8-K

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

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (date of earliest event reported): June 15, 2006

Adobe Systems Incorporated
(Exact name of Registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation) 0-15175
(Commission File Number) 77-0019522
(I.R.S. Employer Identification No.)

345 Park Avenue
San Jose, California 95110-2704
(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (408) 536-6000

Not Applicable
(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

oWritten communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

oSoliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o     Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

oPre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Section 2 – Financial Information

Item 2.02. Results of Operations and Financial Condition.

On June 15, 2006, the Registrant issued a press release announcing its financial results for its second fiscal quarter ended June 2, 2006. A copy of this press release is furnished and attached hereto as Exhibit 99.1 and is incorporated herein by reference.

The information in this report and the exhibit attached hereto are being furnished and shall not be deemed filed for purposes of the Securities Exchange Act of 1934, as amended, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except as shall be expressly stated by specific reference in such filing.

The attached press release includes non-GAAP diluted earnings per share, non-GAAP net income, non-GAAP operating income, non-GAAP operating expense, non-GAAP gross margin, non-GAAP effective tax rate and forecasted non-GAAP earnings per share for the third quarter of fiscal 2006 and for the full fiscal year 2006.

These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. The Registrant believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with the Registrant’s results of operations as determined in accordance with GAAP and that these measures should only be used to evaluate the Registrant’s results of operations in conjunction with the corresponding GAAP measures.

For our internal budgeting and resource allocation process, Adobe’s management uses financial information that does not include: (a) the stock-based compensation impact of SFAS 123R, (b) restructuring and other charges,  (c) amortization of purchased intangibles and incomplete technology, (d) amortization of Macromedia deferred compensation, (e) investment gains and losses, (f) tax differences related to the timing and deductibility of the Macromedia acquisition-related charges, (g) tax differences related to the timing and deductibility of SFAS 123R stock-based compensation, and (h) the net tax impact of the repatriation of certain foreign earnings. Adobe’s management uses these non-GAAP financial measures in making operating decisions because we believe the measures provide meaningful supplemental information regarding Adobe’s operational performance and gives us a better understanding of how we should invest in research and development and fund infrastructure and go-to-market strategies. In addition, these non-GAAP financial measures facilitate management’s internal comparisons to our historical operating results and comparisons to competitors’ operating results.

As described above, Adobe excludes the following items from one or more of its non-GAAP measures:

A.            Stock compensation impact of SFAS 123R.  These expenses consist of expenses for employee stock options and employee stock purchases under SFAS 123(R). Adobe excludes stock-based compensation expenses from our non-GAAP measures primarily because they are non-cash expenses that Adobe does not believe are reflective of ongoing operating results. Further, as Adobe applies SFAS 123R, we believe that it is useful to investors to understand the impact of the application of SFAS 123R to our results of operations.

B.            Restructuring and other charges. Adobe incurred Board of Director approved restructuring charges associated with realigning its business upon the acquisition of Macromedia in December 2005. These actions were taken to eliminate certain duplicative activities, focus our resources on future growth opportunities and reduce our cost structure. In connection with the worldwide restructuring plan, Adobe recognized costs related to termination benefits for former Adobe employees whose positions were eliminated and for the closure of Adobe facilities. We also recognized costs related to the cancellation of certain contracts held by Adobe. Adobe excludes these items because these expenses

are not reflective of ongoing operating results in the current period. It is possible, however, that additional charges related to its facility leases may be incurred for various reasons including changes in cost estimates, the date the facility is vacated, subtenant leases, etc.

C.            Amortization of purchased intangibles and incomplete technology. Adobe incurs amortization of purchased intangible assets primarily in connection with its acquisition of Macromedia in December 2005. Adobe also incurred a charge related to incomplete technology in connection with a small acquisition. Adobe excludes these items because these expenses are not reflective of ongoing operating results in the current period and have no direct correlation to the operation of Adobe’s business. In addition, the amortization of purchased intangibles from a business combination is generally a non-cash expense.

D.            Amortization of Macromedia deferred compensation. Adobe incurs amortization of acquired deferred compensation in connection with its acquisition of Macromedia in December 2005. Adobe excludes these items because these expenses are not reflective of ongoing operating results in the current period and have no direct correlation to the operation of Adobe’s business. In addition, the amortization of deferred compensation is a non-cash expense.

E.             Investment gains and losses. Adobe incurs investment gains and losses on the sale and exchange of equity securities that are held directly and also indirectly through investment partnerships. Adobe does not actively trade publicly-held securities nor does Adobe rely on these securities positions for funding its ongoing operations. We exclude gains and losses on these equity securities because these items are unrelated to our ongoing business and operating results.

F.             Tax differences related to the timing and deductibility of the Macromedia acquisition-related charges. These amounts are independent and not reflective of Adobe’s ongoing operating results and are excluded on such a basis consistent with the explanations provided above.

G.            Tax differences related to the timing and deductibility of SFAS 123R stock-based compensation. These amounts are dependent on the trading price of Adobe’s common stock and the timing and exercise by employees of their stock options. As such, they have no direct correlation to Adobe’s operation of its business.

H.            Net tax impact of the repatriation of certain foreign earnings. In 2005 Adobe repatriated foreign earnings under the American Jobs Creation Act of 2004. Future repatriations are not expected to reoccur. Adobe excludes this item because the repatriation transaction is not reflective of ongoing operating results and has no direct correlation to the operation of Adobe’s business.

Adobe believes that non-GAAP measures have limitations in that they do not reflect all of the amounts associated with Adobe’s financial results as determined in accordance with GAAP and that these measures should only be used to evaluate Adobe’s financial results in conjunction with the corresponding GAAP measures and that is why Adobe qualifies the use of non-GAAP financial information in a statement when non-GAAP information is presented.

Adobe believes that where the adjustments used in calculating non-GAAP net income and non-GAAP net income per share are based on specific, identified amounts that impact different line items in the Condensed Consolidated Statements of Income (including cost of revenue – products, cost of revenue – services and support, gross margin, operating expenses (including research and development, sales and marketing, and general and administrative expenses), operating income and net income, net of tax) that it is useful to investors to understand how these specific line items in the Condensed Consolidated Statements of Income are affected by these adjustments for the following reasons:

A.            Cost of revenue (product, services and support, and total) and gross margin. Excluding stock-based compensation expense related to employee stock options and employee stock purchases from cost of revenue and gross margin calculations assists investors in evaluating period-over-period changes without giving effect to these charges which are non-cash in nature. Excluding the impact from the

amortization of Macromedia deferred compensation and the amortization of purchased intangibles assists investors in evaluating period-over-period changes without giving effect to these charges which are a function of prior period acquisition transactions rather than the underlying operating activities of the period presented.

B.            Operating expenses (including research and development, sales and marketing, and general and administrative expenses). Excluding stock-based compensation expense related to employee stock options and employee stock purchases assists investors in evaluating period-over-period changes in each line item of operating expenses without giving effect to these charges which are non-cash in nature. Excluding the impact of (a) the amortization of Macromedia deferred compensation, (b) restructuring and other charges, and (c) the amortization of purchased intangibles and incomplete technology assists investors in evaluating period-over-period changes to the affected line items in the Condensed Consolidated Statement of Income without giving effect to these charges which are a function of acquisition transactions rather than the underlying operating activities of the period presented.

C.            Operating income. Excluding stock-based compensation expense related to employee stock options and employee stock purchases from the calculation of operating income assists investors in evaluating period-over-period changes without giving effect to these charges which are non-cash in nature. Excluding the impact from (a) the amortization of Macromedia deferred compensation, (b) restructuring and other charges, and (c) the amortization of purchased intangibles and incomplete technology assists investors in evaluating period-over-period changes without giving effect to these charges which are a function of acquisition transactions rather than the underlying operating activities of the period presented.

D.            Net Income, Net of Tax Effect of Non-GAAP Adjustments. Excluding stock-based compensation expense related to employee stock options and employee stock purchases from the calculation of net income assists investors in evaluating period-over-period changes without giving effect to these charges which are non-cash in nature. Excluding the impact from (a) the amortization of Macromedia deferred compensation, (b) restructuring and other charges, and (c) the  amortization of purchased intangibles and incomplete technology assists investors in evaluating period-over-period changes without giving effect to these charges which are a function of acquisition transactions rather than the underlying operating activities of the period presented. Excluding gains and losses on equity securities assists investors in evaluating changes in this measure without giving effect to transactions in equity securities which do not relate to the funding and performance of Adobe’s ongoing operations. Excluding the net tax impact of the repatriation of foreign earnings assists investors in comparing periods in which repatriation does not occur.

E.             Effective Tax Rate. Excluding the income tax effect of the non-GAAP pre-tax adjustments from the provision for income taxes assists investors in understanding the tax provision associated with those adjustments and the effective tax rate of Adobe related to its ongoing operations.

Section 9 – Financial Statements and Exhibits

Item 9.01. Financial Statements and Exhibits.

(d)Exhibits

99.1         Press release dated June 15, 2006

SIGNATURES

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

	ADOBE SYSTEMS INCORPORATED
Date: June 15, 2006	By:	/s/ RANDY FURR
		RANDY FURR
		Executive Vice President and Chief
		Financial Officer

EXHIBIT INDEX

	Exhibit No.	Description
99.1		Press release issued on June 15, 2006 entitled “Adobe Reports Q2 Financial Results.”

EX-99.1

Investor Relations Contact:
Mike Saviage
Adobe Systems Incorporated
408-536-4416
ir@adobe.com

Public Relations Contact:
Holly Campbell
Adobe Systems Incorporated
408-536-6401
campbell@adobe.com

Adobe Reports Q2 Financial Results

Company Achieves Profitability Targets On Lower Than Expected Revenue

SAN JOSE, Calif. — June 15, 2006 — Adobe Systems Incorporated (Nasdaq:ADBE) today reported record financial results for its second quarter ended June 2, 2006.  The Company’s Q2 results reflect the acquisition of Macromedia in December, 2005, and are compared to pre-acquisition results of prior fiscal periods as applicable.

In the second quarter of fiscal 2006, Adobe achieved revenue of $635.5 million, compared to $496.0 million reported for the second quarter of fiscal 2005 and $655.5 million reported in the first quarter of fiscal 2006. On a year-over-year basis, this represents 28 percent revenue growth. Adobe’s second quarter revenue target range was $640 to $670 million.

“We are pleased we were able to deliver on our earnings targets in Q2 despite coming in slightly below our targeted revenue range,” said Bruce R. Chizen, Adobe chief executive officer. “Looking forward, as the explosion of digital content accelerates, we continue to be excited about our prospects for future growth.”

GAAP diluted earnings per share for the second quarter of fiscal 2006 were $0.20. Adobe’s second quarter GAAP EPS target range was $0.18 to $0.21.

Non-GAAP diluted earnings per share, which excludes amortization of purchased intangibles, amortization of Macromedia deferred compensation, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, SFAS 123R stock-based compensation, tax differences due to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation, and investment gains, were $0.31. Adobe’s second quarter non-GAAP EPS target range was $0.30 to $0.32.

GAAP net income was $123.1 million for the second quarter of fiscal 2006, compared to $149.8 million reported in the second quarter of fiscal 2005, and $105.1 million in the first quarter of fiscal 2006. Non-GAAP net income, which excludes, as applicable, amortization of purchased intangibles, amortization of Macromedia deferred compensation, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, SFAS 123R stock-based compensation, the net tax impact of the repatriation of certain foreign earnings, tax differences due to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation,

and investment gains and losses, was $189.4 million for the second quarter of fiscal 2006, compared to $142.9 million in the second quarter of fiscal 2005, and $197.5 million in the first quarter of fiscal 2006.

GAAP diluted earnings per share for the second quarter of fiscal 2006 were $0.20 based on 613.8 million weighted average shares. This compares with GAAP diluted earnings per share of $0.29 reported in the second quarter of fiscal 2005, based on 508.2 million weighted average shares, and GAAP diluted earnings per share of $0.17 reported in the first quarter of fiscal 2006, based on 621.8 million weighted average shares.

Adobe’s GAAP operating income was $147.9 million in the second quarter of fiscal 2006, compared to $182.2 million in the second quarter of fiscal 2005 and $130.0 million in the first quarter of fiscal 2006. As a percent of revenue, GAAP operating income in the second quarter of fiscal 2006 was 23.3 percent, compared to 36.7 percent in the second quarter of fiscal 2005 and 19.8 percent in the first quarter of fiscal 2006.

Adobe’s non-GAAP operating income, which excludes, as applicable, amortization of purchased intangibles, amortization of Macromedia deferred compensation, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, and SFAS 123R stock-based compensation was $243.1 million in the second quarter of fiscal 2006, compared to $182.2 million in the second quarter of fiscal 2005 and $252.4 million in the first quarter of fiscal 2006. As a percent of revenue, non-GAAP operating income in the second quarter of fiscal 2006 was 38.3 percent, compared to 36.7 percent in the second quarter of fiscal 2005 and 38.5 percent in the first quarter of fiscal 2006.

Adobe Provides Third Quarter FY2006 Financial Targets

For the third quarter of fiscal 2006, Adobe announced it is targeting revenue of $580 million to $610 million. The Company also is targeting a GAAP operating margin of approximately 16 to 19 percent in the third quarter. On a non-GAAP basis, which excludes acquisition-related costs and SFAS 123R stock-based compensation, the Company is targeting a third quarter operating margin of approximately 33 to 35 percent.

In addition, Adobe is targeting its share count to be between 606 million and 608 million shares in the third quarter of fiscal 2006. The Company also is targeting other income in its third quarter to be approximately $13 million to $15 million, with a GAAP and non-GAAP tax rate of approximately 26 percent.

These targets lead to a third quarter GAAP earnings per share target range of approximately $0.13 to $0.16. On a non-GAAP basis, which excludes acquisition-related costs, SFAS 123R stock-based compensation, and tax differences related to the timing and deductibility of the Macromedia

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acquisition-related charges and SFAS 123R stock-based compensation, the Company is targeting earnings per share of approximately $0.25 to $0.27.

Adobe Updates FY2006 Targets

For fiscal year 2006, Adobe announced it is lowering its revenue target to a range of $2.54 to $2.60 billion, with a targeted GAAP earnings per share range of $0.70 to $0.76 and a targeted non-GAAP earnings per share range of $1.20 to $1.25. The Company’s prior annual targets were revenue of approximately $2.7 billion, with GAAP and non-GAAP earnings per share ranges of $0.74 to $0.82 and $1.26 to $1.30 respectively.

Forward Looking Statements Disclosure

This press release contains forward looking statements, including those related to revenue, operating margin, other income, tax rate, share count and earnings per share, which involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to: adverse changes in general economic or political conditions in any of the major countries in which Adobe does business, delays in development or shipment of Adobe’s new products or major new versions of existing products, introduction of new products by existing and new competitors, failure to successfully manage transitions to new business models and markets, difficulty in predicting revenue from new businesses, failure to anticipate and develop new products in response to changes in demand for application software, computers and printers, intellectual property disputes and litigation, inability to protect Adobe’s intellectual property from unauthorized copying, use, disclosure or malicious attack, failure to realize the anticipated benefits of past or future acquisitions and difficulty in integrating such acquisitions, changes to Adobe’s distribution channel, disruption of Adobe’s business due to catastrophic events, interruptions or terminations in Adobe’s relationships with turnkey assemblers, risks associated with international operations, fluctuations in foreign currency exchange rates, changes in, or interpretations of, accounting rules and regulations, impairment of Adobe’s goodwill or intangible assets, unanticipated changes in tax rates, Adobe’s inability to attract and retain key personnel, and market risks associated with Adobe’s equity investments. For further discussion of these and other risks and uncertainties, individuals should refer to Adobe’s SEC filings. Adobe does not undertake an obligation to update forward looking statements.

About Adobe Systems Incorporated

Adobe revolutionizes how the world engages with ideas and information — anytime, anywhere, and through any medium. For more information, visit www.adobe.com.

###

© 2006 Adobe Systems Incorporated. All rights reserved. Adobe, Macromedia, and the Adobe logo are either registered trademarks or trademarks of Adobe Systems Incorporated in the United States and/or other countries. All other trademarks are the property of their respective owners.

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Condensed Consolidated Statements of Income
(In thousands, except per share data; unaudited)

	Three Months Ended					Six Months Ended
	June 2, 2006		June 3, 2005			June 2, 2006		June 3, 2005
Revenue:
Products	$	614,895	$	485,620		$	1,251,721	$	948,767
Services and support	20,561		10,409			39,213		20,144
Total revenue	635,456		496,029			1,290,934		968,911
Total cost of revenue:
Products	49,269		21,774			112,118		43,629
Services and support	16,338		5,660			31,235		10,774
Total cost of revenue	65,607		27,434			143,353		54,403
Gross profit	569,849		468,595			1,147,581		914,508
Operating expenses:
Research and development	133,285		89,409			270,828		176,095
Sales and marketing	210,399		154,963			424,215		302,346
General and administrative	59,716		42,019			120,013		83,151
Restructuring and other charges	1,235		—			20,219		—
Amortization of goodwill and purchased intangibles	17,306		—			34,418		—
Total operating expenses	421,941		286,391			869,693		561,592
Operating income	147,908		182,204			277,888		352,916
Non-operating income:
Investment gain (loss)	2,660		(2,701		)	1,395		(4,255		)
Interest and other income	13,929		8,305			29,471		15,932
Total non-operating income	16,589		5,604			30,866		11,677
Income before income taxes	164,497		187,808			308,754		364,593
Provision for income taxes	41,400		38,030			80,585		62,921
Net income	$	123,097	$	149,778		$	228,169	$	301,672
Basic net income per share	$	0.21	$	0.31		$	0.39	$	0.62
Shares used in computing basic net income per share	595,284		488,765			579,679		487,610
Diluted net income per share	$	0.20	$	0.29		$	0.37	$	0.59
Shares used in computing diluted net income per share	613,804		508,156			618,582		507,851

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Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)

	June 2, 2006			December 2, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	425,393		$	420,818
Short-term investments	1,400,693			1,280,016
Trade receivables, net	276,240			173,245
Other receivables	55,947			31,504
Deferred income taxes	128,814			58,710
Prepaid expenses and other current assets	41,369			44,285
Total current assets	2,328,456			2,008,578
Property and equipment, net	210,181			103,549
Goodwill	2,143,625			118,683
Purchased and other intangibles, net	593,570			16,477
Investment in lease receivable	126,800			126,800
Other assets	98,854			66,228
Total assets	$	5,501,486		$	2,440,315
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade and other payables	$	49,481		$	41,042
Accrued expenses	280,585			226,915
Accrued restructuring	17,332			70
Income taxes payable	137,866			154,529
Deferred revenue	89,017			57,839
Total current liabilities	574,281			480,395
Other long-term liabilities
Deferred revenue	12,603			9,731
Deferred income taxes	112,067			78,800
Accrued restructuring	25,506			—
Other long-term liabilities	8,422			7,063
Total liabilities	732,879			575,989
Stockholders’ equity:
Common stock, $0.0001 par value	29,908			29,600
Additional paid-in-capital	2,388,203			1,321,146
Retained earnings	3,066,734			2,838,566
Accumulated other comprehensive loss	(2,891		)	(914		)
Treasury stock at cost, net of re-issuances	(713,347		)	(2,324,072		)
Total stockholders’ equity	4,768,607			1,864,326
Total liabilities and stockholders’ equity	$	5,501,486		$	2,440,315

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Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

	Three Months Ended
	June 2, 2006			June 3, 2005
Cash flows from operating activities:
Net income	$	123,097		$	149,778
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	72,578			15,124
Stock compensation expense	41,883			106
Deferred income taxes	(5,904		)	1,034
Provision for (recovery of) losses on receivables	1,535			(366		)
Tax benefit from employee stock option plans	—			20,345
Excess tax benefits from stock-based compensation	(22,732		)	—
Net losses on sales and impairments of investments	5,486			2,704
Changes in operating assets and liabilities:
Receivables	2,495			(41,733		)
Other current assets	(4,524		)	(9,714		)
Trade and other payables	(1,855		)	142
Accrued expenses	(6,382		)	19,156
Accrued restructuring	(11,190		)	—
Income taxes payable	40,686			10,460
Deferred revenue	6,093			3,946
Net cash provided by operating activities	241,266			170,982
Cash flows from investing activities:
Purchases of short-term investments	(275,295		)	(560,745		)
Maturities of short-term investments	279,974			303,841
Sales of short-term investments	64,055			68,505
Acquisitions of property and equipment	(19,683		)	(9,124		)
Purchases of long-term investments and other assets	(9,507		)	(6,953		)
Cash paid for acquisition, net of cash received	(26,477		)	—
Proceeds from sale of equity securities and long-terminvestments	8,490			157
Net cash provided by (used for) investing activities	21,557			(204,319		)
Cash flows from financing activities:
Purchase of treasury stock	(559,620		)	(24		)
Proceeds from issuance of treasury stock	61,760			71,400
Payment of dividends	—			(12		)
Excess tax benefits from stock-based compensation	22,732			—
Net cash provided by (used for) financing activities	(475,128		)	71,364
Effect of foreign currency exchange rates on cash and cash equivalents	2,512			(2,085		)
Net increase (decrease) in cash and cash equivalents	(209,793		)	35,942
Cash and cash equivalents at beginning of period	635,186			217,360
Cash and cash equivalents at end of period	$	425,393		$	253,302

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Non-GAAP Results
(In thousands, except per share data)

The following table shows Adobe’s non-GAAP results reconciled to GAAP results included in this release.

	June 2, 2006			June 3, 2005			March 3, 2006
GAAP operating income	$	147,908		$	182,204		$	129,980
SFAS 123R stock-based compensation*	26,622			—			23,031
Amortization of Macromedia deferred compensation*	15,259			—			23,451
Restructuring and other charges	1,235			—			18,984
Amortization of purchased intangibles and incomplete technology*	52,041			—			56,955
Non-GAAP operating income	$	243,065		$	182,204		$	252,401
GAAP net income	$	123,097		$	149,778		$	105,072
SFAS 123R stock-based compensation, net of tax	19,085			—			18,220
Amortization of Macromedia deferred compensation, net of tax	10,939			—			17,283
Restructuring and other charges, net of tax	885			—			13,991
Amortization of purchased intangibles and incomplete technology, net of tax	37,308			—			41,976
Investment (gain)loss, net of tax	(1,909		)	2,035			932
Net tax impact on foreign earnings repatriation	—			(8,931		)	—
Non-GAAP net income	$	189,405		$	142,882		$	197,474
Diluted net income per share:
GAAP net income	$	0.20		$	0.29		$	0.17
SFAS 123R stock-based compensation, net of tax	0.03			—			0.03
Amortization of Macromedia deferred compensation, net of tax	0.02			—			0.03
Restructuring and other charges, net of tax	0.00			—			0.02
Amortization of purchased intangibles and incomplete technology, net of tax	0.06			—			0.07
Investment (gain)loss, net of tax	0.00			0.01			0.00
Net tax impact on foreign earnings repatriation	—			(0.02		)	—
Non-GAAP net income	$	0.31		$	0.28		$	0.32
Shares used computing diluted net income per share	613,804			508,156			621,839

*See table below for classification on the Consolidated Statements of Income.

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The following table shows the Company’s classification of SFAS 123R stock-based compensation, amortization of Macromedia deferred compensation, and amortization of purchased intangibles and incomplete technology on the Consolidated Statements of Income for the quarter ended June 2, 2006.

	Total Stock-based Compensation
Income Statement Classifications	SFAS 123R		Amortization of Macromedia Deferred Compensation(a)		Amortization of Purchased Intangibles and Incomplete Technology
Cost of revenue — products	$	—	$	—	$	34,235	(a)
Cost of revenue — services and support	677		1,749		—
Research and development	12,129		5,639		500		(b)
Sales and marketing	8,773		5,652		—
General and administrative	5,043		2,219		—
Amortization of purchased intangibles	—		—		17,306		(a)
Total	$	26,622	$	15,259	$	52,041

(a)Relates to Macromedia acquisition

(b)Charge for incomplete technology related to a small acquisition

The following table shows the Company’s reconciliation of non-GAAP to GAAP operating expenses as a percent of revenue and effective tax rate for the quarter ended June 2, 2006.

	Operating Expense as a Percent of Revenue
	Research and Development		Sales and Marketing		General and Administrative		Effective Tax Rate
GAAP	21.0	%	33.1	%	9.4	%	25.2	%
SFAS 123R stock-based compensation	(1.9	)	(1.4	)	(0.8	)	(0.6	)
Amortization of Macromedia deferred compensation	(0.9	)	(0.9	)	(0.3	)	0.4
Amortization of purchased intangibles and incomplete technology	(0.1	)	—		—		1.3
Non-GAAP	18.1	%	30.8	%	8.3	%	26.3	%

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The following table shows the Company’s reconciliation of non-GAAP to GAAP operating expenses for the quarter ended June 2, 2006.

	Operating Expenses
GAAP	$	421,941
SFAS 123R stock-based compensation	(25,945		)
Amortization of Macromedia deferred compensation	(13,510		)
Restructuring and other charges	(1,235		)
Amortization of purchased intangibles and incomplete technology	(17,806		)
Non-GAAP	$	363,445

The following table shows the Company’s reconciliation of non-GAAP to GAAP gross margin for the quarter ended June 2, 2006.

	Gross Margin
GAAP	89.7	%
SFAS 123R stock-based compensation	0.1
Amortization of Macromedia deferred compensation	0.2
Amortization of purchased intangibles and incomplete technology	5.4
Non-GAAP	95.4	%

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Third Quarter and Full Fiscal Year 2006 Non-GAAP Financial Targets

The following table shows Adobe’s non-GAAP financial targets reconciled to GAAP financial targets included in this release.

	Third Quarter Fiscal 2006						Fiscal 2006
	Low			High			Low			High
GAAP operating margin	16		%	19		%	21		%	22		%
Amortization of purchased technology	6			6			5			5
Amortization of purchased intangibles	3			3			3			3
SFAS 123R stock-based compensation	6			5			5			5
Amortization of Macromedia deferred compensation	2			2			2			2
Restructuring and other charges	—			—			1			1
Non-GAAP operating margin	33		%	35		%	37		%	38		%
Diluted net income per share:
GAAP net income per share	$	0.13		$	0.16		$	0.70		$	0.76
Amortization of purchased technology, net of tax	0.04			0.04			0.17			0.17
Amortization of purchased intangibles, net of tax	0.02			0.02			0.08			0.08
SFAS 123R stock-based compensation, net of tax	0.04			0.03			0.14			0.13
Amortization of Macromedia deferred compensation, net of tax	0.02			0.02			0.08			0.08
Restructuring and other charges, net of tax	—			—			0.03			0.03
Non-GAAP net income per share	$	0.25		$	0.27		$	1.20		$	1.25
Shares used in computing diluted net income per share	607.0			607.0			612.0			612.0

Adobe continues to provide all information required in accordance with GAAP, but it believes that evaluating its ongoing operating results may not be as useful if an investor is limited to reviewing only GAAP financial measures. Accordingly, Adobe uses non-GAAP financial information to evaluate its ongoing operations and for internal planning and forecasting purposes. Adobe’s management does not itself, nor does it suggest that investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, financial information prepared in accordance with GAAP. Adobe presents such non-GAAP financial measures in reporting its financial results to provide investors with an additional tool to evaluate Adobe’s operating results in a manner that focuses on what Adobe believes to be its ongoing business operations. Adobe’s management believes it is useful for itself and investors to review, as applicable,  both GAAP information that includes the stock compensation impact of SFAS 123R, restructuring and other charges, amortization of purchased intangibles and incomplete technology, amortization of Macromedia deferred compensation,  investment gains and losses, tax differences related to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation, the net tax impact of the repatriation of certain foreign earnings, and the non-GAAP measures that exclude such information in order to assess the performance of Adobe’s business and for planning and forecasting in subsequent periods. Whenever Adobe uses such a non-GAAP financial

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measure, it provides a reconciliation of the non-GAAP financial measure to the most closely applicable GAAP financial measure. Investors are encouraged to review the related GAAP financial measures and the reconciliation of these non-GAAP financial measures to their most directly comparable GAAP financial measure as detailed above.

For all fiscal 2006 periods presented, Adobe’s GAAP financial information and targets include the stock compensation impact of SFAS 123R, restructuring and other charges, amortization of purchased intangibles and incomplete technology, amortization of Macromedia deferred compensation, and tax differences related to the timing and deductibility of the Macromedia acquisition-related charges and SFAS 123R stock-based compensation. Also, in accordance with GAAP, Adobe incurs investment gains and losses from its venture program. These charges are otherwise unrelated to Adobe’s ongoing business operations and are excluded from its non-GAAP financial information and targets.

In fiscal 2005, Adobe included the net tax impact of the repatriation of certain foreign earnings. This tax impact is not indicative of Adobe’s ongoing business operations and thus is excluded from its non-GAAP financial information.

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