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 August 28, 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 x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. 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 September 25, 2009 was 523,760,118.

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 August 28, 2009 and November 28, 2008	3

		Condensed Consolidated Statements of Income Three and Nine Months Ended August 28, 2009 and August 29, 2008	4

		Condensed Consolidated Statements of Cash Flows Nine Months Ended August 28, 2009 and August 29, 2008	5

		Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		40

Item 4.	Controls and Procedures		40

PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		40

Item 1A.	Risk Factors		40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		49

Item 6.	Exhibits		49

Signature			58

Summary of Trademarks			59

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)

	August 28, 2009			November 28, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	1,132,144		$	886,450
Short-term investments		1,424,317			1,132,752
Trade receivables, net of allowances for doubtful accounts of $6,153 and $4,128, respectively		281,807			467,234
Deferred income taxes		72,163			110,713
Prepaid expenses and other current assets		80,503			137,954
Total current assets		2,990,934			2,735,103
Property and equipment, net		335,752			313,037
Goodwill		2,125,946			2,134,730
Purchased and other intangibles, net		117,384			214,960
Investment in lease receivable		207,239			207,239
Other assets		184,705			216,529
Total assets	$	5,961,960		$	5,821,598

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	48,416		$	55,840
Accrued expenses		349,077			399,969
Accrued restructuring		8,230			35,690
Income taxes payable		20,332			27,136
Deferred revenue		188,328			243,964
Total current liabilities		614,383			762,599
Long-term liabilities:
Debt		350,000			350,000
Deferred revenue		29,866			31,356
Accrued restructuring		4,967			6,214
Income taxes payable		137,296			123,182
Deferred income taxes		105,597			117,328
Other liabilities		25,293			20,565
Total liabilities		1,267,402			1,411,244
Stockholders’ equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized, none issued		—			—
Common stock, $0.0001 par value; 900,000 shares authorized; 600,834 shares issued; 524,665 and 526,111 shares outstanding, respectively		61			61
Additional paid-in-capital		2,303,342			2,396,819
Retained earnings		5,331,957			4,913,406
Accumulated other comprehensive income		21,728			57,222
Treasury stock, at cost (76,169 and 74,723 shares, respectively), net of reissuances		(2,962,530	)		(2,957,154	)
Total stockholders’ equity		4,694,558			4,410,354
Total liabilities and stockholders’ equity	$	5,961,960		$	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						Nine Months Ended
	August 28, 2009			August 29, 2008			August 28, 2009			August 29, 2008
Revenue:
Products	$	649,865		$	838,813		$	2,052,119		$	2,532,076
Services and support		47,642			48,444			136,451			132,512
Total revenue		697,507			887,257			2,188,570			2,664,588
Cost of revenue:
Products		49,365			84,623			164,041			202,657
Services and support		15,682			26,228			50,367			73,535
Total cost of revenue		65,047			110,851			214,408			276,192
Gross profit		632,460			776,406			1,974,162			2,388,396
Operating expenses:
Research and development		138,902			170,124			427,289			508,909
Sales and marketing		231,320			271,439			724,020			813,399
General and administrative		79,593			97,156			224,462			257,163
Restructuring charges		65			1,194			15,866			2,625
Amortization of purchased intangibles		14,978			17,024			45,654			51,222
Total operating expenses		464,858			556,937			1,437,291			1,633,318
Operating income		167,602			219,469			536,871			755,078
Non-operating income (expense):
Interest and other income, net		6,667			9,338			24,753			34,778
Interest expense		(460	)		(2,390	)		(1,872	)		(8,027	)
Investment gains (losses), net		607			2,097			(18,444	)		20,335
Total non-operating income (expense), net		6,814			9,045			4,437			47,086
Income before income taxes		174,416			228,514			541,308			802,164
Provision for income taxes		38,371			36,906			122,757			176,267
Net income	$	136,045		$	191,608		$	418,551		$	625,897
Basic net income per share	$	0.26		$	0.36		$	0.79		$	1.15
Shares used in computing basic net income per share		525,911			531,060			528,015			542,624
Diluted net income per share	$	0.26		$	0.35		$	0.79		$	1.13
Shares used in computing diluted net income per share		531,809			541,311			532,846			552,739

See accompanying Notes to Condensed Consolidated Financial Statements.

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ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Nine Months Ended
	August 28, 2009			August 29, 2008
Cash flows from operating activities:
Net income	$	418,551		$	625,897
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, amortization and accretion		197,386			202,841
Stock-based compensation		126,231			137,613
Deferred income taxes		22,671			34,336
Unrealized losses (gains) on investments		13,308			(9,690	)
Retirements of property and equipment		3,435			185
Tax benefit from employee stock option plans		2,711			83,740
Provision for losses on trade receivables		3,049			3,870
Other non-cash items		2,464			2,709
Excess tax benefits from stock-based compensation		(84	)		(23,635	)
Changes in operating assets and liabilities, net of acquired assets and assumed liabilities:
Trade receivables		182,377			(13,695	)
Prepaid expenses and other current assets		15,663			2,044
Trade payables		(7,424	)		(3,574	)
Accrued expenses		(44,351	)		(43,996	)
Accrued restructuring		(27,527	)		(5,418	)
Income taxes payable		12,619			(73,957	)
Deferred revenue		(57,126	)		23,163
Net cash provided by operating activities		863,953			942,433
Cash flows from investing activities:
Purchases of short-term investments		(1,142,015	)		(840,782	)
Maturities of short-term investments		333,219			520,784
Proceeds from sales of short-term investments		504,958			486,904
Purchases of property and equipment		(84,659	)		(88,481	)
Acquisitions, net of cash acquired		—			485
Purchases of long-term investments and other assets		(24,891	)		(102,085	)
Proceeds from sale of long-term investments		4,909			18,085
Other		3,271			—
Net cash used for investing activities		(405,208	)		(5,090	)
Cash flows from financing activities:
Purchases of treasury stock		(350,013	)		(1,422,735	)
Proceeds from issuance of treasury stock		122,219			301,454
Excess tax benefits from stock-based compensation		84			23,635
Proceeds from borrowings under credit facility		—			450,000
Repayments of borrowings under credit facility		—			(100,000	)
Net cash used for financing activities		(227,710	)		(747,646	)
Effect of foreign currency exchange rates on cash and cash equivalents		14,659			(1,856	)
Net increase in cash and cash equivalents		245,694			187,841
Cash and cash equivalents at beginning of period		886,450			946,422
Cash and cash equivalents at end of period	$	1,132,144		$	1,134,263
Supplemental disclosures:
Cash paid for income taxes, net of refunds	$	78,635		$	129,320
Cash paid for interest	$	453		$	2,311

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 nine months ended August 28, 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 June 2009, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of GAAP, a replacement of SFAS No. 162” (“SFAS 168”). SFAS 168 will become the source of authoritative GAAP recognized by the FASB to be applied by nongovernmental entities. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009 and will be effective for us beginning in the fourth quarter of fiscal 2009. On the effective date of SFAS 168, it will supersede all then-existing non-SEC accounting and reporting standards. As SFAS 168 is not intended to change or alter existing GAAP, it is not expected to have any impact on our consolidated financial statements and will only impact references for accounting guidance.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation (“FIN”) No. 46(R)” (“SFAS 167”), which amends the evaluation criteria to identify the primary beneficiary of a variable interest entity and requires ongoing reassessment of whether an enterprise is the primary beneficiary of the variable interest entity. The provisions of SFAS 167 are effective for interim and annual reporting periods ending after November 15, 2009 and will be effective for us beginning in the fourth quarter of fiscal 2009. We are currently evaluating the impact of adopting SFAS 167 on our consolidated financial position, results of operations and cash flows.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The provisions of SFAS 165 are effective for interim and annual reporting periods ending after June 15, 2009. We adopted SFAS 165 during the third quarter of fiscal 2009 and as the pronouncement only requires additional disclosures, the adoption did not have an impact on our consolidated financial position, results of operations or cash flows. We have evaluated subsequent events through October 1, 2009, the date that these financial statements were issued.

In April 2009, the FASB issued three related FASB Staff Positions (“FSP”): (i) FSP Financial Accounting Standard (“FAS”) No. 115-2 and FAS No. 124-2, “Recognition of Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”), (ii) FSP FAS No. 107-1 and Accounting Principles Board Opinion (“APB”) No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”), and (iii) FSP FAS No. 157-4, “Determining the Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4), which are effective for interim and annual reporting periods ending after June 15, 2009. FSP FAS 115-2 and FAS 124-2 amends the other-than-temporary impairment guidance in GAAP for debt securities to modify the requirement for recognizing other-than-temporary impairments, change the existing

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

impairment model, and modify the presentation and frequency of related disclosures. FSP FAS 107-1 and APB 28-1 requires disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). We adopted these FSPs during the third quarter of fiscal 2009 and they did not have a material effect on our consolidated financial position, results of operations or cash flows.

In September 2008, the FASB issued FSP FAS No. 133-1 and FIN No. 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of 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 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 FAS 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 FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. FSP FAS 142-3 is effective for us beginning in the first quarter of fiscal 2010. Early adoption is not permitted. 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. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase. We classify all of our cash equivalents and short-term investments as “available-for-sale.” These investments are free of trading restrictions or become free of trading restrictions within one year. We carry these investments at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity. Gains are recognized when realized in our Condensed Consolidated Statements of Income. Losses are recognized as realized or when we have determined that an other-than-temporary decline in fair value has occurred. Gains and losses are determined using the specific identification method.

Cash, cash equivalents and short-term investments consisted of the following as of August 28, 2009 (in thousands):

	Carrying Value		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Current assets:
Cash	$	33,923	$	—	$	—		$	33,923
Cash equivalents:
Money market mutual funds		1,043,750		—		—			1,043,750
Bank deposits		49,451		—		—			49,451
United States treasury notes		5,021		—		(1	)		5,020
Total cash equivalents		1,098,222		—		(1	)		1,098,221
Total cash and cash equivalents		1,132,145		—		(1	)		1,132,144
Short-term investments:
United States treasury notes		749,616		5,164		(10	)		754,770
United States government agency bonds		133,164		127		(21	)		133,270
Government guaranteed bonds		265,448		1,724		(73	)		267,099
Corporate bonds		204,126		3,626		(2	)		207,750
Obligations of foreign governments		28,222		488		—			28,710
Bonds of multi-lateral government agencies		27,434		340		—			27,774
Subtotal		1,408,010		11,469		(106	)		1,419,373
Other marketable equity securities		2,504		2,440		—			4,944
Total short-term investments		1,410,514		13,909		(106	)		1,424,317
Total cash, cash equivalents and short-term investments	$	2,542,659	$	13,909	$	(107	)	$	2,556,461

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash, cash equivalents and short-term investments consisted of the following as of November 28, 2008 (in thousands):

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

See Note 3 for further information regarding our financial instruments.

The following table summarizes the fair value and gross unrealized losses related to available-for-sale securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at August 28, 2009 (in thousands):

	Less Than 12 Months					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
United States treasury notes and agency bonds	$	108,878	$	(32	)	$	108,878	$	(32	)
Government guaranteed bonds		23,084		(73	)		23,084		(73	)
Corporate bonds		3,473		(2	)		3,473		(2	)
Total	$	135,435	$	(107	)	$	135,435	$	(107	)

As of August 28, 2009, there were no securities in a continuous loss position for more than twelve months. There were 18 securities that were in an unrealized loss position at August 28, 2009.

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

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ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of November 28, 2008, there were no securities in a continuous loss position for more than twelve months. There were 33 securities that were in an unrealized loss position at November 28, 2008.

The following table summarizes the cost and estimated fair value of debt securities classified as short-term investments based on stated maturities as of August 28, 2009 (in thousands):

	Cost		Estimated Fair Value
Due within one year	$	772,898	$	775,869
Due within two years		317,246		320,399
Due within three years		241,150		243,434
Due after three years		76,716		79,671
Total	$	1,408,010	$	1,419,373

We review our debt and marketable equity securities classified as short-term investments on a regular basis to evaluate whether or not any security has experienced an other-than-temporary decline in fair value. We consider factors such as the length of time and extent to which the market value has been less than the cost, the financial condition and near-term prospects of the issuer and our intent to sell, or whether it is more likely than not we will be required to sell, the investment before recovery of the investment’s amortized cost basis. If we believe that an other-than-temporary decline exists in one of these securities, we write down these investments to fair value. The portion of the write-down related to credit loss would be recorded to investment gains (losses), net on our Condensed Consolidated Statements of Income for equity securities and to interest and other income, net for debt securities. Any portion of the other-than-temporary decline not related to credit loss would be recorded to accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity on our Condensed Consolidated Balance Sheets. As of August 28, 2009, we do not consider any of our investments to be other-than-temporarily impaired.

NOTE 3. 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 August 28, 2009 (in thousands):

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Current assets:
Money market funds and overnight deposits(1)	$	1,093,201	$	1,093,201	$	—	$	—
Fixed income available-for-sale securities(2)		1,424,393		—		1,424,393		—
Available-for-sale equity securities(3)		4,944		4,944		—		—
Total current assets		2,522,538		1,098,145		1,424,393		—
Non-current assets:
Investments of limited partnership(4)		34,705		—		—		34,705
Foreign currency derivatives(5)		4,688		—		4,688		—
Deferred compensation plan assets(4):
Money market funds		770		770		—		—
Equity and fixed income mutual funds		7,754		—		7,754		—
Subtotal for deferred compensation plan assets		8,524		770		7,754		—
Total non-current assets		47,917		770		12,442		34,705
Total assets	$	2,570,455	$	1,098,915	$	1,436,835	$	34,705
Liabilities:
Foreign currency derivatives(6)	$	729	$	—	$	729	$	—
Total liabilities	$	729	$	—	$	729	$	—

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

	Fair Value Measurements at Reporting Date Using
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
Current assets:
Money market funds and overnight deposits(1)	$	722,742	$	722,742	$	—	$	—
Fixed income available-for-sale securities(2)		1,175,732		—		1,175,732		—
Available-for-sale equity securities(3)		3,047		3,047		—		—
Total current assets		1,901,521		725,789		1,175,732		—
Non-current assets:
Investments of limited partnership(4)		39,004		251		—		38,753
Foreign currency derivatives(5)		49,848		—		49,848		—
Deferred compensation plan assets(4):
Money market funds		704		704		—		—
Equity and fixed income mutual funds		6,856		—		6,856		—
Subtotal for deferred compensation plan assets		7,560		704		6,856		—
Total non-current assets		96,412		955		56,704		38,753
Total assets	$	1,997,933	$	726,744	$	1,232,436	$	38,753
Liabilities:
Foreign currency derivatives(6)	$	1,739	$	—	$	1,739	$	—
Total liabilities	$	1,739	$	—	$	1,739	$	—

_________________________________________

(1)	Included in cash and cash equivalents on our Condensed Consolidated Balance Sheets.

(2)	Included in either cash and cash equivalents or short-term investments on our Condensed Consolidated Balance Sheets.

(3)	Included in short-term investments on our Condensed Consolidated Balance 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.

See Note 2 for further information regarding our financial instruments.

Fixed income available-for-sale securities include United States (“U.S.”) treasury securities, Agency or U.S. government guaranteed securities (75% of total), corporate bonds (15% of total), obligations of foreign governments and their agencies (8% of total), and obligations of multi-lateral government agencies (2% of total) at August 28, 2009 and U.S. treasury securities, Agency or U.S. government guaranteed securities (78% of total), corporate bonds (10% of total), obligations of foreign governments and their agencies (10% of total), and obligations of multi-lateral government agencies (2% of total) at November 28, 2008. These are all high quality, investment grade securities with a minimum credit rating of A- and a weighted average credit rating better than AA+. We value these securities based on pricing from pricing vendors, who may use quoted prices in active markets for identical assets (Level 1 inputs) or inputs other than quoted prices that are observable either directly or indirectly (Level 2 inputs) in determining fair value. However, we classify all of our fixed income available-for-sale securities as having Level 2 inputs. Our procedures include controls to ensure that appropriate fair values are recorded such as comparing prices obtained from multiple independent sources.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The investments of limited partnership relate to our interest in Adobe Ventures IV L.P. (“Adobe Ventures”), which 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 consist of 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 August 28, 2009 and November 28, 2008 was as follows (in thousands):

Balance as of November 28, 2008	$	38,753
Purchases and sales of investments, net		966
Unrealized net investment losses included in earnings		(5,014	)
Balance as of August 28, 2009	$	34,705

We also have direct investments in 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 nine months ended August 28, 2009, we determined that certain of our cost method investments were other-than-temporarily impaired which resulted in a charge of $13.9 million, included in investment gains (losses), net in our Condensed Consolidated Statements of Income. The fair value of cost method investments that were impaired was estimated using Level 3 inputs. We did not have any other-than-temporary impairments of our cost method investments during the three months ended August 28, 2009.

See Note 6 for further information regarding our limited partnership interest in Adobe Ventures and our cost method investments.

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.

In accordance with SFAS 133, we recognize derivative instruments and hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income on our Condensed Consolidated Balance Sheets, until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income to interest and other income, net on our Condensed Consolidated Statements of Income at that time.

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

The aggregate fair value of derivative instruments in net asset positions as of August 28, 2009 was $4.7 million. This amount represents the maximum exposure to loss at the reporting date as a result of all of the counterparties failing to perform as contracted. This exposure could be reduced by up to $0.7 million of liabilities included in master netting arrangements with those same counterparties.

The fair value of derivative instruments in our Condensed Consolidated Balance Sheets as of August 28, 2009 were as follows (in thousands):

	Fair Values of Derivative Instruments
	Asset Derivatives			Liability Derivatives
	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments:
Foreign exchange option contracts(*)	Prepaid expense and other current assets	$	4,507	Accrued expenses	$	—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Prepaid expense and other current assets		181	Accrued expenses		729
Total derivatives		$	4,688		$	729

_________________________________________

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

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

	Three Months						Nine Months
	Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts			Foreign Exchange Option Contracts			Foreign Exchange Forward Contracts
Derivatives in cash flow hedging relationships:
Net gain (loss) recognized in OCI(1)	$	(329	)	$	—		$	(14,516	)	$	—
Net gain (loss) reclassified from accumulated OCI into income(2)	$	749		$	—		$	27,138		$	—
Net gain (loss) recognized in income(3)	$	(3,734	)	$	—		$	(12,782	)	$	—

Derivatives not designated as hedging relationships:
Net gain (loss) recognized in income(4)	$	—		$	(1,650	)	$	—		$	(10,200	)

_________________________________________

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

(2)	Effective portion classified as revenue.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

NOTE 4. ACQUISTIONS

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

NOTE 5. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Goodwill as of August 28, 2009 and November 28, 2008 was $2.126 billion and $2.135 billion, respectively. The change includes reductions in goodwill of $7.5 million related to the release of tax reserves associated with the acquisitions of Accelio and Macromedia in addition to a facility lease obligation adjustment of $1.7 million related to Macromedia, offset in part by small foreign currency translation adjustments.

Purchased and other intangible assets subject to amortization as of August 28, 2009 were as follows (in thousands):

	Cost		Accumulated Amortization			Net
Purchased technology	$	405,830	$	(375,412	)	$	30,418
Localization	$	24,441	$	(16,567	)	$	7,874
Trademarks		130,925		(97,940	)		32,985
Customer contracts and relationships		196,617		(150,754	)		45,863
Other intangibles		800		(556	)		244
Total other intangible assets	$	352,783	$	(265,817	)	$	86,966
Total purchased and other intangible assets	$	758,613	$	(641,229	)	$	117,384

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 $34.4 million and $109.7 million for the three and nine months ended August 28, 2009, respectively. Comparatively, amortization expense was $43.2 million and $140.7 million for the three and nine months ended August 29, 2008, respectively. Of these amounts, $19.4 million and $64.1 million were included in cost of sales for the three and nine months ended August 28, 2009, respectively, and $26.2 million and $89.5 million were included in cost of sales for the three and nine months ended August 29, 2008, respectively.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

As of August 28, 2009, we expect amortization expense in future periods to be as follows (in thousands):

Fiscal year	Purchased Technology		Other Intangible Assets
Remainder of 2009	$	13,736	$	20,133
2010		8,301		52,202
2011		4,994		12,444
2012		3,387		1,009
2013		—		789
Thereafter		—		389
Total expected amortization expense	$	30,418	$	86,966

NOTE 6. OTHER ASSETS

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

	2009		2008
Acquired rights to use technology	$	87,806	$	90,643
Investments		61,110		76,589
Security and other deposits		8,655		16,087
Deferred compensation plan assets		8,524		7,560
Prepaid royalties		8,191		9,026
Restricted cash		4,089		7,361
Prepaid land lease		3,156		3,185
Prepaid rent		1,524		2,658
Other		1,650		3,420
Total other assets	$	184,705	$	216,529

Included in investments are our indirect investments through our limited partnership interest in Adobe Ventures of approximately $34.7 million and $39.0 million as of August 28, 2009 and November 28, 2008, respectively, which is consolidated in accordance with 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 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 3 for further information regarding Adobe Ventures.

Also included in investments are our direct investments in privately-held companies of approximately $26.4 million and $37.6 million as of August 28, 2009 and November 28, 2008, respectively, which are accounted for based on the cost method. We assess these investments for impairment in value as circumstances dictate. See Note 3 for further information regarding our cost method investments.

We entered into a Purchase and Sale Agreement, effective May 12, 2008, for the acquisition of real property located in Waltham, Massachusetts. We purchased the property upon completion of construction of an office building shell and core, parking structure, and site improvements. The purchase price for the property was $44.7 million and closed on June 16, 2009. We made an initial deposit of $7.0 million which was included in security and other deposits as of November 28, 2008 and the remaining balance was paid at closing. This deposit was held in escrow until closing and then applied to the purchase price.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

NOTE 7. ACCRUED EXPENSES

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

	2009		2008
Accrued compensation and benefits	$	141,814	$	177,760
Taxes payable		7,924		21,760
Sales and marketing allowances		22,888		28,127
Other		176,451		172,322
Total accrued expenses	$	349,077	$	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 8. STOCK-BASED COMPENSATION

The assumptions used to value option grants during the three and nine months ended August 28, 2009 and August 29, 2008 were as follows:

	Three Months						Nine Months
	2009			2008			2009			2008
Expected life (in years)		3.7 – 3.8			3.5 – 3.6			3.0 – 3.8			2.3 – 4.7
Volatility		37 – 43	%		34 – 37	%		37 – 57	%		32 – 39	%
Risk free interest rate		1.93 – 2.24	%		2.79 – 3.50	%		1.16 – 2.24	%		1.70 – 3.50	%

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

	Three Months						Nine Months
	2009			2008			2009			2008
Expected life (in years)		0.5 – 2.0			0.5 – 2.0			0.5 – 2.0			0.5 – 2.0
Volatility		40	%		34 – 36	%		40 – 57	%		30 – 36	%
Risk free interest rate		0.33 – 1.05	%		2.12 – 2.66	%		0.27 – 1.05	%		2.12 – 3.29	%

Summary of Stock Options

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

	2009			2008
Beginning outstanding balance		40,704			47,742
Granted		4,914			5,462
Exercised		(4,370	)		(9,983	)
Cancelled		(2,699	)		(2,517	)
Ending outstanding balance		38,549			40,704

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Information regarding stock options outstanding at August 28, 2009 and August 29, 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		38,549	$	29.75		3.92	$	176.9
Options vested and expected to vest		36,986	$	29.78		3.84	$	168.5
Options exercisable		26,573	$	29.21		3.23	$	127.8

2008
Options outstanding		42,070	$	29.67		4.16	$	554.5
Options vested and expected to vest		39,936	$	29.29		4.07	$	541.2
Options exercisable		27,252	$	25.94		3.35	$	460.3

_________________________________________

(*)	The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of August 28, 2009 and August 29, 2008 were $31.73 and $42.83, respectively.

Summary of Employee Stock Purchase Plan Shares

The weighted average subscription date fair value of shares under the ESPP during the nine months ended August 28, 2009 and August 29, 2008 was $5.40 and $9.03, respectively. Employees purchased 3.2 million shares at an average price of $19.04 and 2.4 million shares at an average price of $30.40 for the nine months ended August 28, 2009 and August 29, 2008, respectively. The intrinsic value of shares purchased during the nine months ended August 28, 2009 and August 29, 2008 was $21.7 million and $25.0 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Summary of Restricted Stock Units

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

	2009			2008
Beginning outstanding balance		4,261			1,701
Awarded		3,333			3,177
Released		(984	)		(422	)
Forfeited		(291	)		(195	)
Ending outstanding balance		6,319			4,261

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(Unaudited)

Information regarding restricted stock units outstanding at August 28, 2009 and August 29, 2008 is summarized below:

	Number of Shares (thousands)		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value(*) (millions)
2009
Restricted stock units outstanding		6,319		1.70	$	200.5
Restricted stock units vested and expected to vest		4,978		1.52	$	157.8

2008
Restricted stock outstanding		4,025		1.91	$	172.4
Restricted stock units vested and expected to vest		3,083		1.69	$	132.0

_________________________________________

(*)	The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of August 28, 2009 and August 29, 2008 were $31.73 and $42.83, respectively.

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 nine months ended August 28, 2009 (in thousands):

	Shares Granted			Maximum Shares Eligible to Receive
Beginning outstanding balance		—			—
Awarded		558			642
Forfeited		(3	)		(4	)
Ending outstanding balance		555			638

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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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the summary of performance share activity under our 2006 through 2008 programs, based upon share awards actually achieved, for the nine months ended August 28, 2009 and the fiscal year ended November 28, 2008 (in thousands):

	2009			2008
Beginning outstanding balance		383			—
Achieved		1,022			993
Released		(382	)		(480	)
Forfeited		(59	)		(130	)
Ending outstanding balance		964			383

Information regarding performance shares outstanding at August 28, 2009 and August 29, 2008 is summarized below:

	Number of Shares (thousands)		Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value (*) (millions)
2009
Performance shares outstanding		964		1.30	$	30.6
Performance shares vested and expected to vest		801		1.21	$	25.3

2008
Performance shares outstanding		454		1.44	$	19.4
Performance shares vested and expected to vest		369		1.34	$	15.8

_________________________________________

(*)	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 August 28, 2009 and August 29, 2008 were $31.73 and $42.83, respectively.

Compensation Costs

As of August 28, 2009, there was $225.4 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.5 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the three months ended August 28, 2009 and August 29, 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	$	437	$	190	$	1,189	$	230
Research and development		11,922		6,338		15,612		6,377
Sales and marketing		9,100		4,730		10,576		5,370
General and administrative		4,938		2,087		6,113		2,793
Total	$	26,397	$	13,345	$	33,490	$	14,770

_________________________________________

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

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the nine months ended August 28, 2009 and August 29, 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	$	1,595	$	527	$	2,968	$	483
Research and development		35,317		21,271		43,382		16,380
Sales and marketing		27,681		14,565		31,701		15,558
General and administrative		19,220		6,962		18,841		10,368
Total	$	83,813	$	43,325	$	96,892	$	42,789

_________________________________________

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

NOTE 9. EMPLOYEE BENEFIT PLAN

Deferred Compensation Plan

As of August 28, 2009 and November 28, 2008, the invested amounts under our Deferred Compensation Plan totaled $8.5 million and $7.6 million, respectively, and are recorded as other assets on our Condensed Consolidated Balance Sheets. As of August 28, 2009 and November 28, 2008, we recorded $8.5 million and $7.6 million, respectively, as a long-term liability to recognize undistributed deferred compensation due to employees.

NOTE 10. 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 recorded in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” As of November 28, 2008, $0.4 million was paid.

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In the first quarter of fiscal 2009, we continued to implement restructuring activities under this program. We vacated approximately 89,000 square feet of research and development and sales facilities in the U.S., the United Kingdom and Canada. In accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” we accrued $8.5 million for the fair value of our future contractual obligations under these operating leases using our credit-adjusted risk-free interest rate, estimated at approximately 6% as of the date we ceased to use the leased properties. This amount is net of the fair value of future estimated sublease income of approximately $4.4 million. We also recorded charges of $3.4 million for termination benefits for the elimination of approximately 43 of the remaining 100 full-time positions expected to be terminated.

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

In the third quarter of fiscal 2009, we accrued an additional $0.4 million under this program for termination benefits related to the elimination of substantially all of the remaining full-time positions expected to be terminated.

The following table sets forth a summary of Adobe restructuring activities during the nine months ended August 28, 2009 (in thousands):

	November 28, 2008		Costs Incurred		Cash Payments			Other Adjustments		August 28, 2009		Total Costs Incurred to Date		Total Costs Expected to be Incurred
Termination benefits	$	28,759	$	6,722	$	(34,042	)	$	174	$	1,613	$	36,102	$	36,121
Cost of closing redundant facilities		—		8,514		(4,488	)		613		4,639		9,127		9,601
Total	$	28,759	$	15,236	$	(38,530	)	$	787	$	6,252	$	45,229	$	45,722

Accrued restructuring charges of approximately $6.3 million at August 28, 2009 include $3.3 million recorded in accrued restructuring, current and $3.0 million related to long-term facilities obligations recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets. We expect to pay substantially all of the accrued termination benefits during the remainder of fiscal 2009. We expect to pay facilities-related liabilities through fiscal 2013.

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

Macromedia Merger Restructuring Charges

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

The following table sets forth a summary of Macromedia restructuring activities during the nine months ended August 28, 2009 (in thousands):

	November 28, 2008		Cash Payments			Other Adjustments			August 28, 2009		Total Costs Incurred to Date		Total Costs Expected to be Incurred
Cost of closing redundant facilities	$	12,168	$	(3,986	)	$	(1,255	)	$	6,927	$	41,060	$	41,060
Other		977		(879	)		(80	)		18		2,277		2,277
Total	$	13,145	$	(4,865	)	$	(1,335	)	$	6,945	$	43,337	$	43,337

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Accrued restructuring charges of approximately $6.9 million at August 28, 2009 related to facilities obligations include $5.0 million recorded in accrued restructuring, current and $1.9 million recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets. We expect to pay these liabilities through fiscal 2012. At November 28, 2008, accrued restructuring charges of $13.1 million related to long-term facilities obligations included $6.9 million recorded in accrued restructuring, current and $6.2 million recorded in accrued restructuring, non-current in the accompanying Condensed Consolidated Balance Sheets.

Included in the other adjustments column is a change to previous estimates of $1.3 million and small foreign currency translation adjustments. Included in the change in previous estimates of $1.3 million is an adjustment of $1.7 million associated with an accrual for a leased facility that was included in the purchase price of Macromedia as an assumed liability. During the third quarter of fiscal 2009, adjustments were made to the liability for this lease facility that were recorded as a reduction to Macromedia goodwill. Accordingly, during the nine months ended August 28, 2009, only $0.4 million represents adjustments recorded as an increase to restructuring charges.

NOTE 11. STOCKHOLDERS’ EQUITY

Stock Repurchase Program I

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

During the nine months ended August 28, 2009 and August 29, 2008, we entered into several structured repurchase agreements with large financial institutions, whereupon we provided the financial institutions with prepayments of $350.0 million and $325.0 million, respectively. We entered into these agreements in order to take advantage of repurchasing shares at a guaranteed discount to the Volume Weighted Average Price (“VWAP”) of our common stock over a specified period of time. We only enter into such transactions when the discount that we receive is higher than the foregone return on our cash prepayments to the financial institutions. There were no explicit commissions or fees on these structured repurchases. Under the terms of the agreements, there is no requirement for the financial institutions to return any portion of the prepayment to us.

The financial institutions agree to deliver shares to us at monthly intervals during the contract term. The parameters used to calculate the number of shares deliverable are: the total notional amount of the contract, the number of trading days in the contract, the number of trading days in the interval and the average VWAP of our stock during the interval less the agreed upon discount. During the nine months ended August 28, 2009, we repurchased approximately 9.9 million shares at an average price of $25.31 through structured repurchase agreements, which included prepayments from fiscal 2008 and 2009. During the nine months ended August 29, 2008, we repurchased 19.0 million shares at an average price of $37.12 through structured repurchase agreements, which included prepayments from fiscal 2007. During the nine months ended August 29, 2008, we also repurchased 0.75 million shares at an average price of $39.19 in open market transactions.

As of August 28, 2009 and November 28, 2008, prepayments were classified as treasury stock on our Condensed Consolidated Balance Sheets 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 August 28, 2009 and August 29, 2008, approximately $233.9 million and $41.0 million, respectively, of up-front payments remained under the agreements.

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 nine months ended August 29, 2008, we provided prepayments of $1.0 billion and repurchased 31.9 million shares through structured share repurchase agreements at an average price of $37.15. As of August 29, 2008, there

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were no up-front payments remaining under these agreements. During the nine months ended August 29, 2008, we also repurchased 0.5 million shares at an average price of $39.79 in open market transactions.

NOTE 12. COMPREHENSIVE INCOME

The following table sets forth the activity for each component of other comprehensive income, net of related taxes (income tax effects were insignificant for all periods presented), for the three and nine months ended August 28, 2009 and August 29, 2008 (in thousands):

	Three Months						Nine Months
	2009			2008			2009			2008
Net income	$	136,045		$	191,608		$	418,551		$	625,897
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale securities		278			(1,954	)		1,856			(11,158	)
Reclassification adjustment for (gains) losses on available-for-sale securities recognized during the period		(2,449	)		(44	)		(5,026	)		157
Unrealized (losses) gains on derivative instruments		(329	)		10,494			(14,516	)		10,776
Reclassification adjustment for gains on derivative instruments recognized during the period		(749	)		—			(27,138	)		—
Foreign currency translation adjustments		(2,333	)		(6,358	)		9,330			(4,284	)
Other comprehensive (loss) income		(5,582	)		2,138			(35,494	)		(4,509