Adobe
ADBE
#170
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HK$959.04 B
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Adobe Inc. is an American software company registered in the state of Delaware. It was founded in 1982 by John Warnock and Charles Geschke, the inventors of the PostScript page description language.

Adobe - 10-Q quarterly report FY


Text size:
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

--------------------------

FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MAY 30, 1997

OR

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

FOR THE TRANSITION PERIOD FROM ___________ TO ___________

COMMISSION FILE NUMBER: 33-6885

ADOBE SYSTEMS INCORPORATED
(Exact name of registrant as specified in its charter)

DELAWARE 77-0019522
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

345 PARK AVENUE, SAN JOSE, CALIFORNIA 95110-2704
(Address of principal executive offices) (Zip Code)

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

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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:

Shares Outstanding
Class May 30, 1997
----- ------------

Common stock, $0.0001 par value 72,881,490

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TABLE OF CONTENTS

Page No.

PART I -- FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements 3

Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13

PART II -- OTHER INFORMATION

Item 1. Legal Proceedings 29

Item 4. Submission of Matters to a Vote of Security Holders 30

Item 6. Exhibits and Reports on Form 8-K 32

Signature 36

Summary of Trademarks 37




EXHIBITS

Exhibit 2.1 Agreement and Plan of Merger

Exhibit 3.1 Certificate of Incorporation

Exhibit 3.2.10 Bylaws

Exhibit 10.25.1 Form of Idemnity Agreement

Exhibit 10.41 Amended and Restated Limited Partnership Agreement of Adobe
Incentive Partners, L.P.

Exhibit 11 Computation of Earnings per Common Share

Exhibit 27 Financial Data Schedules


2
PART I -- FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included under this item are as
follows:

SEQUENTIALLY
NUMBERED
FINANCIAL STATEMENT DESCRIPTION PAGE
- ------------------------------------------------------------ -------------
- - Condensed Consolidated Statements of Income
Quarters Ended May 30, 1997 and May 31, 1996
and Six Months Ended May 30, 1997 and May 31, 1996 4

- - Condensed Consolidated Balance Sheets
May 30, 1997 and November 29, 1996 5

- - Condensed Consolidated Statements of Cash Flows
Six Months Ended May 30, 1997 and May 31, 1996 6

- - Notes to Condensed Consolidated Financial Statements 8



3
ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
QUARTERS ENDED SIX MONTHS ENDED
------------------------- -------------------------
MAY 30 MAY 31 MAY 30 MAY 31
1997 1996 1997 1996
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenue:
Licensing $ 53,261 $ 49,287 $ 104,721 $ 96,198
Application products 175,003 155,050 350,002 301,781
---------- ---------- ---------- -----------
Total revenue 228,264 204,337 454,723 397,979
Direct costs 32,658 36,078 66,947 71,286
---------- ---------- ---------- -----------
Gross margin 195,606 168,259 387,776 326,693
---------- ---------- ---------- -----------
Operating expenses:
Software development costs:
Research and development 41,253 37,664 79,450 74,871
Amortization of capitalized
software development costs -- 626 -- 1,252
Sales, marketing and
customer support 75,179 65,738 147,217 128,342
General and administrative 21,106 16,429 38,602 32,080
Write-off of acquired in-
process research and
development 3,157 14,699 3,157 14,699
Other non-recurring items -- -- (2,359) --
---------- ---------- ---------- -----------
Total operating expenses 140,695 135,156 266,067 251,244
---------- ---------- ---------- -----------

Operating income 54,911 33,103 121,709 75,449
Nonoperating income, net:
Investment gain/(loss) 34 297 (590) 3,029
Interest and other income 8,259 6,387 15,252 15,170
---------- ---------- ---------- -----------
Total nonoperating income 8,293 6,684 14,662 18,199
---------- ---------- ---------- -----------
Income before income taxes 63,204 39,787 136,371 93,648
Provision for income taxes 23,098 17,778 49,781 37,976
---------- ---------- ---------- -----------
Net income $ 40,106 $ 22,009 $ 86,590 $ 55,672
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------

Net income per share $ .54 $ .29 $ 1.17 $ . 73
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
Shares used in computing net
income per share 74,416 75,638 74,178 76,016
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>


SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


4
ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

<TABLE>
<CAPTION>
MAY 30 NOVEMBER 29
1997 1996
----------- -----------

ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 185,587 $ 110,745
Short-term investments 461,874 453,371
Receivables, net of allowances
of $4,825 and $5,196, respectively 130,984 115,823
Other current assets 49,232 45,875
----------- -----------
Total current assets 827,677 725,814
Property and equipment 82,917 80,231
Other assets 169,785 195,348
----------- -----------
$ 1,080,379 $ 1,001,393
----------- -----------
----------- -----------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables $ 61,601 $ 43,056
Accrued expenses 102,296 83,065
Accrued restructuring costs 8,931 10,854
Income taxes payable 40,454 67,210
Deferred revenue 19,964 15,537
----------- -----------
Total current liabilities 233,246 219,722
----------- -----------
Deferred income taxes -- 3,809
Put warrants -- 71,348
Stockholders' equity:
Preferred stock, $0.0001 par value;
2,000 shares authorized; none issued -- --
Common stock, $0.0001 par value;
200,000 shares authorized;
72,881 and 71,476 shares issued
and outstanding, respectively 7 7
Additional paid-in capital 246,882 148,595
Retained earnings 587,310 529,546
Unrealized gains on investments 18,306 33,514
Cumulative translation adjustment (5,372) (5,148)
----------- -----------
Total stockholders' equity 847,133 706,514
----------- -----------
$ 1,080,379 $ 1,001,393
----------- -----------
----------- -----------
</TABLE>


SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


5
ADOBE SYSTEMS INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
-----------------------
MAY 30 MAY 31
1997 1996
---------- ----------

Cash flows from operating activities:
Net income $ 86,590 $ 55,672
Adjustments to reconcile net income to net cash
provided by operating activities:
Stock compensation expense 3,711 5,502
Depreciation and amortization 21,649 12,865
Deferred income taxes (2,651) (7,722)
Provision for losses on accounts receivable 308 (687)
Equity in net income of Adobe Ventures 658 --
Write-off of acquired in-process
research and development 3,157 14,699
Changes in operating assets and liabilities:
Receivables (15,121) 17,117
Other current assets (5,144) 1,242
Trade and other payables 18,739 5,775
Accrued expenses (247) 3,588
Accrued restructuring costs (1,826) (17,191)
Income taxes payable (26,832) 12,492
Deferred revenue 4,014 326
---------- ----------

Net cash provided by operating activities 87,005 103,678
---------- ----------
Cash flows from investing activities:
Purchases of short-term investments (1,748,497) (648,925)
Maturities and sales of short-term investments 1,761,554 656,176
Acquisitions of property and equipment (16,610) (16,867)
Additions to other assets (22,487) (33,494)
Acquisitions, net of cash acquired (2,121) (4,527)
---------- ----------

Net cash used for investing activities (28,161) (47,637)
---------- ----------

(Continued)



SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)

SIX MONTHS ENDED
-------------------------
MAY 30 MAY 31
1997 1996
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock $ 60,185 $ 13,092
Repurchase of common stock (36,957) (41,971)
Payment of dividends (7,249) (7,319)
---------- ----------
Net cash provided (used) by financing activities 15,979 (36,198)
---------- ----------

Effect of foreign currency exchange rates on
cash and cash equivalents 19 (620)
---------- ----------

Net increase in cash and cash equivalents 74,842 19,223

Cash and cash equivalents at beginning of period 110,745 58,493
---------- ----------
---------- ----------

Cash and cash equivalents at end of period $ 185,587 $ 77,716
---------- ----------
---------- ----------

Supplemental disclosures:
Cash paid during the period for income taxes $ 56,844 $ 21,278
---------- ----------
---------- ----------

Noncash investing and financing activities:
Dividends declared but not paid $ 3,660 $ 3,632
---------- ----------
---------- ----------

Dividend in-kind declared but not issued $ 21,560 $ --
---------- ----------
---------- ----------

Put warrants written $ 43,767 $ 29,483
---------- ----------
---------- ----------

Issuance of notes for acquisition $ -- $ 9,473
---------- ----------
---------- ----------



SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.


7
ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated balance sheets and
statements of income and cash flows reflect all normal recurring adjustments
which are, in the opinion of management, necessary to present a fair statement
of the condensed consolidated financial position at May 30, 1997, and the
condensed consolidated statements of income and cash flows for the interim
periods ended May 30, 1997 and May 31, 1996.

The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions for Form 10-Q and, therefore,
do not include all information and footnotes necessary for a complete
presentation of the results of operations, the financial position, and cash
flows, in conformity with generally accepted accounting principles. Adobe
Systems Incorporated ("Adobe" or the "Company") filed audited consolidated
financial statements which included all information and footnotes necessary for
such a presentation of the results of operations, financial position and cash
flows for the years ended November 29, 1996, December 1, 1995 and November 25,
1994, in the Company's 1996 Form 10-K.

The results of operations for the interim periods ended May 30, 1997 are
not necessarily indicative of the results to be expected for the full year.

NET INCOME PER SHARE

Net income per share is based upon weighted average common and dilutive
common equivalent shares outstanding using the treasury stock method. Dilutive
common equivalent shares include stock options. Fully diluted earnings per share
for the quarters ended May 30, 1997 and May 31, 1996 were not materially
different from primary earnings per share.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No.128, "Earnings Per Share." SFAS
No.128 establishes a different method of computing net income per share than is
currently required under the provisions of Accounting Principles Board Opinion
No. 15. Under SFAS No.128, the Company will be required to present both basic
net income per share and diluted net income per share. Basic net income per
share is expected to be higher than the currently presented net income per
share as the effect of dilutive stock options will not be considered in
computing basic net income per share. Diluted net income per share is expected
to be comparable or slightly lower than the currently presented net income per
share.


8
ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

NET INCOME PER SHARE (CONTINUED)

The Company plans to adopt SFAS No.128 in its fiscal quarter ending
February 27, 1998 and at that time all historical net income per share data
presented will be restated to conform to the provisions of SFAS No.128.

RECLASSIFICATIONS

Certain reclassifications have been made to the November 29, 1996 balances
to conform to the presentation at May 30, 1997.


NOTE 2. PROPERTY AND EQUIPMENT


Property and equipment consisted of the following:

MAY 30 NOVEMBER 29
1997 1996
--------- ---------

Land $ 782 $ 782
Building 4,478 4,615
Equipment 128,675 121,044
Furniture and Fixtures 20,520 18,126
Leasehold improvements 19,641 13,036
--------- ---------
174,096 157,603
Less accumulated depreciation and amortization 91,179 77,372
--------- ---------

$ 82,917 $ 80,231
--------- ---------
--------- ---------





9
ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)


NOTE 3. OTHER ASSETS

Other assets consisted of the following:

MAY 30 NOVEMBER 29
1997 1996
----------- -----------
Equity investments $ 52,254 $ 97,679
Purchased technology and licensing
agreements 32,636 32,211
Restricted funds and security deposits 81,775 69,443
Miscellaneous other assets 48,996 35,470
----------- -----------

207,066 234,803

Less accumulated amortization 45,876 39,455
----------- -----------

$ 169,785 $ 195,348
----------- -----------
----------- -----------

Included above in other assets, as equity investments, at May 30, 1997, are
equity securities and related unrealized gains and losses thereon. Equity
investments included an investment in Netscape Communications Corporation
("Netscape") at November 26, 1996. However, during the second quarter of fiscal
1997, the investment in Netscape was reclassified to short-term investments when
Adobe announced the dividend of most of the Netscape shares.



NOTE 4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
MAY 30 NOVEMBER 29
1997 1996
---------- ----------
Accrued compensation and benefits $ 32,340 $ 24,673
Sales and marketing allowances 13,582 13,753
Other 56,374 44,639
---------- ----------

$ 102,296 $ 83,065
---------- ----------
---------- ----------



10
ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)


NOTE 5. ACCRUED RESTRUCTURING COSTS

In 1995 and 1994, the Company acquired Frame Technology Corporation
("Frame") and Aldus Corporation ("Aldus"), respectively, and initiated a plan to
combine the operations of the companies. In connection with these acqusitions,
in 1995 and 1994 the Company recorded charges of $31.5 million and $72.2
million, respectively, to operating expenses related to merger transaction and
restructuring costs. In addition, Frame undertook certain restructuring measures
in 1993 due to lower than anticipated revenues.

As of May 30, 1997 and November 29, 1996, $8.9 million and $10.9 million,
respectively, remained accrued and primarily relates to lease and third-party
contract termination payments, resulting from the planned closure of duplicate
offices in Europe and the United States. These payments are expected to continue
through the contract terms or negotiated early termination date, if applicable.


NOTE 6. CAPITAL STOCK

RECAPITALIZATION

In May 1997, the Company was reincorporated in the State of Delaware. As
part of this reincorporation, each outstanding share of the old California
Corporation preferred stock and common stock was converted automatically to one
share of the new Delaware Corporation $0.0001 par value preferred stock and
common stock. This change resulted in a transfer from the common stock account
to the additional paid-in capital account totaling $246.9 million in the period
ending May 30, 1997. All prior periods presented have been restated to reflect
this change.


NOTE 7. COMMITMENTS AND CONTINGENCIES

REAL ESTATE DEVELOPMENT AGREEMENT

During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility in San Jose, California. In August 1996, the construction was
completed and the operating lease commenced. The Company has the option to
purchase the facility at the end of the lease term. In the event the Company
chooses not to exercise this option, the Company is obligated to arrange for
the sale of the facility to an unrelated party and is required to pay the
lessor

11
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
(CONTINUED)


NOTE 7. COMMITMENTS AND CONTINGENCIES (CONTINUED)

REAL ESTATE DEVELOPMENT AGREEMENT (CONTINUED)

any difference between the net sales proceeds and the lessor's net investment
in the facility, in an amount not to exceed that which would preclude
classification of the lease as an operating lease, approximately $57.3
million. During the construction period, the Company was required to pledge
certain interest bearing financial investments to the lessor as collateral to
secure the performance of its obligations under the lease. As of May 30,
1997, the Company's deposits under this agreement totaled approximately $68.2
million in United States government treasury notes and money market mutual
funds. These deposits are included in "Other assets" in the Condensed
Consolidated Balance Sheets.

During the third quarter of 1996, the Company exercised its option under
the development agreement to begin a second phase of development for an
additional office facility. In August 1996, the Company entered into a
construction agreement and an operating lease agreement for this facility. The
operating lease will commence on completion of construction in 1998. The Company
will have the option to purchase the facility at the end of the lease term. In
the event the Company chooses not to exercise this option, the Company is
obligated to arrange for the sale of the facility to an unrelated party and is
required to pay the lessor any difference between the net sales proceeds and the
lessor's net investment in the facility, in an amount not to exceed that which
would preclude classification of the lease as an operating lease, approximately
$64.3 million. The Company also is required, periodically during the
construction period, to deposit funds with the lessor as an interest bearing
security deposit to secure the performance of its obligations under the lease.
During the second quarter of 1997, the Company deposited approximately $5.2
million, and as of May 30, 1997, the Company's deposits under this agreement
totaled approximately $13.6 million. These deposits are included in "Other
assets" in the Condensed Consolidated Balance Sheets.

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.



12
ITEM 2.  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 QUARTERLY REPORT ON FORM 10-Q
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." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE
COMPANY IN 1997AND THE 1996 ANNUAL REPORT ON FORM 10-K . READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY
AS OF THE DATE OF THIS QUARTERLY REPORT ON FORM 10-Q. THE COMPANY UNDERTAKES 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

Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets,
and supports computer software products and technologies that enable users to
create, display, assemble and communicate images and documents in electronic and
printed formats. The Company licenses its technology to major computer,
printing, and publishing suppliers, and markets application software products
and type products for authoring, editing, distributing and printing visually
rich documents. The Company distributes its products through a network of
original equipment manufacturer ("OEM") customers, distributors and dealers, and
value-added resellers ("VARs") and system integrators. The Company has
operations in North America, Europe, Japan, Asia-Pacific and Latin America
regions.


13
The following table sets forth for the quarters and six months ended May
30, 1997, and May 31, 1996, the Company's condensed consolidated statements of
income expressed as a percentage of total revenue:



<TABLE>
<CAPTION>
QUARTERS ENDED NINE MONTHS ENDED
------------------------- -------------------------
MAY 30 MAY 31 MAY 30 MAY 31
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Licensing 23.3% 24.1% 23.0% 24.2%
Application products 76.7 75.9 77.0 75.8
---------- ---------- ---------- ----------
Total revenue 100.0 100.0 100.0 100.0

Direct costs 14.3 17.7 14.7 17.9
---------- ---------- ---------- ----------

Gross margin 85.7 82.3 85.3 82.1
---------- ---------- ---------- ----------

Operating expenses:
Software development costs:
Research and development 18.1 18.4 17.5 18.8
Amortization of capitalized
software development
costs -- 0.3 -- 0.3
Sales, marketing and
customer support 32.9 32.2 32.4 32.2
General and administrative 9.2 8.0 8.5 8.1
Write-off of acquired in-
process research and
development 1.4 7.2 0.7 3.7
Other non-recurring items -- -- (0.5) --
---------- ---------- ---------- ----------

Total operating expenses 61.6 66.1 58.5 63.1
---------- ---------- ---------- ----------

Operating income 24.1 16.2 26.8 19.0

Nonoperating income:
Investment gain (loss) -- 0.2 (0.1) 0.7
Interest and other income 3.6 3.1 3.4 3.8
---------- ---------- ---------- ----------

Total nonoperating income 3.6 3.3 3.2 4.5
---------- ---------- ---------- ----------

Income before income taxes 27.7 19.5 30.0 23.5

Provision for income taxes 10.1 8.7 10.9 9.5
---------- ---------- ---------- ----------

Net income 17.6% 10.8% 19.0% 14.0%
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
</TABLE>



14
REVENUE

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Total revenue $228.3 $204.3 11.7%

Six month period:

Total revenue $454.7 $398.0 14.3%


Revenue increased significantly from last year due to the release of new
products. Product unit volume (as opposed to price) increase was the principal
factor in the Company's revenue growth.

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Product group revenue -- Licensing $53.3 $49.3 8.1%

Percentage of total revenue 23.3% 24.1%

Six month period:

Product group revenue -- Licensing $104.7 $96.2 8.9%

Percentage of total revenue 23.0% 24.2%


Licensing revenue is derived from shipments by OEM customers of products
containing the Adobe PostScript interpreter, Adobe PrintGear software and the
Display PostScript system. Such PostScript products include: (1) standard
roman printers as well as printers that work with Japanese, Chinese, and
Korean languages; (2) imagesetters; and (3) workstations. Licensing revenue
is also derived from shipments of products containing the Configurable
PostScript Interpreter ("CPSI") by OEM customers. CPSI is a fully functional
PostScript interpreter that resides on the host computer system rather than
in a dedicated controller integrated into an output device. The configuration
flexibility of CPSI allows OEMs and software developers to create and market
a variety of PostScript products independently of controller hardware
development. Adobe PostScript products sell to the small office/home office
("SOHO") market, as well as the corporate enterprise and high-end imagesetter
markets. PrintGear software is targeted to the SOHO and home computer market.

The number of units shipped by OEMs continued to grow on a quarterly basis.
Royalty per unit is generally calculated as a percentage of the end user list
price of a printer, although there are some components of licensing revenue
based on a flat dollar amount per unit which typically do not change with list
price changes. In the second quarters and six month periods of 1997 and 1996,
licensing revenue was driven by increased demand for CPSI and by increased
demand for color capability, shipments of PrintGear products, as well as greater
penetration into the Japanese market.


15
The Company has seen year-to-year increases in the number of OEM
customers from which it is receiving licensing revenue and believes that such
increases are attributable to the continued acceptance of PostScript
software, as well as to the diversification of the Company's customer base
across multiple platforms. In 1997, Adobe expects additional customers to
introduce new PrintGear products that will serve the SOHO market. Also in
1997, one of Adobe's largest PostScript customers, Hewlett-Packard Company
("HP"), plans to introduce monochrome laser printer products that will not
contain Adobe PostScript software. These products are expected to contain a
non-Adobe clone version of PostScript and are expected to reach the market in
the fall of 1997. While the Company expects overall licensing revenue growth
to continue over the longer term, the anticipated loss of such revenue from
HP will impact the Company's revenue growth during the short term.

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Product group revenue --
Application products $175.0 $155.1 12.9%

Percentage of total revenue 76.7% 75.9%

Six month period:

Product group revenue --
Application products $350.0 $301.8 16.0%

Percentage of total revenue 77.0% 75.8%


Application products revenue is derived predominantly from shipments of
application software programs marketed through retail distribution channels;
however, Adobe PageMill, Adobe SiteMill, Adobe FrameMaker, and Adobe Acrobat
products are becoming more widely distributed through VARs and systems
integrators. Adobe PhotoDeluxe is primarily distributed through OEM bundling
agreements with digital camera, scanner, and personal computer manufacturers.

During the second quarter and first six months of 1997, application
products revenue was significantly higher than that of the same periods in 1996.
This increase reflected continued demand for Adobe Photoshop 4.0, Acrobat 3.0,
and PhotoDeluxe which were all released in the second half of 1996. In addition,
the Company released Adobe Illustrator 7.0 in multiple languages on both the
Macintosh and Windows platforms late in the second quarter of 1997. Also during
the second quarter of 1997, the Company began shipping new versions of Adobe
Type Manager Deluxe 4.0 for Windows NT, Adobe Dimensions 3.0, Adobe Streamline
4.0, and Acrobat Capture 2.0 for Windows. These increases were partially offset
by decreased revenue for Adobe PageMaker, FrameMaker, Adobe Premiere, SiteMill
and PageMill.

In general, the Company's application products on the Windows platform have
experienced greater growth than those on the Macintosh platform during the
second


16
quarter and first six months of 1997. During the second quarter of 1997,
revenue from Windows-based products exceeded that from Macintosh-based
products for the first time. Total Macintosh applications revenue decreased
12 percent year over year, all of which was related to new unit sales as
opposed to sale of upgrades.

DIRECT COSTS

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Direct costs $32.7 $36.1 (9.5)%

Percentage of total revenue 14.3% 17.7%

Six month period:

Direct costs $66.9 $71.3 (6.1)%

Percentage of total revenue 14.7% 17.9%

Direct costs include royalties; amortization of acquired technologies; and
direct product, localization, packaging and shipping costs.

Gross margins, in general, are affected by the mix of licensing revenue
versus application products revenue as well as the product mix within
application products. Direct costs were lower in the second quarter and first
six months of 1997 compared with the same periods last year due to the
distribution of more application products via CD-ROM media and lower royalty
payments on licensing related to products being shipped.

Gross margins for application products are expected to vary for the
remainder of 1997 depending on the product mix sold during the period.


OPERATING EXPENSES

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Software development costs --
Research and development $41.3 $37.7 9.5%

Percentage of total revenue 18.1% 18.4%

Six month period:

Software development costs --
Research and development $79.5 $74.9 6.1%

Percentage of total revenue 17.5% 18.8%


17
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 expense increased in absolute dollars as the
Company invested in new technologies, new product development, and the
infrastructure to support such activities. The increase reflects the expansion
of the Company's engineering staff and related costs required to support its
continued emphasis on developing new products and enhancing existing products.
The Company continues to make significant investments in development of all of
its software products, including those targeted for the Internet and
professional and personal publishing markets.

The Company believes that continued investments in research and development
are necessary to remain competitive in the marketplace, and are directly related
to continued, timely development of new and enhanced products. Accordingly, the
Company intends to continue recruiting and hiring experienced software
developers.



1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Software development costs --
Amortization of capitalized
software development costs $ -- $0.6 --

Percentage of total revenue -- 0.3%

Six month period:

Software development costs --
Amortization of capitalized
software development costs $ -- $1.3 --

Percentage of total revenue -- 0.3%


In the implementation of Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to Be Sold,
Leased, or Otherwise Marketed," software development expenditures on Adobe
products, after achieving technological feasibility, were deemed to be
immaterial. Certain software development expenditures on Frame products had been
capitalized and were being amortized over the lives of the respective products.
Full amortization of all Frame products was achieved by the end of 1996. In the
second quarter and first six months of 1997, software development expenditures
on all products, after reaching technological feasibility, were immaterial and
the Company expects this trend to continue in the future.


18
1997       1996     CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Sales, marketing and
customer support $75.2 $65.7 14.4%

Percentage of total revenue 32.9% 32.2%

Six month period:

Sales, marketing and
customer support $147.2 $128.3 14.7%

Percentage of total revenue 32.4% 32.2%


Sales, marketing, and customer support expenses generally include salaries
and benefits, sales commissions, travel expenses, and related facility costs for
the Company's sales, marketing, customer support, and distribution personnel.
Sales, marketing, and customer support expenses also include the costs of
programs aimed at increasing revenue, such as advertising, trade shows, and
other market development programs.

Sales, marketing, and customer support expenses increased in the second
quarter and first six months of 1997 compared with the same periods of 1996. The
increases are due to increased advertising and promotional expenditures for
upgrades of existing products and further development of customer and technical
support services to support a growing base of customers.

The increase in absolute dollars for the remainder of 1997 will be due to
new product releases, increased investment in the Windows market and programs
related to furthering worldwide recognition of the Adobe brand.

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

General and administrative $21.1 $16.4 28.5%

Percentage of total revenue 9.2% 8.0%

Six month period:

General and administrative $38.6 $32.1 20.3%

Percentage of total revenue 8.5% 8.1%


General and administrative expenses consist principally of salaries and
benefits, travel expenses, and related facility costs for the finance, human
resources, legal, information services, and administrative personnel of the
Company. General and administrative expenses also include outside legal and
accounting fees, bad debts, and expenses


19
associated with computer equipment and software used in the administration of
the business.

General and administrative expenses increased in absolute dollars for the
second quarter and first six months of 1997 compared with the same periods last
year. The increase resulted primarily from higher information systems costs,
legal costs, employee benefits costs, and costs associated with the
implementaion of a more comprehensive administrative infrastructure.

Because of the investments the Company is making in product development,
marketing and sales efforts and in infrastructure development, operating
expenses are expected to increase in absolute terms and may increase as a
percentage of revenues, depending on the revenue levels achieved in any
particular quarter.

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Write-off of acquired in-
process research and
development $3.2 $14.7 (78.5)%

Percentage of total revenue 1.4% 7.2%

Six month period:

Write-off of acquired in-
process research and
development $3.2 $14.7 (78.5)%

Percentage of total revenue 0.7% 3.7%

During the second quarter of 1997, the Company acquired two software
companies and accounted for the transactions by the purchase method. The
aggregate purchase price was principally allocated to in-process research and
development and, accordingly, $3.2 million was expensed at the time of the
acquisitions.

In May 1996, the Company acquired Ares Software Corporation ("Ares") for
approximately $15.5 million and accounted for the transaction by the purchase
method. Of this amount, the Company paid approximately $4.5 million in cash,
assumed $1.5 million of liabilities, and issued notes payable for $9.5 million.
Approximately $14.7 million was allocated to in-process research and
development, and was expensed at the time of the acquisition. The remainder of
the purchase price was allocated to current assets and goodwill.


20
1997       1996     CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Other non-recurring items $ -- $ -- --

Percentage of total revenue -- --

Six month period:

Other non-recurring items $(2.4) $ -- --

Percentage of total revenue (0.5)% --


The non-recurring item which occurred during the first quarter of 1997
represents proceeds on the divestiture of a product line.

NONOPERATING INCOME

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Investment gain/(loss) $ -- $0.3 --

Percentage of total revenue -- 0.2%

Six month period

Investment gain/(loss) $(0.6) $3.0 (119.5)%

Percentage of total revenue (0.1)% 0.8%

Investment gain (loss) consists principally of realized gains or losses
from direct investments as well as mark-to-market valuation adjustments for
Adobe Ventures L.P. investments.

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Interest and other income $8.3 $6.4 29.3%

Percentage of total revenue 3.6% 3.1%

Six month period

Interest and other income $15.3 $15.2 0.5%

Percentage of total revenue 3.4% 3.8%


Interest and other income consists principally of interest earned on cash,
cash equivalents, and short-term investments.

In the second quarter of 1997, interest and other income was higher than
the second


21
quarter of 1996 as a result of a  significantly higher cash and short term
investments base. Interest and other income for the first six months of 1997 was
consistent with the same period of 1996 primarily as a result of a gain realized
in the first quarter of 1996 on the disposition of a part of the Company's
short-term portfolio.

PROVISION FOR INCOME TAXES

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Provision for income taxes $23.1 $17.8 29.9%

Percentage of total revenue 10.1% 8.7%

Effective tax rate 36.5% 44.7%

Six month period:

Provision for income taxes $49.8 $38.0 31.1%

Percentage of total revenue 10.9% 9.5%

Effective tax rate 36.5% 40.6%


The effective tax rate for the second quarter and first six months of 1997
was lower than the same periods in 1996 as a result of the absence of
significant non-deductible one-time charges in 1997.

NET INCOME AND NET INCOME PER SHARE

1997 1996 CHANGE
---------- --------- -----------
Second quarter period: (Dollars in millions)

Net income $40.1 $22.0 82.2%

Percentage of total revenue 17.6% 10.8%

Net income per share $0.54 $0.29 86.2%

Weighted shares (In thousands) 74,416 75,638 (1.6)%

Six month period:

Net income $86.6 $55.7 55.5%

Percentage of total revenue 19.0% 14.0%

Net income per share $1.17 $0.73 60.3%

Weighted shares (In thousands) 74,178 76,016 (2.4)%



Net income for the second quarter of 1997 increased 82.2 percent from the
second quarter of 1996. Earnings per share were $.54, a 86.2 percent increase
from the second


22
quarter of 1996. Net income for the six months ended May 30, 1997 increased 55.5
percent from the same period in 1996 and earnings per share increased 60.3
percent for the same period. The increase was caused primarily by higher
revenues and improved operating margins.


FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

The Company believes that in the future its results of operations could be
affected by various factors, such as: delays in shipment of the Company's new
products and major new versions of existing products; market acceptance of new
products and upgrades; renegotiation of royalty arrangements; growth in
worldwide personal computer and printer sales and sales price adjustments;
consolidation in the OEM printer business; industry transitions to new business
and information delivery models; adverse changes in general economic
conditions in any of the countries in which the Company does business; the
introduction of new competitive products; and the prices of new or existing
competitive products.

The markets for the Company's products are characterized by rapidly
changing technology and customer needs, evolving industry standards and
frequent new product introductions. The Company's success will depend upon
its ability to develop and market products, including upgrades of currently
shipping products, that successfully adapt to changing customer needs. The
Company's ability to extend its core technologies into new applications and
to anticipate or respond to technological changes could affect its ability to
develop these products. A portion of the Company's future revenue will come
from these products. Delays in product introductions, including delays in
providing localized products for international customers, could have an
adverse effect on the Company's revenue, earnings, or stock price. The
Company cannot determine the ultimate effect that these new products or
upgrades will have on its sales or results of operations.

The Company generally offers its application products on Windows,
Macintosh and for some products, Unix platforms. In the second quarter of
fiscal 1997, Windows-based application revenue exceeded that for the
Macintosh platform for the first time. Total Macintosh-based applications
revenue decreased 12 percent year over year, all of which occurred in new
unit sales. Upgrade revenue on the Macintosh platform increased 34% year over
year. If there is a continued or accelerated slowdown of Macintosh
applications revenue and if the Company is unable to continue to increase its
revenue from Windows customers, the Company's operating results could be
materially adversely affected. Also, as the Company broadens its customer
base to achieve greater penetration in the corporate business, consumer or
personal publishing markets, the Company may need to adapt its application
software distribution channels. The Company could experience decreases in
average selling prices and some loss of revenues in its distribution channel
which could materially adversely affect its operating results. In addition,
to the extent that there is a slowdown of customer purchases of personal
computers in general, the Company's operating results could be materially
adversely affected.

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,
including licensing a PostScript language compatible interpreter from a third
party, which could

23
result in lower licensing revenue for the Company.  During the first quarter
of 1996, there was a change in part of the Company's business relationship
with Hewlett-Packard Company ("Hewlett-Packard"). Beginning in the fall of
1997, Hewlett-Packard plans not to incorporate Adobe PostScript software in
some of its Hewlett-Packard LaserJet printers. The Company estimates the
revenue impact of this action will be approximately $6.0 million per quarter.
The Company expects to continue working with Hewlett-Packard printer
operations to incorporate Adobe PostScript and other technologies in other
Hewlett-Packard products. The Company expects to increase its overall
licensing revenue in the second half of 1997, but if it is unsuccessful, the
loss of the HP revenue from monochrome laser printers would adversely affect
its licensing revenue.

Prior to 1996, the Company experienced significant revenue and headcount
growth. The Company's ability to effectively manage its revenue and headcount
growth will require it to continue to plan and manage its operational and
financial controls and management information systems, and to attract,
retain, motivate and manage employees effectively. The Company is investing
significantly in upgrading its management information systems worldwide. The
failure of the Company to effectively manage growth could have a material
adverse effect on its results of operations.

The internet and intranet markets are rapidly evolving and are
characterized by an increasing number of market entrants who have introduced
or developed products addressing authoring and communication over the
internet and intranet. 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 the authoring and electronic publishing requirements of the
Internet is young and has few proven products. In addition, new models for
licensing software to accommodate new information delivery practices will be
needed. 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 impact this market together
with the software standards and electronic media employed in such markets.

The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe, Japan, Asia-Pacific and Latin
America. While most of the revenue of these subsidiaries is denominated in U.S.
dollars, the majority of their expense transactions are denominated in foreign
currencies, including the Japanese yen and most major European currencies. As a
result, the Company's operating results are subject to fluctuations in foreign
currency exchange rates. To date, the impact of such fluctuations has been
insignificant and the Company has not engaged in any significant activities to
hedge its exposure to foreign currency exchange rate fluctuations. In addition,
the Company generally experiences lower revenue from its European operations in
the third quarter because many customers reduce their business activities in the
summer months.

Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in the




24
fiscal quarter, which could result in an even more immediate and adverse
effect on the trading price of the Company's common stock. Finally, the
Company participates in a highly dynamic industry. In addition to factors
specific to the Company, changes in analysts' earnings estimates for the
Company or its industry and factors affecting the corporate environment or
the securities markets in general will often result in significant volatility
of the Company's common stock price.

FINANCIAL CONDITION


CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

MAY 30 NOVEMBER 29
1997 1996 CHANGE
------ ----------- ------
(Dollars in millions)
Cash, cash equivalents and
short-term investments $647.5 $564.1 14.8%

The Company's cash balances and short term investments have increased
due to profitable operations, partially offset by expenditures for the
repurchase of stock, capital outlays, other investments, and deposits
required under real estate development agreements. Short-term investments
also increased due to a $20.7 million reclassification, from other assets, of
a significant portion of the Company's investment in Netscape Communications
Corporation ("Netscape"). This amount was reclassified because, during the
second quarter of fiscal 1997, the Company announced the dividend of a
portion of its investment in Netscape under the Company's venture stock
dividend program. The Company plans to dividend one share of Netscape common
stock on August 27, 1997, for every one hundred shares of Adobe common stock
held by stockholders' of record on July 31, 1997.

Cash equivalents consist of highly liquid money market instruments. All
of the Company's cash equivalents and short-term investments, consisting
principally of municipal bonds, auction rate certificate securities, United
States government and government agency securities, and asset-backed
securities, are classified as available-for-sale under the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Securities." The securities are carried at fair value
with the unrealized gains and losses, net of tax, reported as a separate
component of stockholders' equity.

25
OTHER ASSETS

MAY 30 NOVEMBER 29
1997 1996 CHANGE
------ ----------- ------
(Dollars in millions)

Other assets $169.8 $195.3 (13.1)%

Included above in other assets at May 30, 1997 are purchased technology
and licensing agreements, restricted funds and security deposits, equity
securities and unrealized gains and losses thereon. The decline in other
assets is primarily due to the reclassification of the Netscape common stock
to short-term investments.

NONCURRENT LIABILITIES AND STOCKHOLDERS' EQUITY


MAY 30 NOVEMBER 29
1997 1996 CHANGE
------ ----------- ------
(Dollars in millions)

Noncurrent liabilities and
stockholders' equity $847.1 $781.7 8.4%

At November 29, 1996, deferred income taxes related to unrealized gains
and losses on equity investments and obligations for put warrants are
included in noncurrent liabilities and stockholders' equity. The Company has
no long-term debt. The increase from November 29, 1996 to May 30, 1997
results from net income and the issuances of common stock under the Company's
stock option and employee stock purchase plans partially offset by a decrease
in the unrealized gain on the equity investment in Netscape and the
repurchase of stock. Also, as a result of changes made during the second
quarter of 1997 to settlement terms in option contracts, the Company no
longer reclassifies the potential obligations for put warrants as a reduction
of stockholders' equity.

Under its stock repurchase program, the Company repurchased 3,321,500
shares at a cost of $124.5 million in 1996. During the second quarter and
first six months of 1997, the Company repurchased 500,000 shares at a cost of
$20.8 million and 977,000 shares at a cost of $36.9 million, respectively.
The Company intends to continue to directly repurchase common shares and
arrange options to purchase common shares to partially offset the effects of
the Company's employee stock purchase and stock option plans.

The Board of Directors of the Company declared a cash dividend on the
Company's common stock of $.05 per common share on June 16, 1997, for the
second quarter of 1997. The dividend will be for stockholders of record as of
July 7, 1997, and will be paid on July 21, 1997. The declaration of future
dividends is within the discretion of the Board of Directors of the Company
and will depend upon business conditions, results of operations, the
financial condition of the Company and other factors. In addition, on April
24, 1997, the Company announced the first dividend of venture investment
stock under the venture stock dividend program. Adobe plans to dividend one
share of Netscape

26
common stock on August 27, 1997 for each one hundred shares of Adobe common
stock held by stockholders of record on July 31, 1997; an equivalent cash
dividend will be paid for holdings of less than twenty-five hundred Adobe
shares and for odd lots less than one hundred Adobe shares, based on the
Netscape closing price on July 31, 1997.

WORKING CAPITAL

MAY 30 NOVEMBER 29
1997 1996 CHANGE
------ ----------- ------
(Dollars in millions)

Working capital $594.2 $506.1 17.4%

Net working capital grew to $594.2 million as of May 30, 1997, compared
to $506.1 million as of November 29, 1996. Cash flow provided by operations
during the first six months of 1997 was $87.0 million.

Expenditures during the first six months of 1997 for property and
equipment totaled $16.6 million. Such expenditures are expected to continue,
including computer systems for development, sales and marketing, product
support, and administrative staff. In the future, additional cash may be used
to acquire software products or technologies complementary to the Company's
business. Net cash used by financing activities during the first six months
of 1997 was $16.0 million primarily resulting from the issuance of common
stock under employee stock plans partially offset by repurchase of common
stock and payment of dividends.

The Company's principal commitments as of May 30, 1997 consisted of
obligations under operating leases, venture investing activities, real estate
development agreements, and various service and lease guarantee agreements
with a related party.

REAL ESTATE DEVELOPMENT

During 1994, the Company entered into a real estate development
agreement and an operating lease agreement in connection with the
construction of an office facility. In August 1996, the construction was
completed and the operating lease commenced. The Company has the option to
purchase the facility at the end of the lease term. In the event the Company
chooses not to exercise this option, the Company is obligated to arrange for
the sale of the facility to an unrelated party and is required to pay the
lessor any difference between the net sales proceeds and the lessor's net
investment in the facility, in an amount not to exceed that which would
preclude classification of the lease as an operating lease, approximately
$57.3 million. During the construction period, the Company was required to
pledge certain interest bearing intruments to the lessor as collateral to
secure the performance of its obligations under the lease. As of May 30,
1997, the Company's deposits under this agreement totaled approximately $68.2
million in United States government treasury notes and money market mutual
funds. These deposits are included in "Other assets" in the Condensed
Consolidated Balance Sheets.

During the third quarter of 1996, the Company exercised its option under
the development agreement to begin a second phase of development for an
additional office facility. In August 1996, the Company entered into a
construction agreement and an


27
operating lease agreement for this facility. The operating lease will
commence on completion of construction in 1998. The Company will have the
option to purchase the facility at the end of the lease term. In the event
the Company chooses not to exercise this option, the Company is obligated to
arrange for the sale of the facility to an unrelated party and is required to
pay the lessor any difference between the net sales proceeds and the lessor's
net investment in the facility, in an amount not to exceed that which would
preclude classification of the lease as an operating lease, approximately
$64.3 million. The Company also is required, periodically during the
construction period, to deposit funds with the lessor as an interest bearing
security deposit to secure the performance of its obligations under the
lease. During the second quarter of 1997, the Company deposited approximately
$5.2 million, and as of May 30, 1997 the Company's deposits under this
agreement totaled approximately $13.6 million. These deposits are included in
"Other assets" in the Condensed Consolidated Balance Sheets.

SERVICE AND LEASE GUARANTEES

The Company holds a 14 percent equity interest in McQueen Holdings
Limited ("McQueen"), a U.K. Company, and accounts for the investment at cost.
During 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.

The Company believes that existing cash, cash equivalents, and
short-term investments, together with cash generated from operations, will
provide sufficient funds for the Company to meet its operating cash
requirements in the foreseeable future.







28
PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Quantel Limited, a U.K. corporation, filed and served on the Company in
January 1996 a complaint alleging that the Adobe Photoshop program infringes
five U.S. patents held by Quantel. The complaint was filed in the United
States District Court for the District of Delaware. The complaint seeks a
permanent injunction and unspecified damages. The Company has analyzed the
patents and believes it has adequate legal defenses to the major causes of
action and intends to vigorously defend the lawsuit. The case is currently in
the discovery phase.

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, 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. Adobe believes
that the allegations against it and its officers and directors are without
merit and intends to vigorously defend the lawsuit. The case is currently in
the discovery phase.

On April 17, 1997, a derivative action was filed in the Superior Court
of the State of California, County of Santa Clara, against the current
members of Adobe's Board of Directors and Paul Brainerd, a former member of
the Board. The suit was filed by a shareholder purporting to assert on behalf
of the Company claims for alleged breach of the Directors' fiduciary duty and
mismanagement related to the Company's acquisition of Frame in October 1995.
The Company has moved for dismissal of the suit on the ground that the
shareholder was required to make a demand on the Board to bring this
litigation before the shareholder proceeded with his own lawsuit on behalf of
Adobe, and he failed to make such a demand.

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


29
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of shareholders was held on April 9, 1997.

A proposal to elect four (4) Class II directors of the Company to serve
for a two-year term expiring at the Annual Meeting of Stockholders in 1999
was approved by the shareholders. This proposal received the following votes:

For Withheld
---------- ---------
John E. Warnock 64,105,752 2,314,499
Gene P. Carter 64,460,643 1,959,608
Robert Sedgewick 64,460,643 1,959,608
William J. Spencer 64,459,783 1,960,468


Incumbent Class I directors Charles M. Geschke, William R. Hambrecht,
and Delbert W. Yocam are currently serving for a term expiring at the Annual
Meeting of Stockholders in 1998.

Introduced was a proposal to approve the reincorporation of the Company
in the State of Delaware and related changes to the rights of stockholders.
This proposal received the following votes:

For: 36,866,839
Against: 15,737,065
Abstain: 952,533

Introduced was a proposal to approve an increase in the Company's share
reserve under the 1994 Stock Option Plan by 5,600,000 shares to a total of
29,200,000 shares and a decrease in the option term period to eight years
from ten years for all options granted after approval of this proposal. This
proposal received the following votes:

For: 37,479,997
Against: 15,520,571
Abstain: 555,868

Also, there was a proposal to approve the 1997 Employee Stock Purchase
Plan. This proposal received the following votes:

For: 44,117,138
Against: 10,533,352
Abstain: 217,905

(Continued)

30
ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(Continued)


In addition, shareholders ratified the appointment of KPMG Peat Marwick
LLP as independent public accountants of the Company for fiscal 1997. This
proposal received the following votes:

For: 66,262,620
Against: 77,150
Abstain: 80,481

Abstentions and broker non-votes were each included in the determination
of the number of shares present and voting for purposes of determining the
presence of a quorum at the Company's annual meeting of stockholders. Each
was tabulated separately. Abstentions were included in tabulations of the
votes cast for purposes of determining whether a proposal had been approved.
Broker non-votes however, were not counted for purposes of determining the
number of votes cast for a proposal.


31
ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K

(a) Index to Exhibits

<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT -------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- ---- ------ --------
<S> <C> <C> <C> <C> <C>
2.1 Agreement and Plan of X
Merger effective 5/30/97
(by virtue of a reincorp-
oration), by and between
Adobe Systems Incorpor-
ated, a California Corp-
oration and Adobe Systems
(Delaware) Incorporated,
a Delaware corporation.

3.1 The Registrant's (as successor- X
in-interest to Adobe Systems
Incorporation by virtue of a
reincorporation effective
5/30/97), Certificate of
of Incorporation, as filed with
the Secretary of State of the
State of Delaware on 5/9/97.

3.2.10 The Registrant's, (as X
(successor-in-interest
to Adobe Systems
(Delaware) Incorporated
by virtue of a
reincorporation) Bylaws as
currently in effect.

4.1 Shareholders Rights 10-Q 05/31/96 4.1
Plan, as amended

10.1.6 1984 Stock Option Plan, 10-Q 07/02/93 10.1.6
as amended*

10.1.7 1994 Stock Option Plan* 10-Q 05/27/94 10.1.7

10.1.8 1994 Stock Option Plan, S-8 05/30/97 10.1.8
as amended*

10.12.1 1988 Employee Stock 10-Q 07/06/94 10.12.1
Purchase Plan, as
amended*
</TABLE>
(Continued)


32
3.   Index to Exhibits (Continued)

<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- -------- ------- --------
<S> <C> <C> <C> <C> <C>
10.17.1 License Agreement 10-K 11/30/88 10.17.1
Restatement between the
Company and Apple
Computer, Inc., dated
April 1, 1987
(confidential treatment
granted)

10.17.2 Amendment No. 1 to the 10-K 11/30/90 10.17.2
License Agreement
Restatement between the
Company and Apple
Computer, Inc., dated
November 27, 1990
(confidential treatment
granted)

10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3

10.24.1 1994 Performance and S-4 07/27/94 10.1
Restricted Stock Plan*

10.25.0 Form of Indemnity 10-K 11/30/90 10.17.2
Agreement*

10.25.1 Form of Indemnity X
Agreement*

10.32 Sublease of the Land and 10-K 11/25/94 10.32
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 1)
</TABLE>



(Continued)


33
3.   Index to Exhibits (Continued)

<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- -------- ------- --------
<S> <C> <C> <C> <C> <C>

10.33 Sale of Rights under 10-Q 06/02/95 10.33
Software Development
and Acquisition Agreement
By and Between Adobe
Systems Incorporated and
Thomas Knoll and John
Knoll (confidential
treatment granted)

10.34 Agreement and Plan of S-4 08/18/95 2.1
Merger and Reorganization
By and Among Adobe
Systems Incorporated, J
Acquisition Corporation
and Frame Technology
Corporation

10.35 Form of Executive 10-K 12/01/95 10.35
Severance and Change
of Control Agreement*

10.36 1996 Outside Directors 10-Q 05/31/96 10.36
Stock Option plan*

10.37 Confidential Resignation 10-Q 05/31/96 10.37
Agreement*

10.38 Sublease of the Land and 10-Q 08/30/96 10.38
Lease of the Improvements
By and Between
Sumitomo Bank Leasing
and Finance Inc. and
Adobe Systems Incorporated
(Phase 2)

10.39 1997 Employee Stock Purchase S-8 05/30/97 10.39
Plan

10.40 Amended and Restated X
Limited Partnership
Agreement of Adobe
Incentive Partners, L.P.
</TABLE>

(Continued)
34
3.   Index to Exhibits (Continued)

<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ----------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
------- ------------------- ---- -------- ------- --------
<S> <C> <C> <C> <C> <C>

11 Computation of Net Income X
Per Common Share

27 Financial Data Schedule X

------------------------------------------
*Compensatory plan or arrangement

(b) Reports on Form 8-K

No reports on Form 8-K were filed in the quarter ended May 30, 1997.

</TABLE>







35
SIGNATURE

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.



ADOBE SYSTEMS INCORPORATED


Date: July 14, 1997


By /s/ P. JACKSON BELL
------------------------------
P. Jackson Bell,
Executive Vice President,
Chief Financial Officer,
Chief Administrative Officer,
and Assistant Secretary
(Principal Financial Officer)







36
SUMMARY OF TRADEMARKS

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

Acrobat
Adobe
Capture
Dimensions
Illustrator
FrameMaker
PageMaker
PageMill
PhotoDeluxe
Photoshop
PostScript
Premiere
PrintGear
SiteMill
Streamline
Type Manager

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






37