ADOBE SYSTEMS INC, 10-K, 1998-02-17

ADOBE SYSTEMS INC
10-K, 1998-02-17
PREPACKAGED SOFTWARE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED NOVEMBER 28, 1997
OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________________ TO ___________________

COMMISSION FILE NUMBER: 0-15175

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

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

345 PARK AVENUE, SAN JOSE, 95110-2704
CALIFORNIA
(Address of principal executive (Zip Code)
offices)
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Registrant's telephone number, including area code: (408) 536-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No ____

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

The aggregate market value of the common stock held by non-affiliates of the
registrant as of December 26, 1997 was $2,533,370,488.

The number of shares outstanding of the registrant's common stock as of
December 26, 1997 was 68,639,439.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive Proxy Statement dated March 4, 1998 to be
delivered to stockholders in connection with the Notice of Annual Meeting of
Stockholders to be held on April 8, 1998 are incorporated by reference into Part
III.

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TABLE OF CONTENTS

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PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 12
Item 3. Legal Proceedings........................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders......................................... 14

PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters........................ 15
Item 6. Selected Financial Data..................................................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 17
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................. 27
Item 8. Financial Statements and Supplementary Data................................................. 30
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure........ 31

PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 32
Item 11. Executive Compensation...................................................................... 33
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 34
Item 13. Certain Relationships and Related Transactions.............................................. 35

PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K............................. 36
Signatures.............................................................................................. 38
Summary of Trademarks................................................................................... 39
Financial Statements.................................................................................... 40
Financial Statement Schedule............................................................................ 67
Exhibits................................................................................................ 69
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FORWARD-LOOKING STATEMENTS

IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM 10-K
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY. FACTORS THAT MIGHT CAUSE OR
CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
IN THE SECTION ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS." READERS SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE
COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q TO BE FILED BY THE
COMPANY IN 1998. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS ANNUAL
REPORT ON FORM 10-K. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE
ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.

PART I

ITEM 1. BUSINESS

BUSINESS OVERVIEW

Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and
supports computer software products and technologies that enable users to
express and use information across all print and electronic media. The Company
offers a market-leading line of application software and type products for
creating and distributing visually rich communication materials; licenses its
industry-standard technologies to major hardware manufacturers, software
developers, and service providers; and offers integrated software solutions to
businesses of all sizes. The Company's software runs on Microsoft Windows, Apple
Macintosh, and UNIX platforms.

The Company was originally incorporated in California in October 1983 and
was reincorporated in Delaware in May 1997. The Company maintains its executive
offices and principal facilities at 345 Park Avenue, San Jose, California
95110-2704. Its telephone number is 408-536-6000. The Company also maintains a
World Wide Web site at HTTP://WWW.ADOBE.COM.

PRODUCTS

In 1984, Adobe developed the software that initiated desktop publishing.
Today, Adobe is uniquely positioned to make a further dramatic impact not only
on how society creates visually rich information, but also on how it distributes
and accesses that information electronically.

While other major software companies' products deal in raw words, data, and
numbers, Adobe software helps people use the computer to express and share their
ideas in imaginative and meaningful new ways, whether the choice of media is
static or dynamic, paper or electronic. In the simplest terms, Adobe products
enable people to create, send, view, and print high-impact information, helping
them and their ideas stand out.

Adobe software enables users to work with professional creative tools;
assemble illustrations, images, and text into fully formatted documents; output
documents directly to any kind of printing device; and distribute documents on
paper, video, or compact disc, over the Internet, an e-mail system, or corporate
network. Moreover, Adobe software enables users to perform all of these tasks
across multiple computing environments, including Microsoft Windows, Apple
Macintosh, and UNIX.

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GRAPHICS PRODUCTS

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

Adobe Illustrator--an illustration and page design tool for print, the
Internet, and multimedia used by professional illustrators and Internet
content creators.

Adobe PageMaker--a tool for creating and producing professional-quality
printed and electronic pages used by designers, business people, publishers,
and prepress professionals around the world.

Adobe Premiere--provides non-linear digital video editing used in
multimedia and video production.

Adobe After Effects--provides two-dimensional (2D) animation, motion
compositing, and special effects used in multimedia, broadcast, and film
production.

Adobe Type Library--contains over 2,400 high-quality outline typefaces
used by graphics professionals and Internet content creators worldwide.

ENTERPRISE PRODUCTS

Adobe FrameMaker--an application for authoring and publishing long and
complex documents including books, technical manuals, and reports.

Adobe Acrobat--the fastest way to publish and distribute business
documents of any kind on corporate e-mail and intranets, the Internet, or
CD-ROM. Adobe Acrobat software includes everything needed to create and
distribute rich electronic documents that can be viewed seamlessly within
leading Web browsers. Adobe Acrobat Capture enables conversion of legacy
paper-based documents into indexable, searchable, platform-independent
electronic form for archiving and distribution purposes.

HOME & OFFICE PRODUCTS

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

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

PRINTING SYSTEMS PRODUCTS

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

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

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

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Adobe PostScript Extreme--the innovative new production printing
architecture that integrates Adobe PostScript and the Portable Document
Format ("PDF"). This architecture has been endorsed by the printing industry
as the new standard for high-performance print-on-demand, direct-to-press,
and high-resolution imagesetter printing systems.

COMPETITION

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

GRAPHICS PRODUCTS

Within its Graphics Products area, Adobe markets six product families that
fall into two major groupings: professional publishing (Adobe Photoshop, Adobe
PageMaker, Adobe Illustrator, and Adobe Type Library) and dynamic media (Adobe
Premiere and Adobe After Effects). In these groupings, the individual products
compete favorably on the basis of features and functions, installed base, ease
of use, product reliability, and price and performance characteristics. In
addition, the products increasingly work well together, providing broader
functionality and minimizing product learning issues for the individual who uses
multiple applications to complete a project.

A number of companies currently offer one or more products that compete
directly or indirectly with one or more of Adobe's graphics products. These
companies include Quark, Macromedia, Corel, MetaCreations, Avid and Linotype.

With the advent of the World Wide Web, the needs of the graphics
professional are rapidly changing to encompass on-line publishing as well as
print-based publishing. These changing customer needs have created new
opportunities for Adobe's graphics products, drive the Company's product
development cycles, and introduce new potential competitors.

ENTERPRISE PRODUCTS

In the authoring and publishing market, the Company's Adobe FrameMaker
product faces competition from large-scale electronic publishing systems
developed by several companies, including Interleaf. Participants in this market
compete based on the quality and features of their products, the level of
customization and integration with other publishing system components, the
number of hardware platforms supported, service, and price. The Company believes
it can successfully compete in this market based upon the quality and features
of the Adobe FrameMaker product, its extensive application programming
interface, the large number of platforms supported, and other factors.

In the document transmission and archive area, the Company's Adobe Acrobat
family faces competition from entrenched office applications and internet
content creation tools that use HTML. The Company feels it competes favorably in
terms of the combined benefits of compression, visual fidelity, transmittal time
and security of documents expressed using Adobe Acrobat Portable Document Format
(PDF). Competitors include Microsoft and Corel.

HOME & OFFICE PRODUCTS

The consumer software market is characterized by intense competition, price
sensitivity, brand awareness, and strength in retail distribution. Adobe faces
direct and indirect competition in these markets from a number of companies,
including Microsoft and Broderbund. The Company believes it competes favorably
with its Adobe PhotoDeluxe product due to its strong relationships with critical
original

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equipment manufacturers ("OEMs") and market influencers and its ability to
leverage core competencies from established products.

The Internet market is a constantly evolving and highly volatile market,
characterized by rapid technology developments and frequent new product
introductions. Adobe PageMill faces significant competition from companies
offering similar products and will continue to face competition from emerging
technologies and products. Some of these competitors include Macromedia,
Microsoft, and NetObjects.

PRINTING SYSTEMS PRODUCTS

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

OPERATIONS

MARKETING AND DISTRIBUTION

Adobe markets and distributes its products directly and through multiple
channels, including distributors, retailers, systems integrators, software
developers, and value-added resellers ("VARs"), as well as through OEM and
hardware bundle customers. Adobe supports its worldwide distribution network and
end-user customers through international subsidiaries. Adobe Systems Europe Ltd.
is headquartered in Edinburgh, Scotland, with subsidiaries in France, Germany,
Italy, the Netherlands, Spain, Sweden, Switzerland, and the United Kingdom.
Adobe's Pacific Rim presence includes Adobe Systems Company Ltd. in Japan as
well as operations in Asia, Pacific, and Latin America, including Australia,
Hong Kong, Korea, Singapore, India, and Mexico. The Company also has operations
in Canada. More than 6,000 resellers in the United States and Canada and more
than 300 distributors throughout Europe, Japan, and Asia, Pacific, and Latin
America offer Adobe software applications and type products.

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

MANUFACTURING

Manufacturing operations include duplication of disks, assembly of purchased
parts, and final packaging for retail products. Adobe contracts a majority of
its manufacturing activities to third parties, both in the United States and in
Europe.

Disk duplication for European language versions of the Company's products is
managed through the European headquarters. The master disks of European-language
versions of products are forwarded to McQueen Holdings Limited ("McQueen") which
duplicates the disks, prints, and assembles the components and ships the
completed product. Quality control tests are performed on all duplicate disks
and finished products.

At November 28, 1997, the Company held a 13% equity interest in McQueen.
Effective December 31, 1997, McQueen was acquired by Sykes Enterprises, Inc.
("Sykes") and the Company exchanged its shares of McQueen for shares of Sykes
common stock. The Company expects to maintain its business relationship

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with McQueen and that McQueen will continue to provide services to the Company
for the foreseeable future.

To date, Adobe has not experienced significant difficulties in obtaining raw
materials for the manufacture of its products or in the duplication of disks,
printing, and assembly of components, although an interruption in production by
a supplier could result in a delay in shipment of Adobe's products. There was no
material backlog of orders as of December 26, 1997.

CUSTOMER SUPPORT AND EDUCATION

For Adobe's application software, a technical support and services staff
responds to customer queries by phone and on-line. The Company also informs
customers through its ADOBE MAGAZINE and a growing series of how-to books
published by Adobe Press, a joint venture with Macmillan Computer Publishing. In
addition, Adobe prepares and authorizes independent trainers to teach Adobe
software classes in person or increasingly via computer-based and internet-based
training programs, sponsors workshops led by its own graphics staff, interacts
with independent user groups, and conducts regular seeding and testing programs.

INVESTMENT IN NEW MARKETS

The Company has invested in two venture capital limited partnerships that
are chartered to invest in innovative companies strategic to Adobe's software
business. Adobe Ventures L.P. and Adobe Ventures II L.P. enable the Company to
join other investors in making new products and services available to computer
users and in building new market opportunities. Adobe has thus invested in new
markets, and intends to continue investing in new markets, both through the
limited partnerships as well as by direct investments by the Company.

The Company owns a minority interest in certain companies and a majority
interest in Adobe Ventures L.P. and Adobe Ventures II L.P. Investments in
publicly traded equity securities that are free of trading restrictions, or will
become free of trading restrictions within one year, are carried at fair value
based on quoted market prices. Investments in equity securities that are not
publicly traded, or are restricted from trading for more than one year, are
carried at the lower of cost or market.

The investments in Adobe Ventures L.P. and Adobe Ventures II L.P. are
accounted for using the equity method of accounting, and, accordingly, the
investments are adjusted to reflect the Company's share of Adobe Ventures L.P.
and Adobe Ventures II L.P.'s investment income (loss) and dividend
distributions. Adobe Ventures L.P. and Adobe Ventures II L.P. carry their
investments in equity securities at an estimated fair market value and
unrealized gains and losses are included in investment income (loss).
Substantially all of the technology companies held by the limited partnerships
at November 28, 1997 are not publicly traded, and, therefore, there is no
established market for these investments. As such, these investments are valued
based on the most recent round of financing involving new non-strategic
investors and estimates made by the general partner, a third party. When
investments held by the limited partnerships are publicly traded, the fair value
of such investments is based on quoted market prices, and mark-to-market
adjustments are included in investment income. In general, as a matter of policy
of the limited partnerships, the investments in the technology companies held by
the limited partnerships will be distributed to the partners prior to the
investee company's initial public offering.

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

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Adobe's Class A senior limited partnership interest includes both a
liquidation preference and a preference in recovery of the cost basis of each
specific investment. The executives' Class B junior limited partnership interest
qualifies for partnership distributions only after: (a) Adobe has fully
recovered the cost basis of its investment in the specific investee company for
which a distribution is made; and (b) the participating executive has vested in
his or her distribution rights. The distribution rights generally vest on a
monthly basis over three years, such that the rights are 25% vested after one
year, 50% vested after two years and fully vested at the end of three years. The
limited partnership investments are restricted to investments in companies that
are private at the time of the establishment of AIP or when the investment is
made, whichever is later. Partnership interests may be allocated to designated
officers only while the investee company is still private. Class B interests may
not exceed a maximum of 20% of the venture investments included in AIP. No
distributions were made to the participating officers in fiscal 1997 and expense
related to AIP in fiscal 1997 was immaterial. At November 28, 1997, the minority
interest held by the participating officers was immaterial and is included in
accrued expenses on the balance sheet.

The Company's portfolio of equity investments including those held by AIP at
November 28, 1997, had a cost basis of $56.1 million and was valued at $46.9
million. Gross proceeds from the sale of equity securities during 1997 was $40.0
million. The Company's equity investments and Adobe Ventures L.P. and Adobe
Ventures II L.P.'s investments in equity securities at November 28, 1997
consisted of the following companies:

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ADOBE EQUITY INVESTMENTS
Cascade Systems International.................................................................. X
Datalogics Incorporated........................................................................ X
McQueen International Ltd...................................................................... X
Objectivity Incorporated....................................................................... X
Pointcast Inc.................................................................................. X
Siebel Systems, Inc............................................................................ X
Tier Two Systems............................................................................... X
Vertec Solutions, Inc.......................................................................... X

ADOBE VENTURES L.P. EQUITY INVESTMENTS
Cogito Learning Media, Inc..................................................................... X
Crosswise Corporation.......................................................................... X
Digimarc Corporation........................................................................... X
Digital Think Inc.............................................................................. X
Electronic Submission Publishing Systems, Inc.................................................. X
Extensis Corporation........................................................................... X
Filenet Corporation............................................................................ X
Lantana Research............................................................................... X
Managing Editor Inc............................................................................ X
mFactory, Inc.................................................................................. X
Salon Internet, Inc............................................................................ X

ADOBE VENTURES II L.P. EQUITY INVESTMENTS
Extensis Corporation........................................................................... X
Tumbleweed Software Corporation................................................................ X
Vignette Corporation........................................................................... X
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PRODUCT DEVELOPMENT

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

During the years ended November 28, 1997, November 29, 1996, and December 1,
1995, the Company's research and development expenses, including costs related
to contract development, were $170.9 million, $152.9 million, and $138.6
million, respectively. During each of the years 1997, 1996, and 1995, the
Company acquired through purchase transactions one or more software companies.
In each of these transactions, a portion of the purchase price was allocated to
in-process research and development and expensed at the time of the acquisition.
In 1997, 1996, and 1995, $6.0 million, $21.3 million, and $15.0 million was
expensed, respectively.

PRODUCT PROTECTION

Adobe regards its software as proprietary and protects it with copyrights,
patents, trademarks, trade secret laws, internal and external nondisclosure
precautions, and restrictions on disclosure and transferability that are
incorporated into its software license agreements. The Company protects the
source code of its software programs as trade secrets, and makes source code
available to OEM customers only under limited circumstances and specific
security and confidentiality constraints.

The Company's products are generally licensed to end users on a "right to
use" basis pursuant to a license that is nontransferable and restricts the use
of the products to the customer's internal purposes on a designated number of
printers or computers. The Company also relies on copyright laws and on "shrink
wrap" and electronic licenses that are not signed by the end user. Copyright
protection may be unavailable under the laws of certain countries. The
enforceability of "shrink wrap" and electronic licenses has not been
conclusively determined. Adobe has obtained many patents and has registered
numerous trademarks 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. Adobe conducts vigorous anti-piracy
programs. Adobe products do not contain copy protection, except on copies for
international distribution in certain countries. Many products, including Adobe
PageMaker, Adobe Photoshop, and Adobe Illustrator, incorporate network
copy-detection features. These capabilities help encourage compliance with the
Company's license agreements by alerting customers about certain concurrent
usage problems over a given network.

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

EMPLOYEES

As of December 26, 1997, Adobe employed 2,702 people, none of whom are
represented by a labor union. The Company has not experienced work stoppages and
believes its employee relations are good. Competition in recruiting personnel in
the software industry is intense. Adobe believes its future success will depend
in part on its continued ability to recruit and retain highly skilled
management, marketing, and technical personnel.

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EXECUTIVE OFFICERS

The executive officers of the Company as of February 16, 1998 are as
follows:

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John E. Warnock 57 Chairman of the Board and Chief Executive Officer

Charles M. Geschke 58 Chairman of the Board and President

P. Jackson Bell 56 Executive Vice President, Chief Financial Officer, Chief Administrative
Officer, and Assistant Secretary

Ross A. Bott 46 Executive Vice President, Product Divisions

Robert A. Roblin 45 Executive Vice President, Marketing

Frederick A. Snow 61 Executive Vice President, Worldwide Field Operations

Hachiro Kimura 55 President, Adobe Systems Japan

Derek J. Gray 48 Senior Vice President and General Manager, Adobe Systems Europe

Colleen M. Pouliot 39 Senior Vice President, General Counsel, and Secretary

Fredrick A. Schwedner 56 Senior Vice President and General Manager, Printing and Systems Division

David P. Eichler 49 Vice President, Finance
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A biography, including the principal occupations for the past five years of
each of the executive officers, is provided below.

Dr. Warnock was a founder of the Company and has been its Chairman of the
Board since April 1989. Beginning September 1997, he shares the position of
Chairman of the Board with Charles M. Geschke. He has been Chief Executive
Officer since 1982. Dr. Warnock received a Ph.D. in electrical engineering from
the University of Utah. He is a director of Evans & Sutherland Computer
Corporation, Netscape Communications Corporation, and Redbrick Systems.

Dr. Geschke was a founder of the Company and has been its President since
April 1989. In September 1997, Dr. Geschke assumed the position of Chairman of
the Board, sharing that office with Dr. Warnock. He was Chief Operating Officer
from December 1986 until July 1994. Dr. Geschke received a Ph.D. in computer
science from Carnegie Mellon University. Dr. Geschke is a director of Rambus
Incorporated.

Mr. Bell joined the Company in November 1996 as Executive Vice President,
Chief Financial Officer, Chief Administrative Officer, and Assistant Secretary.
From September 1993 to March 1996, Mr. Bell was Executive Vice President and
Chief Financial Officer of Conner Peripherals Incorporated. From 1991 through
September 1993, Mr. Bell was Senior Vice President of Planning and Senior Vice
President of Strategic Programs for American Airlines Incorporated.

Mr. Bott joined the Company in December 1996 as Senior Vice President and
General Manager, Graphics Division. He was promoted to Executive Vice President,
Product Divisions, in December 1997. From August 1996 to December 1996, he
served as Senior Vice President of Enterprise Technologies at Silicon Graphics
Incorporated. Prior to that time, he was Vice President and Chief Technology
Officer of Pyramid Technology Corporation.

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Mr. Roblin joined the Company in June 1996 as Senior Vice President,
Corporate Marketing. In December 1997, he was promoted to Executive Vice
President, Marketing. Prior to that time, Mr. Roblin served as Vice President of
Marketing for IBM Corporation's Consumer Division from April 1994 until joining
Adobe. Prior to IBM, Mr. Roblin was Vice President of Marketing for AT&T's EO
personal communicator company as a result of AT&T's acquisition of Pensoft
Corporation which he joined as Vice President of Marketing in 1992.

Mr. Snow joined the Company in February 1998 as Executive Vice President,
Worldwide Field Operations. Mr. Snow served as Chairman and Chief Executive
Officer of Kenwood Management Group from April 1997 until he joined the Company.
From November 1995 to April 1997, Mr. Snow was President and Chief Executive
Officer of SoftWorld Services Corporation. Prior to that time, Mr. Snow served
as Senior Vice President of Sales of Tech Data Corporation.

Mr. Kimura joined the Company in November 1993 as President and General
Manager of Adobe Systems Japan. In May 1996, Mr. Kimura was appointed as a
corporate officer of the Company. Mr. Kimura was President of SCI Japan, the
subsidiary of Systems Center Incorporated, from June 1992 until he joined the
Company. Prior to that time, Mr. Kimura was Vice President of Sales and Services
at Applied Materials Japan Corporation.

Mr. Gray joined the Company upon the closing of the acquisition of Aldus in
August 1994, at which time he was elected Senior Vice President of the Company
and General Manager, Adobe Systems Europe. Prior to that time, Mr. Gray served
as Managing Director of Aldus Europe Limited since 1986. Mr. Gray is a
co-founder and, for the ten years prior to joining Aldus, Managing Director of
McQueen International Limited, a distributor of computer hardware and software,
of which the Company was a 17% stockholder by virtue of the acquisition of
Aldus. Pursuant to a reorganization of the Company's Europe entity, Mr. Gray was
elected General Manager of Adobe Systems Europe in April 1995.

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

Mr. Schwedner joined the Company in August 1989 as Director of Engineering,
and in 1991 was promoted to Vice President of Engineering, Systems Product
Division. In May 1996, he was promoted to Senior Vice President and General
Manager of the Printing and Systems Division.

Mr. Eichler joined the Company in December 1997 as Vice President, Finance.
Mr. Eichler served as Senior Vice President, Finance and Administration, and
Chief Financial Officer of Hyundai Electronics America from March 1994 until he
joined the Company. From June 1993 to February 1994, Mr. Eichler was Chief
Financial and Chief Administrative Officer of Trident Systems. Prior to that
time, Mr. Eichler served as Assistant Corporate Treasurer of Syntex Corporation.

11
<PAGE>
ITEM 2. PROPERTIES

The following table sets forth the location, approximate square footage, and
use of each of the principal properties used by the Company. Except as where
indicated, all of the properties are leased or subleased by the Company. Such
leases expire at various times through January 2014. The annual base rent
expense for all facilities (including operating expenses, property taxes, and
assessments) is currently $22.3 million and is subject to annual adjustment.

<TABLE>
<CAPTION>
APPROXIMATE
SQUARE
LOCATION FOOTAGE USE
- ------------------------------------------------- ------------ -------------------------------------------------
<S> <C> <C>

North America:
345 Park Avenue 354,000 Research, product development, sales, marketing
San Jose, California and administration
USA

333 West San Carlos Avenue 105,970 Sales and administration
San Jose, California
USA

303 Almaden Boulevard 134,627 Sales, administration, research and product
San Jose, California development
USA

411 First Avenue South 144,038 Product development, customer support, and
Seattle, Washington administration
USA (1)

Europe:
Five Mid New Cultins 22,000 Sales, marketing, and administration
Edinburgh EH11 4DU
Scotland, United Kingdom
(Owned)

Japan:
Yebisu Garden Place Tower 20,237 Sales, marketing, and administration
4-20-3 Ebisu, Shibuya-ku
Tokyo 150 Japan

Asia, Pacific, and Latin America:
18-20 Orion Road 4,277 Sales, marketing, and administration
Lane Cove, NSW 2066
Australia
</TABLE>

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

(1) The lease on this facility expires in July 1998 and is expected to be
replaced by a lease on a new 253,000 square foot facility in Seattle.

12
<PAGE>
ITEM 3. LEGAL PROCEEDINGS

Quantel Limited, a U.K. corporation, filed and served on the Company in
January 1996 a complaint alleging that the Adobe Photoshop program infringed
five U.S. patents held by Quantel. The complaint was filed in the United States
District Court for the District of Delaware. On September 19, 1997, a jury in
federal court in Delaware found in favor of Adobe, finding that Adobe Photoshop
did not infringe the five patents held by Quantel Limited, and that the five
patents are invalid. Quantel has filed post-trial motions requesting a new
trial. Adobe is vigorously opposing the motions.

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

On April 17, 1997, a derivative action was filed in the Superior Court of
the State of California, County of Santa Clara, against the current members of
Adobe's Board of Directors and Paul Brainerd, a former member of the Board. The
suit was filed by a stockholder purporting to assert on behalf of the Company
claims for alleged breach of the Directors' fiduciary duty and mismanagement
related to the Company's acquisition of Frame in October 1995. The Court granted
Adobe's motion for dismissal of the suit, with leave to amend for the plaintiff.
In January 1998, the plaintiff filed an amended complaint making substantially
the same claims.

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

13
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

14
<PAGE>
PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on The Nasdaq National Stock Market
under the symbol "ADBE." On December 26, 1997, there were 2,084 holders of
record of the Company's common stock. Because many of such shares are held by
brokers and other institutions on behalf of stockholders, the Company is 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 the Company's common stock, and the cash dividends paid per share, for the
periods indicated.

<TABLE>
<CAPTION>
PRICE RANGE CASH
-------------------- DIVIDEND
HIGH LOW PER SHARE
--------- --------- -----------
<S> <C> <C> <C>
Fiscal 1996:
First Quarter......................... $ 74.25 $ 30.00 $ 0.05
Second Quarter........................ 45.13 30.75 0.05
Third Quarter......................... 37.88 28.50 0.05
Fourth Quarter........................ 44.13 31.50 0.05
Fiscal Year........................... 74.25 28.50 0.20
Fiscal 1997:
First Quarter......................... $ 44.13 $ 34.63 $ 0.05
Second Quarter........................ 49.00 32.50 0.05
Third Quarter......................... 45.25 34.00 0.05
Fourth Quarter........................ 53.13 39.75 0.05
Fiscal Year........................... 53.13 32.50 0.20
</TABLE>

The Company has paid cash dividends on its common stock each quarter since
the second quarter of 1988. In March 1997, the Company established the venture
stock dividend program under which the Company may, from time to time,
distribute as a dividend-in-kind shares of its equity holdings in investee
companies to Adobe stockholders. In 1997, the Company dividended one share of
Netscape Communications Corporation ("Netscape") common stock for each 100
shares of Adobe common stock held by stockholders of record on July 31, 1997. An
equivalent cash dividend was paid for holdings of less than 2,500 Adobe shares
and for fractional Netscape shares. Also, on December 1, 1997, the Company
dividended one share of Siebel Systems, Incorporated ("Siebel") common stock for
each 300 shares of Adobe common stock held by stockholders of record on October
31, 1997. An equivalent cash dividend was paid for holdings of less than 7,500
Adobe shares and for fractional Siebel shares. The declaration of future
dividends, whether in cash or in-kind, is within the discretion of the Board of
Directors of the Company and will depend upon business conditions, the Company's
results of operations, the financial condition of the Company, and other
factors.

15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

THE FOLLOWING SELECTED CONSOLIDATED FINANCIAL DATA (PRESENTED IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS AND EMPLOYEE DATA) ARE DERIVED FROM THE COMPANY'S
CONSOLIDATED FINANCIAL STATEMENTS. THIS DATA SHOULD BE READ IN CONJUNCTION WITH
THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO, AND WITH ITEM 7,
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.

<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOV. 28 NOV. 29 DEC. 1 NOV. 25 NOV. 26
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
Operations:
Revenue............................... $ 911,894 $ 786,563 $ 762,339 $ 675,617 $ 580,103
Merger transaction and restructuring
costs............................... -- 4,955 31,534 72,183 25,800
Income before income taxes............ 296,090 244,824 163,853 52,946 72,358
Net income (1)........................ 186,837 153,277 93,485 15,337 42,007
Net income per share (1).............. 2.52 2.04 1.26 0.22 0.62
Cash dividends declared per common
share (2)........................... 0.20 0.20 0.20 0.20 0.20
Financial position:
Cash and short-term investments....... 502,956 564,116 516,040 444,768 344,714
Working capital....................... 454,299 506,092 506,472 402,837 347,683
Total assets.......................... 940,071 1,001,393 872,827 710,000 597,696
Stockholders' equity.................. 715,424 706,514 698,417 514,315 457,216
Additional data:
Worldwide employees................... 2,654 2,222 2,322 2,055 2,500
</TABLE>

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

(1) In 1997, includes investment gains of $34.3 million, other non-recurring
gains of $0.6 million, and the write-off of $6.0 million of acquired
in-process research and development. In 1996, includes investment gains of
$68.9 million, the write-off of $21.3 million of acquired in-process
research and development, and restructuring charges related to divested
products of $5.0 million. In 1995, reflects restructuring charges of $31.5
million related to the acquisition of Frame and the write-off of $15.0
million of acquired in-process research and development. In 1994, reflects
restructuring charges of $72.2 million related to the acquisition of Aldus
Corporation ("Aldus") and the write-off of $15.5 million of acquired
in-process research and development. In 1993, reflects restructuring charges
of $25.8 million initiated by Frame and the write-off of $4.3 million of
acquired in-process research and development.

(2) Dividends prior to the acquisition of Frame on October 28, 1995 and Aldus on
August 31, 1994 have not been restated to reflect the effects of the
poolings of interest.

16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION (PRESENTED IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS AND
NOTES THERETO.

RESULTS OF OPERATIONS

OVERVIEW

Adobe Systems Incorporated ("Adobe" or the "Company") develops, markets, and
supports computer software products and technologies that enable users to
express and use information across all print and electronic media. The Company
licenses its technology to major computer, printing, and publishing suppliers,
and markets a line of application software products and type products for
authoring and editing visually rich documents. The Company distributes its
products through a network of original equipment manufacturer ("OEM") customers,
distributors and dealers, and value-added resellers ("VARs") and systems
integrators. The Company has operations in North America, Europe, Japan, and
Asia, Pacific, and Latin America.

In January 1996, the Company divested its prepress applications product
business to a newly established company, Luminous Corporation ("Luminous").
Under the terms of the agreement, Luminous continued to develop, market, and
distribute Adobe's prepress application products, and Adobe maintained ownership
of certain core technologies for Adobe prepress products. Revenue from the
prepress application business unit was approximately $10.4 million in fiscal
year 1995. In October 1996, the Company sold its remaining interest in Luminous
for approximately $6.8 million, which was recorded as a realized gain.

REVENUE

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Total revenue........................... $ 911.9 16% $ 786.6 3% $ 762.3
</TABLE>

Revenue growth in 1997 is attributable primarily to increased application
products shipments resulting from the release of new and enhanced products. In
1996, revenue grew due to increases in both licensing activity related to the
Company's PostScript interpreter and application products. Product unit volume
(as opposed to price) growth was the principal factor in the Company's revenue
growth in application products revenue in both 1997 and 1996. No customer
accounted for more than 10% of the Company's total revenue in 1997, 1996, or
1995.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Product group revenue--Licensing........ $ 196.2 -- $ 196.7 7% $ 183.4
Percentage of total revenue............. 21.5% 25.0% 24.1%
</TABLE>

17
<PAGE>
Licensing revenue is derived from shipments by OEM customers of products
containing the Adobe PostScript interpreter, Adobe PrintGear software, and the
Display PostScript system. Such Adobe PostScript products include: (1) standard
roman printers as well as printers that work with Japanese, Chinese, and Korean
languages; (2) imagesetters; and (3) workstations. Licensing revenue is also
derived from shipments of products containing the Configurable PostScript
Interpreter ("CPSI") by OEM customers. CPSI is a fully functional Adobe
PostScript interpreter that resides on the host computer system rather than in a
dedicated controller integrated into an output device. The configuration
flexibility of CPSI allows OEMs and software developers to create and market a
variety of Adobe PostScript products independently of controller hardware
development. Adobe PostScript products sell to the small office/home office
("SOHO") market, as well as the corporate enterprise and high-end imagesetter
markets. Adobe PrintGear software is targeted to the SOHO and home computer
market.

Royalty per unit is generally calculated as a percentage of the end user
list price of a printer, although some components of licensing revenue based on
a flat dollar amount per unit typically do not change with list prices.
Licensing revenue in 1997 was unchanged from 1996 licensing revenue. Increased
demand for CPSI, color capability, and Adobe PrintGear products was offset by a
number of factors affecting OEMs, primarily in the Japanese and Macintosh
markets. These factors included, but were not limited to, continuing weakness in
Macintosh-related printer sales and in Japanese personal computer and printer
markets, as well as a slow pace of new Adobe PostScript 3 and Adobe PrintGear
products being brought to market by OEMs.

The Company has seen year-to-year increases in the number of OEM customers
from which it is receiving licensing revenue and believes that such increases
are attributable to the continued acceptance of Adobe PostScript software, as
well as the diversification of the Company's customer base across multiple
platforms. During 1997, a number of OEM customers introduced new Adobe PrintGear
products that serve the SOHO market. Late in 1997, some OEM customers began to
transition from Adobe PostScript Level 2 products to Adobe PostScript 3
products. This transition is expected to continue through 1998. Also in the fall
of 1997, one of Adobe's largest PostScript customers, Hewlett-Packard Company
("HP"), introduced a non-Adobe clone version of PostScript in one family of
monochrome laser printers. The Company continues to be cautious about licensing
revenue in the short term because of the factors identified in the previous
paragraph and the anticipated loss of revenue from monochrome laser printer
products from HP.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Product group revenue--Application
products.............................. $ 715.7 21% $ 589.9 2% $ 578.9
Percentage of total revenue............. 78.5% 75.0% 75.9%
</TABLE>

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

Application products revenue growth in 1997 was primarily due to increased
demand for Adobe Photoshop, the Adobe Acrobat family of products, Adobe
PhotoDeluxe, Adobe Illustrator, and Adobe PageMaker. A new version of Adobe
Photoshop was released in late fiscal 1996, and new versions of Adobe PageMaker
and Adobe Illustrator were released in the first and second quarters of fiscal
1997, respectively. In addition, during the second half of 1997, a new version
of Adobe FrameMaker across multiple platforms and in multiple languages, the
Windows version of Adobe PhotoDeluxe 2.0, and various other products in
localized international versions were released. The 1996 revenue growth in this
area resulted from increased demand for Adobe Photoshop, Adobe PageMill, Adobe
SiteMill, Adobe Illustrator, and the Adobe Acrobat family of products, as well
as demand for new products. The increase was partially offset by decreased
demand for Adobe FrameMaker and Adobe PageMaker products. The

18
<PAGE>
Company released Adobe Photoshop 4.0 for both the Macintosh and Windows
platforms, and Adobe Acrobat 3.0 near the end of the fourth quarter of 1996. In
addition, Adobe PageMill and Adobe SiteMill, which were both released in late
1995, added revenue in 1996.

Overall, revenue from the Company's application products on the Windows
platform increased by 64% in 1997 over 1996, while application products revenue
from the Macintosh platform increased 1%. In 1997, the Windows and Macintosh
platforms accounted for 50.6% and 49.4%, respectively, of application products
revenue, excluding platform-independent and UNIX products, compared to 38.6% and
61.4%, respectively, in 1996. The Company expects this trend toward the Windows
platform to continue for the foreseeable future.

At the end of 1997, the Company experienced a decline in revenue from the
Japanese market, due to reductions in sell-through rates by the Company's
Japanese distributors and corresponding higher inventory levels. The Company
remains cautious about the economic conditions in Japan as well as the
fluctuating economic conditions in other Asian countries in the short term.

DIRECT COSTS

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Direct costs............................ $ 126.3 (11)% $ 141.1 8% $ 130.3
Percentage of total revenue............. 13.8% 17.9% 17.1%
</TABLE>

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

Gross margin (expressed as a percentage of revenue), in general, is affected
by the mix of licensing revenue versus application products revenue, as well as
the product mix within application products. Direct costs for application
products decreased during 1997 as the Company transitioned from distribution of
its products on disk to distribution on CD-ROM media, which has a lower cost per
unit. In addition, certain acquired technologies became fully amortized during
1997, and localization costs were lower in 1997 than in 1996. Localization costs
will vary from year-to-year depending on the timing of the release of new
versions of products. Direct costs were slightly higher in 1996 compared to 1995
as a percentage of revenue due to higher localization costs. Also, there was a
general decline in 1996 in Adobe FrameMaker revenue and associated gross
margins.

Gross margin in 1998 is expected to be approximately the same as in 1997 as
the cost savings from the continued shift to CD-ROM media is offset by higher
localization costs.

OPERATING EXPENSES

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Software development costs--Research and
development........................... $ 170.9 12% $ 152.9 10% $ 138.6
Percentage of total revenue............. 18.7% 19.4% 18.2%
</TABLE>

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

Research and development expense has increased over the last three years as
the Company has invested in new technologies, new product development, and the
infrastructure to support such activities. The increase reflects the expansion
of the Company's engineering staff and related costs required to support these
efforts. The Company continues to make significant investments in the
development of its

19
<PAGE>
Adobe PostScript and application software products, including those targeted for
the growing Internet market.

The Company believes that investments in research and development are
necessary to remain competitive in the marketplace and are directly related to
continued timely development of new and enhanced products. Accordingly, the
Company intends to continue recruiting and hiring experienced software
developers. While the Company expects that research and development expenditures
in 1998 will increase in absolute dollars, such expenditures are expected to
remain approximately the same as a percentage of revenue.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Software development costs--Amortization
of capitalized software development
costs................................. -- (100)% $ 2.5 (77 )% $ 11.1
Percentage of total revenue............. -- 0.3% 1.5%
</TABLE>

During 1997, software development expenditures on all products, after
reaching technological feasibility, were immaterial and therefore were expensed
as incurred. Certain software development expenditures on products developed by
Frame Technology Corporation ("Frame") and Aldus Corporation ("Aldus") prior to
their acquisition by Adobe were capitalized and were amortized over the lives of
the respective products. Amortization of capitalized software development costs
decreased in 1997 and 1996 as a result of achieving full amortization of all
Frame products by the end of 1996 and all Aldus products by the end of 1995.

The Company expects that software development expenditures on all products,
after achieving technological feasibility, will continue to be immaterial in the
future and therefore will be expensed as incurred.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Sales, marketing, and customer
support............................... $ 303.3 19% $ 255.0 5% $ 242.7
Percentage of total revenue............. 33.3% 32.4% 31.8%
</TABLE>

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

Increases in sales, marketing, and customer support expenses in both 1997
and 1996 are due to increased advertising and promotional expenditures for
upgrades of existing products and further development of customer and technical
support services to support a growing installed base of customers. In addition,
a portion of the 1997 increase relates to new product releases, increased
investment in the Windows market, and programs related to furthering worldwide
recognition of the Adobe brand.

For fiscal 1998, sales, marketing, and customer support expenditures are
expected to increase in absolute dollars and may increase as a percentage of
revenue.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
General and administrative.............. $ 75.4 21% $ 62.0 6% $ 58.5
Percentage of total revenue............. 8.3% 7.9% 7.7%
</TABLE>

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

20
<PAGE>
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 increased from 1997 compared to 1996 due
to higher information system costs, legal costs, and employee costs primarily
associated with a more comprehensive administrative infrastructure. The 1996
increase over 1995 resulted primarily from Frame integration costs in the first
quarter of 1996 and a higher headcount entering fiscal 1996. In addition, the
increase was driven by salary increases as well as higher systems and legal
costs in 1996.

The Company expects general and administrative spending in 1998 to be
slightly higher than 1997 levels in absolute dollars as the Company continues to
invest in an expanded and more comprehensive executive and administrative
infrastructure.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Write-off of acquired in-process
research and development.............. $ 6.0 (72)% $ 21.3 42% $ 15.0
Percentage of total revenue............. 0.7% 2.7% 2.0%
</TABLE>

During 1997, 1996, and 1995, the Company acquired seven software companies,
in separate transactions, and accounted for them using the purchase method. In
each of these transactions, a portion of the purchase price was allocated to
in-process research and development and was expensed at the time of the
acquisitions.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
----- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Merger transaction and restructuring
costs................................. -- (100)% $ 5.0 (84 )% $ 31.5
Percentage of total revenue............. -- 0.6% 4.1%
</TABLE>

Merger transaction and restructuring costs for 1996 were $5.0 million. This
represents charges of $5.7 million less the reversal of $0.7 million of excess
reserves related to restructuring costs recorded in prior years. The 1996
charges were recorded in connection with the disposition of two business units
previously owned by Frame.

During the fourth quarter of 1995, the Company recorded merger transaction
and restructuring costs primarily associated with the acquisition of Frame of
$32.5 million and reversed approximately $1.0 million of excess restructuring
reserves related to the acquisition of Aldus in 1994 as well as the remaining
accrued restructuring costs related to a 1993 restructuring implemented by
Frame.

At November 28, 1997, the remaining accrued restructuring balance of $8.4
million, included in other accrued expenses on the balance sheet, related to
lease and third-party contract termination payments, resulting from the planned
closure of duplicate offices in Europe and the United States. These payments are
expected to continue through the lease terms or negotiated early termination
date, if applicable.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ------------- ----- ------------- -----
<S> <C> <C> <C> <C> <C>
Other nonrecurring items................ $ (0.6) -- -- -- --
Percentage of total revenue............. (0.1)% -- --
</TABLE>

Nonrecurring items in 1997 included a gain of $2.4 million related to the
divestiture of a product line partially offset by a $1.8 million charge related
to the acquisition of an intellectual property.

NONOPERATING INCOME

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Investment gain (loss).................. $ 34.3 (50)% $ 68.9 9,223% $ (0.8)
Percentage of total revenue............. 3.8% 8.8% (0.1)%
</TABLE>

21
<PAGE>
Investment gain (loss) consists principally of realized gains or losses from
direct investments as well as mark-to-market valuation adjustments for Adobe
Ventures L.P. investments.

In 1997, the investment gain relates primarily to the Company's liquidation
of its investment in Netscape Communications Corporation ("Netscape") through
the distribution to its stockholders of 554,660 shares of Netscape as a
dividend-in-kind and the sale of its remaining Netscape shares. The 1996 gain
arose primarily as a result of realized gains of approximately $43.6 million and
approximately $6.8 million for the sale of a portion of the Company's investment
in Netscape and its entire investment in Luminous Corporation, respectively.
Also, a portion of one of the equity investments included in the Adobe Ventures
L.P. portfolio was sold for a gain of $13.9 million during 1996 and at November
29, 1996, the remaining portion of this investment was marked-to-market for an
unrealized gain of approximately $3.7 million. These and other gains were
partially offset by write-downs on certain other investments.

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Interest and other income............... $ 31.0 6% $ 29.2 (3)% $ 30.0
Percentage of total revenue............. 3.4% 3.7% 3.9%
</TABLE>

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

The increase in interest and other income in 1997 from 1996 is primarily due
to higher interest income in 1997 on higher average cash balances. The slight
decrease in 1996 from 1995 is primarily due to foreign exchange gains in 1995
compared to foreign exchange losses in 1996.

INCOME TAX PROVISION

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Income tax provision.................... $ 109.3 19% $ 91.5 30% $ 70.4
Percentage of total revenue............. 12.0% 11.6% 9.2%
Effective tax rate...................... 36.9% 37.4% 42.9%
</TABLE>

The Company's effective tax rate decreased in 1997 from 1996 primarily due
to lower nondeductible charges for the write-off of acquired in-process research
and development and higher tax-exempt income. The 1996 tax rate decreased
significantly from 1995 primarily as a result of lower nondeductible charges,
including merger costs, goodwill, and the write-off of acquired in-process
research and development. An analysis of the differences between the statutory
and effective income tax rates is provided in Note 7 of Notes to Consolidated
Financial Statements.

The Company expects that the effective tax rate for fiscal 1998 will be
between 37% and 38% due to lower tax-exempt interest income as a result of cash
requirements for the Company's stock repurchase programs.

NET INCOME AND NET INCOME PER SHARE

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net income.............................. $ 186.8 22% $ 153.3 64% $ 93.5
Percentage of total revenue............. 20.5% 19.5% 12.3%
Net income per share.................... $ 2.52 24% $ 2.04 62% $ 1.26
Weighted average shares (in
thousands)............................ 74,132 (1)% 75,064 1% 74,253
</TABLE>

22
<PAGE>
Net income in each of the three years included several one-time charges, and
in 1997 and 1996, significant investment gains that would not normally be
included in the Company's operating results. A reconciliation of the reported
results of operations to the results of operations excluding these one-time
charges for each of the years follows:
<TABLE>
<CAPTION>
1997
-----------------------------------------------
<S> <C> <C> <C> <C>
INCOME
BEFORE INCOME NET
INCOME TAX NET INCOME
TAXES PROVISION INCOME PER SHARE
---------- ---------- ---------- -----------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Reported results of operations.................................... $ 296,090 $ 109,253 $ 186,837 $ 2.52
Write-off of acquired in-process research and development costs... 5,969 -- 5,969 0.08
Other nonrecurring items.......................................... (590) (218) (372) --
Net investment gain............................................... (34,290) (11,255) (23,035) (0.31)
---------- ---------- ---------- -----------
Results of operations excluding one-time charges (gains).......... $ 267,179 $ 97,780 $ 169,399 $ 2.29
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------------------------------
<S> <C> <C> <C> <C>
INCOME
BEFORE INCOME NET
INCOME TAX NET INCOME
TAXES PROVISION INCOME PER SHARE
---------- ---------- ---------- -----------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Reported results of operations.................................... $ 244,824 $ 91,547 $ 153,277 $ 2.04
Write-off of acquired in-process research and development costs... 21,251 1,837 19,414 0.26
Restructuring costs............................................... 4,955 1,505 3,450 0.05
Other one-time charges............................................ 2,917 886 2,031 0.03
Net investment gain............................................... (68,875) (18,873) (50,002) (0.67)
---------- ---------- ---------- -----------
Results of operations excluding one-time charges (gains).......... $ 205,072 $ 76,902 $ 128,170 $ 1.71
---------- ---------- ---------- -----------
---------- ---------- ---------- -----------
</TABLE>
<TABLE>
<CAPTION>
1995
------------------------------------------------
<S> <C> <C> <C> <C>
INCOME
BEFORE INCOME NET
INCOME TAX NET INCOME
TAXES PROVISION INCOME PER SHARE
---------- ----------- ---------- -----------

<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Reported results of operations..................................... $ 163,853 $ 70,368 $ 93,485 $ 1.26
Write-off of acquired in-process research and development.......... 14,983 -- 14,983 0.20
Acquisition of Frame:
Merger transaction costs......................................... 11,399 -- 11,399 0.15
Restructuring costs.............................................. 20,135 6,086 14,049 0.19
Other one-time charges............................................. 3,160 1,484 1,676 0.02
Effect of fourth quarter antidilutive common stock equivalents..... -- -- -- (0.02)
---------- ----------- ---------- -----------
Results of operations excluding one-time charges................... $ 213,530 $ 77,938 $ 135,592 $ 1.80
---------- ----------- ---------- -----------
---------- ----------- ---------- -----------
</TABLE>

FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

The Company believes that in the future its results of operations could be
affected by various factors, such as delays in shipment of the Company's new
products and major new versions of existing products,

23
<PAGE>
market acceptance of new products and upgrades, continuing weakness in demand
for Macintosh application software and Macintosh-related printers, renegotiation
of royalty arrangements, growth in worldwide personal computer and printer sales
and sales price adjustments, consolidation in the OEM printer business, industry
transitions to new business and information delivery models, ongoing weakness in
the Japanese and other Asian economies, and adverse changes in general economic
conditions in any of the countries in which the Company does business.

The Company's ability to develop and market products, including upgrades of
current products that successfully adapt to changing customer needs, may also
have an impact on the results of operations. The Company's ability to extend its
core technologies into new applications and to anticipate or respond to
technological changes could affect its ability to develop these products. A
portion of the Company's future revenue will come from these products. Delays in
product introductions could have an adverse effect on the Company's revenue,
earnings, or stock price. The Company cannot determine the ultimate effect that
these new products or upgrades will have on its revenue or results of
operations.

Although the Company generally offers its application products on Macintosh,
Windows, and UNIX platforms, a majority of the overall revenue from these
products prior to 1997 has been for the Macintosh platform, particularly for the
higher end Macintosh computers. In 1997, Windows-based application revenue
exceeded that for the Macintosh platform for the first time. If there is a
continuing slowdown of customer purchases in the higher end Macintosh market, or
if the Company is unable to increase its sales to Windows customers, the
Company's operating results could be materially adversely affected. Also, if the
Company broadens its customer base to achieve greater penetration in the
corporate business and consumer markets, the Company may need to adapt its
application software distribution channels. The Company could experience
decreases in average selling prices and some transitions in its distribution
channel which could materially adversely affect its operating results. In
addition, to the extent that there is a slowdown of customer purchases of
personal computers in general, the Company's operating results could be
materially adversely affected.

The Company's OEM customers on occasion seek to renegotiate their royalty
arrangements. The Company evaluates these requests on a case-by-case basis. If
an agreement is not reached, a customer may decide to pursue other options,
which could result in lower licensing revenue for the Company. In the fall of
1997, HP began to ship non-Adobe clone software in some HP LaserJet printers,
resulting in somewhat lower licensing revenue to the Company, although the
impact was minimal. The Company expects a more significant impact on its 1998
licensing revenue, although it continues to work with HP printer operations to
incorporate Adobe PostScript and other technologies in other HP products.

During late 1997, the Company experienced a decline in both application and
licensing revenue from the Japanese market, due to a weak Japanese computer
market and general economic conditions in Japan. In addition, at the end of
fiscal 1997, inventory levels for application products at the Company's Japanese
distributors remained higher than what the Company considers normal. The Company
expects these adverse economic conditions to continue in the short term, and
they may adversely affect the Company's revenue and earnings. Although there are
also adverse conditions in other Asian economies, the countries affected
represent a much smaller portion of the Company's revenue and thus have less
impact on the Company's operational results.

Through its acquisitions, the Company has experienced significant growth.
The Company's ability to effectively manage its growth will require it to
continue to improve its operational and financial controls and information
management systems, and to attract, retain, motivate, and manage employees
effectively. The failure of the Company to effectively manage growth and
transition in multiple areas of its business could have a material adverse
effect on its results of operations.

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 communications over the Internet. As is typical in the
case of a new and evolving industry, demand and market acceptance for

24
<PAGE>
recently introduced products and services are subject to a high level of
uncertainty. The software industry addressing the authoring for and
communications over the Internet is young and has few proven products. In
addition, new models for licensing software will be needed to accommodate new
information delivery practices. Moreover, critical issues concerning the
commercial use of the Internet (including security, reliability, ease of use and
access, cost, and quality of service) remain unresolved and may affect the
growth of Internet use, together with the software standards and electronic
media employed in such markets.

The Company derives a significant portion of its revenue and operating
income from its subsidiaries located in Europe, Japan, and Asia, Pacific, and
Latin America. The Company generally experiences lower revenue from its European
operations in the third quarter because many customers reduce their business
activities in the summer months. While most of the revenue of the European
subsidiaries is denominated in U.S. dollars, the majority of revenue derived
from Japan is denominated in yen and the majority of all subsidiaries' operating
expenses are denominated in their local currencies. As a result, the Company's
operating results are subject to fluctuations in foreign currency exchange
rates. To date, the accounting impact of such fluctuations has been
insignificant. The Company's hedging policy attempts to mitigate some of these
risks, based on management's best judgment of the appropriate trade-offs among
risk, opportunity, and expense. The Company has established a hedging program as
described below in "Derivatives and Financial Instruments." The program is used
to hedge its exposure to foreign currency exchange rate fluctuations, primarily
of the Japanese yen. The Company's hedging program is not comprehensive, and
there can be no assurance that the program will offset more than a portion of
the adverse financial impact resulting from unfavorable movement in foreign
currency exchange rates.

Due to the factors noted above, the Company's future earnings and stock
price may be subject to significant volatility, particularly on a quarterly
basis. Any shortfall in revenue or earnings from levels expected by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's common stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in the fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's common stock. Finally, the Company participates in a highly
dynamic industry. In addition to factors specific to the Company, changes in
analysts' earnings estimates for the Company or its industry and factors
affecting the corporate environment or the securities markets in general will
often result in significant volatility of the Company's common stock price.

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the disclosure, but requires the
Company to display an amount representing total comprehensive income for the
period in its financial statements. The Company will be required to implement
SFAS No. 130 for its fiscal year 1999.

Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the manner in which public companies

25
<PAGE>
report information about operating segments in annual and interim financial
statements. The Company is currently evaluating the operating segment
information that it will be required to report. The Company will be required to
implement SFAS No. 131 for its fiscal year 1999.

In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997 and will require the Company to modify
certain aspects of its revenue recognition policies. The Company does not expect
the adoption of SOP 97-2 to have a material impact on the Company's consolidated
results of operations.

"YEAR 2000" ISSUES

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The "Year 2000" problem
is pervasive and complex, as many computer systems will be affected in some way
by the rollover of the two-digit year value to 00. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. The "Year 2000" issue creates risk for the Company from unforeseen
problems in its own computer systems and from third parties with whom the
Company deals on financial transactions worldwide. Failures of the Company's
and/or third parties' computer systems could have a material impact on the
Company's ability to conduct its business.

The Company's financial information systems include an SAP system recently
implemented in the United States and Japan and an Oracle system in Europe that
will be upgraded to the most recent version in the first quarter of fiscal 1998.
These systems are believed to be "Year 2000" compliant. The Company is analyzing
its remaining computer systems to identify any potential "Year 2000" issues and
will take appropriate corrective action based on the results of such analysis.
Management has not yet determined the cost related to achieving "Year 2000"
compliance.

In addition, the "Year 2000" issue could affect the products that the
Company sells. The Company believes that the current versions of its products
are "Year 2000" compliant. The Company's products are subject to ongoing
analysis and review.

FINANCIAL CONDITION

CASH, CASH EQUIVALENTS, AND SHORT-TERM INVESTMENTS

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents, and short-term
investments........................... $ 503.0 (11)% $ 564.1 9% $ 516.0
</TABLE>

The Company's cash, cash equivalents, and short-term investments decreased
in 1997 from 1996 primarily as a result of cash expended for the Company's stock
repurchase program. These expenditures were partially offset by cash generated
from operations.

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

NONCURRENT LIABILITIES AND STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Noncurrent liabilities and stockholders'
equity................................ $ 715.4 (8)% $ 781.7 12% $ 698.4
</TABLE>

26
<PAGE>
Included above is stockholders' equity, and at November 29, 1996, deferred
income taxes of $3.8 million related to unrealized gains and losses on equity
investments, and obligations for put warrants of $71.3 million. The Company has
no long-term debt. Stockholders' equity as of November 28, 1997 was $715.4
million, compared to $706.5 million as of November 29, 1996 and $698.4 million
as of December 1, 1995. The year-to-year increases in stockholders' equity
include issuances of common stock under the Company's stock option and employee
stock purchase plans and, in 1997, the reclassification of the put warrant
obligation back to stockholders' equity. In 1997 and 1996, the increase in
stockholders' equity was substantially offset by the repurchase of stock.

In September 1997, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 15,000,000 shares of the
Company's stock over the next two years. Under this program, as well as under
previously authorized programs, the Company repurchased 6,150,656 shares and
3,321,500 shares in 1997 and 1996, respectively. The Company may continue to
directly repurchase common shares and arrange options to purchase common shares,
depending on market conditions and the Company's cash requirements.

The Company has paid cash dividends on its common stock each quarter since
the second quarter of 1988. During 1997, the Company paid cash dividends of
$0.20 per common share. In addition, during 1997, the Company distributed its
holdings in Netscape Communications Corporation and Siebel Systems, Inc. to the
Company's stockholders as a dividend-in-kind. The declaration of future
dividends, whether in cash or in-kind, is within the discretion of the Company's
Board of Directors and will depend upon business conditions, the Company's
results of operations and financial condition, and other factors.

WORKING CAPITAL

<TABLE>
<CAPTION>
1997 CHANGE 1996 CHANGE 1995
--------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Working capital......................... $ 454.3 (10)% $ 506.1 -- $ 506.5
</TABLE>

The decrease in working capital in fiscal 1997 from 1996 is primarily due to
lower cash and short-term investment balances as a result of the Company's stock
repurchase program. Cash flow provided by operations during fiscal 1997 was
$208.6 million compared to $198.1 million in fiscal 1996.

Expenditures for property and equipment in 1997 totaled $33.9 million. Such
expenditures are expected to continue, including expenditures for computer
systems for research and development, sales and marketing, product support, and
administrative staff. In the future, additional cash may be used to acquire
software products or technologies complementary to the Company's business. Net
cash used by financing activities during 1997 was $219.2 million, or $117.7
million greater than in fiscal 1996, primarily resulting from the repurchase of
common stock and payment of cash dividends partially offset by issuance of
common stock under employee stock plans.

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

DERIVATIVES AND FINANCIAL INSTRUMENTS
(ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK)

FOREIGN CURRENCY HEDGING INSTRUMENTS

The Company transacts business in various foreign currencies, primarily in
certain European countries and Japan. Accordingly, the Company is subject to
exposure from adverse movements in foreign currency exchange rates. This
exposure is primarily related to yen denominated sales in Japan and local
currency denominated operating expenses in Europe, where the Company sells
primarily in U.S. dollars.

27
<PAGE>
The Company's Japanese operating expenses are in yen, which mitigates the
exposure related to yen denominated sales in Japan. In addition, the Company
hedges firmly committed transactions using primarily forward contracts with
maturities of less than three months. At November 28, 1997, the Company held
$1.9 million of aggregate foreign currency forward exchange contracts for the
sale of Japanese yen, all of which expire at various times through February 25,
1998. The unrealized gains and losses associated with these contracts are not
material.

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

The Company does not use derivative financial instruments for speculative
trading purposes, nor does the Company hedge its foreign currency exposure in a
manner that entirely offsets the effects of changes in foreign exchange rates.

The Company currently does not use financial instruments to hedge local
currency denominated operating expenses in Europe. Instead, the Company believes
that a natural hedge exists, in that local currency revenue from product
upgrades substantially offsets the local currency denominated operating
expenses. The Company assesses the need to utilize financial instruments to
hedge European currency exposure on an ongoing basis.

The Company regularly reviews its hedging program and may as part of this
review determine at any time to change its hedging program.

FIXED INCOME INVESTMENTS

At November 28, 1997, the Company had an investment portfolio of fixed
income securities, including those classified as cash equivalents, of $523.9
million. These securities are subject to interest rate fluctuations. An increase
in interest rates could affect the market value of the Company's fixed income
securities.

A sensitivity analysis was performed on the Company's investment portfolio
as of November 28, 1997. This sensitivity analysis is based on a modeling
technique that measures the hypothetical market value changes that would result
from a parallel shift in the yield curve of plus 50, plus 100, or plus 150 basis
points over a 12-month time horizon. The market value changes for a 50, 100, or
150 basis point increase in short-term treasury security yields were not
material due to the limited duration of the Company's portfolio.

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

PUT WARRANTS AND CALL OPTIONS

To facilitate the Company's stock repurchase program, the Company sold put
warrants in a series of private placements in 1997 and 1996. Each warrant
entitled the holder to sell one share of Adobe's

28
<PAGE>
common stock to the Company at a specified price. Approximately 4.6 million and
4.5 million put warrants were written in 1997 and 1996, respectively. At
November 28, 1997, approximately 2.9 million put warrants were outstanding that
expire on various dates through May 1998 that have exercise prices ranging from
$37.07 to $47.98 per share, with an average exercise price of $43.09 per share.
In addition, in 1997 and 1996, the Company purchased call options from an
independent third party that entitled the Company to buy 2.3 million and 4.5
million shares, respectively, of its common stock. At November 28, 1997,
approximately 0.5 million call options were outstanding that expire on various
dates through April 1998 and have exercise prices ranging from $37.32 to $46.86
per share, with an average exercise price of $41.32 per share. Under these
arrangements, the Company, at its option, can settle with physical delivery or
net shares equal to the difference between the exercise price and the market
value at the date of exercise.

COMMITMENTS

The Company's principal commitments as of November 28, 1997 consisted of
obligations under operating leases, a real estate development agreement, and
various service agreements with a related party.

During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility. In August 1996, the construction was completed and the
operating lease commenced. The Company will have the option to purchase the
facility at the end of the lease term, in October 2001. In the event the Company
chooses not to exercise this option, the Company is obligated to arrange for the
sale of the facility to an unrelated party and is required to pay the lessor any
difference between the net sales proceeds and the lessor's net investment in the
facility, in an amount not to exceed that which would preclude classification of
the lease as an operating lease, approximately $57.3 million. During the
construction period, the Company was required to pledge certain interest-bearing
instruments to the lessor as collateral to secure the performance of its
obligations under the lease. As of November 28, 1997, the Company's deposits
under this agreement totaled approximately $66.7 million in United States
government treasury notes and money market mutual funds. These deposits are
included in "Other assets" in the Consolidated Balance Sheets.

In 1996, the Company exercised its option under the development agreement to
begin a second phase of development for an additional office facility. In August
1996, the Company entered into a construction agreement and an operating lease
agreement for this facility. The operating lease will commence on completion of
construction in 1998. The Company will have the option to purchase the facility
at the end of the lease term (five years after occupancy). In the event the
Company chooses not to exercise this option, the Company is obligated to arrange
for the sale of the facility to an unrelated party and is required to pay the
lessor any difference between the net sales proceeds and the lessor's net
investment in the facility, in an amount not to exceed that which would preclude
classification of the lease as an operating lease, approximately $64.3 million.
The Company also is required, periodically during the construction period, to
deposit funds with the lessor as an interest-bearing security deposit to secure
the performance of its obligations under the lease. During 1997, the Company
deposited approximately $33.0 million and as of November 28, 1997, the Company's
deposits under this agreement totaled approximately $36.3 million. These
deposits are included in "Other assets" in the Consolidated Balance Sheets.

At November 28, 1997, the Company held a 13% equity interest in McQueen
International Limited ("McQueen") and accounted for the investment using the
cost method. During 1994, the Company entered into various agreements with
McQueen, whereby the Company contracted with McQueen to perform product
localization and technical support functions and to provide printing, assembly,
and warehousing services. Effective December 31, 1997, McQueen was acquired by
Sykes Enterprises, Incorporated ("Sykes"), a publicly traded company. In
connection with the acquisition, the Company exchanged its shares of McQueen for
486,676 shares of Sykes' restricted common stock and will record a gain on the
exchange of $6.7 million in fiscal 1998. The Company's equity interest in Sykes
is less than 2%. The Company expects that McQueen will continue to provide
services to the Company for the foreseeable future.

29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

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

SUPPLEMENTARY DATA

THE FOLLOWING TABLES (PRESENTED IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) SET
FORTH QUARTERLY SUPPLEMENTARY DATA FOR EACH OF THE YEARS IN THE TWO-YEAR PERIOD
ENDED NOVEMBER 28, 1997.

<TABLE>
<CAPTION>
1997
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED YEAR
---------------------------------------------- ENDED
FEB. 28 MAY 30 AUG. 29 NOV. 28 NOV. 28
---------- ---------- ---------- ---------- ----------
Revenue.............................................. $ 226,459 $ 228,264 $ 230,039 $ 227,132 $ 911,894
Gross profit......................................... 192,170 195,606 197,350 200,497 785,623
Income before income taxes........................... 73,167 63,204 85,528 74,191 296,090
Net income........................................... 46,484 40,106 53,428 46,819 186,837
Net income per share................................. 0.63 0.54 0.72 0.64 2.52
Shares used in computing net income
per share.......................................... 73,939 74,416 74,528 73,646 74,132
</TABLE>

<TABLE>
<CAPTION>
1996
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
QUARTER ENDED YEAR
---------------------------------------------- ENDED
MAR. 1 MAY 31 AUG. 30 NOV. 29 NOV. 29
---------- ---------- ---------- ---------- ----------
Revenue.............................................. $ 193,642 $ 204,337 $ 180,909 $ 207,675 $ 786,563
Gross profit......................................... 158,434 168,259 147,292 171,431 645,416
Income before income taxes........................... 53,861 39,787 48,686 102,490 244,824
Net income........................................... 33,663 22,009 29,847 67,758 153,277
Net income per share................................. 0.44 0.29 0.40 0.92 2.04
Shares used in computing net income
per share.......................................... 76,394 75,638 74,309 73,913 75,064
</TABLE>

30
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

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

31
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

Information with respect to Directors may be found in the section captioned
"Election of Directors" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on April 8, 1998. Such information is incorporated herein by
reference.

EXECUTIVE OFFICERS

Information with respect to executive officers may be found in Item 1.
Business.

32
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION

Information with respect to this item may be found in the section captioned
"Executive Compensation" appearing in the definitive Proxy Statement to be
delivered to stockholders in connection with the Annual Meeting of Stockholders
to be held on April 8, 1998. Such information is incorporated herein by
reference.

33
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information with respect to this item may be found in the section captioned
"Security Ownership of Certain Beneficial Owners and Management" appearing in
the definitive Proxy Statement to be delivered to stockholders in connection
with the Annual Meeting of Stockholders to be held April 8, 1998. Such
information is incorporated herein by reference.

34
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

35
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULE, AND REPORTS ON FORM 8-K

(a) Documents filed as part of this report

<TABLE>
<C> <S> <C>
1. Financial statements

-
Management's Report

-
Independent Auditors' Report

-
Consolidated Balance Sheets
November 28, 1997 and November 29, 1996

-
Consolidated Statements of Income
Years Ended November 28, 1997, November 29, 1996, and December 1, 1995

-
Consolidated Statements of Stockholders' Equity
Years Ended November 28, 1997, November 29, 1996, and December 1, 1995

-
Consolidated Statements of Cash Flows
Years Ended November 28, 1997, November 29, 1996, and December 1, 1995

-
Notes to Consolidated Financial Statements

2. Financial statement schedule

-
Schedule II--Valuation and Qualifying Accounts

3. Exhibits
</TABLE>

(a) Index to Exhibits

<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- ---------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
2.1 Agreement and Plan of Merger effective 5/30/97 (by virtue 10-Q 05/30/97 2.1
of a reincorporation), by and between Adobe Systems
Incorporated, a California Corporation and Adobe Systems
(Delaware) Incorporated, a Delaware corporation.
3.1 The Registrant's (as successor in-interest to Adobe 10-Q 05/30/97 3.1
Systems (Delaware) Incorporated by virtue of a
reincorporation effective 5/30/97) Certificate of
Incorporation, as filed with the Secretary of State of the
State of Delaware on 5/9/97.
3.2.10 Amended and Restated Bylaws as currently in effect. X
3.3 Certificate of Designation of the Series A Preferred Stock X
4.1 Second Amended and Restated Rights Agreement between the 8-K 08/29/97 4
Company and Harris Trust Company of California
10.1.6 1984 Stock Option Plan, as amended* 10-Q 07/02/93 10.1.6
10.1.7 1994 Stock Option Plan* 10-Q 05/27/94 10.1.7
</TABLE>

36
<PAGE>
<TABLE>
<CAPTION>
INCORPORATED BY REFERENCE
EXHIBIT ------------------------------- FILED
NUMBER EXHIBIT DESCRIPTION FORM DATE NUMBER HEREWITH
- --------- ---------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
10.17.1 License Agreement Restatement between the Company and 10-K 11/30/88 10.17.1
Apple Computer, Inc., dated April 1, 1987 (confidential
treatment granted)
10.17.2 Amendment No. 1 to the License Agreement Restatement 10-K 11/30/90 10.17.2
between the Company and Apple Computer, Inc., dated
November 27, 1990 (confidential treatment granted)
10.21.3 Revised Bonus Plan* 10-Q 02/28/97 10.21.3
10.24.1 1994 Performance and Restricted Stock Plan* S-8 07/27/94 10.1
10.25.0 Form of Indemnity Agreement* 10-K 11/30/90 10.17.2
10.25.1 Form of Indemnity Agreement* 10-Q 05/30/97 10.25.1
10.32 Sublease of the Land and Lease of the Improvements By and 10-K 11/25/94 10.32
Between Sumitomo Bank Leasing and Finance Inc. and Adobe
Systems Incorporated (Phase 1)
10.36 1996 Outside Directors Stock Option Plan* 10-Q 05/31/96 10.36
10.37 Confidential Resignation Agreement* 10-Q 05/31/96 10.37
10.38 Sublease of the Land and Lease of the Improvements By and 10-Q 08/30/96 10.38
Between Sumitomo Bank Leasing and Finance Inc. and Adobe
Systems Incorporated (Phase 2)
10.39 1997 Employee Stock Purchase Plan, as amended* S-8 05/30/97 10.39
10.40 1994 Stock Option Plan Amendment, as amended* S-8 05/30/97 10.40
10.41 Amended and Restated Limited Partnership Agreement of 10-Q 05/30/97 10.41
Adobe Incentive Partners, L.P.*
10.42 Amended and Restated Limited Partnership Agreement of X
Adobe Incentive Partners, L.P.*
10.43 Resignation Agreement* X
10.44 Forms of Retention Agreement* X
11 Computation of Earnings Per Common Share X
21 Subsidiaries of the Registrant X
23 Consent of Independent Auditors X
27 Financial Data Schedule X
</TABLE>

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

*Compensatory plan or arrangement

(b)Reports on Form 8-K

No reports on Form 8-K were filed in the quarter ended November 28, 1997.

37
<PAGE>
SIGNATURES

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

<TABLE>
<S> <C> <C>
ADOBE SYSTEMS INCORPORATED

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 17th day of February, 1998.

<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------ --------------------------

<C> <S>
/s/ JOHN E. WARNOCK Chairman of the Board of
- ------------------------------ Directors
John E. Warnock and Chief Executive
Officer
(Principal Executive
Officer)

/s/ CHARLES M. GESCHKE Chairman of the Board of
- ------------------------------ Directors
Charles M. Geschke and President

/s/ WILLIAM R. HAMBRECHT Director
- ------------------------------
William R. Hambrecht

/s/ ROBERT SEDGEWICK Director
- ------------------------------
Robert Sedgewick

/s/ DELBERT W. YOCAM Director
- ------------------------------
Delbert W. Yocam

/s/ WILLIAM J. SPENCER Director
- ------------------------------
William J. Spencer

/s/ GENE P. CARTER Director
- ------------------------------
Gene P. Carter

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

/s/ DAVID P. EICHLER Vice President, Finance
- ------------------------------ (Principal Accounting
David P. Eichler Officer)
</TABLE>

38
<PAGE>
SUMMARY OF TRADEMARKS

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

Adobe
Acrobat
After Effects
Aldus
Frame
FrameMaker
Illustrator
PageMaker
PageMill
PhotoDeluxe
Photoshop
PostScript
Premiere
PrintGear
SiteMill
Type Library

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

39
<PAGE>
FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
FINANCIAL STATEMENT DESCRIPTION PAGE
- ------------------------------------------------------------------------------------------------------------------ -----
<C> <S> <C>
- Management's Report.................................................................................... 41
- Independent Auditors' Report........................................................................... 42
- Consolidated Balance Sheets
November 28, 1997 and November 29, 1996.............................................................. 43
- Consolidated Statements of Income
Years Ended November 28, 1997, November 29, 1996, and December 1, 1995............................... 44
- Consolidated Statements of Stockholders' Equity
Years Ended November 28, 1997, November 29, 1996, and December 1, 1995............................... 45
- Consolidated Statements of Cash Flows
Years Ended November 28, 1997, November 29, 1996, and December 1, 1995............................... 48
- Notes to Consolidated Financial Statements............................................................. 49
</TABLE>

40
<PAGE>
MANAGEMENT'S REPORT

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

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

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

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

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

December 16, 1997

41
<PAGE>
INDEPENDENT AUDITORS' REPORT

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

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Adobe
Systems Incorporated and subsidiaries as of November 28, 1997 and November 29,
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended November 28, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.

KPMG Peat Marwick LLP
San Jose, California
December 16, 1997

42
<PAGE>
ADOBE SYSTEMS INCORPORATED

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
NOVEMBER 28 NOVEMBER 29
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................... $ 267,576 $ 110,745
Short-term investments.............................................................. 235,380 453,371
Receivables, net of allowances for doubtful accounts of $3,634 and $5,196,
respectively...................................................................... 130,974 115,823
Other current assets................................................................ 45,016 45,875
------------ ------------
Total current assets.............................................................. 678,946 725,814
Property and equipment................................................................ 80,978 80,231
Deferred income taxes................................................................. 16,999 --
Other assets.......................................................................... 163,148 195,348
------------ ------------
$ 940,071 $1,001,393
------------ ------------
------------ ------------

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade and other payables............................................................ $ 57,857 $ 43,056
Accrued expenses.................................................................... 102,741 93,919
Income taxes payable................................................................ 48,343 67,210
Deferred revenue.................................................................... 15,706 15,537
------------ ------------
Total current liabilities......................................................... 224,647 219,722
------------ ------------
Deferred income taxes................................................................. -- 3,809
Put warrants.......................................................................... -- 71,348

Stockholders' equity:
Preferred stock, $0.0001 par value; 2,000 shares authorized; none issued............ -- --
Common stock, $0.0001 par value;
Authorized: 200,000 shares;
Issued: 73,941 and 71,476 shares in 1997 and 1996, respectively;
Outstanding: 68,765 and 71,476 shares in 1997 and 1996, respectively.............. 7 7
Additional paid-in capital.......................................................... 291,274 148,595
Retained earnings................................................................... 663,861 529,546
Unrealized gains on investments, net................................................ 3,590 33,514
Cumulative translation adjustment................................................... (4,620) (5,148)
Treasury stock, at cost (5,176 shares in 1997)...................................... (238,688) --
------------ ------------
Total stockholders' equity........................................................ 715,424 706,514
------------ ------------
$ 940,071 $1,001,393
------------ ------------
------------ ------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

43
<PAGE>
ADOBE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF INCOME

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
<S> <C> <C> <C>
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------ ------------ -----------
Revenue:
Licensing............................................................. $ 196,230 $ 196,693 $ 183,437
Application products.................................................. 715,664 589,870 578,902
------------ ------------ -----------
Total revenue........................................................... 911,894 786,563 762,339
Direct costs............................................................ 126,271 141,147 130,301
------------ ------------ -----------
Gross profit............................................................ 785,623 645,416 632,038
------------ ------------ -----------
Operating expenses:
Software development costs:
Research and development............................................ 170,862 152,914 138,616
Amortization of capitalized software development costs.............. -- 2,504 11,095
Sales, marketing, and customer support................................ 303,268 254,972 242,713
General and administrative............................................ 75,358 62,034 58,526
Write-off of acquired in-process research and development............. 5,969 21,251 14,983
Merger transaction and restructuring costs............................ -- 4,955 31,534
Other nonrecurring items.............................................. (590) -- --
------------ ------------ -----------
Total operating expenses................................................ 554,867 498,630 497,467
------------ ------------ -----------
Operating income........................................................ 230,756 146,786 134,571

Nonoperating income:
Investment gain (loss)................................................ 34,290 68,875 (755)
Interest and other income............................................. 31,044 29,163 30,037
------------ ------------ -----------
Total nonoperating income............................................... 65,334 98,038 29,282
------------ ------------ -----------
Income before income taxes.............................................. 296,090 244,824 163,853
Income tax provision.................................................... 109,253 91,547 70,368
------------ ------------ -----------
Net income.............................................................. $ 186,837 $ 153,277 $ 93,485
------------ ------------ -----------
------------ ------------ -----------

Net income per share.................................................... $ 2.52 $ 2.04 $ 1.26
------------ ------------ -----------
------------ ------------ -----------

Shares used in computing net income per share........................... 74,132 75,064 74,253
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

44
<PAGE>
ADOBE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAINS ON CUMULATIVE TREASURY STOCK
-------------- PAID-IN RETAINED INVESTMENTS, TRANSLATION ---------------
SHARES AMOUNT CAPITAL EARNINGS NET ADJUSTMENT SHARES AMOUNT TOTAL
------ ------ ---------- -------- ------------ ---------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
November 25, 1994...... 69,390 $ 7 $204,026 $315,611 $(1,277) $(4,052) -- $-- $514,315
Stock issued under
employee stock and
stock option plans..... 3,914 -- 70,367 -- -- -- -- -- 70,367
Tax benefit from employee
stock option plans..... -- -- 32,445 -- -- -- -- -- 32,445
Stock compensation
expense................ -- -- 4,433 -- -- -- -- -- 4,433
Adjustment for change in
Frame Technology
Corporation fiscal
year-end............... (10) -- (171) (1,784) -- -- -- -- (1,955)
Dividends declared....... -- -- -- (13,177) -- -- -- -- (13,177)
Subchapter S
distributions of
Mastersoft............. -- -- -- (3,342) -- -- -- -- (3,342)
Repurchase of common
stock.................. (460) -- (17,849) -- -- -- -- -- (17,849)
Unrealized gains on
investments, net....... -- -- -- -- 20,108 -- -- -- 20,108
Cumulative translation
adjustment............. -- -- -- -- -- (413) -- -- (413)
Net income............... -- -- -- 93,485 -- -- -- -- 93,485
------ ------ ---------- -------- ------------ ---------- ------ ------ --------
Balances as of
December 1, 1995....... 72,834 $ 7 $293,251 $390,793 $18,831 $(4,465) -- $-- $698,417
------ ------ ---------- -------- ------------ ---------- ------ ------ --------
(Continued)
</TABLE>

See accompanying Notes to Consolidated Financial Statements

45
<PAGE>
ADOBE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAINS ON CUMULATIVE TREASURY STOCK
-------------- PAID-IN RETAINED INVESTMENTS, TRANSLATION ---------------
SHARES AMOUNT CAPITAL EARNINGS NET ADJUSTMENT SHARES AMOUNT TOTAL
------ ------ ---------- -------- ------------ ---------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 1, 1995..... 72,834 $ 7 $293,251 $390,793 $18,831 $(4,465) -- $-- $698,417
Stock issued under
employee stock and
stock option plans... 2,032 -- 39,870 -- -- -- -- -- 39,870
Tax benefit from
employee stock option
plans................ -- -- 10,828 -- -- -- -- -- 10,828
Stock compensation
expense.............. -- -- 2,772 -- -- -- -- -- 2,772
Dividends declared..... -- -- -- (14,524) -- -- -- -- (14,524)
Repurchase of common
stock................ (3,390) -- (126,778) -- -- -- -- -- (126,778)
Reclassification of put
warrant
obligations.......... -- -- (71,348) -- -- -- -- -- (71,348)
Unrealized gains on
investments, net..... -- -- -- -- 14,683 -- -- -- 14,683
Cumulative translation
adjustment........... -- -- -- -- -- (683) -- -- (683)
Net income............. -- -- -- 153,277 -- -- -- -- 153,277
------ ------ ---------- -------- ------------ ---------- ------ ------ --------
Balances as of
November 29, 1996.... 71,476 $ 7 $148,595 $529,546 $33,514 $(5,148) -- $-- $706,514
------ ------ ---------- -------- ------------ ---------- ------ ------ --------
(Continued)
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

46
<PAGE>
ADOBE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK ADDITIONAL GAINS ON CUMULATIVE TREASURY STOCK
-------------- PAID-IN RETAINED INVESTMENTS, TRANSLATION -----------------
SHARES AMOUNT CAPITAL EARNINGS NET ADJUSTMENT SHARES AMOUNT TOTAL
------ ------ ---------- -------- ------------ ---------- ------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
November 29,
1996............... 71,476 $ 7 $148,595 $529,546 $ 33,514 $(5,148) -- $ -- $706,514
Stock issued under
employee stock and
stock option
plans.............. 3,631 -- 70,995 -- -- -- -- -- 70,995
Tax benefit from
employee stock
option plans....... -- -- 29,607 -- -- -- -- -- 29,607
Stock compensation
expense............ -- -- 1,329 -- -- -- -- -- 1,329
Dividends declared... -- -- -- (52,522) -- -- -- -- (52,522)
Repurchase of common
stock.............. (1,166) -- (36,956) -- -- -- (5,176) (238,688) (275,644)
Proceeds from sale of
put warrants....... -- -- 6,356 -- -- -- -- -- 6,356
Reclassification of
expired put warrant
obligations........ -- -- 71,348 -- -- -- -- -- 71,348
Unrealized gains on
investments, net... -- -- -- -- (29,924) -- -- -- (29,924)
Cumulative
translation
adjustment......... -- -- -- -- -- 528 -- -- 528
Net income........... -- -- -- 186,837 -- -- -- -- 186,837
------ ------ ---------- -------- ------------ ---------- ------ --------- --------
Balances as of
November 28,
1997............... 73,941 $ 7 $291,274 $663,861 $ 3,590 $(4,620) (5,176) $(238,688) $715,424
------ ------ ---------- -------- ------------ ---------- ------ --------- --------
------ ------ ---------- -------- ------------ ---------- ------ --------- --------
</TABLE>

See accompanying Notes to Consolidated Financial Statements

47
<PAGE>
ADOBE SYSTEMS INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------------
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................................................................... $ 186,837 $ 153,277 $ 93,485
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................... 59,384 55,621 60,435
Deferred income taxes............................................................ (4,172) (9,420) (7,167)
Equity in net (income) loss of Adobe Ventures.................................... 1,326 (19,001) 755
Gains on sales of equity securities.............................................. (35,616) (53,216) --
Tax benefit from employee stock option plans..................................... 29,607 10,828 32,445
Stock compensation expense....................................................... 1,329 2,772 4,433
Write-off of acquired in-process research and development........................ 5,969 21,251 14,983
Noncash restructuring costs...................................................... -- 2,525 4,714
Changes in operating assets and liabilities:
Receivables.................................................................... (15,151) 8,556 (24,548)
Other current assets........................................................... (2,351) (1,173) 628
Trade and other payables....................................................... 14,802 8,534 (7,032)
Accrued expenses............................................................... (1,192) (27,427) 4,996
Income taxes payable........................................................... (32,294) 48,768 (4,845)
Deferred revenue............................................................... 169 (3,781) 4,474
------------ ------------ ------------
Net cash provided by operating activities............................................ 208,647 198,114 177,756
------------ ------------ ------------
Cash flows from investing activities:
Purchases of short-term investments................................................ (2,657,302) (2,363,993) (2,614,349)
Maturities and sales of short-term investments..................................... 2,875,294 2,363,793 2,403,631
Acquisitions of property and equipment............................................. (33,882) (45,869) (34,071)
Additions to other assets.......................................................... (42,122) (65,399) (96,721)
Acquisitions, net of cash acquired................................................. (6,121) (8,027) (15,158)
Proceeds from sales of equity securities........................................... 30,993 72,630 --
------------ ------------ ------------
Net cash provided by (used for) investing activities................................. 166,860 (46,865) (356,668)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock and put warrants............................ 77,351 39,870 70,367
Repurchase of common stock......................................................... (275,644) (126,778) (17,849)
Payment of dividends............................................................... (20,911) (14,586) (12,310)
Payment of Subchapter S distributions of Mastersoft................................ -- -- (3,342)
------------ ------------ ------------
Net cash provided by (used for) financing activities................................. (219,204) (101,494) 36,866
Effect of foreign currency exchange rates on cash and cash equivalents............... 528 2,497 10
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents................................. 156,831 52,252 (142,036)
Adjustment for change in acquired company's fiscal year-end.......................... -- -- (3,591)
Cash and cash equivalents at beginning of year....................................... 110,745 58,493 204,120
------------ ------------ ------------
Cash and cash equivalents at end of year............................................. $ 267,576 $ 110,745 $ 58,493
------------ ------------ ------------
------------ ------------ ------------
Supplemental disclosures:
Cash paid during the year for income taxes......................................... $ 85,062 $ 30,463 $ 44,470
------------ ------------ ------------
------------ ------------ ------------
Noncash investing and financing activities:
Cash dividends declared but not paid............................................. $ 3,558 $ 3,582 $ 3,645
------------ ------------ ------------
------------ ------------ ------------
Dividends in-kind declared but not distributed................................... $ 10,032 $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Dividends in-kind distributed.................................................... $ 21,603 $ -- $ --
------------ ------------ ------------
------------ ------------ ------------
Issuance of notes for acquisition................................................ $ -- $ 9,473 $ --
------------ ------------ ------------
------------ ------------ ------------
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

48
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

OPERATIONS

Founded in 1982, Adobe Systems Incorporated ("Adobe" or the "Company")
develops, markets, and supports computer software products and technologies that
enable users to express and use information across all print and electronic
media. The Company licenses its technology to major computer, printing, and
publishing suppliers, and markets a line of application software products and
type products for authoring and editing visually rich documents. Additionally,
the Company markets a line of powerful, easy-to-use products for home and small
business users. The Company distributes its products through a network of
original equipment manufacturer ("OEM") customers, distributors and dealers, and
value-added resellers ("VARs") and systems integrators. The Company has
operations in North America, Europe, Japan, and Asia, Pacific, and Latin
America.

FISCAL YEAR

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

BASIS OF CONSOLIDATION

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

RECAPITALIZATION

In May 1997, the Company was reincorporated in the State of Delaware. As
part of this reincorporation, each outstanding share of the predecessor
California Corporation preferred stock and common stock was converted
automatically to one share of the new Delaware Corporation $0.0001 par value
preferred stock and common stock. All prior periods presented have been restated
to reflect this change.

USE OF ESTIMATES

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

CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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

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

49
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FOREIGN CURRENCY TRANSLATION

Assets and liabilities of certain foreign subsidiaries, whose functional
currency is the local currency, are translated at year-end exchange rates.
Income and expense items are translated at the average rates of exchange
prevailing during the year. The adjustment resulting from translating the
financial statements of such foreign subsidiaries is reflected as a separate
component of stockholders' equity. Certain other transaction gains or losses,
which have not been material, are reported in results of operations.

PROPERTY AND EQUIPMENT

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

OTHER ASSETS

Purchased technology, goodwill, and certain other intangible assets are
stated at cost less accumulated amortization. Amortization is provided on the
straight-line method over the estimated useful lives of the respective assets,
generally three to seven years. Capitalization of computer software development
costs, when material, begins upon the establishment of technological
feasibility. Such costs are amortized using the greater of the ratio of current
product revenue to the total current and anticipated product revenue or the
straight-line method over the software's estimated economic life, generally 9 to
36 months. The Company periodically reviews the net realizable value of its
intangible assets and adjusts the carrying amount accordingly.

The Company owns a minority interest in certain technology companies. Such
investments are accounted for under the cost method, as the Company does not
have significant influence or control over the investee companies. The Company
owns a majority interest in two limited partnerships that were established to
invest in technology companies. The limited partnership investments are
accounted for under the equity method because contractually the partnerships are
controlled by the general partner, a third party.

LONG-LIVED ASSETS

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

50
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EMPLOYEE STOCK PLANS

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

REVENUE RECOGNITION

Application products revenue is recognized upon shipment. Revenue from
distributors is subject to agreements allowing limited rights of return and
price protection. The Company provides for estimated future returns at the time
the related revenue is recorded.

Licensing revenue is recognized when the Company's OEM customers ship their
products incorporating Adobe's software. Revenue associated with adapting the
Company's software products to an OEM customer's hardware products is recognized
based on the percentage-of-completion method and is included in licensing
revenue.

Deferred revenue includes customer advances under OEM licensing agreements.
Additionally, maintenance revenue for application products is deferred and
recognized ratably over the term of the contract, generally 12 months.

DIRECT COSTS

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

ADVERTISING COSTS

Advertising costs are expensed as incurred.

INCOME TAXES

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

FOREIGN CURRENCY HEDGING INSTRUMENTS

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

The Company currently uses forward contracts as hedges of firmly committed
transactions. For these contracts, mark-to-market gains and losses are
recognized as other income or expense in the current period, generally
consistent with the period in which the gain or loss of the underlying
transaction is

51
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
recognized. All forward foreign currency contracts currently entered into by the
Company have maturities of 90 days or less.

PUT WARRANTS AND CALL OPTIONS

The Company utilizes put warrants and call option arrangements to facilitate
the repurchase of its common stock. In 1997, the Company can settle, at its
option, all outstanding puts and calls with physical delivery or net shares
equal to the difference between the exercise price and the market value at the
date of exercise. Accordingly, the potential repurchase obligation under these
arrangements is included in stockholders' equity. In 1996, the arrangements
required physical delivery, and accordingly, the potential buyback obligation
was removed from stockholders' equity and recorded as put warrants. Proceeds
from the sale of put warrants are recorded in stockholders' equity.

NET INCOME PER SHARE

Net income per share is based upon weighted average common and dilutive
common equivalent shares outstanding using the treasury stock method. Dilutive
common equivalent shares include stock options and restricted stock. The
difference between primary and fully diluted net income per share is not
significant in all periods presented.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in the financial statements. It does
not, however, require a specific format for the disclosure but requires the
Company to display an amount representing total comprehensive income for the
period in its financial statements. The Company will be required to implement
SFAS No. 130 for its fiscal year 1999.

Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments
of an Enterprise and Related Information." SFAS No. 131 establishes standards
for the manner in which public companies report information about operating
segments in annual and interim financial statements. The Company is currently
evaluating the operating segment information that it will be required to report.
The Company will be required to implement SFAS No. 131 for its fiscal year 1999.

52
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition." SOP
97-2 establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997 and will require the Company to modify
certain aspects of its revenue recognition policies. The Company does not expect
the adoption of SOP 97-2 to have a material impact on the Company's consolidated
results of operations.

RECLASSIFICATIONS

Certain reclassifications were made to the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.

NOTE 2. ACQUISITIONS

During 1997, 1996, and 1995, the Company acquired seven software companies,
in separate transactions, for an aggregate consideration of approximately $45.8
million in cash, notes payable, and the assumption of certain liabilities. These
acquisitions were accounted for using the purchase method of accounting and
resulted in the write-off of acquired in-process research and development of
$6.0 million, $21.3 million, and $15.0 million during fiscal 1997, 1996, and
1995, respectively. The operating results of the acquired companies have been
included in the accompanying consolidated financial statements from their dates
of acquisition. The operating results of each company acquired are not
considered material to the consolidated financial statements of Adobe and,
accordingly, pro forma information has not been presented.

NOTE 3. CASH EQUIVALENTS AND INVESTMENTS

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

<TABLE>
<CAPTION>
AS OF NOVEMBER 28, 1997
----------------------------------------------
<S> <C> <C> <C> <C>
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
Classified as current assets:
Money market mutual funds...................................... $ 53,051 $ -- $-- $ 53,051
State and municipal bonds and notes............................ 394,295 757 (36) 395,016
Corporate and bank notes....................................... 6,400 -- -- 6,400
Auction-rate securities........................................ 2,800 -- -- 2,800
Equity securities.............................................. 4,082 5,292 -- 9,374
-------- ---------- ----- ----------
Total current.................................................. 460,628 6,049 (36) 466,641
-------- ---------- ----- ----------
Classified as noncurrent assets:
Money market mutual funds...................................... 46 -- -- 46
United States government treasury notes........................ 66,607 9 (9) 66,607
-------- ---------- ----- ----------
Total noncurrent............................................... 66,653 9 (9) 66,653
-------- ---------- ----- ----------
Total securities............................................... $527,281 $ 6,058 $ (45) $ 533,294
-------- ---------- ----- ----------
-------- ---------- ----- ----------
</TABLE>

53
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 3. CASH EQUIVALENTS AND INVESTMENTS (CONTINUED)

<TABLE>
<CAPTION>
AS OF NOVEMBER 29, 1996
----------------------------------------------
<S> <C> <C> <C> <C>
UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
-------- ---------- ---------- ----------
Classified as current assets:
Money market mutual funds...................................... $ 39,381 $ -- $-- $ 39,381
United States government treasury notes and agency discount
notes........................................................ 90,617 424 (247) 90,794
State and municipal bonds and notes............................ 358,612 1,894 (36) 360,470
Corporate and bank notes....................................... 38,598 405 (33) 38,970
Auction-rate securities........................................ 10,000 -- -- 10,000
Asset-backed securities........................................ 11,740 91 (110) 11,721
-------- ---------- ----- ----------
Total current.................................................. 548,948 2,814 (426) 551,336
-------- ---------- ----- ----------
Classified as noncurrent assets:
Money market mutual funds...................................... 15,977 -- -- 15,977
United States government treasury notes........................ 50,327 -- (183) 50,144
Equity securities.............................................. 3,882 54,216 (19) 58,079
-------- ---------- ----- ----------
Total noncurrent............................................... 70,186 54,216 (202) 124,200
-------- ---------- ----- ----------
Total securities............................................... $619,134 $57,030 $(628) $ 675,536
-------- ---------- ----- ----------
-------- ---------- ----- ----------
</TABLE>

Approximately $231.2 million and $97.9 million in investments are classified
as cash equivalents as of November 28, 1997 and November 29, 1996, respectively,
and all noncurrent investments are included in other assets. Unrealized gains
(losses) on all securities are reported as a separate component of stockholders'
equity, net of taxes of $2.4 million and $23.0 million as of November 28, 1997
and November 29, 1996, respectively. Net realized gains for the years ended
November 28, 1997 and November 29, 1996 of $38.4 million and $48.4 million,
respectively, are included in nonoperating income.

As of November 28, 1997, the cost, which approximated fair value, of current
debt securities and money market mutual funds with a maturity of one year or
less was $257.0 million, and the cost and estimated fair value of current debt
securities with maturities ranging from one to five years was $196.7 million and
$197.4 million, respectively. Other debt securities include auction-rate
securities of $2.8 million. Included in auction-rate securities are Auction Rate
Certificate Securities whose stated maturities exceed ten years. However, the
Company has the option of adjusting the respective interest rates or liquidating
these investments at auction on stated auction dates every 35 days.

54
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 4. PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

<TABLE>
<CAPTION>
NOVEMBER 28 NOVEMBER 29
1997 1996
----------- -----------
<S> <C> <C>
Land.............................................................. $ 782 $ 782
Building.......................................................... 4,477 4,615
Equipment......................................................... 141,067 121,044
Furniture and fixtures............................................ 21,243 18,126
Leasehold improvements............................................ 19,916 13,036
----------- -----------
187,485 157,603
Less accumulated depreciation and amortization.................... 106,507 77,372
----------- -----------
$ 80,978 $ 80,231
----------- -----------
----------- -----------
</TABLE>

NOTE 5. OTHER ASSETS

Other assets consisted of the following:

<TABLE>
<CAPTION>
NOVEMBER 28 NOVEMBER 29
1997 1996
------------ ------------
<S> <C> <C>
Equity investments................................................ $ 35,689 $ 97,679
Purchased technology and licensing agreements..................... 5,043 32,211
Restricted funds and security deposits............................ 102,962 69,443
Intangibles and other assets...................................... 45,097 35,470
------------ ------------
188,791 234,803
Less accumulated amortization..................................... 25,643 39,455
------------ ------------
$ 163,148 $ 195,348
------------ ------------
------------ ------------
</TABLE>

Included above in equity investments at November 29, 1996, are unrealized
gains and losses. The equity investment in Netscape Communications Corporation
("Netscape") was marked-to-market for an unrealized gain of $47.7 million in
1996.

In 1997, the Company recorded realized gains of $32.8 million related to the
disposal of its holdings in Netscape through the distribution of 554,660
Netscape shares to the Company's stockholders as a dividend-in-kind and the sale
of its remaining Netscape shares. The Company recorded additional realized gains
in 1997 of $4.5 million related to the sale of other equity investments. During
1996, the Company recorded realized gains of approximately $43.6 million and
approximately $6.8 million for the sale of a portion of its investment in
Netscape and its entire investment in Luminous, respectively.

Amortization expense related to purchased technology and other intangibles
was $26.2 million and $42.8 million in fiscal 1997 and fiscal 1996,
respectively.

55
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 6. ACCRUED EXPENSES

Accrued expenses consisted of the following:

<TABLE>
<CAPTION>
NOVEMBER 28 NOVEMBER 29
1997 1996
------------ ------------
<S> <C> <C>
Accrued compensation and benefits................................. $ 37,833 $ 24,673
Sales and marketing allowances.................................... 13,028 13,753
Other............................................................. 51,880 55,493
------------ ------------
$ 102,741 $ 93,919
------------ ------------
------------ ------------
</TABLE>

NOTE 7. INCOME TAXES

Income before income taxes includes net income from foreign operations of
approximately $59.3 million, $25.4 million, and $19.2 million for the years
ended November 28, 1997, November 29, 1996, and December 1, 1995, respectively.

The provision for income taxes consisted of the following:

<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
<S> <C> <C> <C>
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------ ------------ -----------
Current:
United States federal................................................. $ 42,238 $ 65,118 $ 21,466
Foreign............................................................... 29,260 12,290 18,418
State and local....................................................... 12,320 12,731 5,206
------------ ------------ -----------
Total current........................................................... 83,818 90,139 45,090
------------ ------------ -----------
Deferred:
United States federal................................................. (1,721) (6,825) (6,305)
Foreign............................................................... (2,071) (780) (986)
State and local....................................................... (380) (1,815) 124
------------ ------------ -----------
Total deferred.......................................................... (4,172) (9,420) (7,167)
------------ ------------ -----------
Charge in lieu of taxes attributable to employee stock plans............ 29,607 10,828 32,445
------------ ------------ -----------
$ 109,253 $ 91,547 $ 70,368
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

56
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 7. INCOME TAXES (CONTINUED)
Total income tax expense differs from the expected tax expense (computed by
multiplying the United States federal statutory rate of approximately 35 percent
for 1997, 1996, and 1995 by income before income taxes) as a result of the
following:

<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
<S> <C> <C> <C>
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------ ------------ -----------
Computed "expected" tax expense......................................... $ 103,632 $ 85,689 $ 57,349
State tax expense, net of federal benefit............................... 10,301 9,819 6,442
Nondeductible merger costs.............................................. -- -- 4,078
Nondeductible write-off of acquired in-process research and
development........................................................... 1,791 5,310 5,244
Nondeductible goodwill.................................................. 825 772 3,689
Tax-exempt income....................................................... (5,559) (3,304) (3,532)
Tax credits............................................................. (4,604) (4,912) (3,904)
Foreign losses, not benefited........................................... -- -- 2,706
Foreign tax rate differential........................................... 1,864 (4,003) 1,130
Other, net.............................................................. 1,003 2,176 (2,834)
------------ ------------ -----------
$ 109,253 $ 91,547 $ 70,368
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets and liabilities as of 1997 and 1996 are
presented below:

<TABLE>
<CAPTION>
NOVEMBER 28 NOVEMBER 29
1997 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Acquired technology................................................................. $ 12,720 $ 12,037
Reserves and deferred revenue....................................................... 25,511 24,615
Depreciation and amortization....................................................... 3,558 7,662
Net operating loss carryforwards.................................................... 3,260 4,278
Tax credits and other carryforwards................................................. -- 1,614
Other............................................................................... 5,652 5,800
------------ ------------
Total gross deferred tax assets................................................... 50,701 56,006
Deferred tax asset valuation allowance............................................ (3,643) (5,950)
------------ ------------
Total deferred tax assets......................................................... 47,058 50,056
------------ ------------
Deferred tax liabilities:
Investments......................................................................... (2,423) (22,888)
Other............................................................................... (1,812) (1,943)
------------ ------------
Total deferred tax liabilities.................................................... (4,235) (24,831)
------------ ------------
Net deferred tax assets............................................................... $ 42,823 $ 25,225
------------ ------------
------------ ------------
</TABLE>

The Company provides United States income taxes on the earnings of foreign
subsidiaries unless the subsidiaries' earnings are considered permanently
reinvested outside the United States. As of November 28, 1997, the cumulative
amount of earnings upon which United States income taxes have not been

57
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 7. INCOME TAXES (CONTINUED)
provided are approximately $32.7 million. The unrecognized deferred tax
liability for these earnings is approximately $4.0 million.

As of November 28, 1997, the Company has foreign operating loss carryovers
in various jurisdictions of approximately $3.1 million with various expiration
dates. For financial reporting purposes, a valuation allowance has been
established to fully offset the deferred tax assets related to foreign operating
losses due to uncertainties in utilizing these losses. A valuation allowance has
also been established for certain deductions related to investments. Management
believes that it is more likely than not that the results of future operations
will generate sufficient taxable income to realize the net deferred tax assets.

The Company's federal tax returns have been examined by the Internal Revenue
Service for all years through 1993. The Internal Revenue Service has proposed
assessments that the Company is contesting in Tax Court. Management believes
that any related adjustments that might be required will not have a material
effect on the Company's financial position or results of operations.

NOTE 8. BENEFIT PLANS

PRETAX SAVINGS PLAN

In 1987, the Company adopted an Employee Investment Plan, qualified under
Section 401(k) of the Internal Revenue Code, which is a pretax savings plan
covering substantially all of the Company's United States employees. Under the
plan, eligible employees may contribute up to 18% of their pretax salary,
subject to certain limitations. The Company matches approximately 25% of
employee contributions and contributed approximately $1.8 million, $1.6 million,
and $1.2 million in 1997, 1996, and 1995, respectively. Matching contributions
can be terminated at the Company's discretion.

ADOBE INCENTIVE PARTNERS

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

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

Assets held by AIP include Adobe's entire interests in Adobe Ventures L.P.
and Adobe Ventures II L.P. and equity securities of privately held companies. At
November 28, 1997, the cost basis of all

58
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 8. BENEFIT PLANS (CONTINUED)
investments included in AIP was approximately $34.8 million. No distributions
were made to the participating officers in fiscal 1997, and expense related to
AIP in fiscal 1997 was immaterial. At November 28, 1997, the minority interest
held by the participating officers was immaterial and is included in accrued
expenses on the balance sheet.

NOTE 9. EMPLOYEE STOCK PLANS

STOCK OPTION PLANS

As of November 28, 1997, the Company has reserved 29,200,000 shares of
common stock for issuance under its employee stock option plan. The employee
stock option plan provides for the granting of stock options to employees and
officers at the fair market value of the Company's common stock at the grant
date. Options generally vest 25% after the first year and ratably thereafter
such that 50% and 100% are vested after the second and third year, respectively.
The option terms range from five to ten years.

The Company has reserved, as of November 28, 1997, 500,000 shares of common
stock for issuance under its Outside Directors Stock Option Plan, which provides
for the granting of nonqualified stock options to nonemployee directors. Option
grants are limited to 10,000 shares per person in each fiscal year, except for a
new nonemployee director, who may be granted 15,000 shares upon election as a
director. All options are immediately exercisable within a ten-year term. Any
exercised, unvested option shares are subject to repurchase by the Company at
the original purchase price upon termination of the director's service. Options
generally vest over three years: 25% in each of the first two years and 50% in
the third year.

On March 22, 1996, the Company offered its employees a stock option
repricing program that allowed the employees to exchange on a two-for-three
share basis any options priced above the March 29, 1996 closing price of Adobe
stock, which was $32.25. As a result, approximately 1,252,000 options were
surrendered by eligible employees for approximately 834,000 repriced options.
The repriced options were not exercisable until November 1, 1996.

Stock option activity for 1997, 1996, and 1995 is presented below:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------------------ ------------------------- -------------------------

<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
----------- ----------- ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.................. 9,297,188 $ 25.68 10,125,792 $ 26.30 11,173,336 $ 19.61
Granted......................................... 2,452,117 $ 40.85 2,670,673 $ 33.53 2,391,568 $ 47.72
Exercised....................................... (3,063,778) $ 20.29 (1,470,762) $ 17.37 (3,008,917) $ 19.04
Canceled........................................ (539,292) $ 33.75 (2,028,515) $ 45.15 (430,195) $ 26.57
----------- ------------ ------------
Outstanding, end of year........................ 8,146,235 $ 31.74 9,297,188 $ 25.68 10,125,792 $ 26.30
----------- ------------ ------------
----------- ------------ ------------
Exercisable, end of year........................ 4,562,954 $ 26.50 6,057,500 $ 21.63 5,783,226 $ 18.71
----------- ------------ ------------
----------- ------------ ------------
Weighted-average fair value of options granted
during the year............................... $ 15.68 $ 12.91
</TABLE>

59
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 9. EMPLOYEE STOCK PLANS (CONTINUED)
Information regarding the stock options outstanding at November 28, 1997 is
summarized below.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------------------------------------------- ----------- ----------- ----------- ---------- -----------
$ 3.45--$ 9.45...................................... 480,163 1.67 years $ 8.64 477,979 $ 8.67
$10.13--$19.63...................................... 538,026 4.38 years $ 14.79 536,576 $ 14.78
$20.00--$29.88...................................... 1,927,381 5.18 years $ 25.15 1,883,067 $ 25.13
$30.00--$39.88...................................... 3,131,671 8.13 years $ 34.21 1,145,311 $ 32.97
$40.38--$49.81...................................... 1,724,524 8.72 years $ 42.44 313,080 $ 42.15
$50.75--$67.00...................................... 344,470 7.57 years $ 51.20 206,941 $ 51.14
----------- ----------
$ 3.45--$67.00...................................... 8,146,235 6.91 years $ 31.74 4,562,954 $ 26.50
----------- ----------
----------- ----------
</TABLE>

PERFORMANCE AND RESTRICTED STOCK PLAN

The Performance and Restricted Stock Plan ("the Plan") provides for the
granting of restricted stock and/or performance units to officers and key
employees. As of November 28, 1997, the Company had reserved 1,500,000 shares of
its common stock for issuance under this plan. Restricted shares issued under
this plan generally vest annually over three years but are considered
outstanding at the time of grant, as the stockholders are entitled to dividends
and voting rights. As of November 28, 1997, 110,511 shares were outstanding and
not yet vested.

In fiscal 1997, the Company granted 129,550 shares of restricted stock with
a weighted-average fair value of $39.04, and in fiscal 1996, the Company granted
26,750 shares of restricted stock with a weighted-average fair value of $37.71.

Performance units issued under this plan entitle the recipient to receive,
at the discretion of the Company, shares or cash upon completion of the
performance period subject to attaining identified performance goals.
Performance units are generally earned over a three-year period, and shares
earned are issued at the end of the three-year period. The ultimate value of the
performance units is dependent upon the Company's revenue and operating margin
growth (as defined by the Plan) during the three-year performance period
adjusted by a factor determined in 1997 by comparing the Company's return on
equity to the return on equity of a group of comparable companies. In 1996 and
1995, the factor was determined by comparing the growth in the Company's stock
price to an index of comparable stocks. The projected value of these units is
accrued by the Company and charged to expense over the three-year performance
period. As of November 28, 1997, November 29, 1996, and December 1, 1995,
performance units for 170,874; 94,745; and 75,420 shares were outstanding,
respectively, and $(2.1) million, $(0.2) million and $2.5 million was charged
(credited) to expense in 1997, 1996, and 1995, respectively. In fiscal 1997 and
1996, performance units were granted for 156,500 and 48,965 shares,
respectively, and the weighted-average fair value of the shares were $39.04 and
$64.03, respectively.

EMPLOYEE STOCK PURCHASE PLAN

The Company's Employee Stock Purchase Plan allows eligible employee
participants to purchase shares of the Company's common stock at a discount
through payroll deductions. The plan consists of two-

60
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 9. EMPLOYEE STOCK PLANS (CONTINUED)
year offering periods with four six-month purchase periods in each offering
period. Employees purchase shares at 85% of the market value at either the
beginning of the offering period or the end of the purchase period, whichever
price is lower. As of November 28, 1997, the Company had reserved 7,000,000
shares of its common stock for issuance under this plan and 3,383,780 shares
remain available for future issuance.

The weighted-average fair value of the purchase rights granted in fiscal
1997 and 1996 was $16.36 and $14.01, respectively.

PRO FORMA FAIR VALUE DISCLOSURES

The Company accounts for its employee stock plans, consisting of fixed stock
option plans, an employee stock purchase plan, and a performance and restricted
stock plan, using the intrinsic value method. The table below sets forth the pro
forma amounts of net income and net income per share that would have resulted if
the Company accounted for its employee stock plans under the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."

<TABLE>
<CAPTION>
YEARS ENDED
--------------------------
<S> <C> <C>
NOVEMBER 28 NOVEMBER 29
1997 1996
------------ ------------
Net income:
As reported..................................................... $ 186,837 $ 153,277
Pro forma....................................................... $ 161,790 $ 144,368
Net income per share:
As reported..................................................... $ 2.52 $ 2.04
Pro forma....................................................... $ 2.21 $ 1.92
</TABLE>

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

<TABLE>
<CAPTION>
YEARS ENDED
------------------------------
<S> <C> <C>
NOVEMBER 28 NOVEMBER 29
1997 1996
-------------- --------------
Expected life of options..................................... 3 years 3 years
Expected life of restricted stock............................ 3 years 3 years
Expected life of purchase rights............................. 1.25 years 1.25 years
Volatility................................................... 50% 50%
Risk-free interest rate...................................... 5.01--6.60% 5.54--6.66%
Dividend yield............................................... 0.5% 0.5%
</TABLE>

Options and restricted stock grants vest over several years, and new option
and restricted stock grants are generally made each year. Because of this and
because the provisions of SFAS No. 123 are effective only for fiscal years 1996
and 1997, the pro forma amounts shown above may not be representative of the pro
forma effect on reported net income in future years.

61
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 10. STOCKHOLDERS' EQUITY

STOCKHOLDER RIGHTS PLAN

The Company's Stockholder Rights Plan is intended to protect stockholders
from unfair or coercive takeover practices. In accordance with this plan, the
Board of Directors declared a dividend distribution of one common stock purchase
right on each outstanding share of its common stock held as of July 24, 1990,
and on each share of common stock issued by the Company thereafter. Each right
entitles the registered holder to purchase from the Company a share of common
stock at $115. The rights become exercisable in certain circumstances including
upon an entity acquiring or announcing the intention to acquire beneficial
ownership of 20 percent or more of the Company's common stock without the
approval of the Board of Directors or upon the Company being acquired by any
person in a merger or business combination transaction. The rights are
redeemable by the Company prior to exercise at $0.01 per right and expire on
July 24, 2000.

STOCK REPURCHASE PROGRAM

In September 1997, the Board of Directors authorized, subject to certain
business and market conditions, the purchase of up to 15,000,000 shares of the
Company's stock over the next two years. The Company purchased 6,342,395 shares
and 3,390,240 shares of its common stock in 1997 and 1996,
respectively, at a cost of $275.6 million and $126.8 million, respectively,
under its stock repurchase programs as well as through employee stock option
exercise transactions. Prior to the Company's reincorporation in the State of
Delaware in May 1997, the shares purchased were returned to the status of
authorized and unissued as required by California law. The 5,175,851 shares
purchased at a cost of $238.7 million subsequent to the Company's
reincorporation are presented as treasury stock in the Stockholders' Equity
section of the balance sheet.

PUT WARRANTS

To facilitate the Company's stock repurchase programs, the Company sold put
warrants in a series of private placements in 1997 and 1996. Each warrant
entitled the holder to sell one share of Adobe's common stock to the Company at
a specified price. Approximately 4.6 million and 4.5 million put warrants were
written in 1997 and 1996, respectively. At November 28, 1997, approximately 2.9
million put warrants were outstanding that expire on various dates through May
1998 and have exercise prices ranging from $37.07 to $47.98 per share, with an
average exercise price of $43.09 per share. In addition, in 1997 and 1996, the
Company purchased call options from an independent third party that entitled the
Company to buy 2.3 million and 4.5 million shares, respectively, of its common
stock. At November 28, 1997, approximately 0.5 million call options were
outstanding that expire on various dates through April 1998 and have exercise
prices ranging from $37.32 to $46.86 per share, with an average exercise price
of $41.32 per share.

As part of the Company's current stock repurchase programs, the Company may,
from time to time, enter into additional put warrant and call option
arrangements. Under these arrangements, the Company, at its option, can settle
with physical delivery or net shares equal to the difference between the
exercise price and market value at the date of exercise. Accordingly, the
arrangements do not require the reclassification of the obligation under put
warrants from equity, and no such reclassification of the Company's obligation
at November 28, 1997 has been made. Such arrangements were not in place at
November 29, 1996, and therefore, the Company's potential buyback obligation of
$71.3 million as of

62
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 10. STOCKHOLDERS' EQUITY (CONTINUED)
November 29, 1996 was removed from stockholders' equity and recorded as put
warrants. In the future, the Company may consider other methods to acquire the
Company's stock including direct purchases, open market purchases, accelerated
stock purchase programs, and other potential methods.

VENTURE STOCK DIVIDEND PROGRAM

In March 1997, the Company established the venture stock dividend program
under which the Company may, from time to time, distribute as a dividend-in-kind
shares of its equity holdings in investee companies to Adobe stockholders. In
1997, the Company dividended one share of Netscape common stock for each 100
shares of Adobe common stock held by stockholders of record on July 31, 1997. An
equivalent cash dividend was paid for holdings of less than 2,500 Adobe shares
and for fractional Netscape shares. Also on December 1, 1997, the Company
dividended one share of Siebel common stock for each 300 shares of Adobe common
stock held by stockholders of record on October 31, 1997. An equivalent cash
dividend was paid for holdings of less than 7,500 Adobe shares and for
fractional Siebel shares. The declaration of future dividends under this program
is within the discretion of the Board of Directors of the Company and will
depend upon business conditions, the Company's results of operations and
financial condition, and other factors.

NOTE 11. COMMITMENTS AND CONTINGENCIES

LEASE COMMITMENTS

The Company has operating leases for its corporate headquarters, field sales
offices, and certain office equipment that expire at various dates through 2015.
Rent expense for these leases aggregated $17.8 million, $18.3 million, and $21.0
million during 1997, 1996, and 1995, respectively. As of November 28, 1997,
future minimum lease payments under noncancelable operating leases are as
follows: 1998 - $17.9 million; 1999 -$12.8 million; 2000--$9.3 million;
2001--$7.8 million; 2002--$3.0 million and $13.2 million, thereafter.

REAL ESTATE DEVELOPMENT AGREEMENT

During 1994, the Company entered into a real estate development agreement
and an operating lease agreement in connection with the construction of an
office facility. In August 1996, the construction was completed, and the
operating lease commenced. The Company will have the option to purchase the
facility at the end of the lease term in October 2001. In the event the Company
chooses not to exercise this option, the Company is obligated to arrange for the
sale of the facility to an unrelated party and is required to pay the lessor any
difference between the net sales proceeds and the lessor's net investment in the
facility, in an amount not to exceed that which would preclude classification of
the lease as an operating lease, approximately $57.3 million. During the
construction period, the Company was required to pledge certain interest-bearing
instruments to the lessor as collateral to secure the performance of its
obligations under the lease. As of November 28, 1997, the Company's deposits
under this agreement totaled approximately $66.7 million in United States
government treasury notes and money market mutual funds. These deposits are
included in "Other assets" in the Consolidated Balance Sheets.

63
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreement and an operating lease agreement for this facility. The operating
lease will commence on completion of construction in 1998. The Company will have
the option to purchase the facility at the end of the lease term (five years
after occupancy). In the event the Company chooses not to exercise this option,
the Company is obligated to arrange for the sale of the facility to an unrelated
party and is required to pay the lessor any difference between the net sales
proceeds and the lessor's net investment in the facility, in an amount not to
exceed that which would preclude classification of the lease as an operating
lease, approximately $64.3 million. The Company also is required, periodically
during the construction period, to deposit funds with the lessor as an
interest-bearing security deposit to secure the performance of its obligations
under the lease. During 1997, the Company deposited approximately $33.0 million,
and as of November 28, 1997, the Company's deposits under this agreement totaled
approximately $36.3 million. These deposits are included in "Other assets" in
the Consolidated Balance Sheets.

ROYALTIES

The Company has certain royalty commitments associated with the shipment and
licensing of certain products. While royalty expense is generally based on a
dollar amount per unit shipped, ranging from $0.25 to $312, certain royalties
are based on a percentage, ranging from 0.03% to 12%, of the underlying revenue.
Royalty expense was approximately $25.0 million, $19.8 million, and $23.1
million in 1997, 1996, and 1995, respectively.

LEGAL ACTIONS

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

NOTE 12. TRANSACTIONS WITH AFFILIATE

At November 28, 1997, the Company held a 13% equity interest in McQueen
International Limited ("McQueen") and accounts for the investment using the cost
method. During 1994, the Company entered into various agreements with McQueen,
whereby the Company contracted with McQueen to perform product localization and
technical support functions and to provide printing, assembly, and warehousing
services. Adobe makes minimum annual payments to McQueen for certain services
which amounted to $5.2 million and $4.8 million in 1997 and 1996, respectively,
and will be approximately $1.4 million in 1998. Purchases from McQueen amounted
to $35.0 million, $34.3 million, and $23.6 million during 1997, 1996, and 1995,
respectively.

Effective December 31, 1997, McQueen was acquired by Sykes Enterprises,
Incorporated ("Sykes"), a publicly traded company. In connection with the
acquisition, the Company exchanged its shares of McQueen for 486,676 shares of
Sykes' restricted common stock and will record a gain on the exchange of $6.7
million in fiscal 1998. The Company's equity interest in Sykes is less than 2%.

64
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 13. FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

The Company's majority interest in Adobe Ventures L.P. and Adobe Ventures II
L.P. is carried at a combined value of $25.7 million which is believed to
approximate the fair value of underlying investments in technology companies.
Substantially all of the technology companies held by the limited partnerships
at November 28, 1997 are not publicly traded, and therefore there is no
established market for these investments. As such, these investments are valued
based on the most recent round of financing involving new non-strategic
investors and estimates made by the general partner, a third party. When
investments held by the limited partnerships are publicly traded, the fair value
of such investments is based on quoted market prices, and mark-to-market
adjustments are included in investment income. In general, as a matter of policy
of the limited partnerships, the investments in the technology companies held by
the limited partnerships will be distributed to the partners prior to the
investee company's initial public offering.

FOREIGN CURRENCY HEDGING INSTRUMENTS

The Company enters into forward exchange contracts to hedge foreign currency
exposures on a continuing basis for periods consistent with its committed
exposures. These transactions generally do not subject the Company to risk of
accounting loss because gains and losses on these contracts offset losses and
gains on the assets, liabilities, and transactions being hedged. However, the
Company is exposed to credit-related losses in the event of nonperformance by
the counterparties in these contracts. These contracts have maturities of less
than three months, and the amounts of unrealized gains and losses are
immaterial. The Company held $1.9 million of aggregate foreign currency forward
exchange contracts for the sale of the Japanese yen outstanding at the end of
fiscal year 1997. There were no foreign currency forward exchange contracts
outstanding at the end of fiscal 1996.

CONCENTRATION OF RISK

Financial instruments that potentially subject the Company to concentrations
of credit risk are primarily cash, cash equivalents, short-term investments, and
accounts receivable. The Company's investment portfolio consists of
investment-grade securities diversified among security types, industries, and
issuers. The Company's investments are managed by recognized financial
institutions that follow the Company's investment policy. The Company's policy
limits the amount of credit exposure in any one issue, and the Company believes
no significant concentration of credit risk exists with respect to these
investments.

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

65
<PAGE>
ADOBE SYSTEMS INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

NOTE 13. FINANCIAL INSTRUMENTS (CONTINUED)
A significant portion of the Company's licensing revenue is derived from a
small number of OEM customers. The Company's OEM customers on occasion seek to
renegotiate their royalty arrangements. The Company evaluates these requests on
a case-by-case basis. If an agreement is not reached, a customer may decide to
pursue other options, which could result in lower licensing revenue for the
Company. Also, in the fall of 1997, one of Adobe's largest PostScript customers,
Hewlett-Packard Company ("HP"), introduced a non-Adobe clone version of
PostScript in one family of monochrome laser printers.

INDUSTRY SEGMENT

Adobe and its subsidiaries operate in one dominant industry segment, as
defined by SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise." The Company is engaged principally in the design, development,
manufacture, and licensing of computer software. No customer accounted for more
than 10% of the Company's total revenue in 1997, 1996, or 1995.

NOTE 14. FOREIGN OPERATIONS

Geographic information for each of the years in the three-year period ended
November 28, 1997, is presented below:

<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
<S> <C> <C> <C>
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------ ------------ -----------
Revenue:
North America....................................................... $ 606,633 $ 526,251 $ 533,332
Europe.............................................................. 226,557 134,879 133,982
Japan and Asia, Pacific, and Latin America.......................... 222,911 176,490 107,357
Eliminations........................................................ (144,207) (51,057) (12,332)
------------ ------------ -----------
$ 911,894 $ 786,563 $ 762,339
------------ ------------ -----------
------------ ------------ -----------
Operating income:
North America....................................................... $ 87,035 $ 31,186 $ 26,446
Europe.............................................................. 69,371 16,408 37,319
Japan and Asia, Pacific, and Latin America.......................... 135,657 103,002 70,416
Eliminations........................................................ (61,307) (3,810) 390
------------ ------------ -----------
$ 230,756 $ 146,786 $ 134,571
------------ ------------ -----------
------------ ------------ -----------
Identifiable assets:
North America....................................................... $ 923,704 $1,015,065 $ 934,705
Europe.............................................................. 79,291 67,506 62,993
Japan and Asia, Pacific, and Latin America.......................... 32,161 22,102 13,946
Eliminations........................................................ (95,085) (103,280) (138,817)
------------ ------------ -----------
$ 940,071 $1,001,393 $ 872,827
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

66
<PAGE>
FINANCIAL STATEMENT SCHEDULE

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

<TABLE>
<CAPTION>
SCHEDULE
NUMBER FINANCIAL STATEMENT SCHEDULE DESCRIPTION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
Schedule II............................................. Valuation and Qualifying Accounts
</TABLE>

67
<PAGE>
ADOBE SYSTEMS INCORPORATED

SCHEDULE II

VALUATION AND QUALIFYING ACCOUNTS

(IN THOUSANDS)

VALUATION AND QUALIFYING ACCOUNTS WHICH ARE DEDUCTED IN THE
BALANCE SHEET FROM THE ASSETS TO WHICH THEY APPLY

<TABLE>
<CAPTION>
ADDITIONS
--------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OPERATING OTHER END
OF PERIOD EXPENSES ACCOUNTS (1) DEDUCTIONS OF PERIOD
----------- ----------- ------------- ----------- -----------
Allowance for doubtful accounts:
Year Ended:
November 28, 1997............................. $ 5,196 $ (440) $ -- $ 1,122 $ 3,634
November 29, 1996............................. $ 3,698 $ 1,927 $ -- $ 429 $ 5,196
December 1, 1995.............................. $ 3,893 $ 2,038 $ (423) $ 1,810 $ 3,698
</TABLE>

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

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

(1) The $423 reduction in 1995 reflects the effect of including Frame allowance
activity for the month ended December 31, 1994 in the years ended November
25, 1994 and December 1, 1995.

See accompanying Independent Auditors' Report.

68
<PAGE>
EXHIBITS

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

<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------

<S> <C>
3.2.10 Amended and Restated Bylaws as currently in effect

3.3 Certificate of Designation of the Series A Preferred Stock

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

10.43 Resignation Agreement

10.44 Forms of Retention Agreement

11 Computation of Earnings per Common Share

21 Subsidiaries of the Registrant

23 Consent of Independent Auditors

27 Financial Data Schedule
</TABLE>

<PAGE>

EXHIBIT 3.2.10

AMENDED AND RESTATED

BYLAWS

ADOBE SYSTEMS INCORPORATED

DATED SEPTEMBER 19, 1997

<PAGE>

TABLE OF CONTENTS
PAGE
----
ARTICLE I

OFFICES . . . . . . . . . . . . . . . 1
Section 1. Registered Office. . . . . . . . . . . . . . . . . . . . 1
Section 2. Other Offices. . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE II

CORPORATE SEAL . . . . . . . . . . . . . 1
Section 3. Corporate Seal . . . . . . . . . . . . . . . . . . . . . 1

ARTICLE III

STOCKHOLDERS' MEETINGS . . . . . . . . . . . 1
Section 4. Place of Meetings. . . . . . . . . . . . . . . . . . . . 1
Section 5. Annual Meeting . . . . . . . . . . . . . . . . . . . . . 2
Section 6. Special Meetings . . . . . . . . . . . . . . . . . . . . 4
Section 7. Notice of Meetings . . . . . . . . . . . . . . . . . . . 4
Section 8. Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 4
Section 9. Adjournment and Notice of Adjourned Meetings . . . . . . 5
Section 10. Voting Rights. . . . . . . . . . . . . . . . . . . . . . 5
Section 11. Joint Owners of Stock. . . . . . . . . . . . . . . . . . 6
Section 12. List of Stockholders . . . . . . . . . . . . . . . . . . 6
Section 13. Action Without Meeting . . . . . . . . . . . . . . . . . 6
Section 14. Organization . . . . . . . . . . . . . . . . . . . . . . 6

ARTICLE IV

DIRECTORS. . . . . . . . . . . . . . . 7
Section 15. Number and Term of Office. . . . . . . . . . . . . . . . 7
Section 16. Powers . . . . . . . . . . . . . . . . . . . . . . . . . 7
Section 17. Classes of Directors.. . . . . . . . . . . . . . . . . . 7
Section 18. Vacancies. . . . . . . . . . . . . . . . . . . . . . . . 8
Section 19. Resignation. . . . . . . . . . . . . . . . . . . . . . . 8
Section 20. Removal. . . . . . . . . . . . . . . . . . . . . . . . . 8
Section 21. Meetings . . . . . . . . . . . . . . . . . . . . . . . . 9
(a) Annual Meetings . . . . . . . . . . . . . . . . . . 9
(b) Regular Meetings. . . . . . . . . . . . . . . . . . 9
(c) Special Meetings. . . . . . . . . . . . . . . . . . 9
(d) Telephone Meetings. . . . . . . . . . . . . . . . . 9

<PAGE>

TABLE OF CONTENTS
(CONTINUED)
PAGE
----

(e) Notice of Meetings. . . . . . . . . . . . . . . . . 9
(f) Waiver of Notice. . . . . . . . . . . . . . . . . . 9
Section 22. Quorum and Voting. . . . . . . . . . . . . . . . . . . . 10
Section 23. Action Without Meeting . . . . . . . . . . . . . . . . . 10
Section 24. Fees and Compensation. . . . . . . . . . . . . . . . . . 10
Section 25. Committees . . . . . . . . . . . . . . . . . . . . . . . 10
(a) Executive Committee . . . . . . . . . . . . . . . . 10
(b) Other Committees. . . . . . . . . . . . . . . . . . 11
(c) Term. . . . . . . . . . . . . . . . . . . . . . . . 11
(d) Meetings. . . . . . . . . . . . . . . . . . . . . . 11
Section 26. Organization . . . . . . . . . . . . . . . . . . . . . . 12

ARTICLE V

OFFICERS. . . . . . . . . . . . . . . 12
Section 27. Officers Designated. . . . . . . . . . . . . . . . . . . 12
Section 28. Tenure and Duties of Officers. . . . . . . . . . . . . . 13
(a) General . . . . . . . . . . . . . . . . . . . . . . 12
(b) Duties of Chairman of the Board of Directors. . . . 13
(c) Duties of Chief Executive Officer . . . . . . . . . 13
(d) Duties of President . . . . . . . . . . . . . . . . 13
(e) Duties of Vice Presidents . . . . . . . . . . . . . 13
(f) Duties of Secretary . . . . . . . . . . . . . . . . 14
(g) Duties of Chief Financial Officer . . . . . . . . . 14
Section 29. Delegation of Authority. . . . . . . . . . . . . . . . . 14
Section 30. Resignations . . . . . . . . . . . . . . . . . . . . . . 14
Section 31. Removal. . . . . . . . . . . . . . . . . . . . . . . . . 15

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION . . . . . . . 15
Section 32. Execution of Corporate Instruments . . . . . . . . . . . 15
Section 33. Voting of Securities Owned by the Corporation. . . . . . 15
<PAGE>

TABLE OF CONTENTS
(CONTINUED)
PAGE
----

ARTICLE VII

SHARES OF STOCK . . . . . . . . . . . . . 16
Section 34. Form and Execution of Certificates . . . . . . . . . . . 16
Section 35. Lost Certificates. . . . . . . . . . . . . . . . . . . . 16
Section 36. Transfers. . . . . . . . . . . . . . . . . . . . . . . . 17
Section 37. Fixing Record Dates. . . . . . . . . . . . . . . . . . . 17
Section 38. Registered Stockholders. . . . . . . . . . . . . . . . . 17

ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION . . . . . . . . 18
Section 39. Execution of Other Securities. . . . . . . . . . . . . . 18

ARTICLE IX

DIVIDENDS. . . . . . . . . . . . . . . 18
Section 40. Declaration of Dividends . . . . . . . . . . . . . . . . 18
Section 41. Dividend Reserve . . . . . . . . . . . . . . . . . . . . 18

ARTICLE X

FISCAL YEAR . . . . . . . . . . . . . . 19
Section 42. Fiscal Year. . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE XI

INDEMNIFICATION . . . . . . . . . . . . . 19
Section 43. Indemnification of Directors, Executive Officers, Other
Officers, Employees and Other Agents . . . . . . . . . . 19
(a) Directors and Executive Officers. . . . . . . . . . 19
(b) Other Officers, Employees and Other Agents. . . . . 19
(c) Expenses. . . . . . . . . . . . . . . . . . . . . . 19
(d) Enforcement . . . . . . . . . . . . . . . . . . . . 20
(e) Non-Exclusivity of Rights . . . . . . . . . . . . . 21
(f) Survival of Rights. . . . . . . . . . . . . . . . . 21
(g) Insurance . . . . . . . . . . . . . . . . . . . . . 21
<PAGE>

TABLE OF CONTENTS
(CONTINUED)
PAGE
----

(h) Amendments. . . . . . . . . . . . . . . . . . . . . 21
(i) Saving Clause . . . . . . . . . . . . . . . . . . . 21
(j) Certain Definitions . . . . . . . . . . . . . . . . 21

ARTICLE XII

NOTICES . . . . . . . . . . . . . . . 23
Section 44. Notices. . . . . . . . . . . . . . . . . . . . . . . . . 23
(a) Notice to Stockholders. . . . . . . . . . . . . . . 23
(b) Notice to Directors . . . . . . . . . . . . . . . . 23
(c) Affidavit of Mailing. . . . . . . . . . . . . . . . 23
(d) Time Notices Deemed Given . . . . . . . . . . . . . 23
(e) Methods of Notice . . . . . . . . . . . . . . . . . 23
(f) Failure to Receive Notice . . . . . . . . . . . . . 23
(g) Notice to Person with Whom Communication Is
Unlawful. . . . . . . . . . . . . . . . . . . . . 23
(h) Notice to Person with Undeliverable Address . . . . 24

ARTICLE XIII

AMENDMENTS . . . . . . . . . . . . . . 24
Section 45. Amendments . . . . . . . . . . . . . . . . . . . . . . . 24

ARTICLE XIV

LOANS TO OFFICERS. . . . . . . . . . . . . 25
Section 46. Loans to Officers. . . . . . . . . . . . . . . . . . . . 25

ARTICLE XV

MISCELLANEOUS. . . . . . . . . . . . . . 25
Section 47. Annual Report. . . . . . . . . . . . . . . . . . . . . . 25

<PAGE>

AMENDED AND RESTATED

BYLAWS

ADOBE SYSTEMS INCORPORATED

ARTICLE I

OFFICES

SECTION 1. REGISTERED OFFICE. The registered office of the corporation
in the State of Delaware shall be in the City of Wilmington, County of New
Castle.

SECTION 2. OTHER OFFICES. The corporation shall also have and maintain
an office or principal place of business at such place as may be fixed by the
Board of Directors, and may also have offices at such other places, both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the corporation may require.

ARTICLE II

CORPORATE SEAL

SECTION 3. CORPORATE SEAL. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to
be impressed or affixed or reproduced or otherwise.

ARTICLE III

STOCKHOLDERS' MEETINGS

SECTION 4. PLACE OF MEETINGS. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.

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SECTION 5. ANNUAL MEETING.

(a) The annual meeting of the stockholders of the corporation, for
the purpose of election of directors and for such other business as may lawfully
come before it, shall be held on such date and at such time as may be designated
from time to time by the Board of Directors.

(b) At an annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be: (A) specified
in the notice of meeting (or any supplement thereto) given by or at the
direction of the Board of Directors, (B) otherwise properly brought before the
meeting by or at the direction of the Board of Directors, or (C) otherwise
properly brought before the meeting by a stockholder. For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a stockholder proposal to be presented an annual meeting shall be
received at the corporation's principal executive offices not less than one
hundred twenty (120) calendar days in advance of the date that the corporation's
(or the corporation's predecessor's) proxy statement was released to
stockholders in connection with the previous year's annual meeting of
stockholders; PROVIDED, HOWEVER, that in the event that no annual meeting was
held in the previous year or the date of the annual meeting has been changed by
more than thirty (30) days from the date contemplated at the time of the
previous year's proxy statement, or in the event of a special meeting, notice by
the stockholder to be timely must be so received not earlier than the close of
business on the tenth (10th) day following the day on which a notice of the date
of the meeting was mailed or a public announcement thereof was made. A
stockholder's notice to the Secretary shall set forth as to each matter the
stockholder proposes to bring before the annual meeting: (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any material interest of
the stockholder in such business and (v) any other information that is required
to be provided by the stockholder pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), in his capacity as
a proponent to a stockholder proposal. Notwithstanding the foregoing, in order
to include information with respect to a stockholder proposal in the proxy
statement and form of proxy for a stockholder's meeting, stockholders must
provide notice as required by the regulations promulgated under the 1934 Act.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this paragraph (b). The chairman of the annual meeting shall, if the
facts warrant, determine and declare at the meeting that business was not
properly brought before the meeting and in accordance with the provisions of
this paragraph (b), and, if he should so determine, he shall so declare at the
meeting that any such business not properly brought before the meeting shall not
be transacted.

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(c) Only persons who are nominated in accordance with the procedures
set forth in this paragraph (c) shall be eligible for election as directors.
Nominations of persons for election to the Board of Directors of the corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures set
forth in this paragraph (c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made pursuant to timely notice
in writing to the Secretary of the corporation in accordance with the provisions
of paragraph (b) of this Section 5. Such stockholder's notice shall set forth
(i) as to each person, if any, whom the stockholder proposes to nominate for
election or re-election as a director: (A) the name, age, business address and
residence address of such person, (B) the principal occupation or employment of
such person, (C) the class and number of shares of the corporation which are
beneficially owned by such person, (D) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nominations are to
be made by the stockholder, and (E) any other information relating to such
person that is required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required, in each case pursuant to Regulation 14A
under the 1934 Act (including without limitation such person's written consent
to being named in the proxy statement, if any, as a nominee and to serving as a
director if elected); and (ii) as to such stockholder giving notice, the
information required to be provided pursuant to paragraph (b) of this Section 5.
At the request of the Board of Directors, any person nominated by a stockholder
for election as a director shall furnish to the Secretary of the corporation
that information required to be set forth in the stockholder's notice of
nomination which pertains to the nominee. No person shall be eligible for
election as a director of the corporation unless nominated in accordance with
the procedures set forth in this paragraph (c). The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
Bylaws, and if he should so determine, he shall so declare at the meeting, and
the defective nomination shall be disregarded.

(d) For purposes of this Section 5, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press, Business Wire or comparable national news service or in a document
publicly filed by the corporation with the Securities and Exchange Commission
pursuant to Section 13, 14 or 15(d) of the Exchange Act.

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SECTION 6. SPECIAL MEETINGS.

(a) Special meetings of the stockholders of the corporation may be
called, for any purpose or purposes, by (i) the Chairman of the Board of
Directors, (ii) the President, (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption) or (iv) by the holders of shares entitled to cast not less than ten
percent (10%) of the votes at the meeting, and shall be held at such place, on
such date, and at such time as the Board of Directors, shall fix.

(b) If a special meeting is called by any person or persons other
than the Board of Directors, the request shall be in writing, specifying the
general nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the Chairman of the Board of Directors, the Chief Executive
Officer, or the Secretary of the corporation. No business may be transacted at
such special meeting otherwise than specified in such notice. The Board of
Directors shall determine the time and place of such special meeting, which
shall be held not less than thirty-five (35) nor more than one hundred twenty
(120) days after the date of the receipt of the request. Upon determination of
the time and place of the meeting, the officer receiving the request shall cause
notice to be given to the stockholders entitled to vote, in accordance with the
provisions of Section 7 of these Bylaws. If the notice is not given within
sixty (60) days after the receipt of the request, the person or persons
requesting the meeting may set the time and place of the meeting and give the
notice. Nothing contained in this paragraph (b) shall be construed as limiting,
fixing, or affecting the time when a meeting of stockholders called by action of
the Board of Directors may be held.

SECTION 7. NOTICE OF MEETINGS. Except as otherwise provided by law or
the Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) days nor more than sixty (60) days before
the date of the meeting to each stockholder entitled to vote at such meeting,
such notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.

SECTION 8. QUORUM. At all meetings of stockholders, except where
otherwise provided by statute or by the Certificate of Incorporation, or by
these Bylaws, the presence, in

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person or by proxy duly authorized, of the holders of a majority of the
outstanding shares of stock entitled to vote shall constitute a quorum for
the transaction of business. In the absence of a quorum, any meeting of
stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum
is present, may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave less than a
quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these Bylaws, all action taken by the holders of a majority
of the vote cast, excluding abstentions, at any meeting at which a quorum is
present shall be valid and binding upon the corporation; PROVIDED, HOWEVER,
that directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote
on the election of directors. Where a separate vote by a class or classes or
series is required, except where otherwise provided by the statute or by the
Certificate of Incorporation or these Bylaws, a majority of the outstanding
shares of such class or classes or series, present in person or represented
by proxy, shall constitute a quorum entitled to take action with respect to
that vote on that matter and, except where otherwise provided by the statute
or by the Certificate of Incorporation or these Bylaws, the affirmative vote
of the majority (plurality, in the case of the election of directors) of the
votes cast, including abstentions, by the holders of shares of such class or
classes or series shall be the act of such class or classes or series.

SECTION 9. ADJOURNMENT AND NOTICE OF ADJOURNED MEETINGS. Any meeting
of stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken.
At the adjourned meeting, the corporation may transact any business, which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.

SECTION 10. VOTING RIGHTS. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either in person or by an
agent or agents authorized by a proxy granted in accordance with Delaware law.
An agent so appointed need not be a stockholder. No proxy shall be voted after
three (3) years from its date of creation unless the proxy provides for a longer
period.

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SECTION 11. JOINT OWNERS OF STOCK. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his or her act binds all; (b) if more than one (1) votes, the act
of the majority so voting binds all; (c) if more than one (1) votes, but the
vote is evenly split on any particular matter, each faction may vote the
securities in question proportionally, or may apply to the Delaware Court of
Chancery for relief as provided in the General Corporation Law of Delaware,
Section 217(b). If the instrument filed with the Secretary shows that any such
tenancy is held in unequal interests, a majority or even-split for the purpose
of subsection (c) shall be a majority or even-split in interest.

SECTION 12. LIST OF STOCKHOLDERS. The Secretary shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order, showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the time and place of meeting during the whole time thereof
and may be inspected by any stockholder who is present.

SECTION 13. ACTION WITHOUT MEETING. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the stockholders
by written consent.

SECTION 14. ORGANIZATION.

(a) At every meeting of stockholders, the Chairman of the Board of
Directors, or, if a Chairman has not been appointed or is absent, the Chief
Executive Officer, or if the Chief Executive has not been appointed or is
absent, the President, or, if the President is absent, a chairman of the meeting
chosen by a majority in interest of the stockholders entitled to vote, present
in person or by proxy, shall act as chairman. The Secretary, or, in his or her
absence, an Assistant Secretary directed to do so by the President, shall act as
secretary of the meeting.

(b) The Board of Directors of the corporation shall be entitled to
make such rules or regulations for the conduct of meetings of stockholders as it
shall deem necessary, appropriate or convenient. Subject to such rules and
regulations of the Board of Directors, if any, the chairman of the meeting shall
have the right and authority to prescribe such rules,

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<PAGE>

regulations and procedures and to do all such acts as, in the judgment of
such chairman, are necessary, appropriate or convenient for the proper
conduct of the meeting, including, without limitation, establishing an agenda
or order of business for the meeting, rules and procedures for maintaining
order at the meeting and the safety of those present, limitations on
participation in such meeting to stockholders of record of the corporation
and their duly authorized and constituted proxies and such other persons as
the chairman shall permit, restrictions on entry to the meeting after the
time fixed for the commencement thereof, limitations on the time allotted to
questions or comments by participants and regulation of the opening and
closing of the polls for balloting on matters which are to be voted on by
ballot. Unless and to the extent determined by the Board of Directors or the
chairman of the meeting, meetings of stockholders shall not be required to be
held in accordance with rules of parliamentary procedure.

ARTICLE IV

DIRECTORS

SECTION 15. NUMBER AND TERM OF OFFICE. The authorized number of
directors of the corporation shall be fixed in accordance with the Certificate
of Incorporation. Directors need not be stockholders unless so required by the
Certificate of Incorporation. If for any cause, the directors shall not have
been elected at an annual meeting, they may be elected as soon thereafter as
convenient at a special meeting of the stockholders called for that purpose in
the manner provided in these Bylaws.

SECTION 16. POWERS. The powers of the corporation shall be exercised,
its business conducted and its property controlled by the Board of Directors,
except as may be otherwise provided by statute or by the Certificate of
Incorporation.

SECTION 17. CLASSES OF DIRECTORS. Subject to the rights of the holders
of any series of Preferred Stock to elect additional directors under specified
circumstances, the directors shall be divided into two classes designated as
Class I and Class II, respectively. Directors shall be assigned to each class in
accordance with a resolution or resolutions adopted by the Board of Directors.
At the first annual meeting of stockholders following November 30, 1997, the
term of office of the Class I directors shall expire and Class I directors shall
be elected for a full term of two years. At the second annual meeting of
stockholders following November 30, 1997, the term of office of the Class II
directors shall expire and Class II directors shall be elected for a full term
of two years. At each succeeding annual meeting of stockholders, directors
shall be elected for a full term of two years to succeed the directors of the
class whose terms expire at such annual meeting.

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Notwithstanding the foregoing provisions of this Section, each director
shall serve until his successor is duly elected and qualified or until his
death, resignation or removal. No decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.

SECTION 18. VACANCIES. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A
vacancy in the Board of Directors shall be deemed to exist under this Bylaw in
the case of the death, removal or resignation of any director.

SECTION 19. RESIGNATION. Any director may resign at any time by
delivering his written resignation to the Secretary, such resignation to specify
whether it will be effective at a particular time, upon receipt by the Secretary
or at the pleasure of the Board of Directors. If no such specification is made,
it shall be deemed effective at the pleasure of the Board of Directors. When
one or more directors shall resign from the Board of Directors, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have power to fill such vacancy or vacancies, the vote
thereon to take effect when such resignation or resignations shall become
effective, and each Director so chosen shall hold office for the unexpired
portion of the term of the Director whose place shall be vacated and until his
successor shall have been duly elected and qualified.

SECTION 20. REMOVAL.

Subject to the rights of the holders of any series of Preferred Stock, the
Board of Directors or any individual director may be removed from office at any
time with or without cause by the affirmative vote of the holders of a majority
of the voting power of all the then-outstanding shares of voting stock of the
corporation, entitled to vote at an election of directors (the "Voting Stock").

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SECTION 21. MEETINGS.

(a) ANNUAL MEETINGS. The annual meeting of the Board of Directors
shall be held immediately before or after the annual meeting of stockholders and
may be at the place where such meeting is held. No notice of an annual meeting
of the Board of Directors shall be necessary and such meeting shall be held for
the purpose of electing officers and transacting such other business as may
lawfully come before it.

(b) REGULAR MEETINGS. Except as hereinafter otherwise provided,
regular meetings of the Board of Directors shall be held in the office of the
corporation required to be maintained pursuant to Section 2 hereof. Unless
otherwise restricted by the Certificate of Incorporation, regular meetings of
the Board of Directors may also be held at any place within or without the State
of Delaware which has been designated by resolution of the Board of Directors or
the written consent of all directors.

(c) SPECIAL MEETINGS. Unless otherwise restricted by the Certificate
of Incorporation, special meetings of the Board of Directors may be held at any
time and place within or without the State of Delaware whenever called by the
Chairman of the Board, the President or any two of the directors.

(d) TELEPHONE MEETINGS. Any member of the Board of Directors, or of
any committee thereof, may participate in a meeting by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
by such means shall constitute presence in person at such meeting.

(e) NOTICE OF MEETINGS. Notice of the time and place of all special
meetings of the Board of Directors shall be orally or in writing, by telephone,
facsimile, electronic mail, telegraph or telex, during normal business hours, at
least twenty-four (24) hours before the date and time of the meeting, or sent in
writing to each director by first class mail, charges prepaid, at least three
(3) days before the date of the meeting. Notice of any meeting may be waived in
writing at any time before or after the meeting and will be waived by any
director by attendance thereat, except when the director attends the meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.

(f) WAIVER OF NOTICE. The transaction of all business at any meeting
of the Board of Directors, or any committee thereof, however called or noticed,
or wherever held, shall be as valid as though had at a meeting duly held after
regular call and notice, if a quorum be present and if, either before or after
the meeting, each of the directors not present shall sign a written waiver of
notice. All such waivers shall be filed with the corporate records or made a
part of the minutes of the meeting.

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SECTION 22. QUORUM AND VOTING.

(a) Unless the Certificate of Incorporation requires a greater number
and except with respect to indemnification questions arising under Section 43
hereof, for which a quorum shall be one-third of the exact number of directors
fixed from time to time in accordance with the Certificate of Incorporation, a
quorum of the Board of Directors shall consist of a majority of the exact number
of directors fixed from time to time by the Board of Directors in accordance
with the Certificate of Incorporation; PROVIDED, HOWEVER, at any meeting whether
a quorum be present or otherwise, a majority of the directors present may
adjourn from time to time until the time fixed for the next regular meeting of
the Board of Directors, without notice other than by announcement at the
meeting.

(b) At each meeting of the Board of Directors at which a quorum is
present, all questions and business shall be determined by the affirmative vote
of a majority of the directors present, unless a different vote be required by
law, the Certificate of Incorporation or these Bylaws.

SECTION 23. ACTION WITHOUT MEETING. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.

SECTION 24. FEES AND COMPENSATION. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.

SECTION 25. COMMITTEES.

(a) EXECUTIVE COMMITTEE. The Board of Directors may by resolution
passed by a majority of the whole Board of Directors appoint an Executive
Committee to consist of one (1) or more members of the Board of Directors. The
Executive Committee, to the extent permitted by law and provided in the
resolution of the Board of Directors shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, including without limitation the power or authority
to declare a dividend, to authorize the issuance of stock and to adopt a
certificate of ownership and merger,

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and may authorize the seal of the corporation to be affixed to all papers
which may require it; but no such committee shall have the power or authority
in reference to amending the Certificate of Incorporation (except that a
committee may, to the extent authorized in the resolution or resolutions
providing for the issuance of shares of stock adopted by the Board of
Directors fix the designations and any of the preferences or rights of such
shares relating to dividends, redemption, dissolution, any distribution of
assets of the corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes or any other series of the
same or any other class or classes of stock of the corporation or fix the
number of shares of any series of stock or authorize the increase or decrease
of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange
of all or substantially all of the corporation's property and assets,
recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the bylaws of the corporation.

(b) OTHER COMMITTEES. The Board of Directors may, by resolution
passed by a majority of the whole Board of Directors, from time to time appoint
such other committees as may be permitted by law. Such other committees
appointed by the Board of Directors shall consist of one (1) or more members of
the Board of Directors and shall have such powers and perform such duties as may
be prescribed by the resolution or resolutions creating such committees, but in
no event shall such committee have the powers denied to the Executive Committee
in these Bylaws.

(c) TERM. Each member of a committee of the Board of Directors shall
serve at the pleasure of the Board of Directors and until his or her successors
shall have been duly elected, unless sooner removed. The Board of Directors,
subject to the provisions of subsections (a) or (b) of this Bylaw may at any
time increase or decrease the number of members of a committee or terminate the
existence of a committee. The membership of a committee member shall terminate
on the date of his death or voluntary resignation from the committee or from the
Board of Directors. The Board of Directors may at any time for any reason
remove any individual committee member and the Board of Directors may fill any
committee vacancy created by death, resignation, removal or increase in the
number of members of the committee. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee, and, in addition, in the
absence or disqualification of any member of a committee, the member or members
thereof present at any meeting and not disqualified from voting, whether or not
he or they constitute a quorum, may unanimously appoint another member of the
Board of Directors to act at the meeting in the place of any such absent or
disqualified member.

(d) MEETINGS. Unless the Board of Directors shall otherwise provide,
regular meetings of the Executive Committee or any other committee appointed
pursuant to this Section 25 shall be held at such times and places as are
determined by the Board of Directors, or by any such committee, and when notice
thereof has been given to each member of such

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committee, no further notice of such regular meetings need be given
thereafter. Special meetings of any such committee may be held at any place
which has been determined from time to time by such committee, and may be
called by any director who is a member of such committee, upon written notice
to the members of such committee of the time and place of such special
meeting given in the manner provided for the giving of written notice to
members of the Board of Directors of the time and place of special meetings
of the Board of Directors. Notice of any special meeting of any committee
may be waived in writing at any time before or after the meeting and will be
waived by any director by attendance thereat, except when the director
attends such special meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. A majority of the authorized
number of members of any such committee shall constitute a quorum for the
transaction of business, and the act of a majority of those present at any
meeting at which a quorum is present shall be the act of such committee.

SECTION 26. ORGANIZATION. At every meeting of the directors, the
Chairman of the Board of Directors, or, if a Chairman has not been appointed or
is absent, the Chief Executive Officer, or if the Chief Executive Officer is
absent, the President, or if the President is absent, the most senior Vice
President, or, in the absence of any such officer, a chairman of the meeting
chosen by a majority of the directors present, shall preside over the meeting.
The Secretary, or in his or her absence, an Assistant Secretary directed to do
so by the President, shall act as secretary of the meeting.

ARTICLE V

OFFICERS

SECTION 27. OFFICERS DESIGNATED. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairmen of the
Board of Directors (such officers to comprise the Office of the Chairman of the
Board of Directors), the Chief Executive Officer, the President, one or more
Vice Presidents, the Secretary and the Chief Financial Officer, all of whom
shall be appointed at the annual meeting of the Board of Directors. Effective
September 19, 1997, the Office of the Chairman of the Board of Directors shall
be held jointly by the Chief Executive Officer and the President of the
Corporation. The Board of Directors (or if so empowered in accordance with this
Section 27) may also appoint other officers and agents with such powers and
duties as it shall deem necessary. Notwithstanding the foregoing, the Board of
Directors may empower the Chief Executive Officer of the corporation to appoint
such officers, other than Chairmen of the Board, President, Secretary or Chief
Financial Officer, as the business of the corporation may require. The Board of
Directors may assign such additional titles to one or more of the officers as it
shall deem appropriate. Any one person may hold any number of offices of the
corporation at any one time unless specifically prohibited therefrom by law.
The salaries and other compensation of the officers of the corporation shall be

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fixed by or in the manner designated by the Board of Directors or a designated
committee of the Board of Directors.

SECTION 28. TENURE AND DUTIES OF OFFICERS.

(a) GENERAL. All officers shall hold office at the pleasure of the
Board of Directors and until their successors shall have been duly elected and
qualified, unless sooner removed. Any officer elected or appointed by the Board
of Directors may be removed at any time by the Board of Directors. If the
office of any officer becomes vacant for any reason, the vacancy may be filled
by the Board of Directors.

(b) DUTIES OF THE CHAIRMEN OF THE BOARD OF DIRECTORS. Either of the
officers comprising the Office of the Chairman of the Board, when present, shall
preside at all meetings of the stockholders and the Board of Directors. The
Chairmen of the Board of Directors shall perform other duties commonly incident
to their office and shall also perform such other duties and have such other
powers as the Board of Directors shall designate from time to time. If either
position of Chief Executive Officer or President is vacant, then the remaining
officer shall serve as the Chairman of the Board of Directors and shall have the
powers and duties prescribed in this paragraph 28(b).

(c) DUTIES OF CHIEF EXECUTIVE OFFICER. Subject to such supervisory
powers, if any, as may be given by the Board of Directors to the Chairman of the
Board, if there by such an officer, the Chief Executive Officer shall be the
general manager and chief executive officer of the corporation and shall,
subject to the control of the Board of Directors, have general supervision,
direction, and control of the business and officers of the corporation. He or
she shall preside at all meetings of the stockholders and shall have the general
powers and duties of management usually vested in the office of chief executive
officer of a corporation, and shall have other powers and duties as may be
prescribed by the Board of Directors.

(d) DUTIES OF PRESIDENT. In the absence or disability of the Chief
Executive Officer, the President shall perform the duties of the Chief Executive
Officer and, when so acting, shall have all the powers of, and be subject to all
of the restrictions upon, the Chief Executive Officer. The President shall have
such other powers and perform such other duties as from time to time may be
prescribed for the President by the Board of Directors or the Chief Executive
Officer.

(e) DUTIES OF VICE PRESIDENTS. In the absence or disability of the
President, the Vice Presidents in order of their rank as fixed by the Board of
Directors, or if not ranked, the Vice President designated by the Board of
Directors, shall perform the duties of the President, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as

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from time to time may be prescribed for them respectively by the Board of
Directors, the Chief Executive Officer or the President.

(f) DUTIES OF SECRETARY. The Secretary shall keep, or cause to be
kept, a book of minutes in written form of the proceedings of the Board of
Directors, committees of the Board, and stockholders. Such minutes shall
include all waivers of notice, consents to the holding of meetings, or approvals
of the minutes of meetings executed pursuant to these Bylaws or the Delaware
General Corporation Law. The Secretary shall keep, or cause to be kept at the
principal executive office or at the office of the corporation's transfer agent
or registrar, a record of its stockholders, giving the name and addresses of all
stockholders and the number and class of shares held by each. The Secretary
shall give or cause to be given, notice of all meetings of the stockholders and
of the Board of Directors required by these Bylaws or by law to be given, and
shall keep the seal of the corporation in safe custody, and shall have such
other powers and perform such other duties as may be prescribed by the Board of
Directors, the Chief Executive Officer or the President.

(g) DUTIES OF CHIEF FINANCIAL OFFICER. The Chief Financial Officer
shall keep and maintain, or cause to be kept and maintained, adequate and
correct books and records of account in written form or any other form capable
of being converted into written form. The Chief Financial Officer shall deposit
all monies and other valuables in the name and to the credit of the corporation
with such depositories as may be designated by the Board of Directors. He or
she shall disburse all funds of the corporation as may be ordered by the Board
of Directors, shall render to the President, Chief Executive Officer and
Directors, whenever they request it, an account of all of his or her
transactions as Chief Financial Officer and of the financial condition of the
corporation, shall perform other duties commonly incident to his or her office
and shall have such other powers and perform such other duties as may be
prescribed by the Board of Directors, the Chief Executive Officer or the
President. The Chief Executive Officer or President may direct the Vice
President Finance to assume and perform the duties of the Chief Financial
Officer in the absence or disability of the Chief Financial Officer, and the
Vice President Finance shall perform other duties commonly incident to his or
her office and shall also perform such other duties and have such other powers
as the Board of Directors, the Chief Executive Officer, the President or the
Chief Financial Officer shall designate from time to time.

SECTION 29. DELEGATION OF AUTHORITY. The Board of Directors may from
time to time delegate the powers or duties of any officer to any other officer
or agent, notwithstanding any provision hereof.

SECTION 30. RESIGNATIONS. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be

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necessary to make it effective. Any resignation shall be without prejudice
to the rights, if any, of the corporation under any contract with the
resigning officer.

SECTION 31. REMOVAL. Any officer may be removed from office at any
time, either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.

ARTICLE VI

EXECUTION OF CORPORATE INSTRUMENTS AND VOTING
OF SECURITIES OWNED BY THE CORPORATION

SECTION 32. EXECUTION OF CORPORATE INSTRUMENTS. The Board of Directors
may, in its discretion, determine the method and designate the signatory officer
or officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.

Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, the Chief Executive Officer, or the President, Chief
Financial Officer or any Vice President. All other instruments and documents
requiring the corporate signature, but not requiring the corporate seal, may be
executed as aforesaid or in such other manner as may be directed by the Board of
Directors.

All checks and drafts drawn on banks or other depositaries on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.

Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.

SECTION 33. VOTING OF SECURITIES OWNED BY THE CORPORATION. All stock
and other securities of other corporations owned or held by the corporation for
itself, or for other parties in

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any capacity, shall be voted, and all proxies with respect thereto shall be
executed, by the person authorized so to do by resolution of the Board of
Directors, or, in the absence of such authorization, by the Chairman of the
Board of Directors, the Chief Executive Officer, the President, or any Vice
President.

ARTICLE VII

SHARES OF STOCK

SECTION 34. FORM AND EXECUTION OF CERTIFICATES. Certificates for the
shares of stock of the corporation shall be in such form as is consistent with
the Certificate of Incorporation and applicable law. Every holder of stock in
the corporation shall be entitled to have a certificate signed by or in the name
of the corporation by the Chairman of the Board of Directors, the Chief
Executive Officer, or the President or any Vice President and by the or
Assistant Treasurer or the Secretary or Assistant Secretary, certifying the
number of shares owned by him in the corporation. Any or all of the signatures
on the certificate may be facsimiles. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued with the same effect as if
he were such officer, transfer agent, or registrar at the date of issue. Each
certificate shall state upon the face or back thereof, in full or in summary,
all of the powers, designations, preferences, and rights, and the limitations or
restrictions of the shares authorized to be issued or shall, except as otherwise
required by law, set forth on the face or back a statement that the corporation
will furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative, participating, optional, or other
special rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Within a
reasonable time after the issuance or transfer of uncertificated stock, the
corporation shall send to the registered owner thereof a written notice
containing the information required to be set forth or stated on certificates
pursuant to this section or otherwise required by law or with respect to this
section a statement that the corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative
participatng, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights. Except as otherwise expressly provided by law, the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.

SECTION 35. LOST CERTIFICATES. A new certificate or certificates
shall be issued in place of any certificate or certificates theretofore
issued by the corporation alleged to have been lost, stolen, or destroyed,
upon the making of an affidavit of that fact by the person claiming the
certificate of stock to be lost, stolen, or destroyed. The corporation may
require, as a condition precedent to the issuance of a new certificate or
certificates, the owner of such lost, stolen, or

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destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require or to give the
corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.

SECTION 36. TRANSFERS.

(a) Transfers of record of shares of stock of the corporation shall
be made only upon its books by the holders thereof, in person or by attorney
duly authorized, and upon the surrender of a properly endorsed certificate or
certificates for a like number of shares.

(b) The corporation shall have power to enter into and perform any
agreement with any number of stockholders of any one or more classes of stock of
the corporation to restrict the transfer of shares of stock of the corporation
of any one or more classes owned by such stockholders in any manner not
prohibited by the General Corporation Law of Delaware.

SECTION 37. FIXING RECORD DATES.

(a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the Board of Directors may fix, in advance, a record date,
which record date shall not precede the date upon which the resolution fixing
the record date is adopted by the Board of Directors, and which record date
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting. If no record date is fixed by the Board of Directors, the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held. A determination
of stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; PROVIDED, HOWEVER,
that the Board of Directors may fix a new record date for the adjourned meeting.

SECTION 38. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person whether or not it shall have express
or other notice thereof, except as otherwise provided by the laws of Delaware.

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ARTICLE VIII

OTHER SECURITIES OF THE CORPORATION

SECTION 39. EXECUTION OF OTHER SECURITIES. All bonds, debentures and
other corporate securities of the corporation, other than stock certificates
(covered in Section 34), may be signed by the Chairman of the Board of
Directors, the Chief Executive Officer, the President or any Vice President, or
such other person as may be authorized by the Board of Directors, and the
corporate seal impressed thereon or a facsimile of such seal imprinted thereon
and attested by the signature of the Secretary or an Assistant Secretary, or the
Chief Financial Officer or Treasurer or an Assistant Treasurer; PROVIDED,
HOWEVER, that where any such bond, debenture or other corporate security shall
be authenticated by the manual signature, or where permissible facsimile
signature, of a trustee under an indenture pursuant to which such bond,
debenture or other corporate security shall be issued, the signatures of the
persons signing and attesting the corporate seal on such bond, debenture or
other corporate security may be the imprinted facsimile of the signatures of
such persons. Interest coupons appertaining to any such bond, debenture or
other corporate security, authenticated by a trustee as aforesaid, shall be
signed by the Chief Financial Officer, Treasurer or an Assistant Treasurer of
the corporation or such other person as may be authorized by the Board of
Directors, or bear imprinted thereon the facsimile signature of such person. In
case any officer who shall have signed or attested any bond, debenture or other
corporate security, or whose facsimile signature shall appear thereon or on any
such interest coupon, shall have ceased to be such officer before the bond,
debenture or other corporate security so signed or attested shall have been
delivered, such bond, debenture or other corporate security nevertheless may be
adopted by the corporation and issued and delivered as though the person who
signed the same or whose facsimile signature shall have been used thereon had
not ceased to be such officer of the corporation.

ARTICLE IX

DIVIDENDS

SECTION 40. DECLARATION OF DIVIDENDS. Dividends upon the capital stock
of the corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors pursuant to law
at any regular or special meeting. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.

SECTION 41. DIVIDEND RESERVE. Before payment of any dividend, there may
be set aside out of any funds of the corporation available for dividends such
sum or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property

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<PAGE>

of the corporation, or for such other purpose as the Board of Directors shall
think conducive to the interests of the corporation, and the Board of
Directors may modify or abolish any such reserve in the manner in which it
was created.

ARTICLE X

FISCAL YEAR

SECTION 42. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the Board of Directors.

ARTICLE XI

INDEMNIFICATION

SECTION 43. INDEMNIFICATION OF DIRECTORS, EXECUTIVE OFFICERS, OTHER
OFFICERS, EMPLOYEES AND OTHER AGENTS.

(a) DIRECTORS AND EXECUTIVE OFFICERS. The corporation shall
indemnify its directors and executive officers (for the purposes of this Article
XI, "executive officers shall have the meaning defined in Rule 3b-7 promulgated
under the 1934 Act) to the fullest extent not prohibited by the Delaware General
Corporation Law; PROVIDED, HOWEVER, that the corporation may modify the extent
of such indemnification by individual contracts with its directors and executive
officers; and, PROVIDED, FURTHER, that the corporation shall not be required to
indemnify any director or executive officer in connection with any proceeding
(or part thereof) initiated by such person unless (i) such indemnification is
expressly required to be made by law, (ii) the proceeding was authorized by the
Board of Directors of the corporation, (iii) such indemnification is provided by
the corporation, in its sole discretion, pursuant to the powers vested in the
corporation under the Delaware General Corporation Law or (iv) such
indemnification is required to be made under subsection (d).

(b) OTHER OFFICERS, EMPLOYEES AND OTHER AGENTS. The corporation
shall have power to indemnify its other officers, employees and other agents as
set forth in the Delaware General Corporation Law.

(c) EXPENSES. The corporation shall advance to any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is or was a director or
executive officer of the corporation, or is or was serving at the request of the
corporation as a director or executive officer of another corporation,
partnership,

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joint venture, trust or other enterprise, prior to the final disposition of
the proceeding, promptly following request therefor, all expenses incurred by
any director or executive officer in connection with such proceeding upon
receipt of an undertaking by or on behalf of such person to repay said
amounts if it should be determined ultimately that such person is not
entitled to be indemnified under this Bylaw or otherwise.

Notwithstanding the foregoing, unless otherwise determined pursuant to
paragraph (e) of this Bylaw, no advance shall be made by the corporation to an
executive officer of the corporation (except by reason of the fact that such
executive officer is or was a director of the corporation in which event this
paragraph shall not apply) in any action, suit or proceeding, whether civil,
criminal, administrative or investigative, if a determination is reasonably and
promptly made (i) by the Board of Directors by a majority vote of a quorum
consisting of directors who were not parties to the proceeding, or (ii) if such
quorum is not obtainable, or, even if obtainable, a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, that
the facts known to the decision-making party at the time such determination is
made demonstrate clearly and convincingly that such person acted in bad faith or
in a manner that such person did not believe to be in or not opposed to the best
interests of the corporation.

(d) ENFORCEMENT. Without the necessity of entering into an
express contract, all rights to indemnification and advances to directors and
executive officers under this Bylaw shall be deemed to be contractual rights
and be effective to the same extent and as if provided for in a contract
between the corporation and the director or executive officer. Any right to
indemnification or advances granted by this Bylaw to a director or executive
officer shall be enforceable by or on behalf of the person holding such right
in any court of competent jurisdiction if (i) the claim for indemnification
or advances is denied, in whole or in part, or (ii) no disposition of such
claim is made within ninety (90) days of request therefor. The claimant in
such enforcement action, if successful in whole or in part, shall be entitled
to be paid also the expense of prosecuting his claim. In connection with any
claim for indemnification, the corporation shall be entitled to raise as a
defense to any such action that the claimant has not met the standards of
conduct that make it permissible under the Delaware General Corporation Law
for the corporation to indemnify the claimant for the amount claimed. In
connection with any claim by an executive officer of the corporation (except
in any action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such executive officer is or was a
director of the corporation) for advances, the corporation shall be entitled
to raise a defense as to any such action clear and convincing evidence that
such person acted in bad faith or in a manner that such person did not
believe to be in or not opposed to the best interests of the corporation, or
with respect to any criminal action or proceeding that such person acted
without reasonable cause to believe that his conduct was lawful. Neither the
failure of the corporation (including its Board of Directors, independent
legal counsel or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he has met the applicable standard of conduct set
forth in the Delaware General Corporation Law, nor an actual determination by
the corporation

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(including its Board of Directors, independent legal counsel or its
stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that
claimant has not met the applicable standard of conduct. In any suit brought
by a director or executive officer to enforce a right to indemnification or
to an advancement of expenses hereunder, the burden of proving that the
director or executive officer is not entitled to be indemnified, or to such
advancement of expenses, under this Article XI or otherwise shall be on the
corporation.

(e) NON-EXCLUSIVITY OF RIGHTS. The rights conferred on any person by
this Bylaw shall not be exclusive of any other right which such person may have
or hereafter acquire under any statute, provision of the Certificate of
Incorporation, Bylaws, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding office. The corporation is
specifically authorized to enter into individual contracts with any or all of
its directors, officers, employees or agents respecting indemnification and
advances, to the fullest extent not prohibited by the Delaware General
Corporation Law.

(f) SURVIVAL OF RIGHTS. The rights conferred on any person by this
Bylaw shall continue as to a person who has ceased to be a director, officer,
employee or other agent and shall inure to the benefit of the heirs, executors
and administrators of such a person.

(g) INSURANCE. To the fullest extent permitted by the Delaware
General Corporation Law, the corporation, upon approval by the Board of
Directors, may purchase insurance on behalf of any person required or permitted
to be indemnified pursuant to this Bylaw.

(h) AMENDMENTS. Any repeal or modification of this Bylaw shall only
be prospective and shall not affect the rights under this Bylaw in effect at the
time of the alleged occurrence of any action or omission to act that is the
cause of any proceeding against any agent of the corporation.

(i) SAVING CLAUSE. If this Bylaw or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
corporation shall nevertheless indemnify each director and executive officer to
the full extent not prohibited by any applicable portion of this Bylaw that
shall not have been invalidated, or by any other applicable law.

(j) CERTAIN DEFINITIONS. For the purposes of this Bylaw, the
following definitions shall apply:

(i) The term "proceeding" shall be broadly construed and shall
include, without limitation, the investigation, preparation, prosecution,
defense, settlement, arbitration and appeal of, and the giving of testimony
in, any threatened, pending or

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<PAGE>

completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.

(ii) The term "expenses" shall be broadly construed and shall
include, without limitation, court costs, attorneys' fees, witness fees,
fines, amounts paid in settlement or judgment and any other costs and
expenses of any nature or kind incurred in connection with any proceeding.

(iii) The term the "corporation" shall include, in addition
to the resulting corporation, any constituent corporation (including any
constituent of a constituent) absorbed in a consolidation or merger which,
if its separate existence had continued, would have had power and authority
to indemnify its directors, officers, and employees or agents, so that any
person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Bylaw with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.

(iv) References to a "director," "executive officer," "officer,"
"employee," or "agent" of the corporation shall include, without
limitation, situations where such person is serving at the request of the
corporation as, respectively, a director, executive officer, officer,
employee, trustee or agent of another corporation, partnership, joint
venture, trust or other enterprise.

(v) References to "other enterprises" shall include employee
benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer,
employee, or agent with respect to an employee benefit plan, its
participants, or beneficiaries; and a person who acted in good faith and in
a manner he reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have acted
in a manner "not opposed to the best interests of the corporation" as
referred to in this Bylaw.

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<PAGE>

ARTICLE XII

NOTICES

SECTION 44. NOTICES.

(a) NOTICE TO STOCKHOLDERS. Whenever, under any provisions of these
Bylaws, notice is required to be given to any stockholder, it shall be given in
writing, timely and duly deposited in the United States mail, postage prepaid,
and addressed to his last known post office address as shown by the stock record
of the corporation or its transfer agent.

(b) NOTICE TO DIRECTORS. Any notice required to be given to any
director may be given by the method stated in subsection (a), or by facsimile,
telex or telegram, except that such notice other than one which is delivered
personally shall be sent to such address as such director shall have filed in
writing with the Secretary, or, in the absence of such filing, to the last known
post office address of such director.

(c) AFFIDAVIT OF MAILING. An affidavit of mailing, executed by a
duly authorized and competent employee of the corporation or its transfer agent
appointed with respect to the class of stock affected, specifying the name and
address or the names and addresses of the stockholder or stockholders, or
director or directors, to whom any such notice or notices was or were given, and
the time and method of giving the same, shall in the absence of fraud, be prima
facie evidence of the facts therein contained.

(d) TIME NOTICES DEEMED GIVEN. All notices given by mail, as above
provided, shall be deemed to have been given as at the time of mailing, and all
notices given by facsimile, telex or telegram shall be deemed to have been given
as of the sending time recorded at time of transmission.

(e) METHODS OF NOTICE. It shall not be necessary that the same
method of giving notice be employed in respect of all directors, but one
permissible method may be employed in respect of any one or more, and any other
permissible method or methods may be employed in respect of any other or others.

(f) FAILURE TO RECEIVE NOTICE. The period or limitation of time
within which any stockholder may exercise any option or right, or enjoy any
privilege or benefit, or be required to act, or within which any director may
exercise any power or right, or enjoy any privilege, pursuant to any notice sent
him in the manner above provided, shall not be affected or extended in any
manner by the failure of such stockholder or such director to receive such
notice.

(g) NOTICE TO PERSON WITH WHOM COMMUNICATION IS UNLAWFUL. Whenever
notice is required to be given, under any provision of law or of the Certificate
of Incorporation or

23
<PAGE>

Bylaws of the corporation, to any person with whom communication is unlawful,
the giving of such notice to such person shall not be required and there
shall be no duty to apply to any governmental authority or agency for a
license or permit to give such notice to such person. Any action or meeting
which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such
notice had been duly given. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate shall
state, if such is the fact and if notice is required, that notice was given
to all persons entitled to receive notice except such persons with whom
communication is unlawful.

(h) NOTICE TO PERSON WITH UNDELIVERABLE ADDRESS. Whenever notice is
required to be given, under any provision of law or the Certificate of
Incorporation or Bylaws of the corporation, to any stockholder to whom
(i) notice of two consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such person during
the period between such two consecutive annual meetings, or (ii) all, and at
least two, payments (if sent by first class mail) of dividends or interest on
securities during a twelve-month period, have been mailed addressed to such
person at his address as shown on the records of the corporation and have been
returned undeliverable, the giving of such notice to such person shall not be
required. Any action or meeting which shall be taken or held without notice to
such person shall have the same force and effect as if such notice had been duly
given. If any such person shall deliver to the corporation a written notice
setting forth his then current address, the requirement that notice be given to
such person shall be reinstated. In the event that the action taken by the
corporation is such as to require the filing of a certificate under any
provision of the Delaware General Corporation Law, the certificate need not
state that notice was not given to persons to whom notice was not required to be
given pursuant to this paragraph.

ARTICLE XIII

AMENDMENTS

SECTION 45. AMENDMENTS. Subject to paragraph (h) of Section 43 of the
Bylaws, the Bylaws may be altered or amended or new Bylaws adopted by the
affirmative vote of a majority of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend, or repeal the Bylaws.

24
<PAGE>

ARTICLE XIV

LOANS TO OFFICERS

SECTION 46. LOANS TO OFFICERS. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance
may be with or without interest and may be unsecured, or secured in such manner
as the Board of Directors shall approve, including, without limitation, a pledge
of shares of stock of the corporation. Nothing in these Bylaws shall be deemed
to deny, limit or restrict the powers of guaranty or warranty of the corporation
at common law or under any statute.

ARTICLE XV

MISCELLANEOUS

SECTION 47. ANNUAL REPORT.

(a) Subject to the provisions of paragraph (b) of this Bylaw, the
Board of Directors shall cause an annual report to be sent to each stockholder
of the corporation not later than one hundred twenty (120) days after the close
of the corporation's fiscal year. Such report shall include a balance sheet as
of the end of such fiscal year and an income statement and statement of changes
in financial position for such fiscal year, accompanied by any report thereon of
independent accountants, or if there is no such report, the certificate of an
authorized officer of the corporation that such statements were prepared without
audit from the books and records of the corporation.

When there are more than one hundred (100) stockholders of record of
the corporation's shares, as determined by Section 605 of the California
Corporations Code, additional information as required by Section 1501(b) of the
California Corporations Code shall also be contained in such report, provided
that if the corporation has a class of securities registered under Section 12 of
the 1934 Act, that Act shall take precedence. Such report shall be sent to
stockholders at least fifteen (15) days prior to the next annual meeting of
stockholders after the end of the fiscal year to which it relates.

(b) If and so long as there are fewer than 100 holders of record of
the corporation's shares, the requirement of sending of an annual report to the
stockholders of the corporation is hereby expressly waived.

<PAGE>

Exhibit 3.3

CERTIFICATE OF DESIGNATION
OF THE VOTING POWERS, DESIGNATION,
PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS OF THE
SERIES A PREFERRED STOCK

Pursuant to Section 151 of the
General Corporation Law of
the State of Delaware

I, John E. Warnock, Chairman of the Board and Chief Executive Officer of
Adobe Systems Incorporated, a corporation organized and existing under the
General Corporation Law of the State of Delaware (the "CORPORATION"), DO
HEREBY CERTIFY:

that, pursuant to authority conferred upon the Board of Directors of the
Corporation by its Certificate of Incorporation (the "CERTIFICATE"), and,
pursuant to the provisions of Section 151 of the General Corporation Law of
the State of Delaware, said Board of Directors, at a duly called meeting held
on July 30, 1997, at which a quorum was present and acted throughout, adopted
the following resolutions, which resolutions remain in full force and effect
on the date hereof creating a series of 100,000 shares of Preferred Stock
having a par value of $.0001 per share, designated as Series A Preferred
Stock (the "SERIES A PREFERRED STOCK") out of the class of 2,000,000 shares
of preferred stock of the par value of $.0001 per share (the "PREFERRED
STOCK"):

RESOLVED, that pursuant to the authority vested in the Board of
Directors in accordance with the provisions of the Certificate, the Board of
Directors does hereby create, authorize and provide for the issuance of the
Series A Preferred Stock having the voting powers, designation, relative,
participating, optional and other special rights, preferences, and
qualifications, limitations and restrictions thereof that are set forth as
follows:

Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Preferred Stock" and the number of shares
constituting such series shall be 100,000.

Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and
superior rights of the holders of any shares of any other series of Preferred
Stock or any other shares of preferred stock of the Corporation ranking prior
and superior to the shares of Series A Preferred Stock with respect to
dividends, each holder of one one-

<PAGE>

thousandth (1/1,000) of a share (a "UNIT") of Series A Preferred Stock shall
be entitled to receive, when, as and if declared by the Board of Directors
out of funds legally available for that purpose, (i) quarterly dividends
payable in cash on the last day of March, June, September and December in
each year (each such date being a "QUARTERLY DIVIDEND PAYMENT DATE"),
commencing on the first Quarterly Dividend Payment Date after the first
issuance of such Unit of Series A Preferred Stock, in an amount per Unit
(rounded to the nearest cent) equal to the greater of (a) $.01 or (b) subject
to the provision for adjustment hereinafter set forth, the aggregate per
share amount of all cash dividends declared on shares of the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first
issuance of a Unit of Series A Preferred Stock, and (ii) subject to the
provision for adjustment hereinafter set forth, quarterly distributions
(payable in kind) on each Quarterly Dividend Payment Date in an amount per
Unit equal to the aggregate per share amount of all non-cash dividends or
other distributions (other than a dividend payable in shares of Common Stock
or a subdivision of the outstanding shares of Common Stock, by
reclassification or otherwise) declared on shares of Common Stock since the
immediately preceding Quarterly Dividend Payment Date, or with respect to the
first Quarterly Dividend Payment Date, since the first issuance of a Unit of
Series A Preferred Stock. In the event that the Corporation shall at any
time after July 11, 1990 (the "RIGHTS DECLARATION DATE") (i) declare any
dividend on outstanding shares of Common Stock payable in shares of Common
Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine
outstanding shares of Common Stock into a smaller number of shares, then in
each such case the amount to which the holder of a Unit of Series A Preferred
Stock was entitled immediately prior to such event pursuant to the preceding
sentence shall be adjusted by multiplying such amount by a fraction the
numerator of which shall be the number of shares of Common Stock that are
outstanding immediately after such event and the denominator of which shall
be the number of shares of Common Stock that were outstanding immediately
prior to such event.

(B) The Corporation shall declare a dividend or distribution on Units
of Series A Preferred Stock as provided in paragraph (A) above immediately
after it declares a dividend or distribution on the shares of Common Stock
(other than a dividend payable in shares of Common Stock); PROVIDED, HOWEVER,
that, in the event no dividend or distribution shall have been declared on
the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$.01 per Unit on the Series A Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.

2
<PAGE>

(C) Dividends shall begin to accrue and shall be cumulative on each
outstanding Unit of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issuance of such Unit of Series A
Preferred Stock, unless the date of issuance of such Unit is prior to the
record date for the first Quarterly Dividend Payment Date, in which case,
dividends on such Unit shall begin to accrue from the date of issuance of
such Unit, or unless the date of issuance is a Quarterly Dividend Payment
Date or is a date after the record date for the determination of holders of
Units of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events
such dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall not bear interest.
Dividends paid on Units of Series A Preferred Stock in an amount less than
the aggregate amount of all such dividends at the time accrued and payable on
such Units shall be allocated pro rata on a unit-by-unit basis among all
Units of Series A Preferred Stock at the time outstanding. The Board of
Directors may fix a record date for the determination of holders of Units of
Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be no more than 30
days prior to the date fixed for the payment thereof.

Section 3. VOTING RIGHTS. The holders of Units of Series A Preferred
Stock shall have the following voting rights:

(A) Subject to the provision for adjustment hereinafter set forth, each
Unit of Series A Preferred Stock shall entitle the holder thereof to one vote
on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time after the Rights Declaration
Date (i) declare any dividend on outstanding shares of Common Stock payable
in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock
or (iii) combine the outstanding shares of Common Stock into a smaller number
of shares, then in each such case the number of votes per Unit to which
holders of Units of Series A Preferred Stock were entitled immediately prior
to such event shall be adjusted by multiplying such number by a fraction the
numerator of which shall be the number of shares of Common Stock outstanding
immediately after such event and the denominator of which shall be the number
of shares of Common Stock that were outstanding immediately prior to such
event.

(B) Except as otherwise provided herein or by law, the holders of Units
of Series A Preferred Stock and the holders of shares of Common Stock shall
vote together as one class on all matters submitted to a vote of stockholders
of the Corporation.

3
<PAGE>

(C) (i) If at any time dividends on any Units of Series A Preferred
Stock shall be in arrears in an amount equal to six quarterly dividends
thereon, then during the period (a "DEFAULT PERIOD") from the occurrence of
such event until such time as all accrued and unpaid dividends for all
previous quarterly dividend periods and for the current quarterly dividend
period on all Units of Series A Preferred Stock then outstanding shall have
been declared and paid or set apart for payment, all holders of Units of
Series A Preferred Stock, voting separately as a class, shall have the right
to elect two Directors.

(ii) During any default period, such voting rights of the holders of
Units of Series A Preferred Stock may be exercised initially at a special
meeting called pursuant to subparagraph (iii) of this Section 3(C) or at any
annual meeting of stockholders, and thereafter at annual meetings of
stockholders, provided that neither such voting rights nor any right of the
holders of Units of Series A Preferred Stock to increase, in certain cases,
the authorized number of Directors may be exercised at any meeting unless
one-third of the outstanding Units of Preferred Stock shall be present at
such meeting in person or by proxy. The absence of a quorum of the holders
of Common Stock shall not affect the exercise by the holders of Units of
Series A Preferred Stock of such rights. At any meeting at which the holders
of Units of Series A Preferred Stock shall exercise such voting rights
initially during an existing default period, they shall have the right,
voting separately as a class, to elect Directors to fill up to two vacancies
in the Board of Directors, if any such vacancies may then exist, or, if such
right is exercised at an annual meeting, to elect two Directors. If the
number which may be so elected at any special meeting does not amount to the
required number, the holders of the Series A Preferred Stock shall have the
right to make such increase in the number of Directors as shall be necessary
to permit the election by them of the required number. After the holders of
Units of Series A Preferred Stock shall have exercised their right to elect
Directors during any default period, the number of Directors shall not be
increased or decreased except as approved by a vote of the holders of Units
of Series A Preferred Stock as herein provided or pursuant to the rights of
any equity securities ranking senior to the Series A Preferred Stock.

(iii) Unless the holders of Series A Preferred Stock shall, during an
existing default period, have previously exercised their right to elect
Directors, the Board of Directors may order, or any stockholder or
stockholders owning in the aggregate not less than 25% of the total number of
the Units of Series A Preferred Stock outstanding may request, the calling of
a special meeting of the holders of Units of Series A Preferred Stock, which
meeting shall thereupon be called by the Secretary of the Corporation.
Notice of such meeting and of any annual meeting at which holders of Units of
Series A Preferred Stock are entitled to vote pursuant to this paragraph
(C)(iii)

4
<PAGE>

shall be given to each holder of record of Units of Series A Preferred Stock
by mailing a copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a
time not earlier than 20 days and not later then 60 days after such order or
request or in default of the calling of such meeting within 60 days after
such order or request, such meeting may be called on similar notice by any
stockholder or stockholders owning in the aggregate not less than 25% of the
total number of outstanding Units of Series A Preferred Stock.
Notwithstanding the provisions of this paragraph (C)(iii), no such special
meeting shall be called during the 60 days immediately preceding the date
fixed for the next annual meeting of the stockholders.

(iv) During any default period, the holders of shares of Common Stock
and Units of Series A Preferred Stock, and other classes or series of stock
of the Corporation, if applicable, shall continue to be entitled to elect all
the Directors until holders of the Units of Series A Preferred Stock shall
have exercised their right to elect two Directors voting as a separate class,
after the exercise of which right (x) the Directors so elected by the holders
of Units of Series A Preferred Stock shall continue in office until their
successors shall have been elected by such holders or until the expiration of
the default period, and (y) any vacancy in the Board of Directors may (except
as provided in paragraph (C)(ii) of this Section 3) be filled by vote of a
majority of the remaining Directors theretofore elected by the holders of the
class of capital stock which elected the Director whose office shall have
become vacant. References in this paragraph (C) to Directors elected by the
holders of a particular class of capital stock shall include Directors
elected by such Directors to fill vacancies as provided in clause (y) of the
foregoing sentence.

(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Units of Series A Preferred Stock as a separate class to
elect Directors shall cease, (y) the term of any Directors elected by the
holders of Units of Series A Preferred Stock as a separate class shall
terminate, and (z) the number of Directors shall be such number as may be
provided for in the Certificate or by-laws irrespective of any increase made
pursuant to the provisions of paragraph (C)(ii) of this Section 3 (such
number being subject, however, to change thereafter in any manner provided by
law or in the Certificate or by-laws). Any vacancies in the Board of
Directors effected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining Directors.

(vi) The provisions of this paragraph (C) shall govern the election of
Directors by holders of Units of Preferred Stock during any default period
notwithstanding any provisions of the Certificate to the contrary, including,
without limitation, the

5
<PAGE>

provisions of Article V of the Certificate.

(D) Except as set forth herein, holders of Units of Series A Preferred
Stock shall have no special voting rights and their consents shall not be
required (except to the extent they are entitled to vote with holders of
shares of Common Stock as set forth herein) for taking any corporate action.

Section 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or
other dividends or distributions payable on Units of Series A Preferred Stock
as provided in Section 2 are in arrears, thereafter and until all accrued and
unpaid dividends and distributions, whether or not declared, on outstanding
Units of Series A Preferred Stock shall have been paid in full, the
Corporation shall not

(i) declare or pay dividends on, make any other distributions on,
or redeem or purchase or otherwise acquire for consideration any shares
of junior stock;

(ii) declare or pay dividends on or make any other distributions on
any shares of parity stock, except dividends paid ratably on Units of
Series A Preferred Stock and shares of all such parity stock on which
dividends are payable or in arrears in proportion to the total amounts
to which the holders of such Units and all such shares are then entitled;

(iii) redeem or purchase or otherwise acquire for consideration
shares of any parity stock, PROVIDED, HOWEVER, that the Corporation may
at any time redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any junior stock;

(iv) purchase or otherwise acquire for consideration any Units of
Series A Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the Board of
Directors) to all holders of such Units.

(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.

Section 5. REACQUIRED SHARES. Any Units of Series A Preferred
Stock purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be

6
<PAGE>

retired and cancelled promptly after the acquisition thereof. All such Units
shall, upon their cancellation, become authorized but unissued Units of
Preferred Stock and may be reissued as part of a new series of Preferred
Stock to be created by resolution or resolutions of the Board of Directors,
subject to the conditions and restrictions on issuance set forth herein.

Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (i) to the holders of shares of
junior stock unless the holders of Units of Series A Preferred Stock shall
have received, subject to adjustment as hereinafter provided in paragraph
(B), the greater of either (a) $.01 per Unit plus an amount equal to accrued
and unpaid dividends and distributions thereon, whether or not earned or
declared, to the date of such payment, or (b) the amount equal to the
aggregate per share amount to be distributed to holders of shares of Common
Stock, or (ii) to the holders of shares of parity stock, unless
simultaneously therewith distributions are made ratably on Units of Series A
Preferred Stock and all other shares of such parity stock in proportion to
the total amounts to which the holders of Units of Series A Preferred Stock
are entitled under clause (i)(a) of this sentence and to which the holders of
shares of such parity stock are entitled, in each case upon such liquidation,
dissolution or winding up.

(B) In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare any dividend on outstanding shares of Common
Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of
Common Stock, or (iii) combine outstanding shares of Common Stock into a
smaller number of shares, then in each such case the aggregate amount to
which holders of Units of Series A Preferred Stock were entitled immediately
prior to such event pursuant to clause (i)(b) of paragraph (A) of this
Section 6 shall be adjusted by multiplying such amount by a fraction the
numerator of which shall be the number of shares of Common Stock that are
outstanding immediately after such event and the denominator of which shall
be the number of shares of Common Stock that were outstanding immediately
prior to such event.

Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall
enter into any consolidation, merger, combination or other transaction in
which the shares of common stock are exchanged for or converted into other
stock or securities, cash and/or any other property, then in any such case
Units of Series A Preferred Stock shall at the same time be similarly
exchanged for or converted into an amount per Unit (subject to the provision
for adjustment hereinafter set forth) equal to the aggregate amount of stock,
securities, cash and/or any other property (payable in kind), as the

7
<PAGE>

case may be, into which or for which each share of Common Stock is converted
or exchanged. In the event the Corporation shall at any time after the
Rights Declaration Date (i) declare any dividend on outstanding shares of
Common Stock payable in shares of Common Stock, (ii) subdivide outstanding
shares of Common Stock, or (iii) combine outstanding Common Stock into a
smaller number of shares, then in each such case the amount set forth in the
immediately preceding sentence with respect to the exchange or conversion of
Units of Series A Preferred Stock shall be adjusted by multiplying such
amount by a fraction the numerator of which shall be the number of shares of
Common Stock that are outstanding immediately after such event and the
denominator of which shall be the number of shares of Common Stock that were
outstanding immediately prior to such event.

Section 8. REDEMPTION. The Units of Series A Preferred Stock shall not
be redeemable.

Section 9. RANKING. The Units of Series A Preferred Stock shall rank
junior to all other series of the Preferred Stock and to any other class of
preferred stock that hereafter may be issued by the Corporation as to the
payment of dividends and the distribution of assets, unless the terms of any
such series or class shall provide otherwise.

Section 10. AMENDMENT. The Certificate, including, without limitation,
this resolution, shall not hereafter be amended, either directly or
indirectly, or through merger or consolidation with another corporations in
any manner that would alter or change the powers, preferences or special
rights of the Series A Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of a majority or more of the outstanding
Units of Series A Preferred Stock, voting separately as a class.

Section 11. FRACTIONAL SHARES. The Series A Preferred Stock may be
issued in Units or other fractions of a share, which Units or fractions shall
entitle the holder, in proportion to such holder's fractional shares, to
exercise voting rights, receive dividends, participate in distributions and
to have the benefit of all other rights of holders of Series A Preferred
Stock.

Section 12. CERTAIN DEFINITIONS. As used herein with respect to the
Series A Preferred Stock, the following terms shall have the following
meanings:

(A) The term "COMMON STOCK" shall mean the class of stock designated as
the common stock, par value $.0001 per share, of the Corporation at the date
hereof or any other class of stock resulting from successive changes or
reclassification of such

8
<PAGE>

common stock.

(B) The term "JUNIOR STOCK" (i) as used in Section 4, shall mean the
Common Stock and any other class or series of capital stock of the
Corporation hereafter authorized or issued over which the Series A Preferred
Stock has preference or priority as to the payment of dividends and (ii) as
used in Section 6, shall mean the Common Stock and any other class or series
of capital stock of the Corporation over which the Series A Preferred Stock
has preference or priority in the distribution of assets on any liquidation,
dissolution or winding up of the Corporation.

(C) The term "PARITY STOCK" (i) as used in Section 4, shall mean any
class or series of stock of the Corporation hereafter authorized or issued
ranking PARI PASSU with the Series A Preferred Stock as to the payment of
dividends and (ii) as used in Section 6, shall mean any class or series of
capital stock ranking PARI PASSU with the Series A Preferred Stock in the
distribution of assets on any liquidation, dissolution or winding up of the
Corporation.

9
<PAGE>

IN WITNESS WHEREOF, Adobe Systems Incorporated has caused this
Certificate to be signed by its Chairman of the Board and Chief Executive
Officer and attested by its Secretary this 29th day of August, 1997.

ADOBE SYSTEMS INCORPORATED

By: /s/ John E. Warnock
------------------------------------
Name: John E. Warnock
Title: Chairman of the Board and
Chief Executive Officer

Attest:

/s/ Colleen M. Pouliot
- ------------------------------

<PAGE>

EXHIBIT 10.42

THE SECURITIES EVIDENCED BY THIS PARTNERSHIP AGREEMENT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD,
TRANSFERRED, ASSIGNED OR HYPOTHECATED UNLESS THERE IS AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE 1933 ACT COVERING SUCH SECURITIES OR THE
GENERAL PARTNER RECEIVES AN OPINION OF COUNSEL FOR THE HOLDER OF THESE
SECURITIES REASONABLY SATISFACTORY TO THE GENERAL PARTNER, STATING THAT SUCH
SALE, TRANSFER, ASSIGNMENT OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION
AND PROSPECTUS DELIVERY REQUIREMENTS OF THE 1933 ACT.

THE INTERESTS IN THE PARTNERSHIP OF THE CLASS B LIMITED PARTNERS ARE SUBJECT
TO AN OPTION SET FORTH IN AN AGREEMENT BETWEEN THE PARTNERSHIP AND EACH CLASS
B LIMITED PARTNER, OR THE PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE
AT THE PRINCIPAL OFFICE OF THIS PARTNERSHIP. ANY TRANSFER OR ATTEMPTED
TRANSFER OF ANY UNITS SUBJECT TO SUCH OPTION IS VOID WITHOUT THE PRIOR
EXPRESS WRITTEN CONSENT OF THE ISSUER OF THESE UNITS.

AMENDED AND RESTATED

LIMITED PARTNERSHIP AGREEMENT

ADOBE INCENTIVE PARTNERS, L.P.

OCTOBER 31, 1997

<PAGE>

TABLE OF CONTENTS

PAGE

ARTICLE 1

CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Accounting Period. . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Adjusted Asset Value . . . . . . . . . . . . . . . . . . . . . . 1
1.3 Affiliate. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.4 Capital Account. . . . . . . . . . . . . . . . . . . . . . . . . 2
1.5 Capital Contribution.. . . . . . . . . . . . . . . . . . . . . . 2
1.6 Code . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Deemed Gain or Deemed Loss . . . . . . . . . . . . . . . . . . . 2
1.8 Excluded Investment. . . . . . . . . . . . . . . . . . . . . . . 3
1.9 Majority in Interest of the Class A Limited Partners.. . . . . . 3
1.10 Marketable; Marketable Securities; Marketability . . . . . . . . 3
1.11 Nonmarketable Securities . . . . . . . . . . . . . . . . . . . . 3
1.12 Profit or Loss . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.13 Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.14 Securities Act . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.15 Short Term Income. . . . . . . . . . . . . . . . . . . . . . . . 4
1.16 Treasury Regulations . . . . . . . . . . . . . . . . . . . . . . 4
1.17 Units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.18 AVI Marketable Securities. . . . . . . . . . . . . . . . . . . . 4

ARTICLE 2

NAME, PURPOSE AND OFFICES OF PARTNERSHIP . . . . . . . . . . . . . . . . . . 5
2.1 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.2 Purpose. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
2.3 Principal Office . . . . . . . . . . . . . . . . . . . . . . . . 5

ARTICLE 3

TERM OF PARTNERSHIP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.2 Events Affecting a Limited Partner of the Partnership. . . . . . 5
3.3 Events Affecting the General Partner of the Partnership. . . . . 5

ARTICLE 4

NAME AND ADMISSION OF PARTNERS . . . . . . . . . . . . . . . . . . . . . . . 6
4.1 Name, Address and Units. . . . . . . . . . . . . . . . . . . . . 6

<PAGE>

TABLE OF CONTENTS
(CONTINUED)

PAGE

4.2 Admission of Additional Partners . . . . . . . . . . . . . . . . 6

ARTICLE 5

CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS . . . . . . . . . . . . . . . . . 6
5.1 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Initial Capital Contributions. . . . . . . . . . . . . . . . . . 7
5.3 Capital Contributions of the General Partner . . . . . . . . . . 7
5.4 Additional Capital Contributions.. . . . . . . . . . . . . . . . 7

ARTICLE 6

PARTNERSHIP ALLOCATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.1 Allocation of Profit or Loss . . . . . . . . . . . . . . . . . . 7
6.2 Other Allocations. . . . . . . . . . . . . . . . . . . . . . . . 8
6.3 Income Tax Allocations . . . . . . . . . . . . . . . . . . . . . 9

ARTICLE 7

PARTNERSHIP EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
7.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

ARTICLE 8

WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS . . . . . . . . . . . . . . 10
8.1 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
8.2 Withdrawals by the Partners. . . . . . . . . . . . . . . . . . . 10
8.3 Partners' Obligation to Repay or Restore . . . . . . . . . . . . 10
8.4 Cash Distributions . . . . . . . . . . . . . . . . . . . . . . . 10
8.5 In Kind Distributions. . . . . . . . . . . . . . . . . . . . . . 11
8.6 Withdrawal of Class B Limited Partners.. . . . . . . . . . . . . 12

ARTICLE 9

MANAGEMENT DUTIES AND RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . 13
9.1 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
9.2 No Control by the Limited Partners; No Withdrawal. . . . . . . . 13

<PAGE>

TABLE OF CONTENTS
(CONTINUED)

PAGE
9.3 Class A Limited Partner Approval Rights. . . . . . . . . . . . . 13
9.4 Investment Opportunities . . . . . . . . . . . . . . . . . . . . 14
9.5 Compliance with Partnership Agreement; Detrimental Acts. . . . . 14

ARTICLE 10

INVESTMENT REPRESENTATION AND TRANSFER
OF PARTNERSHIP INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . 14
10.1 Investment Representation of the Limited Partners. . . . . . . . 14
10.2 Qualifications of the Limited Partner. . . . . . . . . . . . . . 15
10.3 Transfer by the General Partner. . . . . . . . . . . . . . . . . 15
10.4 Transfer by a Limited Partner. . . . . . . . . . . . . . . . . . 15
10.5 Requirements for Transfer. . . . . . . . . . . . . . . . . . . . 15
10.6 Substitution as a Limited Partner. . . . . . . . . . . . . . . . 16
10.7 Expenses of Transfer . . . . . . . . . . . . . . . . . . . . . . 16

ARTICLE 11

DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP . . . . . . . . . . . . . . . 16
11.1 Early Termination of the Partnership . . . . . . . . . . . . . . 16
11.2 Winding Up Procedures. . . . . . . . . . . . . . . . . . . . . . 17

ARTICLE 12

FINANCIAL ACCOUNTING,
REPORTS, MEETINGS AND VOTING . . . . . . . . . . . . . . . . . . . . . . . . 18
12.1 Financial Accounting; Fiscal Year. . . . . . . . . . . . . . . . 18
12.2 Supervision; Inspection of Books . . . . . . . . . . . . . . . . 18
12.3 Partnership Reports; Financial Statements of the
Partnership. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
12.4 Tax Returns and Tax Information. . . . . . . . . . . . . . . . . 19
12.5 Tax Matters Partner. . . . . . . . . . . . . . . . . . . . . . . 19
12.6 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . 19

ARTICLE 13

VALUATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
13.1 Valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
<PAGE>

TABLE OF CONTENTS
(CONTINUED)

PAGE

ARTICLE 14

OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14.1 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . 21
14.2 Limitation of Liability of the Limited Partners. . . . . . . . . 21
14.3 Exculpation. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
14.4 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 21
14.5 Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
14.6 Execution and Filing of Documents. . . . . . . . . . . . . . . . 22
14.7 Other Instruments and Acts . . . . . . . . . . . . . . . . . . . 22
14.8 Binding Agreement. . . . . . . . . . . . . . . . . . . . . . . . 22
14.9 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
14.10 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . 22
14.11 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . 22
14.12 Titles; Subtitles. . . . . . . . . . . . . . . . . . . . . . . . 23
14.13 Partnership Name . . . . . . . . . . . . . . . . . . . . . . . . 23

<PAGE>
ADOBE INCENTIVE PARTNERS, L.P.
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT

THIS AGREEMENT is made and entered into as of the 31st day of October,
1997, by ADOBE SYSTEMS INCORPORATED, a Delaware corporation ("Adobe") who in its
capacity as the sole general partner and sole Class A Limited Partner is
empowered to enter into this amended and restated agreement and who hereby
amends and restates the June 16, 1997 Amended and Restated Limited Partnership
Agreement of ADOBE INCENTIVE PARTNERS, L.P. (the "Partnership"), to reflect the
contribution to the Partnership by Adobe in its capacity as the Class A Limited
Partner of its interest in Adobe Ventures, L.P., a California limited
partnership ("AVI") and related matters, pursuant to the provisions of the
California Revised Limited Partnership Act (the "Act"), as follows:

ARTICLE 1

CERTAIN DEFINITIONS

1.1 ACCOUNTING PERIOD. An Accounting Period shall be (i) the Fiscal
Year if there are no changes in the Partners' respective interests in the
Profits or Losses of the Partnership during such period except on the first day
thereof, or (ii) any other period beginning on the first day of the Fiscal Year,
or any other day during the Fiscal Year upon which occurs a change in such
respective interests, and ending on the last day of the Fiscal Year, or on the
day preceding an earlier day upon which any change in such respective interest
shall occur.

1.2 ADJUSTED ASSET VALUE. The Adjusted Asset Value with respect to
any asset shall be the asset's adjusted basis for federal income tax purposes,
except as follows:

(a) The initial Adjusted Asset Value of any asset contributed
by a Partner to the Partnership shall be the lesser of (i) the gross fair market
value of such asset or (ii) the asset's adjusted basis for federal income tax
purposes at the time of contribution, as determined by the contributing Partner
and the General Partner.

(b) In the discretion of the General Partner, the Adjusted
Asset Values of all Partnership assets may be adjusted to equal their respective
gross fair market values, as determined by the General Partner, and the
resulting unrealized profit or loss allocated to the Capital Accounts of the
Partners pursuant to Article 6, as of the following times: (i) the acquisition
of an additional interest in the Partnership by any new or existing Partner in
exchange for more than a DE MINIMIS capital contribution, and (ii) the
distribution by the Partnership to a Partner of more than a DE MINIMIS amount of
Partnership assets, unless all Partners receive simultaneous distributions of
either undivided interests in the distributed property or identical Partnership
assets in proportion to their interests in Partnership distributions as provided
in paragraphs 8.4 and 8.5.

(c) The Adjusted Asset Values of all Partnership assets shall
be adjusted to equal their respective gross fair market values, as determined by
the General Partner, and the resulting unrealized profit or loss allocated to
the Capital Accounts of the Partners pursuant to Article 6, as of the following
times: (i) the termination of the Partnership for federal income tax purposes
pursuant to

1.
<PAGE>

Code Section 708(b)(1)(B); and (ii) the termination of the Partnership either
by expiration of the Partnership's term or the occurrence of an event
described in paragraph 11.1.

1.3 AFFILIATE. An Affiliate of any person shall mean any person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by or is under common control with the person specified.

1.4 CAPITAL ACCOUNT. The Capital Account of each Partner shall
consist of its original capital contribution (in kind contributions shall be
credited at their Adjusted Asset Value), (i) increased by any additional capital
contributions, its share of income or gain that is allocated to it pursuant to
this Agreement, any Capital Account shift in favor of such Partner, and (ii)
decreased by the amount of any distributions to or withdrawals by it, its share
of expense or loss that is allocated to it pursuant to this Agreement, the
amount of any Capital Account shift away from the Capital Account of such
Partner. The foregoing provision and the other provisions of this Agreement
relating to the maintenance of Capital Accounts are intended to comply with
Treasury Regulation Section 1.704 1(b)(2)(iv), and shall, except as otherwise
expressly provided herein, be interpreted and applied in a manner consistent
with such Regulations. In the event the General Partner shall determine that it
is prudent to modify the manner in which the Capital Accounts, or any debits or
credits thereto, are computed in order to comply with such Regulations, the
General Partner may make such modification, provided that it is not likely to
have more than an insignificant effect on the total amounts distributable to any
Partner pursuant to Article VIII and Article XI.

1.5 CAPITAL CONTRIBUTION. A Partner's Capital Contribution shall mean
the amount that such Partner has contributed to the capital of the Partnership
as set forth opposite such Partner's name on Exhibit A hereto, as from time to
time amended.

1.6 CODE. The Code is the Internal Revenue Code of 1986, as amended
from time to time (or any corresponding provisions of succeeding law).

1.7 DEEMED GAIN OR DEEMED LOSS. The Deemed Gain from any in kind
distribution of Securities shall be equal to the excess, if any, of the fair
market value of the Securities distributed (valued as of the date of
distribution in accordance with paragraph 13.1), over the aggregate Adjusted
Asset Value of the Securities distributed. The Deemed Loss from any in kind
distribution of Securities shall be equal to the excess, if any, of the
aggregate Adjusted Asset Value of the Securities distributed over the fair
market value of the Securities distributed (valued as of the date of
distribution in accordance with paragraph 13.1).

1.8 EXCLUDED INVESTMENT. Excluded Investment means a Security of the
Partnership that one or more Partners does not share in because (i) he or she is
an officer, director or five percent or greater shareholder of the issuer of the
Security or (ii) the Investment Committee of the Board of Directors of Adobe
otherwise determines that it is inappropriate for such Partner to participate in
the investment because of the Partner's involvement with the issuer of the
Security. An Excluded Investment shall be designated as such at the time of its
acquisition.

1.9 MAJORITY IN INTEREST OF THE CLASS A LIMITED PARTNERS. Majority in
Interest of the Class A Limited Partners means one or more Class A Limited
Partners who own in the aggregate a majority of the Class A Units.

1.10 MARKETABLE; MARKETABLE SECURITIES; MARKETABILITY. These terms
shall refer to

2.
<PAGE>

Securities that are (a) traded on a national securities exchange or over the
counter or (b) currently the subject of an effective Securities Act
registration statement. Notwithstanding the foregoing, a Security shall not
be deemed to be a Marketable Security if, in the good faith judgment of the
General Partner, the market on which such Security trades is not adequate to
permit an orderly sale of all shares of such Security held by the Partnership
within a reasonable time period or if the Securities cannot be sold because
of lock-up restrictions or other contractual restrictions on transfer.

1.11 NONMARKETABLE SECURITIES. Nonmarketable Securities are all
Securities other than Marketable Securities.

1.12 PROFIT OR LOSS. Profit or Loss shall be an amount computed
separately for each Security for each Accounting Period as of the last day
thereof that is equal to the Partnership's taxable income or loss for each
Security for such Accounting Period, determined in accordance with Section
703(a) of the Code (for this purpose, all items of income, gain, loss, or
deduction required to be stated separately pursuant to Code Section 703(a)(1)
shall be included in taxable income or loss), with the following adjustments:

(a) Any income of the Partnership that is exempt from federal
income tax and not otherwise taken into account in computing Profit or Loss
pursuant to this paragraph shall be added to such taxable income or loss;

(b) Any expenditures of the Partnership described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treasury Regulation Section 1.704 1(b)(2)(iv)(i) and not otherwise
taken into account in computing Profit or Loss pursuant to this paragraph shall
be subtracted from such taxable income or loss;

(c) Gain or loss resulting from any disposition of a
Partnership asset with respect to which gain or loss is recognized for federal
income tax purposes shall be computed by reference to the Adjusted Asset Value
of the asset disposed of rather than its adjusted tax basis;

(d) The difference between the gross fair market value of all
Partnership assets and their respective Adjusted Asset Values shall be added to
such taxable income or loss in the circumstances described in paragraph 1.2;

(e) Items which are specially allocated pursuant to paragraph
6.3 hereof shall not be taken into account in computing Profit or Loss; and

(f) Short Term Income shall not be taken into account in
computing Profit or Loss; and

(g) any unrecognized gain or loss respecting a Security held by
AVI or AVII that is treated as deemed gain or loss under the limited partnership
agreements of AVI or AVII shall be added to the Partnership's taxable income or
loss.

1.13 SECURITIES. Securities shall mean securities of every kind and
nature and rights and options with respect thereto, including stock, notes,
bonds, debentures, evidences of indebtedness and other business interests of
every type, including partnerships, joint ventures, proprietorships, limited
liability companies and other business entities. Each Security held by AVI and
AVII shall be treated as a separate Security of the Partnership.

3.
<PAGE>

1.14 SECURITIES ACT. Securities Act is the Securities Act of 1933, as
amended.

1.15 SHORT TERM INCOME. Short Term Income shall mean gross income
realized by the Partnership from investments of funds pending their investment
or distribution, including amounts earned from investments in commercial paper,
securities of the United States government, certificates of deposit and cash
deposits in banks and other financial institutions.

1.16 TREASURY REGULATIONS. Treasury Regulations shall mean the Income
Tax Regulations promulgated under the Code, as such Regulations may be amended
from time to time (including corresponding provisions of succeeding
Regulations).

1.17 UNITS. Units means the ownership interests in the Partnership
designated as Class A Units and Class B Units and such other classes of units as
may from time to time be issued with the consent of the General Partner and a
Majority in Interest of the Class A Limited Partners.

1.18 AVI MARKETABLE SECURITIES. AVI Marketable Securities means the
Securities of AVI designated as AVI Marketable Securities on Exhibit A-1 hereto.

ARTICLE 2

NAME, PURPOSE AND OFFICES OF PARTNERSHIP

2.1 NAME. The name of the Partnership is ADOBE INCENTIVE PARTNERS,
L.P. The affairs of the Partnership shall be conducted under the Partnership
name.

2.2 PURPOSE. The primary purpose of the Partnership is to (i) invest
in, and receive and hold capital contributions of, Securities of private
companies (either directly or indirectly through AVI) which either (a) operate
or are expected to operate in any industry related to the business operations of
Adobe, including companies which possess or may possess technologies, sales and
services capabilities, operations or content related to any Adobe product, or
(b) have been identified by Adobe as candidates for a strategic relationship
with Adobe and (ii) invest as a limited partner in Adobe Ventures II, L.P., a
California limited partnership ("AVII") and any successor Adobe Ventures
investment fund. The general purposes of the Partnership are to buy, sell,
hold, and otherwise invest in securities of such companies of every kind and
nature and rights and options with respect thereto, including, without
limitation, stock, notes, bonds, debentures, partnership interests, interests in
limited liability companies and evidences of indebtedness; to exercise all
rights, powers, privileges, and other incidents of ownership or possession with
respect to Securities held or owned by the Partnership; to enter into, make, and
perform all contracts and other undertakings; and to engage in all activities
and transactions as may be necessary, advisable, or desirable to carry out the
foregoing.

2.3 PRINCIPAL OFFICE. The principal office of the Partnership shall
be at 345 Park Avenue, San Jose, California 95110-2704, or such other place or
places in California as the General Partner may from time to time designate.

4.
<PAGE>

ARTICLE 3

TERM OF PARTNERSHIP

3.1 TERM. The term of the Partnership commenced upon March 17, 1997
(the "Formation Date") and shall continue until the fifteenth anniversary of the
Formation Date unless extended by consent of the General Partner and a Majority
in Interest of the Class A Limited Partners or sooner dissolved as provided in
paragraph 11.1 below.

3.2 EVENTS AFFECTING A LIMITED PARTNER OF THE PARTNERSHIP. The death,
temporary or permanent incapacity, insanity, incompetency, bankruptcy,
liquidation, dissolution, reorganization, merger, sale of all or substantially
all the equity interests or assets of, or other change in the ownership or
nature of a Limited Partner shall not dissolve the Partnership.

3.3 EVENTS AFFECTING THE GENERAL PARTNER OF THE PARTNERSHIP. Except as
specifically provided in paragraph 11.1, the bankruptcy, liquidation,
dissolution, reorganization, merger, sale of all or substantially all the equity
interests or assets of, or other change in the ownership or nature of the
General Partner shall not dissolve the Partnership.

ARTICLE 4

NAME AND ADMISSION OF PARTNERS

4.1 NAME, ADDRESS AND UNITS. The name and address of the General
Partner and each Limited Partner (hereinafter the General Partner and Limited
Partners shall be referred to collectively as the "Partners" and individually as
a "Partner") and the amount of such Partner's Capital Contribution (and a
description of such Capital Contribution if other than cash) to and number of
Units in the Partnership are set forth on Exhibit A hereto. The Partnership
shall initially have two classes of limited partnership interests which are
designated Class A Units and Class B Units and shall have the rights,
preferences and privileges set forth in this Agreement. Each Limited Partner
owning Class A Units is sometimes referred to herein as a Class A Limited
Partner and each Limited Partner owning Class B Units is sometimes referred to
herein as a Class B Limited Partner. The Class A Limited Partners and Class B
Limited Partners are collectively referred to as the Limited Partners. The
ownership of the Class A Units and Class B Units is set forth on Exhibit A
hereto. The General Partner shall cause Exhibit A to be amended from time to
time to reflect the admission of any new Partner, the withdrawal or substitution
of any Partner, receipt by the Partnership of notice of any change of address of
a Partner, or the change in any Partner's Capital Contribution or Units. An
amended Exhibit A shall supersede any prior Exhibit A and become a part of this
Agreement. A copy of the most recent amended Exhibit A shall be kept on file at
the principal office of the Partnership.

4.2 ADMISSION OF ADDITIONAL PARTNERS.

(a) Except as provided in paragraph 10.6, an additional person
may be admitted as a Partner only with the consent of, and on such terms as are
approved by, the General Partner and a Majority in Interest of the Class A
Limited Partners. At the time an additional person is admitted as a Limited
Partner, the General Partner shall determine whether such person shall
participate in investments made prior to the date of admission.

5.
<PAGE>

(b) Each additional person admitted as a Partner shall execute
and deliver to the Partnership a counterpart of this Agreement or otherwise
become bound by the terms of this Agreement.

ARTICLE 5

CAPITAL ACCOUNTS AND CAPITAL CONTRIBUTIONS

5.1 CAPITAL ACCOUNTS. An individual Capital Account shall be
maintained for each Partner and shall be divided into subaccounts for each
Security owned by the Partnership. At the time each Class B Limited Partner is
admitted to the Partnership, and thereafter whenever an additional Capital
Contribution of the Class A Limited Partner to the Partnership is invested in
Securities, there shall be a deemed Capital Account shift from the Class A
Limited Partner in favor of the Class B Limited Partners. The total amount of
Capital Account shift shall be the product of the "Shift Percentage" times the
amount of the Capital Contributions of the Class A Limited Partner so invested,
excluding the AVI Marketable Securities, (with in kind contributions valued at
their Adjusted Asset Value as of the date of contribution except for Securities
held by AVI which shall be valued as of June 16, 1997) times a fraction, the
numerator of which is the number of Class B Units then outstanding and the
denominator of which is the total number of Class A Units and Class B Units
outstanding. The Shift Percentage shall be ten percent (10%) unless the General
Partner determines another percentage is more appropriate.

5.2 INITIAL CAPITAL CONTRIBUTIONS. The initial Capital Contributions
of the Partners is set forth on Exhibit A. Securities contributed by the Class
A Limited Partner are shown at their agreed fair market values on Exhibit A. No
Capital Contribution shall be required of any Class B Limited Partner.

5.3 CAPITAL CONTRIBUTIONS OF THE GENERAL PARTNER. The General Partner
shall contribute capital to the Partnership in cash in an amount equal to the
greater of: (i) one percent (1%) of the amount contributed by the Limited
Partners and the General Partner on each date on which a Limited Partner makes a
contribution or (ii) the amount of Partnership expenses required to be borne by
the General Partner under paragraph 7.1.

5.4 ADDITIONAL CAPITAL CONTRIBUTIONS. A Partner may make additional
Capital Contributions only with the consent of the General Partner and a
Majority in Interest of the Class A Limited Partners. No Partner shall be
required to make any additional Capital Contributions to the Partnership except
as provided in paragraph 5.3.

ARTICLE 6

PARTNERSHIP ALLOCATIONS

6.1 ALLOCATION OF PROFIT OR LOSS. Except as hereinafter provided in
this Article 6:

(a) Profit of the Partnership for each Security for each
Accounting Period shall be separately allocated among the Partners as follows:

(i) First, to the General Partner to and to the extent
of Loss allocations

6.
<PAGE>

respecting such Security previously made to it pursuant to paragraph
6.1(b)(iv);

(ii) Second, to the Class A Limited Partner and General
Partner pro rata in proportion to and to the extent of Loss allocation
respecting such Security previously allocated to them pursuant to paragraph
6.1(b)(iii);

(iii) Third, to the Class B Limited Partners and General
Partner pro rata in proportion to and to the extent of Loss allocations
respecting such Security previously made to them pursuant to paragraph
6.1(b)(ii); and

(iv) Then, 99% to the Limited Partners (pro rata among
them in accordance with their respective number of Units) and 1% to the General
Partner.

(b) Loss of the Partnership for each Accounting Period shall be
allocated as follows:

(i) First, to the Partners pro rata in proportion to and
to the extent of income allocations previously made to them pursuant to
paragraph 6.1(a)(iv);

(ii) Second, 99% to the Class B Limited Partners (pro
rata among them in accordance with their respective number of Units) until their
Capital Accounts are reduced to zero and 1% to the General Partner;

(iii) Then, 1% to the General Partner and 99% to the Class
A Limited Partner until their Capital Accounts are reduced to zero; and

(iv) Then, to the General Partner.

(c) Short Term Income shall be allocated to the Partners (other
than the Class B Limited Partners) pro rata in proportion to their respective
Capital Contributions.

(d) Notwithstanding the foregoing, Profit and Loss from each
AVI Marketable Security shall be allocated exclusively to the Class A Limited
Partner.

6.2 OTHER ALLOCATIONS. Notwithstanding the foregoing, the allocations
provided in this Article 6 shall be subject to the following exceptions:

(a) (i) Any loss or expense otherwise allocable to a Limited
Partner that exceeds the balance in such Limited Partner's Capital Account
subaccount for a Security shall instead be allocated first to all Partners who
have positive balances in their Capital Accounts subaccounts for such Security
in proportion to such positive balances, and when all Partners' Capital Accounts
subaccounts for such Security have been reduced to zero (0), then to the General
Partner.

(ii) In the event the Limited Partner unexpectedly
receives any adjustments, allocations, or distributions described in Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)(4) through (d)(6), that causes the
balance in such Partner's Capital Account to be reduced below zero (0), items of
Partnership income and gain shall be specially allocated to such Limited Partner
in an amount and manner sufficient to eliminate the deficit balance in its
Capital Account created by such adjustments, allocations, or distributions as
quickly as possible.

7.
<PAGE>

(iii) For purposes of this subparagraph (a), the balance
in a Partner's Capital Account shall take into account the adjustments provided
in Treasury Regulation Section 1.704 1(b)(2)(ii)(d)(4) through (d)(6).

(iv) Any special allocations of items of profit, income,
gain, loss or expense pursuant to this subparagraph (a) shall be taken into
account in computing subsequent allocations, so that the net amount of any items
so allocated and the profit, gain, loss, income, expense, and all other items
allocated to each Partner shall, to the extent possible, be equal to the net
amount that would have been allocated to each such Partner if such special
allocations pursuant to this subparagraph (a) had not occurred.

(b) To the extent the Partnership has taxable interest income
or expense with respect to any promissory note between any Partner and the
Partnership as holder and maker or maker and holder pursuant to Section 483,
Sections 1271 through 1288, or Section 7872 of the Code, such interest income or
expense shall be specially allocated to the Partner to whom such promissory note
relates, and such Partner's Capital Account adjusted if appropriate.

(c) No Partner shall be allocated Profit or Loss of a Security
(i) which is designated an Excluded Investment with respect to that Partner or
(ii) which was acquired by the Partnership prior to such Partner's admission to
the Partnership, unless otherwise agreed by the Partnership and such Partner at
the time of such Partner's admission..

6.3 INCOME TAX ALLOCATIONS.

(a) Except as otherwise provided in this paragraph or as
otherwise required by the Code and the rules and Treasury Regulations
promulgated thereunder, a Partner's distributive share of Partnership income,
gain, loss, deduction, or credit for income tax purposes shall be the same as is
entered in the Partner's Capital Account pursuant to this Agreement.

(b) In accordance with Code Section 704(c) and the Treasury
Regulations thereunder, income, gain, loss and deduction with respect to any
asset contributed to the capital of the Partnership shall, solely for tax
purposes, be allocated among the Partners so as to take account of any variation
between the adjusted basis of such property to the Partnership for federal
income tax purposes and its initial Adjusted Asset Value.

(c) In the event the Adjusted Asset Value of any Partnership
asset is adjusted pursuant to the terms of this Agreement, subsequent
allocations of income, gain, loss and deduction with respect to such asset shall
take account of any variation between the adjusted basis of such asset for
federal income tax purposes and its Adjusted Asset Value in the same manner as
under Code Section 704(c) and the Treasury Regulations thereunder.

8.
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ARTICLE 7

PARTNERSHIP EXPENSES

7.1 EXPENSES. The General Partner shall bear (i) all normal operating
expenses incurred in the investigation of investment opportunities and the
monitoring and management of investments; (ii) all costs and expenses incurred
in the holding, purchase, sale or exchange of Securities (whether or not
ultimately consummated), including, but not by way of limitation, private
placement fees, finder's fees, interest, taxes, brokerage fees, legal fees,
audit and accounting fees, consulting fees, and all expenses incurred in
connection with the registration of the Partnership's Securities under
applicable securities laws or regulations; (iii) all expenses incurred by the
General Partner in serving as the tax matters partner, the cost of liability and
other insurance premiums, all out-of-pocket expenses of preparing and
distributing reports to Partners, all legal and accounting fees relating to the
Partnership and its activities, all costs and expenses arising out of the
Partnership's indemnification obligation pursuant to this Agreement and all
other operating expenses of the Partnership; (iv) all organizational and
syndication costs, fees, and expenses incurred by or on behalf of the General
Partner or the Partnership in connection with the formation and organization of
the Partnership, including legal and accounting fees and expenses incident
thereto with respect to the formation and organization of the Partnership; and
(v) all liquidation costs, fees, and expenses incurred by the General Partner
(or its designee) or the Partnership in connection with the liquidation of the
Partnership at the end of the Partnership's term, specifically including but not
limited to legal and accounting fees and expenses.

ARTICLE 8

WITHDRAWALS BY AND DISTRIBUTIONS TO THE PARTNERS

8.1 INTEREST. No interest shall be paid to any Partner on account of
its interest in the capital of or on account of its investment in the
Partnership.

8.2 WITHDRAWALS BY THE PARTNERS. No Partner may withdraw any amount
from its Capital Account unless such withdrawal is made pursuant to this Article
8, Article 11 or, in the case of the Class B Limited Partners, the Restricted
Units Agreement between such Partner and the Partnership.

8.3 PARTNERS' OBLIGATION TO REPAY OR RESTORE. Except as required by
law or the terms of this Agreement, no Partner shall be obligated at any time to
repay or restore to the Partnership all or any part of any distribution made to
it from the Partnership in accordance with the terms of this Article 8.

8.4 CASH DISTRIBUTIONS. Subject to the following mandatory
distribution provisions, the General Partner may, but shall not be obligated to,
distribute cash as it may from time to time deem advisable.

(a) TAX DISTRIBUTIONS. Within 90 days following the end of
each fiscal year, the General Partner shall distribute to each Partner cash in
an amount equal to 50% of the Partnership's taxable income allocated to such
Partner for such year. The General Partner shall have the discretion

9.
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to adjust the rate of distribution provided for in this paragraph 8.4(a) to
reflect any increases made to the rates of taxation of ordinary income or
capital gains, or both, under the Code or California law.

(b) DISTRIBUTIONS OF DISTRIBUTABLE CASH. The Partnership shall
distribute cash in excess of $200,000 arising from the disposition of portfolio
company investments as soon as reasonably practicable. Such cash distributions
shall be made one percent (1%) to the General Partner and ninety-nine percent
(99%) to the Limited Partners as follows (provided, no Partner shall receive
distributions from the disposition of a Security which is an Excluded Investment
with respect to such Partner):

(i) first, to the extent of the Limited Partners'
unreturned capital investment respecting the Security disposed of, among the
Limited Partners in proportion to their respective unreturned capital investment
respecting such Security (unreturned capital investment shall take account of
any Capital Account shifts under paragraph 5.1); and

(ii) then, to the extent of previously undistributed
Profit respecting such Security, among the Partners in proportion to the
allocation of such Profit pursuant to Article 6.

8.5 IN KIND DISTRIBUTIONS. The General Partner may, but shall not be
obligated to (except as provided in subparagraph 8.5(a) and paragraph 8.6
below), distribute Securities as it may from time to time deem advisable,
PROVIDED, HOWEVER, that except with the consent of a Majority in Interest of the
Class A Limited Partners, the General Partner shall not distribute Securities
which are not Marketable Securities, other than distributions pursuant to the
dissolution and winding up of the Partnership.

(a) TIMING.

(i) Marketable Securities acquired by the Partnership in
exchange for the transfer of Nonmarketable Securities shall be distributed
within 90 days of the date on which such Securities become Marketable
Securities.

(ii) Nonmarketable Securities which become Marketable
Securities as a result of a public offering or otherwise shall be distributed
within 90 days after the date on which such Securities become Marketable
Securities.

(b) APPORTIONMENT.

(i) Distributions of Securities shall be made among the
Partners in accordance with paragraph 8.4(b).

(c) Immediately prior to any distribution in kind, the Deemed
Gain or Deemed Loss of any Securities distributed shall be allocated to the
Capital Accounts of the Partners as a Profit or Loss pursuant to Article 6.

(d) Securities distributed in kind shall be subject to such
conditions and restrictions as the General Partner determines are legally or
contractually required. Whenever classes of Securities are distributed in kind,
each Partner shall receive its ratable portion of each class of Securities
distributed in kind.

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8.6 WITHDRAWAL OF CLASS B LIMITED PARTNERS.

(a) DEFINITIONS.

(i) WITHDRAWAL. For purposes of this Agreement, a Class
B Limited Partner shall be deemed to have withdrawn from the Partnership (a
"Withdrawal") if such Class B Limited Partner dies, retires, withdraws or
becomes bankrupt, incompetent, insane or permanently incapacitated.

(ii) BANKRUPT. A person shall be deemed bankrupt if (i)
any proceeding is commenced against such person for any relief under bankruptcy
or insolvency laws, or laws relating to the relief of debtors, reorganizations,
arrangements, compositions, or extensions and is not dismissed within ninety
(90) days after such proceedings have been commenced, or (ii) if such person
commences any proceeding for relief under bankruptcy or insolvency laws or law
relating to the relief of debtors, reorganizations, arrangements, compositions,
or extensions.

(iii) INCOMPETENT. A person shall be deemed incompetent
if such person shall be adjudged incompetent by a decree of a court of competent
jurisdiction or if a conservator is appointed for such person.

(iv) INSANE. A person shall be deemed insane if such
person shall be adjudged insane by a decree of a court of competent
jurisdiction.

(v) PERMANENTLY INCAPACITATED. A person shall be deemed
permanently incapacitated whenever such person is determined by competent
medical authority selected by the General Partner to be permanently incapable of
carrying out his functions as a Class A Limited Partner hereunder.

(vi) FORMER PARTNER. Any Class B Limited Partner who
withdraws from the Partnership, or the estate or legal representative of any
such Member shall be deemed a "Former Partner" on the date of such withdrawal.

(b) EFFECT OF WITHDRAWAL OF A CLASS B LIMITED PARTNER. In the
event of the Withdrawal of a Class B Limited Partner, the interest of such
Former Partner in the Partnership shall terminate and the Former Member, or his
or her personal representative, shall be entitled only to the payments and
distributions provided for in such Former Partner's Restricted Units Agreement,
all on the terms and conditions set forth in such agreement. Any reduction in
the Units of a Class B Limited Partner caused by his or her Withdrawal shall
increase, pro tanto, the Class A Units of the Class A Limited Partner.

ARTICLE 9

MANAGEMENT DUTIES AND RESTRICTIONS

9.1 MANAGEMENT. Except as otherwise provided in this Agreement, the
General Partner shall have the sole and exclusive right to manage, control, and
conduct the affairs of the Partnership and to do any and all acts on behalf of
the Partnership.

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9.2 NO CONTROL BY THE LIMITED PARTNERS; NO WITHDRAWAL. The Limited
Partners shall take no part in the control or management of the affairs of the
Partnership nor shall the Limited Partners have any authority to act for or on
behalf of the Partnership or to vote on any matter relative to the Partnership
and its affairs except as is specifically permitted by this Agreement. Except
as specifically set forth in this Agreement or in the Restricted Units
Agreements between the Partnership and each Class B Limited Partner, no Limited
Partner shall withdraw or be required to withdraw from the Partnership.

9.3 CLASS A LIMITED PARTNER APPROVAL RIGHTS. Notwithstanding
paragraph 9.2, the prior written approval of a Majority in Interest of the Class
A Limited Partners shall be required for the General Partner or the Partnership
to carry out any of the following activities:

(a) Elect or admit a new General Partner;

(b) Dissolve, wind up or liquidate the Partnership, other than
in accordance with the terms of this Agreement;

(d) Invest in or acquire Securities of any one company in an
amount in excess of $3,000,000;

(e) Acquire more than fifty percent (50%) of the outstanding
voting Securities of any one company;

(f) Borrow funds, or pledge, encumber or hypothecate any assets
of the Partnership as security for a loan;

(g) Commence or defend any litigation pertaining to the
Partnership or its assets, prosecute, settle or compromise claims against third
parties, settle or compromise claims against the Partnership, other than with
respect to any litigation pertaining to the obligations of the Limited Partners
under this Agreement, and

(h) Make or revoke any election pursuant to the Code, including
an election pursuant to Section 754 of the Code, or any comparable federal or
state law regarding taxation.

9.4 INVESTMENT OPPORTUNITIES.

(a) Each Limited Partner acknowledges that the General Partner
may make venture capital investments other than through the Partnership. Each
Limited Partner hereby consents and agrees to such activities and investments
and further consents and agrees that neither the Partnership nor any of its
Partners shall have, pursuant to this Agreement, any rights in or to such
activities or investments or any profits derived therefrom.

(b) Each Limited Partner hereby agrees that the General Partner
may offer the right to participate in investment opportunities of the
Partnership to other private investors, groups, partnerships, or corporations
whenever the General Partner, in its discretion, so determines.

12.
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activity whatsoever for its own profit or advantage, whether or not such
activity may be in direct or indirect competition with the Partnership,
subject to any restrictions imposed on such Limited Partner outside this
Agreement.

(d) Any investment by the Partnership shall first be approved
by the Investment Committee of the Board of Directors of Adobe.

9.5 COMPLIANCE WITH PARTNERSHIP AGREEMENT; DETRIMENTAL ACTS. No
Partner shall do any act in contravention of this Agreement or that would be
detrimental to the best interests of this Partnership, or that would make it
impossible to carry on the affairs of the Partnership.

ARTICLE 10

INVESTMENT REPRESENTATION AND TRANSFER
OF PARTNERSHIP INTERESTS

10.1 INVESTMENT REPRESENTATION OF THE LIMITED PARTNERS. This Agreement
is made with each Limited Partner in reliance upon the Limited Partner's
representation to the Partnership, which by executing this Agreement the Limited
Partner hereby confirms, that its interest in the Partnership is to be acquired
for investment, and not with a view to the sale or distribution of any part
thereof, and that it has no present intention of selling, granting participation
in, or otherwise distributing the same, and the Limited Partner understands that
its interest in the Partnership has not been registered under the Securities Act
and that any transfer or other disposition of the interest may not be made
without registration under the Securities Act or pursuant to an applicable
exemption therefrom. Each Limited Partner further represents that it does not
have any contract, undertaking, agreement, or arrangement with any person to
sell, transfer, or grant participations to such person, or to any third person,
with respect to its interest in the Partnership.

10.2 QUALIFICATIONS OF THE LIMITED PARTNERS. Each Limited Partner
represents that it is an "accredited investor" within the meaning of that term
as defined in Regulation D promulgated under the Securities Act as set forth
below or elsewhere in Regulation D as amended from time to time:

(a) An individual who has a net worth or joint net worth with
that person's spouse exceeding $1,000,000 at the time of becoming a Limited
Partner; or

(b) An individual who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and who reasonably expects
reaching the same income level in the current year.

The term "net worth" means the excess of total assets over total
liabilities. In computing net worth for the purposes of paragraph 10.2(a)
above, the principal residence of the investor must be valued at cost, including
cost of improvements, or at a recently appraised value by an institutional
lender making a secured loan, net of encumbrances.

10.3 TRANSFER BY THE GENERAL PARTNER. The General Partner may not
sell, assign, pledge, mortgage or otherwise dispose of its interest in the
Partnership or in its capital assets or property without the prior written
approval of a Majority in Interest of the Class A Limited Partners.

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10.4 TRANSFER BY A LIMITED PARTNER. No Limited Partner may sell,
assign, pledge, mortgage, or otherwise dispose of or transfer its interest in
the Partnership without the prior written approval of the General Partner.

10.5 REQUIREMENTS FOR TRANSFER. No transfer or other disposition of
the interest of a Limited Partner shall be permitted until the General Partner
is reasonably satisfied that the effect of such transfer or disposition would
not:

(a) result in the termination of the Partnership's tax year
under Section 708(b)(1)(B) of the Code;

(b) result in violation of the Securities Act or any comparable
state law;

(d) require the Partnership or the General Partner to register
as an investment adviser under the Investment Advisers Act of 1940, as amended;

(e) result in a termination of the Partnership's status as a
partnership for federal income tax purposes;

(f) result in a violation of any law, rule, or regulation by a
Limited Partner, the Partnership or the General Partner; or

(g) cause the Partnership to be deemed to be a "publicly traded
partnership" as such term is defined in Section 7704(b) of the Code.

10.6 SUBSTITUTION AS A LIMITED PARTNER. A transferee of a Limited
Partner's interest pursuant to this Article 10 shall become a substituted
Limited Partner only with the consent of the General Partner (which consent may
be withheld by the General Partner for any reason or for no reason) and only if
such transferee (a) elects to become a substituted Limited Partner and (b)
executes, acknowledges and delivers to the Partnership such other instruments as
the General Partner may deem necessary or advisable to effect the admission of
such transferee as a substituted Limited Partner, including, without limitation,
the written acceptance and adoption by such transferee of the provisions of this
Agreement.

10.7 EXPENSES OF TRANSFER. Any costs or expenses (including but not
limited to reasonable attorneys fees) incurred by the Partnership in connection
with the transfer of a Partnership interest hereunder shall be borne by the
transferring Partner.

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ARTICLE 11

DISSOLUTION AND LIQUIDATION OF THE PARTNERSHIP

11.1 EARLY TERMINATION OF THE PARTNERSHIP.

(a) The Partnership shall dissolve, and the affairs of the
Partnership shall be wound up prior to the expiration of its term set forth in
paragraph 3.1 upon the occurrence of any of the following events:

(i) One hundred eighty (180) days after the withdrawal,
bankruptcy, or dissolution of the General Partner of the Partnership, unless
within ninety (90) days of such event, a Majority in Interest of the Class A
Limited Partners elect to continue the business of the Partnership and to the
appointment, effective as of the date of such withdrawal, bankruptcy or
dissolution, of a new general partner. In the event that a new general partner
is elected pursuant to the foregoing sentence, the interest of the General
Partner shall be determined in accordance with paragraph 11.1(c) below;

(ii) Sale or other transfer of substantially all of the
assets of the Partnership; or

(iii) Mutual consent of the General Partner and a Majority
in Interest of the Class A Limited Partners.

(b) In the event that the Partnership is dissolved pursuant to
the provisions of this paragraph, the General Partner (or, if the dissolution
occurs because of an event described in paragraph 11.1(a)(i), a Majority in
Interest of the Class A Limited Partners) shall elect one or more liquidators to
manage the liquidation of the Partnership in the manner described in this
Article 11.

(c) If the Limited Partners elect to continue the Partnership
pursuant to its right under paragraph 11.1(a), the former General Partner=s
interest in the Partnership shall become a limited partner interest and such
former General Partner shall have no powers of a General Partner under this
Agreement or the Act. The former General Partner=s interest in Short Term Income
shall remain unchanged. The former General Partner=s interest in Profit and Loss
shall limited to those allocations arising from assets acquired by the
Partnership (i) prior to the date on which the former General Partner ceased to
serve as General Partner (the ACessation Date@) or (ii) by use of the uninvested
portion of the General Partner=s capital contributions made prior to the
Cessation Date. The former General Partner shall have no obligation to make
additional capital contributions pursuant to Article 4 after the Cessation Date.
To the extent reasonably practicable, distributions of amounts allocable to the
former General Partner shall be made in a manner consistent with the foregoing.

15.
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11.2 WINDING UP PROCEDURES.

(a) Promptly upon dissolution of the Partnership (unless the
Partnership is continued in accordance with this Agreement or the provisions of
the Act), the affairs of the Partnership shall be wound up and the Partnership
liquidated. The closing Capital Accounts and subaccounts of all the Partners
shall be computed as of the date of dissolution as if the date of dissolution
were the last day of an Accounting Period in accordance with Article 6, and then
adjusted in the following manner:

(i) All assets and liabilities of the Partnership shall
be valued as of the date of dissolution.

(ii) The Partnership's assets as of the date of
dissolution shall be deemed to have been sold at their fair market values and
the resulting Profit or Loss shall be allocated to the Partners' Capital
Accounts in accordance with the provisions of Article 6.

The result for each Partner shall be its closing Capital Account.

(b) Distributions during the winding up period may be made in
cash or in kind or partly in cash and partly in kind. The General Partner or
the liquidator shall use its best judgment as to the most advantageous time for
the Partnership to sell Securities or to make distributions in kind. All cash
and each Security distributed in kind after the date of dissolution of the
Partnership shall be distributed ratably in accordance with the distribution
provisions of Article 8. Each Security so distributed shall be subject to
reasonable conditions and restrictions necessary or advisable in order to
preserve the value of such Security or for legal reasons.

ARTICLE 12

FINANCIAL ACCOUNTING,
REPORTS, MEETINGS AND VOTING

12.1 FINANCIAL ACCOUNTING; FISCAL YEAR. The books and records of the
Partnership shall be kept in accordance with the provisions of this Agreement
and otherwise in accordance with generally accepted accounting principles
consistently applied, and shall be reviewed at the end of each fiscal year by an
independent public accountant of recognized national standing selected by the
General Partner. The Partnership's fiscal year shall be a fifty-two/fifty-three
week period ending on the Friday closest to November 30 of each year (the
AFiscal Year@).

12.2 SUPERVISION; INSPECTION OF BOOKS. Proper and complete books of
account of the Partnership, copies of the Partnership's federal, state and local
tax returns for each fiscal year, the Schedule of Partners set forth in Exhibit
A, this Agreement and the Partnership's Certificate of Limited Partnership shall
be kept under the supervision of the General Partner at the principal office of
the Partnership. Such books and records shall be open to inspection by the
Limited Partner, or their accredited representatives, at any reasonable time
during normal business hours after reasonable advance notice.

12.3 PARTNERSHIP REPORTS; FINANCIAL STATEMENTS OF THE PARTNERSHIP. The
General

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Partner shall deliver to the Limited Partners the following:

(a) Within 120 days after the close of the Partnership's Fiscal
Year, audited financial statements of the Partnership prepared in accordance
with the terms of this Agreement and otherwise in accordance with generally
accepted accounting principles, including an income statement for the year then
ended and balance sheet as of the end of such year, a statement of changes in
the Partners' Capital Accounts, and a list of investments then held.

(b) Within 60 days after the close of each fiscal quarter,
unaudited financial statements.

(c) Within 10 days after the end of each fiscal quarter, a
report from the General Partner which shall include a status report on cash
reserves, investments then held, a summary of acquisitions and dispositions of
investments made by the Partnership during the preceding period and a valuation
of each such investment.

12.4 TAX RETURNS AND TAX INFORMATION. The Partnership shall use the
method of accounting for tax purposes that is selected by the General Partner
after consultation with the Partnership's independent public accountants. The
General Partner shall cause the Partnership's federal, state and local tax
returns and IRS Form 1065, Schedule K 1, to be prepared and delivered to the
Limited Partners within sixty (60) days after the close of the Partnership's
fiscal year. During such period, the General Partner shall also cause the
Partnership to furnish to any Limited Partner any other tax information
reasonably requested by such Limited Partner.

12.5 TAX MATTERS PARTNER. The General Partner shall be the
Partnership's tax matters partner under the Code and under any comparable
provision of state law. The General Partner shall have the right to resign as
tax matters partner by giving thirty (30) days' written notice to each Partner.
Upon such resignation a successor tax matters partner shall be elected by a
Majority In Interest of the Class A Limited Partners. The tax matters partner
shall employ experienced tax counsel to represent the Partnership in connection
with any audit or investigation of the Partnership by the Internal Revenue
Service and in connection with all subsequent administrative and judicial
proceedings arising out of such audit. If the tax matters partner is required
by law or regulation to incur fees and expenses in connection with tax matters
not affecting all the Partners, then the Partnership shall be entitled to
reimbursement from those Partners on whose behalf such fees and expenses were
incurred. The tax matters partner shall keep the Partners informed of all
administrative and judicial proceedings, as required by Section 6223(g) of the
Code, and shall furnish to each Partner, if such Partner so requests in writing,
a copy of each notice or other communication received by the tax matters partner
from the Internal Revenue Service, except such notices or communications as are
sent directly to such requesting Partner by the Internal Revenue Service. The
relationship of the tax matters partner to the Limited Partners is that of a
fiduciary, and the tax matters partner has fiduciary obligations to perform its
duties as tax matters partner in such manner as will serve the best interests of
the Partnership and all of the Partnership's Partners. To the fullest extent
permitted by law, but subject to the limitations and exclusions of paragraph
14.4 below, the Partnership agrees to indemnify the tax matters partner and its
agents and save and hold them harmless, from and in respect to all (i) fees,
costs and expenses in connection with or resulting from any laim, action, or
demand against the tax matters partner, the General Partner or the Partnership
that arise out of or in any way relate to the tax matters partner's status as
tax matters partner for the Partnership, and (ii) all such claims, actions, and
demands and any losses or damages therefrom, including amounts paid in
settlement or compromise of any such claim, action, or demand.

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12.6 SPECIAL MEETINGS. Subject to the provisions of the Act, each
Partner may call a special meeting of the Partnership at any reasonable time on
not less than ten (10), nor more than sixty (60), days= written notice.

ARTICLE 13

VALUATION

13.1 VALUATION. Subject to the specific standards set forth below, the
valuation of Securities and other assets and liabilities under this Agreement
shall be at fair market value. Except as may be required under applicable
Treasury Regulations, no value shall be placed on the goodwill or the name of
the Partnership in determining the value of the interest of any Partner or in
any accounting among the Partners.

(a) The following criteria shall be used for determining the
fair market value of Securities:

(i) Securities not subject to investment letter or other
similar restrictions on free Marketability:

(1) If traded on one or more securities exchanges
or the Nasdaq National Market, the value shall be deemed to be the Securities'
highest closing price on such exchange(s) on the valuation date.

(2) If actively traded over the counter (other
than on the Nasdaq National Market), the value shall be deemed to be the average
of the closing bid and ask prices of such Securities on the valuation date.

(3) If there is no active public market, the
value shall be the fair market value thereof, as determined by the General
Partner, taking into consideration the purchase price of the Securities,
developments concerning the investee company subsequent to the acquisition of
the Securities, any financial data and projections of the investee company
provided to the General Partner, and such other factor or factors as the General
Partner may deem relevant. If a Majority in Interest of the Class A Limited
Partners objects to the valuation of any Nonmarketable Security within fifteen
(15) days of receipt of the valuation, the fair market value of such Security
shall be determined by an appraiser selected by the senior ranking officer of
the Western Association of Venture Capitalists (or any successor organization)
who is not associated with any of the Partners. The Partnership shall bear the
expense of any such appraisal.

(ii) Securities subject to investment letter or other
restrictions on free Marketability shall be valued by making an appropriate
adjustment from the value determined under (1), (2), or (3) above to reflect the
effect of the restrictions on transfer.

(iii) The valuation of the Partnership's interest in AVII
shall be based on the valuation of the securities owned by AVII determined in
accordance with AVII's limited partnership agreement.

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(b) If the General Partner in good faith determines that,
because of special circumstances, the valuation methods set forth in this
paragraph do not fairly determine the value of a Security, the General Partner
shall make such adjustments or use such alternative valuation method as it deems
appropriate.

ARTICLE 14

OTHER PROVISIONS

14.1 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of California as applied to agreements among the
residents of such state made and to be performed entirely within such state.

14.2 LIMITATION OF LIABILITY OF THE LIMITED PARTNERS. Except as
required by law, no Limited Partner shall be bound by, nor be personally liable
for, the expenses, liabilities, or obligations of the Partnership in excess of
its capital commitment to the Partnership.

14.3 EXCULPATION. Neither the General Partner, nor its members or
Affiliates shall be liable to any Limited Partner or the Partnership for honest
mistakes of judgment, or for action or inaction, taken in good faith for a
purpose that was reasonably believed to be in the best interests of the
Partnership, or for losses due to such mistakes, action, or inaction, or to the
negligence, dishonesty, or bad faith of any employee, broker, or other agent of
the Partnership, provided that such employee, broker, or agent was selected,
engaged, or retained with reasonable care. The General Partner and such persons
may consult with counsel and accountants in respect of Partnership affairs and
be fully protected and justified in any action or inaction that is taken in
accordance with the advice or opinion of such counsel or accountants, provided
that they shall have been selected with reasonable care. Notwithstanding any of
the foregoing to the contrary, the provisions of this paragraph and the
immediately following paragraph shall not be construed so as to relieve (or
attempt to relieve) any person of any liability by reason of fraud, willful
misconduct or gross negligence or to the extent (but only to the extent) that
such liability may not be waived, modified, or limited under applicable law, but
shall be construed so as to effectuate the provisions of such paragraphs to the
fullest extent permitted by law.

14.4 INDEMNIFICATION. The Partnership agrees to indemnify, out of the
assets of the Partnership only, the General Partner and its members and their
agents (the "Indemnified Parties") to the fullest extent permitted by law and to
save and hold them harmless from and in respect of all (a) reasonable fees,
costs, and expenses, including legal fees, paid in connection with or resulting
from any claim, action, or demand against any Indemnified Party that arises out
of or in any way relate to the Partnership, its properties, business, or affairs
and (b) such claims, actions, and demands and any losses or damages resulting
from such claims, actions, and demands, including amounts paid in settlement or
compromise (if recommended by attorneys for the Partnership) of any such claim,
action or demand; provided, however, that this indemnity shall not extend to
conduct not undertaken in good faith to promote the best interests of the
Partnership or the portfolio companies of the Partnership, nor to any conduct
which constitutes fraud, willful misconduct or gross negligence. Expenses
incurred by any Indemnified Party in defending a claim or proceeding covered by
this paragraph shall be paid by the Partnership in advance of the final
disposition of such claim or proceeding provided the indemnified person
undertakes to repay such amount if it is ultimately determined that such person
was not entitled to be indemnified. The provisions of this paragraph 14.4 shall
remain in effect as to each Indemnified

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Party whether or not such Indemnified Party continues to serve in the
capacity that entitled such person to be indemnified.

14.5 ARBITRATION. Any controversy or claim arising out of or relating
to this Agreement, or the breach thereof, except with respect to the valuation
of Partnership assets, shall be settled by arbitration in San Jose, California
in accordance with the rules, then obtaining, of the American Arbitration
Association, and judgment upon the award rendered may be entered in any court
having jurisdiction thereof.

14.6 EXECUTION AND FILING OF DOCUMENTS. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original but all
of which together shall constitute one and the same instrument.

14.7 OTHER INSTRUMENTS AND ACTS. The Partners agree to execute any
other instruments or perform any other acts that are or may be reasonably
necessary to effectuate and carry on the partnership created by this Agreement.

14.8 BINDING AGREEMENT. This Agreement shall be binding upon the
transferees, successors, assigns, and legal representatives of the Partners.

14.9 NOTICES. Any notice or other communication that one Partner
desires to give to another Partner shall be in writing, and shall be deemed
effectively given upon personal delivery or three (3) days after deposit in any
United States mail box, by registered or certified mail, postage prepaid, upon
confirmed transmission by facsimile, or upon confirmed delivery by overnight
commercial courier service, addressed to the other Partner at the address shown
on Exhibit A or at such other address as a Partner may designate by ten (10)
days' advance written notice to the other Partners; provided, however, that any
notice to a Partner with an address outside the United States shall be deemed
effectively given only upon personal delivery or upon transmission by facsimile
with a confirmation copy sent by air mail, or upon confirmed delivery by
international commercial courier service.

14.10 AMENDMENT. This Agreement may be amended only with the written
consent of the General Partner and a Majority in Interest of the Class A Limited
Partners.

14.11 ENTIRE AGREEMENT. This Agreement constitutes the full, complete,
and final agreement of the Partners and supersedes all prior written or oral
agreements between the Partners with respect to the Partnership.

14.12 TITLES; SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and shall not be considered in the
interpretation of this Agreement.

14.13 PARTNERSHIP NAME. The Partnership shall have the exclusive right
to use the Partnership name as long as the Partnership continues. Upon
termination of the Partnership, the Partnership shall assign whatever rights it
may have in such name to the General Partner. No value shall be placed upon the
name or the goodwill attached to it for the purpose of determining the value of
any Partner's Capital Account or interest in the Partnership.

IN WITNESS WHEREOF, the Partners have executed this Agreement as of the
date first written above.

20.
<PAGE>

GENERAL PARTNER: CLASS A LIMITED PARTNER:

ADOBE SYSTEMS INCORPORATED ADOBE SYSTEMS INCORPORATED

By: Ross Bott By: Ross Bott

21.
<PAGE>

EXHIBIT A

SCHEDULE OF PARTNERS

<TABLE>
<CAPTION>
NAME AND ADDRESS CAPITAL
CONTRIBUTION CLASS A UNITS CLASS B UNITS
<S> <C> <C> <C>
GENERAL PARTNER:

Adobe Systems Incorporated
345 Park Avenue
San Jose, CA 95110-2704 (1) 0 0

CLASS A LIMITED PARTNER:

Adobe Systems Incorporated
345 Park Avenue
San Jose, CA 95110-2704 (1) 800,000 30,000

CLASS B LIMITED PARTNERS:

John Warnock(3) $0.00 0 50,000

Charles Geschke(3) $0.00 0 50,000

David Pratt(3) $0.00 0 30,000

P. Jackson Bell(3) $0.00 0 30,000

Colleen Pouliot(2) $0.00 0 10,000

Totals 800,000 200,000

</TABLE>
- ---------------------------------------------------------------------------

- ---------------
(1) cash and securities described on Schedule A-1 to this Exhibit A with an
agreed value as set forth on Schedule A-1.

(2) c/o Adobe Systems Incorporated, 345 Park Avenue, San Jose, CA 95110-2704

<PAGE>

Exhibit 10.43

[ADOBE SYSTEMS INCORPORATED LETTERHEAD]

October 9, 1997

Mr. David B. Pratt
12324 Melody Lane
Los Altos Hills, California 94022

RESIGNATION AGREEMENT

Dear Mr. Pratt:

This will reflect our mutual agreement concerning your resignation from
your position as an officer of Adobe Systems Incorporated (the "COMPANY") and
of each of the subsidiaries of the Company (collectively, the "COMPANIES")
and the Company's retention of you as an employee following such resignation,
in accordance with the terms and conditions set forth below. Your acceptance
of and agreement with the provisions of this letter (hereinafter, the
"RESIGNATION AGREEMENT") will be signified by applying your signature to the
end of this letter by a date no later than 21 days after the letter date.

1. YOUR RESIGNATION AS AN OFFICER. By signing this Resignation
Agreement, you hereby agree that your resignation from all positions you hold
as an officer of the Companies shall become effective as of November 30, 1997
(the "RESIGNATION DATE").

2. TRANSITIONAL EMPLOYMENT ARRANGEMENT. You further agree that as of
the Resignation Date and continuing through January 15, 1998 (the "SEVERANCE
DATE") you shall remain employed by the Company and you shall devote
substantially all of your business time, attention and abilities to the
business of the Company (including its subsidiaries or affiliates, when so
required) and faithfully serve the Company and use your best efforts to
promote and develop the interests of the Company.

<PAGE>

During the period beginning on the Resignation Date and ending on the
Severance Date (hereinafter, the "TRANSITIONAL PERIOD"), your
responsibilities and duties as an employee of the Company will be to provide
advice to the President and Co- Chairman of the Board of Directors of the
Company regarding all matters relating to the transitional management
activities associated with the Pathfinder project.

3. TERMINATION OF EMPLOYMENT. On the Severance Date, you will cease
to be employed in any capacity by the Company.

4. PAYMENTS AND BENEFITS IN CONNECTION WITH YOUR RESIGNATION AND
TRANSITIONAL EMPLOYMENT. In connection with your resignation and
transitional employment, subject to Section 8, the Company agrees to provide
you with the compensation and benefits described below.

(a) SALARY CONTINUATION PAYMENTS. In consideration of your
agreement to continue your employment with the Company during the
Transitional Period, the Company shall continue to pay you your base salary,
at the annual rate currently in effect as of the Resignation Date, payable in
accordance with the Company's normal payroll procedures.

(b) BENEFIT CONTINUATION DURING THE TRANSITIONAL PERIOD. During
the Transitional Period, you shall continue to participate in all Company
welfare benefit plans, including, without limitation, health, medical and
disability insurance plans, in which you participate as of the Resignation
Date (the "Welfare Benefit Plans"), in accordance with the terms and
conditions applicable to you which are currently in effect as of such date.

(c) BENEFIT CONTINUATION AFTER THE SEVERANCE DATE. For a period
of two years and nine months following the Severance Date, you and your
eligible dependents shall continue to participate in the Welfare Benefit
Plans on the same terms (including contribution levels) as are in effect on
the Resignation Date. Your participation in the Welfare Benefit Plans will
terminate at the time you become eligible to receive benefits under the
welfare benefit plans of a subsequent employer. You hereby acknowledge and
agree that you have an affirmative obligation to notify the Company of any
subsequent employment that offers you such welfare benefits.

(d) BONUS. As soon as practicable following the Severance Date,
the Company will pay you your bonus for fiscal year ending 1997, subject to
the terms and conditions of the bonus plan and arrangements applicable to
you. You will not

<PAGE>

however, receive a bonus for any portion of fiscal year ending 1998.

(e) SPECIAL SEVERANCE PAYMENT. As soon as practicable following
the Severance Date, the Company will make a one-time lump sum cash severance
payment (the "Severance Payment") to you of $1,496,000, representing (i) two
and nine-twelfths multiplied by (ii) the sum of your annual salary and target
bonus which are currently in effect. If within six monthe of the Severance
Date, you breach any of the provisions of Section 8 below, you shall either
(i) forfeit 30% of the Severance Payment as described this Section 4(e) (the
"Forfeited Amount") if you have not received such Severance Payment at the
time of the breach or (ii) if you have received the Severance Payment at the
time of such breach, you shall immediately incur the binding and enforceable
obligation to the Company to repay the Forfeited Amount within thirty days
from the date the Company provides you written notice of such breach.

5. OPTIONS. All stock option awards of the Adobe Stock Option Plan of
1984 and the Adobe Stock Option Plan of 1994, granted to you under the
Company's stock option plans, will vest and become exercisable as of the
Severance Date. The exercisable options will remain exercisable for a period
of 90 days from the Severance Date, after which all options will be canceled
and become void.

6. PERFORMANCE UNITS. You will earn performance units for the Adobe
Long Term Incentive Plan period 1995 through 1997 in accordance with the
terms of the plan. You will earn a pro rata share of the performance units
for the periods 1996 through 1998 and 1997 through 1999 as follows:

(i) on December 24, 1997, you will receive 4,600 vested
performance units for the period 1996 through 1998 according to the
terms of the plan,

(ii) on December 24, 1997 you will receive 6,667 vested
performance units for the period 1997 through 1999 according to the
terms of the plan.

7. PARTNERSHIP UNITS. On the Severance Date 7,500 of your partnership
units in Adobe Incentive Partners, L.P. shall vest for the 12-month period
ending December 31, 1997. No partnership units will vest for the partial
month January 1998 during which your employment with the Company will
terminate.

8. PROTECTING THE INTERESTS OF THE COMPANY.

<PAGE>

(a) RESTRICTIVE COVENANTS. You acknowledge and agree that
following the Severance Date, you shall continue to remain subject to and
bound to comply with the Employee Inventions and Proprietary Rights
Assignment Agreement between you and the Company dated May 16, 1988.

(b) COOPERATION IN LITIGATION. In consideration of the payments
hereunder, you agree to reasonably cooperate with and assist the Company and
its counsel, following the Severance Date, (i) in the preparation and
assertion of any claim or defense in connection with any action, suit or
proceeding brought by or against any of the Companies and (ii) in any
investigations (including internal investigations) and audits of the
Companies' current and past conduct and business and accounting practices,
provided that you possess relevant knowledge and/or expertise in the matter.
Subject to documentation and itemization to the Company's reasonable
satisfaction, the Company agrees to pay all travel expenses, attorneys' fees
and other out-of-pocket expenses, actually, necessarily and reasonably
incurred by you in connection with the activities described in the preceding
sentence.

(c) NO SOLICITATION. You agree that for a period of 24 months
after the Severance Date, you shall not, either directly or indirectly,
solicit or encourage any employee of the Companies to terminate his or her
employment with the Companies.

(d) PRESS RELEASES. During the Transitional Period, you and the
Company shall agree upon the form of any statements to that are released to
the press with respect to the subject matter of this Resignation Agreement
and you agree not to make any remarks or comments concerning your termination
of employment with the Company that are inconsistent with any such press
releases.

(e) CONFIDENTIALITY OF THE RESIGNATION AGREEMENT. Subject to any
legal requirements to divulge such information, you and the Company mutually
agree to keep the contents and terms of this Resignation Agreement
confidential for a period of six months following the Severance Date.

(f) PUBLIC COMMENT. You agree to refrain from making now or at
any time in the future any derogatory or disparaging comment concerning any
of the Companies or any current or former directors, officers or employees of
any of the Companies to the press, any employees of any of the Companies or
any individual or entity with whom you or any of the Companies has a business
relationship. The Company agrees to refrain from

<PAGE>

making now or at any time in the future any derogatory or disparaging comment
concerning you to the press or to any person with whom you or any of the
Companies has a business relationship.

(g) INJUNCTIVE RELIEF. Without intending to limit the remedies
available to the Company, you acknowledge that a breach of any of the
covenants contained in this Section 8 may result in material irreparable
injury to the Company for which there is no adequate remedy at law, that it
will not be possible to measure damages for such injuries precisely and that,
in the event of such a breach or threat thereof, the Company shall be
entitled to obtain a temporary restraining order and/or a preliminary or
permanent injunction restraining you from engaging in activities prohibited
by this Section 8, or such other relief as may be required to specifically
enforce any of the covenants in this Section 8.

9. RELEASE.

(a) In recognition of the consideration cited above, you hereby
release and discharge on behalf of each of the Releasing Parties (as defined
below) each of the Released Parties (as defined below) from any and all
claims, actions and causes of action that the Releasing Parties may have or
in the future may possess with respect to the Released Parties, including,
but not limited to, any claims arising under Title VII of the Civil Rights
Act of 1964 as amended, the Rehabilitation Act of 1973 as amended, the
Americans with Disabilities Act of 1990 as amended, the Civil Rights Act of
1866 as amended, the Civil Rights Act of 1991 as amended, the Employee
Retirement Income Security Act of 1974 as amended, the Older Workers Benefit
Protection Act as amended, the Family Medical Leave Act of 1993 as amended,
or any other federal or state or local law, whether such claim arises under
statute or common law and whether or not you are presently aware of the
existence of such claim, damage, action or cause of action, suit or demand.
You also forever release, discharge and waive any right the Releasing Parties
may have to recover in any proceeding brought by any federal, state or local
agency against the Released Parties to enforce any laws. You agree that the
value received as described in this Resignation Agreement shall be in full
satisfaction of any and all claims, actions or causes of action for payment
or other benefits of any kind that the Releasing Parties may have against the
Released Parties. "RELEASING PARTIES" means you, your family members, your
estate, your beneficiaries, your heirs and your assigns and the estate,
beneficiaries, heirs and assigns of each of the foregoing. "RELEASED PARTIES"
means the Companies and their present, former and future shareholders,
directors, officers, employees, agents, attorneys, heirs and assigns.

<PAGE>

(b) In further recognition of the consideration cited above, you
hereby release and forever discharge on behalf of each of the Releasing
Parties each of the Released Parties from any and all claims, actions and
causes of action that you may have as of the date you sign and deliver to the
Company this Resignation Agreement arising under the federal Age
Discrimination in Employment Act of 1967, as amended, and the applicable
rules and regulations promulgated thereunder ("ADEA") which may be based in
whole or in part on age discrimination.

"A general release does not extend to claims which the
creditor does not know or suspect to exist in his favor at the
time of executing the release, which if known by him must have
materially affected his settlement with the debtor."

You waive any rights that you have or may have under Section 1542 of the
Civil Code to the full extent that you may lawfully waive such rights with
respect to this general release of all claims.

10. TERMINATION OF PRIOR AGREEMENTS AND UNDERSTANDINGS. With the
exception of the terms and conditions outlined in the Amended and Restated
Partnership Agreement of the Adobe Incentive Partners, L.P. and the
Restricted Units Agreement and the vesting of your partnership units outlined
herein, This Resignation Agreement constitutes the entire agreement between
the parties with respect to the subject matter hereof and supersedes all
prior negotiations and agreements, whether written or oral. This Resignation
Agreement may not be modified or amended except by a document signed by you
and an authorized officer of the Company.

11. ARBITRATION. Any controversy or claim arising out of or relating
to this Resignation Agreement, including, but not limited to, any claim
relating to the validity, interpretation, enforceability or breach of this
Resignation Agreement, which is not settled by agreement between you and the
Company (collectively, the "PARTIES") shall be settled by arbitration in San
Jose, California, before a panel of three arbitrators, one to be selected by
the Company, one by you and the other by the two persons so selected, all in
accordance with the rules of the American Arbitration Association then in
effect; PROVIDED, HOWEVER, that the Company shall nevertheless be entitled to
seek relief under Section 8 above in accordance with Section 8(g) thereof.
In consideration of the Parties' agreement

<PAGE>

to submit to arbitration disputes with regard to this Resignation Agreement
and with regard to any alleged tort, contract or other claim arising out of
the employment relationship, and in consideration of the anticipated
expedition and minimization of expense of this arbitration remedy, each Party
agrees that the arbitration provisions of this Resignation Agreement shall
provide it with the exclusive remedy, except as provided in the preceding
sentence, and each Party expressly waives any right it might have to seek
redress in any other form except as provided herein. The Parties further
agree that the arbitrators acting hereunder shall be empowered to assess no
remedy other than payment of compensatory damages or an order (including
temporary, preliminary or permanent injunctive relief) enforcing the
provisions of Section 8 above. Any decision or order of the majority of
arbitrators shall be binding upon the Parties hereto and judgment thereon may
be entered in the Santa Clara County Superior Court or any other court having
jurisdiction. The prevailing party shall be entitled to recover from the
losing party its attorneys' fees and costs incurred in any lawsuit or other
action brought to enforce any right arising out of this Resignation Agreement.

12. ACKNOWLEDGMENT. By signing this Resignation Agreement, you hereby
acknowledge and confirm the following:

(a) You were advised by the Company in connection with your
resignation to consult with an attorney of your choice prior to signing this
Resignation Agreement and to have such attorney explain to you the terms of
this Resignation Agreement including, without limitation, the terms relating
to your release of claims arising out of ADEA.

(b) You were given not less than 21 days to consider the terms of
this Resignation Agreement and to consult with an attorney of your choosing
with respect thereto, and that for a period of seven days following your
acceptance hereof, you have the option to revoke such acceptance in
accordance with the terms set forth below.

13. REVOCATION. You shall have the right to revoke this Resignation
Agreement during the seven-day period (the "REVOCATION PERIOD ") commencing
immediately following the date you sign and deliver this Resignation
Agreement to the Company. The Revocation Period shall expire at 5:00 p.m.
(California time) on the last day of the Revocation Period; PROVIDED,
HOWEVER, that if such seventh day is not a business day, the Revocation
Period shall extend to 5:00 p.m. on the next succeeding business day. In the
event of any such

<PAGE>

revocation by you, all obligations of any of the Companies under this
Resignation Agreement shall terminate and be of no further force and effect
as of the date of such revocation. No such revocation by you shall be
effective unless it is in writing and signed by you and received by the
Company prior to the expiration of the Revocation Period

Your signature on the line below constitutes your agreement with each
provision contained herein.

Very truly yours,

Adobe Systems Incorporated

By: Charles M. Geschke
--------------------------------
Title: President

I UNDERSTAND AND AGREE WITH THE ABOVE:

/s/ David B. Pratt
- ----------------------------
David B. Pratt

Dated: October 13, 1997
- ----------------------------

<PAGE>

EXHIBIT 10.44

ADOBE SYSTEMS INCORPORATED

[GOLD VERSION A]

________ ___, 1997
[Name]
[Address]

RETENTION AGREEMENT

Dear _______:

Adobe Systems Incorporated, a Delaware corporation (the "COMPANY"),
considers it essential to the best interests of its stockholders to take
reasonable steps to retain key management personnel. Further, the Board of
Directors of the Company (the "BOARD") recognizes that the uncertainty and
questions which might arise among management in the context of a change in
control of the Company could result in the departure or distraction of
management personnel to the detriment of the Company and its stockholders.

The Board has determined, therefore, that appropriate steps should
be taken to reinforce and encourage the continued attention and dedication of
members of the management of the Company and its subsidiaries, including
yourself, to their assigned duties without distraction in the face of
potentially disturbing circumstances arising from any possible change in control
of the Company.

In order to induce you to remain in the employ of the Company, the
Company has determined to enter into this letter agreement (this "AGREEMENT")
which addresses the terms and conditions of your employment in the event of a
change in control of the Company. Capitalized words which are not otherwise
defined herein shall have the meanings assigned to such words in Section 7 of
this Agreement.

1. TERM OF EMPLOYMENT UNDER THE AGREEMENT. The term of your
employment under this Agreement shall commence on the Change in Control Date and
shall continue until the second anniversary of the Change in Control Date (the
"TERM").

2. EMPLOYMENT DURING THE TERM. During the Term, the following
terms and conditions shall apply to your employment with the Company:

<PAGE>

(a) TITLES; REPORTING AND DUTIES. Your position, titles, nature
and status of responsibilities and reporting obligations shall be no less
favorable to you than those that you enjoyed immediately prior to the Change in
Control Date.

(b) SALARY AND BONUS. Your base salary and annual bonus
opportunity may not be reduced, and your base salary shall be periodically
reviewed and increased in the manner commensurate with increases awarded to
other similarly situated executives of the Company.

(c) INCENTIVE COMPENSATION. You shall be eligible to participate
in each long-term incentive plan or arrangement established by the Company for
its executive employees at your level of seniority (excluding the Investment
Partnership, except to the extent you hold Restricted Units) in accordance with
the terms and provisions of such plan or arrangement and at a level consistent
with the Company's practices applicable to you prior to the Change in Control
Date.

(d) BENEFITS. You shall be eligible to participate in all
pension, welfare and fringe benefit plans and arrangements that the Company
provides to its executive employees in accordance with the terms of such plans
and arrangements, which shall be no less favorable to you, in the aggregate,
than the terms and provisions available to other executive employees of the
Company.

(e) LOCATION. You will continue to be employed at a business
location in the same metropolitan area in which you were employed prior to the
Change in Control Date and the amount of time that you are required to travel
for business purposes will not be increased in any significant respect from the
amount of business travel required of you prior to the Change in Control Date.

3. INVOLUNTARY TERMINATION DURING THE TERM.

(a) CASH SEVERANCE PAYMENT. In the event of your Involuntary
Termination during the Term, the Company shall pay you within five (5) days of
the date of such Involuntary Termination the full amount of any earned but
unpaid base salary through the Date of Termination at the rate in effect at the
time of the Notice of Termination, plus a cash payment (calculated on the basis
of your Reference Salary) for all unused vacation time which you may have
accrued as of the Date of Termination. The Company shall also pay you within
five (5) days of the Date of Termination a pro rata portion of the annual bonus
for the year in which your Involuntary Termination occurs, calculated on the
basis of your target bonus for that year and on the assumption that all
performance targets have been or will be achieved. In addition, the Company
shall pay you in a cash lump sum, within eight (8) days following the date of
your execution of the release described in the last sentence of this Section
3(a) (or on

<PAGE>

the Date of Termination, if later), an amount (the "SEVERANCE PAYMENT") equal
to the product of (i) the sum of your Reference Salary and your Reference
Bonus, multiplied by (ii) two (2) plus one twelfth (1/12th) for each of your
completed years of service with the Company (not in excess of twelve (12))
(the number determined in accordance with the clause (ii) being hereinafter
referred to as the "SEVERANCE MULTIPLE"). The Severance Payment shall be in
lieu of any other cash severance payments which you are entitled to receive
under any other severance pay plan or arrangement sponsored by the Company
and its subsidiaries.

(b) VESTING AND EXERCISE OF EQUITY AWARDS AND RESTRICTED UNITS.
Notwithstanding anything to the contrary contained in an applicable Equity Award
or Restricted Unit agreement, all Equity Awards granted to you under the Equity
Plans (except performance share unit awards, which shall continue to be governed
by their current terms) shall vest in full and become exercisable, and all
Restricted Units granted to you under the Investment Partnership shall vest in
full, upon your Involuntary Termination during the Term. Anything in this
Agreement to the contrary notwithstanding, in no event shall the vesting and
exercisability provisions applicable to you under the terms of your Equity
Awards or Restricted Units be less favorable to you than the terms and
provisions of such awards in effect on the date hereof.

(c) BENEFITS CONTINUATION. In the event of your Involuntary
Termination during the Term, you and your eligible dependents shall continue to
be eligible to participate during the Benefit Continuation Period (as
hereinafter defined) in the medical, dental, health, life and other fringe
benefit plans and arrangements applicable to you immediately prior to your
Involuntary Termination on the same terms and conditions (including the level of
your contributions) in effect for you and your dependents immediately prior to
such Involuntary Termination. For purposes of the previous sentence, "BENEFIT
CONTINUATION PERIOD" means the period beginning on the Date of Termination and
continuing for a number of years (and fractions of years) equal to the Severance
Multiple.

<PAGE>

later of the date specified in the Notice of Termination or ten (10) days
following the date such notice is received by you. If the basis of your
Involuntary Termination is your resignation for Good Reason, the Date of
Termination shall be ten (10) days after the date your Notice of Termination
is received by the Company. The Date of Termination for a resignation of
employment other than for Good Reason shall be the date set forth in the
applicable notice, which shall be no earlier than ten (10) days after the
date such notice is received by the Company.

(e) NO MITIGATION OR OFFSET. You shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise, nor shall the amount of any payment or benefit
provided for in this Agreement be reduced by any compensation earned by you as
the result of employment by another employer or by pension benefits paid by the
Company or another employer after the Date of Termination or otherwise.

4. LIMITATION ON PAYMENTS. In the event that it is determined
by the Accounting Firm that any amount payable to you under this Agreement,
alone or when aggregated with any other amount payable or benefit provided to
you pursuant to any other plan or arrangement of the Company, would constitute
an "excess parachute payment" within the meaning of Section 280G of the Code,
then the aggregate present value of all such payments and benefits shall be
reduced to the amount, expressed as a present value, which, as determined by the
Accounting Firm, maximizes the aggregate present value of the payments without
causing any payment to be nondeductible by the Company under Section 280G of the
Code.

5. LEGAL FEES AND EXPENSES. The Company shall pay or reimburse
you for all costs and expenses (including, without limitation, court costs and
reasonable legal fees and expenses which reflect common practice with respect to
the matters involved) incurred by you as a result of any claim, action or
proceeding (i) arising out of your termination of employment during the Term,
(ii) contesting, disputing or enforcing any right, benefits or obligations under
this Agreement or (iii) arising out of or challenging the validity, advisability
or enforceability of this Agreement or any provision thereof. The payments or
reimbursements provided for herein shall be paid by the Company promptly (but in
no event more than five (5) business days) following receipt of a written
request for payment or reimbursement, as the case may be.

6. SUCCESSORS; BINDING AGREEMENT.

<PAGE>

required to perform it if no such succession had taken place; PROVIDED,
HOWEVER, that no such assumption shall relieve the Company of its obligations
hereunder. As used in this Agreement, the "Company" shall mean the Company
as hereinbefore defined and any successor to its business and/or assets as
aforesaid which assumes and agrees to perform this Agreement by operation of
law or otherwise.

(b) ENFORCEABILITY; BENEFICIARIES. This Agreement shall be
binding upon and inure to the benefit of you (and your personal representatives
and heirs) and the Company and any organization which succeeds to substantially
all of the business or assets of the Company, whether by means of merger,
consolidation, acquisition of all or substantially all of the assets of the
Company or otherwise, including, without limitation, as a result of a Change in
Control or by operation of law. This Agreement shall inure to the benefit of
and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If you
should die while any amount would still be payable to you hereunder if you had
continued to live, all such amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of this Agreement to your devisee, legatee or
other designee or, if there is no such designee, to your estate.

7. DEFINITIONS. For purposes of this Agreement, the following
capitalized words shall have the meanings set forth below:

"ACCOUNTING FIRM" shall mean KPMG Peat Marwick LLP or, if such firm
is unable or unwilling to perform such calculations, such other national
accounting firm as shall be designated by agreement between you and the Company.

"CAUSE" shall mean a termination of your employment during the Term
which is a result of (i) your felony conviction, (ii) your willful disclosure of
material trade secrets or other material confidential information related to the
business of the Company and its subsidiaries or (iii) your willful and continued
failure substantially to perform your same duties with the Company as in
existence prior to the Change in Control (other than any such failure resulting
from your incapacity due to physical or mental illness or any actual or
anticipated failure resulting from a resignation by you for Good Reason) after a
written demand for substantial performance is delivered to you by the Board,
which demand identifies the specific actions which the Board believes constitute
willful and continued failure substantially to perform your duties, and which
performance is not substantially corrected by you within ten (10) days of
receipt of such demand. For purposes of the previous sentence, no act or
failure to act on your part shall be deemed "willful" unless done, or omitted to
be done, by you with willful malfeasance or gross negligence and without
reasonable belief that your action or omission was not materially adverse to the
best interest of the Company. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote of
<PAGE>

not less than three-fourths (3/4ths) of the entire membership of the Board at
a meeting of the Board called and held for such purpose (after reasonable
notice to you and an opportunity for you, together with your counsel, to be
heard before the Board), finding that in the good faith opinion of the Board
you were guilty of conduct set forth above in clause (i), (ii) or (iii) of
the first sentence of this section and specifying the particulars thereof in
detail.

"CHANGE IN CONTROL" shall mean a change in control of the Company
of a nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or
not the Company is then subject to such reporting requirement; PROVIDED,
HOWEVER, that, anything in this Agreement to the contrary notwithstanding, a
Change in Control shall be deemed to have occurred if:

(i) any individual, partnership, firm, corporation, association,
trust, unincorporated organization or other entity or person, or any
syndicate or group deemed to be a person under Section 14(d)(2) of the
Exchange Act, is or becomes the "beneficial owner" (as defined in Rule
13d-3 of the General Rules and Regulations under the Exchange Act),
directly or indirectly, of securities of the Company representing 30% or
more of the combined voting power of the Company's then outstanding
securities entitled to vote in the election of directors of the Company;

(ii) during any period of two (2) consecutive years (not including
any period prior to the execution of this Agreement), individuals who at
the beginning of such period constituted the Board and any new directors,
whose election by the Board or nomination for election by the Company's
stockholders was approved by a vote of at least three-fourths (3/4ths) of
the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved (the "INCUMBENT DIRECTORS"), cease for any reason to
constitute a majority thereof;

(iii) there occurs a reorganization, merger, consolidation or other
corporate transaction involving the Company or a subsidiary of the Company
(a "TRANSACTION"), in each case with respect to which the stockholders of
the Company immediately prior to such Transaction do not, immediately after
the Transaction, own securities representing more than 50% of the combined
voting power of the Company, a parent of the Company or other corporation
resulting from such Transaction (counting, for this purpose, only those
securities held by the Company's stockholders immediately after the
Transaction that were received in exchange for, or represent their
continuing ownership of, securities of the Company held by them immediately
prior to the Transaction);
<PAGE>

(iv) all or substantially all of the assets of the Company are
sold, liquidated or distributed; or

(v) there is a "change in control" or a "change in the effective
control" of the Company within the meaning of Section 280G of the Code and
the Regulations.

"CHANGE IN CONTROL DATE" shall mean the date on which the Change in
Control occurs. Notwithstanding the first sentence of this definition, if your
employment with the Company terminates prior to the Change in Control Date and
it is reasonably demonstrated that your termination of employment (i) was at the
request of the third party who has taken steps reasonably calculated to effect
the Change in Control or (ii) otherwise arose in connection with or in
anticipation of the Change in Control, then "Change in Control Date" shall mean
the date immediately prior to the date of your termination of employment.

"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
any successor provisions thereto.

"COMMON STOCK" shall mean the common stock of the Company.

"DISABILITY" shall mean (i) your incapacity due to physical or
mental illness which causes you to be absent from the full-time performance of
your duties with the Company for six (6) consecutive months and (ii) your
failure to return to full-time performance of your duties for the Company within
thirty (30) days after written Notice of Termination due to Disability is given
to you. Any question as to the existence of your Disability upon which you and
the Company cannot agree shall be determined by a qualified independent
physician selected by you (or, if you are unable to make such selection, such
selection shall be made by any adult member of your immediate family), and
approved by the Company. The determination of such physician made in writing to
the Company and to you shall be final and conclusive for all purposes of this
Agreement.

"EQUITY AWARDS" shall mean options, restricted stock, bonus stock or
other grants or awards which consist of, or relate to, equity securities of the
Company and which have been granted to you under the Equity Plans. For purposes
of this Agreement, Equity Awards shall also include any securities acquired upon
the exercise of an option, warrant or similar right that constitutes an Equity
Award.

"EQUITY PLANS" shall mean the Adobe Systems Incorporated 1994 Stock
Option Plan, the Adobe Systems Incorporated 1994 Performance and Restricted
Stock Plan and any other equity-based incentive plan or arrangement adopted by
the Company, but shall not include the Adobe Systems Incorporated 1997 Employee
Stock Purchase Plan.
<PAGE>

"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.

"GOOD REASON" shall mean a resignation of your employment during the
Term as a result of any of the following:

(i) A meaningful and detrimental alteration in your position,
your titles, or the nature or status of your responsibilities (including
your reporting responsibilities) from those in effect immediately prior to
the Change in Control Date. For purposes of this clause (i), a meaningful
and detrimental alteration shall exist if, on or after the Change in
Control Date, without limitation, any of the following occurs: (A) at any
time you do not hold the position of the [INSERT TITLE/DUTIES] of the
Company (or the surviving entity resulting from the merger or consolidation
(through one or more related transactions) of the Company with another
entity (the "SURVIVING ENTITY")); (B) at any time you do not hold the
position of the [INSERT TITLE/DUTIES] of any entity that beneficially owns
a majority of the voting stock of the Company (or the Surviving Entity) or
that has the power to elect a majority of the Board (or the board of
directors of the Surviving Entity) (the "CONTROLLING ENTITY"); (C) at any
time you do not report directly to the [chief executive officer] of the
Company (or the Surviving Entity) and to the [chief executive officer] of
any Controlling Entity; (D) at any time you do not have regular direct
access to the [chief executive officer] of the Company (or the Surviving
Entity) and to the [chief executive officer] of any Controlling Entity or
(E) any similar adverse change on or after the Change in Control Date in
your title, position or reporting responsibilities;

(ii) A reduction by the Company in your annual base salary as in
effect immediately prior to the Change in Control Date or as the same may
be increased from time to time thereafter; a failure by the Company to
increase your salary at a rate commensurate with that of other key
executives of the Company; or a reduction in the target incentive
opportunity percentage used to determine your Target Annual Bonus below the
percentage in effect for you prior to the Change in Control Date;

(iii) The relocation of the office of the Company where you are
employed immediately prior to the Change in Control Date (the "CIC
LOCATION") to a location which is more than thirty five (35) miles away
from the CIC Location or the Company's requiring you to be based more than
thirty five (35) miles away from the CIC Location (except for required
travel on the Company's business to an extent substantially consistent with
your customary business travel obligations in the ordinary course of
business prior to the Change in Control Date);

<PAGE>

(iv) The failure by the Company to continue in effect any
compensation plan in which you participated prior to the Change in Control
Date or made available to you after the Change in Control Date, unless an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan in connection with the Change
in Control, or the failure by the Company to continue your participation
therein on at least as favorable a basis, both in terms of the amount of
benefits provided and the level of your participation relative to other
participants, as existed on the Change in Control Date;

(v) The failure by the Company to continue to provide you with
benefits at least as favorable in the aggregate to those enjoyed by you
under the Company's pension, savings, life insurance, medical, health and
accident, disability, and fringe benefit plans and programs in which you
were participating immediately prior to the Change in Control Date; or the
failure by the Company to provide you with the number of paid vacation days
to which you are entitled on the basis of years of service with the Company
in accordance with the Company's normal vacation policy in effect
immediately prior to the Change in Control;

(vi) The failure by the Company to pay or provide you any material
item of compensation or benefits promptly when due;

(vii) The failure of the Company to obtain an agreement reasonably
satisfactory to you from any successor to assume and agree to perform this
Agreement, as contemplated in Section 6(a) hereof or, if the business for
which your services are principally performed is sold at any time after a
Change in Control, the failure of the Company to obtain such an agreement
from the purchaser of such business;

(viii) Any termination of your employment which is not effected
pursuant to the terms of this Agreement; or

(ix) A material breach by the Company of the provisions of this
Agreement;

PROVIDED, HOWEVER, that an event described above in clause (i), (ii), (iv), (v),
(vi) or (ix) shall not constitute Good Reason unless it is communicated by you
to the Company in writing and is not corrected by the Company in a manner which
is reasonably satisfactory to you (including full retroactive correction with
respect to any monetary matter) within 10 days of the Company's receipt of such
written notice from you.

"INVESTMENT PARTNERSHIP" shall mean Adobe Incentive Partners, L.P.
<PAGE>

"INVOLUNTARY TERMINATION" shall mean (i) your termination of
employment by the Company and its subsidiaries during the Term other than for
Cause, (ii) your resignation of employment with the Company and its subsidiaries
during the Term for Good Reason or (iii) the termination of your employment by
reason of Disability.

"REFERENCE BONUS" shall mean the greater of (i) the Target Annual
Bonus applicable to you for the year in which your Involuntary Termination
occurs and (ii) the highest Target Annual Bonus applicable to you in any of the
three years ending prior to the Change in Control Date.

"REFERENCE SALARY" shall mean the greater of (i) the annual rate of
your base salary from the Company and its subsidiaries in effect immediately
prior to the date of your Involuntary Termination and (ii) the annual rate of
your base salary from the Company in effect at any point during the three-year
period ending on the Change in Control Date.

"REGULATIONS" shall mean the proposed, temporary and final
regulations under Section 280G of the Code or any successor provision thereto.

"RESTRICTED UNITS" shall mean restricted Class B Units of limited
partnership interests in the Investment Partnership granted pursuant to a
Restricted Units Agreement.

"TARGET ANNUAL BONUS" shall mean an amount equal to your base salary
times your target incentive opportunity percentage under the Company's MBO Bonus
and Profit Sharing Plans (or any successor plans, if any, then in effect).

8. NOTICE. For the purpose of this Agreement, notices and all
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given when delivered or mailed by United
States registered mail, return receipt requested, postage prepaid, addressed to
the Board of Directors, Adobe Systems Incorporated, 345 Park Avenue, San Jose,
California 95110 - 2704, with a copy to the General Counsel of the Company, or
to you at the address set forth on the first page of this Agreement or to such
other address as either party may have furnished to the other in writing in
accordance herewith, except that notice of change of address shall be effective
only upon receipt.

9. MISCELLANEOUS.
<PAGE>

(a) AMENDMENTS, WAIVERS, ETC. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in writing. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement and this
Agreement shall supersede all prior agreements, negotiations, correspondence,
undertakings and communications of the parties, oral or written, with respect to
the subject matter hereof, including, without limitation, the prior Severance
and Change of Control Agreement between you and the Company; PROVIDED, HOWEVER,
that, except as expressly set forth herein, this Agreement shall not supersede
the terms of Equity Awards or Restricted Units previously granted to you.

(b) VALIDITY. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement, which shall remain in full force and
effect.

(c) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

(d) NO CONTRACT OF EMPLOYMENT. Nothing in this Agreement shall
be construed as giving you any right to be retained in the employ of the Company
or shall affect the terms and conditions of your employment with the Company
prior to the commencement of the Term hereof.

(e) WITHHOLDING. Amounts paid to you hereunder shall be subject
to all applicable federal, state and local withholding taxes.

(f) SOURCE OF PAYMENTS. All payments provided under this
Agreement, other than payments made pursuant to a plan which provides otherwise,
shall be paid in cash from the general funds of the Company, and no special or
separate fund shall be established, and no other segregation of assets made, to
assure payment. To the extent that any person acquires a right to receive
payments from the Company hereunder, such right shall be no greater than the
right of an unsecured creditor of the Company.

(g) HEADINGS. The headings contained in this Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Agreement.
<PAGE>

(h) AMENDMENT. This Agreement may not be amended, modified or
terminated except pursuant to a written instrument executed by both parties
hereto.

(i) GOVERNING LAW. The validity, interpretation, construction,
and performance of this Agreement shall be governed by the laws of the State of
California applicable to contracts entered into and performed in such State.

If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.

Sincerely,

ADOBE SYSTEMS INCORPORATED

By:
---------------------------------
Name:
Title:

Agreed to as of this day of , 1997
--- -------

- --------------------------------
[NAME]
<PAGE>

[GOLD VERSION B]

________ ___, 1997
[Name]
[Address]

RETENTION AGREEMENT

Dear _______:

2. EMPLOYMENT DURING THE TERM. During the Term, the following
terms and conditions shall apply to your employment with the Company:

(a) TITLES; REPORTING AND DUTIES. Your position, titles, nature
and status of responsibilities and reporting obligations shall be no less
favorable to you than those that you
<PAGE>

enjoyed immediately prior to the Change in Control Date.

3. INVOLUNTARY TERMINATION DURING THE TERM.

<PAGE>

hereinafter referred to as the "SEVERANCE MULTIPLE"). The Severance Payment
shall be in lieu of any other cash severance payments which you are entitled to
receive under any other severance pay plan or arrangement sponsored by the
Company and its subsidiaries.

(d) DATE AND NOTICE OF TERMINATION. Any termination of your
employment by the Company or by you during the Term shall be communicated by a
notice of termination to the other party hereto (the "NOTICE OF TERMINATION").
The Notice of Termination shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. The date of your termination of employment
with the Company and its subsidiaries (the "DATE OF TERMINATION") shall be
determined as follows: (i) if your employment is terminated for Disability,
thirty (30) days after a Notice of Termination is given (provided that you shall
not have returned to the full-time performance of your duties during such thirty
(30) day period), (ii) if your employment is terminated by the Company in an
Involuntary Termination, five (5) days after the date the Notice of Termination
is received by you and (iii) if your employment is terminated by the Company for
Cause, the later of the date specified in the Notice of Termination or ten (10)
days following the date such notice is received by you. If the basis of your
Involuntary Termination is your resignation for Good Reason, the Date of
Termination shall be ten (10) days after the date your Notice of Termination is
received by the Company. The Date of Termination for a resignation of
employment other than for Good Reason shall be the date set forth in the
applicable notice, which shall be no earlier than ten (10) days after the date
such notice is received by the

<PAGE>

Company.

6. SUCCESSORS; BINDING AGREEMENT.

(a) ASSUMPTION BY SUCCESSOR. The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business or assets of the Company
expressly to assume and to agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such succession had taken place; PROVIDED, HOWEVER, that no such assumption
shall relieve the Company of its obligations hereunder. As used in this
Agreement, the "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which assumes and agrees to
perform this Agreement by operation of law or otherwise.

(b) ENFORCEABILITY; BENEFICIARIES. This Agreement shall be
binding upon and inure to the benefit of you (and your personal representatives
and heirs) and the Company and

<PAGE>

any organization which succeeds to substantially all of the business or
assets of the Company, whether by means of merger, consolidation, acquisition
of all or substantially all of the assets of the Company or otherwise,
including, without limitation, as a result of a Change in Control or by
operation of law. This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to your
devisee, legatee or other designee or, if there is no such designee, to your
estate.

7. DEFINITIONS. For purposes of this Agreement, the following
capitalized words shall have the meanings set forth below:

<PAGE>

notwithstanding, a Change in Control shall be deemed to have occurred if:

(iv) all or substantially all of the assets of the Company are
sold, liquidated or distributed; or

(v) there is a "change in control" or a "change in the effective
control" of the Company within the meaning of Section 280G of the Code and
the Regulations.

<PAGE>

"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
any successor provisions thereto.

"COMMON STOCK" shall mean the common stock of the Company.

"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.

"GOOD REASON" shall mean a resignation of your employment during the
Term as a result of any of the following:

<PAGE>

(vi) The failure by the Company to pay or provide you any material
item of compensation or benefits promptly when due;

(viii) Any termination of your employment which is not effected
pursuant to the terms of this Agreement; or

(ix) A material breach by the Company of the provisions of this
Agreement;

<PAGE>

full retroactive correction with respect to any monetary matter) within 10
days of the Company's receipt of such written notice from you.

"INVESTMENT PARTNERSHIP" shall mean Adobe Incentive Partners, L.P.

"REGULATIONS" shall mean the proposed, temporary and final
regulations under Section 280G of the Code or any successor provision thereto.

"RESTRICTED UNITS" shall mean restricted Class B Units of limited
partnership interests in the Investment Partnership granted pursuant to a
Restricted Units Agreement.

9. MISCELLANEOUS.

(a) AMENDMENTS, WAIVERS, ETC. No provision of this Agreement may
be modified, waived or discharged unless such waiver, modification or discharge
is agreed to in

<PAGE>

writing. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made
by either party which are not expressly set forth in this Agreement and this
Agreement shall supersede all prior agreements, negotiations, correspondence,
undertakings and communications of the parties, oral or written, with respect
to the subject matter hereof, including, without limitation, the prior
Severance and Change of Control Agreement between you and the Company;
PROVIDED, HOWEVER, that, except as expressly set forth herein, this Agreement
shall not supersede the terms of Equity Awards or Restricted Units previously
granted to you.

(c) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

(e) WITHHOLDING. Amounts paid to you hereunder shall be subject
to all applicable federal, state and local withholding taxes.

(g) HEADINGS. The headings contained in this Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Agreement.

(h) AMENDMENT. This Agreement may not be amended, modified or
terminated except pursuant to a written instrument executed by both parties
hereto.

(i) GOVERNING LAW. The validity, interpretation, construction,
and performance of this Agreement shall be governed by the laws of the State of
California

<PAGE>

applicable to contracts entered into and performed in such State.

If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.

Sincerely,

ADOBE SYSTEMS INCORPORATED

By:
Name:
Title:

Agreed to as of this day of , 1997
--- -------

- ---------------------------------
[NAME]
<PAGE>

ADOBE SYSTEMS INCORPORATED

[PLATINUM VERSION]

________ ___, 1997
[Name]
[Address]

RETENTION AGREEMENT

Dear _______:

2. EMPLOYMENT DURING THE TERM. During the Term, the following
terms and conditions shall apply to your employment with the Company:
<PAGE>

(c) INCENTIVE COMPENSATION. You shall be eligible to participate
in each long-term incentive plan or arrangement established by the Company for
its executive employees at your level of seniority in accordance with the terms
and provisions of such plan or arrangement and at a level consistent with the
Company's practices applicable to you prior to the Change in Control Date.

3. INVOLUNTARY TERMINATION DURING THE TERM.

<PAGE>

of (i) the sum of your Reference Salary and your Reference Bonus, multiplied
by (ii) two (2) plus one twelfth (1/12th) for each of your completed years of
service with the Company (not in excess of twelve (12)) (the number
determined in accordance with this clause (ii) being hereinafter referred to
as the "SEVERANCE MULTIPLE"). The Severance Payment shall be in lieu of any
other cash severance payments which you are entitled to receive under any
other severance pay plan or arrangement sponsored by the Company and its
subsidiaries.

(b) VESTING AND EXERCISE OF EQUITY AWARDS AND RESTRICTED UNITS.
Notwithstanding anything to the contrary contained in an applicable Equity Award
or Restricted Unit agreement, all Equity Awards granted to you under the Equity
Plans (except performance share unit awards, which shall continue to be governed
by their current terms) shall vest in full and become exercisable, and all
Restricted Units granted to you under the Investment Partnership shall vest in
full, on the Change in Control Date. Anything in this Agreement to the contrary
notwithstanding, in no event shall the vesting and exercisability provisions
applicable to you under the terms of your Equity Awards or Restricted Units be
less favorable to you than the terms and provisions of such awards in effect on
the date hereof.

(d) DATE AND NOTICE OF TERMINATION. Any termination of your
employment by the Company or by you during the Term shall be communicated by a
notice of termination to the other party hereto (the "NOTICE OF TERMINATION").
The Notice of Termination shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination of your employment
under the provision so indicated. The date of your termination of employment
with the Company and its subsidiaries (the "DATE OF TERMINATION") shall be
determined as follows: (i) if your employment is terminated for Disability,
thirty (30) days after a Notice of Termination is given (provided that you shall
not have returned to the full-time performance of your duties during such thirty
(30) day period), (ii) if your employment is terminated by the Company in an
Involuntary Termination, five (5) days after the date the Notice of Termination
is received by you and (iii) if your employment is terminated by the Company for
Cause, the later of the date specified in the Notice of Termination or ten (10)
days following the date such notice is received by you. The Date of Termination
for a resignation of employment shall be
<PAGE>

the date set forth in the applicable notice, which shall be no earlier than
ten (10) days after the date such notice is received by the Company.

6. SUCCESSORS; BINDING AGREEMENT.

<PAGE>

7. DEFINITIONS. For purposes of this Agreement, the following
capitalized words shall have the meanings set forth below:

"CAUSE" shall mean a termination of your employment during the Term
which is a result of (i) your felony conviction, (ii) your willful disclosure of
material trade secrets or other material confidential information related to the
business of the Company and its subsidiaries or (iii) your willful and continued
failure substantially to perform your same duties with the Company as in
existence prior to the Change in Control (other than any such failure resulting
from your incapacity due to physical or mental illness) after a written demand
for substantial performance is delivered to you by the Board, which demand
identifies the specific actions which the Board believes constitute willful and
continued failure substantially to perform your duties, and which performance is
not substantially corrected by you within ten (10) days of receipt of such
demand. For purposes of the previous sentence, no act or failure to act on your
part shall be deemed "willful" unless done, or omitted to be done, by you with
willful malfeasance or gross negligence and without reasonable belief that your
action or omission was not materially adverse to the best interest of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than
three-fourths (3/4ths) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the Board),
finding that in the good faith opinion of the Board you were guilty of conduct
set forth above in clause (i), (ii) or (iii) of the first sentence of this
section and specifying the particulars thereof in detail.
<PAGE>

(iv) all or substantially all of the assets of the Company are
sold, liquidated or distributed; or

(v) there is a "change in control" or a "change in the effective
control" of the Company within the meaning of Section 280G of the Code and
the Regulations.
<PAGE>

"CODE" shall mean the Internal Revenue Code of 1986, as amended, and
any successor provisions thereto.

"COMMON STOCK" shall mean the common stock of the Company.

"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934, as
amended, and any successor provisions thereto.

"INVESTMENT PARTNERSHIP" shall mean Adobe Incentive Partners, L.P.
<PAGE>

"INVOLUNTARY TERMINATION" shall mean (i) your termination of
employment by the Company and its subsidiaries during the Term other than for
Cause, (ii) your resignation of employment with the Company and its subsidiaries
during the Term for any reason or no reason or (iii) the termination of your
employment by reason of Disability.

"REGULATIONS" shall mean the proposed, temporary and final
regulations under Section 280G of the Code or any successor provision thereto.

"RESTRICTED UNITS" shall mean restricted Class B Units of limited
partnership interests in the Investment Partnership granted pursuant to a
Restricted Units Agreement.

9. MISCELLANEOUS.
<PAGE>

(c) COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

(e) WITHHOLDING. Amounts paid to you hereunder shall be subject
to all applicable federal, state and local withholding taxes.

(g) HEADINGS. The headings contained in this Agreement are
intended solely for convenience of reference and shall not affect the rights of
the parties to this Agreement.
<PAGE>

(h) AMENDMENT. This Agreement may not be amended, modified or
terminated except pursuant to a written instrument executed by both parties
hereto.

If this letter sets forth our agreement on the subject matter
hereof, kindly sign and return to the Company the enclosed copy of this letter
which will then constitute our agreement on this subject.

Sincerely,

ADOBE SYSTEMS INCORPORATED

By:
---------------------------------
Name:
Title:

Agreed to as of this day of , 1997
--- -------

- -----------------------------
[NAME]

<PAGE>
ADOBE SYSTEMS INCORPORATED

EXHIBIT 11

COMPUTATION OF EARNINGS PER COMMON SHARE

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------
<S> <C> <C> <C>
NOVEMBER 28 NOVEMBER 29 DECEMBER 1
1997 1996 1995
------------ ------------ -----------
Net income.............................................................. $ 186,837 $ 153,277 $ 93,485
------------ ------------ -----------
------------ ------------ -----------
Primary shares outstanding:
Weighted average shares outstanding during the year................... 72,077 72,557 71,456
Common stock equivalent shares........................................ 2,055 2,507 2,797
------------ ------------ -----------
74,132 75,064 74,253
------------ ------------ -----------
------------ ------------ -----------
Fully diluted shares outstanding:
Weighted average shares outstanding during the year................... 72,077 72,557 71,456
Common stock equivalent shares........................................ 2,166 2,670 2,958
------------ ------------ -----------
74,243 75,227 74,414
------------ ------------ -----------
------------ ------------ -----------
Primary net income per common stock and common stock equivalent share... $ 2.52 $ 2.04 $ 1.26
------------ ------------ -----------
------------ ------------ -----------
Fully diluted net income per common stock and common stock equivalent
share................................................................. $ 2.52 $ 2.04 $ 1.26
------------ ------------ -----------
------------ ------------ -----------
</TABLE>

<PAGE>
ADOBE SYSTEMS INCORPORATED

EXHIBIT 21

SUBSIDIARIES OF THE REGISTRANT

<TABLE>
<CAPTION>
SUBSIDIARY LEGAL NAME JURISDICTION OF INCORPORATION
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
The Americas:
Adobe Systems FSC, Inc................................ Territory of Guam
Adobe Enterprise Publishing Services, Inc............. Michigan
OCR Systems, Inc...................................... Pennsylvania
Frame International, Inc.............................. Delaware
Frame Canada Limited.................................. Canada
Mastersoft Corporation................................ Arizona
Sandcastle, Inc....................................... California
Visualware Incorporated............................... California

Europe:
Adobe Systems Europe Ltd.............................. United Kingdom
Adobe Systems Direct Ltd.............................. United Kingdom
Adobe Systems Nordic AB............................... Sweden
Adobe Systems Benelux BV.............................. The Netherlands
Adobe Systems GmbH.................................... Federal Republic of Germany
Adobe Systems Software AG............................. Switzerland
Adobe Systems France SARL............................. France
Adobe Systems Italia SRL.............................. Italy
Adobe Systems Informatica............................. Spain
Adobe Systems U.K., Ltd............................... United Kingdom
Aldus Ireland......................................... Ireland
Frame International Limited........................... Ireland
Frame International Limited........................... United Kingdom
Frame Technology GmbH................................. Federal Republic of Germany

Japan:
Adobe Systems Company Ltd............................. Japan
Adobe Systems Japan, Inc.............................. California

Asia, Pacific, and Latin America:
Adobe Australia Pty. Ltd.............................. Australia
Adobe Systems India Pvt. Ltd.......................... India
Adobe Systems Korea Ltd............................... Korea
Adobe Systems Pte. Pty................................ Singapore
</TABLE>

All subsidiaries of the registrant are wholly owned and do business under
their legal names.

<PAGE>
ADOBE SYSTEMS INCORPORATED

EXHIBIT 23

CONSENT OF INDEPENDENT AUDITORS

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

We consent to the incorporation by reference in the Registration Statements
(No. 33-10753, No. 33-18986, No. 33-23171, No. 33-30976, No. 33-36501, No.
33-38387, No. 33-48210, No. 33-63518, No. 33-78506, No. 33-83030, No. 33-83502,
No. 33-83504, No. 33-84396, No. 33-86482, No. 33-59335, No. 33-63849, No.
33-63851, No. 333-28195, No. 333-28203, and No. 333-28207) on FORM S-8 of Adobe
Systems Incorporated of our report dated December 16, 1997, relating to the
consolidated balance sheets of Adobe Systems Incorporated and subsidiaries as of
November 28, 1997 and November 29, 1996, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the years in the
three-year period ended November 28, 1997, and related schedule appearing on
page 42 of this FORM 10-K.

KPMG Peat Marwick LLP

San Jose, California
February 17, 1998

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT NOVEMBER 28, 1997 AND THE CONSOLIDATED STATEMENT
OF INCOME FOR THE YEAR ENDED NOVEMBER 28, 1997, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-28-1997
<PERIOD-START> NOV-30-1996
<PERIOD-END> NOV-28-1997
<CASH> 267,576
<SECURITIES> 235,380
<RECEIVABLES> 134,608
<ALLOWANCES> (3,634)
<INVENTORY> 0
<CURRENT-ASSETS> 678,946
<PP&E> 187,485
<DEPRECIATION> (106,507)
<TOTAL-ASSETS> 940,071
<CURRENT-LIABILITIES> 224,647
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 715,417
<TOTAL-LIABILITY-AND-EQUITY> 940,071
<SALES> 196,230
<TOTAL-REVENUES> 911,894
<CGS> 126,271
<TOTAL-COSTS> 126,271
<OTHER-EXPENSES> 555,307
<LOSS-PROVISION> (440)
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 296,090
<INCOME-TAX> 109,253
<INCOME-CONTINUING> 186,837
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 186,837
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.52

</TABLE>