QuickLinks

# UNITED	STATES

# SECURITIES	AND	EXCHANGE	COMMISSION

# (Mark	One)

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

# For	the	fiscal	year	ended	December	3,	1999

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

# ADOBE	SYSTEMS	INCORPORATED

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	or	other	jurisdiction	of incorporation	or	organization)

345	Park	Avenue,	San	Jose,	California

(Address	of	principal	executive	offices)

(I.R.S.	Employer Identification	No.)

(Zip	Code)

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

Securities	registered	pursuant	to	Section	12(b)	of	the	Act:	None

Securities	registered	pursuant	to	Section	12(g)	of	the	Act:	Common	Stock

				Indicate	by	check	mark	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	/	/

				Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	Item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of	the registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	Form	10-K.		/	/

				The	aggregate	market	value	of	the	common	stock	held	by	non-affiliates	of	the	registrant	as	of	December	31,	1999	was	$7,869,021,358.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

				Portions	of	the	definitive	Proxy	Statement	to	be	delivered	to	stockholders	in	connection	with	the	Notice	of	Annual	Meeting	of	Stockholders	to	be	held	on	April	26, 2000	are	incorporated	by	reference	into	Part	III.

|  | PART	I |  |
| :--- | :--- | :--- |
| Item\t1. | Business | 2 |
| Item\t2. | Properties | 14 |
| Item\t3. | Legal\tProceedings | 15 |
| Item\t4. | Submission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 15 |
|  | PART\tII |  |
| Item\t5. | Market\tfor\tRegistrant's\tCommon\tStock\tand\tRelated\tStockholder\tMatters | 16 |
| Item\t6. | Selected\tFinancial\tData | 17 |
| Item\t7. | Management's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 18 |
| Item\t7a. | Quantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 34 |
| Item\t8. | Financial\tStatements\tand\tSupplementary\tData | 36 |

| Item	9.<br>Changes	in	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure | 36 |
| :--- | :--- |
| PART\tIII |  |
| Item\t10.\nDirectors\tand\tExecutive\tOfficers\tof\tthe\tRegistrant | 37 |
| Item\t11.\nExecutive\tCompensation | 37 |
| Item\t12.\nSecurity\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement | 37 |
| Item\t13.\nCertain\tRelationships\tand\tRelated\tTransactions | 37 |
| PART\tIV |  |
| Item\t14.\nExhibits,\tFinancial\tStatement\tSchedule,\tand\tReports\ton\tForm\t8-K | 38 |
| Signatures | 41 |
| Summary\tof\tTrademarks | 42 |
| Financial\tStatements | 43 |
| Financial\tStatement\tSchedule | 82 |

# Exhibits

# Forward-Looking	Statements

				In	addition	to	historical	information,	this	Annual	Report	on	Form	10-K	contains	forward-looking	statements	that	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,	those	discussed	in	the	section	entitled "Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations—Factors	That	May	Affect	Future	Results	of	Operations."	You	should carefully	review	the	risks	described	in	other	documents	we	file	from	time	to	time	with	the	Securities	and	Exchange	Commission,	including	the	Quarterly	Reports	on Form	10-Q	to	be	filed	in	2000.	When	used	in	this	report,	the	words	"expects,"	"anticipates,"	"intends,"	"plans,"	"believes,"	"seeks,"	"estimates,"	and	similar	expressions are	generally	intended	to	identify	forward-looking	statements.	You	should	not	place	undue	reliance	on	the	forward-looking	statements,	which	speak	only	as	of	the	date	of this	Annual	Report	on	Form	10-K.	We	undertake	no	obligation	to	publicly	release	any	revisions	to	the	forward-looking	statements	or	reflect	events	or	circumstances after	the	date	of	this	document.

# PART	I

# Item	1.	Business

				Founded	in	1982,	Adobe	Systems	Incorporated	("Adobe"	or	the	"Company")	is	a	provider	of	graphic	design,	publishing,	and	imaging	software	for	Web	and	print production.	We	offer	a	market-leading	line	of	application	software	products	for	creating,	distributing,	and	managing	information	of	all	types.	We	license	our	industry- standard	technologies	to	major	hardware	manufacturers,	software	developers,	and	service	providers,	and	offer	integrated	software	solutions	to	businesses	of	all	sizes. Our	software	runs	on	Microsoft	Windows,	Apple	Macintosh,	Linux,	and	UNIX	platforms.

				Adobe	was	originally	incorporated	in	California	in	October	1983	and	was	reincorporated	in	Delaware	in	May	1997.	We	maintain	executive	offices	and	principal facilities	at	345	Park	Avenue,	San	Jose,	California	95110-2704.	Our	telephone	number	is	408-536-6000.	We	maintain	a	World	Wide	Web	site	at	www.adobe.com.

				On	September	16,	1999,	Adobe's	Board	of	Directors	announced	a	two-for-one	stock	split,	effected	in	the	form	of	a	stock	dividend	of	our	common	stock	for stockholders	of	record	on	October	4,	1999.	The	stock	dividend	was	paid	on	October	26,	1999.	All	share	and	per	share	amounts	referred	to	in	this	Form	10-K	have	been adjusted	to	reflect	the	stock	split.

# BUSINESS	OVERVIEW

				In	1984,	Adobe	developed	the	software	that	initiated	desktop	publishing.	Today,	we	continue	to	be	uniquely	positioned	to	make	dramatic	changes	not	only	to	how society	creates	visually	rich	information	for	print	and	the	Web,	but	also	as	to	how	it	distributes	and	accesses	that	information	electronically.

				In	the	simplest	of	terms,	Adobe	helps	people	communicate	better.	By	delivering	powerful	graphic	design,	publishing,	and	imaging	software	for	print	and	Web production,	we	help	people	express,	share,	and	manage	their	ideas	in	imaginative	and	meaningful	new	ways.

				Our	strategy	is	to	address	the	needs	of	professional	publishers,	Web	publishers,	business	publishers,	and	consumers,	as	well	as	document	intensive	companies	that	are transitioning	from	paper	to	digital-based	processes	and	workflows.	We	execute	on	this	strategy	by	delivering	products	that	support	industry	standards	and	that	can	be deployed	on	multiple	computing	environments,	including	Microsoft	Windows,	Apple	Macintosh,	Linux,	and	UNIX.

# PRODUCTS	AND	MARKETS	OVERVIEW

				We	categorize	our	products	into	four	principal	business	segments:

# WEB	PUBLISHING

# Web	Publishing	Market	Opportunity

				Professional	Web	designers	use	Adobe's	Web	page	layout,	digital	video,	and	digital	imaging	software	to	enable	the	virtual	presentation	of	products	and	services	on	the Web,	allowing	companies	to	create	brand	differentiation	and	a	satisfying	Web	browsing	and	online	shopping	experience	for	customers.	Web	page	content,	which includes	graphics,	video,	digital	photograph	images,	animation,	navigational	buttons,	banners,	and	textual	items,	are	created	with	our	software	tools	and	integrated	into dynamic,	visually	appealing	web	pages.	Web	design	professionals	use	our	tools	to	make	their	Web	pages	stand	out	and	differentiate	their	companies'	Web	sites	from their	competitors'.

				As	use	of	the	Web	expands,	we	believe	businesses	throughout	the	world	will	continue	to	build	and	enhance	their	online	presence	on	the	Web.	We	also	believe	that	the number	of	Web	design	professionals	who	create	Web	pages	will	grow	to	meet	the	increased	online	needs	of	these	companies.

				In	addition,	companies	will	need	easier-to-use	methods	for	dynamically	populating	Web	pages	with	information	stored	in	databases,	or	data	that	changes	rapidly	and

comes	from	multiple	sources.	Companies	will	also	turn	to	Web	page	elements	that	use	motion	to	convey	messages,	such	as	animation	and	digital	movies.

				We	have	responded	to	these	growing	Internet	trends	with	several	new	releases	of	our	Web	Publishing	software	applications.	In	March	of	fiscal	1999,	we	released	a new	version	of	Adobe	GoLive,	which	is	a	professional	Web	design	and	publishing	tool.	In	July	of	fiscal	1999,	we	released	version	5.5	of	Adobe	Photoshop,	which includes	enhanced	capabilities	for	Web	image	and	graphic	production.	And	in	September	of	fiscal	1999,	we	released	Adobe	After	Effects	version	4.1,	which	offers	a	rich environment	for	compositing,	animation,	and	effects	capabilities	for	film	and	the	Web.

				We	also	developed	and	released	a	new	plug-in	for	Adobe	GoLive	called	DynamicLink	in	December	of	1999.	DynamicLink	is	a	module	that	automatically	generates Active	Server	Page	("ASP")	code	using	content	from	databases	and	allows	Web	page	designers	to	create	data-driven	Web	pages.

				We	expect	to	increase	our	worldwide	presence	in	Web	page	layout,	digital	video,	and	digital	imaging	software	markets	with	new	software	releases	and	updates	as these	markets	continue	to	grow.	We	will	also	work	to	integrate	our	products	more	seamlessly	with	each	other,	providing	Web	design	professionals	a	complete	and creative	working	environment.

# Web	Publishing	Products

				Adobe	ActiveShare—software	that	allows	consumers	to	share	photos	over	the	Web.	Includes	virtually	everything	needed	to	import,	edit,	manage	and	send	photos either	in	an	e-mail	message	or	directly	to	Adobe	Activeshare.com	for	sharing	on	the	Web.

				Adobe	After	Effects—software	used	to	create	sophisticated	animation,	motion	compositing,	and	special	effects	found	in	multimedia,	broadcast,	film	and	the	Web.

				Adobe	Dynamic	Media	Collection—suite	of	four	integrated	application	products	that	allows	users	to	produce	professional-quality	video,	film,	multimedia,	and	Web projects.	Suite	includes	Adobe	After	Effects,	Adobe	Premiere,	Adobe	Photoshop,	and	Adobe	Illustrator.

				Adobe	GoLive—professional	Web	design	and	publishing	software	which	provides	innovative	tools	Web	authors	require	to	design,	layout,	and	produce	cutting-edge Web	sites	without	the	need	for	complex	multimedia	programming.

				Adobe	ImageReady—now	found	in	Adobe	Photoshop,	this	tool	provides	a	comprehensive	environment	to	refine	and	prepare	web	graphics,	which	enables	a	user	to quickly	and	easily	assess	and	balance	the	trade-offs	between	size	and	quality	before	posting	images	to	a	web	site.

				Adobe	ImageStyler—a	software	tool	that	allows	users	to	quickly	add	graphics	and	special	effects	to	Web	sites	without	being	a	design	professional.

				Adobe	PageMill—a	tool	used	to	create	full-featured	Web	pages	without	requiring	user	knowledge	of	hypertext	mark-up	language	("HTML");	it	employs	easy	drag- and-drop	techniques	to	simplify	operation,	from	creating	or	importing	text	and	images	to	adding	audio,	video,	and	animation.

				Adobe	PhotoDeluxe—software	that	allows	consumers	and	small	businesses	to	easily	enhance	and	personalize	their	photos	for	a	wide	variety	of	applications	in	print and	electronic	media.

				Adobe	Photoshop—provides	photo	design	enhancement	capabilities	for	print,	the	Internet,	and	multimedia;	used	by	graphic	designers,	Internet	content	creators, Webmasters,	and	digital	photographers.

				Adobe	Photoshop	Limited	Edition—provides	a	smaller,	basic	set	of	the	image-editing	tools	found	in	Adobe	Photoshop.

				Adobe	Premiere—professional	digital	video-editing	software	used	to	create	broadcast-quality	movies	for	video,	film,	multimedia,	and	the	Web.

				Adobe	Web	Collection—a	comprehensive,	integrated	software	suite	that	allows	users	to	design	still	and	interactive	Web	graphics,	optimize	those	graphics	for efficient	downloading,	and	build	dynamic	Web	sites	that	support	the	latest	technology	and	standards.	Suite	includes	three	award-winning	Adobe	applications:	Adobe GoLive,	Adobe	Photoshop,	and	Adobe	Illustrator.

# PRINT	PUBLISHING

# Print	Publishing	Market	Opportunity

				Graphic	designers,	production	artists,	technical	writers,	and	prepress	professionals	use	Adobe's	solutions	for	professional	page	layout,	illustration,	business publishing,	and	printing	visually	rich	information.	Our	software	tools	are	used	to	create	much	of	the	printed	information	people	see	and	read	every	day,	including magazines,	newspapers,	catalogs,	advertisements,	brochures,	product	documentation,	technical	manuals,	books,	memos,	reports,	and	banners.	Consequently,	we	have significant	market	share	in	the	technical	publishing,	illustration,	typeface,	and	business	publishing/layout	markets.

				We	expect	to	maintain	and	grow	our	worldwide	presence	in	the	professional	publishing	markets	in	which	we	compete	and	increase	our	market	share	in	the professional	page	layout	market	through	licensing	and	adoption	of	our	InDesign	product,	our	new	professional	page	layout	product	that	shipped	in	the	third	quarter	of fiscal	1999.	We	will	also	work	to	integrate	our	products	more	seamlessly	with	each	other,	providing	print	professionals	a	complete	and	creative	working	environment.

# Print	Publishing	Products

				Adobe	Design	Collection—suite	of	four	award-winning	application	products	that	allows	consumers	to	create	and	produce	professional	images,	illustrations,	and layouts,	and	to	publish	documents	across	media.	Suite	includes	Adobe	InDesign,	Adobe	Photoshop,	Adobe	Illustrator,	and	Adobe	Acrobat.

				Adobe	Dimensions—a	3D	rendering	tool	for	life-like	modeling	and	visualization.	Brings	2D	structures	into	3D	and	applies	textured	surfaces,	custom	lighting	effects and	more.

				Adobe	Font	Folio—contains	the	entire	Adobe	Type	Library	of	more	than	2,500	typefaces	on	two	CD-ROMs,	unlocked	and	ready	to	use.

				Adobe	FrameMaker—an	application	for	authoring	and	publishing	long,	structured,	content-rich	documents	including	books,	documentation,	technical	manuals,	and reports;	provides	users	a	way	to	publish	their	content	to	multiple	output	formats,	including	print,	Adobe	Portable	Document	Format	("PDF"),	HTML,	Extensible	Markup Language	("XML"),	and	Microsoft	Word.

				Adobe	FrameMaker+SGML—integrates	all	of	the	capabilities	of	FrameMaker	with	additional	features	designed	to	simplify	the	SGML	and	XML	authoring	and publishing	processes.

				Adobe	Illustrator—an	illustration	design	tool	used	to	create	compelling	artwork	for	print	publications	and	the	Web.

				Adobe	InCopy—a	powerful	editorial	tool	for	seamless	collaboration	between	editors	and	designers;	InCopy	is	a	companion	to	Adobe	InDesign	and	is	sold	through Adobe's	system	integrator	partners.

				Adobe	InDesign—an	innovative,	new	page-layout	application	for	graphics	professionals.	Based	on	a	new,	open,	object-oriented	architecture	that	is	highly	extensible, it	enables	Adobe	and	its	industry	partners	to	deliver	powerful	publishing	solutions.

				Adobe	PageMaker	Plus—software	used	to	create	high-quality	business	documents	simply	and	reliably	with	robust	page	layout	tools,	templates,	and	stock	art.

				Adobe	PressReady—powerful	printing	software	used	by	professionals	and	based	on	Adobe	PostScript	3.	PressReady	turns	color	inkjet	printers	into	high-quality proofing	devices.

				Adobe	Publishing	Collection—suite	of	four	award-winning	application	products	that	allows	consumers	to	create	visually	compelling	print	and	online	communication. Suite	includes	Adobe	PageMaker	Plus,	Adobe	Photoshop,	Adobe	Illustrator,	and	Adobe	Acrobat.

				Adobe	Streamline—converts	scanned	bitmap	images	and	shapes	into	smooth	PostScript	line	art.

				Adobe	Type	Library—contains	over	2,500	Roman	and	almost	100	Japanese	high-quality	outline	typefaces	used	by	graphics	professionals	and	Internet	content	creators worldwide.

				Adobe	Type	Manager—provides	powerful,	easy	management	of	all	Type	1	and	TrueType	fonts.

# ePAPER	SOLUTIONS

# ePaper	Solutions	Market	Opportunity

				An	opportunity	exists	to	enable	intelligent	integration	of	paper	and	digital	document	communications	with	fidelity	and	reliability.	In	the	second	quarter	of	fiscal	1999, we	released	Adobe	Acrobat	4.0	software,	which	contained	new	and	enhanced	annotation,	collaboration,	digital	signature,	Web	capture,	and	security	features.	As	the cornerstone	of	Adobe's	ePaper	Solutions	platform,	we	believe	Acrobat	4.0	delivers	functionality	and	capabilities	that	are	needed	in	several	markets.

				Adobe	ePaper	Solutions,	which	also	include	Adobe	Acrobat	Reader	and	Adobe	PDF,	enable	users	to	transition	from	paper	to	digital-based	processes	and	workflows. Companies	in	markets	such	as	aerospace,	financial	services,	government,	insurance,	legal,	and	pharmaceutical—those	with	paper-intensive	processes—use	Adobe ePaper	Solutions	to	ensure	that	their	electronic	documents	are	delivered	reliably	and	securely	and	can	be	viewed	by	the	recipient	in	the	exact	form	that	the	originator intended.	Companies	can	reduce	paper	and	storage	costs	through	the	use	of	our	ePaper	Solutions	and	can	realize	productivity	gains.

				We	have	distributed	more	than	110	million	copies	of	Acrobat	Reader	from	our	Web	site.	Its	widespread	use	and	the	adoption	of	the	PDF	format	by	industries	and many	worldwide	government	bodies	have	contributed	to	a	dramatic	increase	in	revenue	from	Adobe	ePaper	Solution	products	in	1999.

				We	expect	to	continue	to	add	new	features	and	new	products	to	the	ePaper	Solutions	platform,	including	document	encryption	and	transactional	unlocking	capabilities that	address	the	growing	eBooks	marketplace.	We	also	believe	that	new	versions	of	ePaper	products	will	help	companies	integrate	legacy	paper	documents,	output	from office	and	database	applications,	and	other	paper-based	communication	devices	(such	as	faxes,	letters,	and	e-mails)	so	that	companies	and	even	governments	can	use	the Internet,	intranets,	and	extranets	as	a	communication	and	collaboration	platform.

# ePaper	Solutions	Products

				Adobe	Acrobat—software	that	allows	users	to	publish	and	distribute	business	documents	using	corporate	e-mail	and	intranets,	the	Internet,	or	CD-ROM.	Enables users	to	easily	convert	files	from	any	application	to	Adobe	PDF,	a	compact	cross-platform	electronic	format	that	generally	preserves	layout	fonts,	colors,	and	images. Adobe	Acrobat	software	includes	everything	needed	to	create	and	distribute	rich	electronic	documents	that	can	be	viewed	seamlessly	within	leading	Web	browsers.

				Adobe	Acrobat	Business	Basics—software	which	enables	business	users	to	collaborate	on	documents	with	review,	mark-up,	search,	digital	signature,	electronic	form, document	compare,	and	Web	capture	tools.

				Adobe	Acrobat	Capture—enables	conversion	of	legacy	paper-based	documents	into	indexable,	searchable,	platform-independent	electronic	PDF	files	for	archiving and	distribution	purposes.

				Adobe	Acrobat	Document	Server—server-based	tool	lets	workgroups	view	and	navigate	PDF	files	in	a	Web	browser	without	the	need	for	Acrobat	Reader	or	other client	software.

				Adobe	PDF	Merchant—server-based	technology	designed	to	be	integrated	into	existing	e-commerce	and	transaction	servers;	it	manages	encryption	of	Adobe	PDF files	and	the	distribution	of	keys	to	unlock	the	encryption	and	access	them.

				Acrobat	Reader	with	Web	Buy—free	software	that	allows	users	to	view,	search,	and	print	PDF	files.	The	free	Web	Buy	plug-in	provides	consumers	with	a	mechanism for	purchasing	and	viewing	electronic	Adobe	PDF	content	produced	using	Adobe	PDF	Merchant.

# OEM	POSTSCRIPT	AND	OTHER

# OEM	PostScript	and	Other	Market	Opportunity

				Graphics	professionals	and	professional	publishers	require	quality,	reliability,	and	efficiency	in	production	printing,	and	we	believe	our	printing	technology	provides state-of-the-art	functionality	to	meet	the	sophisticated	requirements	of	this	marketplace.	As	high-end	printing	systems	evolve	and	transition	to	fully	digital,	composite workflows,	Adobe	is	uniquely	positioned	to	be	a	supplier	of	software	and	technology	based	on	the	Adobe	PostScript,	Adobe	Postscript	3,	and	PDF	standards	that	it	has developed,	and	which	are	extensively	used	by	hardware	manufacturers	in	this	industry.

# OEM	PostScript	and	Other	Products

				Adobe	PostScript—a	page	description	language	that	delivers	high	quality	output,	cross-platform	compatibility,	and	top	performance	for	graphically-rich	printing output	from	corporate	desktop	printers	to	high-end	publishing	printers.

				Adobe	PostScript	3—a	page	description	language	that	takes	digital	printing	to	a	new	level,	providing	an	optimized	printing	environment	connected	to	corporate networks,	the	Internet,	and	digital	document	distribution	systems.

				Adobe	PostScript	Extreme—the	innovative	new	production	printing	architecture	that	integrates	Adobe	PostScript	and	Adobe	PDF.	This	architecture	has	been endorsed	by	the	printing	industry	as	the	new

standard	for	high-performance	print-on-demand,	direct-to-press,	and	high-resolution	imagesetter	printing	systems.

				Adobe	PrintGear—a	printing	architecture	that	redefines	the	standards	for	high-throughput,	low-cost,	high-quality	printing	for	the	small	office/home	office	and	small corporate	workgroup	environments.

				For	more	information	on	our	market	segments	and	information	about	geographic	areas,	please	refer	to	Note	16	of	Notes	to	Consolidated	Financial	Statements.

# COMPETITION

				The	markets	for	Adobe	products	are	characterized	by	intense	competition,	evolving	industry	standards,	rapid	technology	developments,	and	frequent	new	product introductions.	Our	future	success	will	depend	on	our	ability	to	enhance	our	existing	products,	introduce	new	products	on	a	timely	and	cost-effective	basis,	meet	changing customer	needs,	extend	our	core	technology	into	new	applications,	and	anticipate	or	respond	to	emerging	standards	and	other	technological	changes.

				The	Internet	market	is	a	constantly	evolving	and	highly	volatile	market,	characterized	by	rapid	technology	developments	and	frequent	new	product	introductions.	The needs	of	the	graphics	professional	are	rapidly	changing	to	encompass	on-line	publishing	as	well	as	print-based	publishing.	Adobe's	tools	in	this	market,	including	Adobe GoLive,	Adobe	Photoshop,	and	Adobe	ImageStyler,	face	significant	competition	from	companies	offering	similar	products	and	will	continue	to	face	competition	from emerging	products	and	technologies.	Some	of	these	competitors	include	Corel,	Jasc	Software,	Macromedia,	and	Microsoft.

				The	consumer	software	market,	which	is	focused	on	digital	imaging	and	Web	publishing,	is	characterized	by	intense	competition,	price	sensitivity,	brand	awareness, and	strength	in	retail	distribution.	We	face	direct	and	indirect	competition	in	these	markets	from	a	number	of	companies,	including	Jasc	Software,	MGI	Software,	and Microsoft.	We	believe	that	we	compete	favorably	with	our	Adobe	Photoshop	LE	and	Adobe	PhotoDeluxe	products	due	to	consumer	awareness	of	our	brand	in	digital imaging,	our	strong	relationships	with	critical	original	equipment	manufacturer	("OEM")	customers	and	market	influencers,	and	our	ability	to	leverage	core competencies	from	our	other	established	products.

				The	dynamic	media	market	is	an	increasingly	competitive	market	as	professional,	enthusiast,	and	home	users	migrate	away	from	analog	video	tools	towards	the	use	of digital	camcorders	and	digital	video	production.	Adobe	After	Effects	and	Adobe	Premiere	face	increased	competition	from	companies	such	as	Apple	Computer,	in-sync Corporation,	Media	100,	MGI	Software,	Avid,	and	Ulead	Systems.	We	believe	we	compete	favorably	with	our	products	in	these	markets	due	to	OEM	customer relationships	and	our	ability	to	leverage	core	competencies	and	integration	from	our	other	products	which	are	used	by	customers	in	these	markets.

				In	the	print	publishing	market,	we	offer	several	products	including	Adobe	InDesign,	Adobe	PageMaker,	Adobe	Illustrator,	and	Adobe	Type	Library.	We	believe	these individual	products	compete	favorably	on	the	basis	of	features	and	functionality,	large	installed	base,	ease	of	use,	product	reliability,	and	price	and	performance characteristics.	In	addition,	the	products	increasingly	work	well	together,	providing	broader	functionality	and	shortening	product	learning	time	for	the	individual	who uses	multiple	applications	to	complete	a	project.

				In	the	technical	authoring	and	publishing	market,	Adobe	FrameMaker	products	face	competition	from	large-scale	electronic	publishing	systems	developed	by	several companies,	including	Interleaf.	Participants	in	this	market	compete	based	on	the	quality	and	features	of	their	products,	the	level	of	customization

and	integration	with	other	publishing	system	components,	the	number	of	hardware	platforms	supported,	service,	and	price.	We	believe	we	can	successfully	compete	in this	market	based	upon	the	quality	and	features	of	the	Adobe	FrameMaker	product,	our	extensive	application	programming	interface,	the	large	number	of	platforms supported,	and	other	factors.

				A	number	of	companies	currently	offer	one	or	more	products	that	compete	directly	or	indirectly	with	one	or	more	of	Adobe's	publishing	products.	These	companies include	Corel,	Interleaf,	Macromedia,	Microsoft,	and	Quark.

				In	the	document	exchange	and	archive	area,	our	Adobe	ePaper	product	family	faces	competition	from	entrenched	office	applications,	internet	content creation/management	tools	that	use	Cascading	Style	Sheets	("CSS"),	XML,	HTML,	Tagged	Information	File	Format	("TIFF")	formats,	and	new	emerging	electronic book	formats	which	are	not	based	on	Adobe	PDF.	We	feel	the	Adobe	ePaper	product	family	competes	favorably	in	terms	of	the	combined	benefits	of	compression, visual	fidelity,	transmittal	time,	and	security	of	documents	expressed	using	Adobe	PDF.

				Emerging	standards	such	as	XML	and	new	standards	such	as	Scalable	Vector	Graphics	("SVG"),	Extensible	Stylesheet	Language	("XSL"),	and	the	Open	eBook ("OEB")	standard	are	being	developed	and	adopted,	and	Adobe	is	working	to	ensure	that	compatibility	exists	between	these	formats	and	the	Adobe	PDF	format,	as	well as	our	Acrobat	software	products	and	other	Adobe	applications.

				Competitors	for	Adobe	ePaper	Solutions	products	include	Microsoft,	Corel,	and	ScanSoft.

				We	believe	that	the	principal	competitive	factors	for	OEM	customers	in	selecting	a	page	description	language	or	a	printing	technology	are	product	capabilities,	market leadership,	reliability,	support,	engineering	development	assistance,	and	price.	We	believe	that	our	competitive	advantages	include	our	technology	competency,	OEM customer	relationships,	and	intellectual	property	portfolio.	Adobe	PostScript	and	Adobe	PrintGear	software	face	competition	from	Hewlett-Packard's	proprietary	PCL page	description	language	and	from	developers	of	page	description	languages	based	on	the	PostScript	language	standard,	including	Xionics	and	Harlequin.

# OPERATIONS

# Marketing	and	Sales

				We	market	and	distribute	our	products	through	sales	channels	which	include	distributors,	retailers,	systems	integrators,	software	developers,	and	value-added	resellers ("VARs"),	as	well	as	through	OEM	and	hardware	bundle	customers.	We	also	market	and	sell	our	products	directly	using	our	sales	force,	Adobe	call	centers,	and	through e-commerce	methods	via	our	Adobe.com	Web	site.

				We	support	our	worldwide	distribution	network	and	end-user	customers	with	international	offices	around	the	world,	including	locations	in	Australia,	Belgium,	Brazil,

Canada,	China,	Denmark,	France,	Germany,	Hong	Kong,	India,	Italy,	Japan,	Korea,	Mexico,	the	Netherlands,	New	Zealand,	Norway,	Scotland,	Singapore,	Spain,

Sweden,	Switzerland,	Taiwan,	and	the	United	Kingdom.

				We	license	our	Adobe	PostScript	software	and	other	printing	systems	technology	to	computer	and	printer	manufacturers,	who	in	turn	distribute	their	products worldwide.	We	derive	a	significant	portion	of	Adobe	PostScript	royalties	from	international	sales	of	printers,	imagesetters,	and	other	output	devices	by	our	OEM customers.

				For	information	regarding	our	significant	customers,	please	refer	to	Note	16	of	Notes	to	Consolidated	Financial	Statements.

# Order	Fulfillment

				The	procurement	of	the	various	components	of	packaged	products,	including	CDs	and	printed	materials,	and	the	assembly	of	packages	for	retail	and	other	applications products	is	controlled	by	order	fulfillment	operations.	We	outsource	all	of	our	order	fulfillment	activities	to	third	parties	in	the	United	States,	Europe,	and	Asia.

				To	date,	we	have	not	experienced	significant	difficulties	in	obtaining	raw	materials	for	the	manufacture	of	our	products	or	in	the	replication	of	CDs,	printing,	and assembly	of	components,	although	an	interruption	in	production	by	a	supplier	could	result	in	a	delay	in	shipment	of	Adobe's	products.	The	backlog	of	orders	as	of December	31,	1999	was	approximately	$33.5	million.

# Technical	Support	and	Education

				For	application	software,	a	technical	support	and	services	staff	responds	to	customer	queries	by	phone,	on-line,	via	e-mail	and	user-to-user	forums.	Free	technical phone	support	is	provided	to	customers;	for	customers	in	Europe,	until	our	release	of	the	second	new	full	version	after	the	version	purchased	by	the	customer,	and	for customers	in	the	rest	of	the	world,	up	to	a	maximum	of	90	days	upon	the	customer's	first	call.	We	have	also	invested	in	improving	self-help	and	on-line	technical	support capabilities	so	that	customers	can	find	answers	to	their	support	questions	via	Adobe's	Web	site	and	have	also	outsourced	our	initial	levels	of	technical	support	to	provide a	consistent	standard	for	customer	support	on	a	worldwide	basis.

				We	inform	customers	through	our	Adobe	Magazine	and	through	a	growing	series	of	how-to	books	published	by	Adobe	Press	pursuant	to	a	joint	publishing	agreement with	Macmillan	Computer	Publishing.	In	addition,	we	prepare	and	authorize	independent	trainers	to	teach	Adobe	software	classes	in	person	or	increasingly	via computer-based	and	internet-based	training	programs.	We	sponsor	workshops	led	by	our	own	graphics	staff,	interact	with	independent	user	groups,	and	conduct	regular beta-testing	programs.

# Investment	in	New	Markets

				We	own	a	majority	interest	in	three	venture	capital	limited	partnerships,	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III,	L.P.,	that	invest	in early	stage	companies	with	innovative	technologies.	These	companies	may	create	new	market	opportunities	for	us	or	enhance	our	existing	business.

				The	investments	in	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III,	L.P.	are	accounted	for	using	the	equity	method	of	accounting,	and accordingly,	the	investments	are	adjusted	to	reflect	the	Company's	share	of	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III,	L.P.'s	investment income	(loss)	and	dividend	distributions.	Adobe	Ventures	L.P.;	Adobe	Ventures	II	L.P.;	and	Adobe	Ventures	III,	L.P.	carry	their	investments	in	equity	securities	at estimated	fair	market	value	and	unrealized	gains	and	losses	are	included	in	investment	income	(loss).	The	stock	of	substantially	all	of	the	technology	companies	held	by the	limited	partnerships	at	December	3,	1999	is	not	publicly	traded,	and,	therefore,	there	is	no	established	market	for	these	investments.	As	such,	these	investments	are valued	based	on	the	most	recent	round	of	financing	involving	new	non-strategic	investors	and	estimates	made	by	the	general	partner,	a	third	party.	When	investments held	by	the	limited	partnerships	are	publicly	traded,	the	fair	value	of	such	investments	is	based	on	quoted	market	prices,	and	mark-to-market	adjustments	are	included	in investment	income.	In	general,	as	a	matter	of	policy	of	the	limited	partnerships,	the	investments	in	the	technology	companies	held	by	the	limited	partnerships	will	be distributed	to	the	partners	prior	to	the	investee	company's	initial	public	offering.

				In	March	1997,	as	part	of	our	venture	investing	program,	we	established	an	internal	limited	partnership,	Adobe	Incentive	Partners,	L.P.	("AIP"),	which	allows	certain of	the	Company's	executive	officers	to	participate	in	cash	or	stock	distributions	from	Adobe's	venture	investments.	Assets	held	by	AIP

include	Adobe's	entire	interests	in	Adobe	Ventures	L.P.	and	Adobe	Ventures	II,	L.P.	and	certain	equity	securities	of	privately-held	companies.	Adobe	is	both	the	general partner	and	a	limited	partner	of	AIP.	Other	limited	partners	are	executive	officers	of	the	Company	who	are	involved	in	Adobe's	venture	investing	activities	and	whose participation	is	deemed	critical	to	the	success	of	the	program.

				Adobe's	Class	A	senior	limited	partnership	interest	in	AIP	includes	both	a	liquidation	preference	and	a	preference	in	recovery	of	the	cost	basis	of	each	specific investment.	The	executives'	Class	B	junior	limited	partnership	interest	qualifies	for	partnership	distributions	only	after	(a)	Adobe	has	fully	recovered	the	cost	basis	of	its investment	in	the	specific	investee	company	for	which	a	distribution	is	made;	and	(b)	the	participating	executive	has	vested	in	his	or	her	distribution	rights.	The distribution	rights	generally	vest	on	a	monthly	basis	over	three	years,	such	that	the	rights	are	25%	vested	after	one	year,	50%	vested	after	two	years	and	fully	vested	at the	end	of	three	years.	The	limited	partnership	investments	are	restricted	to	investments	in	companies	that	were	private	at	the	time	of	the	establishment	of	AIP	or	when the	investment	is	made,	whichever	is	later.	Partnership	interests	may	be	allocated	to	designated	officers	only	while	the	investee	company	is	still	private.	In	fiscal	1999, the	participating	officers	received	aggregate	distributions	of	$7.5	million.	The	distribution	to	the	officers	represents	their	vested	portion	of	nonmarketable	securities	that became	marketable	as	a	result	of	a	public	offering,	as	well	as	their	vested	portion	of	cash	resulting	from	investments	that	were	liquidated	by	AIP.	At	December	3,	1999, the	minority	interest	held	by	the	participating	officers	was	$17.7	million	and	is	included	in	accrued	expenses	on	the	consolidated	balance	sheet.

				Our	portfolio	of	equity	investments,	including	those	held	by	AIP	on	December	3,	1999,	had	a	cost	basis	of	$114.2	million	and	a	recorded	fair	market	value	of $205.4	million.	In	fiscal	1999,	AIP	recorded	net	income	of	$96.4	million.	Gross	proceeds	from	the	sale	of	equity	securities	during	fiscal	1999	were	$63.9	million.	Our equity	investments	and	Adobe	Ventures	L.P.;	Adobe	Ventures	II	L.P.;	and	Adobe	Ventures	III,	L.P.'s	investments	in	equity	securities	at	December	3,	1999	consisted	of the	following	companies:

# Adobe	Ventures	L.P.	Equity	Investments

				We	intend	to	continue	investing	in	new	markets,	through	limited	partnerships	as	well	as	through	direct	investments,	although	we	currently	do	not	anticipate	investing further	through	AIP.

# PRODUCT	DEVELOPMENT

				Since	the	personal	computer	software	industry	is	characterized	by	rapid	technological	change,	a	continuous	high	level	of	expenditures	is	required	for	the	enhancement of	existing	products	and	the	development	of	new	products.	We	primarily	develop	our	software	internally.	We	occasionally	acquire	products	developed	by	others	by purchasing	the	stock	or	assets	of	the	business	entity	that	held	ownership	rights	to	the	technology.	In	other	instances,	we	have	licensed	or	purchased	the	intellectual property	ownership	rights	of	programs	developed	by	others	with	license	or	technology	transfer	agreements	that	may	obligate	us	to	pay	royalties,	typically	based	on	a percentage	of	the	revenues	generated	by	those	programs.

				During	the	fiscal	years	ended	December	3,	1999,	November	27,	1998,	and	November	28,	1997,	our	research	and	development	expenses,	including	costs	related	to contract	development,	were	$197.5	million,	$188.3	million,	and	$165.9	million,	respectively.	During	fiscal	1999,	we	acquired	substantially	all	of	the	assets	of	two software	companies,	through	separate	purchase	transactions,	for	an	aggregate	consideration	of	approximately	$3.6	million.	All	of	the	purchase	price	was	allocated	to	in- process	research	and	development	and	expensed	at	the	time	of	acquisition.	Additionally,	during	fiscal	year	1997,	we	acquired,	through	purchase	transactions,	three software	companies,	in	which	$6.0	million	of	the	purchase	price	was	allocated	to	in-process	research	and	development	and	expensed	at	the	time	of	the	acquisition.	See Management's	Discussion	and	Analysis	for	further	information.

# PRODUCT	PROTECTION

				We	regard	our	software	as	proprietary	and	protect	it	with	copyrights,	patents,	trademarks,	trade	secret	laws,	internal	and	external	nondisclosure	precautions,	and restrictions	on	disclosure	and	transferability	that	are	incorporated	into	our	software	license	agreements.	We	protect	the	source	code	of	our	software	programs	as	trade secrets,	and	make	source	code	available	to	OEM	customers	only	under	limited	circumstances	and	specific	security	and	confidentiality	constraints.

				Our	products	are	generally	licensed	to	end	users	on	a	"right	to	use"	basis	pursuant	to	a	license	that	is	nontransferable	and	restricts	the	use	of	the	products	to	the customer's	internal	purposes	on	a	designated	number	of	printers	or	computers.	We	also	rely	on	copyright	laws	and	on	"shrink	wrap"	and	electronic	licenses	that	are	not signed	by	the	end	user.	Copyright	protection	may	be	unavailable	under	the	laws	of	certain	countries.	The	enforceability	of	"shrink	wrap"	and	electronic	licenses	has	not been	conclusively	determined.	We	have	obtained	many	patents	and	have	registered	numerous	copyrights,	trademarks,	domain	names,	and	logos	in	the	United	States	and foreign	countries.

				Policing	unauthorized	use	of	computer	software	is	difficult,	and	software	piracy	is	a	persistent	problem	for	the	software	industry.	This	problem	is	particularly	acute	in international	markets.	We	conduct	vigorous	anti-piracy	programs.	Our	products	do	not	contain	copy	protection,	except	on	copies	for	international	distribution	in	certain countries.	Many	products,	including	Adobe	PageMaker,	Adobe	Photoshop,	and	Adobe	Illustrator,	incorporate	network	copy-detection	features.	These	capabilities	help encourage	compliance	with	our	license	agreements	by	alerting	customers	about	certain	concurrent	usage	problems	over	a	given	network.

				We	believe	that,	because	computer	software	technology	changes	and	develops	rapidly,	patent,	trade	secret,	and	copyright	protection	are	less	significant	than	factors such	as	the	knowledge,	ability,	and	experience	of	our	personnel,	brand	recognition,	contractual	relationships,	and	ongoing	product	development.

# EMPLOYEES

				As	of	December	31,	1999,	we	employed	2,760	people,	none	of	whom	are	represented	by	a	labor	union.	We	have	not	experienced	work	stoppages	and	believe	our employee	relations	are	good.	Competition	in	recruiting	personnel	in	the	software	industry,	especially	highly	skilled	engineers,	is	intense.	We	believe	our	future	success will	depend	in	part	on	our	continued	ability	to	recruit	and	retain	highly	skilled	technical,	management	and	marketing	personnel.

# EXECUTIVE	OFFICERS

				The	executive	officers	of	the	Company	as	of	February	16,	2000	are	as	follows:

Secretary

				A	biography,	including	the	principal	occupations	for	the	past	five	years	of	each	of	the	executive	officers,	is	provided	below.

				Dr.	Warnock	was	a	founder	of	the	Company	and	has	been	its	Chairman	of	the	Board	since	April	1989.	Since	September	1997,	he	has	shared	the	position	of	Chairman of	the	Board	with	Charles	M.	Geschke.	Dr.	Warnock	has	been	Chief	Executive	Officer	since	1982.	He	will	assume	the	title	of	President	in	April	2000	upon Dr.	Geschke's	retirement.	Dr.	Warnock	is	Chairman	of	Octavo	Corporation.	Dr.	Warnock	received	a	Ph.D.	in	electrical	engineering	from	the	University	of	Utah.

				Dr.	Geschke	was	a	founder	of	the	Company	and	has	been	its	President	since	April	1989.	In	September	1997,	Dr.	Geschke	assumed	the	position	of	Chairman	of	the Board,	sharing	that	office	with	John	E.	Warnock.	He	was	Chief	Operating	Officer	of	the	Company	from	December	1986	until	July	1994.	He	is	a	member	of	the	Board	of Directors	of	Rambus	Incorporated.	Dr.	Geschke	has	announced	his	retirement	as	President	of	the	Company	commencing	in	April	2000.	He	will	continue	to	serve	as	co- Chairman	of	the	Board.	Dr.	Geschke	received	a	Ph.D.	in	computer	science	from	Carnegie	Mellon	University.

				Mr.	Chizen	joined	the	Company	upon	the	closing	of	the	acquisition	of	Aldus	in	August	1994	as	Vice	President	and	General	Manager,	Consumer	Products	Division.	In December	1997,	he	was	promoted	to	Senior	Vice	President	and	General	Manager,	Graphic	Products	Division,	and	in	August	1998,	Mr.	Chizen	was	promoted	to Executive	Vice	President,	Products	and	Marketing.	Prior	to	joining	the	Company,	Mr.	Chizen	was	Vice	President	and	General	Manager,	Consumer	Division	of	Aldus Corporation	from	February	1994	to	August	1994,	and	from	November	1992	to	February	1994,	he	was	Vice	President	and	General	Manager,	Claris	Clear	Choice	for Claris	Corp.,	a	wholly	owned	subsidiary	of	Apple	Computer,	Inc.,	a	manufacturer	of	computers	and	software.	Mr.	Chizen	is	a	member	of	the	Board	of	Directors	of eCircles,	Inc.

				Mr.	Covert	joined	the	Company	in	April	1998	as	Vice	President	Finance	and	Operations	for	Worldwide	Field	Operations.	In	August	1998,	Mr.	Covert	was	appointed Senior	Vice	President	and	Chief	Financial	Officer,	and	in	April	1999	was	appointed	Executive	Vice	President.	From	July	1997	to	April	1998,	Mr.	Covert	was	Vice President	and	Chief	Financial	Officer	of	Philips	Components	NAFTA,	an	operating	entity	of	Philips	Electronics	NV.	From	January	1991	to	June	1997	Mr.	Covert	was	a Partner	in	the	firm	of	DHJ	&	Associates,	Inc.,	Consultants	and	Certified	Public	Accountants.	During	the	last	two	and	a	half	years	of	this	period	he	acted	in	a	full	time capacity	as	Chief	Financial	Officer	for	two	companies.	Prior	to	that	time	Mr.	Covert	held	senior	financial	management	positions	with	ISC	Systems	Corporation	and Northern	Telecom	Inc.

				Mr.	Freeman	joined	the	Company	upon	the	closing	of	the	acquisition	of	Aldus	in	August	1994	as	General	Manager	of	Asia-Pacific	and	Latin	America	("APL")	and became	Vice	President	of	APL	in	June	1996.	In	April	1999,	he	was	promoted	to	Senior	Vice	President	of	Worldwide	Sales	and	Support.	Before	joining	the	Company, Mr.	Freeman	was	Aldus'	General	Manager	for	the	Pacific	region	from	July	1991	to	August	1994.	Prior	to	that	time,	Mr.	Freeman	served	as	Marketing	and	Sales	Director for	Compaq	Computer	Corporation	helping	in	the	establishment	of	its	operations	in	the	Pacific.	Prior	to	joining	Compaq,	Mr.	Freeman	held	a	variety	of	sales	and marketing	positions	with	IBM.

				Ms.	Pouliot	joined	the	Company	in	July	1988	as	Associate	General	Counsel	and	became	the	Corporate	Secretary	in	April	1989.	In	December	1990,	she	was	promoted to	General	Counsel.	In	December	1992,	she	was	promoted	to	Vice	President	and	in	December	1997,	to	Senior	Vice	President.	Ms.	Pouliot	was	an	associate	at	the	law firm	of	Ware	&	Freidenrich	from	November	1983	until	she	joined	the	Company.

# Item	2.	Properties

				The	following	table	sets	forth	the	location,	approximate	square	footage,	and	use	of	each	of	the	principal	properties	used	by	Adobe.	We	lease	or	sublease	all	of	these properties.	Such	leases	expire	at	various	times	through	January	2014.	The	annual	base	rent	expense	for	all	facilities	(including	operating	expenses,	property	taxes,	and assessments)	is	currently	approximately	$26.0	million	and	is	subject	to	annual	adjustment.

| Location | Approximate<br>Square<br>Footage | Use |
| :--- | :--- | :--- |
| North\tAmerica: |  |  |
| 345\tPark\tAvenue | 360,000 | Research,\tproduct\tdevelopment,\tsales,\tmarketing\tand |
| San\tJose,\tCalifornia |  | administration |
| USA |  |  |
| 321\tPark\tAvenue | 280,000 | Research,\tproduct\tdevelopment,\tsales,\tmarketing\tand |
| San\tJose,\tCalifornia |  | administration |
| USA |  |  |
| 801\tN.\t34th\tStreet-Waterfront | 254,328 | Product\tdevelopment,\tsales,\tmarketing,\ttechnical\tsupport,\tand |
| Seattle,\tWashington |  | administration |
| USA |  |  |
| Europe: |  |  |
| Europlaza | 10,000 | Product\tdevelopment,\tsales,\tmarketing\tand\tadministration |

Japan:

Gate	City	Ohsaki	East	Tower 1-11-2	Ohsaki,	Shinagawa-ku

Product	development,	sales,	marketing,	and	administration

				In	general,	all	facilities	are	in	good	condition	and	are	operating	at	capacities	that	range	from	75%	to	100%.

				We	also	lease	office	space	in	the	United	States	and	various	other	countries	under	operating	leases.

				We	have	one	leased	office	building	in	San	Jose,	California	that	was	vacated	in	connection	with	the	restructuring	program	implemented	in	the	third	quarter	of	fiscal 1998.	We	have	subleased	the	building	but	still	have	a	commitment	under	this	lease	agreement.

# Item	3.	Legal	Proceedings

				On	February	6,	1996,	a	securities	class	action	complaint	was	filed	against	Adobe,	certain	of	its	officers	and	directors,	certain	former	officers	of	Adobe	and	Frame Technology	Corporation	("Frame"),	Hambrecht	&	Quist,	LLP	("H&Q"),	investment	banker	for	Frame,	and	certain	H&Q	employees,	in	connection	with	the	drop	in	the price	of	Adobe	stock	following	its	announcement	of	financial	results	for	the	quarter	ended	December	1,	1995.	The	complaint	was	filed	in	the	Superior	Court	of	the	State of	California,	County	of	Santa	Clara.	The	complaint	alleges	that	the	defendants	misrepresented	material	adverse	information	regarding	Adobe	and	Frame	and	engaged	in a	scheme	to	defraud	investors.	The	complaint	seeks	unspecified	damages	for	alleged	violations	of	California	law.	The	court	granted	plaintiffs'	motion	for	class certification	on	September	22,	1999.	We	believe	that	the	allegations	against	us	and	our	officers	and	directors	are	without	merit	and	intend	to	vigorously	defend	the lawsuit.	The	case	is	currently	in	the	discovery	phase.

				On	October	29,	1998,	Heidelberger	Druckmaschinen	AG,	a	German	company,	filed	a	complaint	alleging	that	Adobe	is	using	Heidelberger's	US	patent	number 4,393,399	for	the	partial	electronic	retouching	of	colors.	The	complaint	was	filed	in	the	United	States	District	Court	for	the	District	of	Delaware,	and	seeks	a	permanent injunction	and	unspecified	damages.	We	believe	that	the	allegations	against	us	are	without	merit	and	intend	to	vigorously	defend	the	lawsuit.

				Management	believes	that	the	ultimate	resolution	of	these	matters	will	not	have	a	material	impact	on	our	financial	position	or	results	of	operations.

# Item	4.	Submission	of	Matters	to	a	Vote	of	Security	Holders

				Not	applicable.

# PART	II

# Item	5.	Market	for	Registrant's	Common	Stock	and	Related	Stockholder	Matters

				Our	common	stock	is	traded	on	The	Nasdaq	National	Market	under	the	symbol	"ADBE."	On	December	31,	1999,	there	were	1,653	holders	of	record	of	our	common stock.	Because	many	of	such	shares	are	held	by	brokers	and	other	institutions	on	behalf	of	stockholders,	we	are	unable	to	estimate	the	total	number	of	stockholders represented	by	these	record	holders.	The	following	table	sets	forth	the	high	and	low	sales	price	per	share	of	our	common	stock	and	the	cash	dividends	paid	per	share,	for the	periods	indicated,	all	of	which	are	adjusted	for	the	two-for-one	stock	split	in	the	form	of	a	stock	dividend	effected	October	1999.

|  | High | Low | Per	Share |
| :--- | :--- | :--- | :--- |
| Fiscal\t1999: |  |  |  |
| First\tQuarter | $25.50 | $18.38 | $0.025 |
| Second\tQuarter | 40.53 | 22.72 | 0.025 |
| Third\tQuarter | 52.63 | 33.50 | 0.025 |
| Fourth\tQuarter | 79.00 | 47.53 | 0.025 |
| Fiscal\tYear | 79.00 | 18.38 | 0.10 |
| Fiscal\t1998: |  |  |  |
| First\tQuarter | $22.38 | $16.75 | $0.025 |
| Second\tQuarter | 25.94 | 19.97 | 0.025 |
| Third\tQuarter | 22.57 | 12.03 | 0.025 |
| Fourth\tQuarter | 24.00 | 11.82 | 0.025 |
| Fiscal\tYear | 25.94 | 11.82 | 0.10 |

				We	have	paid	cash	dividends	on	our	common	stock	each	quarter	since	the	second	quarter	of	1988.	In	March	1997,	we	established	the	venture	stock	dividend	program under	which	we	may,	from	time	to	time,	distribute	as	a	dividend-in-kind	shares	of	our	equity	holdings	in	investee	companies	to	our	stockholders.

				On	December	1,	1997,	we	dividended	one	share	of	Siebel	Systems,	Incorporated	("Siebel")	common	stock	for	each	600	shares	of	Adobe	common	stock	held	by stockholders	of	record	on	October	31,	1997.	An	equivalent	cash	dividend	was	paid	for	holdings	of	less	than	15,000	Adobe	shares	and	for	fractional	Siebel	shares.

				Under	the	terms	of	our	line	of	credit	agreement	and	corporate	headquarters	lease	agreement,	we	may	pay	cash	dividends	unless	an	event	of	default	has	occurred	or	we do	not	meet	certain	financial	ratios.	The	declaration	of	future	dividends,	whether	in	cash	or	in-kind,	is	within	the	discretion	of	Adobe's	Board	of	Directors	and	will depend	upon	business	conditions,	our	results	of	operations,	our	financial	condition,	and	other	factors.

# Item	6.	Selected	Financial	Data

				The	following	selected	consolidated	financial	data	(presented	in	thousands,	except	per	share	amounts	and	employee	data)	are	derived	from	the	Company's consolidated	financial	statements.	This	data	should	be	read	in	conjunction	with	the	consolidated	financial	statements	and	notes	thereto,	and	with	Item	7,	Management's Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations.

Years	Ended

|  | Dec.	3<br>1999 | Nov.	27<br>1998 | Nov.	28<br>1997 | Nov.	29<br>1996 | Dec.	1<br>1995 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Operations: |  |  |  |  |  |
| Revenue | $1,015,434 | $894,791 | $911,894 | $786,563 | $762,339 |
| Income\tbefore\tincome\ttaxes | 374,427 | 167,694 | 296,090 | 244,824 | 163,853 |
| Net\tincome(1) | 237,751 | 105,144 | 186,837 | 153,277 | 93,485 |
| Net\tincome\tper\tshare(1) |  |  |  |  |  |
| Basic | 1.97 | 0.79 | 1.30 | 1.06 | 0.66 |
| Diluted | 1.84 | 0.77 | 1.26 | 1.02 | 0.63 |
| Cash\tdividends\tdeclared\tper\tcommon\tshare(2) | 0.10 | 0.10 | 0.10 | 0.10 | 0.10 |
| Financial\tposition: |  |  |  |  |  |
| Cash\tand\tshort-term\tinvestments | 498,716 | 272,547 | 502,956 | 564,116 | 516,040 |
| Working\tcapital | 355,386 | 204,979 | 454,299 | 506,092 | 506,472 |
| Total\tassets | 803,859 | 767,331 | 940,071 | 1,001,393 | 872,827 |
| Stockholders'\tequity | 512,209 | 516,365 | 715,424 | 706,514 | 698,417 |
| Additional\tdata: |  |  |  |  |  |
| Worldwide\temployees | 2,745 | 2,664 | 2,654 | 2,222 | 2,322 |

All	share	and	per	share	amounts	referred	to	in	the	above	table	have	been	adjusted	to	reflect	the	two-for-one	stock	split	in	the	form	of	a	stock	dividend	effected October	26,	1999.

In	1999,	includes	investment	gains	of	$88.9	million,	restructuring	and	other	charges	of	$23.0	million,	and	acquired	in-process	research	and	development	of $3.6	million.	In	1998,	includes	investment	gains	of	$15.0	million	and	restructuring	and	other	charges	of	$38.2	million.	In	1997,	includes	investment	gains	of $34.3	million,	other	nonrecurring	gains	of	$0.6	million,	and	acquired	in-process	research	and	development	of	$6.0	million.	In	1996,	includes	investment	gains	of $68.9	million,	acquired	in-process	research	and	development	of	$21.3	million,	and	restructuring	charges	related	to	divested	products	of	$5.0	million.	In	1995, reflects	restructuring	charges	of	$31.5	million	related	to	the	acquisition	of	Frame	Technology	Corporation	("Frame")	and	acquired	in-process	research	and development	of	$15.0	million.

Dividends	prior	to	the	acquisition	of	Frame	on	October	28,	1995	have	not	been	restated	to	reflect	the	effects	of	the	poolings	of	interest.

# Item	7.	Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

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

				In	addition	to	historical	information,	this	Annual	Report	on	Form	10-K	contains	forward-looking	statements	that	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,	those	discussed	in	the	section	entitled "Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations—Factors	That	May	Affect	Future	Results	of	Operations."	You	should carefully	review	the	risks	described	in	other	documents	we	file	from	time	to	time	with	the	Securities	and	Exchange	Commission,	including	the	Quarterly	Reports	on Form	10-Q	to	be	filed	in	2000.	When	used	in	this	report,	the	words	"expects,"	"anticipates,"	"intends,"	"plans,"	"believes,"	"seeks,"	"estimates,"	and	similar	expressions are	generally	intended	to	identify	forward-looking	statements.	You	should	not	place	undue	reliance	on	these	forward-looking	statements,	which	speak	only	as	of	the	date of	this	Annual	Report	on	Form	10-K.	We	undertake	no	obligation	to	publicly	release	any	revisions	to	the	forward-looking	statements	or	reflect	events	or	circumstances after	the	date	of	this	document.

# RESULTS	OF	OPERATIONS

# Overview

				Founded	in	1982,	Adobe	Systems	Incorporated	("Adobe"	or	the	"Company")	is	a	provider	of	graphic	design,	publishing,	and	imaging	software	for	Web	and	print production.	We	offer	a	market-leading	line	of	application	software	products,	type	products,	and	content	for	creating,	distributing,	and	managing	information	of	all	types. We	license	our	technology	to	major	hardware	manufacturers,	software	developers,	and	service	providers,	and	we	offer	integrated	software	solutions	to	businesses	of	all sizes.	We	distribute	our	products	through	a	network	of	distributors	and	dealers,	value-added	resellers	("VARs"),	systems	integrators,	and	original	equipment manufacturer	("OEM")	customers;	direct	to	end	users	through	Adobe	call	centers;	and	through	our	own	Web	site	at	www.adobe.com.	We	have	operations	in	the Americas,	EMEA	(Europe,	Middle	East,	and	Africa),	and	Asia.

# Revenue

				Revenue	is	categorized	into	four	major	operating	segments:	Web	Publishing,	Print	Publishing,	ePaper	Solutions,	and	OEM	PostScript	and	Other.	The	Web	Publishing, Print	Publishing,	and	ePaper	Solutions	segments	include	application	products	revenue	that	is	derived	predominantly	from	shipments	of	application	software	programs marketed	through	retail,	VAR,	and	OEM	distribution	channels.	The	OEM	PostScript	and	Other	segment	includes	licensing	revenue,	which	is	made	up	of	royalties received	from	OEM	customers	who	ship	products	containing	Adobe's	PostScript	technology,	and	includes	revenue	from	divested	businesses.

				Revenue	from	the	Web	Publishing	segment	is	derived	primarily	from	the	sale	of	the	following	application	products:	Adobe	Photoshop,	Adobe	Premiere,	After Effects,	GoLive,	Adobe	PhotoDeluxe,	Adobe	Web	Collection,	Adobe	Dynamic	Media	Collection,	PageMill,	ImageStyler,	and	ActiveShare.	Print	Publishing	revenue comes	primarily	from	the	sale	of	the	following	application	products:	Adobe	Illustrator,	PageMaker,	InDesign,	FrameMaker,	Adobe	Publishing	Collection,	Adobe Design	Collection,	Adobe	Type	Manager,	Adobe	Type	Library,	PressReady,	Adobe	Font	Folio,	InCopy,	Adobe	Dimensions,	and	Streamline.	The	ePaper	Solutions segment	is	derived	from	the	sale	of	Adobe	Acrobat	software	and	other	Acrobat	related	technologies.

				For	further	information	regarding	our	operating	segments,	see	Note	16	of	the	Notes	to	Consolidated	Financial	Statements.

				During	fiscal	1999,	overall	revenue	increased	13%	compared	to	fiscal	1998,	due	to	increased	licensing	of	products	in	the	Print	Publishing,	ePaper	Solutions,	and	Web Publishing	segments.	Excluding	revenue	from	businesses	divested	in	the	third	quarter	of	fiscal	1998,	revenue	increased	16%.	The	Print	Publishing	segment	provided	the majority	of	the	fiscal	1999	revenue	growth,	with	a	30%	increase	from	$272.2	million	in	fiscal	1998	to	$353.9	million	in	fiscal	1999.	The	increase	in	revenue	from	this segment	was	primarily	due	to	increased	licensing	of	our	Publishing	Collection	product	and	the	introduction	of	InDesign,	a	new	page	layout	application	software	product, in	the	second	half	of	fiscal	1999.	The	increase	in	revenue	from	these	products	was	partially	offset	by	a	decline	in	revenue	from	PageMaker,	Illustrator,	and	FrameMaker, primarily	due	to	product	lifecycle	timing.

				Additional	revenue	growth	was	achieved	through	our	ePaper	Solutions	segment,	as	revenue	more	than	doubled	compared	to	the	prior	year,	from	$58.0	million	in	fiscal 1998	to	$129.3	million	in	fiscal	1999.	This	increase	was	due	to	the	release	of	Acrobat	4.0	in	the	second	quarter	of	the	year,	with	a	higher	number	of	units	licensed	as	a result	of	growing	customer	adoption	of	Adobe	Acrobat	and	Adobe	Portable	Document	Format	("PDF")	technology.

				The	Web	Publishing	segment	also	contributed	to	the	revenue	growth	as	it	grew	11%	in	fiscal	1999	to	$394.1	million	compared	to	$354.2	million	in	fiscal	1998.	The increase	was	primarily	due	to	the	release	of	GoLive,	our	new	Internet	application	software	product	introduced	in	the	first	half	of	fiscal	1999.	In	addition,	this	segment experienced	continued	strength	in	the	licensing	of	our	digital	imaging	and	dynamic	media	products,	with	the	release	of	Photoshop	5.5,	After	Effects	4.1,	and	Adobe Premiere	5.1	in	the	first	half	of	fiscal	1999,	as	well	as	increased	revenue	from	our	Adobe	Web	Collection	and	Dynamic	Media	Collection	products.	The	increase	in revenue	from	this	segment	was	partially	offset	by	a	decline	in	revenue	from	Adobe	PhotoDeluxe,	due	to	reduced	pricing,	and	a	decline	in	revenue	from	PageMill,	due	to product	lifecycle	timing.

				The	increase	in	revenue	in	fiscal	1999	in	the	above	operating	segments	was	partially	offset	by	a	decline	in	revenue	from	the	OEM	PostScript	and	Other	segment	of $72.2	million,	or	34%,	compared	to	fiscal	1998.	OEM	PostScript	licensing	revenue	has	experienced	a	decline	over	the	past	three	years,	primarily	due	to	the	ongoing weakness	in	the	monochrome	laser	printer	market	as	a	result	of	the	following	factors:	loss	of	royalty	revenue	from	Hewlett-Packard	Company's	("HP")	desktop monochrome	laser	printer	division,	which	has	been	incorporating	a	clone	version	of	Adobe	PostScript	software	into	its	products	since	the	fall	of	1997;	a	decline	in	the average	selling	price	of	monochrome	laser	printers;	and	an	increase	in	the	use	of	inkjet	printers,	resulting	in	the	weakness	in	the	monochrome	laser	printer	market.	In addition,	in	fiscal	1998,	we	received	$20.2	million	in	revenue	in	this	segment	from	businesses	we	divested	in	the	third	quarter	of	fiscal	1998,	resulting	in	a	decline	of revenue	in	fiscal	1999	from	the	absence	of	these	businesses.

				We	continue	to	be	cautious	about	revenue	from	our	OEM	PostScript	and	Other	segment	because	of	the	continuing	weakness	in	the	monochrome	laser	printer	market and	the	uncertain	timing	of	OEM	customer	introductions	of	products	incorporating	Adobe's	latest	technologies.	Excluding	our	investments	in	our	high-end	color	printing technologies,	we	anticipate	that	revenue	from	our	OEM	PostScript	and	Other	segment	will	continue	to	decline	in	fiscal	2000.

				Total	revenue	decreased	$17.1	million,	or	2%,	in	fiscal	1998	compared	to	fiscal	1997,	primarily	due	to	adverse	economic	conditions	in	Japan	and	a	decline	in	revenue from	our	Print	Publishing	and	OEM	Postscript	and	Other	segments.	The	Print	Publishing	segment	decreased	15%	in	fiscal	1998	compared	to	fiscal	1997,	due	to	a	decline in	revenue	from	our	PageMaker,	FrameMaker,	and	Adobe	Type	Manager	products,	none	of	which	had	upgrades	released	during	the	year,	and	a	decline	in	revenue	from our	Illustrator	product	as	its	latest	upgrade	was	not	released	until	late	in	the	fourth	quarter.	The	decrease	in	this	segment	from	the	above	products	was	partially	offset	by an	increase	in	our	Adobe	Publishing	Collection	product,	which	was	introduced	in	the	U.S.	and	Asia	in	fiscal	1998.	Additionally,	the	OEM

Postscript	and	Other	segment	experienced	a	9%	decline	in	fiscal	1998	compared	to	fiscal	1997,	due	to	weakness	in	the	Japanese	personal	computer	and	printer	markets, as	well	as	the	reduction	in	royalty	revenue	from	HP's	desktop	monochrome	laser	printer	division.

				The	decline	in	revenue	in	fiscal	1998	was	partially	offset	by	an	increase	in	the	ePaper	Solutions	and	Web	Publishing	segments.	The	ePaper	Solutions	segment	grew 23%	from	fiscal	1997,	due	to	increased	demand	for	Acrobat	3.0.	Additionally,	the	Web	Publishing	segment	increased	14%	in	fiscal	1998	compared	to	fiscal	1997	as	a result	of	the	release	of	our	Photoshop	5.0	and	Adobe	Premiere	5.0	products.

				Overall,	revenue	from	our	application	products	on	the	Windows	platform	increased	22%	in	fiscal	1999	compared	to	fiscal	1998,	and	revenue	from	our	application products	on	the	Macintosh	platform	increased	by	21%	in	fiscal	1999	over	fiscal	1998.	In	fiscal	1998	compared	to	fiscal	1997,	revenue	from	our	application	products	on the	Windows	platform	increased	by	21%	while	revenue	from	our	application	products	on	the	Macintosh	platform	decreased	10%	during	the	same	period.	In	both	fiscal 1999	and	fiscal	1998,	the	Windows	and	Macintosh	platforms	accounted	for	58%	and	42%,	respectively,	of	application	products	revenue,	excluding	platform- independent	and	UNIX	products,	compared	to	51%	and	49%,	respectively,	in	fiscal	1997.	We	expect	the	platform	mix	to	remain	relatively	the	same	in	the	foreseeable future.

# Direct	costs

				We	reclassified	certain	direct	costs	and	operating	expenses	in	the	fiscal	1998	and	1997	consolidated	statements	of	income	to	conform	to	the	fiscal	1999	presentation. These	reclassifications	did	not	impact	total	operating	profit	for	fiscal	1998	or	1997.

				Direct	costs	include	product	packaging,	third-party	royalties,	amortization	related	to	localization	costs	and	acquired	technologies,	and	reserves	for	excess	and	obsolete inventory.

				Direct	costs	decreased	$6.5	million,	or	6%,	in	fiscal	1999	compared	to	fiscal	1998,	due	to	more	effective	inventory	management,	resulting	in	lower	excess	and obsolete	inventory,	as	well	as	lower	unit	cost	of	materials	as	a	result	of	our	ongoing	cost	improvement	program.

				Direct	costs	decreased	$15.2	million,	or	13%,	in	fiscal	1998	compared	to	fiscal	1997,	due	to	lower	packaging	costs	and	our	full	transition	from	distribution	of	our products	on	disk	to	CD-ROM	media.	Direct	costs	also	decreased	in	fiscal	1998	compared	to	fiscal	1997	as	certain	acquired	technologies	became	fully	amortized	and	we incurred	lower	product	localization	costs.

				As	a	result	of	the	impact	of	ongoing	cost	improvement	programs,	we	have	targeted	gross	margin	to	be	approximately	91%	throughout	fiscal	2000.

# Operating	expenses

				Research	and	development	expenses	consist	principally	of	salaries	and	benefits	for	software	developers,	contracted	development	efforts,	related	facilities	costs,	and expenses	associated	with	computer	equipment	used	in	software	development.

				Research	and	development	expenses	increased	$9.2	million,	or	5%,	in	fiscal	1999	compared	to	fiscal	1998,	due	to	higher	incentive	compensation	expenses	primarily associated	with	the	improvement	in	our	financial	performance	in	fiscal	1999	over	fiscal	1998	and	higher	incentive	compensation	targets.	This	increase	was	partially offset	by	a	decrease	in	salaries	as	a	result	of	lower	headcount	and	decreases	in	general	office	expenses	and	professional	fees	as	a	result	of	our	fiscal	1998	restructuring program	and	other	cost	reduction	efforts	implemented	at	that	time.

				Research	and	development	expenses	increased	$22.4	million,	or	14%,	in	fiscal	1998	compared	to	fiscal	1997,	due	to	the	expansion	of	our	engineering	staff	and	related costs	required	to	support	our	continued	emphasis	on	developing	new	products	and	enhancing	existing	products.	The	increase	also	reflects	our	increased	investments	in new	technologies,	new	product	development,	and	the	infrastructure	to	support	such	activities.	The	increase	in	research	and	development	expenses	in	fiscal	1998	was partially	offset	by	certain	cost	reduction	initiatives	related	to	the	restructuring	program	that	was	implemented	during	the	third	quarter	of	fiscal	1998.	We	also	reduced outside	labor	costs	and	professional	fees	by	discontinuing	certain	research	and	development	programs.

				We	believe	that	investments	in	research	and	development,	including	the	recruiting	and	hiring	of	software	developers,	are	critical	to	remain	competitive	in	the marketplace	and	are	directly	related	to	continued	timely	development	of	new	and	enhanced	products.	We	will	continue	to	make	significant	investments	in	the development	of	our	application	software	products,	including	those	targeted	for	the	growing	Internet	market.	We	expect	that	research	and	development	expenses	for	fiscal 2000	will	increase	in	absolute	dollars.	We	have	targeted	such	expenditures	to	be	approximately	20%	of	revenue	in	fiscal	2000.

# Sales	and	Marketing

				Sales	and	marketing	expenses	include	salaries	and	benefits,	sales	commissions,	travel	expenses,	and	related	facilities	costs	for	our	sales,	marketing,	customer	support, and	distribution	personnel.	Sales	and	marketing	expenses	also	include	the	costs	of	programs	aimed	at	increasing	revenue,	such	as	advertising,	trade	shows,	public relations,	and	other	market	development	programs.

				Sales	and	marketing	expenses	increased	$13.0	million,	or	4%,	in	fiscal	1999	compared	to	fiscal	1998	as	a	result	of	higher	incentive	compensation	expenses	primarily associated	with	the	improvement	in	our	financial	performance	in	fiscal	1999	over	the	prior	year	and	higher	incentive	compensation	targets.	In	addition,	sales	and marketing	expenses	increased	year	over	year,	due	to	increased	advertising,	promotional,	and	trade	show	expenses	associated	with	new	product	releases.	The	increase	was partially	offset	by	cost	reduction	initiatives	related	to	the	restructuring	program	implemented	during	the	third	quarter	of	fiscal	1998	that	eliminated	certain	brand advertising	campaigns	and	other	marketing	activities	related	to	the	divestiture	of	a	business.

				Sales	and	marketing	expenses	increased	$25.4	million,	or	9%,	in	fiscal	1998	compared	to	fiscal	1997,	due	to	higher	employee	costs,	increased	customer	support	costs, and	increased	marketing	and	advertising	activities.	Higher	commissions	were	also	paid	as	a	result	of	increased	headcount	and	growth	in	application	products	revenue compared	to	fiscal	1997.	Additionally,	sales	and	marketing	expenses	included	higher	outside	labor	costs	to	support	user	education	related	to	new	product	releases	and	for the	development	of	our	Web	site.	These	increased	expenses	were	partially	offset	by	cost	reduction	initiatives	related	to	the	restructuring	program	implemented	during	the third	quarter	of	fiscal	1998.

				We	expect	sales	and	marketing	expenses	to	increase	in	absolute	dollars	in	fiscal	2000	to	support	investments	in	eBusiness	and	enhanced	marketing	activities.	For	fiscal 2000,	our	sales	and	marketing	expense	target	is	approximately	32%	of	revenue.

				General	and	administrative	expenses	consist	principally	of	salaries	and	benefits,	travel	expenses,	and	related	facilities	costs	for	the	finance,	human	resources,	legal, information	services,	and	executive	personnel	of	Adobe.	General	and	administrative	expenses	also	include	outside	legal	and	accounting	fees,	provision	for	bad	debts,	and expenses	associated	with	computer	equipment	and	software	used	in	the	administration	of	the	business.

				General	and	administrative	expenses	decreased	$15.0	million,	or	13%,	in	fiscal	1999	compared	to	the	prior	year,	reflecting	the	savings	related	to	the	restructuring programs	implemented	in	fiscal	1999	and	1998.	Additionally,	the	decrease	is	attributable	to	decreased	legal	fees	and	lower	bad	debt	expense.	These	decreases	were	offset by	an	increase	in	incentive	compensation	expense	primarily	associated	with	the	improvement	in	our	financial	performance	in	fiscal	1999	over	the	prior	year	and	higher incentive	compensation	targets.

				General	and	administrative	expenses	increased	$17.6	million,	or	17%,	in	fiscal	1998	compared	to	fiscal	1997,	due	to	increased	expenses	for	outside	legal	and investment	banking	services	associated	with	responding	to	an	unsolicited	acquisition	proposal	as	well	as	increased	employee	costs	and	related	depreciation	and	building expenses	associated	with	increased	staff.	Bad	debt	expense	was	also	higher	in	fiscal	1998	to	reserve	for	accounts	receivable	from	certain	customers	that	were	deemed potentially	uncollectible.	These	increased	expenses	were	partially	offset	by	cost	reduction	initiatives	related	to	the	restructuring	program	implemented	in	the	third	quarter of	fiscal	1998	that	included	a	reduction	in	general	office	and	other	administrative	expenses.

				We	expect	that	general	and	administrative	spending	will	remain	flat	or	slightly	increase	in	absolute	dollars	in	fiscal	2000	to	support	ongoing	administrative infrastructure	needs.	However,	we	have	targeted	such	expenditures	to	decrease	as	a	percentage	of	revenue	to	approximately	9%	in	fiscal	2000.

				During	fiscal	1999	and	1998,	we	implemented	three	different	Board-approved	restructuring	programs.	These	unique	restructuring	programs	were	directly	focused	on improving	our	competitive	position	as	well	as	enhancing	Adobe's	allocation	of	resources.	In	addition	to	these	three	restructurings,	we	also	implemented	restructuring programs	in	fiscal	1994	and	1995	related	to	the	Aldus	Corporation	("Aldus")	and	Frame	Technology	Corporation	("Frame")	acquisitions.	As	of	December	3,	1999,	there was	no	restructuring	liability	remaining	for	restructuring	programs	prior	to	fiscal	1998.

# Fiscal	1999	restructuring	programs

				The	fourth	quarter	1999	restructuring	program	was	implemented	to	enhance	our	worldwide	customer	support	activity	and	to	streamline	the	product	distribution	and warehouse	operations	in	North	America.	The	program	resulted	in	a	reduction	in	force	of	86	positions	and	the	closure	of	the	North	American

distribution	warehouse	as	a	result	of	the	decision	to	outsource	our	North	American	distribution	and	warehousing	operations	and	the	majority	of	our	customer	support. The	reduction	in	force	primarily	affected	employees	in	Seattle,	Washington	and	Santa	Clara,	California.	Total	charges	incurred	as	a	result	of	the	restructuring	were $2.1	million,	which	include	severance	and	related	charges	associated	with	the	reduction	in	force	and	charges	for	vacating	leased	facilities.

				The	other	1999	restructuring	program,	implemented	in	the	second	and	third	quarters,	was	directly	related	to	the	centralization	of	our	worldwide	sales	and administrative	organizations	and	the	realignment	of	our	Printing	Solutions	business.	The	program	included	a	reduction	in	force	of	198	positions,	two	of	which	were executive	positions.	The	reduction	in	force	primarily	affected	our	European	headquarters	in	Edinburgh,	Scotland	and	our	North	American	headquarters	in	San	Jose, California.	Total	charges	incurred	as	a	result	of	the	restructuring	were	$17.6	million,	of	which	approximately	$0.1	million	were	noncash	charges.	This	restructuring	was completed	in	the	third	quarter	of	fiscal	1999.

				In	the	third	and	fourth	quarters	of	fiscal	1999,	we	revised	our	estimate	of	the	total	costs	associated	with	the	restructuring	program	implemented	during	the	second	and third	quarters	described	above,	resulting	in	an	adjustment	to	the	restructuring	accrual	of	approximately	$3.2	million.	Approximately	$3.0	million	of	the	adjustment reflects	lower	than	estimated	severance	and	related	charges	primarily	attributable	to	employees	impacted	by	the	restructuring	who	were	able	to	find	alternative employment	within	Adobe.	The	remaining	adjustment	was	due	to	lower	than	expected	charges	related	to	vacating	leased	facilities.

				We	also	recorded	adjustments	during	the	third	and	fourth	quarters	of	fiscal	1999	related	to	prior	year	restructuring	programs	in	the	amount	of	$1.9	million.	For detailed	information	regarding	the	adjustments	and	our	restructuring	programs,	see	Note	7	of	the	Notes	to	Consolidated	Financial	Statements.

# Fiscal	1998	restructuring	program

				The	1998	restructuring	program	was	implemented	to	refocus	our	product	development	efforts	and	to	eliminate	management	redundancies	in	the	organization.	As	part of	the	restructuring	program,	we	implemented	a	reduction	in	force	of	364	positions,	four	of	which	were	executive	positions,	primarily	in	our	North	American	and corporate	operations.	The	reductions	came	predominantly	from	overhead	areas,	divested	business	units,	and	redundant	marketing	activities,	and	as	of	August	31,	1998, the	majority	of	these	terminations	were	completed.	In	addition	to	severance	and	related	charges	associated	with	the	reduction	in	force	of	364	positions,	the	restructuring program	included	charges	for	divesting	two	business	units,	vacating	leased	facilities,	and	canceling	certain	contracts.	These	actions	and	other	nonrestructuring-related items	resulted	in	charges	of	$38.2	million,	of	which	approximately	$9.1	million	were	noncash	charges.

				During	fiscal	1999,	we	experienced	savings	of	approximately	$60.0	million	from	the	fiscal	1998	restructuring	program	as	a	result	of	the	reductions	in	force,	as	well	as reductions	in	marketing,	facilities,	and	other	discretionary	expenses,	such	as	travel	and	outside	services.	We	also	experienced	savings	of	approximately	$15.0	million	as	a result	of	the	restructuring	programs	implemented	during	fiscal	1999,	which,	on	an	annualized	basis,	equate	to	approximately	$25.0	million.	We	believe	that	the	savings realized	under	the	restructuring	programs	will	be	invested	in	programs	and	people	to	enhance	revenue	growth	by	significantly	increasing	our	investment	in	eBusiness and	enhanced	marketing	activities.	We	also	believe	that	these	savings	will	assist	us	in	achieving	our	operating	model	targets	of	20%,	32%,	and	9%	of	revenue	for research	and	development,	sales	and	marketing,	and	general	and	administrative	expenses,	respectively,	in	fiscal	2000.

# Other	charges

				During	the	third	and	fourth	quarters	of	fiscal	1999,	we	recorded	other	charges	of	$8.4	million	that	were	unusual	in	nature.	These	charges	included	$2.0	million associated	with	the	cancellation	of	a	contract,

and	$2.2	million	for	accelerated	depreciation	related	to	the	adjustment	of	the	useful	life	of	certain	assets	as	a	result	of	decisions	made	by	management	as	part	of	the restructuring	program.	Additionally,	we	incurred	a	nonrecurring	compensation	charge	totaling	$2.6	million	for	a	terminated	employee,	and	we	incurred	consulting	fees of	$1.6	million	to	assist	in	the	restructuring	of	our	operations.

				In	fiscal	1997,	restructuring	and	other	charges	included	a	$1.8	million	charge	related	to	the	acquisition	of	intellectual	property.	This	charge	was	offset	by	a $2.4	million	gain	related	to	the	divestiture	of	a	product	line.

# Acquired	in-process	research	and	development

				Acquired	in-process	research	and	development	of	$3.6	million	in	fiscal	1999	is	comprised	of	$3.0	million	and	$0.6	million	associated	with	the	acquisitions	of	Attitude Software,	LLC	("Attitude	Software")	and	Photomerge	Technology	("Photomerge"),	respectively.	The	following	is	a	summary	of	the	projects	acquired	in	the	acquisitions and	the	assumptions	used	in	determining	the	value	of	the	in-process	research	and	development	costs.

				During	the	fourth	quarter	of	fiscal	1999	we	acquired	substantially	all	of	the	assets,	consisting	of	intellectual	property,	of	Attitude	Software.	The	acquisition	was accounted	for	using	the	purchase	method	of	accounting	in	accordance	with	Accounting	Principles	Board	Opinion	No.	16	("APB	16"),	and	substantially	all	of	the purchase	price	of	$3.0	million	cash	was	allocated	to	in-process	research	and	development	and	expensed	at	the	time	of	acquisition.	The	ongoing	project	at	Attitude Software	at	the	time	of	the	purchase	included	the	development	of	the	3D	Anarchy	authoring	product.	We	purchase	this	technology	to	incorporate	it	into	future	versions	of our	existing	Adobe	products	to	further	enhance	the	feature	sets	and	user	interface	contained	within	the	products.	At	the	date	we	acquired	Attitude	Software,	it	was estimated	that	50%	of	the	development	effort	had	been	completed	and	that	the	remaining	50%	of	the	development	effort	would	take	approximately	18	months	to complete	and	would	cost	$1.8	million.	The	efforts	required	to	complete	the	development	of	the	technology	primarily	relate	to	additional	design	efforts	to	integrate	the technologies	into	several	of	Adobe's	products,	finalization	of	coding,	and	completion	testing.	The	value	of	the	in-process	technology	was	determined	by	estimating	the projected	net	cash	flows	related	to	products	the	technology	will	be	integrated	into,	including	costs	to	complete	the	development	of	the	technology	and	the	future	net revenues	that	may	be	earned	from	the	products,	excluding	the	value	attributed	to	the	existing	technology	with	the	products	prior	to	the	integration	of	the	purchased technology.	These	cash	flows	were	discounted	back	to	their	net	present	value	using	a	discount	rate	of	20%,	exclusive	of	the	value	attributable	to	the	use	of	the	in-process technologies	in	future	products.

				Additionally,	during	the	fourth	quarter	of	fiscal	1999,	we	acquired	substantially	all	of	the	assets,	consisting	of	intellectual	property,	of	Photomerge.	In	connection	with the	acquisition	of	Photomerge,	100%	of	the	purchase	price,	or	$600,000	cash,	was	allocated	to	in-process	research	and	development	due	to	the	state	of	completion	and the	uncertainty	of	the	technology.

				During	fiscal	1997,	we	acquired	three	software	companies,	in	separate	transactions,	for	an	aggregate	consideration	of	approximately	$8.5	million.	These	acquisitions were	accounted	for	using	the	purchase	method	of	accounting,	and	approximately	$6.0	million	of	the	purchase	price	was	allocated	to	in-process	research	and	development

and	expensed	at	the	time	of	the	acquisitions.	One	of	the	in-process	technologies	acquired	for	$2.5	million	was	discontinued	in	fiscal	1998.	The	project	associated	with	an additional	$2.8	million	of	the	purchased	in-process	technology	was	canceled	as	part	of	the	restructuring	in	the	third	quarter	of	fiscal	1998	and	was	subsequently	sold	to	a management-led	buyout	group.

# Amortization	of	goodwill	and	purchased	intangibles

				Amortization	of	goodwill	and	purchased	intangibles	in	fiscal	1999	primarily	relates	to	the	acquisition	of	substantially	all	of	the	assets	of	GoLive	Systems,	Inc.	and	a related	partnership	(together	"GoLive	Systems")	in	January	1999.	(For	further	information,	see	Note	2	of	the	Notes	to	Consolidated	Financial	Statements.)

				In	fiscal	1998,	amortization	of	goodwill	and	purchased	intangibles	was	higher	than	fiscal	1997	as	a	result	of	acquisitions	made	in	fiscal	1998	and	remaining amortization	related	to	the	merger	with	Aldus	in	fiscal	1994.

# Nonoperating	income

				Investment	gain	consists	principally	of	realized	gains	or	losses	from	direct	investments	as	well	as	mark-to-market	valuation	adjustments	for	investments	held	by Adobe	Incentive	Partners,	L.P.	("AIP").

				In	fiscal	1999,	we	recorded	a	realized	gain	of	$58.4	million	related	to	the	sale	of	our	investment	in	Vignette	Corporation.	We	also	recorded	investment	gains	from mark-to-market	adjustments	totaling	$17.8	million,	$10.4	million,	and	$7.0	million	related	to	investments	in	Electronic	Submission	Publishing	Systems,	Inc.; DigitalThink,	Inc.;	and	Tumbleweed	Communications	Corporation,	respectively.	These	gains	were	partially	offset	by	an	investment	loss	of	$5.2	million	related	to	the acquisition	of	PointCast,	Inc.,	a	former	investee	of	the	Company,	by	idealab!'s	Launchpad	Technologies,	Inc.	("idealab!").	In	connection	with	the	acquisition,	we exchanged	our	shares	of	PointCast,	Inc.	for	approximately	542,000	shares	of	idealab!	(since	then	has	become	EntryPoint	Inc.).	Additionally,	we	recorded	a	net	gain totaling	$0.5	million	related	to	mark-to-market	adjustments	of	various	other	Adobe	venture	investments.

				In	fiscal	1998,	we	recorded	a	realized	gain	of	$6.7	million	related	to	our	investment	in	McQueen	International	Limited	("McQueen"),	due	to	the	acquisition	of McQueen	by	Sykes	Enterprises,	Incorporated	("Sykes"),	a	publicly	traded	company.	In	addition,	we	liquidated	our	investment	in	Siebel	Systems,	Incorporated	("Siebel") through	the	distribution	to	our	stockholders	of	approximately	165,000	shares	of	Siebel	common	stock	as	a	dividend-in-kind	and	the	sale	of	our	remaining	Siebel	shares. A	gain	was	recognized	on	the	transaction	of	approximately	$5.7	million.	The	remaining	net	realized	gain	recorded	in	fiscal	1998	represents	valuation	adjustments	related to	our	venture	investments	held	by	AIP.

				In	fiscal	1997,	the	investment	gain	related	primarily	to	the	liquidation	of	our	investment	in	Netscape	Communications	Corporation	("Netscape")	through	the distribution	to	its	stockholders	of	554,660	shares	of	Netscape	common	stock	as	a	dividend-in-kind	and	the	sale	of	our	remaining	Netscape	shares.

				We	are	uncertain	of	future	investment	gains	or	losses	as	they	are	primarily	dependent	upon	the	operations	of	the	underlying	investee	companies.

				Interest	and	other	income	consists	principally	of	interest	earned	on	cash,	cash	equivalents,	and	short-term	investments,	as	well	as	foreign	exchange	transaction	gains and	losses	and	realized	gains	or	losses	on	the	disposal	of	assets.

				The	decrease	in	interest	and	other	income	over	the	past	three	years	is	due	to	lower	average	cash	and	short-term	investment	balances,	primarily	as	a	result	of	cash	used for	stock	repurchases.	In	addition,	during	fiscal	1999	more	investments	were	made	in	tax-exempt	securities	resulting	in	lower	interest	income	on	a	comparative	pre-tax basis.	The	decrease	in	interest	and	other	income	in	fiscal	1999	was	partially	offset	by	a	$5.7	million	gain	realized	from	the	sale	of	a	corporate	facility	in	Edinburgh, Scotland	in	connection	with	the	restructuring	program	announced	in	the	second	quarter	of	fiscal	1999.

				Interest	income	is	expected	to	decrease	in	fiscal	2000	due	to	lower	average	cash	balances	resulting	from	stock	repurchases	conducted	in	fiscal	1999.	Further,	our	cash balances	could	also	be	reduced	in	fiscal	2000	due	to	continuing	stock	repurchases	and	the	purchase	of	software	companies,	products,	or	technologies	that	are complementary	to	our	business.

# Income	tax	provision

|  | 1999 | Change | 1998 | Change | 1997 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Income\ttax\tprovision | $136.7 | 119%$ | 62.6 | (43)% $ | 109.3 |
| Percentage\tof\ttotal\trevenue | 13.5% |  | 7.0% |  | 12.0% |
| Effective\ttax\trate | 36.5% |  | 37.3% |  | 36.9% |

				Our	effective	tax	rate	decreased	in	fiscal	1999	compared	to	fiscal	1998,	primarily	due	to	a	decrease	in	nondeductible	goodwill	amortization.

				Our	effective	tax	rate	increased	in	fiscal	1998	from	fiscal	1997	principally	as	a	result	of	the	nondeductible	write-off	of	goodwill	and	lower	tax-exempt	interest	income.

				We	have	targeted	our	effective	tax	rate	to	decrease	in	fiscal	2000	to	approximately	35%.

# Factors	That	May	Affect	Future	Results	of	Operations

				We	believe	that	in	the	future	our	results	of	operations	could	be	affected	by	various	factors,	including:

delays	in	shipment	of	our	new	products	and	major	new	versions	of	existing	products

lack	of	market	acceptance	of	new	products	and	upgrades

introduction	of	new	products	by	major	competitors

weakness	in	demand	for	application	software	and	printers

renegotiation	of	royalty	arrangements

lack	of	growth	in	worldwide	personal	computer	and	printer	sales,	and	downward	sales	price	adjustments

consolidation	in	the	OEM	printer	business

ongoing	weakness	in	our	printing	business	due	to	product	transitions

industry	transitions	to	new	business	and	information	delivery	models

adverse	changes	in	general	economic	conditions	in	any	of	the	countries	in	which	we	do	business

Year	2000	issues	(as	discussed	later	under	"Year	2000	Issues")

				We	have	stated	that	in	fiscal	2000	our	annual	revenue	growth	target	is	20%	over	fiscal	1999	revenue	and	that	our	gross	margin	and	operating	profit	margin	targets	are 91%	and	30%,	respectively.	Additionally,	in	fiscal	2000,	our	operating	model	targets	for	research	and	development,	sales	and	marketing,	and	general	and	administrative expenses	are	20%,	32%,	and	9%	of	revenue,	respectively,	and	our	effective	tax	rate	target	is	35%.	We	use	these	targets	to	assist	us	in	making	decisions	about	our allocation	of	resources	and	investments,	not	as	predictions	of	future	results.	The	targets	reflect	a	number	of	assumptions,	including:

assumptions	about	product	pricing

manufacturing	costs	and	volumes

the	mix	of	application	products	and	licensing	revenue,	full	and	upgrade	products,	distribution	channels,	and	geographic	distribution

				These	and	many	other	factors	described	in	this	report	affect	our	financial	performance	and	may	cause	our	future	results,	including	results	for	the	current	quarter,	to vary	materially	from	these	targets.

				Our	ability	to	develop	and	market	products,	including	upgrades	of	current	products	that	successfully	adapt	to	changing	customer	needs,	may	also	have	an	impact	on our	results	of	operations.	Our	ability	to	extend	our	core	technologies	into	new	applications	and	to	anticipate	or	respond	to	technological	changes	could	affect	our	ability to	develop	these	products.	A	portion	of	our	future	revenue	will	come	from	these	new	applications.	Delays	in	product	or	upgrade	introductions,	whether	by	us	or	by	our OEM	customers,	could	cause	a	decline	in	our	revenue,	earnings,	or	stock	price.	We	cannot	determine	the	ultimate	effect	that	these	new	products	or	upgrades	will	have on	our	revenue	or	results	of	operations.

				The	market	for	our	graphics	applications,	particularly	our	consumer	and	Web	publishing	products,	is	intensely	and	increasingly	competitive	and	is	significantly affected	by	product	introductions	and	market	activities	of	industry	competitors.	Additionally,	Microsoft	Corporation	("Microsoft")	has	increased	its	presence	in	the digital	imaging/graphics	market;	we	believe	that,	due	to	Microsoft's	market	dominance,	any	new	Microsoft	digital	imaging	products	will	be	highly	competitive	with	our products.	If	competing	new	products	achieve	widespread	acceptance,	our	operating	results	would	suffer.

				We	generally	offer	our	application	and	server-based	products	on	Macintosh,	Windows,	UNIX,	and	Linux	platforms.	To	the	extent	that	there	is	a	slowdown	of customer	purchases	of	personal	computers	on	either	the	Windows	or	Macintosh	platforms	or	in	general,	our	business	could	be	harmed.

				We	distribute	our	application	products	primarily	through	distributors,	resellers,	and	retailers	(collectively	referred	to	as	"distributors").	A	significant	amount	of	our revenue	for	application	products	is	from	a	single	distributor.	We	are	in	the	process	of	revising	our	channel	program	to	reduce	the	overall	number	of	our	distributors worldwide	and	focus	our	channel	efforts	on	larger	distributors.	This	revision	of	the	channel	program	has	resulted	in	an	increase	in	our	dependence	on	a	smaller	number of	distributors	selling	through	a	larger	amount	of	our	products.	Additionally,	our	goal	is	to	increase	our	direct	distribution	of	our	products	to	end	users	through	our online	store	located	on	our	Web	site	atwww.adobe.com.	Any	such	increase	in	our	direct	revenue	efforts	will	place	us	in	increased	competition	with	our	channel distributors	and	with	newer	types	of	distribution	of	our	products	by	online,	Internet-based	resellers	of	our	products.	While	we	anticipate	that	the	restructuring	and streamlining	of	our	product	distribution	channels	and	the	increase	in	the	scope	of	our	direct	sales	efforts	will	eventually	improve	our	business	by	decreasing	discounts	or rebate	programs	provided	to	distributors,	decreasing	product	returns,	and	shortening	inventory	cycles,	these	changes	could	instead	seriously	harm	our	business.

				In	addition,	we	continue	to	expand	into	third-party	distribution	channels,	including	value-added	resellers	and	systems	integrators,	in	our	effort	to	further	broaden	our customer	base.	As	a	result,	the	financial	health	of	these	third	parties	and	our	continuing	relationships	with	them	are	becoming	more	important	to	our	success.	Some	of

these	companies	are	thinly	capitalized	and	may	be	unable	to	withstand	changes	in	business	conditions.	Our	business	could	be	seriously	harmed	if	the	financial	condition of	some	of	these	third	parties	substantially	weakens	or	if	our	relationships	with	them	deteriorate.	Also,	as	we	seek	to	further	broaden	our	customer	base	in	the	corporate business	and	consumer	markets,	we	may	not	successfully	adapt	our	application	software	distribution	channels,	which	could	cause	our	operating	results	to	suffer.	We could	experience	decreases	in	average	selling	prices	and	some	transitions	in	our	distribution	channels	that	could	seriously	harm	our	business.

				We	currently	rely	on	three	manufacturers	of	our	products,	each	located	in	a	different	region;	one	of	these	has	just	been	added	in	the	first	quarter	of	fiscal	2000.	If	a manufacturer	terminates	its	relationship	with	us	or	if	our	supply	from	a	manufacturer	is	interrupted	or	terminated	for	any	other	reason,	we	may	not	have	enough	time	to replace	the	supply	of	products	manufactured	by	that	manufacturer	to	avoid	harm	to	our	business.

				Revenue	from	our	OEM	PostScript	and	Other	segment	experienced	a	34%	decline	in	fiscal	1999	compared	to	fiscal	1998,	primarily	as	a	result	of	a	decline	in	revenue from	the	licensing	of	PostScript	technology.	We	expect	this	trend	to	continue	and	believe	that	our	financial	results	could	be	harmed	by	it.	The	weakness	in	the monochrome	laser	printer	and	Japanese	markets	were	factors	causing	the	revenue	decline.	In	addition,	in	the	fall	of	fiscal	1997,	HP	began	to	ship	a	clone	version	of Adobe	PostScript	technology	in	some	printers,	resulting	in	lower	licensing	revenue	to	us	in	fiscal	1999	and	1998.	Even	though	we	continue	to	work	with	HP	printer operations	to	incorporate	Adobe	PostScript	and	other	technologies	into	other	HP	products,	we	expect	continued	lower	revenue	in	this	segment	from	HP	in	fiscal	2000.	If other	significant	customers	also	decide	to	incorporate	a	clone	version	instead	of	Adobe	PostScript	technology,	it	could	seriously	harm	our	business.	Further,	OEM customers	on	occasion	seek	to	renegotiate	their	royalty	arrangements.	We	evaluate	these	requests	on	a	case-by-case	basis.	If	an	agreement	is	not	reached,	a	customer may	decide	to	pursue	other	options,	which	could	result	in	lower	licensing	revenue	for	us.

				From	the	end	of	fiscal	1997	through	the	first	quarter	of	fiscal	1999,	we	experienced	a	decline	in	revenue	from	the	Japanese	market	due	to	a	weak	Japanese	computer market	and	general	economic	conditions	in	Japan.	During	the	second,	third,	and	fourth	quarters	of	fiscal	1999,	we	experienced	an	increase	in	application	revenue	from our	Japanese	operation	but	still	continued	to	experience	a	decline	in	OEM	PostScript	and	Other	revenue.	In	addition,	at	the	end	of	fiscal	1997,	inventory	levels	for application	products	at	our	Japanese	distributors	remained	higher	than	what	we	consider	normal.	During	fiscal	1998,	we	worked	with	our	major	distributors	in	Japan	to reduce	channel	inventory	to	what	we	consider	a	reasonable	level.	Despite	the	slight	improvement	in	the	Japanese	economy	in	the	second,	third,	and	fourth	quarters	of fiscal	1999,	these	adverse	economic	conditions	may	continue	in	the	short	term,	and	they	may	continue	to	adversely	affect	our	revenue	and	earnings.	Although	there	are also	adverse	conditions	in	other	Asian	and	Latin	American	economies,	the	countries	affected	represent	a	much	smaller	portion	of	our	revenue	and	thus	have	less	impact on	our	operational	results.

				We	recently	implemented	restructurings	of	our	business	in	the	second,	third,	and	fourth	quarters	of	fiscal	1999,	resulting	in	a	workforce	reduction	of	9%.	However,	we plan	to	continue	to	invest	in	certain	areas,	which	will	require	us	to	hire	additional	employees.	Competition	for	high-quality	personnel,	especially	highly	skilled	engineers, is	extremely	intense.	Our	ability	to	effectively	manage	this	growth	will	require	us	to	continue	to	improve	our	operational	and	financial	controls	and	information management	systems	and	to	attract,	retain,	motivate,	and	manage	employees	effectively;	otherwise	our	business	could	be	seriously	harmed.

				The	Internet	market	is	rapidly	evolving	and	is	characterized	by	an	increasing	number	of	market	entrants	that	have	introduced	or	developed	products	addressing authoring	and	communication	over	the

Internet.	As	is	typical	in	the	case	of	a	new	and	evolving	industry,	demand	and	market	acceptance	for	recently	introduced	products	and	services	are	subject	to	a	high	level of	uncertainty.	The	software	industry	addressing	authoring	and	communications	over	the	Internet	is	young	and	has	few	proven	products.	Standards	defining	Web graphics	have	not	yet	been	finally	adopted.	In	addition,	new	models	for	licensing	software	will	be	needed	to	accommodate	new	information	delivery	practices. Moreover,	critical	issues	concerning	the	commercial	use	of	the	Internet	(including	security,	reliability,	ease	of	use	and	access,	cost,	and	quality	of	service)	remain unresolved	and	may	affect	the	growth	of	Internet	use,	together	with	the	software	standards	and	electronic	media	employed	in	such	markets.

				We	have	stated	that	we	intend	to	increase	our	investment	in	eBusiness	and	enhanced	marketing	activities	in	an	effort	to	achieve	revenue	growth,	but	we	can	provide	no assurance	that	this	increased	investment	in	this	new	market	will	result	in	increased	revenue.

				We	derive	a	significant	portion	of	our	revenue	and	operating	income	from	our	subsidiaries	located	in	Europe,	Japan,	Asia	Pacific,	and	Latin	America.	We	generally experience	lower	revenue	from	our	European	operations	in	the	third	quarter	because	many	customers	reduce	their	purchasing	activities	in	the	summer	months. Additionally,	we	are	uncertain	whether	the	recent	weakness	experienced	in	the	Japan,	Asia	Pacific,	and	Latin	America	markets	will	continue	in	the	foreseeable	future	due to	possible	currency	devaluation	and	liquidity	problems	in	these	regions.	While	most	of	the	revenue	of	our	European	subsidiaries	is	denominated	in	U.S.	dollars,	the majority	of	our	revenue	derived	from	Japan	is	denominated	in	yen,	and	the	majority	of	all	our	subsidiaries'	operating	expenses	are	denominated	in	their	local	currencies. As	a	result,	our	operating	results	are	subject	to	fluctuations	in	foreign	currency	exchange	rates.	To	date,	the	financial	impact	of	such	fluctuations	has	not	been	significant. Our	hedging	policy	attempts	to	mitigate	some	of	these	risks,	based	on	our	best	judgment	of	the	appropriate	trade-offs	among	risk,	opportunity,	and	expense.	We	have established	a	hedging	program	to	hedge	our	exposure	to	foreign	currency	exchange	rate	fluctuations,	primarily	of	the	Japanese	yen.	Our	hedging	program	is	not comprehensive,	and	our	program	may	not	offset	more	than	a	portion	of	the	adverse	financial	impact	resulting	from	unfavorable	movement	in	foreign	currency	exchange rates.

				In	connection	with	the	enforcement	of	our	own	intellectual	property	rights	or	in	connection	with	disputes	relating	to	the	validity	or	alleged	infringement	of	third-party rights,	we	have	been	and	may	in	the	future	be	subject	to	complex,	protracted	litigation	as	part	of	our	policy	to	vigorously	defend	our	intellectual	property	rights. Intellectual	property	litigation	is	typically	very	costly	and	can	be	disruptive	to	our	business	operations	by	diverting	the	attention	and	energies	of	management	and	key technical	personnel.	Although	we	have	successfully	defended	past	litigation,	we	may	not	prevail	in	any	ongoing	or	future	litigation.	Adverse	decisions	in	such	litigation could	have	negative	results,	including	subjecting	us	to	significant	liabilities,	requiring	us	to	seek	licenses	from	others,	preventing	us	from	manufacturing	or	licensing certain	of	our	products,	or	causing	severe	disruptions	to	our	operations	or	the	markets	in	which	we	compete,	any	one	of	which	could	seriously	harm	our	business.

				We	prepare	our	financial	statements	in	conformity	with	generally	accepted	accounting	principles	("GAAP").	GAAP	are	subject	to	interpretation	by	the	American Institute	of	Certified	Public	Accountants	(the	"AICPA"),	the	Securities	and	Exchange	Commission	(the	"SEC"),	and	various	bodies	formed	to	interpret	and	create appropriate	accounting	policies.	A	change	in	these	policies	can	have	a	significant	effect	on	our	reported	results	and	may	even	affect	the	reporting	of	transactions completed	before	a	change	is	announced.	Accounting	policies	affecting	many	other	aspects	of	our	business,	including:

rules	relating	to	software	revenue	recognition

purchase	and	pooling-of-interests	accounting	for	business	combinations

the	valuation	of	in-process	research	and	development

employee	stock	purchase	plans

stock	option	grants

have	recently	been	revised	or	are	under	review	by	one	or	more	groups.	Changes	to	these	rules	or	the	questioning	of	current	practices	may	have	a	significant	adverse effect	on	our	reported	financial	results	or	in	the	way	in	which	we	conduct	our	business.

				Due	to	the	factors	noted	earlier,	as	well	as	the	Year	2000	issues	noted	later,	our	future	earnings	and	stock	price	may	be	subject	to	significant	volatility,	particularly	on a	quarterly	basis.	Any	shortfall	in	revenue	or	earnings	compared	to	analysts'	or	investors'	expectations	could	cause,	and	has	caused	in	the	past,	an	immediate	and significant	decline	in	the	trading	price	of	our	common	stock.	Additionally,	we	may	not	learn	of	such	shortfalls	until	late	in	the	fiscal	quarter,	which	could	result	in	an even	more	immediate	and	greater	decline	in	the	trading	price	of	our	common	stock.	Finally,	we	participate	in	a	highly	dynamic	industry.	In	addition	to	factors	specific	to us,	changes	in	analysts'	earnings	estimates	for	us	or	our	industry,	and	factors	affecting	the	corporate	environment,	our	industry,	or	the	securities	markets	in	general	will often	result	in	significant	volatility	of	our	common	stock	price.

				We	have	been	addressing	a	broad	range	of	issues	associated	with	the	programming	code	in	existing	computer	systems	as	the	year	2000	approached.	The	Year	2000 problem	is	complex,	as	many	computer	systems	have	been	affected	in	some	way	by	the	rollover	of	the	two-digit	year	value	to	00.	Systems	that	do	not	properly	recognize such	information	could	generate	erroneous	data	or	cause	a	system	to	fail.	The	Year	2000	issue	creates	risk	for	us	from	unforeseen	problems	in	our	products	or	our	own computer	and	embedded	systems	and	from	third	parties	with	whom	we	deal	on	financial	and	other	transactions	worldwide.	Failure	of	our	and/or	third	parties'	computer systems	or	Year	2000	defects	in	our	products	could	harm	our	ability	to	conduct	our	business.

				We	commenced	a	phased	program	to	inventory,	assess,	remediate,	test,	implement,	and	develop	contingency	plans	for	all	mission-critical	applications	and	products potentially	affected	by	the	Year	2000	issue	(the	"Y2K	Program").	All	phases	have	been	substantially	completed,	including	proactive	testing	and	monitoring	in	the	early part	of	the	Year	2000.	All	of	our	business	groups	were	involved	in	the	Y2K	Program	efforts.

				We	identified	three	potential	areas	of	impact	for	review:	(1)	the	software	and	systems,	including	embedded	systems,	used	in	our	internal	business	processes;	(2)	third- party	vendors,	manufacturers	and	suppliers;	and	(3)	our	software	products	offered	to	customers.	We	estimate	that	the	aggregate	cost	incurred	for	the	Y2K	Program	was less	than	$3.0	million,	which	we	funded	from	operating	cash	flows.

				Internal	business	processes.		We	have	substantially	completed	all	phases	of	our	Y2K	Program	related	to	our	internal	business	processes,	including	proactive monitoring	and	testing	of	these	processes	during	the	early	part	of	Year	2000.	In	addition,	in	order	to	protect	against	the	acquisition	of	additional	products	that	may	not	be Year	2000	ready,	we	implemented	a	policy	requiring	Year	2000	review	of	products	or	upgrades	sold	or	licensed	to	us	prior	to	their	acquisition.	Through	January	2000, we	have	not	discovered	any	material	issues.	However,	as	it	is	still	early	in	the	Year	2000,	such	failures,	or	the	failure	of	any	contingency	plan,	remain	a	possibility,	and	it could	seriously	harm	our	business	if	significant	new	noncompliance	issues	are	identified.

				Third-party	vendors,	manufacturers,	and	suppliers.		Both	before	and	after	the	Year	2000	date	change,	we	contacted	our	critical	suppliers,	manufacturers,	distributors, and	other	vendors	to	determine	whether	their	operations	and	the	products	and	services	that	they	provide	to	us	are	Year	2000	compliant.	Through	January	2000,	we	have not	discovered	any	material	issues.	However,	as	it	is	still	early	in	the	Year	2000,	such	failures	or	the	failure	of	any	contingency	plan	remain	a	possibility	and	could seriously	harm	our	business.

				Products.		In	addition,	the	Year	2000	issue	could	affect	the	products	that	we	license.	We	are	currently	continuing	to	test	our	products	and	gather	information	about	our technologies	and	products	affected	by	the	Year	2000	transition.	Current	information	about	our	products	is	available	on	our	Year	2000	Web	site

(www.adobe.com/newsfeatures/year2000).	Information	on	our	Web	site	is	provided	to	customers	for	the	sole	purpose	of	assisting	in	the	transition	to	the	Year	2000.	Such information	is	the	most	currently	available	concerning	our	products	and	is	provided	"as-is"	without	warranty	of	any	kind.	We	can	provide	no	assurance	that	our	current products	do	not	contain	undetected	errors	or	defects	associated	with	Year	2000	issues	that	may	result	in	material	costs	to	us.

				Contingency	plans.		Our	Y2K	Program	was	designed	to	minimize	the	possibility	of	serious	Year	2000	interruptions.	However,	because	the	possibility	of	such interruptions	could	not	be	eliminated,	we	developed	contingency	plans	addressing	Year	2000	issues	in	our	high-impact	areas	and	for	other	areas	as	we	deemed practicable	and	advisable.	Such	plans	for	high-impact	processes	continue	to	be	revised	and	updated	based	on	current	information,	even	after	the	start	of	the	Year	2000, particularly	in	light	of	our	internal	ongoing	process	and	structural	changes.	Other	contingency	plans	were	prepared,	tested,	and	updated	as	we	deemed	practicable	and appropriate.	We	continue	to	expect	to	have	personnel	and	resources	available	to	deal	with	any	Year	2000	problems	that	occur.

				Some	commentators	have	stated	that	a	significant	amount	of	litigation	will	arise	from	Year	2000	compliance	issues,	and	we	are	aware	of	a	growing	number	of lawsuits	against	other	software	vendors.	Because	of	the	unprecedented	nature	of	such	litigation,	it	is	uncertain	whether	or	to	what	extent	we	may	be	affected	by	it,	and the	impact	and	cost	of	such	litigation	is	therefore	not	estimable.	The	impact	of	the	Year	2000	on	our	future	revenue	is	difficult	to	discern	but	is	a	risk	to	be	considered	in evaluating	our	future	growth.	Any	costs	associated	with	potential	Year	2000	litigation	exposure	are	not	included	in	the	total	cost	estimate	above.

# Recent	Accounting	Pronouncements

				In	December	1998,	the	AICPA	issued	Statement	of	Position	("SOP")	98-9,	"Modifications	of	SOP	97-2,	Software	Revenue	Recognition,	With	Respect	to	Certain Transactions,"	which	amends	SOP	97-2	and	supersedes	SOP	98-4.	SOP	98-9	requires	recognition	of	revenue	using	the	"residual	method"	in	a	multiple-element	software arrangement	when	fair	value	does	not	exist	for	one	or	more	of	the	delivered	elements	in	the	arrangement.	Under	the	"residual	method,"	the	total	fair	value	of	the undelivered	elements	is	deferred	and	recognized	in	accordance	with	SOP	97-2.	We	will	adopt	SOP	98-9	in	fiscal	2000,	and	we	do	not	expect	this	to	have	a	significant impact	on	us.

				In	March	1998,	the	AICPA	issued	SOP	98-1,	"Accounting	for	the	Costs	of	Computer	Software	Developed	or	Obtained	for	Internal	Use",	which	provides	guidance	on accounting	for	the	costs	of	developing	computer	software	intended	for	internal	use.	We	must	adopt	SOP	98-1	effective	as	of	fiscal	2000,	and	we	do	not	expect	the adoption	to	have	a	material	impact	on	our	results	of	operations	or	financial	position.

				In	June	1998,	the	Financial	Accounting	Standards	Board	("the	FASB")	issued	Statement	of	Financial	Accounting	Standards	("SFAS")	133,	"Accounting	for Derivative	Instruments	and	Hedging	Activities."	SFAS	133	establishes	accounting	and	reporting	standards	for	derivative	financial	instruments	and	hedging	activities, and	requires	us	to	recognize	all	derivatives	as	either	assets	or	liabilities	on	the	balance	sheet	and	measure	them	at	fair	value.	Gains	and	losses	resulting	from	changes	in fair	value	would	be	accounted	for	depending	on	the	use	of	the	derivative	and	whether	it	is	designated	and	qualifies	for	hedge	accounting.	In	June	1999,	the	FASB	issued SFAS	137,	which	defers	the	implementation	of	SFAS	133.	We	will	be	required	to	implement	SFAS	133	in	fiscal	year	2001.	We	have	not	determined	the	impact	that SFAS	133	will	have	on	our	financial	statements	and	we	believe	that	such	determination	will	not	be	meaningful	until	closer	to	the	date	of	initial	adoption.

# LIQUIDITY	AND	CAPITAL	RESOURCES

Change

Cash,	cash	equivalents,	and	short-term	investments

| Working	capital | $355.4 | 73% | $205.0 | (55)% | $454.3 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Stockholders'\tequity | $512.2 | (0.8)% | $516.4 | (28)% | $715.4 |

				Our	cash,	cash	equivalents,	and	short-term	investments	consist	principally	of	money	market	mutual	funds,	municipal	bonds,	and	United	States	government	agency securities.	All	of	our	cash	equivalents	and	short-term	investments	are	classified	as	available-for-sale	under	the	provisions	of	SFAS	115,	"Accounting	for	Certain Investments	in	Debt	and	Equity	Securities."	The	securities	are	carried	at	fair	value	with	the	unrealized	gains	and	losses,	net	of	tax,	included	in	accumulated	other comprehensive	income,	which	is	reflected	as	a	separate	component	of	stockholders'	equity.

				Our	cash,	cash	equivalents,	and	short-term	investments	increased	$226.2	million,	or	83%,	in	fiscal	1999,	primarily	due	to	cash	generated	from	operations	of $334.2	million,	proceeds	from	the	issuance	of	treasury	stock	related	to	the	exercise	of	stock	options	under	our	stock	option	plans	and	sale	of	stock	under	the	Employee Stock	Purchase	Plan	of	$142.9	million,	and	the	release	of	restricted	funds	totaling	$130.3	million	associated	with	the	refinancing	of	our	corporate	headquarters	lease agreement.	Other	sources	of	cash	include	the	proceeds	from	the	sale	of	equity	securities	and	the	sale	of	a	building	in	the	amount	of	$63.9	million	and	$40.6	million, respectively.	In	addition,	short-term	investments	increased	due	to	a	reclassification	of	$46.7	million	of	investments	classified	as	long-term	to	short-term	as	well	as	mark- to-market	adjustments	totaling	$81.2	million.

				These	factors	were	partially	offset	by	the	purchase	of	treasury	stock	in	the	amount	of	$479.2	million,	capital	expenditures	of	$42.2	million,	the	purchase	of	other assets	for	$43.5	million,	the	purchase	of	the	assets	of	GoLive	Systems	and	Attitude	Software	for	$36.9	million,	and	the	payment	of	dividends	totaling	$12.2	million.

				We	expect	to	continue	our	investing	activities,	including	expenditures	for	computer	systems	for	research	and	development,	sales	and	marketing,	product	support,	and administrative	staff.	Furthermore,	cash	reserves	may	be	used	to	purchase	treasury	stock	and	acquire	software	companies,	products,	or	technologies	that	are complementary	to	our	business.

				In	September	1997,	Adobe's	Board	of	Directors	authorized,	subject	to	certain	business	and	market	conditions,	the	purchase	of	up	to	30.0	million	shares	of	our common	stock	over	a	two-year	period.	We	repurchased	approximately	1.7	million	shares	in	the	first	quarter	of	fiscal	1999,	20.3	million	shares	in	fiscal	1998,	and 8.0	million	shares	in	fiscal	1997,	at	a	cost	of	$30.5	million,	$362.4	million,	and	$188.6	million,	respectively.	This	program	was	completed	during	the	first	quarter	of fiscal	1999.

				In	April	1999,	Adobe's	Board	of	Directors	authorized,	subject	to	certain	business	and	market	conditions,	the	purchase	of	up	to	an	additional	5.0	million	shares	of	our common	stock	over	a	two-year	period.	This	new	stock	repurchase	program	was	in	addition	to	an	existing	program	whereby	we	have	been	authorized	to	repurchase	shares to	offset	issuances	under	employee	stock	option	and	stock	purchase	plans.	No	purchases	have	been	made	under	the	5.0	million	share	repurchase	program.

				Under	our	existing	plan	to	repurchase	shares	to	offset	issuances	under	employee	stock	plans,	we	repurchased	approximately	11.2	million,	0.7	million,	and	4.6	million shares	in	fiscal	1999,	1998,	and	1997,	respectively,	at	a	cost	of	$448.7	million,	$16.8	million,	and	$87.0	million,	respectively.

				We	have	paid	cash	dividends	on	our	common	stock	each	quarter	since	the	second	quarter	of	1988.	Adobe's	Board	of	Directors	declared	a	cash	dividend	on	our common	stock	of	$0.025	per	common	share	for	each	of	the	four	quarters	in	fiscal	1999,	1998,	and	1997.	On	December	1,	1997,	we	dividended	one	share	of	Siebel common	stock	for	each	600	shares	of	Adobe	common	stock	held	by	stockholders	of	record	on	October	31,	1997.	An	equivalent	cash	dividend	was	paid	for	holdings	of less	than	15,000	Adobe	shares	and

for	odd-lot	and	fractional	Siebel	shares.	Also,	in	fiscal	1997,	we	dividended	one	share	of	Netscape	common	stock	for	each	200	shares	of	Adobe	common	stock	held	by stockholders	of	record	on	July	31,	1997.	An	equivalent	cash	dividend	was	paid	for	holdings	of	less	than	5,000	Adobe	shares	and	for	fractional	Netscape	shares.	The declaration	of	future	dividends,	whether	in	cash	or	in-kind,	is	within	the	discretion	of	Adobe's	Board	of	Directors	and	will	depend	on	business	conditions,	our	results	of operations	and	financial	condition,	and	other	factors.

				To	facilitate	our	stock	repurchase	program,	we	sold	put	warrants	in	a	series	of	private	placements	in	fiscal	1999,	1998,	and	1997.	Each	put	warrant	entitles	the	holder to	sell	one	share	of	our	common	stock	to	us	at	a	specified	price.	Approximately	6.0	million,	8.0	million,	and	9.2	million	put	warrants	were	written	in	fiscal	1999,	1998, and	1997,	respectively.	At	December	3,	1999,	approximately	2.7	million	put	warrants	were	outstanding	that	expire	on	various	dates	through	April	2000	and	have exercise	prices	ranging	from	$40.16	to	$69.35	per	share,	with	an	average	exercise	price	of	$54.78	per	share.

				In	addition,	in	fiscal	1999,	1998,	and	1997,	we	purchased	call	options	that	entitle	us	to	buy	2.9	million,	3.2	million,	and	4.6	million	shares,	respectively,	of	our common	stock.	At	December	3,	1999,	approximately	1.6	million	call	options	were	outstanding	that	expire	on	various	dates	through	April	2000	and	have	exercise	prices ranging	from	$43.42	to	$74.83	per	share,	with	an	average	exercise	price	of	$60.42	per	share.	Under	these	arrangements,	at	our	option,	we	can	settle	with	physical delivery	or	net	shares	equal	to	the	difference	between	the	exercise	price	and	the	value	of	the	option	as	determined	by	the	contract.

				We	believe	that	existing	cash,	cash	equivalents,	and	short-term	investments,	together	with	cash	generated	from	operations,	will	provide	sufficient	funds	for	us	to	meet our	operating	cash	requirements	in	the	foreseeable	future.

# Commitments

				Our	principal	commitments	as	of	December	3,	1999	consisted	of	obligations	under	operating	leases,	a	line	of	credit	agreement,	venture	investing	activities,	real	estate development	agreements,	and	various	service	agreements.

				In	fiscal	1994	and	1996,	we	entered	into	real	estate	development	agreements	and	operating	lease	agreements	in	connection	with	the	construction	of	two	corporate headquarters	office	facilities	in	San	Jose,	California.	The	operating	lease	agreement	for	the	first	office	building	commenced	in	1996,	and	the	operating	lease	agreement for	the	second	facility	commenced	in	1998.	In	August	1999,	we	restructured	these	two	lease	agreements	for	our	corporate	headquarters.	The	amended	and	restated agreement	replaces	the	two	prior	lease	agreements	commencing	in	1996	and	1998,	respectively.	The	lease	is	for	a	period	of	five	years	and	is	subject	to	standard covenants	including	financial	ratios.	We	have	an	option	to	purchase	the	buildings	at	any	time	during	the	term	for	an	amount	equal	to	the	total	investment	of	the	lessor.	At the	end	of	the	lease	term,	we	may	exercise	the	purchase	option	or,	with	the	mutual	agreement	of	the	lessor,	renew	the	term	of	the	lease.	In	addition	to	these	possibilities, at	the	end	of	the	term,	we	may	elect	to	have	the	buildings	sold	to	an	unrelated	third	party.	In	such	case,	we	are	obligated	to	use	our	best	efforts	to	arrange	for	such	a	sale and	are	obligated	to	pay	the	lessor	the	difference	between	the	total	investment	in	the	buildings	and	the	net	sales	proceeds,	provided,	however,	that	in	no	event	would	we be	required	to	pay	more	than	a	maximum	guaranteed	residual	amount	as	set	forth	in	the	lease.	In	the	event	we	default	during	the	term	of	the	lease,	the	lessor	could	require us	to	purchase	the	buildings	for	an	amount	equal	to	our	option	price.	As	of	December	3,	1999,	we	were	in	compliance	with	all	financial	covenants.

				During	1998,	we	entered	into	a	real	estate	development	agreement	for	the	construction	of	an	office	building	in	Edinburgh,	Scotland.	During	fiscal	1998	and	1999,	we paid	approximately	$34.9	million	for	land,	fees,	and	construction	costs.	During	fiscal	1999,	we	announced	a	Board-approved	restructuring	which	resulted	in	the	reduction in	workforce	primarily	in	our	European	headquarters	in	Edinburgh,	Scotland.	(For	further	information,	see	Note	7	of	the	Notes	to	Consolidated	Financial	Statements.) As	a	result	of	the	restructuring,	the	decision	was	made	by	management	to	sell	the	new	facility	in	Edinburgh,	and	the	sale	was

completed	in	September	1999.	We	received	$40.6	million	cash	from	the	sale	of	the	facility	and	realized	a	gain	upon	the	sale	of	$5.7	million.	As	of	December	3,	1999,	we had	no	commitments	related	to	this	building.

				In	August	1999,	we	entered	into	a	$200.0	million	unsecured	revolving	line	of	credit	with	a	group	of	15	banks	for	general	corporate	purposes,	subject	to	certain financial	covenants.	One-half	of	the	facility	expires	in	August	2000,	and	the	other	$100.0	million	expires	in	August	2002.	Outstanding	balances	accrue	interest	at London	Interbank	Offered	Rate	("LIBOR")	plus	a	margin	that	is	based	on	our	financial	ratios.	There	were	no	outstanding	balances	on	the	credit	facility	as	of December	3,	1999.	In	addition,	as	of	December	3,	1999,	we	were	in	compliance	with	all	financial	covenants.

				We	believe	that	if	the	line	of	credit	is	canceled	or	amounts	are	not	available	under	the	line,	there	would	not	be	a	material	adverse	effect	on	our	financial	results, liquidity,	or	capital	resources.

				Under	the	terms	of	the	line	of	credit	and	the	lease	agreement,	we	may	pay	cash	dividends	unless	an	event	of	default	has	occurred	or	we	do	not	meet	certain	financial ratios.

# Derivatives	and	Financial	Instruments

# (Item	7a.	Quantitative	and	Qualitative	Disclosures	About	Market	Risk)

# Foreign	currency	hedging	instruments

				We	transact	business	in	various	foreign	currencies,	primarily	in	certain	European	countries	and	Japan.	Accordingly,	we	are	subject	to	exposure	from	movements	in foreign	currency	exchange	rates.	This	exposure	is	primarily	related	to	yen	denominated	licenses	in	Japan	and	local	currency	denominated	operating	expenses	in	Europe, where	we	license	primarily	in	U.S.	dollars.

				Our	Japanese	operating	expenses	are	in	yen,	which	mitigates	a	portion	of	the	exposure	related	to	yen	denominated	licenses	in	Japan.	In	addition,	we	hedge	firmly committed	transactions	using	primarily	forward	contracts.	We	also	hedge	a	percentage	of	forecasted	international	revenue	with	purchased	options.	At	December	3,	1999, total	outstanding	contracts	included	$17.0	million	in	foreign	currency	forward	exchange	contracts	and	purchased	Japanese	yen	put	option	contracts	with	a	notional	value of	$64.0	million.	All	contracts	expire	at	various	times	through	December	2000.	Our	hedging	policy	is	designed	to	reduce	the	impact	of	foreign	currency	exchange	rate movements,	and	we	expect	any	gain	or	loss	in	the	hedging	portfolio	to	be	offset	by	a	corresponding	gain	or	loss	in	the	underlying	exposure	being	hedged.

				A	sensitivity	analysis	was	performed	on	our	hedging	portfolio	as	of	December	3,	1999.	This	sensitivity	analysis	was	based	on	a	modeling	technique	that	measures	the hypothetical	market	value	resulting	from	a	10%	and	15%	shift	in	the	value	of	exchange	rates	relative	to	the	U.S.	dollar.	An	increase	in	the	value	of	the	U.S.	dollar	(and	a corresponding	decrease	in	the	value	of	the	hedged	foreign	currency	asset)	would	lead	to	an	increase	in	the	fair	value	of	our	financial	hedging	instruments	by	$2.6	million and	$4.4	million,	respectively.	Conversely,	a	decrease	in	the	value	of	the	U.S.	dollar	would	result	in	a	decrease	in	the	fair	value	of	these	financial	instruments	by $2.2	million	and	$3.3	million,	respectively.

				Our	accounting	policies	for	these	instruments	are	based	on	our	designation	of	such	instruments	as	hedging	transactions.	We	recognize	gains	and	losses	associated	with the	mark-to-market	of	outstanding	foreign	exchange	forward	contracts	that	are	designated	and	effective	as	hedges	of	existing	transactions,	for	which	a	firm	commitment has	been	attained,	as	income	in	the	current	period.	Corresponding	gains	and	losses	on	the	foreign	currency	denominated	transactions	being	hedged	are	recognized	as income	in	that	same	period.	In	this	manner,	the	gains	and	losses	on	foreign	currency	denominated	transactions	will	be	offset	by	the	gains	and	losses	on	the	foreign currency	contracts.	We	do	not	anticipate	any	material	adverse	effect	on	our	consolidated	financial	position,	results	of	operations,	or	cash	flows	as	a	result	of	these instruments.	We	use	yen	options	to	hedge	anticipated	exposures.

				We	do	not	use	derivative	financial	instruments	for	speculative	trading	purposes,	nor	do	we	hedge	our	foreign	currency	exposure	in	a	manner	that	entirely	offsets	the effects	of	changes	in	foreign	exchange	rates.

				We	currently	do	not	use	financial	instruments	to	hedge	local	currency	denominated	operating	expenses	in	Europe.	Instead,	we	believe	that	a	natural	hedge	exists,	in that	local	currency	revenue	from	product	upgrades	substantially	offsets	the	local	currency	denominated	operating	expenses.	We	assess	the	need	to	utilize	financial instruments	to	hedge	European	currency	exposure	on	an	ongoing	basis.

				We	regularly	review	our	hedging	program	and	may	as	part	of	this	review	determine	at	any	time	to	change	our	hedging	program.

# Fixed	income	investments

				At	December	3,	1999,	we	had	an	investment	portfolio	of	fixed	income	securities,	including	those	classified	as	cash	equivalents,	of	$327.0	million.	These	securities	are subject	to	interest	rate	fluctuations.	An	increase	in	interest	rates	could	adversely	affect	the	market	value	of	our	fixed	income	securities.

				A	sensitivity	analysis	was	performed	on	our	investment	portfolio	as	of	November	30,	1999.	This	sensitivity	analysis	was	based	on	a	modeling	technique	that	measures the	hypothetical	market	value	changes	that	would	result	from	a	parallel	shift	in	the	yield	curve	of	plus	50,	plus	100,	or	plus	150	basis	points	over	six-month	and	twelve- month	time	horizons.	The	market	value	changes	for	a	50,	100,	or	150	basis	point	increase	in	short-term	treasury	security	yields	were	not	material	due	to	the	limited duration	of	our	portfolio.

				We	do	not	use	derivative	financial	instruments	in	our	investment	portfolio	to	manage	interest	rate	risk.	We	do,	however,	limit	our	exposure	to	interest	rate	and	credit risk	by	establishing	and	strictly	monitoring	clear	policies	and	guidelines	for	its	fixed	income	portfolios.	At	the	present	time,	the	maximum	duration	of	all	portfolios	is limited	to	2.3	years.	The	guidelines	also	establish	credit	quality	standards,	limits	on	exposure	to	one	issue,	issuer,	as	well	as	the	type	of	instrument.	Due	to	the	limited duration	and	credit	risk	criteria	established	in	our	guidelines,	we	do	not	expect	the	exposure	to	market	and	credit	risk	to	be	material.

# Facility	leases

				We	are	exposed	to	interest	rate	risk	associated	with	leases	of	our	facilities	whose	payments	are	tied	to	the	LIBOR	and	have	evaluated	the	hypothetical	changes	in	lease obligations	arising	from	selected	hypothetical	changes	in	the	LIBOR	rate.	Market	changes	reflected	immediate	hypothetical	parallel	shifts	in	the	LIBOR	curve	of	plus	or minus	50,	100,	and	150	basis	points	for	a	twelve-month	period.	Based	on	this	analysis,	such	charges	would	not	be	material	to	our	results	of	operations	or	financial position.

# Item	8.	Financial	Statements	and	Supplementary	Data

# FINANCIAL	STATEMENTS

				Our	financial	statements	required	by	this	item	are	submitted	as	a	separate	section	of	this	Form	10-K.	See	Item	14.(a)1	for	a	listing	of	financial	statements	provided	in the	section	titled	"FINANCIAL	STATEMENTS".

# SUPPLEMENTARY	DATA

				The	following	tables	(presented	in	thousands,	except	per	share	amounts)	set	forth	quarterly	supplementary	data	for	each	of	the	years	in	the	two-year	period	ended December	3,	1999.	All	share	and	per	share	amounts	referred	to	in	the	table	below	have	been	adjusted	to	reflect	the	two-for-one	stock	split	in	the	form	of	a	stock	dividend of	our	common	stock	effected	October	26,	1999.

|  | Mar.	5 | June	4 | Sep.	3 | Dec.	3 | Year	Ended<br>Dec.	3 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Revenue | $226,902 | $245,886 | $260,876 | $281,770 | $1,015,434 |
| Gross\tprofit | 204,403 | 222,182 | 236,609 | 257,700 | 920,894 |
| Income\tbefore\tincome\ttaxes | 60,319 | 70,788 | 90,028 | 153,292 | 374,427 |
| Net\tincome | 38,276 | 44,961 | 57,155 | 97,359 | 237,751 |
| Basic\tnet\tincome\tper\tshare | 0.31 | 0.37 | 0.47 | 0.82 | 1.97 |
| Shares\tused\tin\tcomputing\tbasic\tnet\tincome\tper\tshare | 121,946 | 121,144 | 121,896 | 119,170 | 120,786 |
| Diluted\tnet\tincome\tper\tshare | 0.30 | 0.35 | 0.44 | 0.76 | 1.84 |
| Shares\tused\tin\tcomputing\tdiluted\tnet\tincome\tper\tshare | 126,768 | 128,100 | 129,658 | 127,406 | 129,205 |

|  | Feb.	27 | May	29 | Aug.	28 | Nov.	27 | Year	Ended<br>Nov.	27 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Revenue | $197,813 | $227,310 | $222,932 | $246,736 | $894,791 |
| Gross\tprofit | 170,008 | 201,742 | 199,563 | 222,444 | 793,757 |
| Income\tbefore\tincome\ttaxes | 42,635 | 44,645 | 242 | 80,172 | 167,694 |
| Net\tincome | 26,744 | 27,980 | 152 | 50,268 | 105,144 |
| Basic\tnet\tincome\tper\tshare | 0.20 | 0.21 | — | 0.40 | 0.79 |
| Shares\tused\tin\tcomputing\tbasic\tnet\tincome\tper\tshare | 135,524 | 133,470 | 134,556 | 126,230 | 132,866 |
| Diluted\tnet\tincome\tper\tshare | 0.19 | 0.20 | — | 0.39 | 0.77 |
| Shares\tused\tin\tcomputing\tdiluted\tnet\tincome\tper\tshare | 139,170 | 137,980 | 136,824 | 128,414 | 135,948 |

# Item	9.	Changes	in	and	Disagreements	With	Accountants	on	Accounting	and	Financial	Disclosure

				There	were	no	disagreements	on	any	matter	of	accounting	principles,	financial	statement	disclosure,	or	auditing	scope	or	procedure	to	be	reported	under	this	item.

# PART	III

# Item	10.	Directors	and	Executive	Officers	of	the	Registrant

# DIRECTORS

				You	will	find	information	regarding	Directors	in	the	section	captioned	"Election	of	Directors"	appearing	in	the	definitive	Proxy	Statement	to	be	delivered	to stockholders	in	connection	with	the	Annual	Meeting	of	Stockholders	to	be	held	on	April	26,	2000.	Such	information	is	incorporated	herein	by	reference.

				You	will	find	information	with	respect	to	executive	officers	in	Item	1.	Business	of	this	report.

# Item	11.	Executive	Compensation

				You	will	find	this	information	in	the	section	captioned	"Executive	Compensation"	appearing	in	the	definitive	Proxy	Statement	to	be	delivered	to	stockholders	in connection	with	the	Annual	Meeting	of	Stockholders	to	be	held	on	April	26,	2000.	Such	information	is	incorporated	herein	by	reference.

# Item	12.	Security	Ownership	of	Certain	Beneficial	Owners	and	Management

				You	will	find	this	information	in	the	section	captioned	"Security	Ownership	of	Certain	Beneficial	Owners	and	Management"	which	will	appear	in	the	definitive	Proxy Statement	we	will	deliver	to	our	stockholders	in	connection	with	our	Annual	Meeting	of	Stockholders	to	be	held	April	26,	2000.	We	are	incorporating	that	information here	by	reference.

# Item	13.	Certain	Relationships	and	Related	Transactions

				During	fiscal	1999,	we	entered	into	two	separate	loan	agreements	with	Graham	Freeman,	an	executive	officer	of	Adobe,	to	assist	with	his	relocation	to	San	Jose, California.	The	first	loan	in	the	amount	of	$550,000	was	repaid	to	us	on	December	31,	1999.	The	second	loan,	in	the	amount	of	$1.0	million,	is	interest-free	and	is secured	by	Mr.	Freeman's	principal	residence.	Under	the	terms	of	the	agreement,	Mr.	Freeman	is	required	to	repay	this	loan	at	$200,000	per	year	for	the	next	five	years, beginning	December	2000.	In	addition,	the	loan	must	be	repaid	in	full	within	thirty	days	of	any	termination	of	his	employment.

PART	IV

Item	14.	Exhibits,	Financial	Statement	Schedules,	and	Reports	on	Form	8-K

# Documents	filed	as	part	of	this	report

Consolidated	Statements	of	Stockholders'	Equity	and	Other	Comprehensive	Income 		Years	Ended	December	3,	1999,	November	27,	1998,	and	November	28,	1997

# Consolidated	Statements	of	Cash	Flows

# Notes	to	Consolidated	Financial	Statements

Schedule	II—Valuation	and	Qualifying	Accounts

# Index	to	Exhibits

| Number | Exhibit	Description | Form | Date | Number |
| :--- | :--- | :--- | :--- | :--- |
| 3.1 | The\tRegistrant's\t(as\tsuccessor\tin-interest\tto\tAdobe\tSystems | 10-Q | 05/30/97 | 3.1 |
|  | (Delaware)\tIncorporated\tby\tvirtue\tof\ta\treincorporation\teffective |  |  |  |
|  | 5/30/97)\tCertificate\tof\tIncorporation,\tas\tfiled\twith\tthe\tSecretary\tof |  |  |  |
|  | State\tof\tthe\tState\tof\tDelaware\ton\t5/9/97. |  |  |  |
| 3.2.10 | Amended\tand\tRestated\tBylaws\tas\tcurrently\tin\teffect. | 8-K | 9/3/98 | 3.2 |
| 3.3 | Certificate\tof\tDesignation\tof\tthe\tSeries\tA\tPreferred\tStock | 10-K | 05/30/97 | 2.1 |
| 3.4 | Agreement\tand\tPlan\tof\tMerger\teffective\t5/30/97\t(by\tvirtue\tof\ta | 10-Q | 05/30/97 | 2.1 |
|  | reincorporation),\tby\tand\tbetween\tAdobe\tSystems\tIncorporated,\ta |  |  |  |
|  | California\tcorporation\tand\tAdobe\tSystems\t(Delaware)\tIncorporated,\ta |  |  |  |
|  | Delaware\tcorporation. |  |  |  |
| 4.1 | Third\tAmended\tand\tRestated\tRights\tAgreement\tbetween\tthe | 8-K | 12/15/98 | 1 |
|  | Company\tand\tHarris\tTrust\tCompany\tof\tCalifornia |  |  |  |
| 10.1.6 | 1984\tStock\tOption\tPlan,\tas\tamended* | 10-Q | 07/02/93 | 10.1.6 |
| 10.21.3 | Revised\tBonus\tPlan* | 10-Q | 02/28/97 | 10.21.3 |
| 10.24.1 | 1994\tPerformance\tand\tRestricted\tStock\tPlan* | S-8 | 07/27/94 | 10.24.1 |
|  | 38 |  |  |  |
| 10.24.2 | Amended\t1994\tPerformance\tand\tRestricted\tStock\tPlan* | 10-Q | 05/29/98 | 10.24.2 |
| 10.25.0 | Form\tof\tIndemnity\tAgreement* | 10-K | 11/30/90 | 10.17.2 |
| 10.25.1 | Form\tof\tIndemnity\tAgreement* | 10-Q | 05/30/97 | 10.25.1 |
| 10.32 | Sublease\tof\tthe\tLand\tand\tLease\tof\tthe\tImprovements\tBy\tand\tBetween | 10-K | 11/25/94 | 10.32 |
|  | Sumitomo\tBank\tLeasing\tand\tFinance\tInc.\tand\tAdobe\tSystems |  |  |  |
|  | Incorporated\t(Phase\t1) |  |  |  |
| 10.36 | 1996\tOutside\tDirectors\tStock\tOption\tPlan* | 10-Q | 05/31/96 | 10.36 |

# Compensatory	plan	or	arrangement

				We	will	furnish	any	exhibit	listed	above	that	is	not	included	here.	You	must	specifically	request	the	exhibit	you	would	like	to	receive	and	pay	our	reasonable	expenses in	furnishing	it	to	you.	You	should	call	or	write:

				Many	of	the	above	exhibits	are	also	available	through	our	EDGAR	filings	at	www.sec.gov.

Reports	on	Form	8-K

				On	September	17,	1999,	we	filed	a	Report	on	Form	8-K	under	Item	5	to	report	a	two-for-one	split	of	our	common	stock,	in	the	form	of	a	dividend,	for	stockholders	of record	on	October	4,	1999.

# SIGNATURES

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

# /s/	HAROLD	L.	COVERT

Harold	L.	Covert,

Executive	Vice	President	and

Chief	Financial	Officer

(Principal	Financial	and	Accounting	Officer)

# SUMMARY	OF	TRADEMARKS

				The	following	trademarks	of	Adobe	Systems	Incorporated	or	its	subsidiaries,	which	may	be	registered	in	certain	jurisdictions,	are	referenced	in	this	Form	10-K:

Adobe Acrobat Acrobat	Capture Acrobat	Reader ActiveShare Adobe	Dimensions Adobe	Font	Folio Adobe	PhotoDeluxe Adobe	Premiere Adobe	Publishing	Collection Adobe	Type	Library Adobe	Type	Manager After	Effects ePaper ePaper	Solutions Extreme FrameMaker FrameMaker+SGML GoLive

Illustrator

ImageReady

ImageStyler

InCopy

InDesign

PageMaker

PageMill

PDF	Merchant

Photoshop

PostScript

PressReady PrintGear

Streamline

				All	other	brand	or	product	names	are	trademarks	or	registered	trademarks	of	their	respective	holders.

				As	required	under	Item	8.	Financial	Statements	and	Supplementary	Data,	the	consolidated	financial	statements	of	the	Company	are	provided	in	this	separate	section.

The	consolidated	financial	statements	included	in	this	section	are	as	follows:

| Financial	Statement	Description | Page |
| :--- | :--- |
| •Management's\tReport | 44 |
| •Independent\tAuditors'\tReport | 45 |
| •Consolidated\tBalance\tSheets\tDecember\t3,\t1999\tand\tNovember\t27,\t1998 | 46 |
| •Consolidated\tStatements\tof\tIncome\tYears\tEnded\tDecember\t3,\t1999,\tNovember\t27,\t1998,\tand\tNovember\t28,\t1997 | 47 |
| •Consolidated\tStatements\tof\tStockholders'\tEquity\tand\tOther\tComprehensive\tIncome\tYears\tEnded\tDecember\t3, | 48 |
| 1999,\tNovember\t27,\t1998,\tand\tNovember\t28,\t1997 |  |
| •Consolidated\tStatements\tof\tCash\tFlows\tYears\tEnded\tDecember\t3,\t1999,\tNovember\t27,\t1998,\tand\tNovember\t28, | 50 |
| 1997 |  |
| •Notes\tto\tConsolidated\tFinancial\tStatements | 51 |

# MANAGEMENT'S	REPORT

				Management	is	responsible	for	all	the	information	and	representations	contained	in	the	consolidated	financial	statements	and	other	sections	of	thisForm	10-K. Management	believes	that	the	consolidated	financial	statements	have	been	prepared	in	conformity	with	generally	accepted	accounting	principles	appropriate	in	the circumstances	to	reflect,	in	all	material	respects,	the	substance	of	events	and	transactions	that	should	be	included,	and	that	the	other	information	in	thisForm	10-K	is consistent	with	those	statements.	In	preparing	the	consolidated	financial	statements,	management	makes	informed	judgments	and	estimates	of	the	expected	effects	of events	and	transactions	that	are	currently	being	accounted	for.

				In	meeting	its	responsibility	for	the	reliability	of	the	consolidated	financial	statements,	management	depends	on	the	Company's	system	of	internal	accounting	controls. This	system	is	designed	to	provide	reasonable	assurance	that	assets	are	safeguarded	and	transactions	are	executed	in	accordance	with	management's	authorization,	and are	recorded	properly	to	permit	the	preparation	of	consolidated	financial	statements	in	accordance	with	generally	accepted	accounting	principles.	In	designing	control procedures,	management	recognizes	that	errors	or	irregularities	may	nevertheless	occur.	Also,	estimates	and	judgments	are	required	to	assess	and	balance	the	relative cost	and	expected	benefits	of	the	controls.	Management	believes	that	the	Company's	accounting	controls	provide	reasonable	assurance	that	errors	or	irregularities	that could	be	material	to	the	consolidated	financial	statements	are	prevented	or	would	be	detected	within	a	timely	period	by	employees	in	the	normal	course	of	performing their	assigned	functions.

				The	Board	of	Directors	pursues	its	oversight	role	for	these	consolidated	financial	statements	through	the	Audit	Committee,	which	is	comprised	solely	of	Directors who	are	not	officers	or	employees	of	the	Company.	The	Audit	Committee	meets	with	management	periodically	to	review	their	work	and	to	monitor	the	discharge	of	each of	their	responsibilities.	The	Audit	Committee	also	meets	periodically	with	KPMG	LLP,	the	independent	auditors,	who	have	free	access	to	the	Audit	Committee	or	the Board	of	Directors,	without	management	present,	to	discuss	internal	accounting	control,	auditing,	and	financial	reporting	matters.

				KPMG	LLP	is	engaged	to	express	an	opinion	on	our	consolidated	financial	statements.	Their	opinion	is	based	on	procedures	believed	by	them	to	be	sufficient	to provide	reasonable	assurance	that	the	consolidated	financial	statements	are	not	materially	misleading	and	do	not	contain	material	errors.

By /s/	HAROLD	L.	COVERT

Executive	Vice	President	and Chief	Financial	Officer (Principal	Financial	and	Accounting	Officer)

# INDEPENDENT	AUDITORS'	REPORT

To	the	Board	of	Directors	and	Stockholders	of	Adobe	Systems	Incorporated:

				We	have	audited	the	accompanying	consolidated	financial	statements	of	Adobe	Systems	Incorporated	and	subsidiaries	as	listed	in	the	accompanying	index.	In connection	with	our	audits	of	the	consolidated	financial	statements,	we	also	have	audited	the	accompanying	financial	statement	schedule.	These	consolidated	financial statements	and	financial	statement	schedule	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	consolidated financial	statements	and	financial	statement	schedule	based	on	our	audits.

				We	conducted	our	audits	in	accordance	with	generally	accepted	auditing	standards.	Those	standards	require	that	we	plan	and	perform	the	audit	to	obtain	reasonable assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining,	on	a	test	basis,	evidence	supporting	the	amounts	and disclosures	in	the	financial	statements.	An	audit	also	includes	assessing	the	accounting	principles	used	and	significant	estimates	made	by	management,	as	well	as evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

				In	our	opinion,	the	consolidated	financial	statements	referred	to	above	present	fairly,	in	all	material	respects,	the	financial	position	of	Adobe	Systems	Incorporated	and

subsidiaries	as	of	December	3,	1999	and	November	27,	1998,	and	the	results	of	their	operations	and	their	cash	flows	for	each	of	the	years	in	the	three-year	period	ended December	3,	1999,	in	conformity	with	generally	accepted	accounting	principles.	Also,	in	our	opinion,	the	related	financial	statement	schedule,	when	considered	in relation	to	the	basic	consolidated	financial	statements	taken	as	a	whole,	presents	fairly,	in	all	material	respects,	the	information	set	forth	therein.

# KPMG	LLP

# Mountain	View,	California

# CONSOLIDATED	BALANCE	SHEETS

# (In	thousands,	except	per	share	data)

| ASSETS | December	3<br>1999 | November	27<br>1998 |
| :--- | :--- | :--- |
| Current\tassets: |  |  |
| Cash\tand\tcash\tequivalents | $171,145 | $110,871 |
| Short-term\tinvestments | 327,571 | 161,676 |
| Receivables,\tnet\tof\tallowances\tfor\tdoubtful\taccounts\tof\t$5,170\tand\t$6,399,\trespectively | 78,766 | 141,180 |
| Deferred\tincome\ttaxes | 36,185 | 32,028 |
| Other\tcurrent\tassets | 9,348 | 10,190 |
| Total\tcurrent\tassets | 623,015 | 455,945 |
| Property\tand\tequipment,\tnet | 69,138 | 93,887 |
| Deferred\tincome\ttaxes | — | 16,647 |
| Other\tassets | 111,706 | 200,852 |
|  | $803,859 | $767,331 |
| LIABILITIES\tAND\tSTOCKHOLDERS'\tEQUITY |  |  |
| Current\tliabilities: |  |  |
| Trade\tand\tother\tpayables | $35,692 | $48,681 |
| Accrued\texpenses | 150,902 | 117,539 |
| Accrued\trestructuring\tcharges | 8,675 | 8,867 |
| Income\ttaxes\tpayable | 56,684 | 64,546 |
| Deferred\trevenue | 15,676 | 11,333 |
| Total\tcurrent\tliabilities | 267,629 | 250,966 |
| Deferred\tincome\ttaxes | 24,021 | — |
| Stockholders'\tequity: |  |  |
| Preferred\tstock,\t$0.0001\tpar\tvalue; |  |  |
| 2,000\tshares\tauthorized;\tnone\tissued | — | — |
| Common\tstock,\t$0.0001\tpar\tvalue; |  |  |
| Authorized:\t200,000\tshares; |  |  |
| Issued:\t147,882\tshares\tin\t1999\tand\t1998;\tand\tadditional\tpaid-in\tcapital | 369,057 | 306,859 |
| Retained\tearnings | 896,239 | 732,730 |
| Accumulated\tother\tcomprehensive\tincome | 40,332 | (1,879) |
| Treasury\tstock,\tat\tcost\t(29,343\tand\t26,100\tshares\tin\t1999\tand\t1998,\trespectively),\tnet\tof |  |  |
| reissuances | (793,419) | (521,345) |
| Total\tstockholders'\tequity | 512,209 | 516,365 |
|  | $803,859 | $767,331 |

See	accompanying	Notes	to	Consolidated	Financial	Statements.

# CONSOLIDATED	STATEMENTS	OF	INCOME

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Revenue | $1,015,434 | $894,791 | $911,894 |
| Direct\tcosts | 94,540 | 101,034 | 116,188 |
| Gross\tprofit | 920,894 | 793,757 | 795,706 |
| Operating\texpenses: |  |  |  |
| Research\tand\tdevelopment | 197,476 | 188,261 | 165,859 |
| Sales\tand\tmarketing | 328,505 | 315,544 | 290,096 |
| General\tand\tadministrative | 103,622 | 118,615 | 101,050 |
| Restructuring\tand\tother\tcharges | 23,028 | 38,245 | (590) |

| Acquired	in-process	research	and	development | 3,580 | — | 5,969 |
| :--- | :--- | :--- | :--- |
| Amortization\tof\tgoodwill\tand\tpurchased\tintangibles | 4,830 | 7,745 | 2,566 |
| Total\toperating\texpenses | 661,041 | 668,410 | 564,950 |
| Operating\tincome | 259,853 | 125,347 | 230,756 |
| Nonoperating\tincome,\tnet: |  |  |  |
| Investment\tgain,\tnet | 88,891 | 14,994 | 34,290 |
| Interest\tand\tother\tincome | 25,683 | 27,353 | 31,044 |
| Total\tnonoperating\tincome,\tnet | 114,574 | 42,347 | 65,334 |
| Income\tbefore\tincome\ttaxes | 374,427 | 167,694 | 296,090 |
| Income\ttax\tprovision | 136,676 | 62,550 | 109,253 |
| Net\tincome | $237,751 | $105,144 | $186,837 |
| Basic\tnet\tincome\tper\tshare | $1.97 | $0.79 | $1.30 |
| Shares\tused\tin\tcomputing\tbasic\tnet\tincome\tper\tshare | 120,786 | 132,866 | 143,924 |
| Diluted\tnet\tincome\tper\tshare | $1.84 | $0.77 | $1.26 |
| Shares\tused\tin\tcomputing\tdiluted\tnet\tincome\tper\tshare | 129,205 | 135,948 | 148,320 |

# CONSOLIDATED	STATEMENTS	OF	STOCKHOLDERS'	EQUITY

# AND	OTHER	COMPREHENSIVE	INCOME

# (In	thousands)

|  | and	Additional<br>Paid-in	Capital<br>Shares | Amount | Retained<br>Earnings | Comprehensive<br>Income | Accumulated<br>Other<br>Comprehensive<br>Income | Treasury	Stock<br>Shares | Amount | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balances\tas\tof\tNovember\t29,\t1996 | 142,952 | $148,602 | $529,546 | — | $28,366 | — | $— | $706,514 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome | — | — | 186,837 | $186,837 | — | — | — | 186,837 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax: |  |  |  |  |  |  |  |  |
| Unrealized\tgains\ton\tinvestments | — | — | — | 7,416 | — | — | — | — |
| Reclassification\tadjustments\ton\tunrealized\tgains\ton |  |  |  |  |  |  |  |  |
| investments | — | — | — | (37,340) | — | — | — | — |
| Net\tunrealized\tgains\t(losses)\ton\tinvestments,\tnet\tof |  |  |  |  |  |  |  |  |
| taxes\tof\t($17,499) | — | — |  | (29,924) | (29,924) | — | — | (29,924) |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | 528 | 528 | — | — | 528 |
| Other\tcomprehensive\tincome\t(loss) | — | — | — | (29,396) | — | — | — | — |
| Comprehensive\tincome,\tnet\tof\ttax | — | — | — | $157,441 | — | — | — | — |
| Stock\tissued\tunder\temployee\tstock\tand\tstock\toption |  |  |  |  |  |  |  |  |
| plans | 7,262 | 70,995 | — | — | — | — | — | 70,995 |
| Tax\tbenefit\tfrom\temployee\tstock\toption\tplans | — | 29,607 | — | — | — | — | — | 29,607 |
| Stock\tcompensation\texpense | — | 1,329 | — | — | — | — | — | 1,329 |
| Dividends\tdeclared | — | — | (52,522) | — | — | — | — | (52,522) |
| Repurchase\tof\tcommon\tstock | (2,332) | (36,956) | — | — | — | (10,352) | (238,688) | (275,644) |
| Proceeds\tfrom\tsale\tof\tput\twarrants | — | 6,356 | — | — | — | — | — | 6,356 |
| Reclassification\tof\tput\twarrant\tobligations | — | 71,348 | — | — | — | — | — | 71,348 |
| Balances\tas\tof\tNovember\t28,\t1997 | 147,882 | 291,281 | 663,861 | — | (1,030) | (10,352) | (238,688) | 715,424 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome | — | — | 105,144 | $105,144 | — | — | — | 105,144 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax: |  |  |  |  |  |  |  |  |
| Unrealized\tgains\ton\tinvestments | — | — | — | (2,767) |  | — | — | — |
| Reclassification\tadjustments\ton\tunrealized\tgains\ton |  |  |  |  |  |  |  |  |
| investments | — | — | — | — | — | — | — | — |
| Net\tunrealized\tgains\t(losses)\ton\tinvestments,\tnet\tof |  |  |  |  |  |  |  |  |
| taxes\tof\t($1,867) | — | — | — | (2,767) | (2,767) | — | — | (2,767) |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | 1,918 | 1,918 | — | — | 1,918 |
| Other\tcomprehensive\tincome\t(loss) | — | — | — | (849) | — | — | — | — |
| Comprehensive\tincome,\tnet\tof\ttax | — | — | — | $104,295 | — | — | — | — |
| Tax\tbenefit\tfrom\temployee\tstock\toption\tplans | — | 12,595 | — | — | — | — | — | 12,595 |
| Stock\tcompensation\texpense | — | 215 | — | — | — | — | 2,298 | 2,513 |
| Dividends\tdeclared | — | — | (12,962) | — | — | — | — | (12,962) |
| Purchase\tof\ttreasury\tstock | — | — | — | — | — | (21,026) | (379,203) | (379,203) |
| Reissuance\tof\ttreasury\tstock\tunder\temployee\tstock |  |  |  |  |  |  |  |  |
| and\tstock\toption\tplans | — | — | (23,313) | — | — | 5,278 | 94,248 | 70,935 |
| Proceeds\tfrom\tsale\tof\tput\twarrants | — | 2,768 | — | — | — | — | — | 2,768 |
| Balances\tas\tof\tNovember\t27,\t1998 | 147,882 | $306,859 | $732,730 | — | $(1,879) | (26,100) | $(521,345) | $516,365 |

# (Continued)

|  | Common	Stock<br>and	Additional<br>Paid-in	Capital<br>Shares | Amount | Retained<br>Earnings | Comprehensive<br>Income | Accumulated<br>Other<br>Comprehensive<br>Income | Treasury	Stock<br>Shares | Amount | Total |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Balances\tas\tof\tNovember\t27,\t1998 | 147,882 | $306,859 | $732,730 | — | $(1,879) | (26,100) | $(521,345) | $516,365 |
| Comprehensive\tincome: |  |  |  |  |  |  |  |  |
| Net\tincome | — | — | 237,751 | $237,751 | — | — | — | 237,751 |
| Other\tcomprehensive\tincome,\tnet\tof\ttax: |  |  |  |  |  |  |  |  |
| Unrealized\tgains\ton\tinvestments | — | — | — | 101,332 | — | — | — | — |
| Reclassification\tadjustments\ton\tunrealized\tgains\ton |  |  |  |  |  |  |  |  |
| investments | — | — | — | (58,524) | — | — | — | — |
| Net\tunrealized\tgains\t(losses)\ton\tinvestments,\tnet\tof |  |  |  |  |  |  |  |  |
| taxes\tof\t$26,698 | — | — | — | 42,808 | 42,808 | — | — | 42,808 |
| Foreign\tcurrency\ttranslation\tadjustments | — | — | — | (597) | (597) | — | — | (597) |
| Other\tcomprehensive\tincome | — | — | — | 42,211 | — | — | — | — |
| Comprehensive\tincome,\tnet\tof\ttax | — | — | — | $279,962 | — | — | — | — |
| Tax\tbenefit\tfrom\temployee\tstock\toption\tplans | — | 58,478 | — | — | — | — | — | 58,478 |
| Stock\tcompensation\texpense | — | 2,742 | — | — | — | — | 2,530 | 5,272 |
| Dividends\tdeclared | — | — | (12,623) | — | — | — | — | (12,623) |
| Purchase\tof\ttreasury\tstock | — | — | — | — | — | (13,106) | (479,161) | (479,161) |
| Reissuance\tof\ttreasury\tstock\tunder\temployee\tstock |  |  |  |  |  |  |  |  |
| and\tstock\toption\tplans | — | — | (61,619) | — | — | 9,863 | 204,557 | 142,938 |
| Proceeds\tfrom\tsale\tof\tput\twarrants | — | 978 | — | — | — | — | — | 978 |
| Balances\tas\tof\tDecember\t3,\t1999 | 147,882 | $369,057 | $896,239 | — | $40,332 | (29,343) | $(793,419) | $512,209 |

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Cash\tflows\tfrom\toperating\tactivities: |  |  |  |
| Net\tincome | $237,751 | $105,144 | $186,837 |
| Adjustments\tto\treconcile\tnet\tincome\tto\tnet\tcash\tprovided\tby\toperating\tactivities: |  |  |  |
| Depreciation\tand\tamortization | 50,770 | 56,264 | 59,384 |
| Deferred\tincome\ttaxes | 694 | (6,774) | (4,172) |
| Provision\tfor\tlosses\ton\treceivables | (3,319) | 3,336 | (440) |
| Gains\ton\tsales\tof\tequity\tsecurities | (89,977) | (15,337) | (34,290) |
| Gain\ton\tsale\tof\tbuilding | (5,729) | — | — |
| Tax\tbenefit\tfrom\temployee\tstock\toption\tplans | 58,478 | 12,595 | 29,607 |
| Stock\tcompensation\texpense | 5,272 | 2,513 | 1,329 |
| Noncash\trestructuring\tand\tother\tcharges | 14,379 | 9,077 | — |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| Receivables | 65,733 | (14,390) | (14,711) |
| Other\tcurrent\tassets | 842 | 6,886 | (2,351) |
| Trade\tand\tother\tpayables | (12,989) | (8,461) | 14,802 |
| Accrued\texpenses | 21,265 | 32,947 | 4,216 |
| Accrued\trestructuring\tcharges | (14,571) | 3,914 | (2,471) |
| Income\ttaxes\tpayable | 1,257 | 17,125 | (32,294) |
| Deferred\trevenue | 4,343 | (1,370) | (2,768) |
| Net\tcash\tprovided\tby\toperating\tactivities | 334,199 | 203,469 | 202,678 |
| Cash\tflows\tfrom\tinvesting\tactivities: |  |  |  |
| Purchases\tof\tshort-term\tinvestments | (270,960) | (1,278,178) | (2,657,302) |
| Maturities\tand\tsales\tof\tshort-term\tinvestments | 232,973 | 1,347,800 | 2,875,294 |
| Proceeds\tfrom\tthe\trelease\tof\trestricted\tfunds | 130,260 | — | — |
| Acquisitions\tof\tproperty\tand\tequipment | (42,206) | (59,745) | (33,882) |
| Additions\tto\tother\tassets | (43,474) | (57,520) | (36,153) |
| Acquisitions,\tnet\tof\tcash\tacquired | (36,932) | (3,544) | (6,121) |
| Proceeds\tfrom\tthe\tsale\tof\tbuilding | 40,613 | — | — |
| Proceeds\tfrom\tsales\tof\tequity\tsecurities | 63,876 | 10,886 | 30,993 |
| Net\tcash\tprovided\tby\t(used\tfor)\tinvesting\tactivities | 74,150 | (40,301) | 172,829 |
| Cash\tflows\tfrom\tfinancing\tactivities: |  |  |  |
| Proceeds\tfrom\tissuance\tof\tcommon\tstock | — | — | 70,995 |
| Purchase\tof\ttreasury\tstock | (479,161) | (379,203) | (275,644) |
| Proceeds\tfrom\treissuance\tof\ttreasury\tstock | 142,938 | 70,935 | — |
| Proceeds\tfrom\tsale\tof\tput\twarrants | 978 | 2,768 | 6,356 |

| Payment	of	dividends | (12,233) | (16,291) | (20,911) |
| :--- | :--- | :--- | :--- |
| Net\tcash\tused\tfor\tfinancing\tactivities | (347,478) | (321,791) | (219,204) |
| Effect\tof\tforeign\tcurrency\texchange\trates\ton\tcash\tand\tcash\tequivalents | (597) | 1,918 | 528 |
| Net\tincrease\t(decrease)\tin\tcash\tand\tcash\tequivalents | 60,274 | (156,705) | 156,831 |
| Cash\tand\tcash\tequivalents\tat\tbeginning\tof\tyear | 110,871 | 267,576 | 110,745 |
| Cash\tand\tcash\tequivalents\tat\tend\tof\tyear | $171,145 | $110,871 | $267,576 |
| Supplemental\tdisclosures:\nCash\tpaid\tduring\tthe\tyear\tfor\tincome\ttaxes | $68,770 | $22,471 | $85,062 |
| Noncash\tinvesting\tand\tfinancing\tactivities:\nCash\tdividends\tdeclared\tbut\tnot\tpaid | $3,452 | $3,062 | $3,558 |
| Dividends\tin-kind\tdeclared\tbut\tnot\tdistributed | $— | $— | $10,032 |
| Dividends\tin-kind\tdistributed | $— | $7,197 | $21,603 |
| Unrealized\tgains\t(losses)\ton\tavailable-for-sale\tsecurities,\tnet\tof\ttaxes | $42,808 | $(2,767) | $(29,924) |
| Adjustments\trelated\tto\tthe\treissuance\tof\ttreasury\tstock | $58,877 | $23,313 | $— |

# (In	thousands,	except	share	and	per	share	data)

# NOTE	1.	SIGNIFICANT	ACCOUNTING	POLICIES

				Founded	in	1982,	Adobe	Systems	Incorporated	("Adobe"	or	the	"Company")	is	a	provider	of	graphic	design,	publishing,	and	imaging	software	for	Web	and	print production.	The	Company	offers	a	market-leading	line	of	application	software	products,	type	products,	and	content	for	creating,	distributing,	and	managing	information of	all	types;	licenses	its	technology	to	major	hardware	manufacturers,	software	developers,	and	service	providers;	and	offers	integrated	software	solutions	to	businesses of	all	sizes.	The	Company	distributes	its	products	through	a	network	of	distributors	and	dealers,	value-added	resellers	("VARs"),	systems	integrators,	and	original equipment	manufacturer	("OEM")	customers;	direct	to	end	users	through	Adobe	call	centers;	and	through	its	own	Web	site	at	www.	adobe.com.	The	Company	has operations	in	the	Americas,	EMEA	(Europe,	Middle	East,	and	Africa),	and	Asia.

# Fiscal	year

				The	Company's	fiscal	year	is	a	52/53-week	year	ending	on	the	Friday	closest	to	November	30.

# Basis	of	consolidation

				The	accompanying	consolidated	financial	statements	include	those	of	Adobe	and	its	subsidiaries,	after	elimination	of	all	intercompany	accounts	and	transactions.

# Use	of	estimates

				The	preparation	of	financial	statements	in	conformity	with	generally	accepted	accounting	principles	requires	management	to	make	estimates	and	assumptions	that affect	the	reported	amounts	of	assets	and	liabilities	and	disclosure	of	contingent	liabilities,	at	the	date	of	the	financial	statements,	and	reported	amounts	of	revenues	and expenses	during	the	reporting	period.	Actual	results	could	differ	from	those	estimates.

# Cash	equivalents	and	short-term	investments

				Cash	equivalents	consist	of	instruments	with	maturities	of	three	months	or	less	at	the	time	of	purchase.

				All	of	the	Company's	cash	equivalents	and	short-term	investments,	and	certain	restricted	funds	and	noncurrent	investments	in	equity	securities,	free	of	trading restrictions	or	to	become	free	of	trading	restrictions	within	one	year,	are	classified	as	"available-for-sale."	These	investments	are	carried	at	fair	value,	based	on	quoted market	prices,	and	unrealized	gains	and	losses,	net	of	taxes,	are	included	in	accumulated	other	comprehensive	income,	which	is	reflected	as	a	separate	component	of stockholders'	equity.	Realized	gains	and	losses	upon	sale	or	maturity	of	these	investments	are	determined	using	the	specific	identification	method.

# Foreign	currency	translation

				Assets	and	liabilities	of	foreign	subsidiaries,	whose	functional	currency	is	the	local	currency,	are	translated	at	year-end	exchange	rates.	Revenues	and	expenses	are translated	at	the	average	rates	of	exchange	prevailing	during	the	year.	The	adjustment	resulting	from	translating	the	financial	statements	of

such	foreign	subsidiaries	is	included	in	accumulated	other	comprehensive	income,	which	is	reflected	as	a	separate	component	of	stockholders'	equity.	Certain	other transaction	gains	or	losses,	which	have	not	been	material,	are	reported	in	results	of	operations.

# Property	and	equipment

				Property	and	equipment	are	recorded	at	cost.	Depreciation	and	amortization	are	calculated	using	the	straight-line	method	over	the	shorter	of	the	estimated	useful	lives (thirty-five	years	for	the	building;	two	to	seven	years	for	furniture	and	equipment)	or	lease	terms	(five	to	nine	years	for	leasehold	improvements)	of	the	respective	assets.

# Other	assets

				Purchased	technology,	goodwill,	and	certain	other	intangible	assets	are	stated	at	cost	less	accumulated	amortization.	Amortization	is	recorded	utilizing	the	straight- line	method	over	the	estimated	useful	lives	of	the	respective	assets,	generally	three	to	seven	years.	Capitalization	of	computer	software	development	costs,	when

material,	begins	upon	the	establishment	of	technological	feasibility,	which	is	generally	the	completion	of	a	working	prototype	that	has	been	certified	as	having	no critical	bugs	and	is	a	release	candidate.	To	date,	software	development	costs	incurred	between	completion	of	a	working	prototype	and	general	availability	of	the	related product	have	not	been	material.

# Long-lived	assets

				The	Company	reviews	property	and	equipment	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amount	of	an	asset	may	not	be recoverable.	Recoverability	of	property	and	equipment	is	measured	by	comparison	of	its	carrying	amount	to	undiscounted	future	net	cash	flows	the	property	and equipment	are	expected	to	generate.	If	such	assets	are	considered	to	be	impaired,	the	impairment	to	be	recognized	is	measured	by	the	amount	by	which	the	carrying amount	of	the	property	and	equipment	exceeds	its	fair	market	value,	as	determined	by	discounted	cash	flows.	The	Company	assesses	the	recoverability	of	enterprise- level	goodwill	by	determining	whether	the	unamortized	goodwill	balance	can	be	recovered	through	undiscounted	future	results	of	the	acquired	operation.	The	amount	of enterprise-level	goodwill	impairment,	if	any,	is	measured	based	on	projected	discounted	future	results	using	a	discount	rate	reflecting	the	Company's	average	cost	of funds.

# Employee	stock	plans

				The	Company	accounts	for	its	employee	stock	plans,	which	consist	of	fixed	stock	option	plans,	an	employee	stock	purchase	plan,	and	a	performance	and	restricted stock	plan,	using	the	intrinsic	value	method.

# Revenue	recognition

				Application	products	revenue	is	recognized	upon	shipment,	provided	collection	is	determined	to	be	probable	and	no	significant	obligations	remain.	The	Company provides	to	application	products	customers	free	telephone	support,	for	which	the	expense	is	accrued,	up	to	a	maximum	of	90	days	beginning	upon	the

customer's	first	call.	The	cost	of	telephone	support	is	amortized	as	the	obligation	is	fulfilled.	Revenue	from	distributors	is	subject	to	agreements	allowing	limited	rights	of return,	rebates,	and	price	protection.	The	Company	provides	for	estimated	future	returns,	and	price	protection	when	given,	at	the	time	the	related	revenue	is	recorded.

				Licensing	revenue,	primarily	royalties,	is	recorded	when	OEM	customers	ship	products	incorporating	Adobe	software,	provided	collection	of	such	revenue	is probable.	The	Company	has	no	remaining	obligation	in	relation	to	such	licensing	revenue.

				Deferred	revenue	includes	customer	advances	under	OEM	licensing	agreements.	Additionally,	maintenance	revenue	for	application	products	is	deferred	and recognized	ratably	over	the	term	of	the	contract,	generally	twelve	months.

# Income	taxes

				The	Company	uses	the	asset	and	liability	method	of	accounting	for	income	taxes.	Under	the	asset	and	liability	method,	deferred	tax	assets	and	liabilities	are recognized	for	the	future	tax	consequences	attributable	to	differences	between	the	financial	statement	carrying	amounts	and	the	tax	basis	of	existing	assets	and	liabilities. A	valuation	allowance	is	recorded	to	reduce	tax	assets	to	an	amount	whose	realization	is	more	likely	than	not.

				The	Company	enters	into	foreign	exchange	contracts	to	hedge	its	foreign	currency	risks.	Such	contracts	must	be	effective	at	reducing	the	foreign	currency	risk associated	with	the	underlying	transaction	being	hedged	and	must	be	designated	as	a	hedge	at	the	inception	of	the	contract.	The	Company,	as	a	matter	of	policy,	does	not engage	in	speculative	transactions.

				The	Company	currently	uses	forward	contracts	as	hedges	of	firmly	committed	transactions.	For	these	contracts,	mark-to-market	gains	and	losses	are	recognized	as other	income	or	expense	in	the	current	period,	generally	consistent	with	the	period	in	which	the	gain	or	loss	of	the	underlying	transaction	is	recognized.	As	of December	3,	1999,	the	majority	of	all	forward	foreign	currency	contracts	entered	into	by	the	Company	had	maturities	of	90	days	or	less.

# Put	warrants	and	call	options

				The	Company	utilizes	put	warrants	and	call	options	("puts	and	calls")	to	facilitate	the	repurchase	of	its	common	stock.	The	puts	and	calls	permit,	at	the	Company's option,	physical	delivery	or	net	share	settlement	equal	to	the	difference	between	the	exercise	price	and	the	value	of	the	option	as	determined	by	the	contract. Accordingly,	in-the-money	put	warrants	do	not	result	in	a	liability	on	the	balance	sheet.

# Stock	split

				The	Company's	Board	of	Directors	approved	a	two-for-one	stock	split	in	the	form	of	a	stock	dividend	of	the	Company's	common	stock	to	stockholders	of	record	on October	4,	1999	effected	October	26,	1999.	All	share	and	per	share	amounts	referred	to	in	the	consolidated	financial	statements	have	been	adjusted	to	reflect	this	stock split.

# Comprehensive	income

				The	Company	adopted	Statement	of	Financial	Accounting	Standards	No.	130	("SFAS	130"),	"Reporting	Comprehensive	Income,"	on	November	28,	1998.	SFAS	130 establishes	standards	for	the	reporting	and	display	of	comprehensive	income	and	its	components	in	the	financial	statements.	Items	of	comprehensive	income	(loss)	that the	Company	currently	reports	are	unrealized	gains	and	losses	on	marketable	securities	categorized	as	available-for-sale	and	foreign	currency	translation	adjustments. Comprehensive	income	and	its	components	are	displayed	on	the	Company's	Consolidated	Statements	of	Stockholders'	Equity	and	Other	Comprehensive	Income.

				In	December	1998,	the	AICPA	issued	Statement	of	Position	No.	98-9	("SOP	98-9"),	"Modifications	of	SOP	97-2,	Software	Revenue	Recognition,	With	Respect	to Certain	Transactions,"	which	amends	SOP	97-2	and	supersedes	SOP	98-4.	SOP	98-9	requires	recognition	of	revenue	using	the	"residual	method"	in	a	multiple-element software	arrangement	when	fair	value	does	not	exist	for	one	or	more	of	the	delivered	elements	in	the	arrangement.	Under	the	"residual	method,"	the	total	fair	value	of	the undelivered	elements	is	deferred	and	recognized	in	accordance	with	SOP	97-2.	The	Company	will	adopt	SOP	98-9	in	fiscal	2000.	The	adoption	of	SOP	98-9	is	not expected	to	have	a	significant	impact	on	the	Company.

				In	March	1998,	the	AICPA	issued	SOP	98-1,	"Accounting	for	the	Costs	of	Computer	Software	Developed	or	Obtained	for	Internal	Use,"	which	provides	guidance	on accounting	for	the	costs	of	developing	computer	software	intended	for	internal	use.	The	Company	must	adopt	SOP	98-1	effective	as	of	fiscal	2000,	and	the	adoption	is not	expected	to	have	a	material	impact	on	the	Company's	results	of	operations	or	financial	position.

				In	June	1998,	the	Financial	Accounting	Standards	Board	(the	"FASB")	issued	SFAS	133,	"Accounting	for	Derivative	Instruments	and	Hedging	Activities."	SFAS	133 establishes	accounting	and	reporting	standards	for	derivative	financial	instruments	and	hedging	activities	and	requires	the	Company	to	recognize	all	derivatives	as	either assets	or	liabilities	on	the	balance	sheet	and	measure	them	at	fair	value.	Gains	and	losses	resulting	from	changes	in	fair	value	would	be	accounted	for	depending	on	the use	of	the	derivative	and	whether	it	is	designated	and	qualifies	for	hedge	accounting.	In	June	1999,	the	FASB	issued	SFAS	137,	which	defers	the	implementation	of SFAS	133.	The	Company	will	be	required	to	implement	SFAS	133	in	its	fiscal	year	2001.	The	Company	has	not	determined	the	impact	that	SFAS	133	will	have	on	its financial	statements	and	believes	that	such	determination	will	not	be	meaningful	until	closer	to	the	date	of	initial	adoption.

# Reclassifications

				Certain	reclassifications	were	made	to	the	fiscal	1998	and	1997	consolidated	financial	statements	to	conform	to	the	fiscal	1999	presentation,	including	certain reclassifications	within	operating	expenses	and	between	operating	expenses	and	direct	costs	that	were	made	to	enable	management	to	better	analyze	financial	results. These	reclassifications	did	not	impact	total	operating	profit	in	fiscal	1998	and	1997.

# NOTE	2.	ACQUISITIONS

				During	the	fourth	quarter	of	fiscal	1999	the	Company	acquired	substantially	all	of	the	assets,	consisting	of	intellectual	property,	of	Attitude	Software,	LLC	("Attitude Software").	The	acquisition	was	accounted	for	using	the	purchase	method	of	accounting	in	accordance	with	Accounting	Principles	Board	Opinion	No.	16	("APB	16"), and	substantially	all	of	the	purchase	price	of	$3.0	million	cash	was	allocated	to	in-process	research	and	development	and	expensed	at	the	time	of	acquisition.	The ongoing	project	at	Attitude	Software	at	the	time	of	the	purchase	included	the	development	of	the	3D	Anarchy	authoring	product.	This	technology	was	purchased	for incorporation	into	future	versions	of	existing	Adobe	products	to	further	enhance	the	feature	sets	and	user	interface	contained	within	the	products.	At	the	date	the Company	acquired	Attitude	Software,	it	was	estimated	that	50%	of	the	development	effort	had	been	completed	and	that	the	remaining	50%	of	the	development	effort would	take	approximately	eighteen	months	to	complete	and	would	cost	$1.8	million.	The	efforts	required	to	complete	the	development	of	the	technology	primarily	relate to	additional	design	efforts	to	integrate	the	technologies	into	several	of	the	Company's	products,	finalization	of	coding,	and	completion	testing.	The	value	of	the	in- process	technology	was	determined	by	estimating	the	projected	net	cash	flows	related	to	products	the	technology	will	be	integrated	into,	including	costs	to	complete	the development	of	the	technology	and	the	future	net	revenues	that	may	be	earned	from	the	products,	excluding	the	value	attributed	to	the	existing	technology	with	the products	prior	to	the	integration	of	the	purchased	technology.	These	cash	flows	were	discounted	back	to	their	net	present	value	using	a	discount	rate	of	20%,	exclusive	of the	value	attributable	to	the	use	of	the	in-process	technologies	in	future	products.

				Additionally,	during	the	fourth	quarter	of	fiscal	1999,	the	Company	acquired	substantially	all	of	the	assets,	consisting	of	intellectual	property,	of	Photomerge Technology.	In	connection	with	the	acquisition	of	Photomerge	Technology,	100%	of	the	purchase	price,	or	$600,000	cash,	was	allocated	to	in-process	research	and development,	due	to	the	state	of	completion	and	the	uncertainty	of	the	technology.

				On	January	4,	1999,	the	Company	acquired	substantially	all	of	the	assets,	consisting	of	intellectual	property	and	a	minimal	amount	of	fixed	assets,	of	both	GoLive Systems,	Inc.,	a	Delaware	corporation,	and	GoLive	Systems	GmbH	and	Co.	KG,	a	German	limited	partnership	(together	"GoLive	Systems").	GoLive	Systems	creates Web	site	development	software,	which	enables	users	to	effectively	use	the	Internet	for	professional	publishing	and	communication.	The	acquisition	was	accounted	for under	the	purchase	method	of	accounting	in	accordance	with	APB	16.	The	initial	purchase	price	of	the	acquisition	was	approximately	$31.0	million	cash,	plus	additional contingency	payments	of	up	to	$8.0	million	based	on	achieving	certain	technical	and	employment	milestones.	The	Company	determined	that	certain	milestones	had been	reached	as	of	March	5,	1999,	and	as	such,	$4.0	million	in	contingent	payments	were	recorded	as	additional	purchase	price	and	paid	throughout	fiscal	1999. Approximately	$11.4	million	of	the	purchase

price	was	allocated	to	the	developed	technology,	and	the	remaining	$23.6	million	was	allocated	to	trademark,	the	value	of	the	assembled	workforce,	and	goodwill.

				During	fiscal	1997,	the	Company	acquired	three	software	companies,	in	separate	transactions,	for	an	aggregate	consideration	of	approximately	$8.5	million.	These acquisitions	were	accounted	for	using	the	purchase	method	of	accounting,	and	approximately	$6.0	million	of	the	purchase	price	was	allocated	to	in-process	research	and development	and	expensed	at	the	time	of	the	acquisition.	One	of	the	in-process	technologies	acquired	for	$2.5	million	was	discontinued	in	fiscal	1998.	The	project associated	with	an	additional	$2.8	million	of	the	purchased	in-process	technology	was	canceled	as	part	of	the	restructuring	in	the	third	quarter	of	fiscal	1998	and subsequently	sold	to	a	management-led	buyout	group.

# NOTE	3.	CASH,	CASH	EQUIVALENTS,	AND	INVESTMENTS

				All	cash,	cash	equivalents,	and	short-term	investments	consisted	of	the	following:

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| Cash | $42,452 | $— | $— | $42,452 |
| Cash\tequivalents: |  |  |  |  |
| Money\tmarket\tmutual\tfunds | 52,135 | — | — | 52,135 |
| Time\tdeposit | 5,000 | — | — | 5,000 |
| State\tand\tmunicipal\tbonds\tand\tnotes | 66,575 | — | — | 66,575 |
| United\tStates\tgovernment\tagency\tnotes | 4,983 | — | — | 4,983 |
| Total\tcash\tequivalents | 128,693 | — | — | 128,693 |
| Total\tcash\tand\tcash\tequivalents | 171,145 | — | — | 171,145 |
| Short-term\tinvestments: |  |  |  |  |
| State\tand\tmunicipal\tbonds | 198,284 | 441 | (666) | 198,059 |
| Other\tmarketable\tequity\tsecurities | 46,694 | 83,817 | (999) | 129,512 |
| Total\tshort-term\tinvestments | 244,978 | 84,258 | (1,665) | 327,571 |
| Total\tsecurities | $416,123 | $84,258 | $(1,665) | $498,716 |

|  | Cost | Unrealized<br>Gains | Unrealized<br>Losses | Estimated<br>Fair	Value |
| :--- | :--- | :--- | :--- | :--- |
| Classified\tas\tcurrent\tassets:\nCash | $30,755 | $— | $— | $30,755 |
| Cash\tequivalents: |  |  |  |  |
| Money\tmarket\tmutual\tfunds | 34,583 | — | — | 34,583 |
| State\tand\tmunicipal\tbonds\tand\tnotes | 45,533 | — |  | 45.533 |
| Total\tcash\tequivalents | 80,116 | — | — | 80,116 |
| Total\tcash\tand\tcash\tequivalents | 110,871 | — | — | 110,871 |
| Short-term\tinvestments: |  |  |  |  |
| State\tand\tmunicipal\tbonds | 156,344 | 1,435 | (63) | 157,716 |
| United\tStates\tgovernment\ttreasury\tnotes | 3,952 | 7 | — | 3,959 |
| Other\tmarketable\tequity\tsecurities | 1 | — | — | 1 |
| Total\tshort-term\tinvestments | 160,297 | 1,442 | (63) | 161,676 |
| Total\tcurrent\tsecurities | 271,168 | 1,442 | (63) | 272,547 |
| Classified\tas\tnoncurrent\tassets:\nMoney\tmarket\tmutual\tfunds | 66,000 | — | — | 66,000 |
| Total\tsecurities | $337,168 | $1,442 | $(63) | $338,547 |

				Approximately	$128.7	million	and	$80.1	million	in	investments	are	classified	as	cash	equivalents	as	of	December	3,	1999	and	November	27,	1998,	respectively,	and all	noncurrent	investments	are	included	in	other	assets.	Unrealized	gains	(losses)	on	all	securities,	net	of	taxes,	are	included	in	accumulated	other	comprehensive	income, which	is	a	separate	component	of	stockholders'	equity,	and	totaled	$43.6	million	and	$0.8	million	as	of	December	3,	1999	and	November	27,	1998,	respectively.	Net realized	gains	for	the	years	ended	December	3,	1999	and	November	27,	1998	of	$53.7	million	and	$12.9	million,	respectively,	are	included	in	nonoperating	income.

				As	of	December	3,	1999,	the	cost	and	estimated	fair	value	of	current	debt	securities	and	money	market	mutual	funds	with	a	maturity	of	one	year	or	less	were $176.0	million	and	$176.2	million,	respectively,	and	the	cost	and	estimated	fair	value	of	current	debt	securities	with	maturities	ranging	from	one	to	five	years	were $151.0	million	and	$150.6	million,	respectively.	These	securities	are	classified	as	current	assets	based	on	the	Company's	intent	and	ability	to	use	these	securities	as necessary	to	satisfy	significant	short-term	liquidity	requirements	that	may	arise.

# NOTE	4.	PROPERTY	AND	EQUIPMENT

				Property	and	equipment	consisted	of	the	following:

|  | December	3<br>1999 | November	27<br>1998 |
| :--- | :--- | :--- |
| Land | $846 | $7,421 |
| Building | 4,477 | 4,477 |
| Equipment | 156,658 | 156,324 |
| Furniture\tand\tfixtures | 26,840 | 28,464 |
| Capital\tprojects\tin-progress | 6,592 | — |
| Leasehold\timprovements | 25,795 | 24,829 |
|  | 221,208 | 221,515 |
| Less\taccumulated\tdepreciation\tand\tamortization | 152,070 | 127,628 |
|  | $69,138 | $93,887 |

# NOTE	5.	OTHER	ASSETS

				Other	assets	consisted	of	the	following:

|  | December	3<br>1999 | November	27<br>1998 |
| :--- | :--- | :--- |
| Investments | $75,793 | $56,332 |
| Purchased\ttechnology\tand\tlicensing\tagreements | 17,505 | 3,502 |
| Restricted\tfunds\tand\tsecurity\tdeposits | — | 130,260 |
| Intangibles\tand\tother\tassets | 53,387 | 27,527 |
|  | 146,685 | 217,621 |
| Less\taccumulated\tamortization | 34,979 | 16,769 |
|  | $111,706 | $200,852 |

				The	Company	owns	a	minority	interest	in	certain	companies	and	a	majority	interest	in	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III,	L.P. The	limited	partnership	investments	are	accounted	for	under	the	equity	method,	as	contractually	the	partnerships	are	controlled	by	the	general	partner,	a	third	party.

				The	investments	in	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III,	L.P.,	which	were	established	to	enable	the	Company	to	invest	in	emerging technology	companies	strategic	to	Adobe's	software	business,	totaled	$17.1	million,	$31.9	million,	and	$16.1	million,	respectively,	as	of	December	3,	1999,	and	totaled $20.0	million,	$22.3	million,	and	nil,	respectively,	as	of	November	27,	1998.	The	Company's	investments	in	the	limited	partnerships	are	adjusted	to	reflect	its	equity interest	in	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III	L.P.'s	investment	income	(loss)	and	dividend	distributions,	which	totaled $12.4	million,	$346,000,	and	$(1.3)	million	in	fiscal	years	1999,	1998,	and	1997,	respectively.	Adobe	Ventures	L.P.;	Adobe	Ventures	II,	L.P.;	and	Adobe	Ventures	III, L.P.	carry

their	investments	in	equity	securities	at	an	estimated	fair	market	value,	and	unrealized	gains	and	losses	are	included	in	investment	income	(loss).	The	stock	of substantially	all	of	the	technology	companies	held	by	the	limited	partnerships	at	December	3,	1999	is	not	publicly	traded,	and	therefore,	there	is	no	established	market for	these	investments.	As	such,	these	investments	are	valued	based	on	the	most	recent	round	of	financing	involving	new	nonstrategic	investors	and	estimates	made	by the	general	partner,	a	third	party.	When	investments	held	by	the	limited	partnerships	are	publicly	traded,	the	fair	value	of	such	investments	is	based	on	quoted	market prices,	and	mark-to-market	adjustments	are	included	in	investment	income.

				The	Company	owns	minority	interests	in	certain	technology	companies	totaling	$10.6	million	and	$14.0	million	as	of	December	3,	1999	and	November	27,	1998, respectively.	Investments	in	equity	securities	that	are	not	publicly	traded,	or	are	restricted	from	trading	for	more	than	one	year,	are	carried	at	the	lower	of	cost	or	market.

				The	Company's	portfolio	of	equity	investments	at	December	3,	1999	had	a	cost	basis	of	$67.5	million	and	a	fair	market	value	of	$75.8	million.	(For	further information,	see	Note	9.)

				As	of	December	3,	1999,	the	Company	did	not	have	any	restricted	funds	or	pledged	collateral.	The	Company	had	deposited	funds	with	a	lessor	as	an	interest-bearing security	deposit	totaling	$64.3	million	as	of	November	27,	1998.	In	addition,	as	of	November	27,	1998,	the	Company	had	pledged	collateral	with	a	lessor	comprised	of money	market	mutual	funds	totaling	$66.0	million.

				As	of	December	3,	1999,	intangibles	and	other	assets	consist	primarily	of	goodwill	in	the	amount	of	$26.4	million,	capitalized	localization	of	$18.0	million,	and	other intangible	assets	of	$8.9	million.	Amortization	expense	related	to	goodwill,	purchased	technology,	capitalized	localization,	and	other	intangible	assets	was	$21.6	million and	$20.4	million	in	fiscal	1999	and	1998,	respectively.

# NOTE	6.	ACCRUED	EXPENSES

				Accrued	expenses	consisted	of	the	following:

|  | December	3<br>1999 | November	27<br>1998 |
| :--- | :--- | :--- |
| Accrued\tcompensation\tand\tbenefits | $65,957 | $41,592 |
| Sales\tand\tmarketing\tallowances | 9,990 | 13,439 |
| Minority\tinterest | 17,737 | 1,525 |
| Other | 57,218 | 60,983 |
|  | $150,902 | $117,539 |

# NOTE	7.	RESTRUCTURING	AND	OTHER	CHARGES

				During	fiscal	1999	and	1998,	the	Company	implemented	three	different	Board-approved	restructuring	programs.	These	unique	restructuring	programs	were	directly focused	on	improving	the	Company's	competitive	position	as	well	as	enhancing	the	Company's	allocation	of	resources.	In	addition	to	these	three	restructurings,	the Company	also	implemented	restructuring	programs	in	fiscal	1994	and	1995	related	to	the	Aldus	Corporation	("Aldus")	and	Frame	Technology	Corporation	("Frame") acquisitions.	As	of

December	3,	1999,	there	was	no	restructuring	liability	remaining	for	restructuring	programs	prior	to	fiscal	1998.

				The	fourth	quarter	1999	restructuring	program	was	implemented	to	enhance	the	Company's	worldwide	customer	support	activity	and	to	streamline	the	product distribution	and	warehouse	operations	in	North	America.	The	program	resulted	in	severance	and	related	charges	for	86	positions	and	included	charges	for	vacating	leased facilities.

				The	1999	restructuring	program	implemented	in	the	second	and	third	quarters	was	directly	related	to	the	centralization	of	the	Company's	worldwide	sales	and administrative	organization	and	the	realignment	of	the	Company's	Printing	Solutions	business.	The	program	included	a	reduction	in	force	of	198	positions,	two	of	which were	executive	positions.	In	addition	to	severance	and	related	charges,	the	restructuring	program	included	charges	for	vacating	leased	facilities.

				The	1998	restructuring	program	was	implemented	to	refocus	the	Company's	product	development	efforts	and	to	eliminate	management	redundancies	in	the organization.	This	program	consisted	of	severance	and	related	charges	for	364	positions,	four	of	which	were	executive	positions.	Moreover,	the	Company	divested	two business	units,	canceled	certain	contracts,	and	vacated	leased	facilities.

				The	restructuring	program	implemented	in	the	fourth	quarter	of	fiscal	1999	included	a	reduction	in	force	of	86	positions	and	the	closure	of	the	North	American distribution	warehouse	as	a	result	of	the	decision	to	outsource	the	Company's	North	American	distribution	operation	and	the	majority	of	its	customer	support	services. The	reduction	in	force	primarily	affected	employees	in	Seattle,	Washington	and	Santa	Clara,	California.	Total	charges	incurred	as	a	result	of	the	restructuring	were $2.1	million,	which	include	severance	and	related	charges	associated	with	the	reduction	in	force	and	charges	related	to	vacating	leased	facilities.	As	of	December	3, 1999,	$2.1	million	remains	accrued	and	is	expected	to	be	paid	by	the	end	of	the	second	quarter	of	fiscal	2000.

				The	following	table	depicts	the	activity	for	the	1999	fourth-quarter	restructuring	program	through	December	3,	1999:

Severance	and	related	charges

| Total<br>Charges | Cash<br>Payments | Write-<br>Downs | Accrued<br>Balance	at<br>December	3<br>1999 |
| :--- | :--- | :--- | :--- |
| $1,953 | $— | $— | $1,953 |

| Lease	termination	costs | 103 | — | — | 103 |
| :--- | :--- | :--- | :--- | :--- |
| Impairment\tof\tleasehold\timprovements\tat |  |  |  |  |
| vacated\tfacilities | 90 | — | (90) | — |
|  | $2,146 | $— | $(90) | $2,056 |

				Severance	and	related	charges	include	involuntary	termination	and	COBRA	benefits,	outplacement	costs,	and	payroll	taxes	for	86	employees,	or	3%	of	the	worldwide workforce.	The	reduction	in	force	consisted	of	72	employees	from	the	customer	service	and	technical	support	departments	and	14	employees	from	the	North	American distribution	operation.	The	decision	was	made	to	outsource	a	majority	of	these	functions	to	achieve	higher	quality	customer	service	and	improve	time-to-market efficiencies	for	product	distribution.

				Lease	termination	costs	of	$0.1	million	represent	remaining	lease	liabilities	related	to	the	Santa	Clara	distribution	center.	Impairment	of	leasehold	improvements represents	charges	for	the	write-down	of	the	net	book	value	of	equipment	specifically	identified	under	the	restructuring	program	as	assets	held	for	disposal.	These	assets were	written	down	in	accordance	with	the	provisions	of	SFAS	121,	"Accounting	for	the	Impairment	of	Long-Lived	Assets	and	for	Long-Lived	Assets	to	be	Disposed Of."

				The	restructuring	program	implemented	throughout	the	second	and	third	quarters	of	fiscal	1999	included	a	reduction	in	force	of	198	positions,	two	of	which	were executive	positions.	The	reduction	in	force	primarily	affected	the	Company's	European	headquarters	in	Edinburgh,	Scotland	and	its	North	American	headquarters	in	San Jose,	California.	In	addition	to	severance	and	related	charges	associated	with	the	reduction	in	force,	the	restructuring	program	included	charges	for	vacating	leased facilities.	These	restructuring	actions	in	the	second	and	third	quarters	of	fiscal	1999	resulted	in	total	charges	of	$17.6	million,	of	which	approximately	$0.1	million	were noncash	charges.	Of	the	$17.6	million	in	total	charges,	$5.9	million	remains	accrued	at	December	3,	1999.

				In	the	third	and	fourth	quarters	of	fiscal	1999,	the	Company	revised	its	estimate	of	the	total	costs	associated	with	the	program	described	above	resulting	in	an adjustment	to	the	second-quarter	restructuring	accrual	of	approximately	$3.2	million.	Approximately	$3.0	million	of	the	adjustment	reflects	lower	than	estimated severance	and	related	charges	primarily	attributable	to	employees	impacted	by	the	restructuring	who	were	able	to	find	alternative	employment	within	the	Company.	The remaining	adjustment	was	due	to	lower	than	expected	charges	related	to	vacating	leased	facilities.

				The	following	table	depicts	the	activity	for	the	1999	second-quarter	restructuring	program	through	December	3,	1999:

|  | Total<br>Charges | Cash<br>Payments | Write-<br>Downs | Adjustments | Accrued<br>Balance	at<br>December	3<br>1999 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Severance\tand\trelated\tcharges | $14,641 | $(6,458) | $— | $(2,976) | $5,207 |
| Lease\ttermination\tcosts | 2,545 | (1,838) | — | (272) | 435 |
| Impairment\tof\tleasehold\timprovements |  |  |  |  |  |
| at\tvacated\tfacilities | 132 | — | (132) | — | — |
| Other\tcharges | 259 | (54) | — | — | 205 |
|  | $17,577 | $(8,350) | $(132) | $(3,248) | $5,847 |

				Severance	and	related	charges	include	involuntary	termination	and	COBRA	benefits,	outplacement	costs,	and	payroll	taxes	for	198	employees,	or	7%	of	the worldwide	workforce.	The	terminations	were	in	the	following	areas:	42	in	research	and	development,	107	in	sales	and	marketing,	and	49	in	general	and	administrative.

				The	reduction	in	force	within	research	and	development	consisted	of	employees	in	the	Company's	Printing	Solutions	business	in	San	Jose,	California	and	was implemented	in	order	to	realign	product	development	expense	with	the	Company's	operating	targets.	The	majority	of	these	terminations	were	completed	by	August	31, 1999,	and	the	remaining	termination	benefits	will	be	paid	through	the	first	quarter	of	fiscal	2000.

				The	phasing	out	of	the	European	headquarters	in	Edinburgh,	Scotland	was	implemented	to	reduce	redundancies	within	the	organization	and	resulted	in	a	reduction	in force	of	48	general	and	administrative	staff	and	43	sales	and	marketing	staff.	The	closure	of	the	European	headquarters	was	completed	by	December	31,	1999,	and	all termination	benefits	will	be	paid	through	the	first	quarter	of	fiscal	2000.

				The	remaining	terminations	in	the	sales	and	marketing	organization	were	primarily	due	to	the	centralization	of	the	North	American	sales	and	marketing	organization. The	remaining	general	and	administrative	reductions	were	due	to	the	elimination	of	redundancies	throughout	the	organization.	The	majority	of	these	terminations	were completed	by	June	30,	1999,	and	the	termination	benefits	will	be	paid	through	the	first	quarter	of	fiscal	2000.

				Lease	termination	costs	of	$0.4	million	include	remaining	lease	liabilities,	brokerage	fees,	restoration	charges,	and	legal	fees	offset	by	estimated	sublease	income related	to	facilities	in	the	United	States,	Australia,	Scotland,	and	Japan	that	will	be	vacated	as	part	of	the	restructuring	program.	The	facilities	will	be	vacated	as	a	result of	the	elimination	of	staff	and	organizational	decisions	associated	with	the	centralization	of	certain	activities	in	San	Jose,	California.	The	remaining	accrual	balance	as	of December	3,	1999	is	expected	to	be	paid	through	the	second	quarter	of	fiscal	2000.

				Charges	related	to	the	impairment	of	leasehold	improvements	at	vacated	facilities	of	$0.1	million	included	the	write-down	of	the	net	book	value	of	leasehold improvements,	furniture,	and	equipment	used	in	the	vacated	facilities.	These	assets	were	written	down	in	accordance	with	the	provisions	of	SFAS	121.

				Other	charges	of	$0.3	million	included	legal	and	accounting	fees	incurred	in	Edinburgh	and	North	America	associated	with	employee	terminations	as	part	of	the reduction	in	force.	The	remaining	accrual	balance	as	of	December	3,	1999	is	expected	to	be	paid	by	the	second	quarter	of	fiscal	2000.

# Previously	announced	restructuring	programs

				The	following	table	depicts	the	activity	for	previously	announced	restructuring	programs	through	December	3,	1999:

Accrual	related	to	previous	restructurings

				As	of	December	3,	1999,	approximately	$0.8	million	in	accrued	restructuring	costs	remain	related	to	the	Company's	fiscal	1998	restructuring	program.	This	balance	is comprised	of	$0.3	million	in	severance	and	related	charges,	$0.1	million	in	lease	termination	costs,	and	$0.4	million	in	canceled	contracts.	The	majority	of	the	accrual	is expected	to	be	paid	by	the	first	quarter	of	fiscal	2000.	Cash	payments	for	the	twelve	months	ended	December	3,	1999	related	to	the	fiscal	1998	restructuring	were $0.7	million,	$3.6	million,	and	$0.4	million	for	severance	and	related	charges,	lease	termination	costs,	and	canceled	contracts	costs,	respectively.	In	addition,	adjustments related	to	the	fiscal	1998	restructuring	were	made	during	the	year,	which	consisted	of	$0.4	million	related	to	estimated	lease	termination	costs	and	$0.3	million	related	to other	charges.

				Included	in	the	accrual	balance	as	of	November	27,	1998	were	lease	termination	costs	related	to	previously	announced	restructuring	programs	in	fiscal	1994	and	1995. Cash	payments	for	the	twelve	months	ended	December	3,	1999	related	to	both	restructuring	programs	were	$1.5	million.	During	the	third	and	fourth	quarters	of	fiscal 1999,	the	Company	recorded	adjustments	to	the	accrual	balance	of	approximately	$1.2	million	related	to	these	programs.	An	adjustment	of	$0.6	million	was	made	in	the third	quarter	of	fiscal	1999	due	to	the	Company's	success	in	terminating	a	lease	agreement	earlier	than	the	contract	term	specified.	In	addition,	$0.6	million	was	reduced from	the	restructuring	accrual	relating	to	expired	lease	termination	costs	for	two	facilities	resulting	from	the	merger	with	Frame	in	fiscal	1995.	As	of	December	3,	1999 no	accrual	balances	remain	related	to	the	Aldus	and	Frame	mergers.

				During	the	third	and	fourth	quarters	of	fiscal	1999,	the	Company	recorded	other	charges	of	$8.4	million	that	were	unusual	in	nature.	These	charges	included $2.0	million	associated	with	the	cancellation	of	a	contract	and	$2.2	million	for	accelerated	depreciation	related	to	the	adjustment	of	the	useful	life	of	certain	assets	as	a result	of	decisions	made	by	management	as	part	of	the	restructuring	program.	Additionally,	the	Company	incurred	a	nonrecurring	compensation	charge	totaling $2.6	million	for	a	terminated	employee	and	incurred	consulting	fees	of	$1.6	million	to	assist	in	the	restructuring	of	the	Company's	operations.

# NOTE	8.	INCOME	TAXES

				Income	before	income	taxes	includes	net	income	from	foreign	operations	of	approximately	$23.1	million,	$18.8	million,	and	$59.3	million	for	the	years	ended December	3,	1999;	November	27,	1998;	and	November	28,	1997,	respectively.

				The	provision	for	income	taxes	consisted	of	the	following:

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Current: |  |  |  |
| United\tStates\tfederal | $54,097 | $34,466 | $42,238 |
| Foreign | 11,346 | 15,394 | 29,260 |
| State\tand\tlocal | 12,061 | 6,869 | 12,320 |
| Total\tcurrent | 77,504 | 56,729 | 83,818 |
| Deferred: |  |  |  |
| United\tStates\tfederal | (569) | (4,312) | (1,721) |
| Foreign | 1,810 | (1,500) | (2,071) |
| State\tand\tlocal | (547) | (962) | (380) |
| Total\tdeferred | 694 | (6,774) | (4,172) |
| Charge\tin\tlieu\tof\ttaxes\tattributable\tto\temployee\tstock\tplans | 58,478 | 12,595 | 29,607 |
|  | $136,676 | $62,550 | $109,253 |

				Total	income	tax	expense	differs	from	the	expected	tax	expense	(computed	by	multiplying	the	United	States	federal	statutory	rate	of	approximately	35%	for	fiscal years	1999,	1998,	and	1997	by	income	before	income	taxes)	as	a	result	of	the	following:

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Computed\t"expected"\ttax\texpense | $131,050 | $58,693 | $103,632 |
| State\ttax\texpense,\tnet\tof\tfederal\tbenefit | 14,419 | 6,068 | 10,301 |
| Nondeductible\twrite-off\tof\tacquired\tin-process\tresearch\tand\tdevelopment | — | — | 1,791 |
| Nondeductible\tgoodwill | — | 2,011 | 825 |
| Tax-exempt\tincome | (2,650) | (4,190) | (5,559) |
| Tax\tcredits | (2,450) | (4,708) | (4,604) |
| Foreign\ttax\trate\tdifferential | — | 1,406 | 1,864 |
| Other,\tnet | (3,693) | 3,270 | 1,003 |
|  | $136,676 | $62,550 | $109,253 |

				The	tax	effects	of	the	temporary	differences	that	give	rise	to	significant	portions	of	the	deferred	tax	assets	and	liabilities	as	of	fiscal	1999	and	1998	are	presented below:

|  | December	3<br>1999 | November	27<br>1998 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Acquired\ttechnology | $14,916 | $14,099 |
| Reserves\tand\tdeferred\trevenue | 38,159 | 30,655 |
| Net\toperating\tloss\tcarryforwards | 933 | 2,171 |
| Investments | — | 2,988 |
| Other | 821 | 2,562 |
| Total\tgross\tdeferred\ttax\tassets | 54,829 | 52,475 |
| Deferred\ttax\tasset\tvaluation\tallowance | (1,458) | (2,696) |
| Total\tdeferred\ttax\tassets | 53,371 | 49,779 |
| Deferred\ttax\tliabilities: |  |  |
| Depreciation\tand\tamortization | (3,176) | (1,076) |
| Unrealized\tgains\ton\tinvestments | (37,867) | — |
| Other | (164) | (28) |
| Total\tdeferred\ttax\tliabilities | (41,207) | (1,104) |
| Net\tdeferred\ttax\tassets | $12,164 | $48,675 |

				The	Company	provides	United	States	income	taxes	on	the	earnings	of	foreign	subsidiaries	unless	the	subsidiaries'	earnings	are	considered	permanently	reinvested outside	the	United	States.

				As	of	December	3,	1999,	the	Company	has	foreign	operating	loss	carryovers	in	various	jurisdictions	of	approximately	$2.0	million	with	various	expiration	dates.	For financial	reporting	purposes,	a	valuation	allowance	has	been	established	to	fully	offset	the	deferred	tax	assets	related	to	foreign	operating	losses	due	to	uncertainties	in utilizing	these	losses.	A	valuation	allowance	has	also	been	established	for	certain	deductions	related	to	investments.	Management	believes	that	it	is	more	likely	than	not that	the	results	of	future	operations	will	generate	sufficient	taxable	income	to	realize	the	net	deferred	tax	assets.

# NOTE	9.	BENEFIT	PLANS

# Pretax	savings	plan

				In	1987,	the	Company	adopted	an	Employee	Investment	Plan,	qualified	under	Section	401(k)	of	the	Internal	Revenue	Code,	which	is	a	pretax	savings	plan	covering substantially	all	of	the	Company's	United	States	employees.	Under	the	plan,	eligible	employees	may	contribute	up	to	18%	of	their	pretax	salary,	subject	to	certain limitations.	The	Company	matched	approximately	25%	of	the	first	6%	of	employee	contributions	and	contributed	approximately	$2.2	million,	$2.4	million,	and $1.8	million	in	fiscal	1999,	1998,	and	1997,	respectively.	Beginning	in	fiscal	2000,	the	Company	will	match	50%	of	the	first	6%	of	employee	contributions.	Matching contributions	can	be	terminated	at	the	Company's	discretion.

# Profit	sharing	plan

				The	Company	has	a	profit	sharing	plan	that	provides	for	profit	sharing	payments	to	all	eligible	employees	following	each	quarter	in	which	the	Company	achieved	at least	70%	of	its	budgeted	earnings	for	the	quarter.	Beginning	in	fiscal	2000,	the	percentage	of	its	budgeted	earnings	that	the	Company	must	achieve	increases	to	80%. The	plan,	as	well	as	the	annual	operating	budget	on	which	the	plan	is	based,	is	approved	by	the	Company's	Board	of	Directors.	The	Company	contributed	approximately $23.2	million,	$6.8	million,	and	$11.8	million	to	the	plan	in	fiscal	1999,	1998,	and	1997,	respectively.

# Adobe	Incentive	Partners

				In	March	1997,	as	part	of	its	venture	investing	program,	the	Company	established	an	internal	limited	partnership,	Adobe	Incentive	Partners,	L.P.	("AIP"),	which allows	certain	of	the	Company's	executive	officers	to	participate	in	cash	or	stock	distributions	from	Adobe's	venture	investments.	Adobe	is	both	the	general	partner	and	a limited	partner	of	AIP.	Other	limited	partners	are	executive	officers	and	former	executive	officers	of	the	Company	who	are	or	were	involved	in	Adobe's	venture investing	activities	and	whose	participation	is	deemed	critical	to	the	success	of	the	program.

				Adobe's	Class	A	senior	limited	partnership	interest	includes	both	a	liquidation	preference	and	a	preference	in	recovery	of	the	cost	basis	of	each	specific	investment. The	executives'	Class	B	junior	limited	partnership	interest	qualifies	for	partnership	distributions	only	after	(a)	Adobe	has	fully	recovered	the	cost	basis	of	its	investment in	the	specific	investee	company	for	which	a	distribution	is	made;	and	(b)	the	participating	executive	has	vested	in	his	or	her	distribution	rights.	The	distribution	rights generally	vest	on	a	monthly	basis	over	three	years,	such	that	the	rights	are	25%	vested	after	one	year,	50%	vested	after	two	years,	and	fully	vested	at	the	end	of	three years.	The	limited	partnership	investments	are	restricted	to	investments	in	companies	that	are	private	at	the	time	of	the	establishment	of	AIP	or	when	the	investment	is made,	whichever	is	later.	Partnership	interests	may	be	allocated	to	designated	officers	only	while	the	investee	company	is	still	private.	Class	B	interests	may	not	exceed a	maximum	of	20%	of	the	venture	investments	included	in	AIP.

				Assets	held	by	AIP	include	Adobe's	entire	interests	in	Adobe	Ventures	L.P.	and	Adobe	Ventures	II,	L.P.	as	well	as	equity	securities	of	certain	privately	held companies.	At	December	3,	1999,	the	cost	basis	and	recorded	fair	value	of	all	investments	included	in	AIP	were	$114.2	million	and	$205.4	million,	respectively.	In	fiscal 1999,	AIP	recorded	net	income	of	$96.4	million.	The	participating	officers	received	aggregate	distributions	of	$7.5	million	in	fiscal	1999.	The	distribution	to	the	officers represents	their	vested	portion	of	nonmarketable	securities	that	became	marketable	as	a	result	of	a	public	offering,	as	well	as	their	vested	portion	of	cash	resulting	from investments	that	were	liquidated	by	AIP.	The	participating	officers	receive	quarterly	cash	distributions	as	their	partnership	interests	vest	for	investments	that	have	been liquidated	by	AIP.	At	December	3,	1999,	the	minority	interest	held	by	the	participating	officers	was	$17.7	million	and	is	included	in	accrued	expenses	on	the Consolidated	Balance	Sheet.

# NOTE	10.	EMPLOYEE	STOCK	PLANS

# Stock	option	plans

				As	of	December	3,	1999,	the	Company	had	reserved	67.0	million	shares	of	common	stock	for	issuance	under	its	1994	and	1999	Stock	Option	Plans	(the	"Option Plans")	for	employees,	which	provides	for	the	granting	of	stock	options	to	employees	and	officers	at	the	fair	market	value	of	the	Company's	common	stock	at	the	grant date.	Initial	options	granted	under	the	Option	Plans	generally	vest	25%	after	the	first	year	and	ratably	thereafter	such	that	50%	and	100%	are	vested	after	the	second	and third	year,	respectively;	subsequent	options	granted	under	the	Option	Plans	generally	vest	ratably	over	the	entire	term	such	that	50%	and	100%	are	vested	after	the

second	and	third	year,	respectively.	Outstanding	option	terms	under	all	of	the	Company's	employee	stock	option	plans	range	from	five	to	ten	years.

				As	of	December	3,	1999,	the	Company	had	reserved	1.0	million	shares	of	common	stock	for	issuance	under	its	1996	Outside	Directors	Stock	Option	Plan,	which provides	for	the	granting	of	nonqualified	stock	options	to	nonemployee	directors.	In	December	1999,	the	Company's	Board	of	Directors	approved	an	increase	in	the number	of	shares	reserved	under	the	1997	Outside	Directors	Stock	Option	Plan	of	250,000,	to	an	aggregate	of	1.25	million	shares,	subject	to	stockholder	approval. Option	grants	are	limited	to	20,000	shares	per	person	in	each	fiscal	year,	except	for	a	new	nonemployee	director,	who	is	granted	30,000	shares	upon	election	as	a director.	All	options	are	exercisable	as	vested	within	a	ten-year	term.	Options	generally	vest	over	three	years:	25%	on	the	day	preceding	each	of	the	next	two	annual meetings	of	stockholders	of	the	Company	and	50%	on	the	day	preceding	the	third	annual	meeting	of	stockholders	of	the	Company	after	the	grant	of	the	option.	The exercise	price	of	the	options	that	are	issued	is	equal	to	the	fair	value	on	the	date	of	grant.	In	fiscal	1999,	the	Company	granted	options	for	40,000	shares	with	exercise prices	of	$29.72.	In	fiscal	1998,	the	Company	granted	options	for	100,000	shares	with	exercise	prices	of	$22.66	and	an	option	for	30,000	shares	to	a	new	director	with an	exercise	price	of	$21.03.	In	fiscal	1997,	options	for	100,000	shares	were	granted	with	exercise	prices	of	$20.97.

				On	September	23,	1998,	the	Board	of	Directors	approved	a	stock	option	repricing	program	whereby	each	eligible	stock	option	was	automatically	amended	to	have	an exercise	price	equal	to	$16.9063.	As	a	result,	approximately	10.1	million	options	were	amended	by	eligible	employees	for	an	equal	number	of	repriced	options.	All	other terms	of	the	options,	including	expiration	dates,	remain	substantially	the	same.

|  | Number<br>of	Shares | Weighted<br>Average<br>Exercise<br>Price | Number<br>of	Shares | Weighted<br>Average<br>Exercise<br>Price | Number<br>of	Shares | Weighted<br>Average<br>Exercise<br>Price |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Outstanding,\tbeginning\tof\tyear | 20,881,640 | $15.84 | 16,292,470 | $15.87 | 18,594,376 | $12.84 |
| Granted | 9,294,040 | 59.35 | 21,426,700 | 17.53 | 4,904,234 | 20.43 |
| Exercised | (8,521,400) | 14.99 | (3,977,954) | 13.09 | (6,127,556) | 10.15 |
| Canceled | (2,579,761) | 18.12 | (12,859,576) | 19.54 | (1,078,584) | 16.88 |
| Outstanding,\tend\tof\tyear | 19,074,519 | 37.11 | 20,881,640 | 15.84 | 16,292,470 | 15.87 |
| Exercisable,\tend\tof\tyear | 4,899,741 | 15.84 | 8,736,636 | 14.29 | 9,125,908 | 13.25 |
| Weighted\taverage\tfair\tvalue\tof\toptions\ngranted\tduring\tthe\tyear |  | $23.31 |  | $13.84 |  | $15.68 |

				Information	regarding	the	stock	options	outstanding	at	December	3,	1999	is	summarized	below:

| Range	of	Exercise	Prices | Shares<br>Outstanding | Weighted<br>Average	Remaining<br>Contractual	Life | Weighted<br>Average<br>Exercise<br>Price | Shares<br>Exercisable | Weighted<br>Average<br>Exercise<br>Price |
| :--- | :--- | :--- | :--- | :--- | :--- |
| $\t3.28\t—\t$\t4.75 | 101,940 | 0.85\tyears | $4.74 | 101,940 | $4.74 |
| $\t5.06\t—\t$\t7.56 | 206,174 | 2.75\tyears | 7.15 | 206,170 | 7.15 |
| $\t8.13\t—\t$11.94 | 224,338 | 1.97\tyears | 10.38 | 224,268 | 10.38 |
| $12.44\t—\t$16.88 | 1,608,260 | 5.68\tyears | 15.44 | 1,437,089 | 15.43 |
| $16.91 | 7,832,377 | 6.42\tyears | 16.91 | 2,680,719 | 16.91 |
| $19.31\t—\t$28.19 | 1,478,200 | 7.19\tyears | 23.04 | 225,266 | 22.34 |
| $29.72\t—\t$42.69 | 689,650 | 7.60\tyears | 36.09 | 24,265 | 32.50 |
| $49.19\t—\t$68.56 | 635,425 | 7.85\tyears | 59.48 | 24 | 52.31 |
| $71.38 | 6,298,155 | 7.91\tyears | 71.38 | — | 0.00 |
|  | 19,074,519 | 6.88\tyears | $37.11 | 4,899,741 | $15.84 |

# Performance	and	Restricted	Stock	Plan

				The	Performance	and	Restricted	Stock	Plan	("the	Plan")	provides	for	the	granting	of	restricted	stock	and/or	performance	awards	to	officers	and	key	employees.	As	of December	3,	1999,	the	Company	had	reserved	4.0	million	shares	of	its	common	stock	for	issuance	under	the	Plan.	Restricted	shares	issued	under	the	Plan	generally	vest annually	between	two	to	three	years	but	are	considered	outstanding	at	the	time	of	grant,	as	the	stockholders	are	entitled	to	dividends	and	voting	rights.	As	of December	3,	1999,	565,177	shares	were	outstanding	and	not	yet	vested.

				Performance	awards	issued	under	the	Plan	entitle	the	recipient	to	receive,	at	the	discretion	of	the	Company,	shares	or	cash	upon	completion	of	the	performance	period subject	to	attaining	identified	performance	goals.	Performance	awards	are	generally	measured	over	a	three-year	period	and	cliff	vest	at	the	end	of	the	three-year	period. The	projected	value	of	these	awards	is	accrued	by	the	Company	and	charged	to	expense	over	the	three-year	performance	period.	As	of	December	3,	1999;	November	27, 1998;	and	November	28,	1997,	performance	awards	for	320,360;	403,740;	and	341,748	shares	were	outstanding,	respectively,	and	$(0.4)	million,	$(2.2)	million,	and $1.5	million,	was	charged	(credited)	to	expense	in	fiscal	1999,	1998,	and	1997,	respectively.	No	performance	awards	were	granted	in	fiscal	1999.	In	fiscal	1998	and 1997,	performance	awards	were	granted	for	243,640	and	313,000	shares,	respectively,	and	the	weighted	average	fair	value	of	the	shares	was	$17.24	and	$19.52, respectively.

Employee	Stock	Purchase	Plan

				The	Company's	Employee	Stock	Purchase	Plan	allows	eligible	employee	participants	to	purchase	shares	of	the	Company's	common	stock	at	a	discount	through payroll	deductions.	For	offerings	commencing	before	September	1998,	the	plan	consists	of	twenty-four	month	offering	periods	with	four	six-month	purchase	periods	in each	offering	period;	in	September	1998,	the	plan	was	amended	to	reduce	the	offering	periods	for	offerings	commencing	after	that	date	to	twelve-month	offerings	with two	six-month	purchase	periods	in	each	offering	period.	As	of	July	1,	2000,	all	employees	participating	in	the	plan	will	have	twelve-month	offering	periods.	Employees purchase	shares	at	85%	of	the	market	value	at	either	the	beginning	of	the	offering	period	or	the	end	of	the	purchase	period,	whichever	price	is	lower.	As	of	December	3, 1999,	the	Company	had	reserved	19.0	million	shares	of	its	common	stock	for	issuance	under	this	plan,	and	approximately	9.2	million	shares	remain	available	for	future issuance.

# Cash	Incentive	Awards

				The	Company	grants	Cash	Incentive	Awards	("CIAs"),	a	form	of	phantom	stock,	to	designated	key	employees	to	reward	them	based	on	their	contributions	to	a project.	The	cash	value	of	the	CIA	is	structured	to	mirror	the	Company's	Restricted	Stock	Plan.	Designated	employees	are	granted	CIAs	that	generally	vest	annually	over a	three-year	period.	Upon	each	vest	date,	the	employee	is	paid	the	market	value	of	the	stock	on	the	date	of	vest	multiplied	by	the	number	of	vested	shares.	The	Company charged	approximately	$7.9	million,	$2.3	million,	and	$0.1	million	to	expense	for	shares	vested	in	fiscal	1999,	1998,	and	1997.

# Stock	Appreciation	Rights

				In	fiscal	1999	and	1998,	the	Company	granted	Stock	Appreciation	Rights	("SARs"),	a	form	of	phantom	stock,	to	designated	key	employees	based	on	their performance	in	the	Company.	Additionally,	SARs	are	granted	to	employees	in	certain	countries	outside	of	the	U.S.	in	lieu	of	stock	options,	generally	with	similar vesting	schedules	to	the	Company's	option	vesting	schedule;	these	SARs	generally	expire	eight	years	after	the	grant	date.	The	performance-based	SARs	generally	vest over	a	period	of	four	years	from	the	date	of	grant,	but	contain	an	acceleration	feature	that	allows	for	a	two-year	vesting	period	based	on	the	Company	achieving predetermined	performance	goals.	These	performance-based	SARs	expire	five	years	from	the	date	of	grant.	Under	the	Company's	SARs,	designated	employees	are awarded	rights	that	are	equal	to	one	share	of	common	stock	of	the	Company	for	each	right	awarded	with	an	exercise	price	based	on	the	fair	market	value	on	the	grant date.	When	the	award	vests,	employees	have	the	right	to	exercise	the	award	and	receive	the	then-current	value	in	cash	of	the	appreciation	from	the	exercise	price	of	the exercised	number	of	rights	of	the	Company's	common	stock.	The	Company	awarded	14,100	rights	in	fiscal	1999	with	an	exercise	price	of	$71.38	and	awarded	482,660 rights	in	fiscal	1998	with	exercise	prices	ranging	from	$16.91	to	$17.50.	In	fiscal	1999,	the	Company	charged	$9.8	million	to	expense	based	on	the	two-year	vesting schedule	as	the	Company	achieved	the	performance	goals	set	forth	in	the	performance-based	SARs,	and	in	fiscal	1998,	$0.3	million	was	charged	to	expense.	The Company	did	not	grant	SARs	to	employees	in	fiscal	1997.

# Pro	forma	fair	value	disclosures

				The	Company	accounts	for	its	employee	stock	plans,	consisting	of	fixed	stock	option	plans,	an	employee	stock	purchase	plan,	and	a	performance	and	restricted	stock plan,	using	the	intrinsic	value	method.	The	following	table	sets	forth	the	pro	forma	amounts	of	net	income	and	net	income	per	share	that	would	have	resulted	if	the Company	accounted	for	its	employee	stock	plans	under	the	fair	value	recognition	provisions	of	SFAS	123,	"Accounting	for	Stock-Based	Compensation".

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Net\tincome: |  |  |  |
| As\treported | $237,751 | $105,144 | $186,837 |
| Pro\tforma | $198,787 | $54,435 | $161,790 |
| Net\tincome\tper\tshare: |  |  |  |
| As\treported: |  |  |  |
| Basic | $1.97 | $0.79 | $1.30 |
| Diluted | $1.84 | $0.77 | $1.26 |
| Pro\tforma: |  |  |  |
| Basic | $1.64 | $0.41 | $1.12 |
| Diluted | $1.56 | $0.41 | $1.10 |

				For	purposes	of	computing	pro	forma	net	income,	the	fair	value	of	each	option	grant,	restricted	stock	grant,	and	Employee	Stock	Purchase	Plan	purchase	right	is estimated	on	the	date	of	grant	using	the	Black-Scholes	option	pricing	model.	The	assumptions	used	to	value	the	option	grants	and	purchase	rights	are	stated	as	follows:

| Expected	life	of	options | 3	years | 3	years | 3	years |
| :--- | :--- | :--- | :--- |
| Expected\tlife\tof\trestricted\tstock | 3\tyears | 3\tyears | 3\tyears |
| Expected\tlife\tof\tpurchase\trights | 0.75\tyears | 1.25\tyears | 1.25\tyears |
| Volatility | 51% | 53% | 50% |
| Risk-free\tinterest\trate | 4.5-5.9% | 4.2-5.7% | 5.0-6.6% |
| Dividend\tyield | 0.25% | 0.5% | 0.5% |

				Options	and	restricted	stock	grants	vest	over	several	years,	and	new	option	and	restricted	stock	grants	are	generally	made	each	year.	Because	of	this,	the	pro	forma amounts	shown	above	may	not	be	representative	of	the	pro	forma	effect	on	reported	net	income	in	future	years.

# NOTE	11.	STOCKHOLDERS'	EQUITY

# Stockholder	Rights	Plan

				The	Company's	Stockholder	Rights	Plan	is	intended	to	protect	stockholders	from	unfair	or	coercive	takeover	practices.	In	accordance	with	this	plan,	the	Board	of Directors	declared	a	dividend	distribution	of	one	common	stock	purchase	right	on	each	outstanding	share	of	its	common	stock	held	as	of	July	24,	1990	and	on	each	share of	common	stock	issued	by	the	Company	thereafter.	In	August	1997,	the	Stockholder	Rights	Plan	was	amended	so	that	each	right	entitles	the	holder	to	purchase	one	unit of	Series	A	Preferred	Stock,	which	is	equal	to	1/1000	share	of	Series	A	Preferred	Stock,	par	value	$0.0001,	per	share,	at	a	price	of	$115	per	unit.	As	adjusted	for	the Company's	1999	stock	split	in	the	form	of	a	dividend,	each	share	of	common	stock	now	entitles	the	holder	to	one-half	of	such	a	purchase	right.	Each	whole	right	still

entitles	the	registered	holder	to	purchase	from	the	Company	a	unit	of	preferred	stock	at	$115.	The	rights	become	exercisable	in	certain	circumstances,	including	upon	an entity	acquiring	or	announcing	the	intention	to	acquire	beneficial	ownership	of	15%	or	more	of	the	Company's	common	stock	without	the	approval	of	the	Board	of Directors	or	upon	the	Company	being	acquired	by	any	person	in	a	merger	or	business	combination	transaction.	The	rights	are	redeemable	by	the	Company	prior	to exercise	at	$0.01	per	right	and	expire	on	July	24,	2000.

# Stock	repurchase	programs

				In	September	1997,	the	Company's	Board	of	Directors	authorized,	subject	to	certain	business	and	market	conditions,	the	purchase	of	up	to	30.0	million	shares	of	the Company's	common	stock	over	a	two-year	period.	The	Company	repurchased	approximately	1.7	million	shares	in	fiscal	1999,	20.3	million	shares	in	fiscal	1998,	and 8.0	million	shares	in	fiscal	1997,	at	a	cost	of	$30.5	million,	$362.4	million,	and	$188.6	million,	respectively.	This	program	was	completed	during	the	first	quarter	of fiscal	1999.

				In	April	1999,	the	Company's	Board	of	Directors	authorized,	subject	to	certain	business	and	market	conditions,	the	purchase	of	up	to	an	additional	5.0	million	shares of	the	Company's	common	stock	over	a	two-year	period.	This	new	stock	repurchase	program	was	in	addition	to	an	existing	program	whereby	the	Company	has	been authorized	to	repurchase	shares	to	offset	issuances	under	employee	stock	option	and	stock	purchase	plans.	No	purchases	have	been	made	under	the	5.0	million	share repurchase	program.

				Under	the	Company's	existing	plan	to	repurchase	shares	to	offset	issuances	under	employee	stock	plans,	the	Company	repurchased	approximately	11.2	million, 0.7	million,	and	4.6	million	shares	in	fiscal	1999,	1998,	and	1997,	respectively,	at	a	cost	of	$448.7	million,	$16.8	million,	and	$87.0	million,	respectively.

# Put	warrants

				To	facilitate	the	Company's	stock	repurchase	program,	the	Company	sold	put	warrants	in	a	series	of	private	placements	in	fiscal	1999,	1998,	and	1997.	Each	put warrant	entitles	the	holder	to	sell	one	share	of	Adobe's	common	stock	to	the	Company	at	a	specified	price.	Approximately	6.0	million,	8.0,	million	and	9.2	million	put warrants	were	written	in	fiscal	1999,	1998,	and	1997,	respectively.	At	December	3,	1999,	approximately	2.7	million	put	warrants	were	outstanding	that	expire	on various	dates	through	April	2000	and	have	exercise	prices	ranging	from	$40.16	to	$69.35	per	share,	with	an	average	exercise	price	of	$54.78	per	share.

				In	addition,	in	fiscal	1999,	1998,	and	1997,	the	Company	purchased	call	options	that	entitle	the	Company	to	buy	2.9	million,	3.2	million,	and	4.6	million	shares, respectively,	of	its	common	stock.	At	December	3,	1999,	approximately	1.6	million	call	options	were	outstanding	that	expire	on	various	dates	through	April	2000	and have	exercise	prices	ranging	from	$43.42	to	$74.83	per	share,	with	an	average	exercise	price	of	$60.42	per	share.	Under	these	arrangements,	the	Company,	at	its	option, can	settle	with	physical	delivery	or	net	shares	equal	to	the	difference	between	the	exercise	price	and	the	value	of	the	option	as	determined	by	the	contract.

				As	part	of	the	Company's	current	stock	repurchase	programs,	the	Company	may,	from	time	to	time,	enter	into	additional	put	warrant	and	call	option	arrangements. Under	these	arrangements,	the	Company,	at	its	option,	can	settle	with	physical	delivery	or	net	shares	equal	to	the	difference	between	the	exercise	price	and	the	value	of the	option	as	determined	by	the	contract.	In	the	future,	the	Company	may	consider	other	methods	to	acquire	the	Company's	stock,	including	direct	purchases,	open market	purchases,	accelerated	stock	purchase	programs,	and	other	potential	methods.

# Venture	stock	dividend	program

				In	March	1997,	the	Company	established	the	venture	stock	dividend	program	under	which	the	Company	may,	from	time	to	time,	distribute	as	a	dividend-in-kind shares	of	its	equity	holdings	in	investee	companies	to	Adobe	stockholders.	On	December	1,	1997,	the	Company	dividended	one	share	of	Siebel	Systems,	Incorporated ("Siebel")	common	stock	for	each	600	shares	of	Adobe	common	stock	held	by	stockholders	of	record	on	October	31,	1997.	An	equivalent	cash	dividend	was	paid	for holdings	of	less	than	15,000	Adobe	shares	and	for	fractional	Siebel	shares.

# NOTE	12.	NET	INCOME	PER	SHARE

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

| Net	income | $237,751 | $105,144 | $186,837 |
| :--- | :--- | :--- | :--- |
| Shares\tused\tto\tcompute\tbasic\tnet\tincome\tper\tshare\t(weighted\taverage\tshares |  |  |  |
| outstanding\tduring\tthe\tperiod,\texcluding\tunvested\trestricted\tstock) | 120,786 | 132,866 | 143,924 |
| Dilutive\tcommon\tequivalent\tshares: |  |  |  |
| Unvested\trestricted\tstock | 565 | 120 | 240 |
| Stock\toptions | 7,818 | 2,962 | 4,110 |
| Put\twarrants | 36 | — | 46 |
| Shares\tused\tto\tcompute\tdiluted\tnet\tincome\tper\tshare | 129,205 | 135,948 | 148,320 |
| Basic\tnet\tincome\tper\tshare | $1.97 | $0.79 | $1.30 |
| Diluted\tnet\tincome\tper\tshare | $1.84 | $0.77 | $1.26 |

				For	the	years	ended	December	3,	1999;	November	27,	1998;	and	November	28,	1997,	options	to	purchase	approximately	7.2	million,	0.4	million,	and	1.9	million shares,	respectively,	of	common	stock	with	exercise	prices	greater	than	the	average	fair	market	value	of	the	Company's	stock	for	the	period	of	$39.75,	$19.78,	and $20.72,	respectively,	were	not	included	in	the	calculation	because	the	effect	would	have	been	antidilutive.

# NOTE	13.	COMMITMENTS	AND	CONTINGENCIES

Lease	commitments

				The	Company	leases	certain	of	its	facilities	and	some	of	its	equipment	under	noncancelable	operating	lease	arrangements	that	expire	at	various	dates	through	2015. Rent	expense	for	these	leases	aggregated	$29.4	million,	$22.1	million,	and	$17.8	million	during	fiscal	1999,	1998,	and	1997,	respectively.	As	of	December	3,	1999, future	minimum	lease	payments	under	noncancelable	operating	leases,	net	of	sublease	income,	are	as	follows:2000—$21.3	million;	2001—$20.0	million;	2002— $16.9	million;	2003—$14.0	million;	2004—$5.9	million;	and	$2.8	million	thereafter.

				Included	in	the	future	minimum	lease	payments	are	the	following	amounts,	net	of	anticipated	sublease	income,	for	leased	facilities	vacated	in	connection	with	the restructuring	plans	implemented	in	fiscal	1999

				In	fiscal	1994	and	fiscal	1996,	the	Company	entered	into	real	estate	development	agreements	and	operating	lease	agreements	in	connection	with	the	construction	of two	corporate	headquarters	office	facilities	in	San	Jose,	California.	The	operating	lease	agreement	for	the	first	office	building	commenced	in	1996,	and	the	operating lease	agreement	for	the	second	facility	commenced	in	1998.	In	August	1999,	the	Company	restructured	these	two	current	lease	agreements	for	its	corporate	headquarters. The	amended	and	restated	agreement	replaces	the	two	prior	lease	agreements	commencing	in	1996	and	1998,	respectively.	The	lease	is	for	a	period	of	five	years	and	is subject	to	standard	covenants,	including	financial	ratios.	The	Company	has	an	option	to	purchase	the	buildings	at	any	time	during	the	term	for	an	amount	equal	to	the total	investment	of	the	lessor.	At	the	end	of	the	lease	term,	the	Company	may	exercise	the	purchase	option	or,	with	the	mutual	agreement	of	the	lessor,	renew	the	term	of the	lease.	In	addition	to	these	possibilities,	at	the	end	of	the	term,	the	Company	may	elect	to	have	the	buildings	sold	to	an	unrelated	third	party.	In	such	case,	the Company	is	obligated	to	use	its	best	efforts	to	arrange	for	such	a	sale	and	is	obligated	to	pay	the	lessor	the	difference	between	the	total	investment	in	the	buildings	and the	net	sales	proceeds	provided,	however,	that	in	no	event	would	the	Company	be	required	to	pay	more	than	a	maximum	guaranteed	residual	amount	as	set	forth	in	the lease.	In	the	event	of	a	default	by	the	Company	during	the	term	of	the	lease,	the	lessor	could	require	the	Company	to	purchase	the	buildings	for	an	amount	equal	to	the Company's	option	price.	Under	the	terms	of	the	lease	agreements,	the	Company	may	pay	cash	dividends,	unless	an	event	of	default	has	occurred	or	it	does	not	meet certain	financial	ratios.	As	of	December	3,	1999,	the	Company	was	in	compliance	with	all	financial	covenants.

				During	1998,	the	Company	entered	into	a	real	estate	development	agreement	for	the	construction	of	an	office	building	in	Edinburgh,	Scotland.	During	fiscal	1998	and 1999,	the	Company	paid	approximately	$34.9	million	for	land,	fees,	and	construction	costs.	During	fiscal	1999,	the	Company	announced	a	Board-approved	restructuring, which	resulted	in	the	reduction	in	workforce	primarily	in	its	European	headquarters	in	Edinburgh,	Scotland.	(For	further	information,	see	Note	7.)	As	a	result	of	the restructuring,	the	decision	was	made	by	management	to	sell	the	new	facility	in	Edinburgh,	and	the	sale	was	completed	in	September	1999.	Cash	received	from	the	sale	of the	facility	was	$40.6	million,	and	the	gain	realized	upon	the	sale	totaled	$5.7	million.	As	of	December	3,	1999,	the	Company	had	no	commitments	related	to	this building.

# Line	of	credit

				In	August	1999,	the	Company	entered	into	a	$200.0	million	unsecured	revolving	line	of	credit	with	a	group	of	15	banks	for	general	corporate	purposes,	subject	to certain	financial	covenants.	One-half	of	the	facility	expires	in	August	2000;	the	other	$100.0	million	expires	in	August	2002.	Outstanding	balances	accrue	interest	at LIBOR	plus	a	margin	that	is	based	on	the	financial	ratios	of	the	Company.	Under	the	terms	of	the	line	of	credit	agreement,	the	Company	may	pay	cash	dividends,	unless an	event	of	default	has	occurred	or	it	does	not	meet	certain	financial	ratios.	There	were	no	outstanding	balances	on	the	credit	facility	as	of	December	3,	1999.	In addition,	as	of	December	3,	1999,	the	Company	was	in	compliance	with	all	financial	covenants.

# Royalties

				The	Company	has	certain	royalty	commitments	associated	with	the	shipment	and	licensing	of	certain	products.	Royalty	expense	is	generally	based	on	a	dollar	amount per	unit	shipped	or	a	percentage	of	the	underlying	revenue.	Royalty	expense	was	approximately	$24.5	million,	$25.3	million,	and	$25.0	million	in	fiscal	1999,	1998,	and 1997,	respectively.

# Legal	actions

				The	Company	is	engaged	in	certain	legal	actions	arising	in	the	ordinary	course	of	business.	The	Company	believes	it	has	adequate	legal	defenses	and	that	the	ultimate outcome	of	these	actions	will	not	have	a	material	effect	on	the	Company's	financial	position	and	results	of	operations.

# NOTE	14.	RELATED	PARTY	TRANSACTIONS

				During	fiscal	1999,	the	Company	entered	into	two	separate	loan	agreements	with	an	executive	officer	of	the	Company	to	assist	with	his	relocation	to	San	Jose, California.	The	first	loan	in	the	amount	of	$550,000	was	repaid	to	the	Company	on	December	31,	1999.	The	second	loan,	in	the	amount	of	$1.0	million,	is	interest-free and	is	secured	by	the	executive's	principal	residence.	Under	the	terms	of	the	agreement,	the	executive	is	required	to	repay	this	loan	at	$200,000	per	year	for	the	next	five years,	beginning	December	2000.	In	addition,	the	loan	must	be	repaid	in	full	within	thirty	days	of	any	termination	of	the	executive's	employment.

				At	November	28,	1997,	the	Company	held	a	13%	equity	interest	in	McQueen	International	Limited	("McQueen")	and	accounted	for	the	investment	using	the	cost method.	During	fiscal	1994,	the	Company	entered	into	various	agreements	with	McQueen,	whereby	the	Company	contracted	with	McQueen	to	perform	product localization	and	technical	support	functions	and	to	provide	printing,	assembly,	and	warehousing	services.

				Effective	December	31,	1997,	McQueen	was	acquired	by	Sykes	Enterprises,	Incorporated	("Sykes"),	a	publicly	traded	company.	In	connection	with	the	acquisition, the	Company	exchanged	its	shares	of	McQueen	for	486,676	shares	of	Sykes'	restricted	common	stock	and	recorded	a	gain	on	the	exchange	of	$6.7	million	in	fiscal 1998.	Later	in	fiscal	1998,	these	shares	were	sold	at	a	minimal	gain.	The	Company	made	minimum	annual	payments	to	Sykes/McQueen	for	certain	services,	which amounted	to	$2.4	million	and	$5.2	million	in	fiscal	1998	and	1997,	respectively.	Purchases	from	Sykes/McQueen,	during	the	period	in	which	it	was	an	affiliate	of	the Company,	amounted	to	$15.7	million	and	$35.0	million	for	fiscal	1998	and	1997,	respectively.

# NOTE	15.	FINANCIAL	INSTRUMENTS

# Fair	value	of	financial	instruments

				The	Company's	cash	equivalents,	short-term	investments,	and	marketable	equity	securities	are	carried	at	fair	value,	based	on	quoted	market	prices	for	these	or	similar investments.	(For	further	information,	see	Note	3.)

				The	Company	enters	into	forward	exchange	contracts	to	hedge	foreign	currency	exposures	on	a	continuing	basis	for	periods	consistent	with	its	committed	exposures.

These	transactions	do	subject	the	Company	to	risk	of	accounting	gains	and	losses;	however,	the	gains	and	losses	on	these	contracts	offset	gains	and	losses	on	the	assets, liabilities,	and	transactions	being	hedged.	The	Company	is	exposed	to	credit-related	losses	in	the	event	of	nonperformance	by	the	counterparties	in	these	contracts.	The amounts	of	unrealized	gains	and	losses	are	immaterial.	As	of	December	3,	1999	and	November	27,	1998,	the	Company	held	$16.8	million	and	$19.5	million, respectively,	of	aggregate	foreign	currency	forward	exchange	contracts	for	the	sale	of	Japanese	yen.	As	of	December	3,	1999	and	November	27,	1998,	the	Company held	$64.0	million	and	$12.5	million,	respectively,	in	option	contracts	also	for	the	sale	of	Japanese	yen.

# Concentration	of	risk

				Financial	instruments	that	potentially	subject	the	Company	to	concentrations	of	credit	risk	are	primarily	cash,	cash	equivalents,	short-term	investments,	and	accounts receivable.

				The	Company's	investment	portfolio	consists	of	investment-grade	securities	diversified	among	security	types,	industries,	and	issuers.	The	Company's	investments	are managed	by	recognized	financial	institutions	that	follow	the	Company's	investment	policy.	The	Company's	policy	limits	the	amount	of	credit	exposure	to	any	one	issue or	issuer,	and	the	Company	believes	no	significant	concentration	of	credit	risk	exists	with	respect	to	these	investments.

				Credit	risk	in	receivables	is	limited	to	OEM	customers	and	to	dealers	and	distributors	of	hardware	and	software	products	to	the	retail	market.	The	Company	adopts credit	policies	and	standards	to	keep	pace	with	the	evolving	software	industry.	Management	believes	that	any	risk	of	accounting	loss	is	significantly	reduced	due	to	the diversity	of	its	products,	end	users,	and	geographic	sales	areas.	The	Company	performs	ongoing	credit	evaluations	of	its	customers'	financial	condition	and	requires letters	of	credit	or	other	guarantees,	whenever	deemed	necessary.	(For	discussion	of	significant	customers	as	of	December	3,	1999,	see	Note	16.)

				A	significant	portion	of	the	Company's	licensing	revenue	is	derived	from	a	small	number	of	OEM	customers.	The	Company's	OEM	customers	on	occasion	seek	to renegotiate	their	royalty	arrangements.	The	Company	evaluates	these	requests	on	a	case-by-case	basis.	If	an	agreement	is	not	reached,	a	customer	may	decide	to	pursue other	options,	which	could	result	in	lower	licensing	revenue	for	the	Company.	Also,	in	the	fall	of	1997,	one	of	Adobe's	largest	PostScript	customers,	Hewlett-Packard Company,	introduced	a	clone	version	of	Adobe	PostScript	in	one	family	of	monochrome	laser	printers.

# NOTE	16.	INDUSTRY	SEGMENT	AND	GEOGRAPHIC	INFORMATION

				The	Company	adopted	SFAS	131,	"Disclosures	about	Segments	of	an	Enterprise	and	Related	Information"	in	fiscal	1999.	SFAS	131	establishes	standards	for	the manner	in	which	public	companies	report	information	about	operating	segments	and	related	disclosures	about	products,	geographic	information,	and	significant customers.	The	method	for	determining	what	information	to	report	is	based	on	the	way	executive	management	organizes	the	operating	segments	within	the	Company	for making	operating	decisions	and	assessing	performance.

				The	Company	has	four	reportable	segments	that	offer	different	product	lines.	These	segments	are	Web	Publishing,	Print	Publishing,	ePaper	Solutions,	and	OEM PostScript	and	Other.	The	Web	Publishing	segment	provides	software	to	create	Web	sites	with	graphics,	images,	videos,	and	animations.	The	Print	Publishing	segment provides	software	for	professional	page	layout,	illustration,	business	publishing,	and	printing.	The	ePaper	Solutions	segment	allows	users	to	convert	information	to Adobe	Portable	Document	Format	("PDF")	with	the	original	appearance	preserved	and	allows	for	the	distribution	of	documents	via	the	Web,	intranets,	e-mail,	or	CD- ROM	for	viewing	and	printing	on	any	system.	The	OEM	PostScript	and	Other	segment	includes	printing	technology	to	create	and	print	simple	or	visually	rich documents	with	precision.	This	segment	also	includes	revenue	from	divested	businesses.

				The	accounting	policies	of	the	operating	segments	are	the	same	as	those	described	in	the	summary	of	significant	accounting	policies.	The	Company	evaluates performance	based	on	the	contribution	margin	for	each	segment.	The	Company	does	not	identify	or	allocate	its	assets	by	operating	segments.	As	such,	segment	asset information	is	not	disclosed.

				The	following	results	are	broken	out	by	operating	segments	for	the	fiscal	years	1999,	1998,	and	1997:

|  | Web<br>Publishing | Print<br>Publishing | ePaper<br>Solutions | PostScript<br>and	Other | Total |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Fiscal\t1999 |  |  |  |  |  |
| Revenue | $394,073 | $353,863 | $129,333 | $138,165 | $1,015,434 |
| Direct\tcosts | 33,505 | 33,792 | 14,533 | 12,710 | 94,540 |
| Gross\tprofit | 360,568 | 320,071 | 114,800 | 125,455 | 920,894 |
| Direct\toperating\texpenses* | 53,913 | 47,811 | 20,521 | 50,198 | 172,443 |
| Contribution\tmargin | $306,655 | $272,260 | $94,279 | $75,257 | $748,451 |
|  | 78% | 77% | 73% | 54% | 74% |
| Fiscal\t1998 |  |  |  |  |  |
| Revenue | $354,245 | $272,200 | $57,954 | $210,392 | $894,791 |
| Direct\tcosts | 42,110 | 23,431 | 6,524 | 28,969 | 101,034 |
| Gross\tprofit | 312,135 | 248,769 | 51,430 | 181,423 | 793,757 |
| Direct\toperating\texpenses* | 40,243 | 46,226 | 19,660 | 69,902 | 176,031 |
| Contribution\tmargin | $271,892 | $202,543 | $31,770 | $111,521 | $617,726 |
|  | 77% | 74% | 55% | 53% | 69% |
| Fiscal\t1997 |  |  |  |  |  |
| Revenue | $311,912 | $320,982 | $47,160 | $231,840 | $911,894 |
| Direct\tcosts | 51,401 | 29,477 | 5,373 | 29,937 | 116,188 |
| Gross\tprofit | 260,511 | 291,505 | 41,787 | 201,903 | 795,706 |
| Direct\toperating\texpenses* | 30,599 | 48,078 | 16,114 | 78,880 | 173,671 |
| Contribution\tmargin | $229,912 | $243,427 | $25,673 | $123,023 | $622,035 |

Direct	operating	expenses	include	research	and	development	and	product	marketing.

				A	reconciliation	of	the	totals	reported	for	the	operating	segments	to	the	applicable	line	items	in	the	consolidated	financial	statements	for	the	fiscal	years	1999,	1998, and	1997	is	as	follows:

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Total\tcontribution\tmargin\tfrom\toperating\tsegments\tabove | $748,451 | $617,726 | $622,035 |
| Indirect\toperating\texpenses(a) | 461,990 | 454,134 | 385,900 |
| Restructuring\tand\tother | 23,028 | 38,245 | (590) |
| Acquired\tin-process\tresearch\tand\tdevelopment | 3,580 | — | 5,969 |
| Total\toperating\tincome | 259,853 | 125,347 | 230,756 |
| Other\tincome | 114,574 | 42,347 | 65,334 |
| Income\tbefore\ttaxes | $374,427 | $167,694 | $296,090 |

Indirect	operating	expenses	include	expenses	that	are	not	directly	attributable	to	a	segment,	such	as	general	and	administrative	expenses,	corporate	and	field marketing,	sales	and	support,	and	order	fulfillment.

				The	Company	categorizes	its	geographic	information	into	three	major	market	regions:	the	Americas,	EMEA	(Europe,	Middle	East,	and	Africa),	and	Asia.	The Americas	region	includes	the	U.S.,	Canada,	Latin	America,	and	Central	America.	The	Asia	region	includes	Japan	and	the	Asian	Pacific	countries.

				Revenue	and	long-lived	asset	information	by	geographic	areas	for	each	of	the	years	in	the	three-year	period	ended	December	3,	1999	is	presented	below:

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Americas: |  |  |  |
| United\tStates | $497,842 | $449,996 | $427,075 |
| Other | 32,311 | 28,493 | 24,232 |
| Total\tAmericas | 530,153 | 478,489 | 451,307 |
| Europe | 265,981 | 240,220 | 240,233 |
| Asia: |  |  |  |
| Japan | 175,122 | 150,824 | 196,877 |
| Other | 44,178 | 25,258 | 23,477 |
| Total\tAsia | 219,300 | 176,082 | 220,354 |
|  | $1,015,434 | $894,791 | $911,894 |

|  | December	3<br>1999 | November	27<br>1998 | November	28<br>1997 |
| :--- | :--- | :--- | :--- |
| Americas: |  |  |  |
| United\tStates | $53,890 | $67,946 | $67,661 |
| Other | — | — | 1,607 |
| Total\tAmericas | 53,890 | 67,946 | 69,268 |
| Europe | 8,706 | 20,685 | 8,228 |
| Asia | 6,542 | 5,256 | 3,483 |
|  | $69,138 | $93,887 | $80,979 |

				In	fiscal	1999,	sales	of	application	products	to	Ingram	Micro,	Inc.	("Ingram")	accounted	for	27.4%	of	the	Company's	total	revenue.	Receivables	from	Tech	Data Corporation	accounted	for	11.3%	of	total	receivables	at	December	3,	1999.	In	fiscal	1998,	sales	of	application	products	to	Ingram	accounted	for	13.5%	of	the	Company's total	revenue,	and	receivables	from	Ingram	at	year	end	accounted	for	14.4%	of	total	receivables.	No	customer	accounted	for	more	than	10%	of	the	Company's	total revenue	and	total	receivables	in	fiscal	1997.

# NOTE	17.	SUBSEQUENT	EVENTS

				In	December	1999,	the	Company's	Board	of	Directors	approved	an	increase	of	300.0	million	shares	of	common	stock	authorized	for	issuance	by	the	Company,	from 200.0	million	to	an	aggregate	of	500.0	million	shares	of	common	stock,	subject	to	stockholder	approval.

				In	December	1999,	the	Company	sold	its	corporate	headquarters	facility	in	Edinburgh,	Scotland	in	connection	with	the	restructuring	program	implemented	during	the second	and	third	quarters	of	fiscal	1999.	(For	detailed	information	of	the	restructuring	program,	see	Note	7.)	Net	cash	proceeds	from	the	sale	of	the	land	and	building were	approximately	$5.4	million,	and	the	gain	recognized	upon	the	sale	totaled	approximately	$1.0	million.

# FINANCIAL	STATEMENT	SCHEDULE

				As	required	under	Item	8,	Financial	Statements	and	Supplementary	Data,	the	financial	statement	schedule	of	the	Company	is	provided	in	this	separate	section.	The financial	statement	schedule	included	in	this	section	is	as	follows:

Deductions	related	to	the	allowance	for	doubtful	accounts	represent	amounts	written	off	against	the	allowance.

The	Company	invoiced	certain	customers	whose	accounts	were	deemed	potentially	uncollectible.	As	such,	the	accounts	were	entirely	reserved	for	and	no amounts	were	recognized	as	revenue.

				As	required	under	Item	14.	Exhibits,	Financial	Statement	Schedules	and	Reports	on	Form	8-K,	the	exhibits	filed	as	part	of	this	report	are	provided	in	this	separate section.	The	exhibits	included	in	this	section	are	as	follows:

27.3 Financial	Data	Schedule

TABLE	OF	CONTENTS

PART	I BUSINESS	OVERVIEW

LIQUIDITY	AND	CAPITAL	RESOURCES FINANCIAL	STATEMENTS SUPPLEMENTARY	DATA PART	III DIRECTORS EXECUTIVE	OFFICERS PART	IV SIGNATURES SUMMARY	OF	TRADEMARKS

FINANCIAL	STATEMENTS MANAGEMENT'S	REPORT

ADOBE	SYSTEMS	INCORPORATED	SCHEDULE	II	VALUATION	AND	QUALIFYING	ACCOUNTS	(In	thousands)	Valuation	and	Qualifying	Accounts	which are	Deducted	in	the	Balance	Sheet	from	the	Assets	to	which	They	Apply


what is the net change in the balance of accrual related to restructurings during 1999?
   accrual_balance_1999 = 772
 previous_accrual_balance = 8867
 change = accrual_balance_1999 - previous_accrual_balance
 answer = change