Edgar Filing: ADOBE SYSTEMS INC

form_10q.htm

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 May 29, 2009

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

For the transition period from to

Commission File Number: 0-15175

ADOBE SYSTEMS INCORPORATED

(Exact name of registrant as specified in its charter)

_________________________

Delaware

(State or other jurisdiction of

incorporation or organization)

77-0019522

(I.R.S. Employer

Identification No.)

345 Park Avenue, San Jose, California 95110-2704

(Address of principal executive offices and zip code)

(408) 536-6000

(Registrant’s telephone number, including area code)

_________________________

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

(Do not check if a smaller

reporting company)

Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

The number of shares outstanding of the registrant’s common stock as of June 19, 2009 was 524,998,013.

ADOBE SYSTEMS INCORPORATED

FORM 10-Q

TABLE OF CONTENTS

			Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:		3
		Condensed Consolidated Balance Sheets May 29, 2009 and November 28, 2008	3
		Condensed Consolidated Statements of Income Three and Six Months Ended May 29, 2009 and May 30, 2008	4
		Condensed Consolidated Statements of Cash Flows Six Months Ended May 29, 2009 and May 30, 2008	5
		Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		36
Item 4.	Controls and Procedures		36

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		36
Item 1A.	Risk Factors		36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		45
Item 4.	Submission of Matters to a Vote of Security Holders		45
Item 5.	Other Information		46
Item 6.	Exhibits		46
Signature			55
Summary of Trademarks			56

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PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

	May 29, 2009			November 28, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	1,226,780		$	886,450
Short-term investments		1,437,405			1,132,752
Trade receivables, net of allowances for doubtful accounts of $6,474 and $4,128, respectively		262,598			467,234
Deferred income taxes		76,907			110,713
Prepaid expenses and other current assets		84,079			137,954
Total current assets		3,087,769			2,735,103
Property and equipment, net		291,720			313,037
Goodwill		2,134,997			2,134,730
Purchased and other intangibles, net		148,507			214,960
Investment in lease receivable		207,239			207,239
Other assets		193,513			216,529
Total assets	$	6,063,745		$	5,821,598

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	42,258		$	55,840
Accrued expenses		363,431			399,969
Accrued restructuring		11,728			35,690
Income taxes payable		11,024			27,136
Deferred revenue		185,191			243,964
Total current liabilities		613,632			762,599
Long-term liabilities:
Debt		350,000			350,000
Deferred revenue		28,124			31,356
Accrued restructuring		6,559			6,214
Income taxes payable		137,240			123,182
Deferred income taxes		104,490			117,328
Other liabilities		22,659			20,565
Total liabilities		1,262,704			1,411,244
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued		—			—
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 524,530 and 526,111 shares outstanding, respectively		61			61
Additional paid-in-capital		2,361,223			2,396,819
Retained earnings		5,195,912			4,913,406
Accumulated other comprehensive income		27,310			57,222
Treasury stock, at cost (76,304 and 74,723 shares, respectively), net of reissuances		(2,783,465	)		(2,957,154	)
Total stockholders’ equity		4,801,041			4,410,354
Total liabilities and stockholders’ equity	$	6,063,745		$	5,821,598

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

	Three Months Ended						Six Months Ended
	May 29, 2009			May 30, 2008			May 29, 2009			May 30, 2008
Revenue:
Products	$	660,055		$	841,301		$	1,402,254		$	1,693,263
Services and support		44,618			45,585			88,809			84,068
Total revenue		704,673			886,886			1,491,063			1,777,331
Cost of revenue:
Products		55,758			58,229			114,676			118,034
Services and support		16,250			24,637			34,685			47,307
Total cost of revenue		72,008			82,866			149,361			165,341
Gross profit		632,665			804,020			1,341,702			1,611,990
Operating expenses:
Research and development		138,470			170,300			288,387			338,785
Sales and marketing		243,209			279,365			492,700			541,960
General and administrative		70,818			77,078			144,869			160,007
Restructuring charges		3,531			—			15,801			1,431
Amortization of purchased intangibles		15,284			17,099			30,676			34,198
Total operating expenses		471,312			543,842			972,433			1,076,381
Operating income		161,353			260,178			369,269			535,609
Non-operating income (expense):
Interest and other income, net		4,802			12,150			18,086			25,440
Interest expense		(620	)		(3,828	)		(1,412	)		(5,637	)
Investment gains (losses), net		(1,805	)		9,506			(19,051	)		18,238
Total non-operating income (expense), net		2,377			17,828			(2,377	)		38,041
Income before income taxes		163,730			278,006			366,892			573,650
Provision for income taxes		37,659			63,096			84,386			139,361
Net income	$	126,071		$	214,910		$	282,506		$	434,289
Basic net income per share	$	0.24		$	0.40		$	0.54		$	0.79
Shares used in computing basic net income per share		524,159			533,391			527,324			547,996
Diluted net income per share	$	0.24		$	0.40		$	0.53		$	0.78
Shares used in computing diluted net income per share		528,013			542,376			531,338			557,703

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	May 29, 2009			May 30, 2008
Cash flows from operating activities:
Net income	$	282,506		$	434,289
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		133,465			137,858
Stock-based compensation		86,577			91,421
Deferred income taxes		19,984			69,655
Unrealized losses (gains) on investments		16,498			(8,579	)
Retirements of property and equipment		3,426			119
Tax benefit from employee stock option plans		2,711			9,329
Provision for losses on trade receivables		3,281			(390	)
Other non-cash items		1,066			3
Excess tax benefits from stock-based compensation		(84	)		(9,329	)
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Trade receivables		201,354			(2,615	)
Prepaid expenses and other current assets		13,210			(5,673	)
Trade payables		(13,582	)		(4,271	)
Accrued expenses		(32,639	)		(9,774	)
Accrued restructuring		(24,139	)		(2,048	)
Income taxes payable		(4,357	)		23,951
Deferred revenue		(62,005	)		7,145
Net cash provided by operating activities		627,272			731,091
Cash flows from investing activities:
Purchases of short-term investments		(782,362	)		(466,226	)
Maturities of short-term investments		197,709			353,534
Proceeds from sales of short-term investments		273,243			448,184
Purchases of property and equipment		(26,228	)		(48,671	)
Purchases of long-term investments and other assets		(16,580	)		(36,672	)
Proceeds from sale of long-term investments		1,904			9,520
Other		3,000			—
Net cash (used for) provided by investing activities		(349,314	)		259,669
Cash flows from financing activities:
Purchases of treasury stock		(13	)		(1,300,183	)
Proceeds from issuance of treasury stock		48,819			162,467
Excess tax benefits from stock-based compensation		84			9,329
Proceeds from borrowings under credit facility		—			450,000
Repayments of borrowings under credit facility		—			(100,000	)
Net cash provided by (used for) financing activities		48,890			(778,387	)
Effect of foreign currency exchange rates on cash and cash equivalents		13,482			3,658
Net increase in cash and cash equivalents		340,330			216,031
Cash and cash equivalents at beginning of period		886,450			946,422
Cash and cash equivalents at end of period	$	1,226,780		$	1,162,453
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	58,024		$	35,001
Cash paid for interest	$	1,488		$	5,394

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(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 in the United States of America (“GAAP”). In management’s opinion, we have made all adjustments (consisting only of normal, recurring adjustments, except as otherwise indicated) necessary to fairly present our financial position, results of operations and cash flows. Our interim period operating results do not necessarily indicate the results that may be expected for any other interim period or for the full fiscal year. These financial statements and accompanying notes should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended November 28, 2008 on file with the SEC.

There have been no material changes in our significant accounting policies, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended November 28, 2008.

Recent Accounting Pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the six months ended May 29, 2009, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended November 28, 2008, that are of significance, or potential significance, to us.

In May 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009 and will be effective for us beginning in the third quarter of fiscal 2009. Since SFAS 165 only requires additional disclosures, we do not expect the adoption to have an impact on our consolidated financial position, results of operations or cash flows.

In April 2009, the FASB issued three related FASB Staff Positions (“FSP”): (i) FSP FAS No. 115-2 and FAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4), which are effective for interim and annual reporting periods ending after June 15, 2009 and will be effective for us beginning in the third quarter of fiscal 2009. FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to modify the requirement for recognizing other-than-temporary impairments, change the existing impairment model, and modify the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1 require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). We are currently evaluating the impact of adopting these Staff Positions, but we do not expect the adoption to have a material impact on our consolidated financial position, results of operations or cash flows.

In September 2008, the FASB issued FSP No. 133-1 and FASB Interpretation (“FIN”) No. 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Financial Accounting Standard (“SFAS”) No. 133 and FIN No. 45; and Clarification of the Effective Date of SFAS No. 161” (“FSP FAS 133-1 and FIN 45-4”). FSP FAS 133-1 and FIN 45-4 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) to require disclosures by sellers of credit derivatives, including credit derivatives embedded in hybrid instruments. FSP FAS 133-1 and FIN 45-4 also amend FIN No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of SFAS No. 5, 57, and 107 and rescission of FIN No. 34” (“FIN 45”), to require additional disclosure about the current status of the payment/performance risk of a guarantee. The provisions of the FSP that amend SFAS 133 and FIN 45 are effective for reporting periods ending after November 15, 2008. FSP FAS 133-1 and FIN 45-4 also clarifies the effective date in SFAS No. 161, “Disclosures about Derivative

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Instruments and Hedging Activities, an amendment of SFAS 133” (“SFAS 161”). We adopted the disclosures required by SFAS 161 in the first quarter of fiscal 2009. Since FSP FAS 133-1 and FIN 45-4 only required additional disclosures, the adoption did not impact our consolidated financial position, results of operations or cash flows.

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS 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 beginning after December 15, 2008 and interim periods within those fiscal years. FSP 142-3 is effective for us beginning in the first quarter of fiscal 2010. Early adoption is prohibited. As this guidance is to be applied prospectively, on adoption, there is 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. We adopted SFAS 161 in the first quarter of fiscal 2009. Since SFAS 161 only required additional disclosure, the adoption did not impact our consolidated financial position, results of operations or cash flows.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”) and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin (“ARB”) No. 51” (“SFAS 160”). SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 141R and SFAS 160 are effective for us beginning in the first quarter of fiscal 2010. Early adoption is not permitted. We are currently evaluating the impact that SFAS 141R and SFAS 160 will have on our consolidated financial statements.

In September 2006, the FASB issued SFAS 157, which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements and is effective for fiscal years beginning after November 15, 2007. Effective November 29, 2008, we adopted SFAS 157 for all nonfinancial assets and nonfinancial liabilities measured at fair value on a non-recurring basis. Examples include goodwill, intangibles, and other long-lived assets. The adoption of SFAS 157 did not have a material impact on our consolidated financial position, results of operations or cash flows.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 2. FINANCIAL INSTRUMENTS

We measure certain financial assets and liabilities at fair value on a recurring basis. The fair value of these financial assets and liabilities was determined using the following inputs at May 29, 2009 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds and overnight deposits(1)	$	1,171,499	$	1,171,499	$	—	$	—
Fixed income available-for-sale securities(2)		1,432,391		—		1,432,391		—
Available-for-sale equity securities(3)		5,014		5,014		—		—
Investments of limited partnership(4)		33,080		—		—		33,080
Foreign currency derivatives(5)		5,422		—		5,422		—
Deferred compensation plan assets(4)
Money market funds		764		764		—		—
Equity and fixed income mutual funds		8,966		—		8,966		—
Subtotal for deferred compensation plan assets		9,730		764		8,966		—
Total	$	2,657,136	$	1,177,277	$	1,446,779	$	33,080
Liabilities:
Foreign currency derivatives(6)	$	3,477	$	—	$	3,477	$	—
Total	$	3,477	$	—	$	3,477	$	—

The fair value of these financial assets and liabilities was determined using the following inputs at November 28, 2008 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Assets:
Money market funds and overnight deposits(1)	$	722,742	$	722,742	$	—	$	—
Fixed income available-for-sale securities(2)		1,175,732		—		1,175,732		—
Available-for-sale equity securities(3)		3,047		3,047		—		—
Investments of limited partnership(4)		39,004		251		—		38,753
Foreign currency derivatives(5)		49,848		—		49,848		—
Deferred compensation plan assets(4)
Money market funds		704		704		—		—
Equity and fixed income mutual funds		6,856		—		6,856		—
Subtotal for deferred compensation plan assets		7,560		704		6,856		—
Total	$	1,997,933	$	726,744	$	1,232,436	$	38,753
Liabilities:
Foreign currency derivatives(6)	$	1,739	$	—	$	1,739	$	—
Total	$	1,739	$	—	$	1,739	$	—

_________________________________________

(1)	Included in cash and cash equivalents on our condensed consolidated balance sheets.

(2)	Included in either cash and cash equivalents or short-term investments on our condensed consolidated balance sheets.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

(3)	Included in short-term investments on our condensed consolidated balance sheets.

(4)	Included in other assets on our condensed consolidated balance sheets.

(5)	Included in prepaid expenses and other current assets on our condensed consolidated balance sheets.

(6)	Included in accrued expenses on our condensed consolidated balance sheets.

Fixed income available-for-sale securities include United States (“U.S.”) treasury securities, Agency or U.S. Government guaranteed securities (79% of total), corporate bonds (12% of total) and obligations of foreign governments and their agencies (9% of total) at May 29, 2009 and U.S. treasury securities, Agency or U.S. Government guaranteed securities (78% of total), corporate bonds (10% of total), obligations of foreign governments and their agencies (10% of total), and obligations of multi-lateral government agencies (2% of total) at November 28, 2008. These are all high quality, investment grade securities with a minimum credit rating of A and a weighted average credit rating better than AA+. We value these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our fixed income available-for-sale securities as having Level 2 inputs. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.

The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. (“Adobe Ventures”), which are consolidated in our condensed consolidated financial statements. 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. These investments are remeasured at fair value each period with any gains or losses recognized in investment gains (losses), net in our condensed consolidated statements of income. We estimated fair value of the Level 3 investments by considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data.

A reconciliation of the beginning and ending balances for investments of limited partnership using significant unobservable inputs (Level 3) as of May 29, 2009 and November 28, 2008 was as follows (in thousands):

Balance as of November 28, 2008	$	38,753
Purchases and sales of investments, net		(436	)
Unrealized net investment losses included in earnings		(5,237	)
Balance as of May 29, 2009	$	33,080

See Note 4 for further information regarding our limited partnership interest in Adobe Ventures.

We also have direct investments in privately-held companies accounted for under the cost method, which are periodically assessed for other-than-temporary impairment. If we determine that an other-than-temporary impairment has occurred, we write-down the investment to its fair value. We estimated fair value of our cost method investments considering available information such as pricing in recent rounds of financing, current cash positions, earnings and cash flow forecasts, recent operational performance and any other readily available market data. During the three and six months ended May 29, 2009, we determined that certain of our cost method investments were other-than-temporarily impaired which resulted in a charge of $3.3 million and $13.9 million, respectively, included in investment gains (losses), net in the condensed consolidated statements of income. The fair value of cost method investments that were impaired was estimated using Level 3 inputs.

In countries outside the U.S., we transact business in U.S. dollars and in various other currencies. In Europe and Japan, transactions that are denominated in Euro and Yen are subject to exposure from movements in exchange rates. We may use foreign exchange option contracts or forward contracts to hedge operational (“cash flow”) exposures resulting from changes in these foreign currency exchange rates. These foreign exchange contracts, carried at fair value, may have maturities between one and twelve months. We enter into these foreign exchange contracts to hedge a portion of our forecasted foreign currency denominated revenue in the normal course of business and accordingly, they are not speculative in nature.

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss) on our condensed consolidated balance sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to interest and other income, net on our condensed consolidated statements of income at that time.

We also hedge our net recognized foreign currency assets and liabilities with foreign exchange forward contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded to interest and other income, net on our condensed consolidated statements of income. These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives are intended to offset gains and losses on the assets and liabilities being hedged.

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

The aggregate fair value of derivative instruments in net asset positions as of May 29, 2009 was $5.4 million. This amount represents the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $3.5 million of liabilities included in master netting arrangements with those same counterparties.

The fair value of derivative instruments in our condensed consolidated balance sheets as of May 29, 2009 were as follows (in thousands):

	Fair Values of Derivative Instruments
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Foreign exchange option contracts (1)	Prepaid expense and other current assets	$	3,680	Accrued expenses	$	—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expense and other current assets		1,742	Accrued expenses		3,477
Total derivatives		$	5,422		$	3,477

_________________________________________

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

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The effect of derivative instruments designated as cash flow hedges and of derivative instruments not designated as hedges on our condensed consolidated statements of income for the three and six months ended May 29, 2009 were as follows (in thousands):

	Three Months						Six Months
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts			Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI (1)	$	(8,737	)	$	—		$	(14,187	)	$	—
Net gain (loss) reclassified from accumulated OCI into income (2)	$	5,913		$	—		$	26,389		$	—
Net gain (loss) recognized in income (3)	$	(7,416	)	$	—		$	(9,048	)	$	—

Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income (4)	$	—		$	(5,305	)	$	—		$	(8,550	)

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

(2)	Effective portion classified as revenue.

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

(4)	Classified in interest and other income, net.

NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of May 29, 2009 and November 28, 2008 was $2.135 billion for both periods. During the second quarter of fiscal 2009, we completed our annual goodwill impairment test. Based on this analysis, we determined that there was no impairment of goodwill.

Purchased and other intangible assets subject to amortization as of May 29, 2009 were as follows (in thousands):

	Cost		Accumulated Amortization			Net
Purchased technology	$	405,829	$	(361,494	)	$	44,335
Localization	$	26,682	$	(16,568	)	$	10,114
Trademarks		130,925		(91,353	)		39,572
Customer contracts and relationships		196,597		(142,421	)		54,176
Other intangibles		800		(490	)		310
Total other intangible assets	$	355,004	$	(250,832	)	$	104,172
Total purchased and other intangible assets	$	760,833	$	(612,326	)	$	148,507

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Purchased and other intangible assets subject to amortization as of November 28, 2008 were as follows (in thousands):

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

Amortization expense related to purchased and other intangible assets was $36.4 million and $75.4 million for the three and six months ended May 29, 2009, respectively. Comparatively, amortization expense was $48.1 million and $97.6 million for the three and six months ended May 30, 2008, respectively. Of these amounts, $21.1 million and $44.7 million were included in cost of sales for the three and six months ended May 29, 2009, respectively, and $30.9 million and $63.3 million were included in cost of sales for the three and six months ended May 30, 2008, respectively.

Purchased and other intangible assets are amortized over their estimated useful lives of 1 to 13 years. As of May 29, 2009, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal year	Purchased Technology		Other Intangible Assets
Remainder of 2009	$	27,653	$	39,932
2010		8,301		50,136
2011		4,994		11,917
2012		3,387		1,009
2013		—		789
Thereafter		—		389
Total expected amortization expense	$	44,335	$	104,172

NOTE 4. OTHER ASSETS

Other assets as of May 29, 2009 and November 28, 2008 consisted of the following (in thousands):

	2009		2008
Acquired rights to use technology	$	88,332	$	90,643
Investments		58,735		76,589
Security and other deposits		16,058		16,087
Deferred compensation plan assets		9,730		7,560
Prepaid royalties		8,878		9,026
Restricted cash		4,361		7,361
Prepaid land lease		3,166		3,185
Prepaid rent		1,845		2,658
Other		2,408		3,420
Total other assets	$	193,513	$	216,529

Included in investments are our indirect investments through our limited partnership interest in Adobe Ventures of approximately $33.1 million and $39.0 million as of May 29, 2009 and November 28, 2008, respectively, which is consolidated in accordance with FIN No. 46R, a revision to FIN No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” The partnership is controlled by Granite Ventures, an independent venture capital firm and

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sole general partner of Adobe Ventures. We are the primary beneficiary of Adobe Ventures and bear virtually all of the risks and rewards related to our ownership. Our investment in Adobe Ventures does not have a significant impact on our condensed consolidated financial position, results of operations or cash flows. See Note 2 for further information regarding Adobe Ventures.

Also included in investments are our direct investments in privately-held companies of approximately $25.6 million and $37.6 million as of May 29, 2009 and November 28, 2008, respectively, which are accounted for based on the cost method. We assess these investments for impairment in value as circumstances dictate.

We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We purchased the property upon completion of construction of an office building shell and core, parking structure, and site improvements. The purchase price for the property was $44.2 million. We made an initial deposit of $7.0 million which was included in security and other deposits. This deposit was held in escrow until closing and then applied to the purchase price. Closing occurred on June 16, 2009 and the remaining balance was paid. See Note 16 for further discussion of this transaction.

NOTE 5. ACCRUED EXPENSES

Accrued expenses as of May 29, 2009 and November 28, 2008 consisted of the following (in thousands):

	2009		2008
Accrued compensation and benefits	$	160,458	$	177,760
Taxes payable		11,322		21,760
Sales and marketing allowances		26,325		28,127
Other		165,326		172,322
Total accrued expenses	$	363,431	$	399,969

Other primarily includes general corporate accruals for corporate marketing programs, local and regional expenses, and technical support. Other is also comprised of deferred rent related to office locations with rent escalations, accrued royalties, foreign currency derivatives and accrued interest on the credit facility.

NOTE 6. STOCK-BASED COMPENSATION

The assumptions used to value option grants during the three and six months ended May 29, 2009 and May 30, 2008 were as follows:

	Three Months						Six Months
	2009			2008			2009			2008
Expected life (in years)		3.0 – 3.8			3.5 – 4.7			3.0 – 3.8			2.3 – 4.7
Volatility		48 – 55	%		32 – 39	%		48 – 57	%		32 – 39	%
Risk free interest rate		1.27 – 1.61	%		1.70 – 2.83	%		1.16 – 1.61	%		1.70 – 3.35	%

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 six months ended May 29, 2009 and May 30, 2008 were as follows:

	Three Months						Six Months
	2009			2008			2009			2008
Expected life (in years)		0.5 – 2.0			0.5 – 2.0			0.5 – 2.0			0.5 – 2.0
Volatility		49 – 57	%		30 – 31	%		49 – 57	%		30 – 31	%
Risk free interest rate		0.27 – 0.88	%		2.82 – 3.29	%		0.27 – 0.88	%		2.82 – 3.29	%

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Summary of Stock Options

Option activity for the six months ended May 29, 2009 and the fiscal year ended November 28, 2008 was as follows (in thousands):

	2009			2008
Beginning balance		40,704			47,742
Granted		4,745			5,462
Exercised		(2,393	)		(9,983	)
Cancelled		(2,253	)		(2,517	)
Ending balance		40,803			40,704

Information regarding stock options outstanding at May 29, 2009 and May 30, 2008 is summarized below:

	Number of Shares (thousands)		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value* (millions)
2009
Options outstanding		40,803	$	29.20		4.01	$	143.8
Options vested and expected to vest		38,951	$	29.19		3.92	$	137.3
Options exercisable		27,319	$	28.19		3.23	$	108.7

2008
Options outstanding		45,769	$	29.47		4.31	$	668.0
Options vested and expected to vest		41,257	$	28.74		4.14	$	632.1
Options exercisable		28,957	$	25.49		3.41	$	537.9

_________________________________________

*	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 May 29, 2009 and May 30, 2008 were $28.18 and $44.06, respectively.

Summary of Employee Stock Purchase Plan Shares

The weighted average subscription date fair value of shares under the ESPP during the six months ended May 29, 2009 and May 30, 2008 was $5.23 and $11.83, respectively. Employees purchased 1.2 million shares at an average price of $18.10 and 0.9 million shares at an average price of $30.51, respectively, for the six months ended May 29, 2009 and May 30, 2008. The intrinsic value of shares purchased during the six months ended May 29, 2009 and May 30, 2008 was $3.7 million and $10.9 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended May 29, 2009 and the fiscal year ended November 28, 2008 was as follows (in thousands):

	2009			2008
Beginning balance		4,261			1,701
Awarded		3,108			3,177
Released		(889	)		(422	)
Forfeited		(208	)		(195	)
Ending balance		6,272			4,261

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Information regarding restricted stock units outstanding at May 29, 2009 and May 30, 2008 is summarized below:

	Number of Shares (thousands)		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value* (millions)
2009
Restricted stock units outstanding		6,272		1.89	$	176.8
Restricted stock units vested and expected to vest		4,805		1.72	$	135.3
Restricted stock units vested and deferred		4		—	$	0.1

2008
Restricted stock units outstanding		3,891		2.10	$	171.4
Restricted stock units vested and expected to vest		2,649		1.89	$	116.7

_________________________________________

*	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of May 29, 2009 and May 30, 2008 were $28.18 and $44.06, respectively.

Summary of Performance Shares

Effective January 26, 2009, the Executive Compensation Committee adopted the 2009 Performance Share Program (the “2009 Program”). The purpose of the 2009 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2009 Program is our fiscal 2009 year. All members of our executive management and other key senior leaders are participating in the 2009 Program. Awards granted under the 2009 Program were granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with 25% vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining 75% vesting evenly on the following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2009 Program have the ability to receive up to 115% of the target number of shares originally granted.

The following table sets forth the summary of performance share activity under our 2009 Program for the six months ended May 29, 2009 (in thousands):

	Shares Granted		Maximum Shares Eligible to Receive
Beginning balance		—		—
Awarded		537		618
Forfeited		—		—
Ending balance		537		618

In the first quarter of fiscal 2009, the Executive Compensation Committee certified the actual performance achievement of participants in the 2008 Performance Share Program (the “2008 Program”). Based upon the achievement of goals outlined in the 2008 Program, participants had the ability to receive up to 200% of the target number of shares originally granted. Actual performance resulted in participants achieving approximately 124% of target or approximately 1.0 million shares for the 2008 Program. Shares under the 2008 Program vested 25% in the first quarter of fiscal 2009, and the remaining 75% vest evenly on the following three annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe.

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The following table sets forth the summary of performance share activity under our 2008 and prior 2007 programs, based upon share awards actually achieved, for the six months ended May 29, 2009 and the fiscal year ended November 28, 2008 (in thousands):

	2009			2008
Beginning balance		383			—
Achieved		1,022			993
Released		(370	)		(480	)
Forfeited		(30	)		(130	)
Ending balance		1,005			383

Information regarding performance shares outstanding at May 29, 2009 and May 30, 2008 is summarized below:

	Number of Shares (thousands)		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value* (millions)
2009
Performance shares outstanding		1,005		1.53	$	28.3
Performance shares vested and expected to vest		807		1.44	$	22.7
Performance shares vested and deferred		3		—	$	—

2008
Performance shares units outstanding		480		1.65	$	21.2
Performance shares vested and expected to vest		312		1.55	$	13.7
Performance shares vested and deferred		1		—	$	—

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*	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of May 29, 2009 and May 30, 2008 were $28.18 and $44.06, respectively.

Compensation Costs

As of May 29, 2009, there was $253.0 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.6 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

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Total stock-based compensation costs that have been included in our condensed consolidated statements of income for the three months ended May 29, 2009 and May 30, 2008 were as follows (in thousands):

	2009				2008
Income Statement Classifications	Option Grants and Stock Purchase Rights *		Restricted Stock and Performance Share Awards *		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—services and support	$	1,249	$	143	$	975	$	213
Research and development		9,264		6,489		12,844		6,608
Sales and marketing		9,714		4,598		10,218		6,647
General and administrative		8,094		2,009		6,786		4,096
Total	$	28,321	$	13,239	$	30,823	$	17,564

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*	For the three months ended May 29, 2009, we recorded $0.6 million associated with cash recoveries of fringe benefit tax from employees in India. For the three months ended May 30, 2008 there were no amounts associated with cash recoveries of fringe benefit tax from employees in India.

Total stock-based compensation costs that have been included in our condensed consolidated statements of income for the six months ended May 29, 2009 and May 30, 2008 were as follows (in thousands):

	2009				2008
Income Statement Classifications	Option Grants and Stock Purchase Rights *		Restricted Stock and Performance Share Awards *		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—services and support	$	1,158	$	337	$	1,779	$	253
Research and development		23,396		14,933		27,770		10,004
Sales and marketing		18,581		9,835		21,125		10,188
General and administrative		14,282		4,875		12,728		7,574
Total	$	57,417	$	29,980	$	63,402	$	28,019

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*	For the six months ended May 29, 2009, we recorded $0.8 million associated with cash recoveries of fringe benefit tax from employees in India. For the six months ended May 30, 2008 there were no amounts associated with cash recoveries of fringe benefit tax from employees in India.

NOTE 7. EMPLOYEE BENEFIT PLAN

Deferred Compensation Plan

As of May 29, 2009 and November 28, 2008, the invested amounts under our Deferred Compensation Plan totaled $9.7 million and $7.6 million, respectively, and are recorded as other assets on our condensed consolidated balance sheets. As of May 29, 2009 and November 28, 2008, we recorded $9.7 million and $7.6 million, respectively, as a long-term liability to recognize undistributed deferred compensation due to employees.

NOTE 8. RESTRUCTURING CHARGES

Fiscal 2008 Restructuring Charges

In the fourth quarter of fiscal 2008, we initiated a restructuring program, consisting of reductions in workforce of approximately 560 full-time positions globally and the consolidation of facilities, in order to reduce our operating costs and focus our resources on key strategic priorities. In connection with this restructuring program, we recorded restructuring charges in the fourth quarter of fiscal 2008 totaling $29.2 million related to termination benefits for the elimination of approximately 460 of the 560 full-time positions globally. Charges associated with these ongoing termination benefits were

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recorded in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” As of November 28, 2008, $0.4 million was paid.

In the first quarter of fiscal 2009, we continued to implement restructuring activities under this program. We vacated approximately 89,000 square feet of research and development and sales facilities in the U.S., the United Kingdom and Canada. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we accrued $8.5 million for the fair value of our future contractual obligations under the operating lease using our credit-adjusted risk-free interest rate, estimated at approximately 6% as of the date we ceased to use the leased property. This amount is net of the fair value of future estimated sublease income of approximately $3.9 million. We also recorded charges of $3.4 million for termination benefits for the elimination of approximately 43 of the remaining 100 full-time positions expected to be terminated.

In the second quarter of fiscal 2009, we accrued an additional $3.0 million under this program for termination benefits related to the elimination of approximately 48 of the remaining 57 full-time positions expected to be terminated.

The following table sets forth a summary of Adobe restructuring activities during the six months ended May 29, 2009 (in thousands):

	November 28, 2008		Costs Incurred		Cash Payments			Other Adjustments		May 29, 2009		Total Costs Incurred to Date		Total Costs Expected to be Incurred
Termination benefits	$	28,759	$	6,358	$	(32,592	)	$	479	$	3,004	$	36,044	$	36,543
Cost of closing redundant facilities		—		8,514		(3,760	)		589		5,343		9,103		9,612
Total	$	28,759	$	14,872	$	(36,352	)	$	1,068	$	8,347	$	45,147	$	46,155

Accrued restructuring charges of approximately $8.3 million at May 29, 2009 include $5.7 million recorded in accrued restructuring, current and $2.6 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying condensed consolidated balance sheets. We expect to pay substantially all of the accrued termination benefits during the remainder of fiscal 2009. We expect to pay facilities-related liabilities through fiscal 2013.

Included in the other adjustments column are foreign currency translation adjustments of $0.5 million and small changes to previous estimates.

Macromedia Merger Restructuring Charges

We completed our acquisition of Macromedia on December 3, 2005. In connection with this acquisition, we initiated plans to restructure both the pre-merger operations of Adobe and Macromedia to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, we recognized costs related to termination benefits for employee positions that were eliminated and for the closure of duplicative facilities. We also recognized costs related to the cancellation of certain contracts associated with the wind-down of subsidiaries and other service contracts held by Macromedia. Costs for termination benefits and contract terminations were completed during fiscal 2007. Total costs incurred were $27.0 million and $3.2 million, respectively.

The following table sets forth a summary of Macromedia restructuring activities during the six months ended May 29, 2009 (in thousands):

	November 28, 2008		Cash Payments			Other Adjustments		May 29, 2009		Total Costs Incurred to Date		Total Costs Expected to be Incurred
Cost of closing redundant facilities	$	12,168	$	(3,570	)	$	383	$	8,981	$	42,698	$	42,698
Other		977		(18	)		—		959		2,357		2,357
Total	$	13,145	$	(3,588	)	$	383	$	9,940	$	45,055	$	45,055

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Accrued restructuring charges of approximately $9.9 million at May 29, 2009 related to facilities obligations include $6.0 million recorded in accrued restructuring, current and $3.9 million recorded in accrued restructuring, non-current in the accompanying condensed consolidated balance sheets. We expect to pay these liabilities through fiscal 2011. At November 28, 2008, accrued restructuring charges of $13.1 million related to long-term facilities obligations included $6.9 million recorded in accrued restructuring, current and $6.2 million recorded in accrued restructuring, non-current in the accompanying condensed consolidated balance sheets.

Included in the other adjustments column is a change to previous estimates of $0.4 million offset by a small foreign currency translation adjustment.

NOTE 9. STOCKHOLDERS’ EQUITY

Stock Repurchase Program I

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

We did not enter into any new structured repurchase agreements during the six months ended May 29, 2009. During the six months ended May 30, 2008, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $250.0 million. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the six months ended May 29, 2009, we repurchased approximately 5.9 million shares at an average price of $22.70 through structured repurchase agreements, which included prepayments from fiscal 2008. During the six months ended May 30, 2008, we repurchased 16.6 million shares at an average price of $36.58 through structured repurchase agreements, which included prepayments from fiscal 2007.

No prepayments were remaining as of May 29, 2009. As of November 28, 2008, prepayments were classified as treasury stock on our condensed consolidated balance sheet at the payment date, though only shares physically delivered to us by the financial statement date are excluded from the denominator in the computation of earnings per share. As of May 30, 2008, approximately $66.1 million of up-front payments remained under the agreements.

Subsequent to May 29, 2009, as part of Stock Repurchase Program I, we entered into structured stock repurchase agreements with large financial institutions whereupon we provided the financial institutions with prepayments of $350.0 million. This amount will be classified as treasury stock on our balance sheet. See Note 16 for further discussion of our stock repurchase programs.

Stock Repurchase Program II

Under this stock repurchase program, we had authorization to repurchase 50.0 million shares of our common stock. From the inception of the 50.0 million share authorization under this program, we provided prepayments of $1.9 billion under structured share repurchase agreements to large financial institutions. During the third quarter of fiscal 2008, the remaining authorized number of shares were repurchased.

During the six months ended May 30, 2008, we provided prepayments of $1.05 billion and repurchased 31.9 million shares through structured share repurchase agreements at an average price of $37.15. As of May 30, 2008, there were no up-front payments remaining under these agreements.

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NOTE 10. COMPREHENSIVE INCOME (LOSS)

The following table sets forth the activity for each component of other comprehensive income (loss), net of related taxes, for the three and six months ended May 29, 2009 and May 30, 2008 (in thousands):

	Three Months						Six Months
	2009			2008			2009			2008
Net income	$	126,071		$	214,910		$	282,506		$	434,289
Other comprehensive income (loss):
Unrealized (losses) gains on derivative instruments		(8,737	)		313			(14,187	)		282
Reclassification adjustment for (gains) losses on derivative instruments recognized during the period		(5,913	)		—			(26,389	)		—
Unrealized gains (losses) on available-for-sale securities		3,547			(6,097	)		1,578			(9,176	)
Reclassification adjustment for (gains) losses on available-for-sale securities recognized during the period		(1,267	)		173			(2,577	)		173
Foreign currency translation adjustments		14,585			696			11,663			2,074
Other comprehensive income (loss)		2,215			(4,915	)		(29,912	)		(6,647	)
Total other comprehensive income, net of taxes	$	128,286		$	209,995		$	252,594		$	427,642

The following table sets forth the components of accumulated other comprehensive income, net of related taxes, as of May 29, 2009 and November 28, 2008 (in thousands):

	2009		2008
Net unrealized gains on derivative instruments	$	1,174	$	41,750
Net unrealized gains on available-for-sale securities		14,908		15,907
Cumulative foreign currency translation adjustments		11,228		(435	)
Total accumulated other comprehensive income, net of taxes	$	27,310	$	57,222

NOTE 11. NET INCOME PER SHARE

The following table sets forth the computation of basic and diluted net income per share for the three and six months ended May 29, 2009 and May 30, 2008 (in thousands, except per share data):

	Three Months				Six Months
	2009		2008		2009		2008
Net income	$	126,071	$	214,910	$	282,506	$	434,289
Shares used to compute basic net income per share		524,159		533,391		527,324		547,996
Dilutive potential common shares:
Unvested restricted stock and performance share awards		1,054		361		1,166		682
Stock options		2,800		8,624		2,848		9,025
Shares used to compute diluted net income per share		528,013		542,376		531,338		557,703
Basic net income per share	$	0.24	$	0.40	$	0.54	$	0.79
Diluted net income per share	$	0.24	$	0.40	$	0.53	$	0.78

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For the three and six months ended May 29, 2009, options to purchase approximately 31.6 million and 30.8 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $23.38 and $22.20, respectively, were not included in the calculation because the effect would have been anti-dilutive. Comparatively, for the three and six months ended May 30, 2008, options to purchase approximately 17.9 million and 16.7 million shares, respectively, of common stock with exercise prices greater than the average fair market value of our stock of $37.29 and $37.75, respectively, were not included in the calculation because the effect would have been anti-dilutive.

NOTE 12. COMMITMENTS AND CONTINGENCIES

Lease Commitments

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

In August 2004, we extended the lease agreement for our East and West Towers for an additional five years with an option to extend for an additional five years solely at our election. In June 2009, we submitted notice to the lessor that we intend to exercise our option to renew this agreement for an additional five years effective August, 2009. In March 2007, the Almaden Tower lease was extended for five years, with a renewal option for an additional five years solely at our election. As part of the lease extensions, we purchased the lease receivable from the lessor of the East and West Towers for $126.8 million and a portion of the lease receivable from the lessor of the Almaden Tower for $80.4 million, both of which are recorded as investments in lease receivables on our condensed consolidated balance sheets. This purchase may be credited against the residual value guarantee if we purchase the properties or will be repaid from the sale proceeds if the properties are sold to third-parties. 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 May 29, 2009, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment under SFAS No. 13, “Accounting for Leases,” and, as such, the buildings and the related obligations are not included on our condensed consolidated balance sheets. We utilized this type of financing in order to access bank-provided funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease for an additional five year term, purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the residual value guarantee amount.

Guarantees

The lease agreements for our corporate headquarters provide for residual value guarantees as noted above. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002 must be recognized as a liability on our condensed consolidated balance sheets. As such, we recognized $5.2 million and $3.0 million in liabilities, related to the East and West Towers and Almaden Tower leases, respectively. These liabilities are recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the leases. As of May 29, 2009 and November 28, 2008, the unamortized portion of the fair value of the residual value guarantees, for both leases, remaining in other long-term liabilities and prepaid rent was $1.8 million and $2.6 million, respectively.

Royalties

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

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Indemnifications

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

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

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

Legal Proceedings

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 condensed consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.

From time to time, Adobe is subject to legal proceedings, claims and investigations in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. We believe that we have valid defenses with respect to the legal matters pending against Adobe; however, litigation is inherently unpredictable and it is possible that our condensed consolidated financial position, cash flows or results of operations could be negatively affected by an unfavorable resolution of one or more of such proceedings, claims or investigations.

NOTE 13. CREDIT AGREEMENT

In August 2007, we entered into an Amendment to our Credit Agreement dated February 2007 (the “Amendment”), which increased the total senior unsecured revolving facility from $500.0 million to $1.0 billion. The Amendment also permits us to request one-year extensions effective on each anniversary of the closing date of the original agreement, subject to the majority consent of the lenders. We also retain an option to request an additional $500.0 million in commitments, for a maximum aggregate facility of $1.5 billion.

In February 2008, we entered into a Second Amendment to the Credit Agreement dated February 26, 2008, which extended the maturity date of the facility by one year to February 16, 2013. The facility would terminate at this date if no additional extensions have been requested and granted. All other terms and conditions remain the same.

The facility contains a financial covenant requiring us not to exceed a certain maximum leverage ratio. At the Company’s option, borrowings under the facility accrue interest based on either the London interbank offered rate (“LIBOR”) for one, two, three or six months, or longer periods with bank consent, plus a margin according to a pricing grid tied to this financial covenant, or a base rate. The margin is set at rates between 0.20% and 0.475%. Commitment fees are payable on the facility at rates between 0.05% and 0.15% per year based on the same pricing grid. The facility is available to provide loans to us and certain of our subsidiaries for general corporate purposes. As of both May 29, 2009 and

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November 28, 2008, the amount outstanding under the credit facility was $350.0 million, which is included in long-term liabilities on our condensed consolidated balance sheets. As of May 29, 2009, we were in compliance with all of the covenants.

NOTE 14. NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) for the three and six months ended May 29, 2009 and May 30, 2008 included the following (in thousands):

	Three Months						Six Months
	2009			2008			2009			2008
Interest and other income, net:
Interest income	$	9,923		$	13,192		$	21,039		$	30,703
Foreign exchange losses		(6,710	)		(1,234	)		(6,076	)		(5,934	)
Realized gains (losses) on fixed income investment		1,265			(200	)		2,578			(200	)
Other, net		324			392			545			871
Interest and other income, net	$	4,802		$	12,150		$	18,086		$	25,440
Interest expense	$	(620	)	$	(3,828	)	$	(1,412	)	$	(5,637	)
Investment gains (losses), net:
Realized investment gains	$	52		$	10,040		$	52		$	15,437
Unrealized investment gains		2,186			1,044			1,377			4,958
Realized investment losses		(793	)		(254	)		(1,985	)		(637	)
Unrealized investment losses		(3,250	)		(1,324	)		(18,495	)		(1,520	)
Investment gains (losses), net	$	(1,805	)	$	9,506		$	(19,051	)	$	18,238
Total non-operating income (expense), net	$	2,377		$	17,828		$	(2,377	)	$	38,041

NOTE 15. SEGMENTS

We have the following reportable segments: Creative Solutions, Knowledge Worker, Enterprise, Platform and Print and Publishing. Our Creative Solutions segment focuses on delivering a complete professional line of integrated tools for a full range of creative and developer tasks to an extended set of customers. The Knowledge Worker segment focuses on the needs of knowledge worker customers, providing essential applications and services to help them share information and collaborate. This segment contains revenue generated by Acrobat Connect and our Acrobat family of products. Our Enterprise segment provides server-based enterprise interaction solutions that automate people-centric processes and contains revenue generated by our LiveCycle line of products. The Platform segment includes client and developer technologies, such as Adobe Flash Player, Adobe Flash Lite, Adobe AIR, Adobe Flex and Adobe Flex Builder, and also encompasses products and technologies created and managed in other Adobe segments. Finally, the Print and Publishing segment addresses market opportunities ranging from the diverse publishing needs of technical and business publishing, to our legacy type and original equipment manufacturer (“OEM”) printing businesses.

Effective in the first quarter of fiscal 2009, our former Mobile and Devices Solutions segment, was integrated into our Platform business unit to better align our engineering and marketing efforts and is now reported as part of the Platform segment. Prior year information in the table below has been reclassified to reflect the integration of these business units.

We report segment information based on the “management” approach. The management approach designates the internal reporting used by management for making decisions and assessing performance as the source of our reportable segments.

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Our chief operating decision maker reviews revenue and gross margin information for each of our reportable segments. Operating expenses are not reviewed on a segment by segment basis. In addition, with the exception of goodwill and intangible assets, we do not identify or allocate our assets by the reportable segments.

(in thousands)	Creative Solutions		Knowledge Worker		Enterprise		Platform*		Print and Publishing		Total
Three months ended May 29, 2009
Revenue	$	411,749	$	156,023	$	53,696	$	36,819	$	46,386	$	704,673
Cost of revenue