with Adobe Flash and Adobe AIR. In addition, companies,Additionally, HTML 5 specifies scripting applications 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”open source vendors may introduce competitive products. For example, MicrosoftIn addition, recent advances in computing and communications technologies have made available Microsoft Expression Studio freethe software as a service (“SaaS”) 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 exploring the deployment of chargeour own SaaS strategies, but may not be able to students.develop the infrastructure and business models as quickly as our competitors. If any of these competing products or services 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 our Annual Report on Form 10-K for fiscal 2007.2008.
 
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. 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 compliance requirements and costs may increase. In addition, laws in the areas of privacy and behavioral tracking 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.
Additionally, customer requirements for open standards or open source products could impact adoption or use with respect to some of our products. 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 Open Screen Project, and release selected technology for industry standardization. These changes may have negative revenue implications and make it easier for our competitors to produce products similar to ours. If we are unable to respond to these competitive threats, our business could be harmed.
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, theand mobile and device markets and software as service offerings.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 and horizontal markets such as training and marketing. These new offerings and markets require a considerable investment of technical, financial and sales resources, and a scalable 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 partner with device makers, manufacturers and telecommunications carriers to 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 deployment of our own software as a service strategies, but may not be able to develop the infrastructure and business models as quickly as our competitors. It is uncertain whether these strategies will prove successful. Additionally, from time to time we “open source” certain of our technology initiatives, provide broader open access to certain of our technology, such as our recently announced Open Screen Project and release selected technology for industry standardization. These changes may have negative revenue implications and make it easier for our competitors to produce products similar to ours, and if we are unable to respond to these competitive threats, our business could be harmed.
 
If we fail to anticipate and develop new products and services in response to changes in demand for application software and software delivery, computers, printers, or other non PC-devices, our business could be harmed.
 
Any failure to anticipate changing customer requirements and develop and deploy new products in response to changing market conditions may have a material impact on our results of operations. We plan to release numerous new product offerings and employ new software delivery methods in connection with our transition to new business models. 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. 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. Additionally, customer requirements for “open standards” or “open source” products could impact adoption or use with respect to some of our products.
We offer our desktop application-based products primarily on Windows and Macintosh platforms. We generally offer our server-based 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, or to the extent that significant demand arises 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, 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.


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.
 
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. For example, the direction and relative strength of the U.S. economy has recently been increasingly uncertain due to softness in the housing markets, rising oil prices, difficulties in the financial services sector and credit markets and continuing geopolitical uncertainties. If economic growth in the United States and other countries’ economies is slowed, many customers may delay or reduce technology purchases or marketing spending. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. 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 would also likely harm our business, results of operations and financial condition.
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 revenue and revenue may decline quicker than anticipated. Additionally, we have a limited history of licensing products in certain 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.
 
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. In addition, 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 unfavorable terms, prevent us from manufacturing or licensing certain of our products, subject us to injunctions restricting our sale of products, 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 provisions under various license arrangements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products. Any of these 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.
 
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. 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 or costly for us to enforce our rights.

We also devote significant resources to maintaining the security of our products from malicious hackers who develop and deploy viruses, worms, and other malicious software programs that attack our products. Nevertheless, actual or perceived security vulnerabilities in our products could harm our reputation and lead some customers to seek to return
products, to reduce or delay future purchases, to use competitive products or to make claims against us. Also, with the introduction of hosted services with some of our product offerings, our customers may use such services to share confidential and sensitive information. If a breach of security occurs on these hosted systems, we could be held liable to our customers.customers or be subject to governmental complaints. Additionally, such breaches could lead to interruptions, delays and data loss and protection concerns as well as harm to our reputation.

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. Most recently, we announced an agreement to acquire Omniture in September 2009. 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 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 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;
 
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;
 
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;
 
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 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 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 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;
·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 additional exposure to fluctuations in currency exchange rates;
 
potential failure of the due diligence processes to identify significant issues, including but not limited to, product quality, architecture and development, or legal and financial contingencies;
·potential impairment of our relationships with employees, customers, partners, distributors or third-party providers of technology or products;
 
incurring significant exit charges if products acquired in business combinations are unsuccessful;
·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;
 
potential inability to assert that internal controls over financial reporting are effective;
·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;
 
potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and
·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 delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product offerings.
·potential inability to obtain, or obtain in a timely manner, approvals from governmental authorities, which could delay or prevent such acquisitions; and
·potential delay in customer and distributor purchasing decisions due to uncertainty about the direction of our product offerings.
 
Mergers and acquisitions of high technology companies are inherently risky, and ultimately, if we do not complete the integration ofan announced acquisition transaction or integrate an acquired businessesbusiness successfully and in a timely manner, we may not realize the benefits of the acquisitionsacquisition to the extent anticipated, which could adversely affect our business, financial condition or results of operations.anticipated.

Failure to manage our sales and distribution channels effectively could result in a loss of revenue and harm to our business.
 
We distribute our application products through distributors, resellers, OEMs, 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, which represented 20%16% and 9%7% of our net revenue for the third quarter of fiscal 2008,2009, 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 the third quarter of fiscal 2008,2009, 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. We cannot be certain that our distribution channel will continue to market or sell our products effectively. If we are not successful, we may lose sales opportunities, customers and revenues.
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 OEM partners decide not to bundle our applications on their devices, our results could suffer.
In addition, the financial health of our 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 harmed if the financial condition of some of these distributors substantially weakens and we were unable to timely secure a replacement distributor.distributors.

We also sell certain of our products 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.
 
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 Web site for our development, marketing, operational, support, hosted services and sales activities. A disruption or failure of these systems in the event of a major earthquake, fire, telecommunications failure, cyber-attack, war, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in our product development, 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, our data centers, and certain other critical business operations are located in San Jose, California, which is near major earthquake faults. We have developed certain 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.
 
Our future operating results are difficult to predict and are likely to fluctuate substantially from quarter to quarter and as a resultNet revenue, margin or earnings shortfalls or the volatility of the market generally may cause 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 revenue and operating results for a particular period are difficult to predict. Our revenue 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, 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 delayskey performance metrics, changes in estimates or recommendations by securities analysts, the releaseannouncement of new 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, or after the end of, 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, changes in analysts’ earnings estimates forproduct enhancements by us or our industry,competitors, quarterly variations in our or our competitors’ results of operations, developments in our industry; unusual events such as significant acquisitions, divestitures and litigation, general socio-economic, political or market conditions and other factors, affecting the corporate environment,including factors unrelated to our industry, or the securities markets in general, have resulted, and may in the future result, in volatility of our common stock price.operating performance.
 
We are subject to risks associated with international operations which may harm our business.
 
We generate overalmost 50% of our total revenue from sales to customers outside of the Americas. Sales to these customers subject us to a number of risks, including:
 
foreign currency fluctuations;
·foreign currency fluctuations;
 
changes in government preferences for software procurement;
international economic and political conditions;
·changes in government preferences for software procurement;
 
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unexpected changes in, or impositions of, international legislative or regulatory requirements;
 
failure of foreign laws to protect our intellectual property rights adequately;
·international economic, political and labor conditions;
 
inadequate local infrastructure;
·tax laws (including U.S. taxes on foreign subsidiaries);
 
delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;
·unexpected changes in, or impositions of, international legislative or regulatory requirements;
 
transportation delays;
·failure of foreign laws to protect our intellectual property rights adequately;
 
the burdens of complying with a variety of foreign laws, including consumer and data protection laws; and
·inadequate local infrastructure;
 
·delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions;
other factors beyond our control, including terrorism, war, natural disasters and diseases.
·transportation delays;
·the burdens of complying with a variety of foreign laws, including consumer and data protection laws; 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%46% of our employees are located outside the United States.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 expandcontinue 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, which would cause our results to suffer. Moreover, local laws and customs in many countries differ significantly from those in the United States.U.S. We incur additional legal compliance costs associated with our international 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 United States.U.S. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by United StatesU.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 United StatesU.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 Yen and the Euro. We regularly review our hedging program and 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 statementsCondensed Consolidated Financial Statements in accordance with 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 revenue recognition;
·accounting for stock-based compensation;
·accounting for income taxes; and
·accounting for business combinations and related goodwill.
 
accounting for stock-based compensation;
 
accounting for income taxes; and
accounting for business combinations and related goodwill.

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For example, in the first quarter of fiscal 2006, we adopted SFAS No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment” 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 has had, and will continue to have, a significant adverse effect on our reported financial results.
 
We also adopted FIN 48 in the first quarter of fiscal 2008. The adoption of FIN 48 resulted in an increase to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008 and may have an adverse effect on our future operating results and financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), (“SFAS 141R”), “Business Combinations”,141R which changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition 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 restructuring liabilities, the treatment of acquisition related transaction costs and the recognition of changes in the acquirer’s income tax valuation allowance. SFAS 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are in the process of evaluating the impact of the pending adoption of Statement 141R. We currently believe that the adoption of Statement 141R will result in the recognition of certain types of expenses in our results of operations that we currently capitalize pursuant to existing accounting standards and may also impact our financial statements in other ways.
 
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.
 
Under 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 now reported as part of our Platform segment which primarily consists of assets acquired in the Macromedia acquisition,fiscal 2009, is in an emerging market with high growth potential. We recently announced the Open Screen Project. 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. Accordingly, we would expect revenueRevenue from this segment has begun to decrease following the next major release of these products scheduled for fiscal 2009.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 thisour Platform segment do not meet our expectations, we may be required to record a charge to earnings reflecting an impairment of this 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, or interpretation of, tax 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 IRS and other domestic and foreign tax authorities.authorities, including a current examination by the IRS for our fiscal 2005, 2006 and 2007 tax returns. These examinations are expected to focus on our intercompany transfer 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. 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 Bay Area, where many of our employees are located. We have relied on our ability to grant equity

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compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accounting 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.
 
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Our investment portfolio may become impaired by further deterioration of the capital markets.
Our cash equivalent and short-term investment portfolio as of August 29, 200828, 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 manage and limithelp 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 such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may pose risks arising from recent market liquidity and credit concerns. As of August 29, 2008,28, 2009, we had no direct holdings in these categories of investments and our indirect exposure to these financial instruments through our holdings in money market mutual funds was immaterial. As of August 29, 2008, we had nomaterial impairment chargecharges associated with our short-term investment portfolio relating to such adverse financial market conditions. Although we believe 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 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.
 
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 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, 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.
 

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ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
Below is a summary of stock repurchases for the quarterthree months ended August 29, 2008.28, 2009. See Notes 10 and 17Note 11 of our Notes to Condensed 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  May 30, 2008      140,020,904 (3)
May 31—June 27, 2008         
From employees(4)
  7  $42.71    
Structured repurchases  401,563  $41.02    
June 28—July 25, 2008           
From employees(4)
  27  $39.80    
Structured repurchases  1,065,131  $39.13    
Open market repurchases                                                                                               750,000  $39.19    
July 26—August 29, 2008           
Structured repurchases  989,539  $42.40    
Adjustments to repurchase authority for net dilution  —     6,208,888 (5)
Total shares repurchased  3,206,267     (3,206,267) 
Ending shares available to be repurchased under Program I as of August 29, 2008        143,023,525 (6)
            
Stock Repurchase Program II           
Beginning shares available to be repurchased as of  May 30, 2008        456,361  
June 28—July 25, 2008           
Open market repurchases  456,361  $39.79    
Total shares repurchased  456,361     (456,361) 
Ending shares available to be repurchased under Program II  as of August 29, 2008        0  
 
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  May 29, 2009      129,677,547 (3)
May 30—June 26, 2009         
From employees (4) 
  7  $30.15    
Structured repurchases
  —  $—    
June 27—July 24, 2009           
From employees (4) 
  —  $—    
Structured repurchases
  2,127,383  $27.42    
July 25—August 28, 2009           
From employees (4) 
  —  $—    
Structured repurchases
  1,850,895  $31.23    
Adjustments to repurchase authority for net dilution
  —  $— 6,155,922 (5)
Total shares repurchased
  3,978,285     (3,978,285) 
Ending shares available to be repurchased under Program I as of August 28, 2009        131,855,184 (6)
            

 
 (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.
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.
Stock Repurchase Program II
In April 2007, our Board of Directors authorized Stock Repurchase Program II which was not subject to expiration. Under Stock Repurchase Program II, we had authorization to repurchase in aggregate up to 20.0 million shares of our common stock. In November 2007, the Board of Directors approved a 30.0 million share increase to Stock Repurchase Program II. This increased the authorization under this program from the original 20.0 million shares to 50.0 million shares. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased.
 
(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.
 

43

ITEM 5.  OTHER INFORMATION
None.
ITEM 6.  EXHIBITS
 
Exhibit   Incorporated by Reference** Filed
Number Exhibit Description Form Date Number Herewith
           
3.1 Amended and Restated Bylaws 8-K 1/15/08 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  
           
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* 10-Q 4/4/08 10.2  
           
10.3 Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-Q 7/3/08 10.3  
           
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 1/24/08 10.5  
           
10.6 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
           
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  
           

44


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 and restated* DEF 14A 2/27/08 Appendix A  
           
10.11 Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 4/4/08 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 10/07/04 10.14  
           
10.15 Lease between Adobe Systems Incorporated and Selco Service Corporation, dated March 26, 2007 8-K 3/28/07 10.1  
           
10.16 Participation Agreement among Adobe Systems Incorporated, Selco Service Corporation, et al. dated March 26, 2007 8-K 3/28/07 10.2  
           
10.17 Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated November 23, 1999 10-K 3/30/00 10.23  
           
10.18 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  

45


10.19 Form of Restricted Stock Unit Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-Q 4/4/08 10.19  
           
10.20 Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 4/4/08 10.20  
           
10.21 Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 10/07/04 10.11  
           
10.22 2008 Executive Officer Annual Incentive Plan* 8-K 1/30/08 10.4  
           
10.23 2005 Equity Incentive Assumption Plan, as amended* 10-Q 4/4/08 10.23  
           
10.24 Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* 10-Q 4/4/08 10.24  

10.25 Allaire Corporation 1997 Stock Incentive Plan* S-8 03/27/01 4.06  
           
10.26 Allaire Corporation 1998 Stock Incentive Plan* S-8 03/27/01 4.07  
           
10.27 Allaire Corporation 2000 Stock Incentive Plan* S-8 03/27/01 4.08  
           
10.28 Andromedia, Inc. 1996 Stock Option Plan* S-8 12/07/99 4.07  
           
10.29 Andromedia, Inc. 1997 Stock Option Plan* S-8 12/07/99 4.08  
           
10.30 Andromedia, Inc. 1999 Stock Plan* S-8 12/07/99 4.09  
           
10.31 ESI Software, Inc. 1996 Equity Incentive Plan* S-8 10/18/99 4.08  
           
10.32 eHelp Corporation 1999 Equity Incentive Plan* S-8 12/29/03 4.08  
           
10.33 Blue Sky Software Corporation 1996 Stock Option Plan* S-8 12/29/03 4.07  

46


10.34 Bright Tiger Technologies, Inc. 1996 Stock Option Plan* S-8 03/27/01 4.11  
           
10.35 Live Software, Inc. 1999 Stock Option/Stock Issuance Plan* S-8 03/27/01 4.10  
           
10.36 Macromedia, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.07  
           
10.37 Macromedia, Inc. 1992 Equity Incentive Plan* 10-Q 08/03/01 10.01  
           
10.38 Macromedia, Inc. 2002 Equity Incentive Plan* S-8 08/10/05 4.08  
           
10.39 Form of Macromedia, Inc. Stock Option Agreement* S-8 08/10/05 4.09  
           
10.40 Middlesoft, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.09  
           
10.41 Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* S-8 11/23/04 4.10  

10.42 Form of Macromedia, Inc. Restricted Stock Purchase Agreement* 10-Q 2/08/05 10.01  
           
10.43 Adobe Systems Incorporated Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.1  
           
10.44 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  
           
10.45 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  
           
10.46 Adobe Systems Incorporated Deferred Compensation Plan* 10-K 1/24/08 10.52  

47


10.473.2.1 Certificate of Correction of Restated Certificate of Incorporation of Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K10-Q 1/30/074/11/03 10.13.6.1  

10.48 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  
           
10.49 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.3  
           
10.50 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  
           
10.51 Adobe Systems Incorporated Executive Cash Bonus Plan* DEF 14A 2/24/06 Appendix B  
           
10.52 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  
           
10.53 Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control* 8-K 2/13/08 10.2  
           
10.54 Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006* 8-K 11/16/06 10.1  
           
10.55 Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007* 8-K 1/26/07 10.1  

48


10.56Credit 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 Managers8-K8/16/0710.1

10.57 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  
           
10.58 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  
           
10.59 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  
           
10.60 Form of Director Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 7/3/08 10.60  
           
10.61 Form of Director Restricted Stock Unit Agreement in connection with the 2003 Equity Incentive Plan* 10-Q 7/3/08 10.61  

49


31.1Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934Exhibit   Incorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
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  
           
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* 10-Q 4/4/08 10.2  
           
10.3 Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-K 1/23/09 10.3  
           
10.4 1994 Stock Option Plan, as amended* S-8 5/30/97 10.40  
           
10.5 1997 Employee Stock Purchase Plan, as amended* 10-K 1/24/08 10.5  
           
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 and restated* DEF 14A 2/20/09 Appendix A  
50
Exhibit   XIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.11 Form of Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 4/4/08 10.11  
           
10.12 Form of Indemnity Agreement* 10-Q 6/26/09 10.12  
           
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 10/07/04 10.14  
           
10.15 Lease between Adobe Systems Incorporated and Selco Service Corporation, dated March 26, 2007 8-K 3/28/07 10.1  
           
10.16 Participation Agreement among Adobe Systems Incorporated, Selco Service Corporation, et al. dated March 26, 2007 8-K 3/28/07 10.2  
           
10.17 Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated November 23, 1999 10-K 3/30/00 10.23  
           
10.18 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  
           
10.19 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  
           
10.20 Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.20  
           
10.21 Form of Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 10/07/04 10.11  
51
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.22 2008 Executive Officer Annual Incentive Plan* 8-K 1/30/08 10.4  
           
10.23 2005 Equity Incentive Assumption Plan, as amended* 10-Q 4/4/08 10.23  
           
10.24 Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* 10-Q 4/4/08 10.24  
           
10.25 Allaire Corporation 1997 Stock Incentive Plan* S-8 03/27/01 4.06  
           
10.26 Allaire Corporation 1998 Stock Incentive Plan* S-8 03/27/01 4.07  
           
10.27 Allaire Corporation 2000 Stock Incentive Plan* S-8 03/27/01 4.08  
           
10.28 Andromedia, Inc. 1996 Stock Option Plan* S-8 12/07/99 4.07  
           
10.29 Andromedia, Inc. 1997 Stock Option Plan* S-8 12/07/99 4.08  
           
10.30 Andromedia, Inc. 1999 Stock Plan* S-8 12/07/99 4.09  
           
10.31 ESI Software, Inc. 1996 Equity Incentive Plan* S-8 10/18/99 4.08  
           
10.32 eHelp Corporation 1999 Equity Incentive Plan* S-8 12/29/03 4.08  
           
10.33 Blue Sky Software Corporation 1996 Stock Option Plan* S-8 12/29/03 4.07  
           
10.34 Bright Tiger Technologies, Inc. 1996 Stock Option Plan* S-8 03/27/01 4.11  
           
10.35 Live Software, Inc. 1999 Stock Option/Stock Issuance Plan* S-8 03/27/01 4.10  
           
10.36 Macromedia, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.07  
           
10.37 Macromedia, Inc. 1992 Equity Incentive Plan* 10-Q 08/03/01 10.01  
52
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.38 Macromedia, Inc. 2002 Equity Incentive Plan* S-8 08/10/05 4.08  
           
10.39 Form of Macromedia, Inc. Stock Option Agreement* S-8 08/10/05 4.09  
           
10.40 Middlesoft, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.09  
           
10.41 Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* S-8 11/23/04 4.10  
           
10.42 Form of Macromedia, Inc. Restricted Stock Purchase Agreement* 10-Q 2/08/05 10.01  
           
10.43 Adobe Systems Incorporated Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.1  
           
10.44 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  
           
10.45 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  
           
10.46 Adobe Systems Incorporated Deferred Compensation Plan* 10-K 1/24/08 10.52  
           
10.47 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/07 10.1  
           
10.48 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  
53
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
10.49 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.3  
           
10.50 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  
           
10.51 Adobe Systems Incorporated Executive Cash Bonus Plan* DEF 14A 2/24/06 Appendix B  
           
10.52 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  
           
10.53 Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control* 8-K 2/13/08 10.2  
           
10.54 Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006* 8-K 11/16/06 10.1  
           
10.55 Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007* 8-K 1/26/07 10.1  
54
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.56 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  
           
10.57 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  
           
10.58 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  
           
10.59 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  
           
10.60 Form of Director Annual Grant Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.60  
55
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
10.61 Form of Director Initial Grant Restricted Stock Unit Agreement in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.61  
           
10.62 Form of Director Annual Grant Restricted Stock Unit Agreement in connection with the 2003 Equity Incentive Plan* 10-K 1/23/09 10.62  
           
10.63 Description of 2009 Director Compensation* 10-K 1/23/09 10.63  
           
10.64 2009 Performance Share Program Award Calculation Methodology* 8-K 1/29/09 10.3  
           
10.65 2009 Executive Annual Incentive Plan* 8-K 1/29/09 10.4  
           
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
           
101.LAB XBRL Taxonomy Extension Labels††       X
56
ExhibitIncorporated by Reference**Filed
NumberExhibit DescriptionFormDateNumberHerewith
           
31.2Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934X
32.1Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†X

32.2Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†X
100.INSXBRL Instance††X
100.SCHXBRL Taxonomy Extension Schema††X
100.CALXBRL Taxonomy Extension Calculation††X
100.LABXBRL Taxonomy Extension Labels††X
100.PRE101.PRE XBRL Taxonomy Extension Presentation††       X
           
100.DEF101.DEF XBRL Taxonomy Extension Definition††       X

 
*Compensatory plan or arrangement.
 
**References to Exhibits 10.17 and 10.18 are to filings made by the Allaire Corporation. References to Exhibits 10.25 through 10.42 are to filings made by Macromedia, Inc.
 
†The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, 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-Q, irrespective of any general incorporation language contained in such filing.
 
††Furnished, not filed.
 

5057

 
SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 ADOBE SYSTEMS INCORPORATED
  
  
 By
/s/ Mark Garrett
  Mark Garrett
  Executive Vice President and
  Chief Financial Officer
  (Principal Financial Officer)
 
Date: October 2, 20081, 2009

5158

SUMMARY OF TRADEMARKS
 
The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in the United StatesU.S. and/or other countries, are referenced in this Form 10-Q:
 
Adobe
Adobe AIR
Acrobat
Acrobat Connect
ColdFusion
Creative Suite
Flash
Flash Cast
Flash Lite
Flex
Flex Builder
Lightroom
LiveCycle
Macromedia
Photoshop
Scene7PostScript
Reader
Shockwave
 
All other trademarks are the property of their respective owners.

 
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