8-K

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): December 14, 2006

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

Delaware	0-15175	77-0019522
(State or other jurisdiction of incorporation)	(Commission File Number)	(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):

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

o      Soliciting 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))

o      Pre-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 December 14, 2006, the Registrant issued a press release announcing its financial results for its fourth fiscal quarter and fiscal year ended December 1, 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 operating margin and non-GAAP earnings per share for the first fiscal quarter and fiscal year 2007.

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 and the related tax impact, (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) 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.  Management uses these measures to help it make budgeting decisions, for example, as between product development expenses and research and development, sales and marketing and general and administrative expenses. 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. Prior to the adoption of SFAS 123(R) in fiscal 2006, Adobe did not include expenses related to employee stock options and employee stock purchases directly in its financial statements, but elected, as permitted by SFAS 123, to disclose such expenses in the footnotes to its financial statements.  As Adobe applies SFAS 123(R), we believe that it is useful to investors to understand the impact of the application of SFAS 123(R) to our operational performance, liquidity and our ability to invest in research and development and fund acquisitions and capital expenditures.  While stock-based compensation expense calculated in accordance with SFAS 123(R) constitutes an ongoing and recurring expense, such expense is excluded from non-GAAP results because it is not an expense that typically requires or will require cash settlement by Adobe and because such expense is not used by management to assess the core profitability of our business

2

operations. We further believe these measures are useful to investors in that they allow for greater transparency to certain line items in our financial statements.  In addition, excluding this item from various non-GAAP measures facilitates comparisons to our competitors’ operating results.

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. Purchased intangibles include (a) developed technology and (b) core technology and patents. Developed technology relates primarily to Macromedia products across all of Macromedia product lines that had reached technological feasibility as of December 2005. Core technology and patents represent primarily a combination of Macromedia’s processes, patents and trade secrets developed through years of experience in design and development of their products. We expect to amortize for accounting purposes the fair value of the purchased intangibles based on the pattern in which the economic benefits of the intangible assets will be consumed as revenue is generated.  Although, the intangible assets generate revenue for Adobe, we exclude this item because this expense is non-cash in nature and because we believe the non-GAAP financial measures excluding this item provide meaningful supplemental information regarding our operational performance, liquidity and our ability to invest in research and development and fund acquisitions and capital expenditures.  In addition, excluding this item from various non-GAAP measures facilitates management’s internal comparisons to Adobe’s historical operating results and comparisons to our competitors’ operating results.

D.            Amortization of Macromedia deferred compensation.  Adobe is amortizing deferred compensation related to unvested options assumed in connection with its acquisition of Macromedia in December 2005. The deferred compensation is expected to be fully amortized by the end of fiscal 2007.  Adobe excludes these items because these expenses are non-cash in nature and because the non-GAAP financial measures which exclude this item provide meaningful supplemental information regarding our operational performance, liquidity, and our ability to invest in research and development and fund acquisitions and capital expenditures.  We further believe that excluding this expense is useful to investors in that it allows for greater transparency to certain line items in our financial statements.  In addition, excluding this item from various non-GAAP measures facilitates management’s internal comparisons to Adobe’s historical operating results and comparisons to our competitors’ operating results.

E.             Investment gains and losses and the related tax impact.  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 and the related tax impact 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

3

operation of its business.

H.            Net tax impact of the repatriation of certain foreign earnings. In the first quarter of 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 (products, 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

4

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.

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 December 14, 2006

5

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: December 14, 2006	By:	/s/ KAREN COTTLE
		Karen Cottle
		Senior Vice President, General Counsel and Secretary

6

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release issued on December 14, 2006 entitled “Adobe Reports Record Fourth Quarter and Fiscal Year 2006 Revenue.”

7

EX-99.1

Exhibit 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 Record Fourth Quarter and Fiscal Year 2006 Revenue

Company Achieves 31 Percent Annual Revenue Growth

SAN JOSE, Calif. — December 14, 2006 — Adobe Systems Incorporated (Nasdaq:ADBE) today reported financial results for its fourth quarter and fiscal year ended December 1, 2006.   The Company’s results reflect the acquisition of Macromedia in December 2005, and are compared to pre-acquisition results of prior fiscal periods as applicable.

In the fourth quarter of fiscal 2006, Adobe achieved record revenue of $682.2 million, compared to $510.4 million reported for the fourth quarter of fiscal 2005 and $602.2 million reported in the third quarter of fiscal 2006. On a year-over-year basis, this represents 34 percent revenue growth.  Adobe’s fourth quarter revenue target range was $655 to $685 million.

“Fiscal 2006 was another year of solid financial performance for Adobe,” said Bruce R. Chizen, Adobe chief executive officer. “We generated record revenue, and for the fourth consecutive year, achieved double digit revenue growth. At the same time, we successfully integrated Macromedia, leveraging our combined assets to provide platform-level solutions that redefine the way people engage with ideas and information.”

GAAP diluted earnings per share for the fourth quarter of fiscal 2006 were $0.30.  Adobe’s fourth quarter GAAP EPS target range was $0.29 to $0.32.

Non-GAAP diluted earnings per share were $0.33.  Non-GAAP diluted earnings per share exclude 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, investment gains, and tax differences due to the timing and deductibility of certain adjustments.  Adobe’s fourth quarter non-GAAP EPS target range was $0.32 to $0.34.

GAAP net income was $181.9 million for the fourth quarter of fiscal 2006, compared to $156.3 million reported in the fourth quarter of fiscal 2005, and $94.4 million in the third quarter of fiscal 2006.  Non-GAAP net income was $197.0 million for the fourth quarter of fiscal 2006, compared to $151.5 million in the fourth quarter of fiscal 2005, and $171.5 million in the third quarter of fiscal 2006.  Non-GAAP net income 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, investment gains and losses, and tax differences due to the timing and deductibility of certain adjustments as well as the net tax impact of the repatriation of certain foreign earnings.

GAAP diluted earnings per share for the fourth quarter of fiscal 2006 were $0.30 based on 602.2 million weighted average shares. This compares with GAAP diluted earnings per share of $0.31 reported in the fourth quarter of fiscal 2005, based on 508.6 million weighted average shares, and GAAP diluted earnings per share of $0.16 reported in the third quarter of fiscal 2006, based on 600.9 million weighted average shares.

Adobe’s GAAP operating income was $161.5 million in the fourth quarter of fiscal 2006, compared to $191.9 million in the fourth quarter of fiscal 2005 and $110.0 million in the third quarter of fiscal 2006.  As a percent of revenue, GAAP operating income in the fourth quarter of fiscal 2006 was 23.7 percent, compared to 37.6 percent in the fourth quarter of fiscal 2005 and 18.3 percent in the third quarter of fiscal 2006.

Adobe’s non-GAAP operating income was $254.0 million in the fourth quarter of fiscal 2006, compared to $191.9 million in the fourth quarter of fiscal 2005 and $207.2 million in the third quarter of fiscal 2006.  Non-GAAP operating income 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.  As a percent of revenue, non-GAAP operating income in the fourth quarter of fiscal 2006 was 37.2 percent, compared to 37.6 percent in the fourth quarter of fiscal 2005 and 34.4 percent in the third quarter of fiscal 2006.

Adobe Reports Record Annual Revenue in Fiscal Year 2006

In fiscal year 2006, Adobe achieved record revenue of $2.575 billion, compared to $1.966 billion in fiscal 2005.  On a year-over-year basis, annual revenue grew 31 percent.

Adobe’s annual GAAP net income was $504.4 million in fiscal 2006, compared to $602.8 million in fiscal 2005.  Adobe’s annual non-GAAP net income was $752.5 million in fiscal 2006, compared to $575.1 million in fiscal 2005.  Non-GAAP net income 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, investment gains and losses, and tax differences due to the timing and

2

deductibility of certain adjustments as well as the net tax impact of the repatriation of certain foreign earnings.

GAAP diluted earnings per share for fiscal 2006 were $0.82.  Non-GAAP diluted earnings per share for fiscal 2006 were $1.23.  Non-GAAP diluted earnings per share exclude, 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, investment gains and losses, and tax differences due to the timing and deductibility of certain adjustments.

Adobe Provides First Quarter FY2007 and Fiscal Year 2007 Financial Targets

For the first quarter of fiscal 2007, Adobe announced it is targeting revenue of $640 million to $670 million.  The Company also is targeting a GAAP operating margin of approximately 19 to 21 percent in the first quarter.  On a non-GAAP basis, which excludes acquisition-related costs and SFAS 123R stock-based compensation, the Company is targeting a first quarter operating margin of approximately 33 to 34 percent.

In addition, Adobe is targeting its share count to be between 609 million and 611 million shares in the first quarter of fiscal 2007.  The Company also is targeting other income in its first quarter to be approximately $20 million to $22 million, with a GAAP and non-GAAP tax rate of approximately 26 to 28 percent.

These targets lead to a first quarter GAAP earnings per share target range of approximately $0.17 to $0.20.  On a non-GAAP basis, which excludes acquisition-related costs, SFAS 123R stock-based compensation, and tax differences due to the timing and deductibility of certain adjustments, the Company is targeting earnings per share of approximately $0.28 to $0.30.

For fiscal year 2007, Adobe announced it is targeting annual revenue growth of approximately 15 percent.  The Company also is targeting a GAAP operating margin of approximately 25 to 27 percent, and a non-GAAP operating margin – which excludes acquisition-related costs and SFAS 123R stock-based compensation – of approximately 37 to 38 percent.

3

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 principles, 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.

4

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

	Three Months Ended					Year Ended
	December 1, 2006			December 2, 2005		December 1, 2006		December 2, 2005
Revenue:
Products	$	653,805		$	498,457	$	2,484,710	$	1,923,278
Services and support	28,370			11,914		90,590		43,043
Total revenue	682,175			510,371		2,575,300		1,966,321
Total cost of revenue:
Products	61,080			24,720		226,506		89,942
Services and support	18,545			5,975		65,951		22,636
Total cost of revenue	79,625			30,695		292,457		112,578
Gross profit	602,550			479,676		2,282,843		1,853,743
Operating Expenses:
Research and development	142,513			94,647		543,781		365,328
Sales and marketing	222,328			147,229		863,746		593,323
General and administrative	58,973			45,870		236,297		166,658
Restructuring and other charges	(518		)	—		19,733		—
Amortization of purchased intangibles	17,762			—		69,873		—
Total operating expenses	441,058			287,746		1,733,430		1,125,309
Operating income	161,492			191,930		549,413		728,434
Non-operating income:
Investment income (loss), net	64,967			4,998		61,249		(1,301		)
Interest and other income	19,622			10,291		67,185		38,643
Total non-operating income	84,589			15,289		128,434		37,342
Income before income taxes	246,081			207,219		677,847		765,776
Provision for income taxes	64,226			50,968		173,427		162,937
Net income	$	181,855		$	156,251	$	504,420	$	602,839
Basic net income per share	$	0.31		$	0.32	$	0.85	$	1.23
Shares used in computing basic net income per share	584,798			492,517		593,750		489,921
Diluted net income per share	$	0.30		$	0.31	$	0.82	$	1.19
Shares used in computing diluted net income per share	602,175			508,562		612,222		508,070
Cash dividends declared per share	$	—		$	—	$	—	$	0.00625

5

Condensed Consolidated Balance Sheets

(In thousands, except per share data; unaudited)

	December 1,			December 2,
	2006			2005
ASSETS
Current assets:
Cash and cash equivalents	$	772,500		$	420,818
Short-term investments	1,508,379			1,280,016
Trade receivables, net	356,815			173,245
Other receivables	51,851			31,504
Inventories	3,596			3,480
Deferred income taxes	155,613			59,548
Prepaid expenses and other current assets	35,715			40,805
Total current assets	2,884,469			2,009,416
Property and equipment, net	219,317			103,549
Goodwill	2,149,494			118,683
Purchased and other intangibles, net	506,405			16,477
Investment in lease receivable	126,800			126,800
Other assets	68,183			66,228
Total assets	$	5,954,668		$	2,441,153
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade and other payables	$	55,031		$	41,042
Accrued expenses	297,550			226,915
Accrued restructuring	10,088			70
Income taxes payable	177,877			154,529
Deferred revenue	130,310			57,839
Total current liabilities	670,856			480,395
Other long-term liabilities
Deferred revenue	32,644			9,731
Deferred income taxes	70,715			78,800
Accrued restructuring	21,984			—
Other long-term liabilities	7,982			7,063
Total liabilities	804,181			575,989
Stockholders’ equity:
Common stock, $0.0001 par value	56			54
Additional paid-in-capital	2,508,961			1,378,114
Retained earnings	3,316,402			2,811,982
Accumulated other comprehensive income (loss)	6,344			(914		)
Deferred compensation	(57,352		)	—
Treasury stock at cost, net of re-issuances	(623,924		)	(2,324,072		)
Total stockholders’ equity	5,150,487			1,865,164
Total liabilities and stockholders’ equity	$	5,954,668		$	2,441,153

6

Condensed Consolidated Statements of Cash Flows

(In thousands; unaudited)

	Three Months Ended
	December 1, 2006			December 2, 2005
Cash flows from operating activities:
Net income	$	181,855		$	156,251
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	72,543			16,453
Stock-based compensation	39,512			101
Deferred income taxes	(41,124		)	33,226
Provision for losses on receivables	383			369
Tax benefit from employee stock option plans	—			19,050
Excess tax benefits from stock-based compensation	(61,531		)	—
Net gains on sales and impairments of investments	(74,269		)	(4,995		)
Changes in operating assets and liabilities, net of acquired assets and liabilities:
Receivables	(78,358		)	(7,993		)
Other current assets	194			(4,075		)
Trade and other payables	16,407			3,614
Accrued expenses	44,199			22,478
Accrued restructuring	(4,805		)	—
Income taxes payable	104,006			(19,764		)
Deferred revenue	38,163			7,560
Net cash provided by operating activities	237,175			222,275
Cash flows from investing activities:
Purchases of short-term investments	(515,209		)	(280,294		)
Maturities of short-term investments	81,810			91,347
Sales of short-term investments	281,512			345,359
Purchases of property and equipment	(23,549		)	(10,791		)
Purchases of long-term investments and other assets	(26,613		)	(7,858		)
Proceeds from sale of equity securities and other assets	82,302			97
Net cash provided by (used for) investing activities	(119,747		)	137,860
Cash flows from financing activities:
Purchases of treasury stock	(200,163		)	(500,007		)
Proceeds from issuance of treasury stock	148,512			106,882
Excess tax benefits from stock-based compensation	61,531			—
Net cash provided by (used for) financing activities	9,880			(393,125		)
Effect of foreign currency exchange rates on cash and cash equivalents	438			(360		)
Net increase (decrease) in cash and cash equivalents	127,746			(33,350		)
Cash and cash equivalents at beginning of period	644,754			454,168
Cash and cash equivalents at end of period	$	772,500		$	420,818

7

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.

	Three Months Ended								Year Ended
	December 1, 2006			December 2, 2005			September 1, 2006		December 1, 2006			December 2, 2005
GAAP operating income	$	161,492		$	191,930		$	110,033	$	549,413		$	728,434
SFAS 123R stock-based compensation*	30,006			—			27,186		106,846			—
Amortization of Macromedia deferred compensation*	9,505			—			15,471		63,686			—
Restructuring and other charges	(518		)	—			32		19,733			—
Amortization of purchased intangibles and incomplete technology*	53,484			—			54,527		217,006			—
Non-GAAP operating income	$	253,969		$	191,930		$	207,249	$	956,684		$	728,434
GAAP net income	$	181,855		$	156,251		$	94,396	$	504,420		$	602,839
SFAS 123R stock -based compensation, net of tax	17,133			—			20,487		76,336			—
Amortization of Macromedia deferred compensation, net of tax	5,427			—			11,659		45,501			—
Restructuring and other charges, net of tax	(296		)	—			24		14,098			—
Amortization of purchased intangibles and incomplete technology, net of tax	30,539			—			41,092		155,040			—
Investment (gain)loss, net of tax	(37,672		)	(3,734		)	3,827		(42,851		)	975
Tax on foreign repatriation, net of tax	—			(1,043		)	—		—			(28,693		)
Non-GAAP net income	$	196,986		$	151,474		$	171,485	$	752,544		$	575,121
Diluted net income per share:
GAAP net income	$	0.30		$	0.31		$	0.16	$	0.82		$	1.19
SFAS 123R stock -based compensation, net of tax	0.03			—			0.03		0.13			—
Amortization of Macromedia deferred compensation, net of tax	0.01			—			0.02		0.07			—
Restructuring and other charges, net of tax	0.00			—			0.00		0.02			—
Amortization of purchased intangibles and incomplete technology, net of tax	0.05			—			0.07		0.26			—
Investment (gain)loss, net of tax	(0.06		)	(0.01		)	0.01		(0.07		)	0.00
Tax on foreign repatriation, net of tax	—			(0.00		)	—		—			(0.06		)
Non-GAAP net income	$	0.33		$	0.30		$	0.29	$	1.23		$	1.13
Shares used computing diluted net income per share	602,175			508,562			600,882		612,222			508,070

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

8

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 December 1, 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	$	—	$	—	$	34,722	(a)
Cost of revenue – services and support	750		1,134		—
Research and development	13,506		3,656		1,000		(b)
Sales and marketing	9,897		3,276		—
General and administrative	5,853		1,439		—
Amortization of purchased intangibles	—		—		17,762		(a)
Total	$	30,006	$	9,505	$	53,484

(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 for the quarter ended December 1, 2006.

	Operating Expense as a Percent of Revenue
	Research and Development		Sales and Marketing		General and Administrative
GAAP	20.9	%	32.6	%	8.6	%
SFAS 123R stock-based compensation	(2.0	)%	(1.5	)%	(0.9	)%
Amortization of Macromedia deferred compensation	(0.6	)%	(0.4	)%	(0.1	)%
Amortization of purchased intangibles and incomplete technology	(0.1	)%	—		—
Non-GAAP	18.2	%	30.7	%	7.6	%

9

The following table shows the Company’s reconciliation of non-GAAP to GAAP operating expenses for the quarter ended December 1, 2006.

	Operating Expenses
GAAP	$	441,058
SFAS 123R stock-based compensation	(29,255		)
Amortization of Macromedia deferred compensation	(8,372		)
Restructuring and other charges	518
Amortization of purchased intangibles and incomplete technology	(18,762		)
Non-GAAP	$	385,187

The following table shows the Company’s reconciliation of non-GAAP to GAAP gross margin for the quarter ended December 1, 2006.

	Gross Margin
GAAP	88.3	%
SFAS 123R stock-based compensation	0.1	%
Amortization of Macromedia deferred compensation	0.2	%
Amortization of purchased intangibles and incomplete technology	5.1	%
Non-GAAP	93.7	%

The following table shows the Company’s reconciliation of non-GAAP to GAAP operating margin for fiscal 2006 and 2005.

	2006		2005
GAAP	21.3	%	37.0	%
SFAS 123R stock-based compensation	4.1	%	—
Amortization of Macromedia deferred compensation	2.5	%	—
Restructuring and other charges	0.8	%	—
Amortization of purchased intangibles and incomplete technology	8.4	%	—
Non-GAAP	37.1	%	37.0	%

The following table shows the Company’s reconciliation of non-GAAP to GAAP effective tax rate for the quarter ended December 1, 2006.

	Effective
	Tax Rate
GAAP	26.1	%
SFAS 123R stock-based compensation	0.5	%
Amortization of Macromedia deferred compensation	0.1	%
Amortization of purchased intangibles and incomplete technology	0.2	%
Investment gain	1.1	%
Non-GAAP	28.0	%

First Quarter and Fiscal Year 2007 Non-GAAP Financial Targets

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

10

	First Quarter Fiscal 2007				Fiscal Year 2007
	Low		High		Low		High
GAAP operating margin	19	%	21	%	25	%	27	%
Purchase accounting adjustments:
Amortization of purchased technology	4		4		4		4
Amortization of other intangibles and deferred compensation	4		5		3		3
Stock-based compensation impact of SFAS 123R	6		4		5		4
Non-GAAP operating margin	33	%	34	%	37	%	38	%

	First Quarter Fiscal 2007
	Low		High
Diluted net income per share:
GAAP earnings per share	$	0.17	$	0.20
Purchase accounting adjustments:
Amortization of purchased technology	0.03		0.03
Amortization of other intangibles and deferred compensation	0.03		0.03
Stock-based compensation impact of SFAS 123R	0.05		0.04
Non-GAAP earnings per share	$	0.28	$	0.30
Shares used in computing diluted net income per share	611.0		609.0

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 due to the timing and deductibility of certain adjustments, 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 measure, it provides a reconciliation of the non-GAAP financial measure to

11

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 due to the timing and deductibility of certain adjustments. 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.

12