Page No. August 31, December 1, 2007 2006 ASSETS Current assets: Cash and cash equivalents $ 559,283 $ 772,500 Short-term investments 1,396,431 1,508,379 Trade receivables, net of allowances for doubtful accounts of $5,091 and $6,798, respectively 260,953 356,815 Other receivables 60,721 51,851 Deferred income taxes 168,783 155,613 Prepaid expenses and other assets 59,059 39,311 Total current assets 2,505,230 2,884,469 Property and equipment, net 278,722 227,197 Goodwill 2,153,093 2,149,494 Purchased and other intangibles, net 438,260 506,405 Investment in lease receivable 207,239 126,800 Other assets 83,917 68,183 $ 5,666,461 $ 5,962,548 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade and other payables $ 64,374 $ 55,031 Accrued expenses 349,263 303,550 Accrued restructuring 5,849 10,088 Income taxes payable 223,816 178,368 Deferred revenue 164,442 130,310 Total current liabilities 807,744 677,347 Long-term liabilities: Deferred revenue 27,660 32,644 Deferred income taxes 60,777 70,715 Accrued restructuring 15,887 21,984 Other liabilities 21,393 7,982 Total liabilities 933,461 810,672 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 and outstanding 61 61 Additional paid-in-capital 2,432,489 2,451,610 Retained earnings 3,819,384 3,317,785 Accumulated other comprehensive income 13,700 6,344 Treasury stock, at cost (25,153 and 13,608 shares, respectively), net of re-issuances (1,532,634 ) (623,924 ) Total stockholders’ equity 4,733,000 5,151,876 $ 5,666,461 $ 5,962,548 Three Months Ended Nine Months Ended August 31, September 1, August 31, September 1, Revenue: Products $ 813,382 $ 579,185 $ 2,147,149 $ 1,830,905 Services and support 38,304 23,006 99,521 62,220 Total revenue 851,686 602,191 2,246,670 1,893,125 Total cost of revenue: Products 69,002 53,308 193,532 165,426 Services and support 23,619 16,171 62,566 47,406 Total cost of revenue 92,621 69,479 256,098 212,832 Gross profit 759,065 532,712 1,990,572 1,680,293 Operating expenses: Research and development 163,217 130,440 450,395 401,268 Sales and marketing 251,243 217,203 702,323 641,418 General and administrative 71,132 57,311 201,004 177,324 Restructuring and other charges 555 32 555 20,251 Amortization of purchased intangibles and incomplete technology 17,893 17,693 54,542 52,111 Total operating expenses 504,040 422,679 1,408,819 1,292,372 Operating income 255,025 110,033 581,753 387,921 Non-operating income: Investment gain (loss) (694 ) (5,113 ) 9,069 (3,718 ) Interest and other income, net 22,664 18,092 65,691 47,563 Total non-operating income 21,970 12,979 74,760 43,845 Income before income taxes 276,995 123,012 656,513 431,766 Provision for income taxes 71,752 28,616 154,914 109,201 Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565 Basic net income per share $ 0.35 $ 0.16 $ 0.85 $ 0.54 Shares used in computing basic net income per share 583,670 586,433 587,141 594,023 Diluted net income per share $ 0.34 $ 0.16 $ 0.83 $ 0.53 Shares used in computing diluted net income per share 597,334 600,882 602,263 612,791 See accompanying Notes to Condensed Consolidated Financial Statements. ADOBE SYSTEMS INCORPORATED Nine Months Ended August 31, September 1, Cash flows from operating activities: Net income $ 501,599 $ 322,565 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 237,274 232,546 Stock-based compensation 110,090 131,023 Tax benefit from employee stock option plans 75,878 81,587 Retirements of property and equipment 604 — Provision (recovery) for losses on receivables (1,632 ) 724 Net (gains) losses on sales and impairments of investments (10,834 ) 12,055 Deferred income taxes (20,405 ) 7,871 Excess tax benefits from stock-based compensation (54,396 ) (75,822 ) Changes in operating assets and liabilities, net of acquired assets and liabilities: Receivables 94,903 (35,403 ) Prepaid expenses and other current assets (16,135 ) 12,136 Trade and other payables 9,052 (4,516 ) Accrued expenses 34,919 (79,591 ) Accrued restructuring (10,547 ) (36,181 ) Income taxes payable 64,746 (1,612 ) Deferred revenue 25,971 41,527 Net cash provided by operating activities 1,041,087 608,909 Cash flows from investing activities: Purchases of short-term investments (1,755,079 ) (1,082,020 ) Maturities of short-term investments 335,895 275,965 Sales of short-term investments 1,531,651 733,486 Purchases of property and equipment (103,944 ) (50,169 ) Purchases of long-term investments and other assets (85,173 ) (18,595 ) Investment in lease receivable (80,439 ) — Acquisitions, net of cash (66,730 ) 471,502 Issuance costs for credit facility (838 ) — Proceeds from sale of equity securities 11,310 8,490 Net cash (used for) provided by investing activities (213,347 ) 338,659 Cash flows from financing activities: Purchases of treasury stock (1,451,525 ) (1,164,249 ) Proceeds from issuance of treasury stock 354,652 360,994 Excess tax benefits from stock-based compensation 54,396 75,822 Proceeds from issuance of common stock — 306 Net cash used for financing activities (1,042,477 ) (727,127 ) Effect of foreign currency exchange rates on cash and cash equivalents 1,520 3,495 Net (decrease) increase in cash and cash equivalents (213,217 ) 223,936 Cash and cash equivalents at beginning of period 772,500 420,818 Cash and cash equivalents at end of period $ 559,283 $ 644,754 Supplemental disclosures: Common and treasury stock issued and stock options assumed for acquisition of Macromedia $ — $ 3,436,725 Cash paid for income taxes, net of refunds $ 38,434 $ 24,138 ADOBE SYSTEMS INCORPORATED November 30, 2007. Certain prior year amounts long-term and short-term other assets. November 30, 2007, that are of significance, or potential significance, to us. 2006(1) Acquisitions Other 2007 Creative Solutions $ 936,393 $ 51,067 $ (19,992 ) $ 967,468 Knowledge Worker Solutions 423,048 — (11,485 ) 411,563 Enterprise and Developer Solutions 325,033 — (5,347 ) 319,686 Mobile and Device Solutions 217,542 — (4,979 ) 212,563 Other(2) 247,478 — (5,665 ) 241,813 Total $ 2,149,494 $ 51,067 $ (47,468 ) $ 2,153,093 December 1, December 1, Additions Amortization August 31, Purchased technology $ 397,098 $ 249,722 $ 59,470 $ (102,599 ) $ 206,593 Localization $ 9,060 $ 6,799 $ 35,632 $ (19,745 ) $ 22,686 Trademarks 130,925 104,068 300 (19,152 ) 85,216 Customer contracts and relationships 188,401 145,525 11,170 (33,719 ) 122,976 Other intangibles 600 291 700 (202 ) 789 Total other intangible assets $ 328,986 $ 256,683 $ 47,802 $ (72,818 ) $ 231,667 Total purchased and other intangible assets $ 726,084 $ 506,405 $ 107,272 $ (175,417 ) $ 438,260 Fiscal year Purchased Other Intangible Remainder of 2007 $ 29,725 $ 27,972 2008 87,201 80,164 2009 55,950 59,931 2010 6,135 49,350 2011 4,472 12,968 Thereafter 23,110 1,282 Total expected amortization expense $ 206,593 $ 231,667 2007 2006 Investments $ 52,542 $ 46,273 Restricted cash 7,366 2,341 Prepaid royalty 6,407 3,337 Security deposits 6,292 7,510 Prepaid rent 4,692 2,765 Prepaid land lease 3,234 3,263 Unbilled receivables — 2,400 Other 3,384 294 Total other assets $ 83,917 $ 68,183 2007 2006 Trade payables $ 33,962 $ 37,915 Sales and use tax and other payables 30,412 17,116 Total trade and other payables $ 64,374 $ 55,031 2007 2006 Accrued compensation and benefits $ 168,208 $ 148,000 Sales and marketing allowances 19,921 20,361 Other 161,134 135,189 Total accrued expenses $ 349,263 $ 303,550 Three Months Ended Nine Months Ended 2007 2006 2007 2006 Expected life (in years) 3.58 – 3.66 3.7 3.54 – 4.82 3.7 Volatility 29.62 – 33.70 % 33.73 – 36.95 % 29.62 – 33.70 % 30.29 – 36.95 % Risk free interest rate 4.34 – 5.14 % 4.89 – 5.15 % 4.34 – 5.14 % 4.30 – 5.15 % Three Months Ended Nine Months Ended 2007 2006 2007 2006 Expected life (in years) 0.50 – 2.0 1.25 0.50 – 2.0 1.25 Volatility 30.41 – 30.64 % 31.86 – 35.02 % 30.41 – 32.75 % 30.30 – 35.02 % Risk free interest rate 4.87 – 4.93 % 5.16 – 5.26 % 4.79 – 5.11 % 4.32 – 5.26 % As of August Balance Cash Payments Adjustments Balance Total Costs Termination benefits $ 1,002 $ (370 ) $ (632 ) $ — $ 26,986 Cost of closing redundant facilities 28,934 (8,771 ) 170 20,333 19,679 Cost of contract termination 46 (8 ) (38 ) — 3,238 Other 1,444 (31 ) (10 ) 1,403 1,196 Total $ 31,426 $ (9,180 ) $ (510 ) $ 21,736 $ 51,099 29, 2008. Accrued restructuring charges of Three Months Nine Months 2007 2006 2007 2006 Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565 Other comprehensive income (loss): Change in unrealized gain on available-for-sale securities, net of taxes 700 2,730 5,568 2,595 Currency translation adjustments 21 20 1,746 3,495 Net gain (loss) in derivative instruments, net of taxes (3,776 ) 1,903 42 (3,414 ) Other comprehensive income (loss) (3,055 ) 4,653 7,356 2,676 Total comprehensive income, net of taxes $ 202,188 $ 99,049 $ 508,955 $ 325,241 Three Months Nine Months 2007 2006 2007 2006 Net income $ 205,243 $ 94,396 $ 501,599 $ 322,565 Shares used to compute basic net income per share 583,670 586,433 587,141 594,023 Dilutive potential common shares: Unvested restricted stock 11 35 13 35 Stock options 13,653 14,414 15,109 18,733 Shares used to compute diluted net income per share 597,334 600,882 602,263 612,791 Basic net income per share $ 0.35 $ 0.16 $ 0.85 $ 0.54 Diluted net income per share $ 0.34 $ 0.16 $ 0.83 $ 0.53 August $3.0 million and $4.2 million, respectively. In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable to estimate the maximum potential impact of these indemnification provisions on our future results of operations. proceedings, claims or investigations. This segment contains revenue generated by Creative Knowledge Enterprise Mobile and Other* Total Three months ended Revenue $ 545,453 $ 176,764 $ 59,376 $ 12,983 $ 57,110 $ 851,686 Cost of revenue 40,114 15,969 18,897 9,521 8,120 92,621 Gross profit $ 505,339 $ 160,795 $ 40,479 $ 3,462 $ 48,990 $ 759,065 Gross profit as a percentage of revenues 93 % 91 % 68 % 27 % 86 % 89 % Three months ended September 1, 2006 Revenue $ 331,590 $ 150,573 $ 49,421 $ 9,144 $ 61,463 $ 602,191 Cost of revenue 31,409 9,297 16,918 5,610 6,245 69,479 Gross profit $ 300,181 $ 141,276 $ 32,503 $ 3,534 $ 55,218 $ 532,712 Gross profit as a percentage of revenues 91 % 94 % 66 % 39 % 90 % 88 % Creative Knowledge Enterprise Mobile and Other* Total Nine months ended August 31, 2007 Revenue $ 1,328,463 $ 536,382 $ 162,553 $ 38,999 $ 180,273 $ 2,246,670 Cost of revenue 103,023 47,473 60,377 23,206 22,019 256,098 Gross profit $ 1,225,440 $ 488,909 $ 102,176 $ 15,793 $ 158,254 $ 1,990,572 Gross profit as a percentage of revenues 92 % 91 % 63 % 40 % 88 % 89 % Nine months ended September 1, 2006 Revenue $ 1,073,841 $ 476,957 $ 137,301 $ 25,361 $ 179,665 $ 1,893,125 Cost of revenue 101,919 27,036 49,527 15,667 18,683 212,832 Gross profit $ 971,922 $ 449,921 $ 87,774 $ 9,694 $ 160,982 $ 1,680,293 Gross profit as a percentage of revenues 91 % 94 % 64 % 38 % 90 % 89 % Three Months Nine Months 2007 2006 2007 2006 Total gross profit from operating segments above $ 759,065 $ 532,712 $ 1,990,572 $ 1,680,293 Total operating expenses* 504,040 422,679 1,408,819 1,292,372 Total operating income 255,025 110,033 581,753 387,921 Non-operating income 21,970 12,979 74,760 43,845 Income before income taxes $ 276,995 $ 123,012 $ 656,513 $ 431,766 Programs business segment also achieved modest year-over-year revenue growth. Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Product $ 813.4 $ 579.2 40 % $ 2,147.2 $ 1,830.9 17 % Percentage of total revenues 96 % 96 % 96 % 97 % Services and support 38.3 23.0 67 % 99.5 62.2 60 % Percentage of total revenues 4 % 4 % 4 % 3 % Total revenues $ 851.7 $ 602.2 $ 2,246.7 $ 1,893.1 �� products. Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Creative Solutions $ 545.5 $ 331.6 65 % $ 1,328.5 $ 1,073.8 24 % Percentage of total revenues 64 % 55 % 59 % 57 % Knowledge Worker Solutions 176.8 150.6 17 % 536.4 477.0 12 % Percentage of total revenues 21 % 25 % 24 % 25 % Enterprise and Developer Solutions 59.3 49.4 20 % 162.5 137.2 18 % Percentage of total revenues 7 % 8 % 7 % 7 % Mobile and Device Solutions 13.0 9.1 43 % 39.0 25.4 54 % Percentage of total revenues 1 % 2 % 2 % 1 % Other** 57.1 61.5 (7 )% 180.3 179.7 * % Percentage of total revenues 7 % 10 % 8 % 10 % Total revenues $ 851.7 $ 602.2 $ 2,246.7 $ 1,893.1 Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Americas $ 400.7 $ 310.3 29 % $ 1,082.5 $ 929.9 16 % Percentage of total revenues 47 % 52 % 48 % 49 % EMEA 281.5 165.4 70 % 708.1 553.7 28 % Percentage of total revenues 33 % 27 % 32 % 29 % Asia 169.5 126.5 34 % 456.1 409.5 11 % Percentage of total revenues 20 % 21 % 20 % 22 % Total revenues $ 851.7 $ 602.2 $ 2,246.7 $ 1,893.1 2008. Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Product $ 69.0 $ 53.3 29 % $ 193.5 $ 165.4 17 % Percentage of total revenues 8 % 9 % 9 % 9 % Services and support 23.6 16.2 46 % 62.6 47.4 32 % Percentage of total revenues 3 % 3 % 3 % 3 % Total cost of revenues $ 92.6 $ 69.5 $ 256.1 $ 212.8 % Change % Change Increased localization costs related to our product launches 23 % 7 % Increased royalties for licensed technologies 6 5 Increased material costs due to product mix 4 1 Increased excess and obsolete inventory 2 4 Decreased amortization of purchased technology (10 ) (2 ) Various individually insignificant items 4 2 Total change 29 % 17 % Three Months Percent Nine Months Percent 2007 �� 2006 Change 2007 2006 Change Research and development $ 163.2 $ 130.4 25 % 450.4 $ 401.3 12 % Percentage of total revenues 19 % 22 % 20 % 21 % % Change % Change Increased compensation associated with higher incentive compensation and stock based compensation 15 % 5 % Increased compensation and related benefits associated with headcount growth 9 9 Increased professional and consulting fees 1 1 Decreased technology purchases (2 ) (2 ) Various individually insignificant items 2 (1 ) Total change 25 % 12 % Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Sales and marketing $ 251.2 $ 217.2 16 % $ 702.3 $ 641.4 9 % Percentage of total revenues 29 % 36 % 31 % 34 % % Change % Change Increased compensation associated with higher incentive compensation and stock based compensation 7 % 4 % Increased marketing spending related to product launches and overall marketing efforts to further increase revenues 5 1 Increased compensation and related benefits associated with headcount 3 3 Increased professional and consulting fees 1 2 Increased facility costs 1 1 Various individually insignificant items (1 ) (2 ) Total change 16 % 9 % Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change General and administrative $ 71.1 $ 57.3 24 % $ 201.0 $ 177.3 13 % Percentage of total revenues 8 % 10 % 9 % 9 % % Change % Change Increased compensation associated with higher incentive compensation and stock based compensation 15 % 7 % Increased professional and consulting fees 5 1 Increased compensation and related benefits associated with headcount growth 3 3 Increased depreciation and amortization 2 2 Various individually insignificant items (1 ) — Total change 24 % 13 % Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Restructuring and other charges 0.6 — * % 0.6 $ 20.2 (97 )% Percentage of total revenues * % * % * % 1 % Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Amortization of purchased intangibles $ 17.9 $ 17.7 1 % $ 54.5 $ 52.1 5 % Percentage of total revenues. 2 % 3 % 2 % 3 % Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Investment gain (loss), net $ (0.7 ) $ (5.1 ) 86 % $ 9.1 $ (3.7 ) 346 % Percentage of total revenues * % (1 )% * % * % Interest and other income 22.7 18.1 25 % 65.7 47.5 38 % Percentage of total revenues 3 % 3 % 3 % 3 % Total non-operating income $ 22.0 $ 13.0 $ 74.8 $ 43.8 paid upon expiration of the LIBOR contract or at a minimum, quarterly. Provision for Income Taxes for the Three and Nine Months Ended August Three Months Percent Nine Months Percent 2007 2006 Change 2007 2006 Change Provision for income taxes $ 71.8 $ 28.6 151 % $ 154.9 $ 109.2 42 % Percentage of total revenues 8 % 5 % 7 % 6 % Effective tax rate 26 % 23 % 24 % 25 % 2008 of a U.S. income tax examination covering our fiscal years 2001 through 2004, and to a lesser extent, stronger forecasted international profits for fiscal 2008 and lower foreign taxes on those forecasted profits. August 31, December 1, Percent Cash, cash equivalents and short-term investments $ 1,955.7 $ 2,280.9 (14 )% Working capital $ 1,697.5 $ 2,207.1 (23 )% Stockholders’ equity $ 4,733.0 $ 5,151.9 (8 )% August 31, September 1, Percent Net cash provided by operating activities $ 1,041.1 $ 608.9 71 % Net cash (used for) provided by investing activities (213.3 ) 338.6 (163 )% Net cash used for financing activities (1,042.5 ) (727.1 ) 43 % Effect of foreign currency exchange rates on cash and cash equivalents 1.5 3.5 (57 )% Net (decrease) increase in cash and cash equivalents $ (213.2 ) $ 223.9 (195 )% royalties. a lesser extent, proceeds from the sale of equity securities. U.S., our fixed income portfolio is primarily invested in U.S. Treasury 2007. 2007. harmed. Additionally, customer requirements for “open standards” or “open source” products could impact adoption or use with respect to some of our products. 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 party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on offerings. weakens and we were unable to timely secure a replacement distributor. 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. adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations. other ways. 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. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Plan/ Shares Average Maximum Number Beginning shares available to be repurchased as of June 1, 2007 174,585,660 (2) Stock Repurchase Program I June 2 – June 29, 2007 From employees(3) 222 $ 41.66 Structured repurchases 1,918,819 $ 41.06 June 30 – July 27, 2007 From employees(3) 794 $ 41.53 Structured repurchases 1,914,850 $ 39.01 July 28 – August 31, 2007 From employees(3) 53 $ 42.75 Structured repurchases 867,855 $ 38.57 Adjustments to repurchase authority for net dilution — 3,637,407 (4) Total shares repurchased 4,702,593 (4,702,593 ) Stock Repurchase Program II June 30 – July 27, 2007 Structured repurchases 3,797,152 $ 39.86 July 28 – August 31, 2007 Structured repurchases 9,136,673 $ 39.97 12,933,825 (12,933,825 ) Ending shares available to be repurchased as of August 31, 2007 160,586,649 (5) Exhibit Incorporated by Reference** Filed Number Exhibit Description Form Date Number Herewith 3.1 Amended and Restated Bylaws 8-K 9/23/05 3.1 3.2 Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01 10-Q 7/16/01 3.6 3.2.1 Certificate of Correction of Restated Certificate of Incorporation as filed with the Secretary of State of the State of Delaware 10-Q 4/11/03 3.6.1 3.3 Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated 10-Q 7/8/03 3.3 4.1 Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC 8-K 7/3/00 1 4.1.1 Amendment No. 1 to Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC 8-A/2G/A 5/23/03 7 10.1 1984 Stock Option Plan, as amended* 10-Q 7/02/93 10.1.6 10.2 Amended 1994 Performance and Restricted Stock Plan* 10-K/A 2/6/07 10.2 10.3 Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-Q 10/7/04 10.3 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 12/1/00 10.70 10.6 1996 Outside Directors Stock Option Plan, as amended* 10-Q 4/12/06 10.6 10.7 Forms of Stock Option Agreements used in connection with the 1996 Outside Directors Stock Option Plan* S-8 6/16/00 4.8 10.8 1999 Nonstatutory Stock Option Plan, as amended* S-8 10/29/01 4.6 10.9 1999 Equity Incentive Plan, as amended* 10-K 2/26/03 10.37 10.10 2003 Equity Incentive Plan, as amended and restated* DEF 14A 3/02/07 Appendix A 10.11 Forms of Stock Option and Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 10/7/04 10.11 10.12 Form of Indemnity Agreement* 10-Q 5/30/97 10.25.1 10.13 Forms of Retention Agreement* 10-K 11/28/97 10.44 10.14 Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated 10-Q 10/7/04 10.14 10.15 Lease between Adobe Systems and Selco Service Corporation, dated March 26, 2007 8-K 3/28/07 10.1 10.16 Participation agreement among Adobe Systems, 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/A 2/6/07 10.20 10.20 Form of Restricted Stock Unit Agreement used in connection with the 2003 Equity Incentive Plan* 10-K/A 2/6/07 10.21 10.21 Adobe Systems Incorporated 2004 Annual Executive Incentive Plan* 8-K 1/13/05 10.1 10.22 Adobe Systems Incorporated 2005 Annual Executive Incentive Plan* 8-K 1/13/05 10.2 10.23 Description of 2005 Director Compensation* 10-K 2/2/05 10.21 10.24 Description of 2006 Director Compensation* 8-K 9/23/05 10.1 10.25 Adobe Systems Incorporated 2006 Management Team Annual Incentive Plan* 8-K 1/13/06 10.1 10.26 2007 Executive Officer Annual Incentive Plan* 8-K 1/30/07 10.5 10.27 2005 Equity Incentive Assumption Plan* 8-K 12/07/05 10.2 10.28 Form of Stock Option Agreement used in connection with the 2005 Equity Incentive Assumption Plan* 8-K 12/07/05 10.3 10.29 Allaire Corporation 1997 Stock Incentive Plan* S-8 03/27/01 4.06 10.30 Allaire Corporation 1998 Stock Incentive Plan* S-8 03/27/01 4.07 10.31 Allaire Corporation 2000 Stock Incentive Plan* S-8 03/27/01 4.08 10.32 Andromedia, Inc. 1996 Stock Option Plan* S-8 12/07/99 4.07 10.33 Andromedia, Inc. 1997 Stock Option Plan* S-8 12/07/99 4.08 10.34 Andromedia, Inc. 1999 Stock Plan* S-8 12/07/99 4.09 10.35 ESI Software, Inc. 1996 Equity Incentive Plan* S-8 10/18/99 4.08 10.36 eHelp Corporation 1999 Equity Incentive Plan* S-8 12/29/03 4.08 10.37 Blue Sky Software Corporation 1996 Stock Option Plan* S-8 12/29/03 4.07 10.38 Bright Tiger Technologies, Inc. 1996 Stock Option Plan* S-8 03/27/01 4.11 10.39 Live Software, Inc. 1999 Stock Option/Stock Issuance Plan* S-8 03/27/01 4.10 10.40 Macromedia, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.07 10.41 Macromedia, Inc. 1993 Directors Stock Option Plan* 10-Q 08/03/01 10.02 10.42 Macromedia, Inc. 1992 Equity Incentive Plan* 10-Q 08/03/01 10.01 10.43 Macromedia, Inc. 2002 Equity Incentive Plan* S-8 08/10/05 4.08 10.44 Form of Macromedia, Inc. Stock Option Agreement* S-8 08/10/05 4.09 10.45 Middlesoft, Inc. 1999 Stock Option Plan* S-8 08/17/00 4.09 10.46 Form of Macromedia, Inc. Revised Non-Plan Stock Option Agreement* S-8 11/23/04 4.10 10.47 Form of Macromedia, Inc. Restricted Stock Purchase Agreement* 10-Q 2/8/05 10.01 10.48 Restricted Stock Purchase Agreement between Macromedia, Inc. and Stephen Elop, dated January 24, 2005* 10-Q 2/8/05 10.02 10.49 Restricted Stock Purchase Agreement between Macromedia, Inc. and Robert Burgess, dated January 24, 2005* 10-Q 2/8/05 10.03 10.50 Amended and Restated Employment Agreement by and between Robert K. Burgess, dated January 21, 2005* 8-K 1/21/05 10.01 10.51 Amendment to Employment Agreement by and between Adobe Systems Incorporated, Adobe Macromedia Software LLC and Robert K. Burgess, dated December 7, 2005* 8-K 12/12/05 10.2 10.52 Amended and Restated Employment Agreement between Adobe Systems Incorporated and Stephen Elop, dated May 23, 2005* S-4 6/28/05 10.1 10.53 Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 2/3/06 10.1 10.54 Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 2/3/06 10.2 10.55 Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 2/3/06 10.3 10.56 Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 2/3/06 10.4 10.57 Adobe Systems Incorporated Deferred Compensation Plan* 8-K 9/26/06 10.1 10.58 Form of Maximum Award Grant Notice used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 2/3/06 10.5 10.59 Form of Performance Share Maximum Award Agreement used in connection with grants under the Adobe Systems Incorporated 2006 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 2/3/06 10.6 10.60 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Inventive Plan* 8-K 1/30/07 10.1 10.61 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 10.62 Adobe Systems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.3 10.63 Form of Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Stems Incorporated 2007 Performance Share Program pursuant to the Amended 1994 Performance and Restricted Stock Plan* 8-K 1/30/07 10.4 10.64 Adobe Systems Incorporated Executive Cash Bonus Plan* DEF 14A 2/24/06 Appendix B 10.65 Employment Transition Agreement between Adobe Systems Incorporated and Murray J. Demo, dated March 21, 2006* 8-K 3/22/06 10.1 10.66 Employment offer letter between Adobe Systems Incorporated and Randy Furr, dated May 16, 2006* 8-K 5/22/06 10.1 10.67 Adobe Systems Incorporated Executive Severance Plan in the Event of a Change of Control* 8-K 11/16/06 10.2 10.68 Employment offer letter between Adobe Systems Incorporated and Richard Rowley, dated October 30, 2006* 8-K 11/16/06 10.1 10.69 Confidential Resignation Agreement and General Release of Claims between Adobe Systems Incorporated and Peg Wynn, dated January 22, 2007* 10-K/A 2/6/07 10.66 10.70 Employment offer letter between Adobe Systems Incorporated and Mark Garrett dated January 5, 2007* 8-K 1/26/07 10.1 10.71 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 10.72 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 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 100.INS XBRL Instance†† X 100.SCH XBRL Taxonomy Extension Schema†† X 100.CAL XBRL Taxonomy Extension†† X 100.LAB XBRL Taxonomy Extension Labels†† X 100.PRE XBRL Taxonomy Extension†† X 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. By
_________________________x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended August 31, 2007ORo TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 29, 2008 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ____________to ____________
_________________________77-0019522(I.R.S. Employer345 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)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) or a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Act). Large accelerated filer x Accelerated filer o Non-accelerated filer o28, 200726, 2008 was 573,787,932.530,956,085.3 33 44 55 66 2323 3535 3535 PART II—OTHER INFORMATION 3635 3635 4443 4544 4644 5251 5352 2ADOBE SYSTEMS INCORPORATEDSee accompanying Notes to Condensed Consolidated Financial Statements.3 ASSETS Current assets: Cash and cash equivalents $ 1,134,263 $ 946,422 Short-term investments 866,641 1,047,432 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 Deferred income taxes 94,500 171,472 Prepaid expenses and other assets 60,059 44,714 Total current assets 2,517,120 2,572,851 Property and equipment, net 317,071 289,758 Goodwill 2,134,032 2,148,102 Purchased and other intangibles, net 246,401 367,644 Investment in lease receivable 207,239 207,239 Other assets 216,887 128,085 Total assets $ 5,638,750 $ 5,713,679 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Trade and other payables $ 56,254 $ 66,867 Accrued expenses 356,408 383,436 Accrued restructuring 6,862 3,731 Income taxes payable 37,546 215,058 Deferred revenue 204,593 183,318 Total current liabilities 661,663 852,410 Long-term liabilities: Debt 350,000 — Deferred revenue 27,838 25,950 Accrued restructuring 8,096 13,987 Income taxes payable 99,636 — Deferred income taxes 96,827 148,943 Other liabilities 23,248 22,407 Total liabilities 1,267,308 1,063,697 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 Additional paid-in-capital 2,369,689 2,340,969 Retained earnings 4,667,489 4,041,592 Accumulated other comprehensive income 23,439 27,948 Treasury stock, at cost (69,359 and 29,425 shares, respectively), net of reissuances (2,689,236 ) (1,760,588 ) Total stockholders’ equity 4,371,442 4,649,982 Total liabilities and stockholders’ equity $ 5,638,750 $ 5,713,679 ADOBE SYSTEMS INCORPORATEDCONDENSED CONSOLIDATED STATEMENTS OF INCOME(In thousands, except per share data)(Unaudited)
2007
2006
2007
20064thousands)thousands, except per share data) Three Months Nine Months Revenue: Products $ 838,813 $ 813,382 $ 2,532,076 $ 2,147,149 Services and support 48,444 38,304 132,512 99,521 Total revenue 887,257 851,686 2,664,588 2,246,670 Total cost of revenue: Products 84,623 69,002 202,657 193,532 Services and support 26,228 23,619 73,535 62,566 Total cost of revenue 110,851 92,621 276,192 256,098 Gross profit 776,406 759,065 2,388,396 1,990,572 Operating expenses: Research and development 170,124 163,217 508,909 450,395 Sales and marketing 271,439 251,243 813,399 702,323 General and administrative 97,156 71,132 257,163 201,004 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 Total operating expenses 556,937 504,040 1,633,318 1,408,819 Operating income 219,469 255,025 755,078 581,753 Interest and other income, net 9,338 22,733 34,778 65,866 Interest expense (2,390 ) (69 ) (8,027 ) (175 ) Investment gains (loss) 2,097 (694 ) 20,335 9,069 Total non-operating income, net 9,045 21,970 47,086 74,760 Income before income taxes 228,514 276,995 802,164 656,513 Provision for income taxes 36,906 71,752 176,267 154,914 Net income $ 191,608 $ 205,243 $ 625,897 $ 501,599 Basic net income per share $ 0.36 $ 0.35 $ 1.15 $ 0.85 Shares used in computing basic net income per share 531,060 583,670 542,624 587,141 Diluted net income per share $ 0.35 $ 0.34 $ 1.13 $ 0. 83 Shares used in computing diluted net income per share 541,311 597,334 552,739 602,263 (Unaudited)
2007
20065 Nine Months Ended Cash flows from operating activities: Net income $ 625,897 $ 501,599 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, amortization and accretion 200,537 237,274 Stock-based compensation 137,613 110,196 Provision for estimated returns 93,683 132,871 Tax benefit from employee stock option plans 83,740 75,878 Deferred income taxes 34,336 (20,405 ) Other non-cash items 6,764 (1,028 ) Gains on sales of investments, net of impairments (9,690 ) (10,834 ) Excess tax benefits from stock-based compensation (23,635 ) (54,396 ) Changes in operating assets and liabilities, net of acquired assets and liabilities: Receivables (96,399 ) (37,968 ) Prepaid expenses and other current assets (6,202 ) (16,135 ) Trade and other payables (10,613 ) 9,052 Accrued expenses (36,957 ) 34,919 Accrued restructuring (5,418 ) (10,547 ) Income taxes payable (73,957 ) 64,746 Deferred revenue 23,163 25,971 Net cash provided by operating activities 942,862 1,041,193 Cash flows from investing activities: Purchases of short-term investments (840,782 ) (1,755,079 ) Maturities of short-term investments 520,784 335,895 Sales of short-term investments 486,904 1,531,651 Purchases of property and equipment (88,481 ) (103,944 ) Purchases of long-term investments and other assets (102,029 ) (85,173 ) 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 Net cash used for investing activities (5,519 ) (213,347 ) Cash flows from financing activities: Purchases of treasury stock (1,422,735 ) (1,451,525 ) Proceeds from issuance of treasury stock 301,454 354,546 Excess tax benefits from stock-based compensation 23,635 54,396 Proceeds from borrowings under credit facility 450,000 — Repayments of borrowings under credit facility (100,000 ) — Net cash used for financing activities (747,646 ) (1,042,583 ) Effect of foreign currency exchange rates on cash and cash equivalents (1,856 ) 1,520 Net increase (decrease) in cash and cash equivalents 187,841 (213,217 ) Cash and cash equivalents at beginning of period 946,422 772,500 Cash and cash equivalents at end of period $ 1,134,263 $ 559,283 Supplemental disclosures: Cash paid for income taxes, net of refunds $ 129,320 $ 38,434 accounting principlesin 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 Adobe’sour Annual Report on Form 10-K/A10-K for the fiscal year ended December 1, 2006November 30, 2007 on file with the SEC.significantmaterial changes in our significant accounting policies, duringexcept for the three and nine months ended August 31,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/A10-K for the fiscal year ended December 1, 2006.Reclassification for the nine months ended September 1, 2006 as reported in the Consolidated Statements of Cash Flows have been revised. Specifically, there were revisions and reclassifications totaling $9.7 million to operating activities, ($3.9) million to investing activities and ($5.8) million to financing activities. These revisions and reclassifications related to the following:· Changes in prepaid expenses related to the Macromedia acquisition 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 Net Cash Provided by Operating Activitiespurchased intangibles to Net Cash Provided by Investing Activities.· The amortization of premium on availableSee Notes 3 and 4 for sale securities have been reclassified from Net Cash Provided by Investing Activities to Net Cash Provided by Operating Activities.·additional information regarding this reclassification. Excess tax benefits from stock-based compensation have been reclassified from Net Cash Provided by Operating Activities to Net Cash Used for Financing Activities.the Financial Accounting Standards Board (the “FASB”) statements definedthose discussed below, there have been no significantrecent accounting pronouncements or changes in recent accounting pronouncements during the nine months ended August 31, 200729, 2008, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K/A10-K for the fiscal year ended December 1, 2006.February 2007,September 2008, the FASB issued FASB Staff Position (“FSP”) No. 133-1 and FIN 45-4 (“FSP FAS 133-1 and FIN 45-4”), “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of Financial Accounting Standardsthe Effective Date of FASB Statement No. 159, “The Fair Value Option for Financial Assets161”. FSP FAS 133-1 and Financial Liabilities”FIN 45-4 amends FASB Statement No. 133 (“SFAS 159”133”)., “Accounting for Derivative Instruments and Hedging Activities”, 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 Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others”, to require additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend SFAS 159 permits companies to choose to measure certain financial instruments133 and certain other items at fair value. The standard requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings. SFAS 159 isFIN 45 are effective for reporting periods ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the companyeffective date in FASB Statement No. 161 (“SFAS 161”), “Disclosures about Derivative Instruments and Hedging Activities”. Disclosures required by SFAS 161 are effective for financial statements issued for fiscal years and interim periods beginning inafter November 15, 2008. Because FSP FAS 133-1 and FIN 45-4 only require additional disclosures, the first quarter of fiscal year 2008, although earlier adoption is permitted. We are currently evaluating thewill not impact that SFAS 159 will have on our consolidated financial statementsposition, results of operations or cash flows.(Unaudited)NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)AmericanAmerican 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-InvestmentGuide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”). 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 iswould 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.year 2009, although earlier2008. We currently do not have any instruments for which we have elected the fair value option under SFAS 159. Therefore, the adoption of SFAS 159 has not impacted our consolidated financial position, results of operations or cash flows.permitted. Weeffective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB FSP 157-2 which delays the effective date of SFAS 157 for all nonfinancial assets and nonfinancial liabilities, except those that are currently evaluatingrecognized 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 recurring basis. The partial adoption of SFAS 157 for financial assets and liabilities did not have a material impact if any, that SOP 07-1 will have on our consolidated financial position, results of operations or cash flows. See Note 2 for information and related disclosures regarding our fair value measurements.ACQUISITIONSOn December 3, 2005, we completed the acquisition of Macromedia,FINANCIAL INSTRUMENTSprovider of software technologies that enables the development of a wide range of internetrecurring basis, including cash equivalents, available-for-sale fixed income and mobile application solutions.equity securities, other equity securities and foreign currency derivatives. The acquisition of Macromedia accelerated our strategy of delivering an industry-defining technology platform that provided more powerful solutions for engaging people with digital information.The total purchase price was allocated to Macromedia’s net tangible and identifiable intangible assets based upon their estimated fair values as of December 3, 2005. The total purchase price for Macromedia was approximately $3.5 billion, which consisted of 109.0 million shares of Adobe common stock valued at $3.2 billion issued in exchange for 100% of Macromedia outstanding common stock, $227.6 million for the fair value of Macromedia options assumed, $29.1these financial assets and liabilities was determined using the following inputs at August 29, 2008: Fair Value Measurements at Reporting Date Using Total (Level 1) (Level 2) (Level 3) Assets: $ 939,329 $ 939,329 $ — $ — 902,996 — 902,996 — 7,163 7,163 — — 37,934 503 — 37,431 22,639 — 22,639 — Total $ 1,910,061 $ 946,995 $ 925,635 $ 37,431 Liabilities: 1,124 — 1,124 — Total $ 1,124 $ — $ 1,124 $ — transaction costs,our level 3 investments includes, but is not limited to, reviewing each company’s cash position, financing needs, earnings and $72.7 million for restructuring costs. In allocatingrevenue outlook, operational performance, management and ownership changes and competition. The change in this asset balance relates primarily to investment gains included in earnings during the purchase price based on fair values, we recorded $713.2 million in net tangible assets, $680.5 million in identifiable intangible assets, $146.2 million in stock-based compensation,three and $2.0 billion in goodwill.During the nine months ended August 31, 2007, we completed two acquisitions29, 2008. All other activity during the quarter was insignificant both individually and in the aggregate. See Note 4 for cash considerationfurther information regarding Adobe Ventures and related accounting policies.results of operations.per share data)December 1, 2006August 29, 2008 and August 31, 2007:(1)November 30, 2007 was $2.134 billion and $2.148 billion, respectively. The 2006 balances have been revised to correct insignificant errors in the original allocation of Macromedia goodwill to the various segments. The correction resulted in a reduction in goodwillADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES (Continued)allocated to Knowledge Worker, Enterprise & Developer Solutions and Mobile & Devices of $6.0 million, $57.9 million and $103.8 million, respectively, and an increase in goodwill allocated to Creative Solutions and Other of $153.7 million and $14.0 million, respectively. This correction did not impact the total balance of goodwill in our financial statements. This reallocation also had no impact on our annual impairment analysis which occurred in the second quarter of fiscal 2007.(2) Changes in goodwill in “Other” relate primarily to our Print and Classic Publishing segment.The column “Other” abovechange includes net reductions in goodwill of (i) $21.4$9.6 million related to pre-acquisition researchdeferred tax assets associated with our acquisition of Scene7 and development credits for$4.2 million related to the tax reserve associated with the acquisition of Macromedia, including a $5.7 million adjustmentoffset in part by foreign currency changes.third quartercondensed consolidated balance sheets. Specifically, we reclassified $55.5 million of fiscal 2007, (ii) $16.9cost and $20.5 million for insignificant revisionsof accumulated amortization ($35.0 million, net) from purchased intangibles to the valuation of Macromedia assumed options, net of tax impact, (iii) $4.1 million for the realization of tax benefits for deductions resulting from the exercise of stock optionslong-term and disqualifying dispositions of vested options assumed and (iv)short-term other individually insignificant tax related items.Amortization expense related to purchased and other intangible assets was $61.7 million and $175.4 million for the three and nine months ended August 31, 2007, respectively. Comparatively, amortization expense was $54.6 million and $166.6 million for the three and nine months ended September 1, 2006, respectively. Of these amounts, $43.8 million and $122.4 million are included in cost of sales for the three and nine months ended August 31, 2007, respectively and $36.9 million and $114.5 million are included in cost of sales for the three and nine months September 1, 2006, respectively. associated with certain technology license arrangements.31,29, 2008: Cost Net Purchased technology $ 411,408 $ (316,637 ) $ 94,771 Localization $ 18,342 $ (6,536 ) $ 11,806 Trademarks 130,925 (71,709 ) 59,216 Customer contracts and relationships 197,220 (117,022 ) 80,198 Other intangibles 800 (390 ) 410 Total other intangible assets $ 347,287 $ (195,657 ) $ 151,630 Total purchased and other intangible assets $ 758,695 $ (512,294 ) $ 246,401
2006
Cost
2006
Net
Expense
2007
NetDuring Cost Net Purchased technology $ 409,110 $ (250,721 ) $ 158,389 Localization $ 45,854 $ (27,676 ) $ 18,178 Trademarks 131,225 (52,443 ) 78,782 Customer contracts and relationships 197,220 (85,529 ) 111,691 Other intangibles 800 (196 ) 604 Total other intangible assets $ 375,099 $ (165,844 ) $ 209,255 Total purchased and other intangible assets $ 784,209 $ (416,565 ) $ 367,644 fiscalsales 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.entered intoexpect amortization expense in future periods as follows:Fiscal year Remainder of 2008 $ 22,133 $ 21,282 2009 56,328 67,633 2010 8,244 48,611 2011 4,679 11,917 2012 3,387 1,009 Thereafter — 1,178 Total expected amortization expense $ 94,771 $ 151,630 2008 2007 Acquired rights to use technology $ 93,527 $ 41,642 Investments 70,469 52,830 Security and other deposits 15,478 6,650 Prepaid royalties 12,216 6,748 Deferred compensation plan assets 9,209 3,145 Restricted cash 7,364 7,367 Prepaid land lease 3,195 3,224 Prepaid rent 3,065 4,285 Other 2,364 2,194 Total other assets $ 216,887 $ 128,085 for approximately $46.5 million.entered into during the third quarter of fiscal 2008. An estimated $29.8$56.0 million of this cost is related to future licensing rights and has been capitalized and recordedwill 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 purchased technology. The remainder of the cost was charged to cost of sales, for $16.7and 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 second and third quarters of fiscal 2007.future. See Note 13 for further information regarding our contractual commitments.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(thousands, except per share data)(Unaudited)NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES (Continued)Purchased and other intangible assetsgeneral, acquired rights to use technology are amortized over their estimated useful lives upof 3 to 15 years. AsAugust 31, 2007, we expect amortization expense in future periodswhich $28.7 million and $4.7 million were reclassified to be as shown below:
Technology
AssetsOther assets consisted of the following as of August 31, 2007acquired rights to use technology and December 1, 2006:areis our limited partnership interestsinterest in Adobe Ventures which areis consolidated in accordance with FASB Interpretation No. 46R, a revision to FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.”Entities”. The partnerships arepartnership is controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. Investments also includeincluded our direct investments which arewere accounted for under the cost method.31, 200729, 2008 and December 1, 2006:November 30, 2007: 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 ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES (Continued) 2008 2007 Accrued compensation and benefits $ 173,199 $ 205,018 Sales and marketing allowances 23,707 21,231 Other 159,502 157,187 Total accrued expenses $ 356,408 $ 383,436 Three Months Ended Nine Months Ended 2008 2007 2008 2007 Expected life (in years) 3.5 – 3.6 3.6 – 3.7 2.3 – 4.7 3.5 – 4.8 Volatility 34 – 37 % 30 – 34 % 32 – 39 % 30 – 34 % Risk free interest rate 2.79 – 3.50 % 4.34 – 5.14 % 1.70 – 3.50 % 4.34 – 5.14 % Decemberper share data) 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 % 2006:2007, 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. 2008 Options outstanding 42,070 $ 29.67 4.16 years $ 554.5 Options vested and expected to vest 39,936 $ 29.29 4.07 years $ 541.2 Options exercisable 27,252 $ 25.94 3.35 years $ 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 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively. 2008 2007 Beginning balance 1,701 — Awarded 2,823 1,458 Released (353 ) — Forfeited (146 ) (47 ) Ending balance 4,025 1,411 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 * 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 29, 2008 and August 31, 2007 were $42.83 and $42.75, respectively. Beginning balance — — Awarded 931 1,863 Forfeited (74 ) (149 ) Ending balance 857 1,714 Shares Shares achieved 718 Released (205 ) Forfeited (59 ) Ending balance 454 2008 2007 Income Statement Classifications Cost of revenue—services and support $ 1,189 $ 230 $ 1,443 $ 98 Research and development 15,612 6,377 16,664 2,230 Sales and marketing 10,576 5,370 10,414 1,330 General and administrative 6,113 2,793 5,857 671 Total $ 33,490 $ 14,770 $ 34,378 $ 4,329 * For the three months ended August 29, 2008, we recorded $2.1 million associated with cash recoveries of fringe benefit tax from employees in India. 2008 2007 Income Statement Classifications Cost of revenue—services and support $ 2,968 $ 483 $ 4,059 $ 225 Research and development 43,382 16,380 44,192 5,965 Sales and marketing 31,701 15,558 31,071 3,954 General and administrative 18,841 10,368 18,966 1,764 Total $ 96,892 $ 42,789 $ 98,288 $ 11,908 * 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. Stock OptionsOur stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from the (i) 2003 Equity Incentive Plan (the “2003 Plan”), under which options can be granted to all employees, including executive officers, and outside consultants and (ii) the 1996 Outside Directors Stock Option Plan, as amended, under which options are granted automatically under a pre-determined formula to non-employee directors. In addition, our stock option program includes the 2005 Equity Incentive Assumption Plan, from which we currently do not grant options, but may do so. The plans listed above are collectively referred to in the following discussion as “the Plans.” Option vesting periods are generally three to four years for all of the Plans. At the end of the third quarter of fiscal 2007, the number of shares outstanding was 54.8 million.The total intrinsic value of options exercised during the nine months ended August 31, 2007 was $304.3 million. The intrinsic value is calculated as the difference between the market value on the date of exercise and the exercise price of the shares.Employee Stock Purchase PlanOur 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.Restricted StockWe grant restricted stock awards and units and performance awards to officers and key employees under our Amended 1994 Performance and Restricted Stock Plan (the “Restricted Stock Plan”). Restricted stock issued under the Restricted Stock Plan generally vests annually over four years.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)Restricted stock awards are considered outstanding at the time of grant, as the stock award holders are entitled to dividends and voting rights. At the end of the third quarter of fiscal 2007, the number of shares granted but still unvested was less than 0.1 million.Restricted stock units are not considered outstanding at the time of grant, as the holders of these units are not entitled to dividends and voting rights. At the end of the third quarter of fiscal 2007, the number of shares granted, but unreleased was 1.4 million.Neither unvested restricted stock awards nor restricted stock units are considered outstanding in the computation of basic earnings per share.Performance SharesEffective February 2, 2006, the Executive Compensation Committee adopted the 2006 Performance Share Program (the “2006 Program”). The Executive Compensation Committee established the 2006 Program to align the new leadership team to achieve key integration milestones, create stockholder value and to retain key executives. All members of Adobe’s executive management team and other key members of senior management are participating in the 2006 Program which runs through the end of our fiscal 2007. Awards under the 2006 Program were granted in the form of performance shares pursuant to the terms of our 2003 Plan or Restricted Stock Plan. Performance shares will vest 100% at the end of fiscal 2007 if performance goals are met. Participants in the 2006 Program have the ability to receive up to 150% of the shares originally granted. At the end of the third quarter of fiscal 2007, the number of shares granted was 0.3 million and the maximum number of shares eligible to be received is 0.4 million.Effective January 24, 2007, the Executive Compensation Committee adopted the 2007 Performance Share Program (the “2007 Program”). Similar to the 2006 Program, the 2007 program’s purpose is to align key management and senior leadership with stockholder’s interest and to retain key employees. The measurement period for the program is our fiscal 2007 year. All members of Adobe’s executive management and other key senior leaders are participating in the 2007 Program. Awards granted under the 2007 Program were granted in the form of performance shares pursuant to the terms of Restricted Stock Plan. If pre-determined attainment goals are met, shares of stock will be granted to the recipient, with 25% vesting upon achievement of the attainment goals, 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 2007 Program have the ability to receive up to 200% of the shares originally granted. At the end of the third quarter of fiscal year 2007, the number of shares granted was 0.4 million and the maximum number of shares eligible to be received is 0.7 million.Stock-Based CompensationWe currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expectedADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, a risk-free interest rate and any expected dividends.We estimate the expected term of options granted by calculating the average term from our historical stock option exercise experience. We estimate the volatility of our common stock by using implied volatility in market traded options in accordance with Staff Accounting Bulletin No. 107, “Share-Based Payment”. Our decision to use implied volatility was based upon the availability of actively traded options on our common stock and our assessment that implied volatility is more representative of future stock price trends than historical volatility. We base the risk-free interest rate that we use in the option valuation model on zero-coupon yields implied by U.S. Treasury issues with remaining terms similar to the expected term on the options. We do not anticipate paying any cash dividends in the foreseeable future and therefore use an expected dividend yield of zero in the option valuation model. We are required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.The assumptions used to value option grants for the three and nine months ended August 31, 2007 and September 1, 2006 are as follows:The expected term of employee stock purchase plan shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights for the three and nine months ended August 31, 2007 and September 1, 2006 are as follows:31, 2007, there was $158.1 million of unrecognized compensation cost, which will be recognized over a weighted average period of 2.8 years adjusted for estimated forfeitures, related to non-vested stock-based payments granted to Adobe employees. Additionally, as of August 31, 2007, there was $42.9 million of unamortized stock-based compensation related to the assumption of Macromedia unvested options, which will be recognized over a weighted average period of 1.8 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.12ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)On September 21, 2006, the Board of Directors approved the Adobe Systems Incorporated Deferred Compensation Plan, effective December 2, 2006 (the “Deferred Compensation Plan”). The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain executives29, 2008 and members of the Board of Directors are able to defer a portion of their annual compensation. Participants may elect to contribute up to 75% of their base salary and 100% of other specified compensation, including commissions, bonuses, performance shares, restricted stock units and directors’ fees. Participants will be able to elect the payment of benefits to begin on a specified date at least three years after the end of the plan year in which the election is made in the form of a lump sum or annual installments over five to fifteen years. Upon termination of a participant’s employment with Adobe, such participant will receive a distribution in the form of a lump sum payment. All distributions will be made in cash, except that deferred performance share units will be settled in stock. As of August 31,November 30, 2007, the invested amounts under theour Deferred Compensation Plan total $2.1totaled $9.2 million and $3.1 million, respectively, and are recorded as long-term other assets on our balance sheet. As of August 31,29, 2008 and November 30, 2007, we recorded $2.1$9.2 million and $3.1 million, respectively, as a long-term liability to recognize undistributed deferred compensation due to employees.fiscal 2006, pursuant to Board of Directors’ approval, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities.December 3, 2005. We also recognized costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia.Macromedia Merger Restructuring Charges November 30, 2007 Adjustments 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 December 1, 2006 andforeign currency changes. The change to previous estimates of sublease income was included in net income for the nine months ended August 31, 2007:
2006
2007
Incurred To
DateWe completed our acquisition of Macromedia on December 3, 2005. Pursuant to Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase BusinessADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 7. RESTRUCTURING AND OTHER CHARGES (Continued)Combination,” all restructuring charges related to the Macromedia acquisition are recognized as a part of the purchase price allocation.$21.7$15.0 million at August 31, 2007 includes $5.829, 2008 included $6.9 million recorded in accrued restructuring, current and $15.9$8.1 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 2011. At December 1, 2006,November 30, 2007, accrued restructuring chargesincludes $9.8included $3.7 million recorded in accrued restructuring, current and $21.6$14.0 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets. We expect to pay these liabilities through fiscal 2011.Adobe Restructuring ChargesIn connection with the worldwide restructuring plan, we recognized costs related to (i) termination benefits for former Adobe employees whose positions were eliminated, (ii) the closure of Adobe facilities and (iii) the cancellation of certain contracts held by Adobe.Accrued restructuring charges as of August 31, 2007 are zero in the accompanying Condensed Consolidated Balance Sheets as compared to $0.6 million as of December 1, 2006. Accrued restructuring charges as of December 1, 2006 include $0.3 million recorded in accrued restructuring, current and $0.3 million, related to long-term facilities obligations, recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets.stock repurchase agreementsrepurchases with third parties.Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time.of fiscalended August 29, 2008 and August 31, 2007, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $325.0 million and $600.0 million.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.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.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 8. STOCKHOLDERS’ EQUITY (Continued)The 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 2006.31,29, 2008 and November 30, 2007 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 31, 200729, 2008 under this program will expireexpired on or before December 21, 2007.September 19, 2008. As of August 29, 2008 and August 31, 2007, approximately $41.0 million and $200.0 million, respectively, of up-front payments remained under the agreements. During the nine months of fiscal 2007, we repurchased 15.4 million shares at an average price of $39.23 through structured repurchase agreements which included prepayments from fiscal 2006.In September 2007,$500.0$200.0 million. The $500.0 millionThis amount will be classified as treasury stock on our balance sheet.In April 2007, we announced that our Board of Directors authorized a newprogram. Under the new program, which is not subject to expiration, we are authorizedhad authorization to repurchase in aggregate up to 20.050.0 million shares of our common stock. ThisDuring 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, is in additionwe provided prepayments of $1.9 billion under structured share repurchase agreements to our existing stock repurchase program to offset dilution from employee stock programs.large financial institutions. During the nine months ended August 29, 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. As of August 31, 2007, we had provided prepayments of $850.0 million under structured share repurchase agreements to large financial institutions under this program. As of August 31, 2007, weand repurchased 12.9 million shares through structured share repurchase agreements at an average price of $39.94 and approximately$39.94. Approximately $333.4 million of up-front payments remained under these agreements. All outstanding structured repurchase agreements as of August 31, 2007 under this program will expire on or before March 18, 2008.2007.9.11. COMPREHENSIVE INCOMEFASB Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Items of other comprehensive income that we currently report are unrealized gains and losses on marketable securities categorized as available-for-sale and foreign currency translation adjustments. We also report unrealized gains and losses on derivative instruments qualifying as cash flow hedges.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 9. COMPREHENSIVE INCOME (Continued)net of income tax expense, for the three and nine months ended August 29, 2008 and August 31, 2007 and September 1, 2006:2007: Three Months Nine Months 2008 2007 2008 2007 $ 191,608 $ 205,243 $ 625,897 $ 501,599 Change in unrealized gain (loss) on available-for-sale securities, net of taxes (1,998 ) 700 (11,001 ) 5,568 (6,358 ) 21 (4,284 ) 1,746 10,494 (3,776 ) 10,776 42 2,138 (3,055 ) (4,509 ) 7,356 $ 193,746 $ 202,188 $ 621,388 $ 508,955 10.12. NET INCOME PER SHAREBasic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted common stock and stock options using the treasury stock method.20072007: Three Months Nine Months 2008 2007 2008 2007 Net income $ 191,608 $ 205,243 $ 625,897 $ 501,599 Shares used to compute basic net income per share 531,060 583,670 542,624 587,141 Dilutive potential common shares: Unvested restricted stock and performance share awards 1,063 11 991 13 Stock options 9,188 13,653 9,124 15,109 Shares used to compute diluted net income per share 541,311 597,334 552,739 602,263 Basic net income per share $ 0.36 $ 0.35 $ 1.15 $ 0.85 Diluted net income per share $ 0.35 $ 0.34 $ 1.13 $ 0.83 September 1, 2006:Fornine 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. Comparatively, for the three and nine months ended September 1, 2006, options to purchase approximately 27.7 million and 16.7 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $30.21 and $34.38, respectively, were not included in the calculation because the effect would have been anti-dilutive.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)31, 2007,29, 2008, 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 FASB Statement of Financial Accounting StandardsSFAS No. 13, “Accounting for Leases,”Leases”, and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in order to access bank-provided funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term, 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.FASB Interpretation No.FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“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. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As ofADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)31,29, 2008 and November 30, 2007, 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 $4.6 million.Indemnificationsofficersdirectors and directorsofficers for certain events or occurrences while the officerdirector or directorofficer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’sdirector’s or director’sofficer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited;interestsinterest in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships.partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.On October 13, 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R. Chizen, et al was filed in the Superior Court of California for the County of Santa Clara against certain of the Company’s current and former officers and directors, and against Adobe as a nominal defendant. The complaint asserts that stock option grants to executives were priced retroactively by Adobe and were improperly accounted for, and alleges various causes of action based on that assertion. The complaint seeks payment by the defendants to Adobe of damages allegedly suffered by it and disgorgement of profits, as well as injunctive relief. As of August 31, 2007, we do not believe that a loss is probable or estimable.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 11. COMMITMENTS AND CONTINGENCIES in addition to those identified above, Adobe is subject to legal proceedings, claims investigations and proceedingsinvestigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with U.S. generally accepted accounting principles,GAAP, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be negatively affected by thean unfavorable resolution of one or more of such contingencies.Adobeus 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. Also, weWe also retain an option to request an additional $500.0 million in commitments, for a maximum aggregate facility of $1.5 billion.BorrowingsAt 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.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 terminates on February 16, 2012 if no extensions have been requested and 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 August 31,29, 2008 and November 30, 2007, we had nothe amount outstanding borrowings under thisthe credit facility was $350.0 million and zero, respectively, which is included in long-term liabilities on our condensed consolidated balance sheet. As of August 29, 2008, we were in compliance with all of the covenants. Three Months Nine Months 2008 2007 2008 2007 Interest and other income, net: Interest income $ 14,407 $ 22,780 $ 45,110 $ 71,268 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 Interest and other income, net $ 9,338 $ 22,733 $ 34,778 $ 65,866 Interest expense $ (2,390 ) $ (69 ) $ (8,027 ) $ (175 ) Investment gains (losses), net: Realized investment gains $ 2,861 $ 198 $ 18,298 $ 9,308 Unrealized investment gains 2,882 — 7,840 5,091 Realized investment losses (353 ) (624 ) (989 ) (1,784 ) Unrealized investment losses (3,293 ) (268 ) (4,814 ) (3,546 ) Investment gains (losses), net $ 2,097 $ (694 ) $ 20,335 $ 9,069 Total non-operating income, net $ 9,045 $ 21,970 $ 47,086 $ 74,760 and Developer Solutions, Mobile and Device Solutions, Platform and Other, which includes the Print and Classic Publishing and Platform segments.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. This segment combines the products of our Creative Professional and Digital Imaging and Video businesses. 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.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 13. INDUSTRY SEGMENTS (Continued) Adobe Acrobat Connect and our Acrobat family of products. Our Enterprise and Developer Solutions segment provides server-based enterprise interaction solutions that automate people-centric processes. The segmentprocesses and contains revenue generated by our LiveCycle ColdFusion and Flex linesline of products. The Mobile and Device Solutions segment provides solutions that createdeliver compelling experiences through rich content, user interfaces and data services on mobile and non-PC devices such as cellular phones, consumer devices and internetInternet connected hand-held devices. The Platform segment provides developer solutions and technologies, including Adobe Flash Player, Adobe AIR and Flex Builder which are used to build rich application experiences. Finally, Other contains several of our products and services which addressthe Print Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and OEMoriginal equipment manufacturer (“OEM”) printing businesses,businesses.strategic opportunities such as OEM revenue generatedBusiness Productivity Solutions business unit. However, under 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 desktop technology platformEnterprise Solutions segment. The prior year information in the table below has also been updated to reflect this product movement.which includes Adobe Reader and Adobe Flash Player applications.Withby segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by operating segments. See Note 3 for the allocation of goodwill to our reportable segments.
Solutions
Worker
Solutions
and
Developer
Solutions
Device
Solutions
August 31, 2007ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 13. INDUSTRY SEGMENTS (Continued)
Solutions
Worker
Solutions
and
Developer
Solutions
Device
Solutions* Other includes revenue related to the Print and Classic Publishing segment of $47.0 million and $152.0 million for the three and nine months ended August 31, 2007, respectively, or 6% and 7%, respectively, of revenues. For the three and nine months ended September 1, 2006, Other includes revenue related to the Print and Classic Publishing segment of $52.5 million and $152.7 million, respectively, or 9% and 8%, respectively, of revenues. Also included in Other segment revenue, in fiscal 2007 and 2006, is revenue related to our Platform segment. Costs of revenue related to our Print and Classic Publishing segment are $8.1 million and $21.8 million for the three and nine months ended August 31, 2007 and $6.4 million and $18.9 million for the three and nine months ended September 1, 2006. Gross margins for our Print and Classic Publishing segment are $39.0 million and $130.1 million for the three and nine months ended August 31, 2007, respectively, or 83% and 86%, respectively, of revenues. Gross margins for our Print and Classic Publishing segment are $46.1 million and $133.8 million for the three and nine months ended September 1, 2006, respectively, or 88% of revenues.ADOBE SYSTEMS INCORPORATEDNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(In thousands, except per share data)(Unaudited)NOTE 13. INDUSTRY SEGMENTS (Continued)A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three and nine month periods ended August 31, 2007 and September 1, 2006 is as follows:* Total operating expenses include research and development, sales and marketing, general and administrative, restructuring and other charges, and amortization of purchased intangibles. Platform 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 % Platform 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 % AgreementsAsSubsequent to August 29, 2008, as part of the stock repurchase programStock Repurchase Program I, we entered into additional structured stock repurchase agreements in September 2007 with large financial institutions whereupon we provided the financial institutions with prepayments of $500.0$200.0 million. The $500.0 millionThis amount will be classified as treasury stock on our balance sheet. See Note 810 for further information regardingdiscussion of our structured stock repurchase agreements.programs.22titledentitled “Risk Factors” in Part II, Item 1A. You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission,SEC, including the Annual Report on Form 10-K/A10-K for fiscal 20062007 and the other Quarterly Reports on Form 10-Q filed by us in fiscal 2007.2008. 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,”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.consumers, creative professionals, designers, knowledge workers, original equipment manufacturer (“OEM”)high-end consumers, 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;OEMs, direct to end users;users and through our own Web site at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers, and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas;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-personal computernon-PC platforms, depending on the product.nine monthsthird quarter of fiscal 2007,2008, we continued to focus on driving revenue growth and increasing market share of our products through the continued delivery of comprehensive software and technology solutions that meet the evolving needs of our customers.In our Creative Solutions business, we experienced strong demand in the third quarter of fiscal 2007 for our new Creative Suite 3 (“CS3”) family of products, resulting in record revenue in this segment. Shipments of our English versions of these new products began in April, and localized versions began shipping in bulk at the beginning of our third quarter of fiscal 2007. Reviews and industry commentary for our new CS3 products have been positive, helping to stimulate demand.business,segment, we achieved solida fourth consecutive quarter of record revenue with our Acrobat family of products in the third quarter of fiscal 2007.2008. Helping drive this successachievement was strong volume licensingthe successful launch of version 9 of our Acrobat family of products due to ongoing adoption by users in enterprises, governments,major languages across the world.vertical markets such as architecture, engineering and construction.Our Enterprise and Developer Solutions business achieved quarterly sequential and29% year-over-year growth as we continued to focus on delivering innovative products and solutions for our enterprise customers.businessSolutions segment achieved strong year-over-year growthrecord revenue in the third quarter of fiscal 2008 due to the ongoing success we have had targeting mobile operators, handset manufacturers and consumer electronic device manufactures with our Flash Lite and Flash Cast technologies. Other segment revenue decreased year-over-yearOn 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 sequentially, primarily due to lifecycle timingdesigners 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 legacytechnology 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, hosted services and applications.and Classic Publishing business.can have a significant impact onaffect the reported amounts reported in our consolidated financial statements.of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.There three and nine months ended August 31, 200729, 2008 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/A10-K for the year ended December 1, 2006.24 and September 1, 2006 Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Product $ 838.9 $ 813.4 3 % $ 2,532.1 $ 2,147.2 18 % Percentage of total revenue 95 % 96 % 95 % 96 % Services and support 48.4 38.3 26 % 132.5 99.5 33 % Percentage of total revenue 5 % 4 % 5 % 4 % Total revenue $ 887.3 $ 851.7 4 % $ 2,664.6 $ 2,246.7 19 % 1316 of our Notes to Condensed Consolidated Financial Statements, we have the following segments: Creative Solutions, Knowledge Worker Solutions, Enterprise and Developer Solutions, Mobile and Device Solutions, Platform and Other, which includes the Print and Classic Publishing and Platform segments.composedcomprised of consulting, training, and maintenance and support, primarily related to the licensing of our Enterpriseenterprise, developer and Developer Solutions and Mobile and Device Solutionsplatform products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our consulting revenue is recognized using the proportionate performance method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Our maintenance and support offerings which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, are recognized ratably over the term of the arrangement. Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Creative Solutions $ 493.6 $ 545.5 (10 )% $ 1,564.3 $ 1,328.5 18 % Percentage of total revenue 56 % 64 % 59 % 59 % Knowledge Worker Solutions 218.0 176.8 23 % 611.9 536.4 14 % Percentage of total revenue 25 % 21 % 23 % 24 % 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 % Percentage of total revenue 3 % 1 % 2 % 2 % Platform 31.6 18.7 69 % 90.1 53.4 69 % Percentage of total revenue 3 % 2 % 3 % 2 % Print Publishing 51.1 47.1 8 % 159.3 152.3 5 % Percentage of total revenue 6 % 6 % 6 % 7 % Total revenue $ 887.3 $ 851.7 4 % $ 2,664.6 $ 2,246.7 19 % * Percentage is not meaningful.** Other includes revenue relatedRevenue from Creative Solutions decreased $51.9 million during the three months ended August 29, 2008 as compared to the Printthree 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 Classic Publishing segmenta 23% increase in Photoshop revenue.$47.0fiscal 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.$152.0$75.5 million forduring the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007, respectively, or 6%primarily due to the successful launch of 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 7%, respectively,in the number of revenues. Forunits sold for the three and nine months ended September 1, 2006, Other includes revenue relatedAugust 29, 2008 as compared to the Printthree and Classic Publishing segment of $52.5nine months ended August 31, 2007.$152.7$37.0 million during the three and nine months ended August 29, 2008, respectively, or 9%compared to the three and 8%nine months ended August 31, 2007. The increase was primarily due to a larger number of revenues. Also includedenterprise 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 Other segment revenue, inthe prior fiscal 2007 and 2006, is revenue related to our Platform segment.year.Creativetechnology 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 segmentto 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. 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 % September 1, 2006 primarily due to the launch of the English versions of our CS3 family of productsAugust 31, 2007. Additionally, revenue in the second quarter of fiscal 2007EMEA measured in U.S. dollars increased approximately $28.7 million and the release of localized versions of our CS3 family of products during the third quarter of fiscal 2007.Revenue from our Knowledge Worker Solutions segment increased$83.2 million during the three and nine months ended August 31, 2007 as compared to29, 2008, respectively, over the three and nine months ended September 1, 2006 primarily due to an increasesame reporting periods last year. Fluctuations in the licensing of our new Acrobat 8 family of products.Revenue from our Enterprise and Developer Solutions segment increasedEMEA revenue during the three and nine months ended August 31, 200729, 2008 as compared to the three and nine months ended September 1, 2006same periods in fiscal 2007, were primarily attributable to favorable foreign exchange, a decline in CS revenue due to continued adoption of our LiveCycle family of products.Revenue from our Mobile and Device Solutions segment increased during the three and nine months ended August 31, 2007 as compared to the three and nine months ended September 1, 2006, due to continued adoption of our Flash Lite by mobile and non-PC device manufacturers, and our Flash Cast solutions by mobile operators.Revenue from our Other segment decreased during the three months ended August 31, 2007 and was relatively stable for the nine months ended August 31, 2007 as compared to the three and nine months ended September 1, 2006. The decrease was primarily due to lower revenue with some of our legacy products in our Print and Classic Publishing segment due to the timing of the release of new product versions.Geographical InformationOverall revenues in each of the geographic segments for the three and nine months ended August 31, 2007 increased, compared to the three and nine months ended September 1, 2006 primarily due to the launch of the English versions ofwith our CS3CS family of products and normal seasonal weakness in the second quarter of fiscal 2007, the release of the localized versions of our CS3 family of productsEurope during the third quarter of fiscal 2007 and success with our Acrobat 8 family of products.the Americas increasedAsia 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 compared to the three and nine months ended September 1, 20062007. The increase primarily due to the launch of the English versionsresulted from licensing of our CS3CS family of products, during the second quarter of fiscal 2007 and increased revenue from the Acrobat 8 family of products. Revenue in the Americas also increased in the Knowledge Worker Solutions, Mobile and Device Solutions and Platform products, due to higher sales volumes.Revenue in EMEA increased during the three and nine months ended August 31, 2007 compared to the three and nine months ended September 1, 2006 due to the release of localized versions of our CS3 family ofLiveCycle products, and increases in revenue from the Acrobat Proour Platform products. Additionally, revenuesrevenue in EMEAAsia measured in U.S. dollars increased approximately $13.8$10.1 million and $42.5$32.0 million during the three and nine months ended August 31, 2007,29, 2008, respectively, over the same reporting periods last year due to the strength of the euro over the U.S. dollar.Revenue in Asia increased during the three and nine months ended August 31, 2007 compared to the three and nine months ended September 1, 2006 due to the release of localized version of our CS3 family of products. Additionally, revenues in Asia measured in U.S. dollars decreased approximately $2.7 million and $2.6 million during the three and nine months ended August 31, 2007, respectively, over the same reporting periods last year due to the strength of the U.S. dollar over the yen.Inventory InformationAt the end of the third quarter of fiscal 2007 our distributor inventory position was within our global inventory policy which allows up to an estimated 4.5 weeks of anticipated product supply at our distributors. our experience is that the actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects. For example, prior to the finalization and release of new products, we may have significant levels of orders for new product releases. Our backlogBacklog is comprised of unfulfilled orders, at the end of the third quarter of fiscal 2007, other thanexcluding those associated with new product releases, those pending credit review and those not shipped due to the application of our global inventory policy, was approximately 6%policy. We had minimal backlog at the end of the third quarter of fiscal 2007 revenue.2008. The comparable backlog at the end of the second quarter of fiscal 20072008 was approximately 1%4% of the second quarter fiscal 2008 revenue. and September 1, 2006 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 % technologiesrights to use technology and the costs associated with the manufacturing of our products.fluctuatedincreased (decreased) due to the following:
2006 to 2007
QTD
2006 to 2007
YTDLocalization costs Amortization of acquired rights to use technology 42 % 8 % Royalties for licensed technologies 2 4 Amortization of purchased intangibles (10 ) (10 ) Localization costs related to our product launches (14 ) 2 Various individually insignificant items 3 1 Total change 23 % 5 % 20072008. 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 of our Notes to Condensed Consolidated Financial Statements for further information regarding our contractual commitments.2006, primarily due to2007 associated with the release of the localized versions of our CS3 family of products.Amortization expense decreased during the third quarter of fiscal 2007 as compared to the third quarter of fiscal 2006, due to the decrease in the Macromedia purchased technology amortization.composed primarily comprised of employee-related costs and associated costs incurred to provide consulting services, training and product support.31, 200729, 2008 as compared to the three and nine months ended September 1, 2006,August 31, 2007, primarily due to increases in compensation and related benefits as a result of higher headcount to support our product launches anddriven by increases in incentiveheadcount related to product support and utilization by customers of our consulting services.relatedcosts for the three months ended August 29, 2008 is due to increased headcount in all functions. This increase is offset in part by a decrease in profit sharing and employee bonuses based on company performance to date.Operating Expensesdate, when compared to the three months ended August 31, 2007.Threenine months ended August 29, 2008 related to increases in headcount and Nine Months Endedstock-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, 20072007. Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Expenses $ 170.1 $ 163.2 4 % $ 508.9 $ 450.4 13 % Percentage of total revenue 19 % 19 % 19 % 20 % fluctuatedincreased (decreased) due to the following:
2006 to 2007
QTD
2006 to 2007
YTDThe increase in the higher incentive compensation for the three months ended August 31, 2007 relates to higher expense for profit sharing and employee bonuses based on company performance to date. Compensation and related benefits associated with headcount growth 6 % 8 % Compensation associated with incentive compensation and stock-based compensation (2 ) 4 Various individually insignificant items — 1 Total change 4 % 13 % Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Expenses $ 271.4 $ 251.2 8 % $ 813.4 $ 702.3 16 % Percentage of total revenue 31 % 29 % 31 % 31 % includeof salary and benefit expenses, sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.fluctuatedincreased (decreased) due to the following:
2006 to 2007
QTD
2006 to 2007
YTD
growth Compensation and related benefits associated with headcount growth 5 % 5 % Marketing spending related to product launches and overall marketing efforts to further increase revenue 3 5 Compensation associated with incentive compensation and stock-based compensation (1 ) 5 Various individually insignificant items 1 1 Total change 8 % 16 % Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Expenses $ 97.2 $ 71.1 37 % $ 257.2 $ 201.0 28 % Percentage of total revenue 11 % 8 % 10 % 9 % fluctuatedincreased (decreased) due to the following:
2006 to 2007
QTD
2006 to 2007
YTDThe increase Allocation of costs associated with acquired rights to use technology 24 % 8 % Compensation and related benefits associated with headcount growth 5 5 Professional and consulting fees 4 2 Compensation associated with incentive compensation and stock-based compensation (1 ) 6 Various individually insignificant items 5 7 Total change 37 % 28 % higher incentive compensationfuture. See Note 13 of our Notes to Condensed Consolidated Financial Statements for further information regarding our contractual commitments. Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Expenses $ 1.2 $ 0.6 100 % $ 2.6 $ 0.6 333 % Percentage of total revenue * * * * * Percentage is not meaningful. Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Expenses $ 17.0 $ 17.9 (5 )% $ 51.2 $ 54.5 (6 )% Percentage of total revenue 2 % 2 % 2 % 2 % relatesdue to highera decrease in amortization expense for profit sharing and employee bonuses based on company performance to date.* Percentage is not meaningful.29Inassociated with intangible assets purchased through the first quarter of fiscal 2006, pursuant to Board of Directors’ approval, we implemented a restructuring plan to eliminate 313 positions held by Adobe employees worldwide and which impacted all functional areas. The reduction in force was completed in fiscal 2006. The restructuring plan also includes costs related to the world-wide consolidation of facilities, the cancellation of certain contracts and the write-off of fixed assets located at facilities that will be vacated.As a result of acquiring Macromedia we acquired purchased intangibles which will be amortized over their estimated useful lives of two to four years. In addition, during the second quarter of fiscal 2007, we acquired $12.9 million of purchased intangibles which will be amortized over their estimated useful lives.Includedacquisition. Additionally, included in the amortization of purchased intangibles and incomplete technology for the nine months ended August 31, 2007 iswas $1.5 million related to in processthe write-off of in-process research and development from thean acquisition that occurred during the second quarter of fiscal 2007.Non-operating Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Interest and other income, net $ 9.3 $ 22.7 (59 )% $ 34.8 $ 65.9 (47 )% Percentage of total revenue 1 % 3 % 1 % 3 % Interest expense (2.4 ) — * (8.0 ) (0.2 ) * Percentage of total revenue * * * * Investment gains, net 2.1 (0.7 ) (400 )% 20.3 9.1 123 % Percentage of total revenue * * 1 % * $ 9.0 $ 22.0 (59 )% $ 47.1 $ 74.8 (37 )% * Percentage is not meaningful. September 1, 2006* Percentagenot meaningful.Gain (Loss),Gains, netgain (loss),gains, net, consistsconsist 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 and gains and losses of Adobe Ventures. In the three and nine months ended August 31, 2007,29, 2008, investment loss,gains, net, decreasedincreased as compared to the three months ended September 1, 2006 due to a decline in the level of investment impairments recorded in the third quarter of fiscal 2006. In theand nine months ended August 31, 2007 investment gain, net increased due primarily to the gain on sale ofgains from a marketable equitydirect investment.Interest and Other IncomeThe largest component of interest and other income is interest earned on cash, cash equivalents and short-term fixed income investments, but also includes gains and losses on the sale of fixed income investments, foreign exchange transaction and hedging gains and losses, and interest expense.Interest and other income increased Additionally, during the three months ended August 31, 2007 as compared to the three months ended September 1, 2006 due to higher rates of return. For the nine months ended August 31, 2007 as compared29, 2008, we received cash and recognized a gain resulting from the expiration of the escrow period related to the nine months ended September 1, 2006, interest and other income increased as a resultsale of increased levelsour investment in Atom Entertainment, Inc. that occurred during the fourth quarter of invested cash balances and higher ratesfiscal 2006.31, 200729, 2008 and September 1, 2006Our effective tax rate increased approximately 3% in the three months ended August 31, 2007 as compared to the three months ended September 1, 2006. The increase is primarily due to the income tax effects associated with reductions in estimated tax exempt interest income, changes in estimated taxable income in the U.S., and a fiscal 2006 revision of estimates of certain tax credits that we were entitled to claim on our income tax returns. Three Months Percent Nine Months Percent 2008 2007 Change 2008 2007 Change Provision $ 36.9 $ 71.8 (49 )% $ 176.3 $ 154.9 14 % 4 % 8 % 7 % 7 % 16 % 26 % 22 % 24 % 1%10% and 2% during the three and nine months, respectively, ended August 29, 2008 as compared to the three and nine months ended August 31, 2007 as compared2007. The decrease was primarily related to the nine months ended September 1, 2006. The decrease is primarily due to the reinstatement of the federal research and development tax credit in December 2006. The reinstatement of the credit was retroactive to January 1, 2006. A $12.3 million cumulative tax benefit for the credit relating to fiscal 2006 was reflected in its entiretycompletion in the firstthird quarter of fiscal 2007.
2007
2006
Change Cash, cash equivalents and short-term investments $ 2,000.9 $ 1,993.9 Working capital $ 1,855.5 $ 1,720.4 Stockholders’ equity $ 4,371.4 $ 4,650.0
2007
2006
Change Net cash provided by operating activities $ 942.9 $ 1,041.2 Net cash used for investing activities (5.5 ) (213.3 ) Net cash used for financing activities (747.7 ) (1,042.6 ) Effect of foreign currency exchange rates on cash and cash equivalents (1.9 ) 1.5 Net increase in cash and cash equivalents $ 187.8 $ (213.2 ) employee stock purchase planESPP and another use of cash is our stock repurchase program, which is detailed below.$1.0 billion$942.9 million for the nine months ended August 31, 2007,29, 2008, was primarily comprised of net income plus the net effect of non-cash related expenses. The primary working capital sources of cash were increases in net income decreases in trade receivables and increasesdeferred revenue. Increases in deferred revenue income taxes payable, trade payables and accrued expenses. The decrease in accounts receivable was due to collections in the first quarter of fiscal 2007 that were related to the high Acrobat 8 sales at the end of fiscal 2006. In addition, during the third quarter of fiscal 2007, there were strong collections of accounts receivable resulting from shipments of our CS3 family of products. Our days sales outstanding intrade receivables (“DSO”) was 28 days for the third quarter of fiscal 2007. Net changes in accrued expenses is attributable primarily to increases in accrued bonuses. Increases to deferred revenue relate to the Lightroom products and maintenance and support on Enterprise license transactions, wherefrom increased upgrade plans purchased were offset in part by decreases in deferred revenue is being recognized on a ratable basis in addition to other increases related to royalty revenue.outlays forincreases in receivables, prepaid expenses and other current assets coupled with decreases in income taxes payable, accrued expenses, trade payables and payments of accrued restructuring costs. Outlays for prepaid expenses and other current assets wereAccounts receivable increased primarily foras a result of the timing of shipments during the third quarter of fiscal 2008 compared to the same reporting period in fiscal 2007. Income taxes payable decreased primarily due to payments made for tradeshows and prepaid payrollas the result of the completion of a U.S. income tax examination covering our fiscal years 2001 through 2004. Accrued expenses offset in part by restricted cash proceeds and normal amortization for insurance premiums. Accrued restructuring 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. Accrued restructuring costs decreased primarily due to payments of facility and severance costs forduring the nine months ended August 29, 2008.fromused for investing activities decreased from cash provided for the nine months ended September 1, 2006 of $338.6 million to cash used for the nine months ended August 31, 2007 of $213.3 million. Inmillion to cash used in the first nine months ended September 1, 2006, net cash acquired with the Macromedia acquisition amounted to $488.4 million for which no similar transaction of this magnitude occurred during the first nine months ended August 31, 2007.29, 2008 of $5.5 million. Uses of cash during the first nine months ended August 31, 2007 include29, 2008 primarily represented purchases of short-term investments, property and equipment purchasesand long-term investments and other assets. The uses associated with the purchase of long-term investments and other assets which relaterelated primarily to thecash paid for future licensing rights acquired through certain technology licensing arrangements that occurred during the second quarter of fiscal 2007 and two acquisitions completed in 2007. Uses of cash for purchases of short-term investments were offset in part by maturities and sales of short-term investments. Additionally, astotaling $56.0 million. As part of our lease extension for the Almaden Tower lease completed during the second fiscal quarter of fiscal 2007, we purchased a portion of the lease receivable totaling $80.4 million. See Note 11We also completed two acquisitions for cash consideration of our Notesapproximately $70.0 million during fiscal 2007.Condensed Consolidated Financial Statements for further information regarding this lease extension.increased $315.4decreased $294.9 million for a total of approximately $1.0 billion$747.7 million in the nine months ended August 31, 200729, 2008 as compared to cash used for the same period last year, primarily due to increasedlower purchases of treasury stock when compared to the prior year. year (Seesee sections titledentitled “Stock Repurchase Program II” and Stock“Stock Repurchase Program II”). Cash used during the nine months ended August 31, 2007 and 2006 were partially discussed below), offset in part by the proceeds related to the issuance of the treasury stock. Sources of cash during the nine months ended August 29, 2008 also included $450.0 million of proceeds from borrowings under our credit facility offset in part by repayments of $100.0 million on this credit facility.$15.0$27.5 million has already been spent. The remaining balance will be invested over the next three to five years.20072008 and into fiscal 2009 in the event of a further weakening of the economy or changes in our planned cash outlay. However, based on our current business plan and revenue prospects, we believe that our existing balances, together with our anticipated cash flows from operations and our available credit facility will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in Part II, Item 1A titled “Risk Factors.”Factors”. During the third quarter of fiscal 2007, we also increased our existing $500.0 million credit facility to $1.0 billion. ThisThe purpose of the credit facility will be usedis to provide backup liquidity for general corporate purposes. Also,purposes including stock repurchases. In January 2008, we believe thatdrew down $450.0 million under this facility, of which $350.0 million was outstanding as of August 29, 2008 and is included in long-term liabilities on our banking relationships and good credit should afford us the opportunity to raise additional capital in the bank or public market, if required.Adobe usescondensed consolidated balance sheet.mosta large portion of our invested cash. External investment firms managed, on average, 73%43% of Adobe’sour consolidated invested balances during the third quarter of fiscal 2007.2008. Within the U.S., the fixed income portfolio is invested primarily invested in municipal bonds.money market funds for working capital purposes. Outside of thenotes and highly rated corporate notes. The balance of the fixed income portfolio is managed internally and invested primarily in money market and enhanced money market funds for working capital purposes. As of August 31, 2007, $340.7 million of the securities now classified as short-term investments have structural features that allow us to sell the securities at par within 90 days and thus retain similar liquidity characteristics as cash equivalents.securities. All investments are made according to policies approved by the Board of Directors.stock repurchase agreementsrepurchases with third parties.Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time. Refer to Part II, Item 2(c) in this report for share repurchases during the quarter ended August 31, 2007.of fiscal 2007ended August 29, 2008, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $600.0$325.0 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.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. There31, 200729, 2008 are excluded from the denominator in the computation of earnings per share. All outstanding structured repurchase agreements as of August 31, 200729, 2008 under this program will expire on or before December 21, 2007.September 19, 2008. As of August 31, 200729, 2008 approximately $200.0$41.0 million of up-front payments remained under the agreements. During the nine months of fiscal 2007,ended August 29, 2008, we repurchased 15.419.0 million shares at an average price per share of $39.23$37.12 through structured repurchase agreements which included prepayments from fiscal 2006.In September 2007,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 $500.0$200.0 million. The $500.0 millionThis amount will be classified as treasury stock on our balance sheet. See Note 8Notes 10 and Note 1417 of our Notes to Condensed Consolidated Financial Statements for further information regardingdiscussion of our structured stock repurchase agreements.programs.program. Under the new program, which is not subject to expiration, we are authorizedhad authorization to repurchase in aggregate up to 20.050.0 million shares of our common stock. ThisDuring 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, is in additionwe provided prepayments of $1.9 billion under structured share repurchase agreements to our existing stock repurchase program to offset dilution from employee stock programs.large financial institutions. During the nine months ended August 29, 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares under these structured agreements at an average price of $37.15. As of August 31, 2007, we had provided prepayments of $850.0 million under structured share repurchase agreements to large financial institutionsunder this program. As of August 31, 2007, weand repurchased 12.9 million shares through structured share repurchase agreements at anthe average price of $39.94 and approximately$39.94. Approximately $333.4 million of up-front payments remained under these agreements. All outstanding structured repurchase agreements as of August 31, 2007 under2007.program will expire on or before March 18,report for share repurchases during the quarter ended August 29, 2008.31, 200729, 2008 consist of obligations under operating leases, royalty agreements and various service agreements. See Note 1113 of our Notes to Condensed Consolidated Financial Statements for more detailed information.The two1113 of our Notes to Condensed Consolidated Financial Statements are subject to standard financial covenants. As of August 31, 2007,29, 2008, we were in compliance with all of our financial covenants. Wecovenants and we expect to remain in compliance during the next 12 months. We are comfortable withbelieve these limitations and believe they will not impact our cashcredit or creditcash in the coming fiscal year or restrict our ability to execute our business plan.extended East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of August 31, 2007,29, 2008, the unamortized portion of the fair value of the residual value guarantees remaining in other long-term liabilities and prepaid rent was $4.6$3.0 million.officersdirectors and directorsofficers for certain events or occurrences while the officerdirector or directorofficer is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer’sdirector’s or director’sofficer’s lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that 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.interestsinterest in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships.partnership. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.3.3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK31, 2007.29, 2008.31, 2007,29, 2008, 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 Form 10-Q,regulations and were also effective to ensure that information required to be disclosed by us in this quarterly report on Form 10-Q was(ii) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.controlscontrol over financial reporting during the quarter ended August 31, 200729, 2008 that have materially affected, or are reasonably likely to materially affect our internal controlscontrol over financial reporting.35On OctoberSee Note 13 2006, a purported shareholder derivative action entitled Steven Staehr v. Bruce R. Chizen, et al was filed in the Superior Court“Commitments and Contingencies” of California for the County of Santa Clara against certain of the Company’s current and former officers and directors, and against Adobe as a nominal defendant. The complaint asserts that stock option grantsour Notes to executives were priced retroactively by Adobe and were improperly accounted for, and alleges various causes of action based on that assertion. The complaint seeks payment by the defendants to Adobe of damages allegedly suffered by it and disgorgement of profits, as well as injunctive relief. As of August 31, 2007, we do not believe that a loss is probable or estimable.In connection withCondensed Consolidated Financial Statements regarding our anti-piracy efforts, conducted both internally and through organizations such as the Business Software Alliance, from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local laws. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with U.S. generally accepted accounting principles, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of such contingencies.1A.1A. RISK FACTORS We cannot determine the ultimate effect these delays or the introductionor upgrades will have on our revenue or results of operations.Introduction of new productsand business models by existing and new competitors could harm our competitive position and results of operations. end markets for our software products are intenselycharacterized by intense competition, evolving industry standards and increasingly competitive,business models, rapid software and are significantly affected byhardware technology developments and frequent new product introductionsintroductions. Our future success will depend on our ability to enhance our existing products, introduce new products on a timely and market activities of industry competitors, including Microsoft’scost-effective basis, meet changing customer needs, extend our core technology into new applications, and anticipate and respond to emerging standards, business models and other technological changes. For example, Microsoft Windows Vista operating system which contains a new fixed document format, XPS, which competes with Adobe PDF, and its introduction ofPDF. Additionally, Microsoft Office 122007, which offers a feature to save Microsoft Office documents as PDF files through a freely distributed plug-in, which competes with Adobe PDF creation.creation (Microsoft has announced that it will add support for PDF directly in its Office products beginning in 2009. Microsoft also has an Expression lineStudio competes with our Adobe Creative Suite products and Microsoft Silverlight and Visual Studio,tooltools for rich internet applications, which competescompete with Adobe Flash and Adobe Flex. Google’s new web browser, Google Chrome, may end up including technologies that compete with Adobe Flash and Adobe AIR. In addition, competitors,companies, such as Google, Sun, Apple and Microsoft, may introduce competing software offerings for free to support advertising models, or “open source” vendors may introduce competitive products. For example, Microsoft made available Microsoft Expression Studio free of charge to students. If these competing products 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/A10-K for fiscal 2006.and the mobile and device markets.markets and software as service offerings. In the enterprise and government markets, we intend to increase our focus on vertical markets such as education, financial services, manufacturing, and the architecture, engineering and construction markets. With our Adobe Acrobat Connect product line, we intend to increase awareness in targetedmarkets and horizontal markets such as training and marketing. These new offerings and markets require a considerable investment of technical, financial and sales resources, and a scaleablescalable organization. Many of our competitors may have advantages over us due to their larger presence, larger developer network, deeper experience in the enterprise and government markets and the mobile and device markets, and greater sales and marketing resources. In the mobile and device markets, our intent is to license our technology topartner device makers, manufacturers and telecommunications carriers thatto embed our technology on their platforms, and in the enterprise and government market our intent is to form strategic alliances with leading enterprise and government solutions and service providers to provide additional resources to further enable penetration of such markets. If we are unable to successfully enter into strategic alliances with device makers, manufacturers, telecommunication carriers and leading enterprise and government solutions and service providers, or if they are not as productive as we anticipate, our market penetration may not proceed as rapidly as we anticipate and our results of operations could be negatively impacted. Another development is the software-as-a-servicesoftware 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-servicesoftware 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, customer requirements for “open standards” orfrom time to time we “open source” products could impact adoption or use with respect to somecertain of our products.Adversetechnology 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 in general economic or political conditions in any of the major countries in whichmay have negative revenue implications and make it easier for our competitors to produce products similar to ours, and if we doare unable to respond to these competitive threats, our business could adversely affect our operating results.If the economy worsens in any geographic areas where we do business, it would likely cause our future results to vary materially from our targets. A slower economy also may adversely affect our ability to grow.Political instability in any of the major countries in which we do business also may adversely affect our business.Revenues from our new businesses may be difficult to predict.As previously discussed, we are devoting significant resources to the development of product and service offerings where we have a limited operating history. This makes it difficult to predict revenues and revenue may decline quicker than anticipated. Additionally, we intend to expand the use of our Mobile and Device Solutions by licensing our products for use in mobile phones, set-top boxes, game devices, personal digital assistants, hand-held computers and other consumer electronic devices. We have a limited history of licensing products in these markets and in the enterprise market and may experience a number of factors that will make our revenue less predictable, including longer than expected sales and implementation cycles, potential deferral of revenue due to multiple-element revenue arrangements and alternate licensing arrangements.upgrade versions of our current productsemploy new software delivery methods in connection with our transition to new business models. Market acceptance of ourthese new product or version releasesand service offerings will be dependent on our ability to include functionality and usability in such releases that address thecertain customer requirements of customer demographics with which we have limited prior experience. To the extent we incorrectly estimate customer requirements for such products and version releasesor services or if there is a delay in market acceptance of such products and version releases,or services, our business could be harmed.Creative Solutions and Knowledge Worker Solutionsdesktop application-based products primarily on Windows and Macintosh platforms and on some UNIX platforms. We generally offer our server-based products, but not desktop application products on the Linux platform as well as the Windows and UNIX platforms. To the extent that there is a slowdown of customer purchases of personal computers on either the Windows or Macintosh platform or in general, 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.less favorableunfavorable terms, prevent us from manufacturing or licensing certain of our 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 any onearrangements. Any of whichthese could seriously harm our business.code (the “detailed program commands for our software programs”).code. If unauthorized disclosure of our source code occurs, we could potentially lose future trade secret protection for that source code. The loss of future trade secret protection could make it easier for third 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.···········withincluding but not limited to, product quality, architecture and development, or legal and financial contingencies, among other things;·contingencies;···offeringsanticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations.We rely on distributorssellmanage our productssales and any adverse change in our relationship with our distributorsdistribution channels effectively could result in a loss of revenue and harm to our business.primarily 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. In addition, our channel program focuses our efforts on larger distributors,Corporation which has resulted in our dependence on a relatively small number of distributors licensing a large amountrepresented 20% and 9% of our products. net revenue for the third quarter of fiscal 2008, 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, 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 maketheseour 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. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.WebsiteWeb 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, terrorist attack, or other catastrophic event could cause system interruptions, reputational harm, delays in our product development and loss of critical data and couldrevenuesrevenue and operating results for a particular period are difficult to predict. Our revenuesrevenue 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 reflect a number of assumptions, including assumptions about product pricing and demand, economic and seasonal trends, competitive factors, manufacturing costs and volumes, the mix of shrink-wrap and licensing 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.approximatelyover 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 (i) including:fluctuations, (ii) fluctuations;procurement, (iii) procurement;conditions, (iv) conditions;requirements, (v) requirements;infrastructure, (vi) infrastructure;restrictions, (vii) restrictions;delays, (viii) delays;more stringent consumer and data protection laws,laws; andyenYen and the euro.Euro. We regularly review our hedging program and will make adjustments as necessary based on the judgment factors discussed above. Our hedging activities may not offset more than a portion of theconformityaccordance with U.S. generally accepted accounting principles.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:····goodwillIn particular,goodwill.Statement of Financial Accounting StandardsSFAS No. 123—revised 2004123 (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. It will continuesignificantly adversely affectboth assets and liabilities in our reported financialcondensed consolidated balance sheet as of the beginning of fiscal 2008 and may have an adverse effect on our future operating results and financial position.the wayour financial statements in which we conduct our business.generally accepted accounting principles,GAAP, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, resulting in an impact on our results of operations. In particular,For example, our Mobile and Device Solutions segment, which primarily consists of assets acquired in the Macromedia acquisition, is in an emerging market with high growth potential. Revenues are basedWe recently announced the Open Screen Project. As part of the project, we will be removing the license fees on the introductionnext major releases of newAdobe Flash Player and Adobe AIR for devices. Accordingly, we would expect revenue from this segment to decrease following the next major release of these products scheduled for fiscal 2009. 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 royalties. If future revenuesrevenue or revenue forecasts for this segment do not meet our expectations, we willmay be required to record a charge to earnings reflecting an impairment of this recorded goodwill or intangible assets.tax laws or the interpretation of, tax laws,rules and regulations, 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.Internal Revenue ServiceIRS and other domestic and foreign tax authorities, including a current examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily related to our intercompany transfer pricing.authorities. We regularly assess themanagement, including our Chief Executive Officer and other members of our executive team.management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the Bay Area, where the majoritymany of our employees are located. We have relied on our ability to grant equityprivately heldprivately-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.43(c) Below is a summary of stock repurchases for the quarter ended August 31, 2007. 29, 2008. See Note 8Notes 10 and 17 of our Notes to Condensed Consolidated Financial Statements for information regarding our stock repurchase programs. Stock Repurchase Program I Beginning shares available to be repurchased as of May 30, 2008 140,020,904 (3) May 31—June 27, 2008 7 $ 42.71 Structured repurchases 401,563 $ 41.02 June 28—July 25, 2008 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
Period
Repurchased (1)
Price Per
Share
of Shares that May
Yet Be Purchased
Under the Plan (1) Stock Repurchase Program I (1) All shares were purchased as partpublicly announced plans.(2) Additional 109.0 million shares were issued for the acquisition of MacromediaDirectors authorized Stock Repurchase Program I which accounted for the majority of the repurchase authorization.(3) The repurchases from employees represent shares cancelled when surrendered in lieu of cash payments for withholding taxes due.(4) Adjustment of authorityis not subject to reflect changes in the dilution from outstanding shares and options.(5) The remaining authorization for the ongoing stockexpiration. 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 combining all stock issuances, netour Board of any cancelled, surrendered or exchangedDirectors from time to time.less all stock repurchasesof 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 ongoing plan, beginning inoriginal 20.0 million shares to 50.0 million shares. During the firstthird quarter of fiscal 1998.2008, 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. Attached as Exhibit 100 to this Quarterly Report on Form 10-Q are the following materials, formatted in Extensible Business Reporting Language (“XBRL”): the information contained in Item 1 of Part I, (i) the Consolidated Balance Sheets at August 31, 2007 and December 1, 2006, (ii) the Consolidated Statements of Income for the three and nine months ended August 31, 2007 and September 1, 2006 and (iii) the Consolidated Statements of Cash Flows for the nine months ended August 31, 2007 and September 1, 2006 and information contained in Item 2 of Part I. The financial information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of the Registrant. The purpose of submitting these XBRL documents is to test the related format and technology and, as a result, investors should continue to rely on the official filed version of the furnished documents and not rely on this information in making investment decisions.The information in Exhibit 100 attached hereto shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Exchange Act, regardless of any general incorporation language in such filing.45Exhibit 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 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 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 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 * Compensatory plan or arrangement** References to Exhibits 10.18 and 10.19 are to filings made by the Allaire Corporation. References to Exhibits 10.29 through 10.50 are to filings made by Macromedia, Inc.† The certifications attached as Exhibits 32.1 and 32.2 that accompany this 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 filingTable of Adobe Systems Incorporated under the Securities ActContents10.47 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 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 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 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 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 100.INS XBRL Instance†† X 100.SCH XBRL Taxonomy Extension Schema†† X 100.CAL XBRL Taxonomy Extension Calculation†† X 100.LAB XBRL Taxonomy Extension Labels†† X 100.PRE XBRL Taxonomy Extension Presentation†† X 100.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. this Form 10-Q, irrespective of any general incorporation language contained in such filing.††Contents Furnished not filed as stated in Part II, Item 5.51SIGNATUREAdobe Systems IncorporatedBy/s/ MARK GARRETTMark Garrett Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: October 2, 200752certain jurisdictions,the United States and/or other countries, are referenced in this Form 10-Q:AdobeAcrobatAcrobat ConnectColdFusionCreative SuiteFlashFlash CastFlash LiteFlexLightroomLiveCycleReader53