UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


_________________________

FORM 10-Q


_________________________


(Mark One)

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

For the quarterly period ended August 31, 2007

OR

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


xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 29, 2008
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                   ____________to                   ____________

Commission File Number: 0-15175

ADOBE SYSTEMS INCORPORATED

(Exact name of registrant as specified in its charter)


_________________________

Delaware

77-0019522

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

77-0019522
(I.R.S. Employer
Identification No.)

345 Park Avenue, San Jose, California  95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)



345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)
(408) 536-6000
(Registrant’s telephone number, including area code)
_________________________
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the “Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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 o

Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller
reporting company)
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No x

The number of shares outstanding of the registrant’s common stock as of September 28, 200726, 2008 was 573,787,932.

530,956,085.








ADOBE SYSTEMS INCORPORATED
FORM 10-Q

TABLE OF CONTENTS

Page No.

PART I—FINANCIAL INFORMATION

Item 1.

3

3

3

4

4

5

5

6

6

Item 2.

23

23

Item 3.

35

35

Item 4.

35

35

PART II—OTHER INFORMATION

Item 1.

36

35

Item 1A.

36

35

Item 2.

44

43

Item 5.

45

44

Item 6.

46

44

52

51

53

52

2


2


PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADOBE

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
(Unaudited)

 

 

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

 

See accompanying Notes to Condensed Consolidated Financial Statements.

3

  
August 29,
2008
  
November 30,
2007
 
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 INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

August 31,
2007

 

September 1,
2006

 

August 31,
2007

 

September 1,
2006

 

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.

4


3


ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
INCOME
(In thousands)thousands, except per share data)
(Unaudited)
  Three Months  Nine Months 
  
August 29,
2008
  
August 31,
2007
  
August 29,
2008
  
August 31,
2007
 
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 
 
Non-operating income (expense):
                
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)

 

 

Nine Months Ended

 

 

 

August 31,
2007

 

September 1,
2006

 

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

 

 



See accompanying Notes to Condensed Consolidated Financial Statements.

5


4


ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
  Nine Months Ended 
  
August 29,
2008
  
August 31,
2007
 
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 

See accompanying Notes to Condensed Consolidated Financial Statements.

5



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

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

We have prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to these rules and regulations, we have condensed or omitted certain information and footnote disclosures we normally include in our annual consolidated financial statements prepared in accordance with accounting principles generally accepted 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.

There have been no 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.

November 30, 2007.

Reclassification
Reclassification

Certain prior year amounts 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.

long-term and short-term other assets.  ·       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.

Recent Accounting Pronouncements

With the exception of 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.

November 30, 2007, that are of significance, or potential significance, to us.

In 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.

6


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

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)


In April 2008, the FASB issued FSP No. 142-3 (“FSP 142-3”), “Determination of the Useful Life of Intangible Assets”.  FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB Statement No. 142, “Goodwill and Other Intangible Assets”.  This new guidance applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. FSP 142-3 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008.  Early adoption is prohibited.  Since this guidance will be applied prospectively, on adoption, there will be no impact to our current consolidated financial statements.
In March 2008, the FASB issued SFAS 161 which requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses derivative instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, and how derivative instruments and related hedged items affect a company’s financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. Because SFAS 161 only requires additional disclosure, the adoption will not impact our consolidated financial position, results of operations or cash flows.
In June 2007, the 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.
In February 2007, the FASB issued FASB Statement No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities”. Under SFAS 159, companies may elect to measure certain financial instruments 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 and disclosed. SFAS 159 was effective for us beginning in the first quarter of fiscal 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.
In September 2006, the FASB issued FASB Statement No. 157 (“SFAS 157”), “Fair Value Measurements”, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is 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.
In July 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. Additionally, in May 2007, the FASB published FSP No. FIN 48-1 (“FSP FIN 48-1”), “Definition of Settlement in FASB Interpretation No. 48”. FSP FIN 48-1 is an amendment to FIN 48. It clarifies how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 and FSP FIN 48-1 resulted in an increase to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008. See Note 6 for additional information regarding income taxes, including the effects of adoption of FIN 48 and FSP FIN 48-1 on our condensed consolidated financial statements.


7

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


NOTE 2. ACQUISITIONS

On December 3, 2005, we completed the acquisition of Macromedia,FINANCIAL INSTRUMENTS

We measure certain financial assets and liabilities at fair value on a provider 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 
     
Quoted Prices in
Active Markets for
Identical Assets
  
Significant
Other
Observable
Inputs
  
Significant
Unobservable
Inputs
 
  Total  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Money market funds and overnight deposits(1)
 $939,329  $939,329  $  $ 
Fixed income available-for-sale securities(2)
  902,996      902,996    
Equity available-for-sale securities(3)
  7,163   7,163       
Investments of limited partnership(4)
  37,934   503      37,431 
Foreign currency derivatives(5)
  22,639      22,639    
Total $1,910,061  $946,995  $925,635  $37,431 
Liabilities:                
Foreign currency derivatives(6)
  1,124      1,124    
Total $1,124  $  $1,124  $ 

 (1)           Included in cash and cash equivalents on our condensed consolidated balance sheet.
(2)           Included in either cash and cash equivalents or short-term investments on our condensed consolidated balance sheet.
(3)           Included in short-term investments on our condensed consolidated balance sheet.
(4)           Included in other assets on our condensed consolidated balance sheet.
(5)           Included in prepaid expenses and other assets on our condensed consolidated balance sheet.
(6)           Included in accrued expenses on our condensed consolidated balance sheet.
Fixed income available-for-sale securities include United States treasury securities (81% of total), corporate bonds (4% of total) and obligations of foreign governments and their agencies (15% of total).
The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. (“Adobe Ventures”) which was $37.9 million and $30.6 million as of August 29, 2008 and November 30, 2007, respectively. The level 1 investments of limited partnership relate to investments in publicly-traded companies and the level 3 investments relate to investments in privately-held companies. Our estimation of fair value for 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.

Foreign currency derivatives include option and forward foreign exchange contracts primarily for the Japanese Yen and the Euro.

8

ADOBE SYSTEMS INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except share and results of operations.

per share data)
(Unaudited)


NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Below is our goodwill reported by segment

Goodwill as of December 1, 2006August 29, 2008 and August 31, 2007:

 

 

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

 


(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 goodwill


ADOBE SYSTEMS INCORPORATED
NOTES 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.

Certain amounts as of November 30, 2007 have been reclassified to conform to current year presentation in the 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.

Purchased and other intangible assets subject to amortization were as follows as of August 31,29, 2008:
  Cost  
Accumulated
Amortization
  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 
Purchased and other intangible assets subject to amortization were as follows as of November 30, 2007:

 

 

December 1,
2006
Cost

 

December 1,
2006
Net

 

Additions

 

Amortization
Expense

 

August 31,
2007
Net

 

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

 

During

  Cost  
Accumulated
Amortization
  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 
               Amortization expense related to purchased and other intangible assets was $43.2 million and $140.7 million for the three and nine months ended August 29, 2008, respectively. Comparatively, amortization expense was $60.5 million and $157.7 million for the three and nine months ended August 31, 2007, respectively. Of these amounts, $26.2 million and $89.5 million were included in cost of 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.


9

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


Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 13 years. As of August 29, 2008, we entered intoexpect amortization expense in future periods as follows:
Fiscal year 
Purchased
Technology
  
Other Intangible
Assets
 
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 
NOTE 4. OTHER ASSETS
Other assets consisted of the following as of August 29, 2008 and November 30, 2007:
  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 

Acquired rights to use technology includes $100.0 million associated with certain technology licensing arrangements 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 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(

In 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. As

Certain prior year amounts have been reclassified to conform to current year presentation in the condensed consolidated balance sheets. Specifically, there was a reclassification associated with certain technology licensing arrangements totaling $35.0 million, net from purchased intangibles of August 31, 2007, we expect amortization expense in future periodswhich $28.7 million and $4.7 million were reclassified to be as shown below:

Fiscal year

 

 

 

Purchased
Technology

 

Other Intangible
Assets

 

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

 

 

NOTE 4. OTHER ASSETS

Other assets consisted of the following as of August 31, 2007acquired rights to use technology and December 1, 2006:

long-term prepaid royalties, respectively. The remaining amount was reclassified to short-term prepaid royalty.

 

 

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

 

Included in investments 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.


10

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


The increase in security and other deposits relates primarily to the purchase of real property in Massachusetts. We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We will purchase the property subject to completion of construction of an office building shell and core, parking structure and site improvements. The purchase price for the property will be $44.7 million. We made an initial deposit of $7.0 million to be held in escrow until closing and then applied to the purchase price. Closing is expected to occur in May 2009 and the remaining balance is due at such time.

NOTE 5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES

Trade and other payables consisted of the following as of August 31, 200729, 2008 and December 1, 2006:

November 30, 2007:

 

 

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

 


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

NOTE 5. TRADE AND OTHER PAYABLES AND ACCRUED EXPENSES (Continued)

Accrued expenses consisted of the following as of August 29, 2008 and November 30, 2007:
  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 
Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, charitable contributions and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on the credit facility.
NOTE 6. INCOME TAXES
We adopted both FIN 48 and FSP FIN 48-1 on December 1, 2007. The adoption of FIN 48 resulted in an increase of $3.9 million to both assets and liabilities in our condensed consolidated balance sheet as of the beginning of fiscal 2008. Upon adoption, the gross liability for unrecognized tax benefits at December 1, 2007 was $218.4 million, exclusive of interest and penalties. The total amount of gross FIN 48 liabilities includes $57.7 million that relates to certain tax attributes from acquired companies, including Macromedia. These liabilities from acquired companies are not recorded on our balance sheet because they are related to positions that have not yet been claimed on our income tax returns. If the total FIN 48 gross liability for unrecognized tax benefits at December 1, 2007 were recognized in the future, the following amounts, net of an estimated $22.2 million benefit related to deducting such payments on future tax returns, would result: $99.0 million of unrecognized tax benefits would decrease the effective tax rate, $82.8 million would decrease goodwill and $14.4 million would increase additional paid-in-capital.
We have historically presented our estimated liability for unrecognized tax benefits as a current liability. FIN 48 requires liabilities for unrecognized tax benefits to be classified based on whether a payment is expected to be made within the next 12 months. That is, amounts expected to be paid within the next 12 months are to be classified as a current liability and all other amounts are to be classified as a non-current liability. As a result of adopting FIN 48 in the first quarter of fiscal 2008, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable, including accrued interest on the balance.
We have historically presented our estimated state, local and interest liabilities net of the estimated benefit we expect to receive from deducting such payments on future tax returns (i.e., on a “net” basis). FIN 48 requires this estimated benefit to be classified as a deferred tax asset instead of a reduction of the overall liability (i.e., on a “gross” basis). Thus, we recognized additional deferred income tax assets of $3.9 million to present the unrecognized tax benefits as gross amounts on our condensed consolidated balance sheet.

11

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


Our policy to classify interest and penalties on unrecognized tax benefits as income tax expense did not change upon the adoption of FIN 48. As of December 1, 2007, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $42.8 million.
We file income tax returns in the U.S. on a federal basis and in many U.S. state and foreign jurisdictions. We are subject to the continual examination of our income tax returns by the Internal Revenue Service (“IRS”) and other domestic and foreign tax authorities. Our major tax jurisdictions are the U.S., Ireland and California. For California, Ireland and the U.S., the earliest fiscal years open for examination are 2001, 2002 and 2005, respectively.
During the nine months ended August 29, 2008, the gross liability for unrecognized tax benefits significantly changed from the balance at November, 30, 2007.  In August 2008, a U.S. income tax examination covering our fiscal years 2001 through 2004 was completed.  Our accrued tax and interest related to these years was $100.0 million and was previously reported in long-term income taxes payable.  In conjunction with this resolution, we requested and received approval from the IRS to repatriate certain foreign earnings in a tax-free manner, which resulted in a reduction of our long-term deferred income tax liability of $57.8 million.  Together, these liabilities on our balance sheet decreased by $157.8 million.  Also in August 2008, we paid $80.0 million in conjunction with the aforementioned resolution, credited additional paid-in-capital for $41.3 million due to our use of certain tax attributes related to stock option deductions, including a portion of certain deferred tax assets not recorded in our financial statements pursuant to SFAS 123R, and made other individually immaterial adjustments to our tax balances totaling $15.8 million.  A net income statement tax benefit in the third quarter of fiscal 2008 of $20.7 million resulted.  All other movements in the deferred tax asset and liability accounts are the result of our normal 2008 tax provision.
The gross liability for unrecognized tax benefits at August 29, 2008 was $155.8 million, exclusive of interest and penalties. If the total FIN 48 gross liability for unrecognized tax benefits at August 29, 2008 were recognized in the future, the following amounts, net of an estimated $18.1 million benefit related to deducting such payments on future tax returns, would result: $54.7 million of unrecognized tax benefits would decrease the effective tax rate and $83.0 million would decrease goodwill.
As of August 29, 2008, the combined amount of accrued interest and penalties related to tax positions taken on our tax returns and included in non-current income taxes payable was approximately $14.3 million.
The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues in the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements.
NOTE 7. STOCK-BASED COMPENSATION
The assumptions used to value option grants, restricted stock units and performance shares during the three and nine months ended August 29, 2008 and August 31, 2007 are as follows:
  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%


12

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


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

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

Effective April 1, 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.
Summary of Stock Options
Information regarding stock options outstanding at August 29, 2008 and August 31, 2007 is summarized below.
  
Number of
Shares
  
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Life
 
Aggregate
Intrinsic
Value*
(millions)
 
2008          
Options outstanding  42,070  $29.67 4.16 years $554.5 
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 

 

 

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

 

*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.
Summary of Restricted Stock Units
Restricted stock unit activity for the nine months ended August 29, 2008 and August 31, 2007 is as follows:
  2008  2007 
Beginning balance  1,701    
Awarded  2,823   1,458 
Released  (353)   
Forfeited  (146)  (47)
Ending balance  4,025   1,411 


13

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


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

*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.
Summary of Performance Shares
Effective January 24, 2008, the Executive Compensation Committee adopted the 2008 Performance Share Program (the “2008 Program”). The purpose of the 2008 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2008 Program is our fiscal 2008 year. All members of our executive management and other key senior leaders are participating in the 2008 Program. Awards granted under the 2008 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining 75% vesting evenly on the following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2008 Program have the ability to receive up to 200% of the target number of shares originally granted.
The following table sets forth the summary of performance share activity under our 2008 Program for the nine months ended August 29, 2008.
  
Shares
Granted
  
Maximum
Shares Eligible
to Receive
 
Beginning balance      
Awarded  931   1,863 
Forfeited  (74)  (149)
Ending balance  857   1,714 
In the first quarter of fiscal 2008, the Executive Compensation Committee certified the actual performance achievement of participants in the 2006 Performance Share Program (the “2006 Program”) and the 2007 Performance Share Program (the “2007 Program”). Based upon the achievement of goals outlined in the 2006 Program and 2007 Program, participants had the ability to receive up to 150% and 200%, respectively, of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 105% of target or 0.3 million shares for the 2006 Program and 200% of target or 0.7 million shares for the 2007 Program. Shares awarded under the 2006 Program vested 100% and were released in the first quarter of fiscal 2008. Shares under the 2007 Program vested 25% in the first quarter of fiscal 2008, and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe.

14

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


The following table sets forth the summary of performance share activity under our 2007 Program, based upon share awards actually achieved, for the nine months ended August 29, 2008:
Shares
Shares achieved718
Released(205)
Forfeited(59)
Ending balance454
Compensation Costs
As of August 29, 2008, there was $301.8 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.7 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.
Total stock-based compensation costs that have been included in our consolidated statements of income for the three months ended August 29, 2008 and August 31, 2007 are as follows:
  2008  2007 
Income Statement Classifications 
Option Grants
and Stock
Purchase Rights *
  
Restricted
Stock and
Performance
Share
Awards *
  
Option Grants
and Stock
Purchase Rights
  
Restricted
Stock and
Performance
Share
Awards
 
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.

15

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


Total stock-based compensation costs that have been included in our consolidated statements of income for the nine months ended August 29, 2008 and August 31, 2007 are as follows:
  2008  2007 
Income Statement Classifications 
Option Grants
and Stock
Purchase Rights *
  
Restricted
Stock and
Performance
Share
Awards *
  
Option Grants
and Stock
Purchase Rights
  
Restricted
Stock and
Performance
Share
Awards
 
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.

NOTE 6.8. EMPLOYEE BENEFIT PLANS

Stock-BasedPLAN

Deferred Compensation

Stock Options

Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from the (i) 2003 Equity Incentive Plan (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 Plan

Our 1997 Employee Stock Purchase Plan (“ESPP”) allows eligible employee participants to purchase shares of our common stock at a discount through payroll deductions. The ESPP consists of a twenty-four month offering period with four six-month purchase periods in each offering period. Employees purchase shares in each purchase period at 85% of the market value of our common stock at either the beginning of the offering period or the end of the purchase period, whichever price is lower.

Restricted Stock

We 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 INCORPORATED
NOTES 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 Shares

Effective 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 Compensation

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include our expected


ADOBE SYSTEMS INCORPORATED
NOTES 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:

 

 

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

%

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:

 

 

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 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.

12




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

NOTE 6. EMPLOYEE BENEFIT PLANS (Continued)

Deferred Compensation Plan

On September 21, 2006, the Board of Directors approved the Adobe Systems Incorporated Deferred Compensation Plan, effective December 2, 2006 (the “Deferred Compensation Plan”). The Deferred Compensation Plan is an unfunded, non-qualified, deferred compensation arrangement under which certain 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.

NOTE 7.9. RESTRUCTURING AND OTHER CHARGES

In the first quarter

Macromedia Merger Restructuring Charges
We completed our acquisition of fiscal 2006, pursuant to Board of Directors’ approval, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities.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

The following table sets forth a summary of Macromedia restructuring activities during the nine months ended August 29, 2008:
  November 30, 2007  
Cash
Payments
  Adjustments  
August 29,
2008
  
Total Costs
Incurred To
Date
  
Total
Costs
Expected
to be
Incurred
 
Termination benefits $  $  $  $  $26,976  $26,976 
Cost of closing redundant facilities  16,283   (5,287)  2,969   13,965   28,248   42,213 
Cost of contract termination              3,238   3,238 
Other  1,435   (131)  (311)  993   1,363   2,356 
Total $17,718  $(5,418) $2,658  $14,958  $59,825  $74,783 
Included in the adjustments column is a change to previous estimates of sublease income of $2.6 million associated with closing redundant facilities as well as the effect of 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:

 

 

Balance
2006

 

Cash Payments

 

Adjustments

 

Balance
2007

 

Total Costs
Incurred To
Date

 

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

 

 

We completed our acquisition of Macromedia on December 3, 2005. Pursuant to Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection with a Purchase Business


ADOBE SYSTEMS INCORPORATED
NOTES 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.

29, 2008. Accrued restructuring charges of $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 charges


16

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


of $17.7 million includes $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 Charges

In 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.

condensed consolidated balance sheets.

NOTE 8.10.  STOCKHOLDERS’ EQUITY

Stock Repurchase Program I

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured 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.

During the nine months 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 INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(In thousands, except per share data)
(Unaudited)

NOTE 8. STOCKHOLDERS’ EQUITY (Continued)

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

The During the nine months ended August 29, 2008, we repurchased 19.0 million shares at an average price of $37.12 through structured repurchase agreements which included prepayments from fiscal 2007. During the nine months ended August 31, 2007, we repurchased 15.4 million shares at an average price of $39.23 through structured repurchase agreements which included prepayments from fiscal 2006.

During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.
As of August 29, 2008 and November 30, 2007, the prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by August 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,

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.

Stock Repurchase Program II

In April 2007, we announced that our Board of Directors authorized a new

Under this stock repurchase 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 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.

17

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


During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.

NOTE 9.11.  COMPREHENSIVE INCOME

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

NOTE 9. COMPREHENSIVE INCOME (Continued)

The following table sets forth the components of comprehensive income 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

 

 Three Months  Nine Months 

 

2007

 

2006

 

2007

 

2006

 

 2008  2007  2008  2007 

Net income

 

$

205,243

 

$

94,396

 

$

501,599

 

$

322,565

 

 $191,608  $205,243  $625,897  $501,599 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

                

Change in unrealized gain on available-for-sale securities, net of taxes

 

700

 

2,730

 

5,568

 

2,595

 

Change in unrealized gain (loss) on available-for-sale securities, net of taxes  (1,998)  700   (11,001)  5,568 

Currency translation adjustments

 

21

 

20

 

1,746

 

3,495

 

  (6,358)  21   (4,284)  1,746 

Net gain (loss) in derivative instruments, net of taxes

 

(3,776

)

1,903

 

42

 

(3,414

)

  10,494   (3,776)  10,776   42 

Other comprehensive income (loss)

 

(3,055

)

4,653

 

7,356

 

2,676

 

  2,138   (3,055)  (4,509)  7,356 

Total comprehensive income, net of taxes

 

$

202,188

 

$

99,049

 

$

508,955

 

$

325,241

 

 $193,746  $202,188  $621,388  $508,955 

NOTE 10.12.  NET INCOME PER SHARE

Basic net income per share is computed using the weighted average number of common shares outstanding for the period, excluding unvested restricted stock. Diluted net income per share is based upon the weighted average common shares outstanding for the period plus dilutive potential common shares, including unvested restricted common stock and stock options using the treasury stock method.

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended August 29, 2008 and August 31, 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 
For the three and September 1, 2006:

 

 

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

 

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

NOTE 11.13.  COMMITMENTS AND CONTINGENCIES

Lease Commitments

We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the Almaden Tower and the East and West Towers.

In August 2004, we extended the lease agreement for our East and West Towers for an additional five years with an option to extend for an additional five years solely at our election. In March 2007, the Almaden Tower lease was extended for five years, with a renewal option for an additional five years solely at our election. As part of the lease extensions, we
18

purchased the lease receivable from the lessor of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower for $80.4 million, both of which are recorded as investments in lease receivables on our consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West Towers and the agreement for the Almaden Tower, we have the option to purchase the buildings at any time during the lease term for approximately $143.2 million and $103.6 million, respectively. The residual value guarantees under the East and West Towers and the Almaden Tower obligations are $126.8 million and $89.4 million, respectively.

These two leases are both subject to standard covenants including certain financial ratios that are reported to the lessors quarterly. As of August 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.

Contractual Commitments
As discussed in Note 4, during the third quarter of fiscal 2008, we entered into an agreement to license certain technology. This agreement also provides us the ability to acquire rights to intellectual property in the future. Minimum fees associated with this arrangement range between approximately $1.0 million and $1.5 million per year through May 2028 for minimum fees in the aggregate, of approximately $25.0 million.
Guarantees

The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under 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 of


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

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

August 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.

$3.0 million and $4.2 million, respectively.

Royalties

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

Indemnifications
Indemnifications

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

To the extent permitted under Delaware law, we have agreements whereby we indemnify our 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;
19

however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

As part of our limited partnership 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.

Legal Proceedings

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

NOTE 11. COMMITMENTS AND CONTINGENCIES

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

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

proceedings, claims or investigations.

NOTE 12.14.  CREDIT FACILITY

AGREEMENT

In August 2007, we entered into an Amendment to our Credit Agreement dated February 2007 (the “Amendment”), which increased the total senior unsecured revolving facility from $500.0 million to $1.0 billion. The Amendment also permits 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.
In February 2008, we entered into a Second Amendment to the Credit Agreement dated February 26, 2008, which extended the maturity date of the facility by one year to February 16, 2013. The facility would terminate at this date if no additional extensions have been requested and granted. All other terms and conditions remain the same.
The facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio. 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.


20

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


NOTE 15.  NON-OPERATING INCOME (EXPENSE)
Non-operating income (expense) for the three and nine months ended August 29, 2008 and August 31, 2007 includes the following:
  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 

NOTE 13.16.  INDUSTRY SEGMENTS

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

NOTE 13. INDUSTRY SEGMENTS (Continued)

This segment contains revenue generated by 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.

Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment (formerly “Enterprise and Developer Solutions”) to form our new 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.

21

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


Our chief operating decision maker reviews revenue and gross margin information for each of our operating segments. Operating expenses are not reviewed on a segment 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.

 

 

Creative
Solutions

 

Knowledge
Worker
Solutions

 

Enterprise
and
Developer
Solutions

 

Mobile and
Device
Solutions

 

Other*

 

Total

 

Three months ended
August 31, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%


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

NOTE 13. INDUSTRY SEGMENTS (Continued)

 

 

Creative
Solutions

 

Knowledge
Worker
Solutions

 

Enterprise
and
Developer
Solutions

 

Mobile and
Device
Solutions

 

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

%


*                    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 INCORPORATED
NOTES 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:

 

 

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

 

segments.

*                    Total operating expenses include research and development, sales and marketing, general and administrative, restructuring and other charges, and amortization of purchased intangibles.

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

  
Creative
Solutions
  
Knowledge
Worker
Solutions
  
Enterprise
Solutions
  
Mobile and
Device
Solutions
  Platform  
Print
Publishing
  Total 
Nine months ended August 29, 2008                     
Revenue $1,564,335  $611,925  $174,011  $64,919  $90,117  $159,281  $2,664,588 
Cost of revenue  124,024   39,476   56,308   19,525   15,821   21,038   276,192 
Gross profit $1,440,311  $572,449  $117,703  $45,394  $74,296  $138,243  $2,388,396 
Gross profit as a percentage of revenue  92%  94%  68%  70%  82%  87%  90%
Nine months ended August 31, 2007                            
Revenue $1,328,463  $536,382  $137,044  $38,999  $53,359  $152,423  $2,246,670 
Cost of revenue  103,023   47,473   53,237   23,206   9,846   19,313   256,098 
Gross profit $1,225,440  $488,909  $83,807  $15,793  $43,513  $133,110  $1,990,572 
Gross profit as a percentage of revenue  92%  91%  61%  40%  82%  87%  89%

NOTE 14.17.  SUBSEQUENT EVENT

Structured EVENTS

Stock Repurchase Agreements

Programs

AsSubsequent 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.

22



22


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

The following discussion (unaudited and presented in millions, except share and per share amounts) should be read in conjunction with the condensed consolidated financial statements and notes thereto.

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans, future growth and market opportunities, which involve risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section titledentitled “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.

BUSINESS OVERVIEW

Founded in 1982, Adobe Systems Incorporated is one of the largest and most diversified software companies in the world. We offer a line of creative, business and mobile software and services used by 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.

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

OPERATIONS OVERVIEW

Effective in the first quarter of fiscal 2008, to better align our engineering and marketing efforts, we merged our Knowledge Worker Solutions segment with our Enterprise Solutions segment to form our new Business Productivity Solutions business unit. However, under the requirements of SFAS 131, Knowledge Worker Solutions and Enterprise Solutions are separate reportable segments. In addition, we moved responsibility for Flex Builder, Flex SDK and our ColdFusion product line to our Platform segment from our Enterprise Solutions segment. The prior year information has been updated to reflect this product movement.
During the 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.


In our Knowledge Worker Solutions 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.
In our Enterprise Solutions segment, we also achieved record revenue and 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.

In our Creative Solutions segment, revenue declined year-over-year due to the timing of the release of new product versions.  In the third quarter of fiscal 2007, we completed the release of many new versions of our Creative Suite 3 (“CS3”)


family of products.  In the third quarter of fiscal 2008, we began preparing for the next launch of our creative professional products, including the pre-release of newer versions of some of these products.  We achieved solid results with our hobbyist
products, Photoshop Elements and Premiere Elements, and we also had strong results with our Scene7 business in the third quarter of fiscal 2008.
Our Mobile and Device 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.
Our Platform business performed strongly, resulting in significant year-over-year revenue growth and our Print and Classic Publishing business.

business segment also achieved modest year-over-year revenue growth.


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements in accordance with GAAP and pursuant to the rules and regulations of the SEC, we make assumptions, judgments and estimates that can have a significant impact onaffect the reported amounts reported in our consolidated financial statements.of assets, liabilities, revenue and expenses, and related disclosures of contingent assets and liabilities. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis, we evaluate our assumptions, judgments and estimates and make changes accordingly.estimates. We also discuss our critical accounting policies and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, stock-based compensation, goodwill impairment and income taxes have the greatest potential impact on our condensed consolidated financial statements. These areas are key components of our results of operations and are based on complex rules which require us to make judgments and estimates, so we consider these to be our critical accounting policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

There

With the exception of our adoption of FIN 48, there have been no other significant changes in our critical accounting policies and estimates during the 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

November 30, 2007.



RESULTS OF OPERATIONS

Revenue for the Three and Nine Months Ended August 29, 2008 and August 31, 2007 and September 1, 2006

 

 

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

 

 

 

��

 

  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%
As described in Note 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.

products.



Our services and support revenue is 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.

Segment Information

 

 

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 
  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.

The year-over-year decrease in Creative Solutions revenue in the third quarter of $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.
Revenue from Knowledge Worker Solutions increased $41.2 million and $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.
Revenue from Enterprise Solutions increased $14.9 million and $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.

Revenue from Mobile and Device Solutions increased $14.5 million and $25.9 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from Flash Lite OEM licensing due to continued strong adoption of Flash enabled devices. On May 1, 2008, we announced the Open Screen Project.  The project aims to enable a consistent runtime environment that will remove barriers for developers and designers as they publish content and applications across desktops and consumer devices, including phones, MIDs and set top boxes.  As part of the project, we will be removing some restrictions on the use of some of our 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.


Revenue from Platform increased $12.9 million and $36.7 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase was primarily due to increased revenue from our Flex Builder, Flash Player and ColdFusion products.
Revenue from Print Publishing increased $4.0 million and $7.0 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended August 31, 2007. The increase resulted principally from a slight increase in revenue associated with our legacy products.
Geographical Information
  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%

Overall revenue for the three and nine months ended August 29, 2008 increased when compared to the three and nine months ended August 31, 2007 primarily due to continued adoption of our CS3 and LiveCycle families of products and continued licensing of our Acrobat family of products – including the launch of our new Acrobat 9 products in the third quarter of fiscal 2008. Licensing of our Mobile and Device products and Platform products also contributed to the increase.
Revenue in the Americas increased $28.9 million and $127.8 million during the three and nine months ended August 29, 2008, compared to the three months and nine months ended August 31, 2007, due to solid demand, as well as strong licensing of our products in the education market and the Acrobat 9 product launch in the third quarter of fiscal 2008.
Revenue in EMEA increased $14.5 million and $206.4 million during the three and nine months ended August 29, 2008, respectively, compared to the three and nine months ended 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 Information

 

 

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

 

 

 

 

 

Overall 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.

2008.

Revenue in 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.

year.

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 Information

At 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.

Product Backlog
With regard to our product backlog, our experience is that the actual amount of backlog at any particular time may not be a meaningful indicator of future business prospects. For example, prior to the finalization and release of new products, we may have significant levels of orders for new product releases. Our backlogBacklog is comprised of unfulfilled orders, at the end of 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.


Cost of Revenue for the Three and Nine Months Ended August 29, 2008 and August 31, 2007 and September 1, 2006

 

 

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

 

 

 

 

 

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

Cost of product revenue fluctuatedincreased (decreased) due to the following:

 

 

% Change
2006 to 2007
QTD

 

% Change
2006 to 2007
YTD

 

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

%

 

Localization costs

  
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
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%

Amortization of acquired rights to use technology increased primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.0 million during the third quarter of fiscal 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.
Amortization expense decreased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007, due to a decrease in amortization expense primarily associated with intangible assets purchased through the Macromedia acquisition.
Localization costs which are amortized over the product life cycle, decreased during the three months ended August 29, 2008 as compared to the three months ended August 31, 2007, primarily due to increased localization costs in the third quarter of fiscal 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.


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

Cost of services and support revenue increased during the three and nine months ended August 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.


Operating Expenses for the Three and Nine Months Ended August 29, 2008 and August 31, 2007
Research and Development, Sales and Marketing and General and Administrative Expenses
The increase in compensation 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.

The increase in compensation costs for the 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.
Research and September 1, 2006

Development

 

 

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

%

 

 

 

 

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

Research and development expenses fluctuatedincreased (decreased) due to the following:

 

 

% Change
2006 to 2007
QTD

 

% Change
2006 to 2007
YTD

 

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

%

 

The 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.

 
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
Compensation and related benefits associated with headcount growth6%  8%
Compensation associated with incentive compensation and stock-based compensation(2)  4 
Various individually insignificant items   1 
Total change4%  13%
We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products.

 

 

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

%

 

 

 

 

Sales and Marketing
  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%    
Sales and marketing expenses consist primarily includeof salary and benefit expenses, sales commissions, travel expenses and related facilities costs for our sales, marketing, order management and global supply chain management personnel. Sales and marketing expenses also include the costs of programs aimed at increasing revenue, such as advertising, trade shows, public relations and other market development programs.



Sales and marketing expenses fluctuatedincreased (decreased) due to the following:

 

 

% Change
2006 to 2007
QTD

 

% Change
2006 to 2007
YTD

 

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
growth

 

 

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
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
Compensation and related benefits associated with headcount growth5%  5%
Marketing spending related to product launches and overall marketing efforts to further increase revenue3   5 
Compensation associated with incentive compensation and stock-based compensation(1)  5 
Various individually insignificant items1   1 
Total change8%  16%

General and Administrative
  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%    
General and administrative expenses consist primarily of compensation and benefit expenses, travel expenses and related facilities costs for our finance, facilities, human resources, legal, information services and executive personnel. General and administrative expenses also include outside legal and accounting fees, provision for bad debts, expenses associated with computer equipment and software used in the administration of the business, charitable contributions and various forms of insurance.

General and administrative expenses fluctuatedincreased (decreased) due to the following:

 

 

% Change
2006 to 2007
QTD

 

% Change
2006 to 2007
YTD

 

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

%

 

The increase

 
% Change
2007 to 2008
QTD
 
% Change
2007 to 2008
YTD
Allocation of costs associated with acquired rights to use technology24%  8%
Compensation and related benefits associated with headcount growth5   5 
Professional and consulting fees4   2 
Compensation associated with incentive compensation and stock-based compensation(1)  6 
Various individually insignificant items5   7 
Total change37%  28%

Allocation of costs associated with acquired rights to use technology increased primarily due to the fact that we entered into certain technology licensing arrangements totaling $100.0 million during the third quarter of fiscal 2008. An estimated $56.0 million of this cost is related to future licensing rights and has been capitalized and will be amortized on a straight-line basis over the estimated useful lives up to nine years. Of the remaining costs, we estimated that approximately $27.2 million was related to historical use of licensing rights which was expensed as cost of sales, and the residual of $16.8 million was expensed as general and administrative costs.  In connection with these licensing arrangements, we have the ability to acquire additional rights to use technology in the higher incentive compensationfuture.  See Note 13 of our Notes to Condensed Consolidated Financial Statements for further information regarding our contractual commitments.
Restructuring and Other Charges
  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.


During the nine months ended August 29, 2008, there was an adjustment to previous estimates associated with closing redundant Macromedia facilities that were acquired through the acquisition. As of August 29, 2008, accrued restructuring charges related to the Macromedia acquisition totaled $15.0 million. We expect to pay this liability through fiscal 2011.
Amortization of Purchased Intangibles and Incomplete Technology
  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%    
Amortization expense decreased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007, relatesdue to highera decrease in amortization expense for profit sharing and employee bonuses based on company performance to date.

 

 

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

%

 

 

 

 


*                    Percentage is not meaningful.

29




Inassociated 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.

 

 

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

%

 

 

 

 

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

Non-Operating Income for the Three and Nine Months Ended August 29, 2008 and August 31, 2007
  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%  *     
Total non-operating income
 $9.0  $22.0   (59)% $47.1  $74.8   (37)%

*Percentage is not meaningful.
Interest and Other Income, net
The largest component of interest and other income, net, was interest earned on cash, cash equivalents and short-term fixed income investments. Interest and other income, net also included foreign exchange gains and losses, including those from hedging revenue transactions primarily denominated in Japanese Yen and Euro currencies.
Interest and other income, net, decreased during the three and nine months ended August 29, 2008 as compared to the three and nine months ended August 31, 2007 primarily as a result of lower average invested balances due to cash used for our share repurchase programs and September 1, 2006

 

 

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

 

 

 

 

 

lower interest rates.  Additionally, during the nine months ended August 29, 2008, interest and other income, net included gains and losses on the sale or write-down for other-than-temporary impairment of fixed income investments.

*                    Percentage

Interest Expense
Interest expense for the three and nine months ended August 29, 2008, primarily represents interest associated with our credit facility. The outstanding balance as of August 29, 2008 was $350.0 million. Interest due under the credit facility is not meaningful.

paid upon expiration of the LIBOR contract or at a minimum, quarterly.

Investment Gain (Loss),Gains, net

Investment gain (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 Income

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




Provision for Income Taxes for the Three and Nine Months Ended August 31, 200729, 2008 and September 1, 2006

 

 

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

%

 

 

 

 

Our 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%
Percentage of total revenue
  4%  8%      7%  7%    
Effective tax rate
  16%  26%      22%  24%    
Our effective tax rate decreased approximately 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.

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.


LIQUIDITY AND CAPITAL RESOURCES

 

 

August 31,
2007

 

December 1,
2006

 

Percent
Change

 

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

)%

 

This data should be read in conjunction with the consolidated statements of cash flows.
  
August 29,
2008
  
November 30,
2007
 
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 
Summary of our cash flows:

 

 

August 31,
2007

 

September 1,
2006

 

Percent
Change

 

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

)%

 

  
August 29,
2008
  
August 31,
2007
 
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)
Our primary source of cash is receipts from revenue. The primary uses of cash are payroll related expenses; general operating expenses including marketing, travel and office rent; and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and participation in the employee stock purchase planESPP and another use of cash is our stock repurchase program, which is detailed below.

Cash Flows from Operating Activities
Net cash provided by operating activities of $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 in


trade 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.

royalties.


The primary working capital uses of cash were 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.


Cash Flows from Investing Activities
Net cash 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.
These uses of cash were offset in part by maturities and sales of short-term investments and to Condensed Consolidated Financial Statements for further information regarding this lease extension.

a lesser extent, proceeds from the sale of equity securities.

Cash Flows from Financing Activities
Net cash used for financing activities 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.

We expect to continue our investing activities, including short-term and long-term investments and purchases of computer systems for research and development, sales and marketing, product support and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase programs and to strategically acquire software companies, products or technologies that are complementary to our business. The Board of Directors has approved a facilities expansion for our operations in India, which may include the purchase of land and buildings. As previously disclosed, we plan to invest $100.0 million directly in venture capital, of which, approximately $15.0$27.5 million has already been spent. The remaining balance will be invested over the next three to five years.

Our existing cash, cash equivalents and investment balances may decline during the fourth quarter of fiscal 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.

We use professional investment management firms to manage 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 the


U.S., our fixed income portfolio is primarily invested in U.S. Treasury notes 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 Program I

To facilitate our stock repurchase program, designed to return value to our stockholders and minimize dilution from stock issuances, we repurchase shares in the open market and also enter into structured 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.

During the nine months 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. There
were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

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

The prepayments were classified as treasury stock on our balance sheet at the payment date, though only shares physically delivered to us by August 31, 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.

2007.

During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.
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.

Stock Repurchase Program II

In April 2007, we announced that our Board of Directors authorized a new

Under this stock repurchase 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 institutions


under 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.

During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.
Refer to Part II, Item 2 in this program will expire on or before March 18,report for share repurchases during the quarter ended August 29, 2008.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of August 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.

Contractual Commitments
With the exception of our adoption of FIN 48, borrowings under our credit facility and entering into a certain technology license arrangement, there have been no other significant changes in our contractual commitments during the nine months ended August 29, 2008 as compared to the contractual commitments disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended November 30, 2007.
As of August 29, 2008, the principal outstanding under the credit facility was $350.0 million which is due in full no later than February 16, 2013. Interest associated with this facility cannot be estimated with certainty by period throughout the term since it is based on a fluctuating interest rate calculation.


As a result of adopting FIN 48, we reclassified $197.7 million from current income taxes payable to long-term income taxes payable related to unrecognized tax benefits.
The gross liability for unrecognized tax benefits at August 29, 2008 was $155.8 million, exclusive of interest and penalties.  The timing of the resolution of income tax examinations is highly uncertain, and the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. While it is reasonably possible that some issues with the IRS and other examinations could be resolved within the next 12 months, based upon the current facts and circumstances, we cannot estimate the timing of such resolution or range of potential changes as it relates to the unrecognized tax benefits that are recorded as part of our financial statements.
As discussed in Note 4 of our Notes to Condensed Consolidated Financial Statements, during the third quarter of fiscal 2008, we entered into an agreement to license certain technology. This agreement also provides us the ability to acquire rights to intellectual property in the future. Minimum fees associated with this arrangement range between approximately $1.0 million and $1.5 million per year through May 2028 for minimum fees in the aggregate, of approximately $25.0 million.
Lease Commitments

The two

Two of our lease agreements discussed in Note 1113 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.

Royalties

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

Guarantees

The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, 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 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.

Indemnifications

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

To the extent permitted under Delaware law, we have agreements whereby we indemnify our 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.


As part of our limited partnership 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.



ITEM 3.3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We believe that there have been no significant changes in our market risk exposures for the three and nine months ended August 31, 2007.

29, 2008.

ITEM 4.  CONTROLS AND PROCEDURES

Based on their evaluation as of August 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.

There were no changes in our internal 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.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.

35




PART II—OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On 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.

proceedings.

ITEM 1A.1A.  RISK FACTORS

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

Delays in development or shipment of new products or upgrades to existing products could cause a decline in our revenue.

Any delays or failures in developing new products or new features for existing products or marketing our products may have a harmful impact on our results of operations. Our inability to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes could affect continued market acceptance of our products and our ability to develop new products. Delays in product or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction
Introduction of new products or 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.

The 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,


web development 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.

2007.

If we fail to successfully manage transitions to new business models and markets, our results of operations could be negatively impacted.

We are devoting significant resources to the development of technologies and service offerings where we have a limited operating history, including the enterprise and government markets, 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.

harmed.

If we fail to anticipate and develop new products and services in response to changes in demand for application software and software delivery, computers, printers, or other non PC-devices, our business could be harmed.

Any failure to anticipate changing customer requirements and develop and deploy new products in response to changing market conditions may have a material impact on our results of operations. We plan to release numerous new product offerings and 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.

Additionally, customer requirements for “open standards” or “open source” products could impact adoption or use with respect to some of our products.

We offer our 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.



Adverse changes in general economic or political conditions in any of the major countries in which we do business could adversely affect our operating results.
As our business has grown, we have become increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. For example, the direction and relative strength of the U.S. economy has recently been increasingly uncertain due to softness in the housing markets, rising oil prices, difficulties in the financial services sector and credit markets and continuing geopolitical uncertainties. If economic growth in the United States and other countries’ economies is slowed, many customers may delay or reduce technology purchases or marketing spending. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. Any of these events would likely harm our business, results of operations and financial condition. Political instability in any of the major countries we do business would also likely harm our business, results of operations and financial condition.
Revenue from our new businesses may be difficult to predict.
As previously discussed, we are devoting significant resources to the development of product and service offerings where we have a limited operating history. This makes it difficult to predict revenue and revenue may decline quicker than anticipated. Additionally, we have a limited history of licensing products in certain markets such as the 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.
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.

In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights, or disputes relating to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we have been, are currently and may in the future be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation are typically very costly and can be disruptive to our business operations by diverting the attention and energies of management and key technical personnel. Although we have successfully


defended or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. In addition, we may incur significant costs in acquiring the necessary third party intellectual property rights for use in our products. Third party intellectual property disputes could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on less favorableunfavorable terms, prevent us from manufacturing or licensing certain of our products, 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.

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

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

Additionally, we take significant measures to protect the secrecy of our confidential information and trade secrets, including our source code (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.

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


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

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

·

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

·

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

·

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

·

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


·

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

·

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

·

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

·

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

·

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

·

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

·

potential failure of the due diligence processes to identify significant issues, withincluding but not limited to, product quality, architecture and development, or legal and financial contingencies, among other things;

·contingencies;

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

·

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

·

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

·

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

offerings.

Mergers and acquisitions of high technology companies are inherently risky, and ultimately, if we do not complete the integration of acquired businesses successfully and in a timely manner, we may not realize the anticipated benefits of the acquisitions to the extent anticipated, which could adversely affect our business, financial condition or results of operations.

We rely on distributors

Failure to sellmanage 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.

We distribute our application products 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 make
arrangements with new or existing distributors to distribute our products without a substantial disruption to our business; however, any prolonged delay in securing a replacement distributor could have a negative short-term impact on our results of operations.
Our distributors also sell our competitors’ products, and if they favor our competitors’ products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. We also distribute some products through our OEM channel, and if our OEM partners decide not to bundle our applications on their devices, our results could suffer. In addition, the financial health of theseour distributors and our continuing relationships with them are important to our success. Some of these distributors may be unable to withstand adverse changes in business conditions. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.

weakens and we were unable to timely secure a replacement distributor.

We also sell certain of our products through our direct sales force. Risks associated with this sales channel include a longer sales cycle associated with direct sales efforts, difficulty in hiring, retaining and motivating our direct sales force, and substantial amounts of training for sales representatives, including regular updates to cover new and upgraded products.
Catastrophic events may disrupt our business.

We are a highly automated business and rely on our network infrastructure and enterprise applications, internal technology systems and our 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 could


prevent us from fulfilling our customers’ orders. Our corporate headquarters, a significant portion of our research and development activities, our data centers, and certain other critical business operations are located in San Jose, California, which is near major earthquake faults. We have developed certain disaster recovery plans and certain backup systems to reduce the potentially adverse effect of such events, but a catastrophic event that results in the destruction or disruption of any of our data centers or our critical business or information technology systems could severely affect our ability to conduct normal business operations and, as a result, our future operating results could be adversely affected.

Our future operating results are difficult to predict and are likely to fluctuate substantially from quarter to quarter and as a result the market price of our common stock may be volatile and our stock price could decline.

As a result of a variety of factors discussed herein, our quarterly revenuesrevenue 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.

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

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

We generate 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:
foreign currency fluctuations, (ii) fluctuations;
changes in government preferences for software procurement, (iii) procurement;
international economic and political conditions, (iv) conditions;
unexpected changes in, or impositions of, international legislative or regulatory requirements, (v) requirements;
failure of foreign laws to protect our intellectual property rights adequately;
inadequate local infrastructure, (vi) infrastructure;
delays resulting from difficulty in obtaining export licenses for certain technology, tariffs, quotas and other trade barriers and restrictions, (vii) restrictions;
transportation delays, (viii) delays;
the burdens of complying with a variety of foreign laws, including more stringent consumer and data protection laws,laws; and
other factors beyond our control, including terrorism, war, natural disasters and diseases.
If sales to any of our customers outside of the Americas are delayed or cancelled because of any of the above factors, our revenue may be negatively impacted.

In addition, approximately 42% of our employees are located outside the United States. This means we have exposure to changes in foreign laws governing our relationships with our employees, including wage and hour laws and regulations, fair labor standards, unemployment tax rates, workers’ compensation rates, citizenship requirements and payroll and other taxes, which likely would have a direct impact on our operating costs. We also intend to expand our international operations and international sales and marketing activities. Expansion in international markets has required, and will continue to require, significant management attention and resources. Moreover, local laws and customs in many countries differ significantly from those in the United States. We incur additional legal compliance costs associated with our international operations and could become subject to legal penalties in foreign countries if we do not comply with local laws and regulations, which may be substantially different from those in the United States. In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by United States regulations applicable to us such as the Foreign Corrupt Practices Act. Although we implement policies and procedures designed to ensure compliance with these laws, there can be no assurance that all of our employees, contractors and agents, as well as those companies to which we outsource certain of our business operations, including those based in or from countries where practices which violate such United States laws may be customary, will not take actions in violation of our policies. Any such violation, even if prohibited by our policies, could have an adverse effect on our business.
We may incur losses associated with currency fluctuations and may not be able to effectively hedge our exposure.

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


adverse financial impact resulting from unfavorable movement in foreign currency exchange rates, which could adversely affect our financial condition or results of operations.

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

We prepare our consolidated financial statements in conformityaccordance with U.S. 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:

·

software revenue recognition;

·

accounting for stock-based compensation;

·

accounting for income taxes; and

·

accounting for business combinations and related goodwill

In particular,goodwill.



For example, in the first quarter of fiscal 2006, we adopted 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 continue
We also adopted FIN 48 in the first quarter of fiscal 2008. The adoption of FIN 48 resulted in an increase to significantly 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.
If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

Under generally accepted accounting principles,GAAP, we review our goodwill and amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined, resulting in an impact on our results of operations. 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.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in, tax laws or the interpretation of, tax laws,rules and regulations, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, by lapses of the availability of the U.S. research and development tax credit, or by changes in the valuation of our deferred tax assets and liabilities.
In addition, we are subject to the continual examination of our income tax returns by the Internal Revenue ServiceIRS and other domestic and foreign tax authorities, including a current examination by the Internal Revenue Service for our fiscal 2001, 2002 and 2003 tax returns, primarily related to our intercompany transfer pricing.authorities. We regularly assess the


likelihood of outcomes resulting from these examinations to determine the adequacy of our provision for income taxes and have reserved for potential adjustments that may result from the current examination.

We believe such estimates to be reasonable; however, there can be no assurance that the final determination of any of these examinations will not have an adverse effect on our operating results and financial position.

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

Much of our future success depends on the continued service and availability of our senior management, including our Chief Executive Officer and other members of our executive team.management. These individuals have acquired specialized knowledge and skills with respect to Adobe. The loss of any of these individuals could harm our business. Our business is also dependent on our ability to retain, hire and motivate talented, highly skilled personnel. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the Bay Area, where the majoritymany of our employees are located. We have relied on our ability to grant equity


compensation as one mechanism for recruiting and retaining such highly skilled personnel. Recently enacted accounting regulations requiring the expensing of equity compensation may impair our ability to provide these incentives without incurring significant compensation costs. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.

Our investment portfolio may become impaired by further deterioration of the capital markets.
Our cash equivalent and short-term investment portfolio as of August 29, 2008 consisted of US treasury securities, bonds of government agencies, obligations of foreign governments, corporate bonds and taxable money market mutual funds. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.
As a result of current adverse financial market conditions, investments in some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may pose risks arising from liquidity and credit concerns. As of August 29, 2008, we had no direct holdings in these categories of investments and our indirect exposure to these financial instruments through our holdings in money market mutual funds was immaterial. As of August 29, 2008, we had no impairment charge associated with our short-term investment portfolio relating to such adverse financial market conditions. Although we believe our current investment portfolio has very little risk of impairment, we cannot predict future market conditions or market liquidity and can provide no assurance that our investment portfolio will remain unimpaired.
We may suffer losses from our equity investments which could harm our business.

We have investments and plan to continue to make future investments in privately 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.

We rely on turnkey assemblers and any adverse change in our relationship with our turnkey assemblers could result in a loss of revenue and harm our business.

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

43



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

(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.
Plan/Period(1)
 
Shares
Repurchased(2)
  
Average
Price Per
Share
 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan
  
Stock Repurchase Program I         
Beginning shares available to be repurchased as of  May 30, 2008      140,020,904 (3)
May 31—June 27, 2008         
From employees(4)
  7  $42.71    
Structured repurchases  401,563  $41.02    
June 28—July 25, 2008           
From employees(4)
  27  $39.80    
Structured repurchases  1,065,131  $39.13    
Open market repurchases                                                                                               750,000  $39.19    
July 26—August 29, 2008           
Structured repurchases  989,539  $42.40    
Adjustments to repurchase authority for net dilution       6,208,888 (5)
Total shares repurchased  3,206,267     (3,206,267) 
Ending shares available to be repurchased under Program I as of August 29, 2008        143,023,525 (6)
            
Stock Repurchase Program II           
Beginning shares available to be repurchased as of  May 30, 2008        456,361  
June 28—July 25, 2008           
Open market repurchases  456,361  $39.79    
Total shares repurchased  456,361     (456,361) 
Ending shares available to be repurchased under Program II  as of August 29, 2008        0  

Plan/
Period

 

 

 

Shares
Repurchased
 (1)

 

Average 
Price Per 
Share

 

Maximum Number 
of Shares that May 
Yet Be Purchased 
Under the Plan

 

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)

 


 (1)Stock Repurchase Program I

(1)                All shares were purchased as part

In December 1997, our Board of publicly 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.

Stock Repurchase Program II
In April 2007, our Board of Directors authorized Stock Repurchase Program II which was not subject to expiration. Under Stock Repurchase Program II, we had authorization to repurchase in aggregate up to 20.0 million shares 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.


ITEM 5.  OTHER INFORMATION

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.

45




None.

ITEM 6.  EXHIBITS

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

 

 

Exhibit   Incorporated by Reference** Filed
Number Exhibit Description Form Date Number Herewith
           
3.1 Amended and Restated Bylaws 8-K 1/15/08 3.1  
           
3.2 Restated Certificate of Incorporation of Adobe Systems Incorporated 10-Q 7/16/01 3.6  
           
3.2.1 Certificate of Correction of Restated Certificate of Incorporation of Adobe Systems Incorporated 10-Q 4/11/03 3.6.1  
           
3.3 Certificate of Designation of Series A Preferred Stock of Adobe Systems Incorporated 10-Q 7/08/03 3.3  
           
4.1 Fourth Amended and Restated Rights Agreement between Adobe Systems Incorporated and Computershare Investor Services, LLC 8-K 7/03/00 1  
           
4.1.1 Amendment No. 1 to Fourth Amended and Restated Rights Agreement between Adobe Systems Incorporated and Computershare Investor Services, LLC  8-A/2G/A 5/23/03 7  
           
10.1 1984 Stock Option Plan, as amended* 10-Q 7/02/93 10.1.6  
           
10.2 Amended 1994 Performance and Restricted Stock Plan* 10-Q 4/4/08 10.2  
           
10.3 Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan* 10-Q 7/3/08 10.3  
           
10.4 1994 Stock Option Plan, as amended* S-8 5/30/97 10.40  
           
10.5 1997 Employee Stock Purchase Plan, as amended* 10-K 1/24/08 10.5  
           
10.6 1996 Outside Directors Stock Option Plan, as amended* 10-Q 4/12/06 10.6  



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

 

 

10.7 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  



10.31

 

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

 

 

10.19 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  

10.52

 

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

 

 

10.25 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  



10.62

 

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

 

 

10.34 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  

10.72

 

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

10.42 Form of Macromedia, Inc. Restricted Stock Purchase Agreement* 10-Q 2/08/05 10.01  
           
10.43 Adobe Systems Incorporated Form of Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.1  
           
10.44 Form of Award Grant Notice and Performance Share Award Agreement used in connection with grants under the Adobe Systems Incorporated 2008 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.2  
           
10.45 2008 Award Calculation Methodology Exhibit A to the 2008 Performance Share Program pursuant to the 2003 Equity Incentive Plan* 8-K 1/30/08 10.3  
           
10.46 Adobe Systems Incorporated Deferred Compensation Plan* 10-K 1/24/08 10.52  

47

*                    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 ActContents



10.47Adobe Systems Incorporated 2007 Performance Share Program pursuant to the 2003 Equity Incentive Plan*8-K1/30/0710.1

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  



10.56Credit Agreement, dated as of February 16, 2007, among Adobe Systems Incorporated and Certain Subsidiaries as Borrowers; BNP Paribas, Keybank National Association, and UBS Loan Finance LLC as Co-Documentation Agents; JPMorgan Chase Bank, N.A. as Syndication Agent; Bank of America, N.A. as Administrative Agent and Swing Line Lender; the Other Lenders Party Thereto; and Banc of America Securities LLC and J.P. Morgan Securities Inc. as Joint Lead Arrangers and Joint Book Managers8-K8/16/0710.1

10.57 Amendment to Credit Agreement, dated as of August 13, 2007, among Adobe Systems Incorporated, as Borrower; each Lender from time to time party to the Credit Agreement; and Bank of America, N.A. as Administrative Agent 8-K 8/16/07 10.2  
           
10.58 Second Amendment to Credit Agreement, dated as of February 26, 2008, among Adobe Systems Incorporated, as Borrower; each Lender from time to time party to the Credit Agreement; and Bank of America, N.A. as Administrative Agent 8-K 2/29/08 10.1  
           
10.59 Purchase and Sale Agreement, by and between NP Normandy Overlook, LLC, as Seller and Adobe Systems Incorporated as Buyer, effective as of May 12, 2008 8-K 5/15/08 10.1  
           
10.60 Form of Director Stock Option Agreement used in connection with the 2003 Equity Incentive Plan* 10-Q 7/3/08 10.60  
           
10.61 Form of Director Restricted Stock Unit Agreement in connection with the 2003 Equity Incentive Plan* 10-Q 7/3/08 10.61  



31.1Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934X
31.2Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934X
32.1Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†X

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

50




SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Adobe Systems Incorporated

ADOBE SYSTEMS INCORPORATED

By

/s/ MARK GARRETT

By

/s/ Mark Garrett
Mark Garrett
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)

Date: October 2, 2007

52

Date: October 2, 2008


The following trademarks of Adobe Systems Incorporated or its subsidiaries, which may be registered in certain jurisdictions,the United States and/or other countries, are referenced in this Form 10-Q:

Adobe

Acrobat

Acrobat Connect

ColdFusion

Creative Suite

Flash

Flash Cast

Flash Lite

Flex

Lightroom

LiveCycle

Reader

Adobe
Adobe AIR
Acrobat
Acrobat Connect
ColdFusion
Creative Suite
Flash
Flash Cast
Flash Lite
Flex
Flex Builder
LiveCycle
Macromedia
Photoshop
Scene7
All other trademarks are the property of their respective owners.

53


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