Indicate by checkmark 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes [X] No [ ]

The aggregate market value of the registrant's common stock, $0.0001 par value per share, held by non-affiliates of the registrant on May 31, 2002, the last business day of the registrant's most recently completed second fiscal quarter, was $1,462,142,091 (based on the closing sales price of the registrant's common stock on that date). Shares of the registrant's common stock held by each officer and director and each person who owns 5% or more of the outstanding common stock of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of January 24, 2003, 231,074,795 shares of the registrant's common stock, $.0001 par value per share, were issued and outstanding.

Portions of the Proxy Statement for the 2003 Annual Meeting of Stockholders (the "Proxy Statement"), to be filed within 120 days of the end of the fiscal year ended November 29, 2002, are incorporated by reference in Part III hereof. Except with respect to information specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed as part hereof.
 

Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") offers a line of software for consumers, businesses, and creative professional customers. Our products enable customers to create, manage and deliver visually rich, compelling and reliable content. We license our technology to 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 manufacturers ("OEMs"); direct to end users; and through our own website at www.adobe.com. We have operations in the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, Pocket PC, and Symbian 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. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC website at www.sec.gov.

In the early 1980s, Adobe developed software that initiated desktop publishing. Today, we continue to be uniquely positioned to make 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, Web, and video production, we help people express, share, and manage their ideas in imaginative and meaningful new ways.

Our strategy is to address the needs of a variety of customers, which include creative professionals -- graphic designers, Web designers, videographers, photographers, and professional publishers; users at work --- knowledge workers, IT managers, line of business managers, and executives; and users at home --- digital imaging and digital video hobbyists and enthusiasts. We execute on this strategy by delivering products that support industry standards and can be deployed on multiple computing environments, including Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, Pocket PC, and Symbian platforms.

Due to a change in business strategy and organizational structure, we have realigned our business segments beginning in the first quarter of fiscal year 2003. Beginning November 30, 2002, a newly named Creative Professional segment replaced the former Cross-media Publishing segment, and now includes Adobe Illustrator and Adobe Graphics Server (formerly called Adobe AlterCast). In addition, a newly named Digital Imaging and Video segment replaced the former Graphics segment. Our ePaper business segment remains the same, including revenue from our recently-acquired Accelio Corporation ("Accelio") business (acquired in the second quarter of fiscal 2002). Our OEM Postscript and Other segment remains the same.

For more information on our old and new segment reporting, please refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Note 17 of our Notes to Consolidated Financial Statements.

Beginning in fiscal 2003, we categorize our products into the four principal business segments as explained below.

Since Adobe was founded in the early 1980's, a core customer of the Company has been the creative professional. Graphic designers, production artists, Web designers, technical writers, videographers, photographers, and prepress professionals use and rely on Adobe's solutions for professional publishing, Web design, business document publishing, and printing visually rich information. Our software tools are used by creative professionals to create much of the printed and on-line information people see and read every day, including newspapers, magazines, Web sites, catalogs, advertisements, brochures, product documentation, technical manuals, books, eBooks, memos, reports, and banners.

Since the global economic downturn began early in 2001, creative professionals have been under economic duress. They derive their revenue mainly from marketing and ad spending in corporations. With a global reduction in marketing spending, the businesses of creative professionals have suffered. Consequently, there has been a decline in spending by creative professionals on software, a decline in growth of the number of creative professionals, and for Adobe, a decline in revenue from the creative professional customer segment.

However, the Creative Professional market continues to evolve, with increased needs to derive greater efficiency from the software they use, the need to streamline their publishing workflows, and the desire to repurpose content across a variety of media.

Adobe's brand and customer loyalty in this market continues to be strong. Existing customers purchase upgrades and new units of our creative professional products because of the frequent use of the products in their daily work. However, until an economic recovery occurs in the major countries in which we do business, we believe that our creative professional business will continue to be challenging.

As part of our corporate strategy, we are increasing our focus on the creative professional customer. Thus, we have established a new creative professional business unit that will focus solely on the needs of this customer. In fiscal 2003, the creative professional business unit will focus on two key strategies: 1) increasing the number of Adobe products they use and 2) enabling more efficient collaboration and workflow through improved product integration and by offering a professional version of Acrobat to assist in digitizing their publishing workflow.

To accomplish these two strategies, Adobe plans to execute against a number of key imperatives. They include: continue to provide best-of-class products; grow usage of Adobe products such as professional page layout and illustration, introduce a new version of Adobe Acrobat which will have specific features creative professionals can use to increase their productivity; and focus on the licensing of collections of Adobe software applications that provide a more complete integrated solution for various types of creative professionals. In addition, the Company plans to continue to focus on enhancing support for eXtensible Markup Language ("XML") in its products, and to enhance the use of Adobe Portable Document Format ("PDF") creation and workflow capabilities in its products -- both of which we expect to result in fast, reliable multi-device output.

In fiscal 2002, Adobe responded to the needs of our customers by delivering several new releases of our Creative Professional software applications. In the first quarter of fiscal 2002, we released new versions of Adobe InDesign -- our software used for professional page layout -- and Adobe GoLive, which is used for Web site content creation and production. In addition, we also shipped a new graphics server product, Adobe Graphics Server (formerly called Adobe AlterCast) to automate the production of images and graphics for data driven content.

In the second quarter of fiscal 2002, we shipped Adobe FrameMaker 7.0, which is our long-document, technical authoring software application.

In the third quarter of fiscal 2002, we shipped Adobe InCopy 2.0, the companion product to Adobe InDesign for copy editing in the professional page layout market. Finally, we also shipped Adobe Content Server 3.0, which is a server product that customers use to create, manage the rights for, and distribute eBooks.

We will work to enhance the integration of our products and provide creative professionals the best possible design experience with Adobe software tools. We plan to continue to provide solutions that help publishers of printed material reuse and repurpose their information to output formats beyond that of print, including Web and wireless formats.

Adobe Content Server---an easy-to-use, all-in-one system for publishers, distributors, retailers, and individual authors to prepare, secure, and license eBooks in Adobe PDF directly from their Web sites.

Adobe Creative Suite Standard Edition---suite of three application products that offers creative professionals software to modify images, create vector diagrams, and produce graphical layouts; includes Adobe Illustrator, Adobe InDesign, and Adobe Photoshop.

Adobe Creative Suite Premium Edition---suite of six professional and integrated software solutions that creative professionals can use to create, modify, format and manage content to be printed, published on the web, sent over wireless links, and viewed on screen. This suite offers document authoring for the Web and wireless devices, digital imaging modification, and digital document sharing. The different applications share a similar user interface and share several commands, tools, palettes and keyboard short-cuts. The suite includes Adobe Acrobat, Adobe GoLive, Adobe InDesign, Adobe Illustrator, Adobe Photoshop, and Adobe Premiere.

Adobe Design Collection---suite of four award-winning application products that allows creative professionals to create and produce high-quality images, illustrations, and layouts, and to publish documents across multiple media; includes Adobe Acrobat, Adobe Illustrator, Adobe InDesign, and Adobe Photoshop.

Adobe Acrobat eBook Reader---software that displays Adobe PDF-based eBooks on notebook and desktop computers in full color, with the high quality and careful design found in printed books.

Adobe Font Folio---contains the entire Adobe Type Library, 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 PDF, Hypertext Markup Language ("HTML"), XML, and Microsoft Word.

Adobe GoLive---professional Web design and publishing software that provides innovative tools that Web authors require to design, layout, produce, and maintain content for Web sites and wireless Web devices without the need for complex multimedia programming.

Adobe Graphics Server---formerly called Adobe AlterCast; imaging server software used to create and maintain digital graphics and images on frequently updated data-driven content, such as Web sites and printed catalogs, by automating the creation and the reuse of images; integrates with content management and e-commerce systems to automate workflows, and eliminates the tedious manual tasks of refining and reformatting images for specific purposes.

Adobe Illustrator---a vector-based illustration design tool used to create compelling graphic artwork for print publications and the Web.

Adobe InCopy---an editorial tool for collaboration between writers, editors, and copy-fitters; InCopy is a companion to Adobe InDesign and is licensed through Adobe's system integrator partners servicing the professional publishing market.

Adobe InDesign---a page-layout application for publishing professionals; based on an open, object-oriented architecture that is extensible, it enables Adobe and its industry partners to deliver powerful publishing solutions for magazine, newspaper, and other high-end publishing applications.

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

Adobe Publishing Collection---suite of four award-winning application products that allows business users to create professional-quality business communications; includes Adobe Acrobat, Adobe Illustrator, Adobe PageMaker, and Adobe Photoshop.

Adobe Type Basics---includes Adobe's best-selling typefaces, plus Adobe Type Manager; makes it easy to create beautiful text for print, Web, and video projects.

Adobe Type Manager---provides powerful, easy management of all PostScript Type 1, OpenType, and TrueType fonts.

Adobe Web Collection---a comprehensive, integrated software suite that allows users to design still and interactive Web graphics, optimize graphics for efficient downloading, and build dynamic Web sites that support the latest technology and standards; includes Adobe Acrobat, Adobe GoLive, Adobe Illustrator, and Adobe Photoshop.

With the first release of Adobe Photoshop more than ten years ago, and with a strong market presence with our imaging and video editing tools today, Adobe sets the standard for digital imaging software. Customers in the digital imaging and video segment include graphic designers, photographers, Web content creators, and multimedia, film, and video producers who work in industries such as advertising, marketing communications, graphic design, printing, publishing, architecture, fine arts, Web design/consulting, and entertainment. They rely on Adobe's digital imaging and digital video editing solutions to create and enhance many of the pictures and video we see everyday in print, on television, and on the Web.

Driving the market opportunities for Adobe in this segment is the growth in the use of digital devices such as digital cameras, digital video cameras, multi-media-enabled computers, scanners, DVD players, Web-capable and image-enabled handheld devices and cellular phones, as well as broadband adoption. As more and more users migrate towards digital photography and digital video recording, the potential market for Adobe grows.

Adobe's digital imaging and video segment consists of powerful software products used by creative professionals, business users, and hobbyists at home to create visually rich content.

Creative professionals use Adobe's digital imaging and video software to create content found in communication media such as books, newspapers, magazines, Web sites, brochures, movies, and television. The digital content they create, which includes photographic images, video, streaming media, and animations, are created with our software tools in order to make their work stand out and to differentiate their companies' products and services from their competitors.

Business users utilize digital imaging and digital video software to enhance digital images and video when accomplishing tasks such as enhancing corporate communications, creating presentations and sales training materials, and developing content for internal (intranet) websites. Hobbyists use this type of software to take advantage of the advancements made in digital photography and video technology to enhance, manage, and share their personal photographs and videos.

As the use of digital photography and digital video cameras grows, we believe creative professionals throughout the world will continue to require software solutions to edit, enhance, and manage their digital photographs and digital videos. We also believe business and hobbyist users will need digital imaging and digital video software as more people use digital cameras and digital camcorders.

We have responded to these market opportunities by delivering several new releases of our digital imaging and video software applications. In the second quarter of fiscal 2002, we released version 7.0 of our Adobe Photoshop product, which is the industry-leading product for digital imaging. In the third quarter of fiscal 2002, we released version 2.0 of our Adobe Photoshop Elements product, which is our digital imaging product targeting the photo editing market for the mid-range hobbyist and enthusiast. We also released version 6.5 of Adobe Premiere, an updated release of our digital video-editing product.

We plan to work with Intel, Microsoft, Dell and Sony to help make Microsoft Windows, and the Intel architecture a strong digital video authoring platform for our customers. With our digital imaging products, we plan to continue to innovate with our Photoshop product to meet the needs of its creative professional customers, while expanding the Photoshop software customer base by improving the interface of the product to be more accessible to non-professional users (business and home users). We have announced plans to introduce new products targeting home user digital image management and professional DVD authoring in fiscal 2003. We plan to leverage the rich media content qualities of Adobe PDF and the vast installed base of Adobe Acrobat Readers to let users of these products easily share their digital photographs in Adobe PDF.

With our digital video products, we plan to take advantage of the improved video-related performance of the latest generation of personal computers, which we believe will allow us to expand our volume in shrink-wrapped software sales independent of our traditional third-party computer video board OEM channel. We intend this channel strategy switch to decrease the percentage of digital video revenue derived through our historical third party computer video board OEM channel and increase the percentage derived through our shrink-wrapped software channels.

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

Adobe Atmosphere (beta)---a software tool for authoring graphically rich three dimensional worlds that viewers on the Web can figuratively enter and interact in; provides a platform for creating realistic and immersive environments that offer a revolutionary approach to content, Web navigation, community, and communication.

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

Adobe LiveMotion---a software tool that allows professional designers to create two-dimensional Web graphics; it provides designers with a rich set of content creation tools for creating both vector and raster graphics in one application for increased productivity.

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 multi-media; used by graphic designers, professional photographers, Web designers, professional publishers, and video professionals.

Adobe Photoshop Album - offers unique, easy-to-use interface to find, organize, share, and edit digital photographs; designed for consumers so that they can manage their collections of digital photographs, easily share photos via e-mail and the Web, create digital slide shows and photo albums, and get their photographs printed via on-line photo finishing services; works well with Photoshop Elements when more advanced digital photograph editing and touch-up is needed.

Adobe Photoshop Elements---offers unique, easy-to-use, powerful image-editing tools designed specifically for amateur photographers and hobbyists who want to create professional-quality images for print and the Web.

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

Adobe SVG Viewer---a plug-in for Web browsers that allows users to view Web graphics created in Scalable Vector Graphics ("SVG") format.

A significant opportunity exists to enable intelligent integration of paper and digital document communications with fidelity and reliability in businesses and governments around the world. Adobe Acrobat software, the cornerstone of our ePaper family of products, at its most basic level enables users to create PDF files --- the worldwide standard for secure and reliable electronic document distribution.

With more than 500 million distributed copies of our Acrobat Reader --- the free multi-platform Adobe PDF viewing software --- Adobe has created a ubiquitous platform for the reliable distribution of electronic documents. The Acrobat Reader is available on the most common operating system platforms, including Microsoft Windows, Apple Macintosh, Linux, various Unix-based platforms, and portable device systems such as Palm OS, Pocket PC, and the Symbian operating system for cellular phones. Together, Acrobat, Adobe PDF, and the Acrobat Reader assure creators of electronic documents that their content will display and print the way they are intended, and that the documents are protected, if they choose, from unauthorized access and alterations.

With additional capabilities in Acrobat that allow users to annotate, collaborate, secure, digitally sign, and archive PDF documents, we believe our ePaper product line delivers unique functionality in many markets. Governments working to deploy eGovernment initiatives, and companies in regulated industries such as aerospace, financial services, 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. Enterprises and governments that deploy Adobe ePaper solutions reduce paper and storage costs, improve customer satisfaction, and realize productivity and time-to-market gains.

Based on the growth in the use of electronic document content, the increasing focus on eGovernment initiatives, and the desire of enterprise customers to utilize XML and extend their businesses beyond the confines of their internal back-end systems, we have increased our investment in our ePaper business during fiscal 2002. These investments include enhancing our research and development strategy and our solutions-based go-to-market capabilities. In marketing and engineering, we have teams that focus on ePaper desktop-based software opportunities and on end-to-end server-based ePaper solution opportunities. To supplement our solution offerings, we acquired Accelio, a supplier of electronic forms and business process automation software solutions, in the second quarter of fiscal 2002.

In our field organization, we realigned our resources throughout fiscal 2002 to focus more heavily on ePaper opportunities. Our goal is to have a majority of our field-based resources focused on ePaper desktop and server-based solutions targeting corporate and government accounts.

With the previously described emerging market trends, and with the addition of Accelio-derived solutions, Adobe has refined its strategy to focus on three distinct ePaper business opportunities in fiscal 2003. They are Document Generation, Document Collaboration, and Document Process Management. 

There is a significant Document Generation market opportunity for transforming raw business data into visually rich, dynamic, customer-focused documents for delivery anytime, anywhere, on any device. In many cases, documents are the main source of interaction governments and businesses have with their constituents, partners, vendors, and customers. Documents are used to generate revenue (such as catalogs, brochures, mailers), conduct transactions (such as tax forms, invoices, loan documents and account statements), and transfer knowledge (such as user manuals, product specifications and financial reports).

We believe the key to producing documents that drive business is an enterprise-strength document generation solution that takes content from multiple sources, dynamically generates documents, and securely and reliably delivers those documents over a variety of systems and devices. Adobe's solutions for Document Generation are intended to: improve customer satisfaction by enabling "self-serve" dynamic document generation, anytime, anywhere, on any device; ensure that documents appear exactly as intended and are protected from unauthorized changes; and reduce costs by automating document and image production processes.

We provide both desktop and server-based solutions for the Document Generation market. On the desktop, Adobe Acrobat generates electronic documents from everyday office applications, such as Microsoft Office. On servers, Adobe offers a combination of products to generate documents, including Adobe Output Server and Adobe Document Server. These server products merge output, including XML-based data, from enterprise applications such as Customer Relationship Management ("CRM"), Enterprise Resource Planning ("ERP"), content management, and legacy systems with highly formatted document templates to generate personalized, reliable documents for print or electronic output.

We believe our key advantages in the Document Generation market include the standardization of PDF usage in many government agencies and regulated industries as a format for distributing, viewing, printing, and archiving electronic documents. In addition, Adobe's electronic document viewing solution, the Acrobat Reader, is available on many platforms, assuring our customers who generate PDF files that their content will be viewable and printable when it is distributed. Finally, from a technology standpoint, integration capabilities between XML-based data and Adobe PDF have made the PDF format a rich, intelligent document container --- one that allows electronic documents to be used on-line and off-line. For example, Adobe PDF-based electronic forms can be filled in off-line (i.e., when a user is not connected to the Internet). Later, when the user reconnects to the Internet, the data entered earlier can be automatically submitted electronically and integrated directly into back-end IS systems such as a co rporate database.

The desire by governments and enterprises to have more effective and timely collaboration solutions has created a significant Document Collaboration market opportunity. Our solutions for Document Collaboration enable more secure and reliable distribution of documents to streamline document exchange, review, commenting, and approval, while protecting content from unauthorized access and alterations. Adobe PDF documents can also be automatically routed, tracked, and integrated into core applications such as document management systems to manage the full collaboration process.

Benefits to customers using Adobe solutions for Document Collaboration include the protection of business information and process integrity, the reduction of costs by automating collaborative processes and reducing paper, and the simplification of document sharing with employees, customers, partners, and other constituents. Governments can shorten the time it takes to approve applications. Enterprise customers can replace paper mailings to customers and suppliers with electronic document distribution, accelerate product and engineering documentation reviews, and streamline contract review and preparation.

In addition to the use of Adobe Acrobat Reader and Adobe Acrobat as desktop software that is used as part of Adobe's Document Collaboration solutions, Adobe also provides server-based solution software called Adobe Document Server for Reader Extensions. This new server product allows publishers of Adobe PDF-based forms and documents to embed usage rights in them that enable features in the free Acrobat Reader that normally are not available, such as form fill-in and save, and digital signatures.

For example, governments can use this server solution to create on-line forms that constituents can fill out and digitally sign in Acrobat Reader; or financial institutions can create electronic forms that are integrated with their back-end systems to provide personalized on-line applications. In both examples, users can fill out such forms in the free Acrobat Reader, which later can be directly integrated with their processing systems, so that manual re-keying of data is not necessary. The cost-saving advantages with such a solution for publishers of documents such as tax forms and on-line applications are significant.

Enterprises have invested significantly in their infrastructure over the last ten years, resulting in the deployment of complex business systems such as CRM, ERP, and Document Content Management ("DCM"). Yet many of these back-end systems are not fully connected with each other, or with how business users work with documents on their desktops on a daily basis. This disconnected workflow has created a market opportunity called Document Process Management, and we have created solutions that enable customers to integrate how they use electronic documents with their internal and external business processes.

With our solutions for Document Process Management, an enterprise's customers, employees, and partners can submit information through intelligent, secure electronic forms via their preferred computer platform or device. The captured information triggers rules-and roles-based workflow, automatically integrating data into core business systems such as CRM, ERP, and DCM. For example, an employee could enter data on-line into an expense report that is submitted electronically; the data could then be automatically integrated into the Company's accounting system. Process tracking and reporting capabilities offer business managers insight into the status of their workflows, and allow them ways to further streamline their processes for better business performance.

Customers using Adobe's Document Process Management solutions can reduce costs and improve responsiveness by eliminating inefficient manual, paper-based processes. They can extend the reach of their business processes to customers, partners, and mobile workers with self-service applications via multiple devices. The end result is often an increase in an enterprise's return on investment made on their back-office solutions.

Adobe's Document Process Management solutions involve several components of its ePaper software, including Adobe Acrobat Reader and Adobe Acrobat on the desktop, and Adobe Document Server for Reader Extensions on the server. In addition, Adobe provides Adobe Form Client, Adobe Form Server and Adobe Workflow Server to complete its solution offering. Based on XML standards, Adobe Form Client is a data capture product that deploys electronic forms to a wide variety of environments such as the Web, Microsoft Outlook, and Microsoft Office. Adobe Form Server enables governments and corporations to post and manage their forms on-line, and Adobe Workflow Server provides the ability to graphically design, implement, and monitor workflows for document processing.

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 almost any application to Adobe PDF, a compact cross-platform electronic format that generally preserves layout, fonts, colors, and images; helps users complete timely and efficient document review and approval processes; includes everything needed to create and distribute rich electronic documents that can be viewed easily within leading Web browsers.

Adobe Acrobat Approval---software that enables business workgroup users to quickly fill in, save, and approve electronic forms, marketing materials, and other documents that have been created as interactive PDF files.

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 Distiller Server---server-based software that provides workgroups with a centralized solution for converting PostScript files to Adobe PDF; gives IT and creative professionals the power of increased productivity and the assurance of consistent, high-quality output.

Adobe Acrobat Messenger---software that works with a scanner or digital copier and is designed for workgroups and departments to transform paper documents into electronic Adobe PDF files and deliver them via e-mail, Web, or fax; allows users to preview their documents on-screen, crop or rotate pages, and add electronic annotations.

Adobe Acrobat Reader---free software for reliably viewing and printing Adobe PDF files on all major computer platforms, including Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS and Pocket PC-based devices.

Adobe Capture Handheld---an advanced, intelligent data capture solution available for handheld devices running Microsoft Pocket PC and Handheld PC; allows mobile workers to capture data through intelligent forms, validate the records entered, and submit the data to back-office systems; biometric signatures can be initiated from the device to ensure validity and to complete a business transaction.

Adobe Central Pro Output Server---server-based software for document generation that allows organizations to create personalized, customer-facing documents from any data source -- including legacy, line-of-business, ERP, or CRM applications; merges data with an electronic document template using a powerful processing engine to dynamically generate electronic documents such as purchase orders, invoices, statements, and checks for delivery via Adobe PDF, the Web, e-mail, fax, or print; works with Adobe Output Designer, which is a companion tool used to create sophisticated document templates.

Adobe Document Server---server-based software for the creation, manipulation and assembly of customized Adobe PDF documents; XML-based data can be inserted into templates to create complex, content-rich documents for more targeted and effective customer communications; integrates with leading enterprise applications as well as custom systems.

Adobe Document Server for Reader Extensions---server-based software which allows enterprises and government agencies to assign additional rights to an Adobe PDF document, enabling users of the free Adobe Acrobat Reader to save and submit electronic form data, add digital signatures, and attach comments, thereby lowering processing costs and virtually eliminating the need for paper-based forms; businesses can leverage their existing paper and Adobe PDF based forms, distribute forms electronically in a format that resembles the paper form, and integrate data that is entered securely into the electronic forms via Acrobat Reader with their current IT structure.

Adobe Form Client---data capture software that enables companies to replace inefficient, paper-based forms processes with intelligent, accessible, and secure electronic data capture solutions to improve organizational agility and productivity; offers flexible desktop deployment options, an XML-based architecture for integration with core business applications, and support for digital signatures; captured information can be routed via industry-standard e-mail and groupware technologies; integrates with Adobe's solution for Document Generation to extend and accelerate business processes within and beyond the organization, and is a key component of Adobe's solution for Document Process Management; works with Adobe Form Server and Adobe Workflow Server.

Adobe Form Designer---a WYSIWYG ("What You See is What You Get") design tool for creating intelligent XML templates, providing users with a simple way to develop and maintain sophisticated data capture solutions without involving third-party tools; creates both HTML and Adobe PDF forms.

Adobe Form Server---server-based software for document process management; enables governments and corporations to post electronic forms on the Web; creates and publishes Adobe PDF or Web-based forms which allow for the verification of the accuracy of data entered in a form, as well as other validations, calculations, and confirmations; forms can be used on-line, or saved and used off-line and later reconnected so that data entered in the forms can be submitted electronically and integrated with core business processes; has the ability to enable secure transactions involving confidential or sensitive information; works together with Adobe Form Designer and Adobe Workflow Server to deliver a complete business process automation solution.

Adobe Output Designer---a WYSIWYG design tool that allows users to create electronic document templates for use with Adobe solutions for document generation; aids in the creation of electronic documents that exactly replicate existing paper documents.

Adobe Output Pak for mySAP.com---SAP certified server-based software for document generation that enables organizations to optimize their investment in their SAP solution by creating personalized, professional-looking, customer-facing documents; provides an easy, fast, and cost-effective way to create and maintain documents for the SAP environment; integrates directly with an SAP system to extract information which is merged with a document template that defines the layout and formatting of the document; output can be in a variety of formats, including Adobe PDF, print, fax, e-mail, and the Web, to multiple devices.

Adobe Output Pak for Oracle E-Business Suite---server-based software for document generation which is an Oracle EBSI-approved integration; expands the scope of the Oracle E-Business Suite by allowing customers to easily create, maintain, and integrate high-quality, professional-looking electronic documents with their Oracle business processes in an easy, fast, and cost-effective way; integrates directly with Oracle Reports to extract XML data from other applications which is then merged with a document template that defines the layout and formatting of the document output; used to dynamically generate documents such as purchase orders, invoices, statements, and checks which can then be delivered via Adobe PDF, print, fax, e-mail, and the Web.

Adobe Web Output Pak---server-based software for document generation; creates documents in Adobe PDF and HTML for presentation on the Web, and in Wireless Markup Language ("WML") for presentation to a wireless device; allows users to personalize and control the look and feel of documents based on the data the documents contain.

Adobe Workflow Server--- a server-based workflow application that allows for the design, deployment and management of forms-based business processes by integrating people, processes, and applications to improve organizational agility and productivity; uses a rules-and roles-based design tool that defines business rules a process must follow, as well as the roles of each individual involved in the process; works with Adobe Form Server, Adobe Form Client and Adobe Central Output Server.

Create Adobe PDF Online---a Web-hosted fee-based service that allows users to convert documents from a wide variety of applications into Adobe PDF files.

Graphics professionals and professional publishers require quality, reliability, and efficiency in production printing, and we believe our printing technology provides advanced 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 and Adobe PDF standards for use by hardware manufacturers in this industry. Adobe generates revenues by licensing its technology to OEMs that manufacture printers and other output devices.

Adobe PostScript---a printing and imaging 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; gives users the power to create and print visually rich documents with total precision; licensed to printing equipment manufacturers for integration into their printing products.

Adobe Extreme---a printing architecture for service bureaus, prepress shops, and commercial printers; the fastest, most flexible implementation of Adobe printing technology; provides an integrated workflow that automates prepress tasks, optimizing output speeds and quality by using Adobe PDF and job tickets; offers flexibility while delivering a scalable, reliable, and productive printing environment.

Adobe PDF Transit---a Software Development Kit that enables print providers to develop streamlined, reliable, and secure Adobe PDF-based workflows that begins at their customers' desktops and extends across the Internet to a printing device.

The markets for Adobe products are characterized by intense competition, evolving industry standards, rapid technology and hardware 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.

In our Creative Professional segment, we offer several products, including Adobe GoLive, Adobe Illustrator, Adobe InDesign, Adobe PageMaker, and Adobe FrameMaker. We believe these individual products compete favorably on the basis of features and functionality, ease of use, product reliability, and price and performance characteristics. In addition, the products work well together, providing broader functionality and shortened product learning time for the individual who uses multiple applications to complete a project.

We also offer several product "Collections," which are packaged combinations of several of our products. Collections targeting the creative professional customer include the Adobe Design Collection, the Adobe Publishing Collection, and the Adobe Web Collection. The approach of providing packages with multiple Adobe products allows us to market them as complete solutions for specific market needs.

Drawing and illustration products are characterized by feature-rich competition, brand awareness, and price sensitivity. Our Adobe Illustrator product faces competition from companies such as Corel and Macromedia. We believe our product competes favorably due to high awareness of the features in our Illustrator product, especially the drawing and illustration functionalities, the features and technical capabilities of the product, and our ability to leverage core technologies from our other established products.

Our Adobe InDesign product, used for professional page layout, faces tough competition. The main competitive product, Quark XPress, has a leadership position in the professional page layout market. Quark also benefits from an established industry infrastructure that has been built around the use of their XPress product in print shops and service bureaus, and through the development of third party plug-in products. Barriers to the adoption of Adobe InDesign by Quark XPress customers include this infrastructure, as well as the cost of conversion, training, and software/hardware procurement required in a switch to InDesign in a tough economic environment. We believe we will increase adoption of InDesign software due to our superior product offering with new innovative features, such as typographical treatment, the integration of InDesign with other Adobe products used by creative professionals, our strong brand among users, our support for Apple's Mac OS X operating system, and improved infras tructure support by the industry for our overall solution.

The demand for Web page layout is constantly evolving and highly volatile, and has been impacted by both the recent global economic downturn and the reduction in Web product spending. We believe Adobe GoLive trails in market share and faces significant direct and indirect competition for Web page layout applications from companies such as Macromedia and Microsoft. We believe our product compares favorably due to the features of Adobe GoLive. However, we believe the market opportunity for Web-based products continues to be negatively impacted by the continuing effects of the global economic downturn that began in 2001.

In the technical authoring and publishing market, our Adobe FrameMaker product faces competition from large-scale electronic publishing systems, XML-based publishing companies such as Arbortext, as well as low-end desktop publishing products such as Microsoft Word. Competition is based on the quality and features of 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 based upon the quality and features of the Adobe FrameMaker product, our extensive application programming interface, and the large number of platforms supported.

In the business document publishing and authoring market, our Adobe PageMaker product faces competition from other desktop publishing software products, including Microsoft Publisher. Competition is based on the quality and features of products, ease-of-use, printer service support, and price. We believe we have a strong product and can successfully compete with these types of applications based upon the quality and features of the Adobe PageMaker product, its strong brand among users, and its widespread adoption among printer service bureaus.

A number of companies currently offer one or more products that compete directly or indirectly with more than one of Adobe's Creative Professional products. These companies include Arbortext, BroadVision, Macromedia, Microsoft, and Quark.

The Digital Imaging and Video software markets are constantly evolving markets, characterized by rapid technology and hardware developments, and frequent new product introductions. The needs of the users in these markets --- especially at the low-end consumer level --- are rapidly changing as more people become avid users of digital cameras, digital video cameras, and digital imaging and digital video equipped hardware devices and personal computers.

Our tools in this market, including Adobe Photoshop, Adobe Photoshop Elements, Adobe After Effects, and Adobe Premiere software, face significant competition from companies offering similar products and will continue to face competition from emerging products and technologies. In addition, any future products created by Adobe to enter the digital image management and DVD authoring markets will face similar competitive environments.

The mid-range consumer digital imaging and image management software markets are subject to 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 ACD Systems, AI Soft (Japan), Apple Computer, ArcSoft, Corel, Image Software, JASC Software, Luna Imaging, Microsoft, Paessler GmbH (Germany), Pegasus Imaging Company, Roxio, TriVista Technologies, Ulead Systems, and VCOM Products.

We believe we compete favorably against other mid-range digital imaging and consumer-focused image management software applications with our Adobe Photoshop Elements product due to strong consumer awareness of our brand in digital imaging, our relationships with significant OEMs, positive recommendations for our products by market influencers, our increased focus on the retail software channel, and a strong feature set.

The professional digital imaging software market is a competitive market where software applications compete based on product features, brand awareness, and price sensitivity. We face direct and indirect competition from a number of companies. We are an industry leader and compete favorably with our Adobe Photoshop product due to high awareness of the Photoshop brand in digital imaging, the positive recommendations for our Photoshop product by market influencers, the features and technical capabilities of the product, and our ability to leverage core features from our other established products.

Applications for digital video editing, compositing and special effects, and DVD authoring face increasing competition as professional, enthusiast, and home users migrate away from analog video tools towards the use of digital camcorders and digital video production on their computers, and DVD systems for rich media playback. Adobe After Effects and Adobe Premiere software face increased competition from companies such as Apple Computer, Autodesk, Avid, Eyeon, in-sync Corporation, Kodak, Pinnacle, Roxio, Sonic Foundry, and Ulead Systems.

Adobe After Effects software is a leader in professional compositing and special effects editing applications due to our strong feature set and the integration with our other products to create a broad platform for our customers.

In professional digital video editing, we are a leader on the Microsoft Windows platform with Adobe Premiere, and compete favorably due to our strong feature set, our OEM relationships, and the integration with our other products to create a broad platform for our customers. In professional digital video editing for the Macintosh platform, we believe we trail in new user adoption to Apple Computer's digital video editing product. We believe that competition on the Macintosh platform with Adobe Premiere is difficult, based on Apple's marketing and development advantage relative to their ownership and control of the Macintosh operating system and hardware platform.

A number of companies currently offer one or more products that compete directly or indirectly with more than one of Adobe's Digital Imaging and Video products. These companies include Apple Computer, Microsoft, Roxio, and Ulead.

As we broaden the scope of our ePaper products and solutions, we face increased competition from entrenched office applications, PDF-based clones of our Acrobat product, electronic forms solution providers, emerging products/technologies, and potentially, enterprise collaboration system providers. Additionally, current office applications and content creation/management tools that use HTML, Macromedia Flash, Microsoft Word, Tagged Information File Format ("TIFF"), and various XML-based formats for electronic document distribution provide alternate solutions to customers, and indirectly compete with Adobe's ePaper products and the use of Adobe PDF.

For Document Generation solutions --- specifically, the desktop and server-based PDF file creation markets --- Adobe Acrobat and our server solutions such as Adobe Distiller Server and Adobe Document Server face competition from Acrobat clone products such as those from Ansyr Technology, Global Graphics, and other smaller PDF creation solutions that can be found at a low cost, or for free, on the Internet. Additional competitors in the Document Generation market include StreamServer, Optio, and Formscape. However, many PDF creation solutions in the market today use technology from us, licensed as Adobe PDF Libraries, to implement the PDF creation capabilities of their products or solutions.

We have recently announced our intent to provide different versions of our Acrobat desktop product in 2003 to meet the needs of different types of users. Providing a PDF creation-only version of Acrobat may allow us to achieve our goal of broader proliferation of paid-for Acrobat software, as well as compete more effectively with low-end PDF-creation product companies such as Global Graphics. The creation of a new high-end professional version of Acrobat could directly or indirectly position Adobe against other creative professional PDF tool providers, such as Enfocus, Lantana, TeamPDF, and Zinio.

For Document Collaboration and Document Process Management solutions, where electronic document delivery, exchange, collaboration, and archival needs exist, our Adobe ePaper product family faces competition from entrenched office applications such as Microsoft Office. In addition, some content management vendors provide collaboration and business process management capabilities that could directly or indirectly compete with our offerings, although we view our solutions in these areas as an extension of those supplied by such vendors.

In many of the ePaper market opportunities that Adobe is targeting, Microsoft has, over the past few years, attempted to improve its products and their capabilities. These areas include the collaborative document review, document security, and electronic document distribution capabilities of its Office suite. In addition, Microsoft has recently announced new XML and .NET-based product initiatives codenamed XDocs, ePeriodicals, and Jupiter that are positioned to be part of the launch of the next version of Microsoft Office. These initiatives, targeted for 2003 availability, indicate Microsoft may be planning to have new electronic form, electronic document distribution, eBook, and related functionality like that in Adobe Acrobat that could directly or indirectly compete with our ePaper products that provide similar capabilities.

In addition to Microsoft's XDocs initiative, we also face competition from Cardiff, Shana, and PureEdge for electronic forms solutions. Similarly, we face competition for Document Process Management solutions from workflow solutions vendors such as MetaStorm, Staffware, and Ultimus.

We believe the Adobe ePaper product family competes favorably against these companies and formats in terms of the combined benefits of superior functionality, file compression, visual page fidelity/reliability, multi-platform capability, printing and security of documents expressed using Adobe PDF.

Looking to the future, electronic document systems targeting enterprises that use emerging standards such as XML and Microsoft's .NET initiative are being developed and will likely be adopted. We are working to ensure that compatibility exists between these formats/platforms and the Adobe PDF format, as well as our Acrobat software products and other Adobe ePaper applications.

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

Although Adobe has numerous OEM customer relationships that license Adobe PostScript technologies, revenues from a small number of the OEMs make up a majority of the revenue in this market segment.

We market and distribute our products through sales channels, which include distributors, retailers, software developers, and, increasingly, systems integrators and value-added resellers ("VARs"), as well as through OEM and hardware bundle customers. We also market and license our products directly using our sales force and through our own website at www.adobe.com.

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, England, Finland, France, Germany, Hong Kong, India, Ireland, Italy, Japan, Korea, Mexico, the Netherlands, Norway, Portugal, Scotland, Singapore, Spain, Sweden, Switzerland, and Taiwan.

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 OEMs.

We also license software with post-contract customer support ("PCS"). An amount equal to the fair value of the PCS is deferred and recognized as revenue ratably over the PCS period. Fair value of the undelivered PCS is determined by the rate charged to customers to renew their PCS arrangement. PCS includes rights to upgrades, when and if available, a limited period of telephone support, updates, and enhancements.

For information regarding our market segments and segment revenue, geographic areas and significant customers, please refer to Note 17 of our Notes to Consolidated Financial Statements.

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 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 our products. The backlog of orders as of January 24, 2003 was approximately $16.1 million. The backlog of orders as of January 25, 2002 was approximately $15.7 million.

Adobe provides Professional Services, Technical Support and Customer Service to a wide variety of customers including consumers, creative professionals and those in the enterprise market. Our service and support revenue consists primarily of consulting fees, software maintenance and support fees, and training fees.

Adobe has a global Professional Services team dedicated to developing and implementing solutions for enterprise customers in key vertical markets and to transfer technical expertise to our Solution Partners. The Professional Services team uses a comprehensive, customer-focused methodology to develop high quality solutions, which in turn deliver a significant competitive advantage to our enterprise customers. A portfolio of technical training courses is also available for desktop and server-based products to meet the needs of our enterprise customers and Solution Partners.

A significant portion of our support revenue is composed of our extended Enterprise Maintenance and Support offerings, which entitles customers to the right to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year. This also includes support for mission-critical enterprise solutions. Regional Support Centers are charged with providing timely, high quality technical expertise on ePaper products and solutions to meet the growing needs of our customers.

Our support revenue also includes support for our desktop products whereby Adobe offers a range of support programs, from fee-based incidents to annual support contracts. Additionally, Adobe provides extensive self-help and online technical support capabilities via the web, which allows customers quick and easy access to possible solutions. Adobe provides product support through a combination of outsourced vendors and internal support centers.

Adobe also offers Developer Support to partners and developer organizations. The Adobe Solution Network ("ASN") Developer Program focuses on providing developers with high-quality tools (Solutions Development Kits), information, and services.

Free telephone support is provided to customers who are under warranty for support. For customers in North America and Asia, support is provided up to a maximum of 30 or 90 days beginning upon the customer's first call or for a maximum of one or two support incidents, depending on the product. For customers in Europe, support is provided until our release of the second new full version after the version purchased by the customer. Historically, the majority of support for European customers is provided within the first 90 days.

We inform customers about our products through on-line informational services on our Web site (www.adobe.com), and through a growing series of how-to books published by Adobe Press pursuant to a joint publishing agreement with Peachpit Press. In addition, we develop tests to certify independent trainers who teach Adobe software classes. We sponsor workshops, work with professional associations and user groups, and conduct regular beta-testing programs.

We own limited partnership interests in four venture capital limited partnerships, Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P. (collectively "Adobe Ventures"), that invest in early stage companies with innovative technologies. In addition to the potential for financial returns, our venture activities increase our knowledge of emerging markets and technologies, as well as expand our ecosystem of Adobe products and services. The partnerships are managed by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.

The investments in Adobe Ventures are accounted for using the equity method of accounting, and accordingly, the investments are adjusted to reflect our share of Adobe Ventures' investment income (loss) and dividend distributions. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general partner and approving acquisitions that exceed certain established parameters. However, these rights are considered to be protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment income (loss) on our consolidated statements of income. The stock of a number of technology investments held by the limited partnerships at November 29, 2002 is not publicly traded, and, therefore, there is no establishe d market for their securities. In order to determine the fair market value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates made by Granite Ventures based on their assessment of the current market value. It is our policy to review the fair value of these investments held by Adobe Ventures on a regular basis to evaluate the carrying value of the investments in these companies. This policy includes, but is not limited to, reviewing each companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition. The evaluation process is based on information that we request from these privately-held companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If we believe that the carrying value of a co mpany is carried at an amount in excess of fair value, it is our policy to record a reserve in addition to our equity method of accounting.

In March 1997, as part of our venture investing program, we established an internal limited partnership, Adobe Incentive Partners, L.P. ("AIP"), which allowed certain of Adobe's executive officers to participate in cash or stock distributions from Adobe's venture investments. In November 2002, the partnership was liquidated. Immediately prior to the liquidation, assets held by AIP included Adobe's entire interests in Adobe Ventures L.P. and Adobe Ventures II, L.P. and certain equity securities of privately-held companies. Adobe was both the general partner and a limited partner of AIP. Other limited partners were executive officers and former executive officers of Adobe who were involved in Adobe's venture investing activities and whose participation was deemed critical to the success of the program. No limited partnership interests were granted in fiscal 2002, 2001, or 2000.

Adobe's Class A senior limited partnership interest in AIP included 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 qualified for partnership distributions only after (a) Adobe had fully recovered the cost basis of its investment in the specific investee company for which a distribution was made; and (b) the participating executive had vested in his or her distribution rights. The distribution rights generally vested on a monthly basis over three years, and were 25% vested after one year, 50% vested after two years and fully vested at the end of three years. As of June 30, 2000, all existing partnership interests were fully vested or ceased vesting. The limited partnership investments were restricted to investments in Adobe Ventures or in companies that were private at the time of the establishment of AIP, or when the investment was made, whichever was later. In fiscal 2002, the current an d former participating officers received cash distributions with an aggregate fair value of $0.6 million, including a $0.3 million distribution related to the partnership liquidation. At November 29, 2002, due to the partnership liquidation, there was no minority interest held by the participating officers.

Our equity investments and Adobe Ventures investments in equity securities at November 29, 2002 consisted of the following companies:

We intend to continue investing in new markets through limited partnerships as well as through direct investments.

Since the personal computer and enterprise software industries are 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 fiscal years ended November 29, 2002, November 30, 2001 and December 1, 2000, our research and development expenses, including costs related to contract development, were $246.1 million, $224.1 million, and $240.2 million, respectively.

On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio. Accelio was a provider of Web-enabled solutions that helped customers manage business processes driven by electronic forms. The acquisition of Accelio enhances our ability to broaden our ePaper solution business by combining Accelio's electronic forms solutions with Adobe Acrobat and PDF technologies. Through this combination we can now extend Acrobat solutions to enterprise users in Global 2000 businesses, governments and educational institutions to deliver greater value to our customers. The aggregate purchase price was $70.2 million, which included the issuance of 1.8 million shares of common stock of Adobe, valued at $68.4 million, and cash of $1.8 million.

In December 2001, we acquired Fotiva, Inc. ("Fotiva"). Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share digital photographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. At the date we acquired Fotiva, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eleven months to complete. The efforts required to complete the development of the technology primarily include finalization of coding, internationalization, and extensive quality assurance testing. We developed a new product, Adobe Photoshop Album, that we released in the first quarter of fiscal 2003 usi ng Fotiva's image management technology with our digital imaging and ePaper technologies.

During fiscal 2000, we acquired Glassbook, Inc. for a total consideration of approximately $28.0 million. Based on an independent appraiser's valuation, $0.5 million was allocated to in-process research and development related to this acquisition. The ongoing project at Glassbook at the time of the purchase included the development of the Glassbook Reader and the Glassbook Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0.

We regard our software as proprietary and protect it under the laws of copyrights, patents, trademarks, and trade secrets. We protect the source code of our software programs as trade secrets, and make source code available to third parties 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 restricts the use of the products to 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, however, and 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. However, our products generally do not currently contain copy protection or network copy-detection features.

As of January 24, 2003, we employed 3,341 people. 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 extremely 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.

Adobe's executive officers as of January 31, 2003 are as follows:

Mr. Chizen joined Adobe 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. In April 2000, Mr. Chizen was promoted to President of Adobe and in December 2000, he also became Adobe's Chief Executive Officer and joined the Adobe Board of Directors on December 2000. Prior to joining Adobe, 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 Synopsys, Inc.

Mr. Narayen joined Adobe in January 1998 as Vice President and General Manager of Adobe's engineering technology group. He was promoted to Senior Vice President, Worldwide Products in January 1999 and to Executive Vice President, Worldwide Product Marketing and Development in March 2001. Prior to joining Adobe, Mr. Narayen co-founded Pictra Inc., a software internet company, in 1996. He was Director of Desktop and Collaboration products at Silicon Graphics Inc. and held various senior manager positions at Apple Computer Inc. before founding Pictra.

Ms. Cottle joined Adobe in February 2002 as Senior Vice President, General Counsel and Secretary. Prior to joining Adobe, Ms. Cottle served as General Counsel for Vitria Technology, Inc. from February 2000 to February 2002. From 1996 to 1999, Ms. Cottle served as Vice President, General Counsel and Secretary of Raychem Corporation and from 1986 to 1996 as Division Counsel of Raychem Corporation. Prior to that, Ms. Cottle was a partner in Farella, Braun and Martel in San Francisco, California.

Mr. Demo joined Adobe in August 1996 as the Director of Operations Finance. In July 1998 he was promoted to Corporate Controller. In October 1999, he was promoted to Vice President and Corporate Controller and in June 2000 was promoted to Senior Vice President and Chief Financial Officer. Prior to joining Adobe, Mr. Demo was the Director of Finance for Miller Freeman, Inc, a division of United News & Media, London, England from June 1993 to July 1996. Prior to Miller Freeman, Inc., Mr. Demo held a variety of senior finance and business development positions at First Financial Management, Visionary Corporate Technologies, and Hughes Electronics.

Mr. Stephens joined Adobe in February 1990 and held various senior management positions in sales and marketing for Adobe's Printing Systems Division before being promoted in November 1997 to Vice President of Change Management. In June 1998, he was promoted to Vice President, Investor Relations and in April 1999, Mr. Stephens was promoted to Vice President, Corporate Development. In September 2000, Mr. Stephens was promoted to Senior Vice President, E-business Development, and in October 2001, Mr. Stephens was promoted to Senior Vice President, Worldwide Sales, Customer Care and Field Marketing. For ten years prior to joining Adobe, Mr. Stephens held sales and marketing management positions at Dataproducts Corporation and Texas Instruments.

Mr. Lamkin joined the Company in February 1992 and held various senior management positions in marketing for Adobe's graphics and publishing products. In March 1997, he was promoted to Vice President of Marketing and in March 2000, he was promoted to Senior Vice President, Product Marketing. Mr. Lamkin is currently Senior Vice President of the Digital Imaging and Video Business Unit. Prior to joining Adobe, Mr. Lamkin held various product management positions at Software Publishing Corporation from 1986 to 1992.

Ms. Dyrdahl joined Adobe upon the closing of the acquisition of Aldus in August 1994 as Director of Marketing for the Consumer Products Division. In August 1998, Ms. Dyrdahl was appointed Vice President of Worldwide Marketing Communications, and in April of 2000, she was promoted to Senior Vice President of Corporate Marketing and Communications. Prior to joining Adobe, Ms. Dyrdahl was Director of Sales Operations of Claris Corp., a wholly owned subsidiary of Apple Computer, Inc., from 1988 to 1993, and previously held several marketing management positions at Hewlett-Packard from 1983 to 1988. Ms. Dyrdahl also serves on the Board of Trustees for the San Jose Museum of Art.

Ms. Townsley joined the Company in 1988 and held various senior management positions within the human resources group before being promoted in May 1999 to Vice President of Worldwide Human Resources. In December 1999, she was promoted to Senior Vice President, Worldwide Human Resources. Prior to joining Adobe, Ms. Townsley held various human resources positions at FMC Corporation from 1979 to 1988.

Mr. Heeger joined Adobe in February 2002 as Senior Vice President of Cross Media Publishing, now Senior Vice President, Creative Professional Business Unit. He was Chief Executive Officer and President of Fotiva, Inc. from March 2001 to December 2001, when Fotiva was acquired by Adobe. From September 1993 to June 2000, Mr. Heeger was with Intuit, Inc., where he served as Senior Vice President and General Manager of Small Business Division from July 1997 to June 2000. In April 1995, Mr. Heeger became Chief Financial Officer and served as Chief Financial Officer and Senior Vice President of Administration until July 1997; Mr. Heeger began at Intuit as Vice President and General Manager of Supplies Division from December 1993 to April 1995. Prior to Intuit, Mr. Heeger spent 11 years with Hewlett-Packard in marketing and distribution roles.

Mr. Koon joined the Company in August 2002 as Senior Vice President of the ePaper Business Unit. Prior to joining Adobe, Mr. Koon was President of the New Technologies Division at BEA Systems from November 1999 to July 2002. Prior to BEA, Mr. Koon served in various executive management roles at S2 Systems, including President and Chief Operating Officer from February 1997 to September 1999.

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; some of them are leased under operating leases. Such leases expire at various times through March 2091. The annual base rent expense for all facilities (including operating expenses, property taxes, and assessments) is currently approximately $26.6 million and is subject to annual adjustments as well as changes in interest rates.

In general, all facilities are in good condition and are operating at capacities that range from 65% to 100%.

We also lease office space in the United States and various other countries under operating leases. We have one leased set of offices 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 offices but still have a commitment under this lease agreement until 2007.

On September 3, 2002, Adobe filed suit in the U.S. District Court, Northern District of California ("the California Action"), against International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, seeking a declaration that (a) Adobe's distribution of font software, which generates ITC typefaces, did not breach its contract pursuant to which Adobe licensed certain rights with respect to ITC typefaces, and (b) Adobe did not violate the Digital Millennium Copyright Act ("DMCA") with respect to, or induce or contribute to the infringement of copyrights in, ITC's and AMT's TrueType font software. AMT had previously asserted that Adobe had committed such breach of contract and violation of the DMCA.

On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces. AMT has made a breach of contract claim in response to Adobe's arbitration demand in the London Arbitration, asserting that Adobe wrongfully granted and/or allowed third parties greater rights to distribute and embed AMT fonts than Adobe was licensed to grant and/or allow.

If AMT prevails on its breach of contract claims, AMT may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates AMT typefaces. Adobe asserts that it negotiated for and obtained express, written licenses from both AMT and ITC approximately ten years ago permitting Adobe to allow end users to embed AMT and ITC fonts in electronic documents for "print and view" and disputes the other breach of contract claims. Adobe also asserts that Adobe Acrobat 5.0, which AMT and ITC correctly acknowledge has been superceded by version 5.05, neither violates the DMCA nor induces or contributes to the infringement of copyrights in ITC's and AMT's TrueType font software.

On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action") against Adobe, asserting only that Adobe's distribution of the superceded 5.0 version of Adobe Acrobat violated the DMCA, as described above. The Illinois Action seeks statutory damages of $200-$2,500 for each copy of Acrobat 5.0 found to violate the DMCA, a claim that Adobe disputes as a matter of law and fact. The Illinois Action also seeks injunctive relief with respect to Acrobat 5.0, although it specifically alleges, correctly, that Adobe no longer distributes Acrobat 5.0.

On November 13, 2002, ITC filed another suit against Adobe in the United States District Court for the Eastern District of Illinois ("the Second Illinois Action"), this time asserting that Adobe breached its contract with ITC and that ITC, and not Adobe, owns the copyrights in font software created by Adobe which generates ITC typefaces.

AMT and ITC made a motion to dismiss the California action, challenging jurisdiction and venue. That motion was granted by the court on December 16, 2002. As such, the parties' respective claims will be resolved in the other actions described above.

The results of any litigation are inherently uncertain, and AMT and ITC may assert other claims. Adobe cannot assure that it will be able to successfully defend itself against any of the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's business, financial condition and operating results. We strongly believe that all of AMT's and ITC's claims are without merit, and will vigorously defend against them in addition to pursuing our own claims as described above.

On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc., and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags For Application And Database Development." The plaintiff's Complaint asserts that "Defendants have infringed, and continue to infringe one or more claims of the '712 patent by making, using, selling and/or offering for sale, inter alia, products supporting Microsoft Active Server Pages technology." The plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. Adobe strongly disagrees with the plaintiff's claims and intends to vigorously defend against this action.

On November 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben Weiss filed a civil action in the U.S. District Court in Los Angeles against the Company alleging false designation of origin, trade secret misappropriation, breach of contract, and other causes of action. The claim derives from the Plaintiffs' belief that the "healing brush" technique of Adobe Photoshop incorporates Plaintiffs' trade secrets. Plaintiffs seek preliminary and permanent injunctive relief, compensatory, treble, and punitive damages, and fees and costs. We believe that the action has no merit and intend to defend vigorously against it.

From time to time Adobe is involved in lawsuits, claims, investigations and proceedings, in addition to those identified above, consisting of intellectual property, commercial, employment and other matters, which arise in the ordinary course of business. In accordance with Statement of Financial Accounting Standards No. 5 ("SFAS No. 5"), "Accounting for Contingencies," Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, Adobe believes that it has valid defenses with respect to the legal matters pending against it, as well as adequate provisions for any probable and estimable losses. It is possible, nevertheless, that cash flows or results of operations could be affected in any particular period by the resolution of one or more of these contingencies.

Not applicable.

Our common stock is traded on The Nasdaq National Market under the symbol "ADBE." On January 24, 2003, there were 1,819 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.

We have paid cash dividends on our common stock each quarter since the second quarter of 1988. Under the terms of our lease agreements and real estate financing agreement, we may pay cash dividends unless an event of default has occurred; however, our ability to distribute dividends may be limited if we do not meet certain financial ratios. We have been in compliance with financial ratio covenant requirements since the inception of our lease and real estate financing agreements. 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.

For information on our equity compensation plans refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the section titled "Employee Stock Options."

All share and per share amounts referred to in the above table have been adjusted to reflect the two-for-one stock splits in the form of stock dividends effected October 24, 2000 and October 26, 1999.

(1) In 2002, includes investment loss of $17.2 million, restructuring and other charges of $12.1 million, acquired in-process research and development of $5.8 million, and amortization and impairment of goodwill and purchased intangibles of $21.0 million. In 2001, includes investment loss of $93.4 million, restructuring and other charges of $12.1 million, and amortization of goodwill and purchased intangibles of $14.3 million. In 2000, includes investment gains of $14.3 million, one-time gains from the sale of assets of $2.7 million, restructuring and other charges of $5.6 million, in-process research and development of $0.5 million, and amortization of goodwill and purchased intangibles of $7.0 million. In 1999, includes investment gains of $88.9 million, one-time gains from the sale of assets of $5.7 million, restructuring and other charges of $23.0 million, acquired in-process research and development of $3.6 million, and amortization of goodwill and purchased intangibles of $4.8 mi llion. In 1998, includes investment gains of $15.0 million, restructuring and other charges of $38.2 million, and amortization of goodwill and purchased intangibles of $7.7 million. The numbers presented above are pretax amounts.

Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company") offers a line of software for consumers, businesses, and creative professional customers. Our products enable customers to create, manage and deliver visually rich, compelling and reliable content. We license our technology to 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 manufacturers ("OEMs"); direct to end users; and through our own website at www.adobe.com. We have operations in the Americas; Europe, Middle East, and Africa ("EMEA"); and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX, Palm OS, Pocket PC, and Symbian platforms.

We have four reportable segments that offer different product lines: Graphics, Cross-media Publishing, ePaper Solutions, and OEM PostScript and Other. The Graphics segment provides users with software for creating, editing and enhancing digital images and photographs, digital video, animations, graphics, and illustrations. The Cross-media Publishing segment provides software for professional page layout, professional Web page layout, technical document publishing, and business publishing. The ePaper Solutions segment provides electronic document distribution software that allows users to create, enhance, annotate, and securely send Adobe PDF files that can be shared, viewed, navigated, and printed exactly as intended on a broad range of hardware and software platforms. In addition, our recently-acquired Accelio business focusing on electronic forms is included in our ePaper segment. The OEM PostScript and Other segment includes printing technology to create and print simple or visually rich docu ments with precision.

Revenue from our Graphics segment is derived primarily from the licensing of the following application products: Photoshop, Illustrator, Adobe Premiere, Photoshop Elements, After Effects, Adobe Graphics Server (formerly called Adobe AlterCast), Digital Video Collection, Adobe PhotoDeluxe, Atmosphere, and LiveMotion. Cross-media Publishing includes the following application products: Web Collection, GoLive, Design Collection, Adobe Publishing Collection, PageMaker, FrameMaker, Adobe Type products, InDesign, Adobe Creative Suites, Adobe Content Server, eBooks, and PressReady. The ePaper Solutions segment includes Adobe Acrobat software and other Acrobat related technologies, Document Server, Form Server, Output Server, and Workflow Server. The OEM Postscript and Other segment includes printing technology to create and print simple or visually rich documents with precision.

Beginning in the first quarter of fiscal year 2003, we realigned our business segments to reflect the recent change in the way we manage our business. The former Graphics segment has been renamed the Digital Imaging and Video segment. The former Cross-media Publishing segment has been renamed the Creative Professional segment and includes two products that were formerly included in our Graphics segment, Adobe Illustrator and Adobe Graphics Server (formerly called Adobe AlterCast). There were no changes to our ePaper and OEM Postscript and Other segments. The management discussion and analysis that follows is based on our segment reporting that was in effect throughout fiscal 2002. For more information on both our old and new segment reporting, please refer to Note 17 of our Notes to Consolidated Financial Statements.

During fiscal 2002, our products revenue decreased 6%, or $76.6 million, compared to fiscal 2001, primarily due to continued economic weakness in Asia, Europe, and the U.S., as well as declines in revenue from our Graphics, Cross-media Publishing, and OEM PostScript and Other segments, for reasons explained below.

Revenue from our Graphics segment decreased 7%, or $40.4 million, from $543.4 million in fiscal 2001 to $503.0 million in fiscal 2002. The annual decrease in revenue in our Graphics segment was primarily due to a 13% year-over-year decline in our illustration software revenue, due to product lifecycle timing and the continued economic impact on creative professional customers, who are the main end-user market for this software. We also experienced a 3% overall decline in our digital imaging software revenue, which includes the Adobe Photoshop, Adobe Photoshop Elements, and Adobe PhotoDeluxe products. We believe the decline in digital imaging software is due to a combination of the economic weakness across the world, the impact of lower marketing spending by corporations resulting in a reduced number of creative professional customers, and the trend of our customers migrating towards the purchasing of Adobe Collection products as opposed to individual products. In addition, we experienced a 15% year-over-y ear revenue decline in our digital video software licensing, which is made up of our Adobe Premiere, Adobe After Effects, and our Adobe Digital Video Collection products, due to product lifecycle timing and the economic impact on the digital video software market.

Revenue from our Cross-media Publishing segment decreased 10%, or $29.4 million, from $289.6 million in fiscal 2001 to $260.2 million in fiscal 2002. The annual decrease in revenue from our Cross-media Publishing segment during fiscal 2002 compared to fiscal 2001 was due to multiple factors. In the Web publishing segment, we experienced a 35% decline in revenue from our Web-focused products: Adobe GoLive and the Adobe Web Collection. We attribute this decline to weakness in the Web publishing segment and less sales and marketing emphasis. In addition, we experienced a 23% year-over-year decline in our business publishing revenue, which is derived from our PageMaker and Adobe Publishing Collection products. We attribute this decline to the weaker global economy in 2002 when compared to 2001, the adoption of our Adobe Design Collection product (especially by creative professionals) instead of the Adobe Publishing Collection product, and less sales and marketing emphasis. Finally, we experienced a 29% year-o ver-year decline in type and technical publishing products, which includes our Adobe FrameMaker product, due to overall economic weakness in the geographic markets in which these products are used.

The decrease in revenue from these Cross-media products in fiscal 2002 compared to fiscal 2001 was partially offset by a 42% increase in revenue in our professional layout publishing products, which includes revenue from our InDesign, Adobe Design Collection, and Adobe Creative Suites products. We attribute this revenue increase to increased marketing activities and growing customer demand.

Revenue from our OEM PostScript and Other segment decreased 15%, or $15.8 million, from $104.8 million in fiscal 2001 to $89.0 million in fiscal 2002, due to the following factors: continued weakness in the print business, lower average selling prices generating less royalties from certain OEM customers, and smaller OEM customers transferring to clone PostScript technologies. Revenue from this segment has declined over the last few years and we expect this trend to continue, but if it significantly exceeds our expectations, it may harm our future results.

The decrease in revenue from the above-mentioned segments in fiscal 2002 compared to fiscal 2001 was partially offset by an increase of $9.0 million, or 3%, in our ePaper Solutions segment. This segment increased from $291.9 million in fiscal 2001 to $300.9 million in fiscal 2002, primarily due to a 5% increase in Acrobat revenue in the U.S. and an increase in revenue of $21.5 million from our newly-acquired Accelio business.

During fiscal 2001, our overall product revenue decreased 3%, or $36.7 million, compared to fiscal 2000, primarily due to adverse economic conditions, especially in the U.S., and a decline in revenue from our Graphics, Cross-media Publishing, and OEM PostScript and Other segments for the reasons explained below.

Revenue from our Graphics segment decreased 10%, or $58.7 million, from $602.1 million in fiscal 2000 to $543.4 million in fiscal 2001. We attribute this decrease in Graphics segment revenue primarily to severe economic pressure on the creative professional and consumer markets, as well as product lifecycle timing and the decline in spending on Web-focused software tools. As a result of these factors, we experienced an 11% decrease in our digital imaging software revenue and a 17% decrease in our illustration software revenue when comparing fiscal 2001 to fiscal 2000.

The declines in our fiscal 2001 Graphics business were partially offset by a 14% year-over-year revenue increase in our digital video software products. Growth in our digital video software revenue was driven by new updates of our products in fiscal 2001.

Revenue from our Cross-media Publishing segment decreased 11%, or $35.6 million, from $325.2 million in fiscal 2000 to $289.6 million in fiscal 2001. The largest factors contributing to the Cross-media Publishing segment revenue decline were a 25% year-over-year decline in our Web publishing software revenue due to weakness in the Web layout and Web animation products market, a 23% year-over-year decline in type and technical publishing products due to product lifecycle timing and overall economic weakness in the geographic markets in which these products are used, and a 19% decline in our business publishing software revenue due to the adoption of our Adobe Design Collection product (especially by creative professionals) instead of our Adobe Publishing Collection product.

The declines in our fiscal 2001 Cross-media Publishing segment were partially offset by a 55% year-over-year revenue increase from our professional page layout publishing products due to increased marketing and promotional activities for these products throughout the year.

Revenue from our OEM PostScript and Other segment decreased 20%, or $26.7 million, from $131.5 million in fiscal 2000 to $104.8 million in fiscal 2001, due to the following factors: continued weakness in the print business, renegotiated pricing with certain OEM customers, and the outsourcing of certain OEM accounts to a third party solution provider.

The decrease in revenue from the above mentioned segments in fiscal 2001 compared to fiscal 2000 was partially offset by an increase of 41%, or $84.3 million, in our ePaper Solutions segment, as it increased from $207.6 million in fiscal 2000 to $291.9 million in fiscal 2001, due to the release of our Acrobat 5.0 product in the second quarter of fiscal 2001, as well as the continuing movement from paper-based processes to electronic workflows by enterprises and government agencies which contributed to broader adoption of our ePaper products.

Services and support is composed of professional services (such as consulting services and training) and support (such as maintenance and technical support) primarily related to the products we acquired from Accelio. Professional services revenue is recognized using the percentage of completion method and is measured monthly based primarily on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Our professional services revenue depends in large part on our software license revenue from the products that we acquired from Accelio. A significant portion of our support revenue is composed of our extended Enterprise Maintenance and Support offerings, which entitles customers to receive product upgrades and enhancements during the term of the maintenance and support period, which is typically one year. Our support revenue depends on both our software license revenue and ren ewals of our maintenance agreements. Our support revenue also includes support for our desktop products whereby Adobe offers a range of support programs, from fee-based incident to annual support contracts, and Developer Support to partners and developer organizations.

For fiscal 2002, our services and support revenue increased $11.6 million, or 100%, compared to fiscal 2001 solely due to the acquisition of the Accelio business in April 2002.

We categorize our geographic results into three major market regions: the Americas, EMEA, and Asia. Revenue generated in the Americas, EMEA, and Asia as a percentage of total revenue is presented below:

The decrease in the percent of revenue from Asia and corresponding increase in the Americas in 2002 compared to 2001 was primarily due to weakness in the Japan economy. The decrease in the Americas in fiscal 2001 compared to 2000 was primarily due to adverse economic conditions, especially in the U.S.

Overall, revenue from our application products on the Windows and Macintosh platforms decreased 4% and 10%, respectively, in fiscal 2002 compared to fiscal 2001. In fiscal 2001 compared to fiscal 2000, revenue from our application products on the Windows platform increased 9%, and revenue from our application products on the Macintosh platform decreased 21% during the same period. In fiscal 2002, the Windows and Macintosh platforms accounted for 71% and 29%, respectively, of application products revenue, excluding platform-independent and UNIX products, compared to 70% and 30%, respectively, in fiscal 2001, and 63% and 37%, respectively, in fiscal 2000. We expect the trend towards the Windows platform to continue in the foreseeable future.

Cost of products revenue increased in absolute dollars and as a percentage of revenue in fiscal 2002 compared to fiscal 2001 primarily due to increased amortization of website development costs related to Adobe Design Team (formerly Adobe Studio) which launched in the fourth quarter of fiscal 2001, and the subsequent impairment charge for the remaining Adobe Design Team development costs due to the decision to discontinue the Adobe Design Team service in the third quarter of fiscal 2002.

Cost of products revenue decreased in absolute dollars and as a percentage of revenue in fiscal 2001 compared to fiscal 2000, primarily due to an 8% decrease in third-party royalties, mainly associated with our PostScript and Type products revenue, and a 5% decrease in material costs due to decreased product licensing of shrink-wrapped products. These decreases were offset by a 2% increase in localization costs primarily due to localization for our Photoshop and Acrobat products, a 2% increase in excess and obsolete inventory expenses, and a 1% increase in hosted server costs due to the launch of Adobe Design Team (formerly Adobe Studio).

Cost of services and support is composed primarily of employee-related costs and the related infrastructure costs incurred to provide consulting services, training, and product support for our Accelio business.

Cost of services and support increased in absolute dollars and as a percentage of revenue in fiscal 2002 compared to fiscal 2001 due to the acquisition of the Accelio business in April 2002.

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

Research and development expenses increased $22.0 million, or 10%, in fiscal 2002 compared to fiscal 2001, primarily due to higher compensation and related benefits related to headcount growth from the acquisition of Accelio to support product development efforts.

Research and development expenses decreased $16.1 million, or 7%, in fiscal 2001 compared to fiscal 2000. Of the 7% change, 3% was due to a decrease in compensation and related benefits due to lower incentive compensation expenses and 2% was due to a decrease in contractor and professional fees as less development work was performed through outside sources.

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 focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products.

Sales and marketing expenses include salary and benefit expenses, sales commissions, travel expenses, and related facilities costs for our sales, marketing, customer support, order management, and order fulfillment 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 decreased $23.3 million, or 6%, in fiscal 2002 compared to fiscal 2001, primarily due to decreased marketing and advertising spending.

Sales and marketing expenses increased $2.5 million, or 1%, in fiscal 2001 compared to fiscal 2000. The 1% increase was primarily made up of a 6% increase from marketing spending, which was partially offset by a 3% decrease from compensation and related benefits due to lower incentive compensation.

General and administrative expenses consist principally of salary and benefit expenses, travel expenses, and related facilities costs for our finance, human resources, legal, information services, and executive personnel. 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 $7.5 million, or 7%, in fiscal 2002 compared to fiscal 2001. The 7% decrease was primarily made up of 3% from a decrease in contractor and professional fees, 3% from a decrease in facility expenses due to lower rent expenses, and 3% from a decrease in compensation and related benefits due to reduced headcount. These decreases were partially offset by a 2% increase from higher depreciation expenses.

General and administrative expenses decreased $0.9 million, or 1%, in fiscal 2001 compared to fiscal 2000. The 1% decrease was primarily made up of 5% from a decrease in bad debt expense related to enhanced global credit evaluations, on-going risk mitigation efforts (such as letters of credit, guarantees, and credit insurance) in Asia, and improved collections of our royalty accounts. This decrease was partially offset by a 2% increase from higher legal fees due to litigation and a 2% increase from facility expenses due to higher utility costs.

In the fourth quarter of fiscal 2002, we incurred a restructuring charge of $11.1 million, which included severance and related charges and the closure of a facility. The related restructuring program eliminated 239 engineering, sales and marketing, and general and administrative positions worldwide in order to realign our resources for our future business plans. These plans include adding resources to support our ePaper enterprise business in fiscal 2003.

The restructuring program is expected to be completed in fiscal 2003. Of the $11.1 million in charges, $4.7 million remained accrued at November 29, 2002.

In the second quarter of fiscal 2002, we implemented a restructuring program to eliminate 39 redundant sales and marketing positions, held by Adobe employees worldwide, as a result of the acquisition of Accelio. The restructuring included severance and related charges associated with the reduction in force and the cost of vacating a leased facility. Total restructuring charges were $1.6 million and the majority of these payments were paid in the second quarter of fiscal 2002. Of the $1.6 million in charges, $.05 million remains accrued at November 29, 2002. The remaining payments will be paid in the first quarter of fiscal 2003.

During the fourth quarter of fiscal 2002, we paid our remaining obligations under our 2001 restructuring program. We also lowered our estimate of the total costs associated with the restructuring program, resulting in an adjustment of approximately $0.6 million. The adjustment primarily reflected lower than estimated relocation and severance expenses and related charges.

In the fourth quarter of fiscal 2001, we implemented a restructuring plan to realign our workforce to our future strategic goals and to align our resources with our lower fiscal 2002 revenue targets due to adverse economic conditions resulting in part from the events of September 11, 2001. This restructuring enabled us to increase our investment in digital imaging, digital video, and ePaper-based businesses in fiscal 2002. As part of the restructuring program, we implemented a reduction in force of 247 positions, affecting organizations throughout the company. The reductions came predominantly from sales and marketing and in our North American operations, and as of November 30, 2001, the majority of these terminations were completed. The restructuring charge in the fourth quarter of fiscal 2001 was $12.1 million, all of which related to severance and related charges associated with the reduction in force. As of November 29, 2002, there was no restructuring liability remaining for our fiscal year 2001 rest ructuring program. For more information, see Note 8 of our Notes to Consolidated Financial Statements.

In fiscal 2000, restructuring and other charges consisted of $6.3 million of other charges relating to the disposal of certain equipment and one-time litigation related expenses, and a credit of $0.7 million related to the fiscal 1999 and fiscal 1998 restructuring programs. The $0.7 million credit was recorded in the first quarter of fiscal 2000, as we revised our estimates of the total costs associated with the fiscal 1999 and 1998 restructuring programs. The credit primarily reflected lower than estimated severance and related charges attributable to employees whose positions were eliminated as a result of the restructurings but who were able to find alternative employment within Adobe. The remaining credit was due to lower than expected charges related to vacating leased facilities.

On April 12, 2002, we acquired 100% of the outstanding common stock of Accelio Corporation. Accelio was a provider of Web-enabled solutions that help customers manage business processes driven by electronic forms. We obtained an independent appraiser's valuation to determine the amounts allocated to purchased technology and in-process research and development. The valuation analysis utilized the Income Approach that takes into consideration discounted future cash flows. Based on this valuation $0.4 million was allocated to in-process research and development. The amount allocated to in-process research and development of $0.4 million was expensed as of the date of the acquisition due to the state of the development of certain products and the uncertainty of the technology.

In December 2001, we acquired Fotiva, Inc. ("Fotiva"). Substantially all of Fotiva's assets were intellectual property. Fotiva was a development stage software company that created solutions to help consumers manage, store, enrich, and share digital photographs and other related personal media. In connection with the acquisition, substantially all of the purchase price of $5.4 million cash was allocated to in-process research and development and expensed at the time of acquisition due to the in-process state of the technology. At the date we acquired Fotiva, it was estimated that 50% of the development effort had been completed and that the remaining 50% of the development effort would take approximately eleven months to complete. The efforts required to complete the development of the technology primarily include finalization of coding, internationalization, and extensive quality assurance testing. We developed a new product, Adobe Photoshop Album, that we released in the first quarter of fiscal 2003 using Fotiva's image management technology with our digital imaging and ePaper technologies.

In fiscal 2000, we recorded $0.5 million of acquired in-process research and development related to our acquisition of Glassbook, Inc. ("Glassbook"). The acquisition was accounted for under the purchase method of accounting in accordance with Accounting Principles Board Opinion No. 16 ("APB 16"). Based on an independent appraiser's valuation, $0.5 million of the total $28.0 million purchase price was allocated to in-process research and development due to the state of the development and the uncertainty of the technology. The ongoing projects at Glassbook at the time of the purchase included the development of the Glassbook Reader and the Glassbook Content Server products. We released new products that contained the purchased technology in April 2001, with Acrobat eBook Reader 2.1 and Adobe Content Server 2.0.

Amortization of goodwill and purchased intangibles increased $6.7 million, or 47%, in fiscal 2002 compared to fiscal 2001, primarily due to the goodwill impairment charge for the remaining book value of the Glassbook acquisition. The impairment charge was determined based on discounted future cash flows.

As part of the acquisition of Accelio in April 2002, we allocated $75.0 million to goodwill which, in accordance with Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," will not be amortized. During the fourth quarter of fiscal 2002, we revised our estimate of certain costs associated with our acquisition of Accelio, resulting in an increase to goodwill of approximately $2.6 million. The adjustment primarily reflected higher than estimated transaction costs and costs related to closing redundant facilities. The goodwill associated with the acquisitions of Accelio and GoLive will be reviewed for impairment on an annual basis.

Amortization of goodwill and purchased intangibles increased $7.3 million, or 104%, in fiscal 2001 compared to fiscal 2000, due to a full year of amortization of Glassbook goodwill totaling $7.2 million and purchased intangibles of $0.1 million.

Investment gain (loss) consists principally of realized gains or losses from the sale of marketable equity investments, other-than-temporary declines in the value of marketable equity securities, and equity method gains and losses of Adobe Ventures.

During fiscal 2002, investment losses consisted of other-than-temporary writedowns related to our marketable equity securities in DigitalThink, Inc., Tumbleweed Communications Corp., Engage, Inc., Virage, Inc., Viewpoint Corporation, AvantGo, Inc., and Salon Media Group, Inc. (formerly Salon.com) of $11.3 million. These losses were partially offset by gains totaling $7.2 million from the sale of our marketable equity securities. We also recorded net investment losses related to investments in Adobe Ventures and our cost method investments totaling $13.1 million. As of November 29, 2002, our short-term investments included marketable equity securities of $14.1 million and our long-term investments included investments in Adobe Ventures and other cost method investments of $35.6 million. These securities are inherently risky and we may experience further deterioration in fair value in the future.

During fiscal 2001, investment losses consisted of other-than-temporary writedowns related to our marketable equity securities in Tumbleweed Communications Corp., Salon Media Group, Inc. (formerly Salon.com), Engage, Inc., Liquent, Inc. (formerly ESPS, Inc.), AvantGo, Inc., Viewpoint Corporation, and Virage, Inc. of $53.1 million. These losses were partially offset by gains totaling $19.5 million from the sale of our marketable equity securities. We also recorded net investment losses related to investments in Adobe Ventures and our cost method investments totaling $59.8 million. As of November 30, 2001, our short-term investments included marketable equity securities of $37.8 million and our long-term investments included investments in Adobe Ventures and other cost method investments of $31.7 million.

During fiscal 2000, we recorded investment gains related to the sale of a portion of our investment in Tumbleweed Communications Corp. and Digimarc Corporation for $10.4 million and $2.2 million, respectively. Additionally, we recorded investment gains totaling $13.0 million related to the mark-to-market valuation adjustment for AvantGo, Inc. and other net gains totaling approximately $15.0 million related to various other Adobe Ventures investments activities. These gains were partially offset by investment losses related to the writedown of our investments in Engage, Inc.; Classmates Online, Inc. (formerly eCircles, Inc.); Salon Media Group, Inc. (formerly Salon.com); and Impresse Corporation, totaling approximately $26.3 million.

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

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

Interest and other income decreased $7.1 million, or 32%, in fiscal 2002 compared to fiscal 2001 primarily due to a decrease in interest income of $6.0 million due to lower interest rates and lower realized gains of $2.5 million resulting from the sales of fixed income investments. The decreases in interest and other income in fiscal 2002 compared to fiscal 2001 were partially offset by a reduction in losses of $1.1 million related to the lowered cost of purchased options used in foreign currency hedging.

Interest and other income increased $0.6 million, or 3%, in fiscal 2001 compared to fiscal 2000 primarily due to realized gains of $5.9 million resulting from the sale of fixed income investments. Interest and other income also increased in fiscal 2001 compared to fiscal 2000 due to higher average cash balances resulting in an increase in interest income of $1.8 million. The increase in interest and other income in fiscal 2001 compared to fiscal 2000 was partially offset by foreign currency losses of $4.4 million. These foreign currency losses resulted from the implementation of Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities" and subsequent recording of the cost of hedging foreign currency exposures in interest and other income. In addition, in fiscal 2000, interest and other income increased due to a one-time gain of $2.5 million from the sale of a corporate facility in Edinburgh, Scotland.

Our effective tax rate decreased in fiscal 2002 from fiscal 2001 and from fiscal 2000 to fiscal 2001, due to tax benefits associated with the restructuring of our international operations. Part of the tax rate decrease in fiscal year 2002 was offset by a tax rate increase, approximately 0.8%, due to the non-tax deductible goodwill impairment expense.

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

• adverse changes in general economic or political conditions in any of the major countries in which we do business
• introduction of new products by existing and new competitors, particularly Microsoft
• delays in shipment of our new products or major new versions of existing products
• difficulties in transitions to new markets, including the enterprise, government, corporate business and consumer markets
• inability to attract and retain key personnel
• lack of market acceptance of new products and upgrades
• weakness in demand for application software, computers, and printers
• downward sales price adjustments
• intellectual property disputes and litigation
• industry transitions to new business models
• renegotiation or termination of royalty or intellectual property licensing arrangements
• changes in accounting rules
• market risks associated with our equity investments (as discussed later under "Quantitative and Qualitative Disclosures about Market Risk")

We periodically provide operating model targets for revenue, expenses, gross margin, operating profit, other income, tax rate, and share count. 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 and demand
• manufacturing costs and volumes
• the mix of application products and licensing revenue, full and upgrade products, distribution channels, and geographic distribution
• no change occurring in the global market conditions affecting our customers

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 or from results for prior periods. In particular, the slow-down in some geographic areas, primarily in the U.S., Europe, and Japan, has adversely affected all of our product segments and may adversely affect our ability to achieve our targets. We attribute this slow-down, which is affecting all of our product segments, to continued economic weakness. These adverse economic conditions in the U.S., Europe, Japan, and potentially other geographic markets 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 countries, these other countries represent a much smaller portion of our revenue and thus have less impact on our operational results. Furthermore, if the economic slow-down worsens or spreads to other geograph ic areas where we do business, it would likely cause our future results, including results for the current quarter, to vary materially from our targets. In addition, political conditions in any of the major countries in which we do business may adversely affect our business.

The end markets for our software products are intensely and increasingly competitive and are significantly affected by product introductions and market activities of industry competitors. In the ePaper applications market, a number of competitors have developed and brought to market clones of our Acrobat application to create and enhance PDF files. Through lower pricing and aggressive marketing to existing or potential Adobe customers, these competitors could impact Adobe Acrobat average seat pricing, and our overall ePaper revenue. Additionally, any incorporation into an operating system of software for the creation of PDF files, or other software that competes with our ePaper or graphics applications, could seriously harm our business. Furthermore, Microsoft has increased its presence in the low-end and mid-range consumer digital imaging/graphics markets, as well as indicating that it may include new electronic form, electronic document distribution, eBook and related functionality like that i n Adobe Acrobat and our server-based ePaper software, including announcing a new electronic forms tool that is planned to ship in mid-2003. We believe that, due to Microsoft's market dominance, any new Microsoft products in these markets will be highly competitive with our products. If competing graphics or ePaper products achieve widespread acceptance, our operating results would suffer. In addition, consolidation has occurred among some of the competitors in our markets. Any further consolidations among competitors of ours may result in stronger competitors and may therefore harm our results of operations.

Also, as we seek to further broaden our customer base in the enterprise, government, corporate business and consumer markets, we may not successfully adapt our application software licensing and distribution channels, which could cause our operating results to suffer. As we currently have limited experience in these markets, we believe we will need to recruit, train, and retain personnel with experience in these markets, and our failure to do so may harm our ability to penetrate these markets. We could also experience decreases in average selling prices and some transitions in our distribution channels that could seriously harm our business. In connection with the Accelio acquisition, we may not be successful in integrating Accelio or developing, marketing or licensing products, particularly products for the enterprise, government, corporate business and consumer markets, based on Accelio's technology or expertise. We also may not be successful in integrating its distribution channels with ours, or in dev eloping the necessary relationships with enough significant systems integrators to succeed with these new customer bases. Additionally, we may face unanticipated expenses relating to the integration of Accelio personnel and its products, distribution channels, and administrative functions. All of these factors may affect our realizability of Accelio's assets, including goodwill.

We plan to recruit key talent for our future growth, especially to support our enterprise business. These plans to continue to invest in certain areas will require us to continue 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. We rely on our ability to grant stock options in order to recruit and retain highly skilled employees in a competitive environment. The proposed requirement that stockholder approval would be required for the adoption of all stock option plans and for any material modifications to such plans, as well as the potential requirement to recognize an expense for stock options in our financial statements, may result in our inability to provide adequate incentives to effectively recruit and retain talented employees.

Any delays or failures in developing and marketing our products, including upgrades of current products that successfully adapt to changing customer needs, may also have a harmful impact on our results of operations. Our ability to extend our core technologies into new applications and new platforms 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 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.

We offer our application-based products primarily on Macintosh and Windows platforms, and on some UNIX platforms. We generally offer our server-based products, but not desktop products, on the Linux platform as well as the three platforms mentioned above. To the extent that there is a slow-down of customer purchases of personal computers on either the Windows or Macintosh platform or in general, or to the extent that significant demand arises for our products or competitive products on the Linux desktop platform before we choose and are able to offer our products on this platform, our business could be harmed.

We distribute our application products primarily through distributors, resellers, retailers, and increasingly, systems integrators and VARs (collectively referred to as "distributors"). A significant amount of our revenue for application products is from two distributors. In addition, our channel program now focuses our efforts on larger distributors, which has resulted in our dependence on a relatively small number of distributors selling through a large amount of our products. Sales through the distribution channel result in unstable pricing and significant product returns. Our distributors sell our competitors' products; if our distributors favor our competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, and in that case, our results would suffer. Additionally, one of our goals is to increase our direct distribution of our products to end users through our online store located on our website at www.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.

In addition, we continue to expand into third-party distribution channels, including VARs 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 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.

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, are currently, and may in the future be subject to complex, protracted litigation or negotiations as part of our policy to vigorously defend our intellectual property rights, including rights derived from third party licensors. 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 or resolved past litigation and disputes, we may not prevail in any ongoing or future litigation and disputes. Adverse decisions in such litigation or disputes 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 sever e disruptions to our operations or the markets in which we compete, any one of which could seriously harm our business.

Our computer network and applications could be adversely impacted by malicious code such as worms and viruses, which are released into the public Internet using recently discovered vulnerabilities in popular software programs. Although we have a response team that is notified of high-risk malicious events from multiple sources and we take certain preventative measures, these procedures may not be sufficient to avoid harm to our business.

In some markets and for some products, we have adopted a strategy aiming to increase our market share where it is low and therefore may receive significantly less revenue from certain licensing arrangements than we otherwise would receive for licensing these products. Increased market penetration may in fact lead to lower revenue growth in these areas. While we believe that this potential market share increase will ultimately benefit us, this strategy could instead harm our business through reduced revenue growth.

We currently rely on five turnkey assemblers of our products, with at least two turnkeys located in each major region we serve. If any significant turnkey assembler terminates its relationship with us, or if our supply from any significant turnkey is interrupted or terminated for any other reason, we may not have enough time or be able to replace the supply of products manufactured by that turnkey assembler to avoid serious harm to our business.

Revenue from our OEM PostScript and Other segment experienced a 15% decline in fiscal 2002 compared to fiscal 2001, primarily as a result of a decline in the print business. We expect this segment to continue to decline in fiscal 2003 relative to fiscal 2002, which may harm our business if the magnitude of the decline significantly exceeds our expectations. The continuing weakness in the economy is contributing to the decrease in revenue for the monochrome laser printers market, in addition to the decline in average selling prices of monochrome laser printers and the increasing use of inkjet printers. If a current major customer decided to incorporate a clone version instead of Adobe PostScript technology, it could seriously harm our business. Further, OEM partners 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.

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 industry for software that addresses authoring and communications over the Internet is still developing. Standards defining Web graphics have not yet been fully adopted. In addition, new models for licensing software will be needed to accommodate new information delivery practices. The new models may be less lucrative for us than our existing business models. 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 derive a significant portion of our revenue and operating income from our customers located in Europe and Japan. We generally experience lower revenue from our European operations in the third quarter because many customers reduce their purchasing activities in the summer months. We are uncertain whether the recent currency appreciation experienced in Europe and Japan will continue in the foreseeable future. Our operating results are subject to fluctuations in foreign currency exchange rates. Dramatic fluctuations in foreign currency exchange rates may have significant financial impact. We attempt to mitigate a portion of these risks through foreign currency hedging, 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 and the euro. We regularly review our hedging program and will make adjustments based on our best judgment. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. These principles 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. Our accounting policies that recently have been or may be affected by changes in the accounting rules are as follows:

• software revenue recognition
• stock option grants and accounting for stock options
• accounting for business combinations
• accounting for variable interest entities
• goodwill and other intangible assets accounting

In particular, new FASB guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period. It is possible that in the future, we may incur less frequent, but larger, impairment charges related to goodwill we have already recorded, as well as goodwill arising out of potential future acquisitions. See "Recent Accounting Pronouncements" for more information on this new FASB guideline. 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. See the discussion under "Critical Accounting Policies" below for additional information about our critical accounting policies and some risks associated with these policies.

Due to the factors noted above, our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings, or any delay in the release of any product or upgrade, 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 or delays 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 identified the following as critical accounting policies to our company: revenue recognition, accounting for our marketable and non-marketable fixed income and equity securities, accounting for leases of property and equipment, and accounting for income taxes.

We recognize application products revenue upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations remain. Application products revenue from distributors is subject to agreements allowing limited rights of return, rebates, and price protection. Accordingly, we reduce revenue recognized for estimated future returns, price protection, and rebates at the time the related revenue is recorded. The estimates for returns are adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel, and other related factors.

We provide free technical phone support for our shrink-wrapped application products to customers who are under warranty for support. We record the estimated cost of free technical phone support upon shipment of software.

We also license software in multiple element arrangements in which a customer purchases a combination of software, post-contract customer support ("PCS"), and/or professional services. PCS, or maintenance, includes rights to upgrades, when and if available, telephone support, updates, and enhancements. Professional services relate to consulting services and training. When vendor specific objective evidence ("VSOE") of fair value exists for all elements in a multiple element arrangement, revenue is allocated to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when the same element is sold separately. We determine VSOE of fair value of PCS based on renewal rates for the same term PCS. In a multiple element arrangement whereby VSOE of fair value of all undelivered elements exists but VSOE of fair value does not exist for one or more delivered elements, revenue is recognized using the residual method. Under the residual method, the f air value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue, assuming delivery has occurred and collectibility is probable. Revenue allocated to PCS is recognized ratably over the contractual term (typically one to two years).

We record OEM licensing revenue, primarily royalties, when OEM partners ship products incorporating Adobe software, provided collection of such revenue is deemed probable.

Deferred revenue includes customer advances under OEM licensing agreements and maintenance revenue. In cases where we will provide a specified free upgrade to an existing product, we defer revenue until the future obligation is fulfilled.

We perform ongoing credit evaluations of our customers' financial condition and generally do not require collateral. We maintain allowances for estimated credit losses.

We classify all of our cash equivalents and short-term investments that are free of trading restrictions, or become free of trading restrictions within one year, as "available-for-sale." We carry these investments 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 are recognized when realized in our consolidated statements of income. The market prices in our short-term equity investments have been volatile in the past. It is our policy to review our equity holdings on a regular basis to evaluate whether or not each security has experienced an other-than-temporary decline in fair value. Our policy includes, but is not limited to, reviewing each of the companies' cash position, earnings/revenue outlook, stock price performance over the past six months, liquidity and management/ownership. If we believe that an other - -than-temporary decline exists in one of our marketable equity securities, it is our policy to write down these equity investments to the market value and record the related writedown as an investment loss on our consolidated statements of income. The ultimate value realized on these equity investments is subject to market volatility until they are sold. For further information on our cash equivalents and short-term investments, please refer to Note 1 of our Notes to Consolidated Financial Statements.

Our long-term investments include direct investments and indirect investments in privately held companies. We own limited partnership interests in four venture capital limited partnerships, Adobe Ventures L.P., Adobe Ventures II, L.P., Adobe Ventures III, L.P., and Adobe Ventures IV, L.P. (collectively "Adobe Ventures"), that invest in early stage companies with innovative technologies. In addition to the potential for financial returns, our venture activities increase our knowledge of emerging markets and technologies, as well as expand our ecosystem of Adobe products and services. The partnerships are managed by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures.

The investments in Adobe Ventures are accounted for using the equity method of accounting, and accordingly, the investments are adjusted to reflect our share of Adobe Ventures' investment income (loss) and dividend distributions. Under the terms of the partnership agreements, the general partner has the sole and exclusive right to manage and control the partnerships. Adobe as the limited partner has certain rights, including replacing the general partner and approving acquisitions that exceed certain established parameters. However, these rights are considered to be protective rights and do not suggest an ability to control the partnerships. Adobe Ventures carry their investments in equity securities at estimated fair market value and unrealized gains and losses are included in investment gain (loss). The stock of a number of technology investments held by the limited partnerships at November 29, 2002 is not publicly traded, and, therefore, there is no established market for their securities. In order to determine the fair market value of these investments, we use the most recent round of financing involving new non-strategic investors or estimates made by Granite Ventures based on their assessment of the current market value. It is our policy to review the fair value of these investments held by Adobe Ventures on a regular basis to evaluate the carrying value of the investments in these companies. This policy includes, but is not limited to, reviewing each companies' cash position, financing needs, earnings/revenue outlook, operational performance, management/ownership changes, and competition. The evaluation process is based on information that we request from these privately held companies. This information is not subject to the same disclosure regulations as U.S. publicly traded companies, and as such, the basis for these evaluations is subject to the timing and the accuracy of the data received from these companies. If we believe that the carrying value of a company is carried at an amount in excess of fair value, it is our policy to record a reserve in addition to our equity method of accounting. Estimating the fair value of non-marketable equity investments in early-stage technology companies is inherently subjective and may contribute to significant volatility in our reported results of operations.

We recognize realized gains and losses upon sale or maturity of these investments using the specific identification method. For further information on our long-term investments, please refer to Note 1 of our Notes to Consolidated Financial Statements.

We entered into two operating lease agreements in 1999 and 2001 (the latter for a building currently under construction) related to our headquarter office buildings in San Jose, California. The agreements qualify for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13 ("SFAS No. 13"), "Accounting for Leases," and, as such, the buildings are not included on our balance sheet. According to SFAS No. 13, a lease is classified as operating if it does not meet any of the following criteria at its inception: 1) the lease transfers ownership of the property to the lessee at the end of the lease term, 2) the lease contains a bargain purchase option, 3) the lease term is equal to 75% or more of the economic life of the leased property, 4) the present value of the minimum lease payments equals or exceeds 90% of the fair value of the leased property. These agreements are subject to standard covenants, including liquidity, leverage, and profitability ratios that are reported to the lessors quarterly. We believe we will be able to meet our obligations under the agreements, but if we default on our commitments and are unable to remedy the default quickly enough, the lessors may terminate all remaining commitments (if any remain), and they may demand we purchase the building for an amount equal to the current lease balance, or require that we remarket or relinquish the building. If we are required to purchase the buildings and do not elect to refinance, this will substantially decrease our cash available for working capital and require us to add the value of the buildings to our balance sheet. If we remarket or relinquish the buildings, this could require us to find alternate facilities on terms that may not be as favorable as the current arrangement. As of November 29, 2002, we were in compliance with all covenants. For further information on these leases, please refer to Note 14 of our Notes to Consolidated Financial Statements.

Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Judgment is required in assessing the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Fluctuations in the actual outcome of these future tax consequences could materially impact the Company's financial position or its results of operations.

Our stock option program is a broad-based, long-term retention program that is intended to attract, retain, and provide performance incentives for talented employees, officers and directors, and to align stockholder and employee interests. Currently, we grant options from three stock plans (the "Plans"): 1) the 1994 Stock Option Plan, under which officers and key employees are granted options to purchase shares of our stock, 2) the 1999 Equity Incentive Plan, our broad-based plan under which options may be granted to all employees and outside consultants, and 3) the 1996 Outside Directors Stock Option Plan, as amended, under which options are granted automatically under a pre-determined formula to non-employee directors. In addition, our stock option program includes the Adobe 1984 Stock Option Plan, as amended, and the Aldus 1984 Restated Stock Option Plan from which we currently do not grant options. The plans listed above are collectively referred to in the following discussion as "the Plans." We c onsider our option programs critical to our operation and productivity; essentially all of our employees participate. Option vesting periods are generally three years for all of the Plans.

All stock option grants to current executive officers are made after a review by, and with the approval of, the Executive Compensation Committee of the Board of Directors. All members of the Executive Compensation Committee are independent directors, as defined in the rules applicable to issuers traded on The Nasdaq Stock Market. See the "Report of the Executive Compensation Committee" appearing in the Company's 2003 Proxy Statement for further information concerning the policies and procedures of the Company and the Executive Compensation Committee regarding the use of stock options.

The table below provides information about stock options granted for 2002, 2001, and, 2000 to our Chief Executive Officer and our four other most highly compensated executive officers as of November 29, 2002, who will also be identified in our 2003 Proxy Statement. This group is referred to as the Named Executive Officers. Please refer to the section headed "Executive Options" below for the Named Executive Officers.

Options granted to employees, directors and Named Executive Officers for the fiscal years 2000 through 2002 are summarized as follows:

Employees, Directors and Named Executive Officers Option Grants in 2002, 2001, and 2000 ⁽¹⁾