-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UL05ciRvvUnVDqfHOYWsg/IGMsokm0e2rejDkVAB3R2AFKpc9LRDbdhA6Dum4NTH uX+it2In6c7NL+SeWB3Nwg== 0001047469-04-030652.txt : 20041007 0001047469-04-030652.hdr.sgml : 20041007 20041007134222 ACCESSION NUMBER: 0001047469-04-030652 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20040903 FILED AS OF DATE: 20041007 DATE AS OF CHANGE: 20041007 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADOBE SYSTEMS INC CENTRAL INDEX KEY: 0000796343 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 770019522 STATE OF INCORPORATION: DE FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15175 FILM NUMBER: 041069835 BUSINESS ADDRESS: STREET 1: 345 PARK AVE CITY: SAN JOSE STATE: CA ZIP: 95110-2704 BUSINESS PHONE: 4085366000 MAIL ADDRESS: STREET 1: 345 PARK AVENUE CITY: SAN JOSE STATE: CA ZIP: 95110-2704 10-Q 1 a2144543z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 3, 2004

o	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)

Delaware
(State or other jurisdiction of
incorporation or organization)

77-0019522
(I.R.S. Employer
Identification No.)

345 Park Avenue, San Jose, California 95110-2704
(Address of principal executive offices and zip code)

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

Indicate by checkmark 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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ý No o

The number of shares outstanding of the registrant's common stock as of October 1, 2004 was 238,627,028.

ADOBE SYSTEMS INCORPORATED
FORM 10-Q

TABLE OF CONTENTS

			Page No.
PART I—FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements:
		Condensed Consolidated Balance Sheets September 3, 2004 and November 28, 2003	3
		Condensed Consolidated Statements of Income Three and Nine Months Ended September 3, 2004 and August 29, 2003	4
		Condensed Consolidated Statements of Cash Flows Nine Months Ended September 3, 2004 and August 29, 2003	5
		Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46
Item 4.	Controls and Procedures		46
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings		47
Item 2.	Changes in Securities and Use of Proceeds		49
Item 5.	Other Information		49
Item 6.	Exhibits and Reports on Form 8-K		50
Signature			52
Summary of Trademarks			53

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)

			September 3, 2004			November 28, 2003
ASSETS
Current assets:
	Cash and cash equivalents		$	198,700		$	189,917
	Short-term investments			941,072			906,616
	Trade receivables, net			110,573			146,311
	Other receivables			26,518			27,731
	Deferred income taxes			30,113			35,875
	Other current assets			26,595			22,578

		Total current assets		1,333,571			1,329,028
Property and equipment, net				89,029			77,007
Goodwill				110,260			95,971
Purchased and other intangibles, net				14,200			15,318
Investment in lease receivable				126,800			—
Other assets				46,948			37,721

		Total assets	$	1,720,808		$	1,555,045

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Trade and other payables		$	36,661		$	37,437
	Accrued expenses			169,724			160,009
	Income taxes payable			176,691			193,484
	Deferred revenue			47,148			45,600

		Total current liabilities		430,224			436,530
Other long-term liabilities				5,097			—
Deferred income taxes				59,731			17,715
Commitments and contingencies
Stockholders' equity:
	Common stock, $0.0001 par value			29,576			29,576
	Additional paid-in-capital			1,006,431			874,126
	Retained earnings			2,128,353			1,800,398
	Accumulated other comprehensive loss			(558	)		(999	)
	Treasury stock, at cost, (58,860 and 57,464 shares in 2004 and 2003, respectively), net of re-issuances			(1,938,046	)		(1,602,301	)

		Stockholders' equity		1,225,756			1,100,800

		Total liabilities and stockholders' equity	$	1,720,808		$	1,555,045

See accompanying Notes to Condensed Consolidated Financial Statements.

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)

			Three Months Ended						Nine Months Ended
			September 3, 2004			August 29, 2003			September 3, 2004			August 29, 2003
Revenue:
	Products		$	395,450		$	312,633		$	1,213,755		$	917,538
	Services and support			8,263			6,489			23,324			18,625

		Total revenue		403,713			319,122			1,237,079			936,163

Cost of revenue:
	Products			19,035			18,854			62,685			58,426
	Services and support			4,534			3,223			12,321			9,369

		Total cost of revenue		23,569			22,077			75,006			67,795

Gross profit				380,144			297,045			1,162,073			868,368
Operating expenses:
	Research and development			80,072			68,814			231,196			203,892
	Sales and marketing			122,939			106,134			380,854			309,874
	General and administrative			36,819			30,321			104,608			90,857
	Restructuring and other charges			—			(439	)		—			(439	)

		Total operating expenses		239,830			204,830			716,658			604,184

Operating income				140,314			92,215			445,415			264,184
Non-operating income (loss):
	Investment loss, net			(1,494	)		(2,996	)		(1,652	)		(13,254	)
	Interest and other income			2,343			2,958			11,502			10,492

		Total non-operating income (loss)		849			(38	)		9,850			(2,762	)

Income before income taxes				141,163			92,177			455,265			261,422
Provision for income taxes				36,702			27,653			118,368			78,427

Net income			$	104,461		$	64,524		$	336,897		$	182,995

Basic net income per share			$	0.44		$	0.28		$	1.41		$	0.79

Shares used in computing basic net income per share				238,471			233,364			238,491			232,288

Diluted net income per share			$	0.42		$	0.27		$	1.37		$	0.77

Shares used in computing diluted net income per share				247,113			240,495			246,749			238,592

Cash dividends declared per share			$	0.0125		$	0.0125		$	0.0375		$	0.0375

See accompanying Notes to Condensed Consolidated Financial Statements.

ADOBE SYSTEMS INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

					Nine Months Ended
					September 3, 2004			August 29, 2003
Cash flows from operating activities:
	Net income				$	336,897		$	182,995
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization				43,007			36,239
		Stock compensation expense				294			2,459
		Deferred income taxes				48,442			17,324
		Provision for (recovery of) losses on receivables				(2,152	)		1,300
		Tax benefit from employee stock option plans				29,972			12,349
		Net gains on sales and impairments of investments				1,645			13,254
		Non-cash restructuring and other charges				—			(439	)
		Changes in operating assets and liabilities:
			Receivables			39,518			4,577
			Other current assets			(1,509	)		(12,246	)
			Trade and other payables			(776	)		(5,695	)
			Accrued expenses			13,591			22,692
			Accrued restructuring charges			(777	)		(8,426	)
			Income taxes payable			(16,793	)		27,714
			Deferred revenue			1,548			10,424

				Net cash provided by operating activities		492,907			304,521

Cash flows from investing activities:
	Purchases of short-term investments					(955,732	)		(483,268	)
	Maturities and sales of short-term investments					914,016			206,366
	Acquisitions of property and equipment					(41,352	)		(26,864	)
	Purchases of long-term investments and other assets					(19,024	)		(15,859	)
	Cash paid for acquisitions					(15,545	)		(16,500	)
	Investment in lease receivable					(126,800	)		—
	Proceeds from sale of equity securities					3,145			2,321

				Net cash used for investing activities		(241,292	)		(333,804	)

Cash flows from financing activities:
	Purchase of treasury stock					(408,666	)		(84,537	)
	Proceeds from issuance of treasury stock					174,960			81,100
	Payment of dividends					(8,960	)		(8,701	)

				Net cash used for financing activities		(242,666	)		(12,138	)

	Effect of foreign currency exchange rates on cash and cash equivalents					(166	)		2,198

Net increase (decrease) in cash and cash equivalents						8,783			(39,223	)
Cash and cash equivalents at beginning of period						189,917			183,684

Cash and cash equivalents at end of period					$	198,700		$	144,461

Supplemental disclosures:
	Cash paid during the period for income taxes				$	59,426		$	11,997

Non-cash investing and financing activities:
	Cash dividends declared but not paid				$	2,961		$	2,917

	Unrealized losses on available-for-sale securities, net of taxes				$	(4,002	)	$	(502	)

See accompanying Notes to Condensed Consolidated Financial Statements.

ADOBE SYSTEMS INCORPORATED

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share data)

(Unaudited)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements include those of Adobe and its subsidiaries, after elimination of all intercompany accounts and transactions. Adobe has prepared the accompanying interim condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, consistent in all material respects with those applied in our Annual Report on Form 10-K for the year ended November 28, 2003. The interim financial information is unaudited but reflects all adjustments which are, in the opinion of management, necessary to provide fair condensed consolidated balance sheets, condensed consolidated statements of income and cash flows for the interim periods presented. Such adjustments are normal and recurring except as otherwise noted. You should read these interim condensed consolidated financial statements in conjunction with the audited financial statements in our Annual Report on Form 10-K for the year ended November 28, 2003.

Revenue Recognition

Our revenue is derived from the licensing of application and server-based software products, professional services, and maintenance and support. We recognize revenue when persuasive evidence of an arrangement exists, we have delivered the product or performed the service, the fee is fixed or determinable and collection is probable.

Product revenue

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

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

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

Our product-related deferred revenue includes maintenance upgrade revenue and customer advances under OEM license agreements. Our maintenance upgrade revenue for our desktop application products is included in our product revenue line item as the maintenance primarily entitles customers to receive product upgrades. In cases where we provide a specified free upgrade to an existing product, we defer the fair value for the specified upgrade right until the future obligation is fulfilled or when the right to the specified free upgrade expires.

Services and support revenue

Our professional services revenue is recognized using the percentage of completion method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones when applicable. Our maintenance and support offerings, which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, are recognized ratably over the term of the arrangement.

Multiple element arrangements

We enter into revenue arrangements in which a customer may purchase a combination of software, upgrades, maintenance and support, and professional services (multiple-element arrangements). When vendor-specific objective evidence ("VSOE") of fair value exists for all elements, we allocate revenue to each element based on the relative fair value of each of the elements. VSOE of fair value is established by the price charged when that element is sold separately. For maintenance and support, VSOE of fair value is established by renewal rates. For arrangements where VSOE exists only for the undelivered elements, we defer the full fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as revenue, assuming all other criteria for revenue recognition have been met.

We perform ongoing credit evaluations of our customers' financial condition and in some cases we require various forms of security. We also maintain allowances for estimated losses on receivables.

Stock-Based Incentive Compensation

We account for our stock option plans and our employee stock purchase plan using the intrinsic value method under Accounting Principles Board Opinion No. 25. The following table sets forth the pro forma amounts of net income and net income per share, for the three and nine months ended September 3, 2004 and August 29, 2003, that would have resulted if we accounted for our employee stock plans under the fair

value recognition provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation."

		Three Months Ended						Nine Months Ended
		2004			2003			2004			2003
Net income:
	As reported	$	104,461		$	64,524		$	336,897		$	182,995
	Add: Stock-based compensation expense for employees included in reported net income, net of related tax effects		31			429			191			1,599
	Less: Total stock-based compensation expense for employees determined under the fair value based method, net of related tax effects		(22,186	)		(36,453	)		(84,445	)		(153,101	)

	Pro forma	$	82,306		$	28,500		$	252,643		$	31,493

Basic net income per share:
	As reported	$	0.44		$	0.28		$	1.41		$	0.79
	Pro forma	$	0.35		$	0.12		$	1.06		$	0.14
Diluted net income per share:
	As reported	$	0.42		$	0.27		$	1.37		$	0.77
	Pro forma	$	0.33		$	0.12		$	1.02		$	0.13

For purposes of computing pro forma net income, we estimate the fair value of option grants and employee stock purchase plan purchase rights using the Black-Scholes option pricing model. The Black-Scholes option pricing model was developed for use in estimating the fair value of traded options that have no vesting restriction and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Additionally, option valuation models require the input of highly subjective assumptions, including the expected volatility of the stock price. Because our employee stock options and employee stock purchase plan shares have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimates, in management's opinion, the existing models do not provide a reliable single measure of the fair value of our stock-based awards.

For purposes of determining expected volatility, we considered implied volatility in market-traded options on our common stock as well as third party volatility quotes. In addition, we considered historical volatility. We will continue to monitor these and other relevant factors used to measure expected volatility for future option grants.

The assumptions used to value the option grants and purchase rights, for the three and nine months ended September 3, 2004 and August 29, 2003, are as follows:

	Three Months Ended				Nine Months Ended
	2004		2003		2004		2003
Expected life of options (in years)	2.5		2.5		2.5		2.5 - 3
Expected life of purchase rights (in years)	1.24		1.24		1.24		1.24
Volatility	37	%	40	%	37 - 40	%	40 - 66	%
Risk free interest rate—options	2.68 - 2.85	%	1.37	%	2.18 - 3.11	%	1.36 - 1.74	%
Risk free interest rate—purchase rights	1.24 - 1.76	%	1.12 - 1.47	%	1.24 - 1.76	%	1.12 - 1.74	%
Dividend yield	0.11	%	0.13	%	0.11 - 0.13	%	0.13	%

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

Income Taxes

We use the asset and liability method of accounting for income taxes. Under the asset and liability method, we recognize deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. We record a valuation allowance to reduce deferred tax assets to an amount for which realization is more likely than not. We also account for any income tax contingencies in accordance with Statement of Financial Accounting Standards No. 5 ("SFAS 5"), "Accounting for Contingencies."

Recent Accounting Pronouncements

In June 2004, the Financial Accounting Standards Board ("FASB") issued Emerging Issues Task Force Issue No. 02-14 ("EITF 02-14"), "Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock." EITF 02-14 addresses whether the equity method of accounting applies when an investor does not have an investment in voting common stock of an investee but exercises significant influence through other means. EITF 02-14 states that an investor should only apply the equity method of accounting when it has investments in either common stock or in-substance common stock of a corporation, provided that the investor has the ability to exercise significant influence over the operating and financial policies of the investee. The accounting provisions of EITF 02-14 are effective for reporting periods beginning after September 15, 2004. We do not expect the adoption of EITF 02-14 to have a material impact on our consolidated financial position, results of operations or cash flows.

In March 2004, the FASB issued EITF Issue No. 03-1 ("EITF 03-1"), "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments" which provides new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

In December 2003, the FASB issued Interpretation No. 46R ("FIN 46R"), a revision to FIN 46. FIN 46R clarifies some of the provisions of FIN 46 and exempts certain entities from its requirements. FIN 46R is effective at the end of the first interim period ending after December 15, 2003. We have considered the provisions of FIN 46R and believe it will not be necessary to include in our consolidated financial statements any assets, liabilities, or activities of the third-party entities holding our corporate headquarters leases. We have provided certain disclosures related to these leases in other areas of this Quarterly Report on Form 10-Q (see Note 8 of our Notes to Condensed Consolidated Financial Statements). Under the provisions of FIN 46R, we began consolidating our Adobe Ventures partnerships in the first quarter of fiscal 2004. This consolidation did not have a material impact on our consolidated financial position, results of operations or cash flows.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 ("SAB 104"), "Revenue Recognition," which supercedes Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superceded as a result of the issuance of Emerging Issues Task Force 00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple Deliverables." SAB 104 also incorporated certain sections of the SEC's "Revenue Recognition in Financial Statements—Frequently Asked Questions and Answers" document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on our consolidated financial position, results of operations or cash flows.

NOTE 2. ACQUISITION

On May 3, 2004, we acquired Q-Link Technologies, Inc ("Q-Link"), a privately held company, for $15.9 million in cash. Q-Link provides Java-based workflow technology that will be integrated with our Intelligent Documents platform to enable customers to integrate document process management with core applications. Goodwill has been allocated to our Intelligent Documents segment. Purchased technology is being amortized over its estimated useful life of three years. The consolidated financial statements include the operating results of Q-Link from the date of purchase. Pro forma results of operations have not been

presented because the effect of this acquisition was not material. The following table summarizes the purchase price allocation:

Cash and cash equivalents			$	312
Accounts receivable, net				415
Other current assets				18
Purchased technology				1,380
Goodwill				14,289
Other intangible assets				290

	Total assets acquired			16,704

Current liabilities				(99	)
Liabilities recognized in connection with the business combination				(748	)

	Total liabilities assumed			(847	)

		Net assets acquired	$	15,857

NOTE 3. GOODWILL AND PURCHASED AND OTHER INTANGIBLES

Below is a breakdown of our goodwill reported by segment as of September 3, 2004 and November 28, 2003:

	2004		2003
Digital Imaging and Video	$	14,112	$	14,112
Creative Professional		4,650		4,650
Intelligent Documents		91,498		77,209

Total goodwill	$	110,260	$	95,971

In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," we review our goodwill periodically for impairment. We completed our annual goodwill impairment test during the second quarter of fiscal 2004 and determined that the carrying amount of goodwill was not impaired.

Purchased and other intangible assets, subject to amortization, were as follows as of September 3, 2004:

	Cost		Accumulated Amortization			Net
Purchased technology	$	34,509	$	(24,432	)	$	10,077

Localization		9,673		(6,050	)		3,623
Trademarks		300		(124	)		176
Other intangibles		1,002		(678	)		324

Total other intangible assets		10,975		(6,852	)		4,123

Total purchased and other intangible assets	$	45,484	$	(31,284	)	$	14,200

Purchased and other intangible assets, subject to amortization, were as follows as of November 28, 2003:

	Cost		Accumulated Amortization			Net
Purchased technology	$	28,509	$	(18,875	)	$	9,634

Localization	$	10,540	$	(5,348	)	$	5,192
Trademarks		300		(97	)		203
Other intangibles		716		(427	)		289

Total other intangible assets	$	11,556	$	(5,872	)	$	5,684

Total purchased and other intangible assets	$	40,065	$	(24,747	)	$	15,318

Amortization expense related to purchased and other intangible assets was $4.7 million and $13.7 million for the three and nine months ended September 3, 2004. Amortization expense related to purchased and other intangible assets was $3.7 million and $11.0 million for the three and nine months

ended August 29, 2003. As of September 3, 2004, we expect amortization expense in future periods to be as shown below:

Fiscal year	Purchased Technology		Other Intangible Assets
Remainder of 2004	$	1,729	$	3,179
2005		4,833		800
2006		1,701		18
2007		507		18
2008		316		18
2009		316		18
Thereafter		675		72

Total expected amortization expense	$	10,077	$	4,123

NOTE 4. OTHER ASSETS

Other assets consisted of the following as of September 3, 2004 and November 28, 2003:

		2004		2003
Investments		$	34,212	$	30,840
Security deposits and other			4,289		3,503
Land deposit			3,350		3,378
Prepaid rent			5,097		—

	Total other assets	$	46,948	$	37,721

We own limited partnership interests in Adobe Ventures which are consolidated in accordance with FIN 46R. The partnerships are controlled by Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures. As of September 3, 2004 and November 28, 2003, the estimated fair value of our partnership interests in Adobe Ventures were $34.6 million and $30.6 million, respectively.

We recognize realized gains and losses upon the sale of investments using the specific identification method. During the three and nine months ended September 3, 2004, investment losses included losses related to our Adobe Ventures and our cost method investments totaling $1.6 million and $2.4 million, respectively. These losses were partially offset by gains on our short-term investments of $0.1 million and $0.2 million, respectively. For the nine months ended September 3, 2004, investment losses were also partially offset by gains of $0.5 million from the sale of our marketable equity securities.

partially offset by gains of $0.7 million from the sale of our marketable equity securities. During the nine months ended August 29, 2003, investment losses also included write-downs due to other-than-temporary declines in value of $4.0 million related to our short-term investments.

During the third quarter of fiscal 2004, we restructured the lease for two of our headquarter office buildings. See Note 8 of our Notes to Condensed and Consolidated Financial Statements for additional information. The lease agreement provides for a residual value guarantee. In accordance with FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others," we have recognized the fair value of the residual value guarantee of $5.2 million as a long-term liability on our balance sheet with the offsetting entry to prepaid rent in other assets. The balance will be amortized to the income statement over five years, the life of the lease. As of September 3, 2004, the unamortized portion of the fair value of the residual value guarantee remaining in prepaid rent was $5.1 million.

NOTE 5. ACCRUED EXPENSES

Accrued expenses consisted of the following as of September 3, 2004 and November 28, 2003:

		2004		2003
Accrued compensation and benefits		$	82,032	$	65,870
Sales and marketing allowances			11,265		14,169
Accrued restructuring			355		1,132
Other			76,072		78,838

	Total accrued expenses	$	169,724	$	160,009

NOTE 6. RESTRUCTURING AND OTHER CHARGES

In connection with our acquisition of Accelio in the second quarter of fiscal 2002, we recognized $14.5 million in liabilities associated with a worldwide reduction in force of Accelio employees, transaction costs, costs related to closing redundant facilities and terminating contracts and other exit costs associated with the acquisition. As of September 3, 2004, $0.4 million remained accrued and comprised transaction and facilities costs. Transaction costs primarily relate to the liquidation of Accelio's subsidiaries and are expected to be paid through fiscal 2004. Facility costs relate to leases we assumed upon acquisition of Accelio that terminate at various times through September 2006.

A summary of restructuring activities, related to our acquisition of Accelio, is as follows:

		Balance at November 28, 2003		Cash Payments			Adjustments			Balance at September 3, 2004
Transaction costs		$	255	$	(112	)	$	(19	)	$	124
Cost of closing redundant facilities			829		(598	)		—			231
Other exit costs			48		(5	)		(43	)		—

	Total	$	1,132	$	(715	)	$	(62	)	$	355

NOTE 7. STOCKHOLDERS' EQUITY

Stock Repurchase Program I—On-going Dilution Coverage

To facilitate our stock repurchase program, designed to minimize dilution from stock issuance primarily from employee stock plans, we repurchase shares in the open market and from time to time enter into structured repurchase agreements with third parties. Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time.

During the three and nine months ended September 3, 2004, we repurchased 4.5 million shares at an average price of $43.32 and 8.5 million shares at an average price of $42.00, respectively, through open market repurchases and structured repurchase agreements. During the three and nine months ended August 29, 2003, we repurchased 1.2 million shares at an average price of $32.96 and 2.8 million shares at an average price of $30.39, respectively, through open market repurchases and the exercise of put and call options.

During the second and third quarters of fiscal 2004, we entered into several stock purchase agreements with a large financial institution. Under these agreements, we provided the financial institution with up-front payments totaling $150.0 million. The financial institution agreed to deliver to us, at certain intervals during the contract term, a certain number of our shares based on the volume weighted average price during such intervals less a specified discount. Upon payment, the $150.0 million was classified as treasury stock on our balance sheet. As of September 3, 2004, approximately $53.1 million of the up-front payment remained under an agreement that expired October 1, 2004. At the expiration of this agreement, we received the remaining shares.

Stock Repurchase Program II—Additional Authorization above Dilution Coverage

On September 25, 2002, our Board of Directors authorized a program to purchase up to an additional 5.0 million shares of our common stock over a three-year period, subject to certain business and cash flow requirements. We have not made any purchases under this 5.0 million share repurchase program. The authorization for this program will expire in September 2005.

NOTE 8. COMMITMENTS AND CONTINGENCIES

Lease Commitments

We lease certain of our facilities and some of our equipment under noncancelable operating lease arrangements that expire at various dates through 2025. We also have one land lease that expires in 2091.

We occupy three office buildings in San Jose, California where our corporate headquarters are located. We reference these office buildings as the "Almaden tower," and the "East and West towers."

In December 2003, upon completion of construction, we began a five year lease agreement for the Almaden tower. Under the agreement, we have the option to purchase the building at any time during the lease term for the lease balance, which is approximately $103.0 million. The maximum recourse amount ("residual value guarantee") under this obligation is $90.8 million.

In August 2004, we extended the lease agreement for our East and West towers for an additional five years with an option to extend for an additional five years solely at Adobe's election. As part of the lease extension, we purchased a portion of the lease receivable of the lessor for $126.8 million, which is recorded as an investment in lease receivable on our consolidated balance sheet. This purchase may be credited against the residual value guarantee if we purchase the properties or repaid from the sale proceeds if the properties are sold to third parties. Under the agreement for the East and West towers, we have the option to purchase the buildings at any time during the lease term for the lease balance, which is approximately $143.2 million. The maximum recourse amount ("residual value guarantee") under this obligation is $126.8 million.

These two leases are both subject to standard covenants including liquidity, leverage and profitability ratios that are reported to the lessor quarterly. As of September 3, 2004, we were in compliance with all covenants. In the case of a default, the lessor may demand we purchase the buildings for an amount equal to the lease balance, or require that we remarket or relinquish the buildings. Both leases qualify for operating lease accounting treatment under Statement of Financial Accounting Standards No. 13, "Accounting for Leases," and, as such, the buildings and the related obligations are not included on our consolidated balance sheet. We utilized this type of financing in order to access bank-provided funding at the most favorable rates and to provide the lowest total cost of occupancy for the headquarter buildings. At the end of the lease term, we can extend the lease term for an additional five year term, purchase the buildings for the lease balance, remarket or relinquish the buildings. If we choose to remarket or are required to do so upon relinquishing the buildings, we are bound to arrange the sale of the buildings to an unrelated party and will be required to pay the lessor any shortfall between the net remarketing proceeds and the lease balance, up to the maximum recourse amount.

Royalties

We have certain royalty commitments associated with the shipment and licensing of certain products. Royalty expense is generally based on a dollar amount per unit shipped or a percentage of the underlying revenue.

Guarantees

The lease agreements for our corporate headquarters provide for residual value guarantees. Under FIN 45, the fair value of a residual value guarantee in lease agreements entered into after December 31, 2002, must be recognized as a liability on our consolidated balance sheet. As such, we have recognized a $5.2 million liability related to the East and West tower lease that was extended in August 2004. This liability is recorded in other long-term liabilities with the offsetting entry recorded as prepaid rent in other assets. The balance will be amortized to the income statement over the life of the lease. As of September 3, 2004, the unamortized portion of the fair value of the residual value guarantee remaining in other long-term liabilities was $5.1 million.

In the normal course of business, we provide indemnifications of varying scope to customers against claims of intellectual property infringement made by third parties arising from the use of our products. Historically, costs related to these indemnification provisions have not been significant and we are unable

to estimate the maximum potential impact of these indemnification provisions on our future results of operations.

We have commitments to make certain milestone and/or retention payments typically entered into in conjunction with various acquisitions, for which we have made accruals in our consolidated financial statements. In connection with certain acquisitions and purchases of technology assets during fiscal 2003 and 2004, we entered into employee retention agreements and are required to make payments upon satisfaction of certain conditions in the agreements. These costs are being amortized over the retention period to compensation expense. As of September 3, 2004, we have $1.6 million remaining to be paid under our retention agreements.

As permitted under Delaware law, we have agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is, or was serving, at our request in such capacity. The indemnification period covers all pertinent events and occurrences during the officer's or director's lifetime. The maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited; however, we have director and officer insurance coverage that reduces our exposure and enables us to recover a portion of any future amounts paid. We believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

As part of our limited partnership interests in Adobe Ventures, we have provided a general indemnification to Granite Ventures, an independent venture capital firm and sole general partner of Adobe Ventures, for certain events or occurrences while Granite Ventures is, or was serving, at our request in such capacity provided that Granite Ventures acts in good faith on behalf of the partnerships. We are unable to develop an estimate of the maximum potential amount of future payments that could potentially result from any hypothetical future claim, but believe the risk of having to make any payments under this general indemnification to be remote.

We accrue for costs associated with future obligations which include costs for undetected bugs that are discovered only after the product is installed and used by customers. The accrual remaining as of September 3, 2004 primarily relates to our digital video software products. The table below summarizes the activity related to the accrual for the nine months ended September 3, 2004:

Balance at November 28, 2003		Accruals		Payments		Balance at September 3, 2004
$ 3,185		$ 114		$ (3,285)		$ 14

Legal Actions

In early 2002, International Typeface Corporation ("ITC") and Agfa Monotype Corporation ("AMT"), companies which have common ownership and management, each charged, by way of informal letters to Adobe, that Adobe's distribution of font software, which generates ITC and AMT typefaces, breaches its contracts with ITC and AMT, respectively, pursuant to which Adobe licensed certain rights with respect to ITC and AMT typefaces. AMT and ITC further charged that Adobe violated the Digital

Millennium Copyright Act ("DMCA") with respect to, or induced or contributed to, the infringement of copyrights in, ITC's and AMT's TrueType font software.

On September 4, 2002, Adobe initiated arbitration proceedings in London, England ("the London Arbitration") against AMT, seeking a declaration that Adobe's distribution of font software that generates AMT typefaces did not breach its contract pursuant to which it licensed certain rights with respect to AMT typefaces and, therefore, that AMT did not have the right to terminate the agreement. AMT made certain breach of contract claims in response to Adobe's arbitration demand. On June 28, 2004, the arbitrators held that the contract remains in full force and that AMT does not have the right to terminate it. The arbitrators found in favor of AMT on only one of its three claims, but have not yet ruled on whether AMT is entitled to recover any damages from Adobe on that claim. We believe that a damage award, if any, will not have a material adverse effect on Adobe.

On September 5, 2002, AMT and ITC filed suit against Adobe in the U.S. District Court, Eastern District of Illinois ("the Illinois Action"), asserting only that Adobe's distribution of the superseded 5.0 version of Adobe Acrobat violated the DMCA.

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

If ITC prevails on its breach of contract claims in the second Illinois action, ITC may have the right to terminate Adobe's right to distribute any of its products that then still contain font software that generates ITC typefaces. The results of any litigation are inherently uncertain and we cannot assure that we will be able to successfully defend ourselves against the actions described above. AMT and ITC seek an unspecified aggregate dollar amount of damages in the Illinois actions. A favorable outcome for AMT or ITC in these actions could have a material adverse effect on Adobe's consolidated financial position, cash flows or results of operations. We believe that all of AMT's and ITC's remaining claims are without merit and we are vigorously defending against them. We cannot estimate any possible loss at this time.

On September 6, 2002, Plaintiff Fred B. Dufresne filed suit against Adobe, Microsoft Corporation, Macromedia, Inc. and Trellix Corporation in the U.S. District Court, District of Massachusetts, alleging infringement of U.S. Patent No. 5,835,712, entitled "Client-Server System Using Embedded Hypertext Tags for Application and Database Development." The Plaintiff's complaint asserts that "Defendants have infringed, and continue to infringe, one or more claims of the '712 patent by making, using, selling and/or offering for sale, inter alia, products supporting Microsoft Active Server Pages technology." The plaintiff seeks unspecified compensatory damages, preliminary and permanent injunctive relief, trebling of damages for "willful infringement," and fees and costs. We believe the action has no merit and are vigorously defending against it. We cannot estimate any possible loss at this time.

On November 18, 2002, Plaintiffs Shell & Slate Software Corporation and Ben Weiss filed a civil action in the U.S. District Court in Los Angeles against Adobe alleging false designation of origin, trade secret misappropriation, breach of contract and other causes of action. The claim derives from the Plaintiffs' belief that the "healing brush" technique of Adobe Photoshop software incorporates the Plaintiffs' trade secrets. The Plaintiffs seek preliminary and permanent injunctive relief, compensatory,

treble and punitive damages and fees and costs. We believe the action has no merit and are vigorously defending against it. On September 9, 2003, Adobe filed a counter-claim against Ben Weiss for breach of contract and misappropriation of trade secrets. Adobe seeks injunctive relief against any use of Adobe's trade secrets. Adobe seeks compensatory, statutory and punitive damages. We cannot estimate any possible loss at this time.

On June 2, 2004, Plaintiff Information Technology Innovation, LLC filed suit against Adobe in the U.S. District Court, District of Colorado, alleging infringement of U.S. Patent No. 5,892,908, entitled "Method of Extracting Network Information." The Plaintiff's complaint asserted that Adobe infringes the '908 patent by making, using and selling "Acrobat Standard and Professional products." The plaintiff sought unspecified compensatory damages, injunctive relief, and fees and costs. In September 2004, the Plaintiff dismissed this case with prejudice.

In connection with our anti-piracy efforts, conducted both internally and through the Business Software Alliance ("BSA"), from time to time we undertake litigation against alleged copyright infringers. Such lawsuits may lead to counter-claims alleging improper use of litigation or violation of other local law and have recently increased in frequency, especially in Latin American countries. We believe we have valid defenses with respect to such counter-claims; however, it is possible that our consolidated financial position, cash flows or results of operations could be affected in any particular period by the resolution of one or more of these counter-claims.

From time to time, in addition to those identified above, Adobe is subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with generally accepted accounting principles, Adobe makes a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against Adobe. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of these contingencies.

NOTE 9. FINANCIAL INSTRUMENTS

In accordance with Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities" we recognize derivative instruments and hedging activities as either assets or liabilities on the balance sheet and measure them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting.

Economic Hedging—Hedges of Forecasted Transactions

We use option and forward foreign exchange contracts to hedge certain operational ("cash flow") exposures resulting from changes in foreign currency exchange rates. These foreign exchange contracts,

carried at fair value, may have maturities between one and twelve months. Such cash flow exposures result from portions of our forecasted revenues denominated in currencies other than the U.S. dollar, primarily the Japanese yen and the euro. We enter into these foreign exchange contracts to hedge forecasted product licensing revenue in the normal course of business, and accordingly, they are not speculative in nature.

We record changes in the intrinsic value of these cash flow hedges in accumulated other comprehensive income (loss), until the forecasted transaction occurs. When the forecasted transaction occurs, we reclassify the related gain or loss on the cash flow hedge to revenue. In the event the underlying forecasted transaction does not occur, or it becomes probable that it will not occur, we reclassify the gain or loss on the related cash flow hedge from accumulated other comprehensive income (loss) to other income (loss) on the consolidated statement of income at that time. For the three and nine months ended September 3, 2004, there were no such net gains or losses recognized in other income relating to hedges of forecasted transactions that did not occur.

The critical terms of the cash flow hedging instruments are the same as the underlying forecasted transactions. The changes in fair value of the derivatives are intended to offset changes in the expected cash flows from the forecasted transactions. We record any ineffective portion of the hedging instruments in other income (loss) on the consolidated statement of income. The time value of purchased derivative instruments is deemed to be ineffective and is recorded in other income (loss) over the life of the contract.

Gain (Loss) on Hedges of Forecasted Transactions:

	Other Comprehensive Income (Loss)
Balance Sheet	September 3, 2004		November 28, 2003
Recognized but Unrealized—Open Transactions:
Unrealized net gain (loss) remaining in other comprehensive income (loss)	$	2,120	$	(867	)

	Three Months Ended
	September 3, 2004					August 29, 2003
Income Statement	Revenue		Other Income (Loss)			Revenue			Other Income (Loss)
Realized—Closed Transactions:
Realized net gain (loss) reclassified from other comprehensive income (loss) to revenue	$	1,055	$	—		$	(935	)	$	—
Realized net loss from the cost of purchased options and gains or losses from any ineffective portion of hedges		—		(1,718	)		—			(1,478	)
Recognized but Unrealized—Open Transactions:
Unrealized net gain (loss) from time value degradation and any ineffective portion of hedges		—		(555	)		—			490

	$	1,055	$	(2,273	)	$	(935	)	$	(988	)

	Nine Months Ended
	September 3, 2004						August 29, 2003
	Revenue			Other Income (Loss)			Revenue			Other Income (Loss)
Realized—Closed Transactions:
Realized net loss reclassified from other comprehensive income (loss) to revenue	$	(514	)	$	—		$	(3,382	)	$	—
Realized net loss from the cost of purchased options and gains or losses from any ineffective portion of hedges		—			(4,793	)		—			(3,023	)
Recognized but Unrealized—Open Transactions:
Unrealized net loss from time value degradation and any ineffective portion of hedges		—			(648	)		—			(1,172	)

	$	(514	)	$	(5,441	)	$	(3,382	)	$	(4,195	)

Interest Rate Hedging—Hedging of Interest Rate Sensitive Obligations

We have entered into interest rate swap agreements to manage our exposure to operating lease obligations that are tied to short-term interest rates. The swaps allow us to exchange variable interest rate payments for fixed interest rate payments, thereby securing a fixed payment amount for a portion of the total obligation. As of September 3, 2004, there were no swaps outstanding.

Balance Sheet Hedging—Hedging of Foreign Currency Assets and Liabilities

We hedge our net recognized foreign currency assets and liabilities with forward foreign exchange contracts to reduce the risk that our earnings and cash flows will be adversely affected by changes in foreign currency exchange rates. These derivative instruments hedge assets and liabilities that are denominated in foreign currencies and are carried at fair value with changes in the fair value recorded as

other income (loss). These derivative instruments do not subject us to material balance sheet risk due to exchange rate movements because gains and losses on these derivatives offset gains and losses on the assets and liabilities being hedged. At September 3, 2004, the outstanding balance sheet hedging derivatives had maturities of 90 days or less.

Net gains recognized in other income (loss) relating to balance sheet hedging for the three and nine months ended September 3, 2004 and August 29, 2003 were as follows:

		Three Months						Nine Months
		2004			2003			2004			2003
Gain (loss) on foreign currency assets and liabilities:
	Net realized gain (loss) recognized in other income (loss)	$	(1,222	)	$	(3,470	)	$	(2,050	)	$	6,485
	Net unrealized gain (loss) recognized in other income (loss)		(640	)		(2,511	)		1,533			(1,174	)

			(1,862	)		(5,981	)		(517	)		5,311

Gain (loss) on hedges of foreign currency assets and liabilities:
	Net realized gain (loss) recognized in other income (loss)		(1,110	)		1,270			(7,062	)		(5,058	)
	Net unrealized gain recognized in other income (loss)		2,276			3,796			7,405			1,205

			1,166			5,066			343			(3,853	)

Net gain (loss) recognized in other income (loss)		$	(696	)	$	(915	)	$	(174	)	$	1,458

Fair Value Hedges—Hedging of Foreign Currency Denominated Available for Sale Securities

During the second and third quarter of fiscal 2004, a portion of our investment portfolio was invested in euro denominated securities. In order to mitigate the currency risk of those euro denominated securities, we entered into forward contracts. We designated these forward contracts as fair value hedges. As of September 3, 2004, there were no euro denominated securities in the investment portfolio and no remaining fair value hedges.

Net gains recognized in other income (loss) relating to fair value hedges for the three and nine months ended September 3, 2004 and August 29, 2003 were as follows:

		Three Months					Nine Months
		2004			2003		2004			2003
Gain (loss) on foreign currency assets and liabilities:
	Net realized gain recognized in other income (loss)	$	297		$	—	$	2,234		$	—
	Net unrealized loss recognized in other income (loss)		(1,755	)		—		(1,935	)		—

			(1,458	)		—		299			—

Gain (loss) on hedges of foreign currency assets and liabilities:
	Net realized gain (loss) recognized in other income (loss)		(317	)		—		3,026			—
	Net unrealized gain (loss) recognized in other income (loss)		1,663			—		(3,482	)		—

			1,346			—		(456	)		—

Net loss recognized in other income (loss)		$	(112	)	$	—	$	(157	)	$	—

NOTE 10. COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive Income," establishes standards for the reporting and display of comprehensive income and its components in the financial statements. Items of comprehensive income that we currently report are unrealized gains and losses on marketable securities categorized as available-for-sale and foreign currency translation adjustments. We also report gains and losses on derivative instruments qualifying as cash flow hedges such as (i) hedging a forecasted foreign currency transaction, (ii) the variability of cash flows to be received or paid related to a recognized asset or liability and (iii) interest rate hedges.

The following table sets forth the components of comprehensive income, net of income tax expense, for the three and nine months ended September 3, 2004 and August 29, 2003:

			Three Months Ended						Nine Months Ended
			2004			2003			2004			2003
Net income as reported			$	104,461		$	64,524		$	336,897		$	182,995
Other comprehensive income (loss), net of tax:
	Unrealized gain (loss) on available-for-sale securities, net of tax			3,024			3,891			(4,002	)		6,711
	Currency translation adjustments			(11	)		(684	)		(165	)		2,198
	Net gain (loss) in derivative instruments, net of taxes			850			(2,828	)		4,609			(5,086	)

		Other comprehensive income		3,863			379			442			3,823

Total comprehensive income, net of taxes			$	108,324		$	64,903		$	337,339		$	186,818

NOTE 11. NET INCOME PER SHARE

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

The following table sets forth the computation of basic and diluted net income per share for the three and nine months ended September 3, 2004 and August 29, 2003:

		Three Months Ended				Nine Months Ended
		2004		2003		2004		2003
Net income		$	104,461	$	64,524	$	336,897	$	182,995

Shares used to compute basic net income per share (weighted average shares outstanding during the period, excluding unvested restricted stock)			238,471		233,364		238,491		232,288
Dilutive common equivalent shares:
	Unvested restricted stock		11		45		11		45
	Stock options		8,631		7,086		8,247		6,259

Shares used to compute diluted net income per share			247,113		240,495		246,749		238,592

Basic net income per share		$	0.44	$	0.28	$	1.41	$	0.79

Diluted net income per share		$	0.42	$	0.27	$	1.37	$	0.77

NOTE 12. INDUSTRY SEGMENTS

We have four reportable segments that offer different product lines: Digital Imaging and Video, Creative Professional, Intelligent Documents, and OEM PostScript and Other. The Digital Imaging and Video segment provides users with software for creating, editing, enhancing and sharing digital images and photographs, digital video and animations. The Creative Professional segment provides software for professional page layout, professional Web page layout, graphic and illustration creation, technical document publishing and business publishing. Additionally, this segment provides PhotoShop and Acrobat with its Adobe Creative Suite products. The Intelligent Documents segment provides electronic document distribution software that allows users to create, enhance, annotate and securely send Adobe PDF files that can be shared, viewed, navigated and printed exactly as intended on a broad range of hardware and software platforms. In addition, this segment provides server-based solutions for private and public sector enterprises, in the areas of document generation, document process management, document collaboration and document control and security. The OEM PostScript and Other segment includes printing technology used to create and print simple or visually rich documents with precision.

The accounting policies of the operating segments are the same as those described in summary of significant accounting policies. With the exception of goodwill, we do not identify or allocate our assets by operating segment. See Note 3 for the allocation of goodwill to our reportable segments. The following

tables set forth our revenues, cost of revenues, gross profit and gross profit as a percentage of revenue for the three and nine months ended September 3, 2004 and August 29, 2003.

Three Months		Digital Imaging and Video			Creative Professional			Intelligent Documents			OEM PostScript and Other			Total
2004
	Revenue	$	98,449		$	150,395		$	135,548		$	19,321		$	403,713
	Cost of revenue		7,984			5,847			8,323			1,415			23,569

	Gross profit	$	90,465		$	144,548		$	127,225		$	17,906		$	380,144

	Gross profit as a percentage of revenues		92	%		96	%		94	%		93	%		94	%
2003
	Revenue	$	88,334		$	82,058		$	126,954		$	21,776		$	319,122
	Cost of revenue		6,973			4,293			9,354			1,457			22,077

	Gross profit	$	81,361		$	77,765		$	117,600		$	20,319		$	297,045

	Gross profit as a percentage of revenues		92	%		95	%		93	%		93	%		93	%

Nine Months		Digital Imaging and Video			Creative Professional			Intelligent Documents			OEM PostScript and Other			Total
2004
	Revenue	$	312,228		$	461,924		$	401,923		$	61,004		$	1,237,079
	Cost of revenue		27,072			16,140			27,974			3,820			75,006

	Gross profit	$	285,156		$	445,784		$	373,949		$	57,184		$	1,162,073

	Gross profit as a percentage of revenues		91	%		97	%		93	%		94	%		94	%
2003
	Revenue	$	279,878		$	261,618		$	325,936		$	68,731		$	936,163
	Cost of revenue		24,217			15,674			23,438			4,466			67,795

	Gross profit	$	255,661		$	245,944		$	302,498		$	64,265		$	868,368

	Gross profit as a percentage of revenues		91	%		94	%		93	%		94	%		93	%

A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three and nine months ended September 3, 2004 and August 29, 2003 is as follows:

	Three Months					Nine Months
	2004		2003			2004		2003
Total gross profit from operating segments above	$	380,144	$	297,045		$	1,162,073	$	868,368
Total operating expenses*		239,830		204,830			716,658		604,184

Total operating income		140,314		92,215			445,415		264,184
Other income (loss), net		849		(38	)		9,850		(2,762	)

Income before income taxes	$	141,163	$	92,177		$	455,265	$	261,422

*: Total operating expenses include research and development, sales and marketing, general and administrative and for fiscal 2003, restructuring and other charges.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements, including statements regarding product plans and investing activities, 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 "Factors That May Affect Future Performance." You should carefully review the risks described herein and in other documents we file from time to time with the Securities and Exchange Commission, including the Annual Report on Form 10-K for fiscal 2003 and the other Quarterly Reports on Form 10-Q filed by us in fiscal 2004. When used in this report, the words "expects," "could," "would," "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," and similar expressions, as well as statements regarding Adobe's focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

BUSINESS OVERVIEW

Founded in 1982, Adobe offers a line of software for consumers, creative professionals, and enterprises, in both private and public sectors. Our products enable customers to create, manage and deliver visually rich, compelling and reliable content. We distribute our products through a network of distributors and dealers, VARs, systems integrators, independent software vendors ("ISVs") and OEMs; direct to end users; and through our own Web site at www.adobe.com. We also license our technology to major hardware manufacturers, software developers and service providers and we offer integrated software solutions to businesses of all sizes. We have operations in the Americas, EMEA, and Asia. Our software runs on Microsoft Windows, Apple Macintosh, Linux, UNIX and various non-personal computer platforms, depending on the product.

We maintain executive offices and principal facilities at 345 Park Avenue, San Jose, California 95110-2704. Our telephone number is 408-536-6000. We maintain a Web site at www.adobe.com. Investors can obtain copies of our SEC filings from this site free of charge, as well as from the SEC Web site at www.sec.gov.

CRITICAL ACCOUNTING ESTIMATES

In preparing our consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our net revenue, operating income and net income, as well as on the value of certain assets and liabilities on our consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition and income taxes have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, see Note 1 of our Notes to Condensed Consolidated Financial Statements.

Revenue Recognition

We recognize revenue in accordance with current generally accepted accounting principles that have been prescribed for the software industry. Revenue recognition requirements in the software industry are very complex and are subject to change. Our revenue recognition policy is one of our critical accounting policies because revenue is a key component of our results of operations and is based on complex rules which require us to make judgments and estimates. In applying our revenue recognition policy we must determine which portions of our revenue are recognized currently and which portions must be deferred. In order to determine current and deferred revenue, we make judgments and estimates with regard to future deliverable products and services and the appropriate pricing for those products and services. Our assumptions and judgments regarding future products and services could differ from actual events, thus materially impacting our financial position and results of operations.

We have to estimate provisions for returns which are recorded against our revenues. In determining our estimate for returns, and in accordance with our internal policy regarding channel inventory, we rely upon historical data, the estimated amount of product in our distribution channel, the rate at which our product sells through to the end user, product plans and other factors. Our estimated provisions for returns can vary from what actually occurs. More or less product may be returned from what was estimated. The amount of inventory in the channel could be different than what is estimated. Our estimate of the rate of sell through for product in the channel could be different than what actually occurs. These factors and unanticipated changes in the economic and industry environment could make our return estimates differ from actual returns, thus materially impacting our financial position and results of operations.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against our net deferred tax asset. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our financial position and results of operations. Our assumptions, judgments and estimates relative to the value of our net deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate, thus materially impacting our financial position and results of operations.

RESULTS OF OPERATIONS

Overview of the Three and Nine Months Ended September 3, 2004

During the third quarter of fiscal 2004, we continued to focus on delivering comprehensive technology platforms for enterprises and creative professionals to drive revenue and earnings growth. Our latest Acrobat desktop products, released during fiscal 2003, continued to perform well which indicates we are making progress against our Intelligent Documents segment strategy to increase the adoption of Acrobat. Our Intelligent Documents initiatives to deliver a comprehensive server-based platform to help governments and enterprises improve their business processes also have achieved both strong sequential and year-over-year revenue growth. Additionally, we believe our strategy of providing creative professionals a complete design platform is resonating with our customers. The success we achieved in

fiscal 2003 and the first half of fiscal 2004 in our Creative Professional business segment continued in the third quarter of fiscal 2004 due to strong licensing of our Adobe Creative Suite and CS products.

We continue to focus on delivering innovative products and solutions for our customers. However, our success could be limited by several factors, including the timely release of new products, continued market acceptance of our products, the introduction of new products by existing or new competitors and unfavorable exchange rate fluctuations. For a further discussion of these and other risk factors, see the section titled "Factors That May Affect Future Performance."

Revenue for the Three and Nine Months Ended September 3, 2004 and August 29, 2003

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Product		$	395.4		$	312.6		27	%	$	1,213.8		$	917.5		32	%
	Percentage of total revenues		98	%		98	%				98	%		98	%
Services and support			8.3			6.5		27	%		23.3			18.6		25	%
	Percentage of total revenues		2	%		2	%				2	%		2	%

Total revenues		$	403.7		$	319.1		27	%	$	1,237.1		$	936.1		32	%

We have four reportable segments that offer different product lines: Digital Imaging and Video, Creative Professional, Intelligent Documents, and OEM PostScript and Other. The Digital Imaging and Video segment provides users with software for creating, editing, enhancing and sharing digital images and photographs, digital video, audio and animations. The Creative Professional segment provides software for professional page layout, professional Web page layout, graphic and illustration creation, technical document publishing and business publishing. Additionally, this segment provides PhotoShop and Acrobat with its Adobe Creative Suite products. The Intelligent Documents segment provides electronic document distribution software that allows users to create, enhance, annotate and securely send Adobe PDF files that can be shared, viewed, navigated and printed exactly as intended on a broad range of hardware and software platforms. In addition, this segment provides server-based solutions for private and public sector enterprises, in the areas of document generation, document process management, document collaboration, and document control and security. The OEM PostScript and Other segment includes printing technology used to create and print simple or visually rich documents with precision.

Our services and support revenue is composed of professional services (such as consulting services and training) and maintenance and support, primarily related to the licensing of our Intelligent Documents server solution products. Our support revenue also includes technical support and developer support to partners and developer organizations related to our desktop products. Our professional services revenue is recognized using the percentage of completion method and is measured monthly based on input measures, such as on hours incurred to date compared to total estimated hours to complete, with consideration given to output measures, such as contract milestones, when applicable. Our maintenance and support offerings,

which entitle customers to receive product upgrades and enhancements or technical support, depending on the offering, is recognized ratably over the term of the arrangement.

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Digital Imaging and Video		$	98.4		$	88.3		12	%	$	312.2		$	279.9		12	%
	Percentage of total revenues		24	%		27	%				25	%		30	%
Creative Professional			150.4			82.0		83	%		461.9			261.5		77	%
	Percentage of total revenues		37	%		26	%				37	%		28	%
Intelligent Documents			135.5			127.0		7	%		401.9			325.9		23	%
	Percentage of total revenues		34	%		40	%				33	%		35	%
OEM PostScript and Other			19.4			21.8		(11	)%		61.1			68.8		(11	)%
	Percentage of total revenues		5	%		7	%				6	%		7	%

Total revenues		$	403.7		$	319.1		27	%	$	1,237.1		$	936.1		32	%

Revenue from our Digital Imaging and Video segment increased during the three and nine months ended September 3, 2004 due to increases in revenues from both our digital video and digital imaging software products. Overall, revenue from our digital video software products increased 28% and 22% during the three and nine months ended September 3, 2004, respectively, which was attributable to new releases during the second quarter of fiscal 2004. Revenue from our digital imaging software products increased 8% and 9% during the three and nine months ended September 3, 2004, respectively, primarily due to continued success with Adobe Photoshop CS which was released at the end of fiscal 2003. The increase in revenues from Adobe Photoshop CS was partially offset by decreases in revenues from our non-professional digital imaging software products.

Revenue from our Creative Professional segment increased during the three and nine months ended September 3, 2004 primarily due to the continued strength of our Adobe Creative Suite products which were initially released in the fourth quarter of fiscal 2003. The increase in revenues from our Adobe Creative Suite products were partially offset by decreases in revenues from certain of our layout software products due to product lifecycle timing.

Revenue from our Intelligent Documents segment increased during the three months ended September 3, 2004 primarily due to a 69% increase in revenues from our Intelligent Documents server-based products as we continue to focus on both the government sector and financial services markets. Revenue during the three months ended September 3, 2004 increased due to continued growth in license revenue, increased server support revenue and a large license payment from a software partner. Revenue growth for server based products in the third quarter of fiscal 2004 over the prior year quarter would have exceeded overall company revenue growth excluding the payment from the software partner. The increase in server-based products revenue was slightly offset by a 3% decrease in revenue from our Acrobat desktop products due to product lifecycle timing as compared to the same quarter last year. Revenue for the three months ended August 29, 2003 included higher revenue from our new Acrobat desktop launches in the second and third quarters of fiscal 2003. Revenue from our Intelligent Documents segment increased during the nine months ended September 3, 2004 primarily due to an 18% increase in revenues from our Acrobat desktop products due to continued adoption of Acrobat desktop products launched in the second and third quarters of fiscal 2003. Additionally, revenue from our Intelligent Documents server-based products increased 50% due to increased licensing and server support revenue.

Revenue from our OEM PostScript and Other segment decreased during the three and nine months ended September 3, 2004 due to a decline in pricing resulting from competition from clone PostScript technologies and lower prices of output devices.

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Americas		$	195.9		$	156.8		25	%	$	561.9		$	460.7		22	%
	Percentage of total revenues		48	%		49	%				45	%		49	%
EMEA			123.5			84.3		47	%		401.9			260.2		54	%
	Percentage of total revenues		31	%		26	%				33	%		28	%
Asia			84.3			78.0		8	%		273.3			215.2		27	%
	Percentage of total revenues		21	%		24	%				22	%		23	%

Total revenues		$	403.7		$	319.1		27	%	$	1,237.1		$	936.1		32	%

Revenue in the Americas increased during the three and nine months ended September 3, 2004 due to the strength of our Creative Professional and Intelligent Documents products.

Revenue in EMEA increased during the three months ended September 3, 2004 due to the strength of our Creative Professional and Digital Imaging and Video products. Revenue in EMEA increased during the nine months ended September 3, 2004 due to the strength of our Creative Professional, Intelligent Documents and Digital Imaging and Video products.

Revenue in Asia increased during the three months ended September 3, 2004 due to the strength of our Creative Professional products, which was partially offset by a decrease in revenues from our Intelligent Documents products due to the launch of the Acrobat desktop products in third quarter of fiscal 2003. Revenue in Asia increased during the nine months ended September 3, 2004 due to the strength of our Creative Professional, Intelligent Documents and Digital Imaging and Video products.

Additionally, revenues in EMEA and Asia increased approximately $11.0 million and $55.8 million during the three and nine months ended September 3, 2004, respectively, over the same reporting periods last year due to the strength of the euro and the yen.

Application platform mix*

	Three Months				Nine Months
	2004		2003		2004		2003
Windows	73	%	77	%	72	%	75	%
Macintosh	27	%	23	%	28	%	25	%

*: Total application platform mix excludes platform independent and UNIX revenue

Macintosh application revenue increased in recent quarters due to the successful launch of our Creative Professional applications, including Adobe Creative Suite and new CS versions of Illustrator, InDesign and Photoshop, which have large Macintosh customer bases. However, we expect the growth trend towards the Windows platform to continue over the long term due to our targeting of business users with our Intelligent Documents desktop products, where the significant majority of users run the Windows operating system.

In our experience, the actual amount of product backlog at any particular time is not a meaningful indicator of our future business prospects. Prior to major product releases, we tend to have significant levels of backlog, but at other times backlog has historically been low and we normally ship products within a few days of receiving an order, subject to credit verification and maintaining our targeted inventory

position under our global channel inventory policy. In addition, backlog is subject to variability beyond this targeted inventory position. Historically, such variability usually has been less than 5% of reported revenue; however, for fiscal 2004 to date, such variability has been higher than historical levels. At the end of the third quarter of fiscal 2004, our backlog was comparable to second quarter levels.

Our channel inventory position was below our current global channel inventory policy at the end of the third quarter of fiscal 2004 and was comparable to second quarter levels.

During the third quarter of fiscal year 2004, we launched a revised licensing program, Adobe Open Options 4.0. The program changes included reporting some electronic orders on a daily basis rather than on a one month delayed basis. The program changes also resulted in some channel transition issues which have been substantially resolved. We estimate the net effect of the program changes led to a one-time benefit of approximately $10.0 million in revenue in the third quarter.

Cost of Revenues for the Three and Nine Months Ended September 3, 2004 and August 29, 2003

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Product		$	19.0		$	18.9		1	%	$	62.7		$	58.4		7	%
	Percentage of total revenues		5	%		6	%				5	%		6	%
Services and support			4.5			3.2		41	%		12.3			9.4		32	%
	Percentage of total revenues		1	%		1	%				1	%		1	%

Total cost of revenues		$	23.5		$	22.1		7	%	$	75.0		$	67.8		11	%

Cost of product revenue includes product packaging, third-party royalties, excess and obsolete inventory, amortization related to localization costs and acquired technologies, and the costs associated with the manufacturing of our products.

Cost of product revenue increased during the three months ended September 3, 2004 as compared to the three months ended August 29, 2003 primarily due to an increase in localization costs related to our foreign language product launches in the first part of fiscal 2004 and higher royalty fees. These increases were partially offset by lower material costs due to product mix. Cost of product revenue increased during the nine months ended September 3, 2004 as compared to the nine months ended August 29, 2003 due to a charge related to a litigation settlement that occurred during the second quarter of fiscal 2004 and an increase in localization costs related to our product launches. These increases were partially offset by a decrease in overall material costs.

Cost of services and support revenue is composed primarily of employee-related costs and the related costs incurred to provide consulting services, training and product support.

Cost of services and support revenue increased during the three and nine months ended September 3, 2004 as compared to the three and nine months ended August 29, 2003 due to costs associated with our Expert Support program that was initiated during the second quarter of fiscal 2004. Additionally, cost of services and support revenue increased due to increases in compensation and related benefits as a result of higher headcount and incentive compensation to meet increases in support activities in fiscal 2004.

Operating Expenses for the Three and Nine Months Ended September 3, 2004 and August 29, 2003

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Research and development		$	80.1		$	68.8		16	%	$	231.2		$	203.9		13	%
	Percentage of total revenues		20	%		22	%				19	%		22	%

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

Research and development expenses increased 13% and 10% during the three and nine months ended September 3, 2004 as compared to the three and nine months ended August 29, 2003 due to compensation and related benefits associated with headcount growth and higher incentive compensation. The remaining increase in research and development expenses for the three and nine months ended September 3, 2004 was due to various individually insignificant items.

We believe that investments in research and development, including the recruiting and hiring of software developers, are critical to remain competitive in the marketplace and are directly related to continued timely development of new and enhanced products. We will continue to focus on long-term opportunities available in our end markets and make significant investments in the development of our desktop application and server-based software products.

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Sales and marketing		$	122.9		$	106.1		16	%	$	380.9		$	309.9		23	%
	Percentage of total revenues		31	%		33	%				31	%		33	%

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

Sales and marketing expenses increased 10% and 11% during the three and nine months ended September 3, 2004 as compared to the three and nine months ended August 29, 2003 due to compensation and related benefits associated with headcount growth and higher incentive compensation. Sales and marketing expenses also increased 3% and 9%, respectively, due to increased marketing spending related to overall marketing efforts to further increase revenues. The remaining increase in sales and marketing expenses for the three and nine months ended September 3, 2004 was due to various individually insignificant items.

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
General and administrative		$	36.8		$	30.3		21	%	$	104.6		$	90.9		15	%
	Percentage of total revenues		9	%		10	%				9	%		10	%

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

General and administrative expenses increased 9% and 11% during the three and nine months ended September 3, 2004 as compared to the three and nine months ended August 29, 2003 due to compensation

and related benefits associated with headcount growth and higher incentive compensation. General and administrative expenses increased 4% and 1%, respectively, due to higher professional fees. During the three months ended September 3, 2004, general and administrative expenses also increased 3% due to higher legal costs. The remaining increase in general and administrative expenses for the three and nine months ended September 3, 2004 was due to various individually insignificant items.

	Three Months						Nine Months
	Three Months					Percent Change	Nine Months					Percent Change
	2004		2003			Percent Change	2004		2003			Percent Change
Restructuring and other charges	$	—	$	(0.4	)	*	$	—	$	(0.4	)	*
Percentage of total revenues		—		*				—		*

*: Percentage is not meaningful.

During the nine months ended August 29, 2003, we revised our estimates of certain costs associated with a restructuring program that was implemented in the fourth quarter of fiscal 2002. As a result, we revised the accrual related to severance and other charges and facilities during the three months ended August 29, 2003.

Non-Operating Income (Loss) for the Three and Nine Months Ended September 3, 2004 and August 29, 2003

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Investment loss		$	(1.5	)	$	(3.0	)	(50	)%	$	(1.7	)	$	(13.3	)	(88	)%
	Percentage of total revenues		*			(1	)%				*			(1	)%
Interest and other income			2.3			3.0		(21	)%		11.5			10.5		10	%
	Percentage of total revenues		1	%		1	%				1	%		1	%

Total non-operating income (loss)		$	0.8		$	—		*		$	9.8		$	(2.8	)	*

*: Percentage is not meaningful.

Investment Loss

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

During the three and nine months ended September 3, 2004, investment losses included losses related to our Adobe Ventures and our cost method investments totaling $1.6 million and $2.4 million. These losses were partially offset by gains on our short-term investments of $0.1 million and $0.2 million, respectively. For the nine months ended September 3, 2004, investment losses were also partially offset by gains of $0.5 million from the sale of our marketable equity securities.

During the three and nine months ended August 29, 2003, investment losses included losses related to our Adobe Ventures and our cost method investments totaling $2.8 million and $10.0 million. During the three months ended August 29, 2003, we recorded losses from the sale of our marketable equity securities of $0.1 million. During the three months ended August 29, 2003, investment losses also included write-downs due to other-than-temporary declines in value of $0.1 million related to our short-term investments. For the nine months ended August 29, 2003, the investment losses of $10.0 million were partially offset by gains of $0.7 million from the sale of our marketable equity securities. During the nine months ended August 29, 2003, investment losses also included write-downs due to other-than-temporary declines in value of $4.0 million related to our short-term investments.

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

Interest and Other Income

The largest component of interest and other income is interest earned on cash, cash equivalents and short-term fixed income investments, but also includes gains and losses on the sale of fixed income investments, foreign exchange transaction gains and losses, and interest expense.

Interest and other income decreased during the three months ended September 3, 2004 as compared to the three months ended August 29, 2003 due to higher costs related to our foreign currency hedging activity. Interest and other income increased during the nine months ended September 3, 2004 as compared to the nine months ended August 29, 2003 due to higher levels of cash during fiscal 2004.

Provision for Income Taxes for the Three and Nine Months Ended September 3, 2004 and August 29, 2003

		Three Months								Nine Months
		Three Months						Percent Change		Nine Months						Percent Change
		2004			2003			Percent Change		2004			2003			Percent Change
Provision for income taxes		$	36.7		$	27.7		33	%	$	118.4		$	78.4		51	%
	Percentage of total revenues		9	%		9	%				10	%		8	%
Effective tax rate			26	%		30	%				26	%		30	%

Our effective tax rate decreased in the three and nine months ended September 3, 2004 as compared to the three and nine months ended August 29, 2003 due to higher international profits which are taxed at a lower statutory rate.

FACTORS THAT MAY AFFECT FUTURE PERFORMANCE

As previously discussed, our actual results could differ materially from our forward looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed below. These and many other factors described in this report could adversely affect our operations, performance and financial condition.

Adverse changes in general economic or political conditions in any of the major countries in which we do business

If the economy worsens in any geographic areas where we do business, it would likely cause our future results to vary materially from our targets. A slower economy may also adversely affect our ability to grow. Political instability in any of the major countries in which we do business may also adversely affect our business.

Delays in development or shipment of our new products or major new versions of existing products

Any delays or failures in developing and marketing our products, including upgrades of current products, may have a harmful impact on our results of operations. Our inability to extend our core technologies into new applications and new platforms and to anticipate or respond to technological changes could affect continued market acceptance of our products and our ability to develop new products. A portion of our future revenue will come from new applications. Delays in product or upgrade introductions could cause a decline in our revenue, earnings or stock price. We cannot determine the ultimate effect these delays or the introduction of new products or upgrades will have on our revenue or results of operations.

Introduction of new products by existing and new competitors, particularly Microsoft

The end markets for our software products are intensely and increasingly competitive, and are significantly affected by product introductions and market activities of industry competitors. Microsoft has an electronic form tool called InfoPath included as part of its latest professional Office product that competes with certain aspects of our Intelligent Documents product line. Given Microsoft's market dominance, InfoPath, or any new competitive Microsoft product or technology that is bundled as part of its Office product or operating system, could harm our overall Intelligent Documents market opportunity. In addition, Microsoft is developing the next generation of its Windows operating system, codenamed Longhorn. It is anticipated that Microsoft will add new electronic document capabilities to Longhorn, potentially providing additional competition to our Intelligent Document products and solutions. We are also seeing an increase in competition from clone PDF products marketed by other companies. Other competitors, including Microsoft and Apple, may increase their presence in the digital imaging markets Additionally, some digital camera manufacturers are bundling their own or our competitors' digital imaging and video software products with their digital camera products. If these competing products achieve widespread acceptance, our operating results could suffer. In addition, consolidation has occurred among some of the competitors in our markets. Any further consolidations among our competitors may result in stronger competitors and may therefore harm our results of operations.

Difficulties in transitions to new business models or markets

We are devoting significant resources to the development of technologies and service offerings to address demands in the marketplace for document generation, document process management, document collaboration, and document control and security. As a result, we are transitioning to new business models and seeking to broaden our customer base in the enterprise and government markets, requiring a considerable investment of technical, financial and sales resources. Many of our competitors may have advantages over us due to their larger presence, deeper experience in the enterprise and government

markets, and greater sales and marketing resources. It is our intent to form strategic alliances with leading enterprise and government solutions and service providers to provide additional resources to further enable penetration of the enterprise and government markets. If we are unable to successfully enter into strategic alliances, or if they are not as productive as we anticipate, our market penetration may not proceed as rapidly as we anticipate and our results of operations could be negatively impacted.

We recently launched our Adobe Creative Suite products. Our limited operating history with these products makes it difficult to predict the revenue effect of the Adobe Creative Suite product cycle and the individual products integrated within the Adobe Creative Suite.

Changes in demand for application software, computers and printers

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

Intellectual property disputes and litigation

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

Additionally, although we actively pursue software pirates as part of our enforcement of our intellectual property rights, we do lose revenue due to illegal use of our software. If piracy activities increase, it may further harm our business.

Changes to our distribution channel

We distribute our application products primarily through distributors, resellers, retailers and increasingly systems integrators, ISVs and VARs (collectively referred to as "distributors"). A significant amount of our revenue for application products is from two distributors. In addition, our channel program focuses our efforts on larger distributors, which has resulted in our dependence on a relatively small number of distributors licensing a large amount of our products. Our distributors also sell our competitors' products, and if they favor our competitors' products for any reason, they may fail to market our products as effectively or to devote resources necessary to provide effective sales, which would cause our results to suffer. In addition, the financial health of these distributors and our continuing relationships with them are becoming more important to our success. Some of these distributors may be unable to withstand adverse changes in business conditions. Our business could be seriously harmed if the financial condition of some of these distributors substantially weakens.

Malicious code such as worms and viruses could impact our computer network and applications

Malicious code, such as worms and viruses, are released into the public Internet using recently discovered vulnerabilities in popular software programs. The documents created by our applications, even those with security features, are also vulnerable to malicious acts such as hacking. Although we have a response team that is notified of high-risk malicious events from multiple sources and we take certain preventative measures, these procedures may not be sufficient to avoid harm to our business.

Interruptions or terminations in our relationships with our turnkey assemblers

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

Our future operating results are difficult to predict and are likely to fluctuate substantially from quarter to quarter

As a result of a variety of factors discussed herein, our quarterly revenues and operating results for a particular period are difficult to predict. Our revenues may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. Additionally, we periodically provide operating model targets for revenue, gross margin, operating expenses, operating margin, other income, tax rate, share count and earnings per share. These targets reflect a number of assumptions, including assumptions about product pricing and demand, economic and seasonal trends, manufacturing costs and volumes, the mix of shrink-wrap and licensing revenue, full and upgrade products, distribution channels and geographic markets. If one or more of these assumptions prove incorrect, our actual results may vary materially from those anticipated, estimated or projected.

Fluctuations in foreign currency exchange rates

Our operating results are subject to fluctuations in foreign currency exchange rates. We attempt to mitigate a portion of these risks through foreign currency hedging, based on our judgment of the appropriate trade-offs among risk, opportunity and expense. We have established a hedging program to hedge our exposure to foreign currency exchange rate fluctuations, primarily the Japanese yen and the euro. We regularly review our hedging program and will make adjustments based on our judgment. Our hedging activities may not offset more than a portion of the adverse financial impact resulting from unfavorable movement in foreign currency exchange rates.

Compliance with Sarbanes-Oxley Act of 2002

Under the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal controls for financial reporting and assert that such internal controls are effective. Our auditors must conduct an audit to evaluate management's assessment concerning the effectiveness of the internal controls over financial reporting and render an opinion on our assessment and the effectiveness of internal controls over financial reporting. To prepare for compliance with the Sarbanes-Oxley Act of 2002 we have undertaken certain actions including the adoption of an internal plan which includes a timeline and schedule of activities for the evaluation, test and remediation, if necessary, of internal controls. Although we believe that our efforts will enable us to provide the required report and our independent auditors to provide the required attestation as of our fiscal year end, we can give no assurance that such efforts will be completed in a timely manner and on a successful basis. If this were to occur, we may be unable to assert that the internal controls over financial reporting are effective, or our auditors may not be able to render

the required attestation concerning our assessment and the effectiveness of the internal controls over financial reporting, which could adversely effect the market price of our common stock.

Changes in accounting rules

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. These principles are subject to interpretation by the Securities and Exchange Commission (the "SEC") and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results and may even retroactively affect previously reported transactions. Our accounting policies that recently have been or may be affected by changes in the accounting rules are as follows:

•: software revenue recognition
•: accounting for stock-based compensation
•: accounting for goodwill and other intangible assets
•: accounting for guarantees and indemnities
•: accounting for variable interest entities
•: accounting for business combinations

In particular, FASB guidelines relating to accounting for goodwill could make our acquisition-related charges less predictable in any given reporting period. It is possible that in the future, we may incur less frequent, but larger, impairment charges related to previously recorded goodwill, as well as goodwill arising out of potential future acquisitions. Changes to these rules or current practices may have a significant adverse effect on our reported financial results or in the way in which we conduct our business.

Unanticipated changes in tax rates

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities.

In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other domestic and foreign tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial position.

Market risks associated with our equity investments (as discussed later under "Quantitative and Qualitative Disclosures about Market Risk")

We hold equity investments in public companies that have experienced significant declines in market value. We also have investments and may continue to make future investments in privately held companies, many of which are considered in the start-up or development stages. These investments are inherently risky, as the market for the technologies or products these companies have under development is typically in the early stages and may never materialize. Our investment activities can impact our net income. Future price fluctuations in these securities and any significant long-term declines in value of any of our investments could reduce our net income in future periods. We are uncertain about future investment gains and losses, as they are primarily dependent upon the operations of the underlying investee companies.

Our inability to attract and retain key personnel

Much of our future success depends on the continued service and availability of skilled personnel. Experienced personnel in the information technology industry are in high demand and competition for their talents is intense, especially in the Silicon Valley, where the majority of our employees are located. We have relied on our ability to grant equity compensation as one mechanism for recruiting and retaining such highly skilled personnel. Potential accounting regulations requiring the expensing of equity compensation may impair our ability to provide these incentives without incurring significant compensation costs. If we are unable to continue to successfully attract and retain key personnel, our business may be harmed.

Future earnings and stock price may be subject to volatility

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

EMPLOYEE AND DIRECTOR STOCK OPTIONS

Option Program Description

Our stock option program is a long-term retention program that is intended to attract, retain and provide incentives for talented employees, officers and directors, and to align stockholder and employee interests. We consider our option programs critical to our operation and productivity; essentially all of our employees participate. Currently, we grant options from the 1) 2003 Equity Incentive Plan ("2003 Plan"), under which options could be granted to all employees, including executive officers, and outside consultants and 2) the 1996 Outside Directors Stock Option Plan, as amended, under which options are granted automatically under a pre-determined formula to non-employee directors. The plans listed above are collectively referred to in the following discussion as "the Plans." Option vesting periods are generally three years for all of the Plans.

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

Distribution and Dilutive Effect of Options

The table below provides information about stock options granted to our Chief Executive Officer and our four other most highly compensated executive officers, as identified in our 2004 Proxy Statement. This group is referred to as the Named Executive Officers. Please refer to the section headed "Named Executive Officer Option Grants" below for the Named Executive Officers.

Options granted to employees, directors and Named Executive Officers for the nine months ended September 3, 2004 and for fiscal year 2003 are summarized as follows:

	2004		2003
Net grants† during the period as % of outstanding shares	4	%	(3	)%
Net grants to Named Executive Officers during the period as % of total options granted	9	%	0	%
Net grants to Named Executive Officers during the period as % of outstanding shares	*	%	0	%
Cumulative options held by Named Executive Officers as % of total options outstanding	17	%	16	%

†: "Net grants" equals the sum of the number of shares subject to options granted to all employees, directors and Named Executive Officers during the specified period reduced by the number of shares subject to options which were canceled or otherwise terminated during such period. Net grants during fiscal 2003 reflect the cancellation of options under our stock option exchange program. Net grants as a percentage of outstanding shares are based on 236.9 million shares and 238.3 million shares of our common stock outstanding as of September 3, 2004 and November 28, 2003, respectively.
*: Less than 1%.

General Option Information

The following table sets forth the summary of option activity under our stock option program for the nine months ended September 3, 2004 and for fiscal year 2003:

	2004						2003
	Options Available for Grant		Number of Options Outstanding		Weighted Average Exercise Price		Options Available for Grant		Number of Options Outstanding		Weighted Average Exercise Price
Beginning of period	12,953,370		42,469,653		$	32.80	5,566,971		57,847,050		$	35.64
Granted	(10,083,265	)	10,083,265			41.74	(1,994,130	)	1,994,130			33.12
Exercised	—		(5,499,301	)		25.24	—		(7,978,054	)		23.81
Canceled	1,089,505		(1,089,505	)		40.32	9,388,535		(9,393,473	)		58.00
Expired	(9,259	)	—			—	(8,006	)	—			—
Increased authorization	4,500,000		—			—	—		—			—

End of period	8,450,351		45,964,112		$	35.49	12,953,370		42,469,653		$	32.80

The following table sets forth a comparison, as of September 3, 2004, of the number of shares subject to outstanding options with exercise prices at or below the closing price of our common stock on September 3, 2004 ("In-the-Money" options) to the number of shares subject to outstanding options with exercise prices greater than the closing price of our common stock on such date ("Out-of-the-Money" options):

		Exercisable	Unexercisable	Total	Percentage of Total Options Outstanding
In-the-Money		22,202,267	17,185,540	39,387,807	86	%
Out-of-the-Money		6,574,625	1,680	6,576,305	14	%

	Total Options Outstanding	28,776,892	17,187,220	45,964,112	100	%

*: The closing price of our common stock was $46.53 on September 3, 2004, as reported by the Nasdaq National Market.

Named Executive Officer Option Grants

The following table sets forth information regarding stock options granted during the nine months ended September 3, 2004, to our Named Executive Officers. All options were granted with an exercise price equal to the closing price of our common stock on the date of grant. Potential realizable values are net of exercise price, but before taxes associated with exercise. These amounts represent hypothetical gains that could be achieved for the options if exercised at the end of the option term of seven years. The assumed 5% and 10% rates of stock price appreciation are provided for purposes of illustration only and do not represent our estimate or projection of the future price of our common stock.

							Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term
(In actual shares and dollars)
(In actual shares and dollars)	Number of Securities Underlying Options Granted	% of Total Options Granted to Employees(1) Year-to-Date
Name				Exercise Price		Expiration Date
Name				Exercise Price		Expiration Date	5%		10%
Bruce R. Chizen	450,000	4	%	$	43.55	5/19/2011	$	7,978,151	$	18,592,483
Shantanu Narayen	150,000	1			43.55	5/19/2011		2,659,384		6,197,494
Murray J. Demo	125,000	1			43.55	5/19/2011		2,216,153		5,164,579
Jim Stephens	100,000	1			43.55	5/19/2011		1,772,922		4,131,663
James Heeger	100,000	1			43.55	5/19/2011		1,772,922		4,131,663

(1): Based on approximately 10.1 million shares subject to options granted to employees under our option plans to date during fiscal 2004.

Stock Option Exercises and Option Holdings

The following table shows stock options exercised by the Named Executive Officers in the nine months ended September 3, 2004, including the total value of gains on the date of exercise based on actual sale prices or on the closing price that day if the shares were not sold that day, in each case less the exercise price of the stock options. In addition, the number of shares covered by both exercisable and non-exercisable stock options, as of September 3, 2004, is shown. Also reported are the values for "In-the-Money" options. The dollar amounts shown in the "In-the-Money" column represent the positive spread between the exercise price of any such existing stock options and closing price as of September 3, 2004 of our common stock.

(In actual shares and dollars)				Number of Securities Underlying Unexercised Options at September 3, 2004
						Value of Unexercised In-the-Money Options at September 3, 2004(2)
	Number of Shares Acquired Upon
Name		Value Realized Upon Exercise(1)
Name		Value Realized Upon Exercise(1)		Exercisable	Unexercisable	Exercisable		Unexercisable
Bruce R. Chizen	—	$	—	2,289,697	969,794	$	18,370,642	$	11,748,067
Shantanu Narayen	—		—	1,194,465	452,085		10,888,672		6,496,825
Murray J. Demo	—		—	961,830	420,837		7,080,944		6,299,990
Jim Stephens	50,000		677,391	614,165	283,337		4,687,941		3,968,740
James Heeger	50,000		852,655	268,750	331,250		3,128,000		4,182,500

(1): The "value realized" represents the total value of gains on the date of exercise based on actual sale prices or on the closing price that day if the shares were not sold that day, in each case less the exercise price of the stock options. See related Section 16 filings for detailed information on dispositions of shares.
(2): Option values are based on $46.53, the closing price of our common stock on September 3, 2004, as reported by the Nasdaq National Market.

Equity Compensation Plan Information

The following table gives information about our common stock that may be issued upon the exercise of options under our existing equity compensation plans as of September 3, 2004:

		Equity Compensation Plan Information
Plan Category		Number of Securities to be Issued Upon Exercise of Outstanding Options (a)		Weighted Average Exercise Price of Outstanding Options (b)			Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c)
Equity compensation plans approved by stockholders		45,964,112		$	35.49		23,863,631	*

*: Includes 12.7 million shares that are reserved for issuance under the 1997 Employee Stock Purchase Plan.

LIQUIDITY AND CAPITAL RESOURCES

	September 3, 2004		November 28, 2003		Percent Change
Cash, cash equivalents and short-term investments	$	1,139.8	$	1,096.5	4	%
Working capital	$	903.3	$	892.5	1	%
Stockholders' equity	$	1,225.8	$	1,100.8	11	%

Our primary source of cash is receipts from revenue. The primary uses of cash are payroll (salaries, bonuses, and benefits), general operating expenses (marketing, travel, office rent) and cost of product revenue. Another source of cash is proceeds from the exercise of employee options and another use of cash is our stock repurchase program, which is detailed below.

Net cash provided by operating activities was $492.9 million for the nine months ended September 3, 2004, an increase of $188.4 million from the $304.5 million provided for the nine months ended August 29, 2003. Cash provided by operating activities, in the nine months ended September 3, 2004, primarily comprised net income, net of non-cash related expenses. Working capital sources of cash were a decrease in accounts receivable and an increase in accrued expenses. Our days sales outstanding in trade receivables ("DSO") decreased from 37 days at November 28, 2003 to 25 days at September 3, 2004. Our accounts receivable decreased due to increased levels of cash collections. Accrued expenses increased primarily due to compensation costs. Working capital uses of cash included a decrease in income taxes payable due to tax payments made for both agreed and disputed tax assessments.

Net cash used for investing activities was $241.3 million for the nine months ended September 3, 2004, a decrease of $92.5 million from the $333.8 million used in the nine months ended August 29, 2003. Net cash used for investing activities, in the nine months ended September 3, 2004, was primarily due to our investment of $126.8 million in a lease receivable associated with the restructuring of the lease agreement for the East and West towers. See below under "Lease Commitments" for further information. Additionally, we used $15.5 million, net of cash received of $0.3 million, in connection with our acquisition of Q-Link. See Note 2 of our Notes to Condensed Consolidated Financial Statements for further information regarding this acquisition. We expect to continue to invest in short-term investments and purchase additional property and equipment to support our growth.

Net cash used for financing activities was $242.7 million in the nine months ended September 3, 2004, an increase of $230.5 million from the $12.1 million used in the nine months ended August 29, 2003. During the nine months ended September 3, 2004, we repurchased 8.5 million shares as compared to 2.8 million shares during the nine months ended August 29, 2003. Cash used for stock repurchases during

fiscal 2004 increased from the same period in fiscal 2003 due to a higher average cost per share, a higher number of shares being repurchased, and remaining prepayments of $53.1 million related to the stock purchase agreements (see Note 7 of our Notes to Condensed Consolidated Financial Statements for further information). The cost of the repurchases was partially offset by proceeds received from employees exercising their stock options. The increase in proceeds received is due to a higher number of options being exercised as well as higher option exercise prices.

We have paid cash dividends on our common stock each quarter since the second quarter of 1988. Adobe's Board of Directors declared a cash dividend on our common stock of $0.0125 per common share for the third quarter of fiscal 2004. Under the terms of our lease agreements for our San Jose headquarters, we are not prohibited from paying cash dividends unless an event of default occurs. The declaration of future dividends, whether in cash or in-kind, is within the discretion of Adobe's Board of Directors and will depend on business conditions, our results of operations and financial condition, and other factors.

We expect to continue our investing activities, including investments in short-term and long-term investments and purchases of computer systems for research and development, sales and marketing, product support, and administrative staff. Furthermore, cash reserves may be used to repurchase stock under our stock repurchase programs and strategically acquire companies, products or technologies that are complementary to our business.

Adobe uses highly regarded investment management firms to manage most of our invested cash. External investment firms actively managed 90% of Adobe's invested balances during the nine months ended September 3, 2004. The fixed income portfolio is primarily invested in municipal bonds within the U.S. and in highly rated corporate and sovereign obligations outside of the U.S. The balance of the fixed income portfolio is managed internally and invested primarily in money market funds for working capital purposes. All investments are made according to guidelines and within compliance of policies approved by the Board of Directors.

Our existing cash, cash equivalents, and investment balances may decline during fiscal 2004 in the event of weakening of the economy or changes in our planned cash outlay. However, based on our current business plan and revenue prospects, we believe that our existing balances together with our anticipated cash flows from operations will be sufficient to meet our working capital and operating resource expenditure requirements for the next twelve months. Cash from operations could be affected by various risks and uncertainties, including, but not limited to the risks detailed in the section "Factors That May Affect Future Performance." Also, while we currently have no committed lines of credit, we believe that our banking relationships and good credit should afford us the opportunity to raise sufficient debt in the bank or public market, if required.

Stock Repurchase Program I—On-going Dilution Coverage

To facilitate our stock repurchase program designed to minimize dilution from stock issuance primarily from employee stock plans, we repurchase shares in the open market and from time to time enter into structured repurchase agreements with third parties.

Authorization to repurchase shares to cover on-going dilution is not subject to expiration. However, this repurchase program is limited to covering net dilution from stock issuances and is subject to business conditions and cash flow requirements as determined by our Board of Directors from time to time. Refer to Part II, Item 2(e) in this filing for share repurchases during the quarter ended September 3, 2004.

price during such intervals less a specified discount. Upon payment, the $150.0 million was classified as treasury stock on our balance sheet. At the expiration of the agreement on October 1, 2004, we received the remaining shares pursuant to the agreement.

During September 2004, we entered into several stock purchase agreements with large financial institutions. Under these agreements, we have provided the financial institutions with up-front payments of $180.0 million and the financial institutions have agreed to deliver to us, at certain intervals during the contract term, a number of our shares based on the volume weighted average price of Adobe stock during such intervals, less a specified discount. These contracts will expire on or before March 24, 2005.

Stock Repurchase Program II—Additional Authorization above Dilution Coverage

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Our principal commitments as of September 3, 2004 consist of obligations under operating leases, royalty agreements and various service agreements. See Note 8 of our Notes to Condensed Consolidated Financial Statements for more detailed information.

Lease Commitments

The two lease agreements discussed in Note 8 of our Notes to Condensed Consolidated Financial Statements are subject to standard financial covenants. As of September 3, 2004 we were in compliance with all of our financial covenants. We expect to remain within compliance in the next 12 months. We are comfortable with these limitations and believe they will not impact our credit or cash in the coming year or restrict our ability to execute our business plan.

Indemnifications

believe the estimated fair value of these indemnification agreements in excess of applicable insurance coverage is minimal.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In comparison with what we disclosed in our Annual Report on Form 10-K for fiscal 2003, we believe that there have been no significant changes in our market risk exposures for the quarter ended September 3, 2004.

ITEM 4. CONTROLS AND PROCEDURES

Based on their evaluation as of September 3, 2004, our Chief Executive Officer and Chief Financial Officer, have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) were sufficiently effective to ensure that the information required to be disclosed by us in this quarterly report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in the SEC's rules and Form 10-Q.

There were no changes in our internal controls over financial reporting during the quarter ended September 3, 2004 that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Adobe have been detected.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

defending against it. On September 9, 2003, Adobe filed a counter-claim against Ben Weiss for breach of contract and misappropriation of trade secrets. Adobe seeks injunctive relief against any use of Adobe's trade secrets. Adobe seeks compensatory, statutory and punitive damages.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

(e) Below is a summary of stock repurchases for the quarter ended September 3, 2004 (in thousands, except average price per share). See Note 7 of our Notes to Condensed Consolidated Financial Statements for information regarding our stock repurchase plans.

Plan/Period			Shares Repurchased(1)	Average Price Per Share		Maximum Number of Shares that May Yet Be Purchased Under the Plan
*Stock Repurchase Program I*
Beginning shares available to be issued as of June 4, 2004						22,734,512
June 5, 2004 - July 2, 2004
	From employees(2)		137	$	45.07
	Open market		225,029		43.51
	Structured repurchases		589,306		44.42
July 3, 2004 - July 30, 2004
	From employees(2)		117		41.59
	Open market		983,948		43.44
July 31, 2004 - September 3, 2004
	From employees(2)		202		44.06
	Open market		1,622,000		43.24
	Structured repurchases		1,097,445		42.71
	Adjustments to repurchase authority for net dilution		—			2,960,384	(3)

		Total shares repurchased	4,518,184			(4,518,184	)

Ending shares available to be issued as of September 3, 2004						21,176,712	(4)

(1): All shares were purchased as part of publicly announced plans.
(2): The repurchases from employees represent shares canceled when surrendered in lieu of cash payments for withholding taxes due.
(3): Adjustment of authority to reflect changes in the dilution from outstanding shares and options.
(4): The remaining authorization for the ongoing stock repurchase plan is determined by combining all stock issuances, net of any canceled, surrendered or exchanged shares less all stock repurchases under the ongoing plan, beginning in the first quarter of fiscal 1998.

ITEM 5. OTHER INFORMATION

Pursuant to Section 10A(i)(2) of the Securities Exchange Act of 1934, we are responsible for listing the non-audit services approved in the third quarter of 2004 by our Audit Committee to be performed by KPMG LLP, our external auditor. Each of the permitted non-audit services has been pre-approved by the Audit Committee or the Audit Committee's Chairman pursuant to delegated authority by the Audit Committee. During the third quarter of 2004, the Audit Committee pre-approved the following non-audit services anticipated to be performed by KPMG LLP: 1) foreign financial statement review and 2) tax audit and compliance services.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a): Index to Exhibits

		Incorporated by Reference
Exhibit Number		Incorporated by Reference			Filed Herewith
Exhibit Number	Exhibit Description	Form	Date	Number	Filed Herewith
3.1	Amended and Restated Bylaws as currently in effect	10-K	02/26/03	3.2
3.2	Restated Certificate of Incorporation, as filed with the Secretary of State of the State of Delaware on 5/22/01	10-Q	7/16/01	3.6
4.1	Fourth Amended and Restated Rights Agreement between the Company and Computershare Investor Services, LLC	8-K	7/3/00	1
10.1	1984 Stock Option Plan, as amended*	10-Q	07/02/93	10.1.6
10.2	Amended 1994 Performance and Restricted Stock Plan*	10-Q	05/29/98	10.24.2
10.3	Form of Restricted Stock Agreement used in connection with the Amended 1994 Performance and Restricted Stock Plan*				X
10.4	1994 Stock Option Plan, as amended*	S-8	05/30/97	10.40
10.5	1997 Employee Stock Purchase Plan, as amended*	10-K	12/1/00	10.70
10.6	1996 Outside Directors' Stock Option Plan, as amended*				X
10.7	Forms of Stock Option Agreements used in connection with the 1996 Outside Directors' Stock Option Plan*	S-8	6/16/00	4.8
10.8	1999 Nonstatutory Stock Option Plan, as amended*	S-8	10/29/01	4.6
10.9	1999 Equity Incentive Plan, as amended*	10-K	02/26/03	10.37
10.10	2003 Equity Incentive Plan*	DEF 14A	3/17/03	10.1
10.11	Forms of Stock Option and Restricted Stock Agreement used in connection with the 2003 Equity Incentive Plan				X
10.12	Form of Indemnity Agreement*	10-Q	05/30/97	10.25.1
10.13	Forms of Retention Agreement*	10-K	11/28/97	10.44
10.14	Second Amended and Restated Master Lease of Land and Improvements by and between SMBC Leasing and Finance, Inc. and Adobe Systems Incorporated				X
10.15	Credit Agreement among Adobe Systems Incorporated, Lenders named therein and ABN AMRO Bank N.V., as Administrative Agent, with certain related Credit Documents	10-Q	9/3/99	10.54
10.16	Credit Agreement among Adobe Systems Incorporated, Lenders Named therein and ABN Amro Bank N.V., as Administrative Agent, with Certain Related Credit Documents	10-Q	9/1/00	10.66

10.17	Lease agreement between Adobe Systems and Selco Service Corporation	10-K	2/21/02	10.77
10.18	Participation agreement among Adobe Systems, Selco Service Corporation, et al.	10-K	2/21/02	10.78
10.19	Executive Severance Plan in the Event of a Change of Control*	10-K	2/21/02	10.80
10.20	Amendment No.1 to Lease Agreement between Adobe and Selco Services Corporation	10-K	02/26/03	10.81
31.1	Certification of Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934				X
31.2	Certification of Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934				X
32.1	Certification of Chief Executive Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†				X
32.2	Certification of Chief Financial Officer, as required by Rule 13a-14(b) of the Securities Exchange Act of 1934†				X

*

Compensatory plan or arrangement

†

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Quarterly Report on Form 10-Q, are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Adobe Systems Incorporated under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Form 10-Q, irrespective of any general incorporation language contained in such filing.

(b)

Reports on Form 8-K

(i): On June 17, 2004, Adobe filed a report on Form 8-K under Item 12 announcing its financial results for the quarter ended June 4, 2004.

SIGNATURE

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

	ADOBE SYSTEMS INCORPORATED
	By		/s/ MURRAY J. DEMO Murray J. Demo, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Date: October 7, 2004

SUMMARY OF TRADEMARKS

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

Adobe
Acrobat
Photoshop
PostScript

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

QuickLinks

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share data)
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
ADOBE SYSTEMS INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (Unaudited)
ADOBE SYSTEMS INCORPORATED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (In thousands, except share and per share data) (Unaudited)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS OVERVIEW
CRITICAL ACCOUNTING ESTIMATES
RESULTS OF OPERATIONS
FACTORS THAT MAY AFFECT FUTURE PERFORMANCE
EMPLOYEE AND DIRECTOR STOCK OPTIONS
LIQUIDITY AND CAPITAL RESOURCES

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

ITEM 5. OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURE
SUMMARY OF TRADEMARKS
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EXHIBIT 10.3

ADOBE SYSTEMS INCORPORATED

1994 PERFORMANCE AND RESTRICTED STOCK PLAN

STOCK GRANT AGREEMENT

                THIS AGREEMENT is made and entered into as of the    _____________ by and between Adobe Systems Incorporated (the “Company”) and        XXXXXXXXX          (the “Participant”).

                The Company desires to issue and Participant desires to acquire stock of the Company as herein described, pursuant to the Company’s 1994 Performance and Restricted Stock Plan (the “Plan”), on the terms and conditions set forth in this Agreement. Capitalized terms in the Agreement shall have the meaning set forth in paragraph 3 hereto.

                IT IS AGREED between the parties as follows:

                1.             Issuance of Shares. On the effective date of this Agreement as set forth above, the Participant will acquire and the Company will issue, subject to the provisions hereof XXX shares of its common stock in consideration for the Participant’s service with the Company.

                2.             Vesting and Unvested Share Reacquisition Right.

                                (a)           Vesting.

                                                (i)            The method of determining Vested Shares and Unvested Shares shall be as set forth on Exhibit A hereto. Notwithstanding the foregoing, in the event a Full Acceleration of Vesting Event occurs, any Unvested Shares shall become Vested Shares immediately before the Full Acceleration of Vesting Event or at such earlier time as the Board may determine. If a Partial Acceleration of Vesting Event occurs the number of Vested Shares shall be determined as if the Participant’s Termination occurred one (1) year after the Participant’s actual Termination.

                                                (ii)           Notwithstanding anything contained herein to the contrary, all Unvested Shares shall become Vested Shares immediately before the death or Total Disability of the Participant, if such death or Total Disability occurs while the Participant is employed by a Participating Company.

                                                (iii)          In the event that the acceleration of the vesting of the Unvested Shares pursuant to paragraph 2(a)(i) or (ii) will result in a “parachute payment” as defined in section 280G of the Code notwithstanding paragraph 2(a)(i) or (ii), the extent to which vesting will be accelerated in connection with a Vesting Acceleration Event, death or Total Disability shall not exceed the amount of vesting which produces the greatest after-tax benefit to the Participant as determined by the Company in a fair and equitable manner.

                                (b)           Unvested Share Reacquisition Right. In the event the Participant’s employment with the Participating Company Group is terminated for any reason, with or without Cause, or if the Participant or the Participant’s legal representative attempts to sell, exchange, transfer (including, without limitation, any transfer to a nominee or agent of the Participant), pledge or otherwise dispose of (other than pursuant to a Change of Control Event described in paragraph 3(d)(iii) or an Option Exercise described in paragraph 2(d)) any shares of Stock which are Unvested Shares, the Control Company shall automatically reacquire the Unvested Shares and the Participant shall not be entitled to any payment therefor. The Control Company shall have the right to

1

assign the Unvested Share Reacquisition Right at any time prior to the time such right is no longer contingent, to one or more persons as may be selected by the Company.

                                (c)           Continuation of Unvested Share Reacquisition Right following a Change of Control Event. In the event of a Change of Control Event, the Unvested Share Reacquisition Right shall continue in full force and effect, subject to the provisions of paragraph 2(a)(i); provided, however that “employment with the Participating Company Group” for purposes of this Agreement shall include all service with any corporation which was a Participating Company at the time the services were rendered, whether or not the corporation was included within such term both before and after the event constituting the Change of Control Event.

                                (d)           Option Exercise. Notwithstanding anything contained herein to the contrary, the Participant may transfer to the Company while the Stock remains subject to the Unvested Share Reacquisition Right any or all of the Stock as payment of the exercise price in connection with an Option Exercise, provided that (i) such payment is made in accordance with the terms of the related option agreement and the plan pursuant to which the option was granted and (ii) a number of the shares issued on such Option Exercise which are equal to the number of whole shares of Stock transferred to the Company for such payment will remain subject to the Unvested Share Reacquisition Right.

                3.             Definitions. As used in this Agreement, the following terms shall have the meanings indicated unless the context requires a different meaning.

                                (a)           Acceleration of Vesting Event. An “Acceleration of Vesting Event” shall mean a Change of Control Event as defined in paragraph 3(d) occurring after the Grant Date followed by a Termination as defined in paragraph 3(t). A “Full Acceleration of Vesting Event” shall mean an Acceleration of Vesting Event where a majority of the Continuing Outside Directors do not approve the Change of Control Event. For purposes of the foregoing, the failure of the Continuing Outside Directors to approve or disapprove the transaction will be construed as nonapproval. A “Partial Acceleration of Vesting Event” shall mean an Acceleration of Vesting Event other than a Full Acceleration of Vesting Event.

                                (b)           Board. The “Board” shall mean the Board of Directors of the Control Company.

                                (c)           Cause. “Cause” shall mean willful and gross misconduct on the part of the Participant or the commission by the Participant of one or more acts which constitute an indictable crime under United States federal, state or local law, provided that such misconduct or act(s) is (are) materially and demonstrably detrimental to the Participating Company Group taken as a whole as determined in good faith by a written resolution duly adopted by the affirmative vote of not less than a majority of all of the Outside Directors at a meeting of such Outside Directors (whether or not such meeting constitutes a meeting of the Board) after reasonable notice to the Participant and opportunity for the Participant and his counsel to be heard.

                                (d)           Change of Control Event. “Change of Control Event” shall mean any one of the following:

                                                (i)            Continuing Outside Directors no longer constitute at least a majority of the Outside Directors;

                                                (ii)           any person or group of persons (as defined in Rule 13d-5 under the Securities Exchange Act of 1934), together with its affiliates, become the beneficial owner, directly or indirectly, of 20%

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of the Control Company’s then outstanding Common Stock or 20% or more of the voting power of the Control Company’s then outstanding securities entitled generally to vote for the election of the Board;

                                                (iii)          the approval by the Control Company’s shareholders of the merger or consolidation of the Participating Company Group with any other corporation, the sale of substantially all of the assets of the Control Company or the liquidation or dissolution of the Control Company, unless, in the case of a merger or consolidation, the Continuing Outside Directors in office immediately prior to such merger or consolidation will constitute at least a majority of the Outside Directors of the surviving corporation of such merger or consolidation and any parent (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934) of such corporation; or

                                                (iv)          at least a majority of the Continuing Outside Directors in office immediately prior to any other action proposed to be taken by the Control Company’s shareholders or by the Board determines that such proposed action, if taken, would constitute a change of control of the Participating Company Group and such action is taken.

                                (e)           Code. “Code” shall mean the Internal Revenue Code of 1986, as amended.

                                (f)            Company. The “Company” shall mean Adobe Systems Incorporated.

                                (g)           Continuing Outside Director. “Continuing Outside Director” shall mean any individual who is an Outside Director on the date hereof, or who is a Director on the date hereof and becomes an Outside Director but only after such person becomes an Outside Director, or who becomes an Outside Director unless a majority of the Continuing Outside Directors designate (before such person becomes an Outside Director) that such person is not a Continuing Outside Director. In the event there are no Outside Directors, the Directors who have been Directors for at least one (1) year shall be deemed to be Continuing Outside Directors for the purposes of this Agreement but only until an Outside Director assumes office.

                                (h)           Control Company. The “Control Company” shall mean the corporation, the stock of which is held by the Participant pursuant to the terms of this Agreement.

                                (i)            Director. “Director” shall mean a member of the Board of Directors of the Control Company.

                                (j)            Good Reason. “Good Reason” shall mean:

                                                (i)            any failure by the Participating Company Group to pay, or any reduction by the Participating Company Group of, the Participant’s base annual salary or bonus compensation in effect immediately prior to the date of the Change of Control Event or any failure by the Participating Company Group to grant an increase in the Participant’s base annual salary each year consistent with any increase in the applicable annual cost of living index, unless no increases in base salary are being given to other employees of the Participating Company Group;

                                                (ii)           any failure by the Participating Company Group (A) to continue to provide the Participant with the opportunity to participate, on terms no less favorable than those in effect immediately prior to the date of the Change of Control Event, in any benefit plans and programs, including, but not limited to, the Participating Company Group’s life, disability, health, dental, and retirement plans in which the Participant was participating immediately prior to the date of the Change of Control Event, or their equivalent, or (B) to provide the

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Participant with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any executive, management or administrative group which customarily includes a person holding the employment position with the Participating Company Group then held by the Participant; or

                                                (iii)          without the Participant’s express written consent, the relocation of the principal place of the Participant’s employment to a location that is more than 50 miles further from the Participant’s principal residence than such principal place of employment immediately prior to the date of the Change of Control Event, or the imposition of travel requirements on the Participant not substantially consistent with such travel requirements existing immediately prior to the date of the Change of Control Event.

                                                (iv)          Notwithstanding the foregoing, Good Reason shall not be deemed to exist under paragraph 3(j)(i) or 3(j)(ii) if the compensation and benefits available to the Participant considered as a whole is reasonably equivalent to the compensation and benefits previously available to the Participant considered as a whole.

                                (k)           Grant Date. The “Grant Date” shall be the effective date of this Agreement, as first above written.

                                (l)            Normal Retirement Date. “Normal Retirement Date” shall mean the date upon which the Participant attains age 65.

                                (m)          Option Exercise. “Option Exercise” shall mean an exercise of an option granted to the Participant by a Participating Company.

                                (n)           Outside Director. “Outside Director” shall mean a Director who is not an employee of the Participating Company Group.

                                (o)           Participant. “Participant” shall mean the person receiving the Stock pursuant to this Agreement, as first above written.

                                (p)           Participating Company. “Participating Company” shall mean (i) the Company and (ii) any present or future parent and/or subsidiary corporation of the Company while such corporation is a parent or subsidiary of the Company. For purposes of this Agreement, a parent corporation and a subsidiary corporation shall be as defined in sections 425(e) and 425(f) of the Code.

                                (q)           Participating Company Group. “Participating Company Group” shall mean at any point in time all corporations collectively which are then a Participating Company.

                                (r)            Plan. The “Plan” shall mean the Adobe Systems Incorporated 1989 Restricted Stock Plan.

                                (s)           Stock. “Stock” shall mean shares of stock that are subject to this Agreement.

                                (t)            Termination. “Termination” shall mean a termination of the Participant’s employment with the Participating Company Group following the occurrence of any Change of Control Event, if such termination is by the Participating Company Group without Cause or by the Participant for Good Reason; provided, however, that “Termination” shall not include any termination of the employment of the Participant (i) by the Participating Company Group as a result of the Total Disability of the Participant or (ii) as a result of the death of the Participant or the retirement of the Participant on or after his Normal Retirement Date.

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                                (u)           Total Disability. “Total Disability” shall mean, as applied to the Participant, that (i) because of sickness or injury the Participant is not able to perform the major duties of the Participant’s occupation, (ii) such total incapacity shall have continued for a period of six consecutive months and (iii) such total incapacity will, in the opinion of a qualified physician, be permanent and continuous during the remainder of the Participant’s life. (“Occupation” shall mean a Participant’s regular occupation or profession at the time he became disabled.)

                                (v)           Unvested Share Reacquisition Right. “Unvested Share Reacquisition Right” shall mean the Company’s right to reacquire the Unvested Shares without any payment to the Participant therefor as described in paragraph 2(b).

                                (w)          Unvested Shares. “Unvested Shares” shall be the total number of shares of Stock in excess of the Vested Shares.

                                (x)            Vested Shares. “Vested Shares” shall be the shares of Stock as set forth on Exhibit A hereto.

                4.             Administration. All questions of interpretation concerning this Agreement shall be determined by the Board and/or by a duly appointed committee of the Board having such powers as shall be specified by the Board. Any subsequent reference herein to the Board shall also mean the committee if such committee has been appointed. All determinations by the Board shall be final and binding upon all persons having an interest in this Agreement.

                5.             Legends. The Participating Company Group may at any time place legends referencing the Unvested Share Reacquisition Right set forth in paragraph 2 (“Vesting and Unvested Share Reacquisition Right”) and any applicable federal and/or state securities restrictions on all certificates representing shares of Stock subject to the provisions of this Agreement. The Participant shall, at the request of the Participating Company Group, promptly present to the Participating Company Group any and all certificates representing shares of Stock acquired under this Agreement in the possession of the Participant in order to effectuate the provisions of this paragraph. Unless otherwise specified by the Participating Company Group, legends placed on such certificates may include but shall not be limited to the following:

                “THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH IN AN AGREEMENT BETWEEN THIS CORPORATION AND THE REGISTERED HOLDER, OR HIS PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.”

                6.             Escrow.

                                (a)           Establishment of Escrow. To insure that Stock subject to the Unvested Share Reacquisition Right will be available for reacquisition, the Company may require the Participant to deposit the certificates evidencing the Stock with an escrow agent designated by the Company under the terms and conditions of an escrow agreement approved by the Company. If the Company does not require such deposit as a condition of this Agreement, the Company reserves the right at any time to require the Participant to so deposit the certificates in escrow. The Company shall bear the expenses of the escrow.

                                (b)           Delivery of Shares to Participant. As soon as practicable after the expiration of the Unvested Share Reacquisition Right, the escrow agent shall deliver to the Participant the shares no longer subject to such restrictions.

                7.             Transfers in Violation of Agreement. The Control Company shall not be required (a) to transfer on its books any shares of the

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Stock which shall have been sold or transferred in violation of any of the provisions set forth in this Agreement, or (b) to treat as owner of such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom any such shares shall have been so transferred.

                8.             Effect of Change in Company’s Capital Structure. Appropriate adjustments shall be made in the number and class of shares of Stock in the event of a stock dividend, stock split, reverse stock split, combination, reclassification or like change in the capital structure of the Control Company. If, from time to time, there is any stock dividend, stock split or other change in the character or amount of any of the outstanding stock of the Control Company including, without limitation, a conversion into cash or securities of another corporation, then in such event any and all new substituted or additional cash or securities to which Participant is entitled by reason of Participant’s ownership of the Stock shall be immediately subject to the Unvested Share Reacquisition Right with the same force and effect as the Stock subject to the Unvested Share Reacquisition Right immediately before such event.

                9.             Rights as a Shareholder or Employee. The Participant shall have no rights as a shareholder with respect to the Stock until the date of the issuance of a certificate or certificates for the Stock. No adjustment shall be made for dividends or distributions or other rights for which the record date is prior to the date such stock certificate or certificates are issued, except as provided in paragraph 8 (“Effect of Change in Company’s Capital Structure”). Nothing in this Agreement shall confer upon the Participant any right to continue in the employ of a Participating Company or interfere in any way with any right of the Participating Company to terminate the Participant’s employment at any time.

                10.           Withholding.

                                (a)           Withholding Requirement. At the time that this Agreement is executed, or at any time thereafter as requested by the Company, Participant shall make adequate provision for federal and state tax withholding obligations of the Company, if any, which arise in connection with the acquisition of shares of Stock under the Plan, including, without limitation, obligations arising upon (i) the transfer, in whole or in part, of any shares of Stock, (ii) the lapse of any restriction with respect to any shares of Stock acquired hereby, or (iii) the filing of an election to recognize a tax liability.

                                (b)           Election to Withhold Shares. The federal and state taxes required to be withheld or collected from the Participant in connection with the acquisition of shares of Stock under the Plan, including, without limitation, upon the lapse of any restriction with respect to any shares of Stock acquired under the Plan or upon the filing of an election to recognize a tax liability (such applicable event upon which the amount of tax to be withheld is determined being referred to herein as the “Tax Date”), may be satisfied, in whole or in part, by the withholding of a sufficient number of shares of Stock which, valued at fair market value on the Tax Date, would be equal to the total withholding obligation of the Participant; provided, however, that no person who is subject to Section 16 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), may elect to satisfy the withholding of federal and state taxes in connection with the acquisition of shares of Stock under the Plan by the withholding of shares of Stock unless such election complies with any conditions or restrictions imposed by the Board, including conditions or restrictions to ensure compliance with the requirements of Rule 16b-3(e) as promulgated pursuant to the Exchange Act, and is made either (i) at

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least six (6) months prior to the applicable Tax Date or (ii) during any of the periods beginning on the third (3rd) business day following the date on which the Company issues a news release containing the operating results of a fiscal quarter or fiscal year and ending on the twelfth (12th) business day following such date. The Board shall adopt rules governing the election to withhold shares of Stock described in this paragraph 10(b), which may include, without limitation, rules requiring that any such election shall be made on or before the Tax Date, shall be irrevocable, shall be subject to the disapproval of the Board and shall be deemed made upon receipt of notice thereof by the Chief Financial Officer of the Company, delivered in person or by certified or registered mail, return receipt requested. In addition, if the Participant is a person subject to Section 16 of the Exchange Act, such election shall state the number of shares to be withheld or specify a formula pursuant to which such number may be determined and may not be made within six (6) months of the grant of the Stock award (except in the event of the death or disability of the Participant).

                11.           Compliance with Securities Laws. Notwithstanding the foregoing, inability of the Company to obtain from any regulatory body having jurisdiction authority deemed by the Company’s counsel to be necessary to the lawful issuance of the Stock hereunder shall relieve the Company of any liability in respect of the non-issuance of the Stock as to which such requisite authority shall not have been obtained.

                12.           Shareholder Approval. Any shares which are granted prior to approval of the Plan, or any amendment thereto, by the Company’s shareholders as provided by Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, shall be contingent upon such shareholder approval and the Participant shall have no right to sell or transfer the Stock prior to such approval. In the event such shareholder approval is not obtained within one (1) year of the Grant Date, the issuance of the Stock shall be null and void and the certificates representing the Stock shall be returned to the Company for cancellation.

                13.           Further Instruments. The parties agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.

                14.           Notice. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery or upon telegraphic delivery, or upon delivery by certified mail, addressed to the other party hereto at his address shown below his signature or at such other address as such party may designate by ten days advance written notice to all other parties hereto.

                15.           Successors and Assigns. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer herein set forth, be binding upon Participant, his heirs, executors, administrators, successors and assigns.

                16.           Certificate Registration. The certificate or certificates for the Stock acquired pursuant to this Agreement shall be registered in the name of the Participant.

                17.           Integrated Agreement. This Agreement constitutes the entire understanding and agreement of the Participant and the Company with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations or warranties among the Participant and the Company other than those as set forth or provided for herein.

                18.           Applicable Law. This Agreement shall be governed by the laws of the State of California as such laws are applied to agreements

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between California residents entered into and to be performed entirely within California.

                19.           Receipt of Prospectus. By execution of this Agreement, the Participant acknowledges receipt of a prospectus for the Plan from the Company in the form most recently registered with the Securities and Exchange Commission.

                IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.

ADOBE SYSTEMS INCORPORATED

PARTICIPANT

By:

By:

(Signature)

(Signature)

Title:

Senior Vice President, Chief Financial Officer

Name:

(Print)

Name:

Murray J. Demo

(Print)

345 Park Avenue

San Jose, CA 95110

(Address)

(Address)

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Exhibit A

Determination of Vesting

Grant Award

                This Exhibit A is an Exhibit to a Stock Grant Agreement between XXXXXXXX and Adobe Systems Incorporated dated XXXXXXXXX covering XXX shares.

                The “Initial Vesting Date” shall be XXXXXXXXXXXXX.

                Prior to the Initial Vesting Date, no shares of Stock shall be Vested Shares, and all such shares shall be Unvested Shares.

                On and after the Initial Vesting Date, one-third (1/3) of the shares of Stock issued to the Participant shall be Vested Shares, provided the Participant is continuously employed by the Participating Company Group from the date the Board grants the Stock under the Plan until and on the Initial Vesting Date, and the balance of such shares shall be Unvested Shares.

                On and after the first anniversary of the Initial Vesting Date (one (1) year after the Initial Vesting Date), two-thirds (2/3) of the shares of Stock issued to the Participant shall be Vested Shares, provided the Participant is continuously employed by the Participating Company Group from the date the Board grants the Stock under the Plan until and on such first anniversary, and the balance of such shares shall be Unvested Shares.

                On and after the second anniversary of the Initial Vesting Date (two (2) years after the Initial Vesting Date), all of the shares of Stock issued to the Participant shall be Vested Shares, provided the Participant is continuously employed by the Participating Company Group from the date the Board grants the Stock under the Plan until and on such second anniversary.

Initialed:

The Participant

The Company

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EX-10.6 4 a2144543zex-10_6.htm EXHIBIT 10.6

EXHIBIT 10.6

ADOBE SYSTEMS INCORPORATED

NONSTATUTORY STOCK OPTION AGREEMENT

FOR OUTSIDE DIRECTORS

                THIS NONSTATUTORY STOCK OPTION AGREEMENT FOR OUTSIDE DIRECTORS (ANNUAL OPTION) (the “Option Agreement”) is made and entered into as of _____________________ by and between Adobe Systems Incorporated and _______ (the “Optionee”).

                The Company has granted to the Optionee an option to purchase certain shares of Stock, upon the terms and conditions set forth in this Option Agreement (the “Option”).

1.             Definitions and Construction.

1.1.                              Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)                                  “Date of Option Grant” means ______________, 200____.

(b)                                 “Number of Option Shares” means _____________ shares of Stock, as adjusted from time to time pursuant to Section 9.

(c)                                  “Exercise Price” means $____________ per share of Stock, as adjusted from time to time pursuant to Section 9.

(d)                                 “Initial Vesting Date” means the day immediately preceding the day of the first annual meeting of the shareholders of the Company following the Date of Option Grant.

(e)                                  “Option Expiration Date” means the date ten (10) years after the Date of Option Grant.

(f)                                    “Vested Percentage” means, on any relevant date, the percentage determined as follows:

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Vested Percentage

Prior to Initial Vesting Date.

0%

On and after Initial Vesting Date, provided Optionee’s Service is continuous from Date of Option Grant until Initial Vesting Date.

25%

On and after the day immediately preceding the day of the second annual meeting of the shareholders of the Company provided Optionee’s Service is continuous from Initial Vesting Date until such date.

50%

On and after the day immediately preceding the day of the third annual meeting of the shareholders of the Company provided Optionee’s Service is continuous from Initial Vesting Date until such date.

100%

(a)                                  “Board” means the Board of Directors of the Company. If one or more Committees have been appointed by the Board to administer the Plan, “Board” shall also mean such Committee(s).

(b)                                 “Code” means the Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(c)                                  “Committee” means a committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. Unless the powers of the Committee have been specifically limited, the Committee shall have all of the powers of the Board granted in the Plan, including, without limitation, the power to amend or terminate the Plan at any time, subject to the terms of the Plan and any applicable limitations imposed by law.

(d)                                 “Company” means Adobe Systems Incorporated, a California corporation, or any successor corporation thereto.

(e)                                  “Director” means a member of the Board or of the board of directors of any other Participating Company.

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(f)                                    “Disability” means the permanent and total disability of the Optionee within the meaning of Section 22(e)(3) of the Code.

(g)                                 “Exchange Act” means the Securities Exchange Act of 1934, as amended.

(h)                                 “Fair Market Value” means, as of any date, if there is then a public market for the Stock, the closing price of the Stock (or the mean of the closing bid and asked prices of the Stock if the Stock is so reported instead) as reported on the National Association of Securities Dealers Automated Quotation (“Nasdaq”) System, the Nasdaq National Market System or such other national or regional securities exchange or market system constituting the primary market for the Stock. If the relevant date does not fall on a day on which the Stock is trading on Nasdaq, the Nasdaq National Market System or other national or regional securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date. If there is then no public market for the Stock, the Fair Market Value on any relevant date shall be as determined by the Board without regard to any restriction other than a restriction which, by its terms, will never lapse.

(i)                                     “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(j)                                     “Participating Company” means the Company or any Parent Corporation or Subsidiary Corporation.

(k)                                  “Participating Company Group” means, at any point in time, all corporations collectively which are then Participating Companies.

(l)                                     “Plan” means the Adobe Systems Incorporated 1996 Outside Directors Stock Option Plan.

(m)                               “Rule 16b-3” means Rule 16b-3 as promulgated under the Exchange Act, as amended from time to time, or any successor rule or regulation.

(n)                                 “Securities Act” means the Securities Act of 1933, as amended.

(o)                                 “Service” means the Optionee’s service as a Director.

(p)                                 “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 9.

(q)                                 “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

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1.2.                              Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural, the plural shall include the singular, and use of the term “or” shall not be exclusive.

2.                                       Tax Status of the Option. This Option is intended to be a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code.

3.                                       Administration. All questions of interpretation concerning this Option Agreement shall be determined by the Board, including any duly appointed Committee of the Board. All determinations by the Board shall be final and binding upon all persons having an interest in the Option. Any officer of a Participating Company shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the officer has apparent authority with respect to such matter, right, obligation, or election.

4.                                       Exercise of the Option.

4.1.                              Right to Exercise.

(a)                                  Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the Number of Option Shares multiplied by the Vested Percentage less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares.

(b)                                 Notwithstanding the foregoing, in the event that the adoption of the Plan or any amendment of the Plan is subject to the approval of the Company’s shareholders in order for the Plan or the grant of the Option to comply with the requirements of Rule 16b-3, the Option shall not be exercisable prior to such shareholder approval.

4.2.                              Method of Exercise. Exercise of the Option shall be by written notice to the Company which must state the election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Optionee’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. The written notice must be signed by the Optionee and must be delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Chief Financial Officer of the Company, or other authorized

4

representative of the Participating Company Group, prior to the termination of the Option as set forth in Section 6, accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such written notice and the aggregate Exercise Price.

4.3.                              Payment of Exercise Price.

(a)                                  Forms of Consideration Authorized. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check, or cash equivalent, (ii) by tender to the Company of whole shares of Stock owned by the Optionee having a Fair Market Value not less than the aggregate Exercise Price, (iii) by means of a Cashless Exercise, as defined in Section 4.3(c), or (iv) by any combination of the foregoing.

(b)                                 Tender of Stock. Notwithstanding the foregoing, the Option may not be exercised by tender to the Company of shares of Stock to the extent such tender of Stock would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. The Option may not be exercised by tender to the Company of shares of Stock unless such shares either have been owned by the Optionee for more than six (6) months or were not acquired, directly or indirectly, from the Company.

(c)                                  Cashless Exercise. A “Cashless Exercise” means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to decline to approve or terminate any such program or procedure.

4.4.                              Tax Withholding. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Optionee agrees to make adequate provision for any sums required to satisfy the federal, state, local and foreign tax withholding obligations of the Participating Company Group, if any, which arise in connection with the Option, including, without limitation, obligations arising upon (a) the exercise, in whole or in part, of the Option, (b) the transfer, in whole or in part, of any shares acquired upon exercise of the Option, or (c) the lapsing

5

of any restriction with respect to any shares acquired upon exercise of the Option.

4.5.                              Certificate Registration. Except in the event the Exercise Price is paid by means of a Cashless Exercise, the certificate for the shares as to which the Option is exercised shall be registered in the name of the Optionee, or, if applicable, the heirs of the Optionee.

4.6.                              Restrictions on Grant of the Option and Issuance of Shares. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (a) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (b) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE OPTIONEE IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE OPTIONEE MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Optionee to satisfy any qualifications that may be necessary or appropriate to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

4.7.                              Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise of the Option.

5.                                       Nontransferability of the Option. The Option may be exercised during the lifetime of the Optionee only by the Optionee or the Optionee’s guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Optionee, the Option, to the extent provided in Section 7, may be exercised by

6

the Optionee’s legal representative or by any person empowered to do so under the deceased Optionee’s will or under the then applicable laws of descent and distribution.

6.                                       Termination of the Option. The Option shall terminate and may no longer be exercised on the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Optionee’s Service as described in Section 7, or (c) a Transfer of Control to the extent provided in Section 8.

7.                                       Effect of Termination of Service.

7.1.                              Option Exercisability.

(a)                                  Disability. If the Optionee’s Service with the Participating Company Group is terminated because of the Disability of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee (or the Optionee’s guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date.

(b)                                 Death. If the Optionee’s Service with the Participating Company Group is terminated because of the death of the Optionee, the Option, to the extent unexercised and exercisable on the date on which the Optionee’s Service terminated, may be exercised by the Optionee (or the Optionee’s legal representative or other person who acquired the right to exercise the Option by reason of the Optionee’s death) at any time prior to the expiration of twelve (12) months after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date. The Optionee’s Service shall be deemed to have terminated on account of death if the Optionee dies within three (3) months after the Optionee’s termination of Service.

(c)                                  Other Termination of Service. If the Optionee’s Service with the Participating Company Group terminates for any reason, except Disability or death, the Option, to the extent unexercised and exercisable by the Optionee on the date on which the Optionee’s Service terminated, may be exercised by the Optionee within three (3) months after the date on which the Optionee’s Service terminated, but in any event no later than the Option Expiration Date.

7.2.                              Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall

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remain exercisable until three (3) months after the date the Optionee is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.

7.3.                              Extension if Optionee Subject to Section 16(b). Notwithstanding the foregoing, if a sale, within the applicable time periods set forth in Section 7.1, of shares acquired upon the exercise of the Option would subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (a) the tenth (10th) day following the date on which a sale of such shares by the Optionee would no longer be subject to such suit, (b) the one hundred and ninetieth (190th) day after the Optionee’s termination of Service, or (c) the Option Expiration Date.

8.                                       Transfer of Control.

8.1.                              Definition. A “Transfer of Control” shall be deemed to have occurred in the event any of the following occurs with respect to the Company:

(a)                                  the direct or indirect sale or exchange by the shareholders of the Company of all or substantially all of the stock of the Company where the shareholders of the Company before such sale or exchange do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company;

(b)                                 a merger or consolidation in which the shareholders of the Company before such merger or consolidation do not retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the Company;

(c)                                  the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange, or transfer to one or more corporations where the shareholders of the Company before such sale, exchange or transfer retain, directly or indirectly, at least a majority of the beneficial interest in the voting stock of the corporations to which the assets were transferred); or

(d)                                 a liquidation or dissolution of the Company.

8.2.                              Effect of Transfer of Control on Option. In the event of a Transfer of Control, any unexercised portion of the Option shall be immediately exercisable and vested in full as of the date thirty (30) days prior to the date of the Transfer of Control. Any exercise of the Option that was permissible solely by reason of this Section 8.2 shall be conditioned upon the consummation of the Transfer of Control. In addition, the surviving, continuing, successor, or purchasing corporation or parent corporation thereof, as the case may be (the “Acquiring Corporation”), may either assume the Company’s rights and obligations under the Option or substitute for the Option a substantially equivalent option for the

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Acquiring Corporation’s stock. The Option shall terminate and cease to be outstanding effective as of the date of the Transfer of Control to the extent that the Option is neither assumed or substituted for by the Acquiring Corporation in connection with the Transfer of Control nor exercised as of the date of the Transfer of Control.

9.                                       Adjustments for Changes in Capital Structure. In the event of any stock dividend, stock split, reverse stock split, recapitalization, combination, reclassification, or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number, Exercise Price and class of shares of stock subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to a Transfer of Control) shares of another corporation (the “New Shares”), the Board may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Board, in its sole discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 9 shall be rounded down to the nearest whole number, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option.

10.                                 Rights as a Shareholder. The Optionee shall have no rights as a shareholder with respect to any shares covered by the Option until the date of the issuance of a certificate for the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 9.

11.                                 Legends. The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Optionee shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Optionee in order to carry out the provisions of this Section.

12.                                 Binding Effect. Subject to the restrictions on transfer set forth herein, this Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.

13.                                 Termination or Amendment. The Board may terminate or amend the Plan or the Option at any time; provided, however, that no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Optionee unless such termination or amendment is necessary to

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comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing.

14.                                 Integrated Agreement. This Option Agreement constitutes the entire understanding and agreement of the Optionee and the Participating Company Group with respect to the subject matter contained herein, and there are no agreements, understandings, restrictions, representations, or warranties among the Optionee and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect.

15.                                 Applicable Law. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California.

ADOBE SYSTEMS INCORPORATED

By:

Murray J. Demo

Senior Vice President

Chief Financial Officer

                The Optionee represents that the Optionee is familiar with the terms and provisions of this Option Agreement and hereby accepts the Option subject to all of the terms and provisions thereof. The Optionee hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Board upon any questions arising under this Option Agreement.

OPTIONEE

Date:

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EX-10.11 5 a2144543zex-10_11.htm EXHIBIT 10.11

EXHIBIT 10.11

ADOBE SYSTEMS INCORPORATED

NONSTATUTORY STOCK OPTION AGREEMENT

(STANDARD)

                THIS NONSTATUTORY STOCK OPTION AGREEMENT (the “Option Agreement”) is made and entered into as of the Date of Option Grant by and between Adobe Systems Incorporated and

                                                                                                (the “Participant”). The Company has granted to the Participant pursuant to the Adobe Systems Incorporated 2003 Equity Incentive Plan (the “Plan”) an option to purchase certain shares of Stock (the “Option”), upon the terms and conditions set forth in this Option Agreement, but subject in any event to the Superseding Agreement, if any, described below.

1.             DEFINITIONS AND CONSTRUCTION.

1.1           Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)           “Date of Option Grant” means

(b)           “Number of Option Shares” means                                 shares of Stock, as adjusted from time to time pursuant to Section 10.

(c)           “Exercise Price” means $                                 per share of Stock, as adjusted from time to time pursuant to Section 10.

(d)           “Initial Vesting Date” means the date occurring one (1) year after the Date of Option Grant.

(e)           “Vested Shares” means, on any relevant date, that portion (disregarding any fractional share) of the Number of Option Shares determined by multiplying the Number of Option Shares by the “Vested Percentage” determined as of such date as follows:

Vested Percentage

Prior to Initial Vesting Date

0

On Initial Vesting Date, provided the Participant’s Service has not terminated prior to such date

25%

Plus:

For each of the next 12 full months of the Participant’s continuous Service from the Initial Vesting Date

2.08%

Plus:

For each of the next 12 full months of the Participant’s continuous Service from the Initial Vesting Date until the Vested Percentage equals 100%

4.17%

(f)            “Affiliate” means (i) an entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company directly, or indirectly through one or more intermediary entities. For this purpose, the term “control” (including the term “controlled by”) means the possession, direct or indirect, of the

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power to direct or cause the direction of the management and policies of the relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning assigned such term for the purposes of registration in the United States (“U.S.”) on Form S-8 under the Securities Act.

(g)           “Board” means the Board of Directors of the Company.

(h)           “Code” means the U.S. Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(i)            “Committee” means the Executive Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. If no committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(j)            “Company” means Adobe Systems Incorporated, a Delaware corporation, or any successor corporation thereto.

(k)           “Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on a Form S-8 Registration Statement under the Securities Act.

(l)            “Disability” means the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code.

(m)          “Employee” means any person treated as an employee (including an Officer or a member of the Board who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a member of the Board nor payment of a director’s fee shall be sufficient to constitute employment.

(n)           “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

(o)           “Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

(i)            If, on such date, the Stock is listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock (or the mean of the closing bid and asked prices of a share of Stock if the Stock is so quoted instead) as quoted on the Nasdaq National Market, the Nasdaq SmallCap Market or such other national or regional securities exchange or market system constituting the primary market for the Stock, as reported on www.Nasdaq.com or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or market system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.

If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.

(p)           “Officer” means any person designated by the Board as an officer of the Company.

(q)           “Option Expiration Date” means the date seven (7) years after the Date of Option Grant.

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(r)            “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(s)           “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(t)            “Participating Company Group” means, at any point in time, all corporations collectively which are then Participating Companies.

(u)           “Securities Act” means the U.S. Securities Act of 1933, as amended.

(v)           “Service” means the Participant’s employment or service with the Participating Company Group as an Employee or a Consultant, whichever such capacity the Participant held on the Date of Option Grant or, if later, the date on which the Participant commenced Service. The Participant’s Service shall be deemed to have terminated if the Participant ceases to render Service to the Participating Company Group in such initial capacity. However, the Participant’s Service shall not be deemed to have terminated merely because of a change in the Participating Company for which the Participant renders Service in such initial capacity, provided that there is no interruption or termination of the Participant’s Service. Furthermore, the Participant’s Service with the Participating Company Group shall not be deemed to have terminated if the Participant takes any bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Participant’s Service shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Participant’s right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Option Agreement. The Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.

(w)          “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 10.

(x)            “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(y)           “Superseding Agreement” means the Adobe Systems Incorporated Executive Severance Plan in the Event of a Change in Control or any successor plan or agreement in which the Participant is a participant or to which the Participant is a party (in each such instance, the “Severance Plan”), or any agreement to which the Participant is a party which, by its existence alone, prevents the Participant from being eligible to participate in the Severance Plan. The terms and conditions of any such Superseding Agreement shall, notwithstanding any provision of this Option Agreement to the contrary, supersede any inconsistent term or condition set forth in this Option Agreement to the extent intended by such Superseding Agreement.

1.2           Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

2.             TAX STATUS OF OPTION.

                                This Option is intended to be a nonstatutory stock option and shall not be treated as an incentive stock option within the meaning of Section 422(b) of the Code.

3.             ADMINISTRATION.

                                All questions of interpretation concerning this Option Agreement shall be determined by the Committee. All determinations by the Committee shall be final and binding upon all persons having an interest in

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the Option. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or election.

4.             EXERCISE OF THE OPTION.

4.1           Right to Exercise. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 7) in an amount not to exceed the number of Vested Shares less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares.

4.2           Method of Exercise. Exercise of the Option shall be by means of electronic notice in a form authorized by the Company, which shall be digitally signed or authenticated by the Participant in such manner as required by the notice and transmitted to the Equity Compensation Department of the Company or other authorized representative of the Company (including a third-party administrator designated by the Company). In the event that the Participant is not authorized or is unable to provide electronic notice of exercise, the Option shall be exercised by written notice to the Company, which shall be signed by the Participant and delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Equity Compensation Department of the Company, or other authorized representative of the Company (including a third-party administrator designated by the Company). Each such notice, whether electronic or written, must state the Participant’s election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Participant’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Further, each such notice must be received by the Company prior to the termination of the Option as set forth in Section 7 and must be accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such electronic or written notice and the aggregate Exercise Price.

4.3           Payment of Exercise Price.

(a)           Forms of Consideration Authorized. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check or by cash equivalent or (ii) by means of a Cashless Exercise, as defined in Section 4.3(b).

(b)           Cashless Exercise. A “Cashless Exercise” means the delivery of a properly executed notice of exercise together with irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any such program or procedure, including with respect to the Participant notwithstanding that such program or procedures may be available to others.

4.4           Tax Withholding. Regardless of any action taken by the Participating Company Group with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Participating Company Group (i) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Option, including the grant, vesting or exercise of the Option, the subsequent sale of shares acquired pursuant to such exercise, or the receipt of any dividends and (ii) does not commit to structure the terms of the grant or any other aspect of the Option to reduce or eliminate the Participant’s liability for Tax-Related Items. At the time of exercise of the Option, the Participant shall pay or make adequate arrangements satisfactory to the Participating Company Group to satisfy all withholding obligations of the Participating Company Group. In this regard, at the time the Option is exercised, in whole or in part, or at any time thereafter as requested by the Company, the Participant hereby authorizes withholding of all applicable Tax-Related Items from payroll and any

4

other amounts payable to the Participant, and otherwise agrees to make adequate provision for withholding of all applicable Tax Related Items by the Participating Company Group, if any, which arise in connection with the Option. Alternatively, or in addition, if permissible under applicable law, the Participating Company Group may (i) sell or arrange for the sale of shares acquired by the Participant to meet the withholding obligation of Tax-Related Items and/or (ii) withhold in shares, provided that only the amount of shares necessary to satisfy the minimum withholding amount are withheld. Finally, the Participant shall pay to the Participating Company Group any amount of the Tax-Related Items that the Participating Company Group may be required to withhold as a result of the Participant’s participation in the Plan that cannot be satisfied by the means previously described. The Company shall have no obligation to process the exercise of the Option or to deliver shares of Stock until the obligations in connection with the Tax-Related Items as described in this section have been satisfied by the Participant.

4.5           Beneficial Ownership of Shares; Certificate Registration. The Participant hereby authorizes the Company, in its sole discretion, to deposit for the benefit of the Participant with any broker with which the Participant has an account relationship of which the Company has notice any or all shares acquired by the Participant pursuant to the exercise of the Option. Except as provided by the preceding sentence, a certificate for the shares as to which the Option is exercised shall be registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.

4.6           Restrictions on Grant of the Option and Issuance of Shares. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE PARTICIPANT IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE PARTICIPANT MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

4.7           Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise of the Option.

5.             NONTRANSFERABILITY OF THE OPTION.

                                The Option may be exercised during the lifetime of the Participant only by the Participant or the Participant’s guardian or legal representative and may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. Following the death of the Participant, the Option, to the extent provided in Section 8, may be exercised by the Participant’s legal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution.

6.             NATURE OF OPTION.

                                In accepting the Option, the Participant acknowledges that:

6.1           the Plan is established voluntarily by the Company; it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Option Agreement;

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6.2           the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of Options, or benefits in lieu of Options, even if Options have been granted repeatedly in the past;

6.3           all decisions with respect to future Option grants, if any, will be at the sole discretion of the Company;

6.4           the Participant’s participation in the Plan shall not create a right to further employment with the Participating Company Group and shall not interfere with any ability of the Participating Company Group to terminate the Participant’s employment relationship at any time with or without cause;

6.5           the Participant is voluntarily participating in the Plan;

6.6           the Option is not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

6.7           in the event that the Participant is not an employee of the Company, the Option grant will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the Option grant will not be interpreted to form an employment contract with the other members of the Participating Company Group;

6.8           the future value of the underlying shares is unknown and cannot be predicted with certainty;

6.9           if the underlying shares do not increase in value, the Option will have no value;

6.10         if the Participant exercises the Option and obtains shares, the value of those shares acquired upon exercise may increase or decrease in value, even below the Option price; and

6.11         no claim or entitlement to compensation or damages arises from termination of the Option or diminution in value of the Option or shares purchased through exercise of the Option resulting from termination of the Participant’s Service with the Participating Company Group (for any reason whether or not in breach of applicable labor laws) and the Participant irrevocably releases the Participating Company Group from any such claim that may arise. If, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen then, by signing this Option Agreement, you shall be deemed irrevocably to have waived your entitlement to pursue such a claim.

7.             TERMINATION OF THE OPTION.

                                The Option shall terminate and may no longer be exercised after the first to occur of (a) the Option Expiration Date, (b) the last date for exercising the Option following termination of the Participant’s Service as described in Section 8, or (c) a Change in Control to the extent provided in Section 9.

8.             EFFECT OF TERMINATION OF SERVICE.

8.1           Option Exercisability.

(a)           Normal Retirement. If the Participant’s Service terminates at or after the normal retirement age sixty-five (65) years (“Normal Retirement”), then (i) the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date, and (ii) solely for the purpose of computing the Vested Percentage, the Participant will be given credit for an additional twelve (12) months of continuous Service; provided, however, that in no event shall the Vested Percentage exceed 100%.

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(b)           Early Retirement. If the Participant’s Service terminates by reason of the early retirement of the Participant pursuant to an early retirement program established by the Participating Company to which the Participant renders Service (“Early Retirement”), then (i) the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months (or such longer period as shall be established pursuant to such early retirement program) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date, and (ii) solely for the purpose of computing the Vested Percentage, the Participant will be given credit for such additional months of continuous Service, if any, as shall be established pursuant to the early retirement program; provided, however, that in no event shall the Vested Percentage exceed 100%.

(c)           Disability. If the Participant’s Service terminates because of the Disability of the Participant, then (i) the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date, and (ii) solely for the purpose of computing the Vested Percentage, the Participant will be given credit for an additional twelve (12) months of continuous Service; provided, however, that in no event shall the Vested Percentage exceed 100%.

(d)           Death. If the Participant’s Service terminates because of the death of the Participant, then (i) the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date, and (ii) solely for the purpose of computing the Vested Percentage, the Participant will be given credit for an additional twelve (12) months of continuous Service; provided, however, that in no event shall the Vested Percentage exceed 100%. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months after the Participant’s termination of Service.

(e)           Termination After Change in Control. If the Participant’s Service ceases as a result of Termination After Change in Control (as defined below), then (i) the Option, to the extent unexercised and exercisable on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date, and (ii) solely for the purpose of computing the Vested Percentage, the Participant will be given credit for an additional twelve (12) months of continuous Service; provided, however, that in no event shall the Vested Percentage exceed 100%.

(f)            Other Termination of Service. If the Participant’s Service terminates for any reason, except Normal Retirement, Early Retirement, Disability, death or Termination After Change in Control, the Option, to the extent unexercised and exercisable by the Participant on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months (or such other longer period of time as determined by the Committee, in its discretion) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.

8.2           Extension if Exercise Prevented by Law. Notwithstanding the foregoing, if the exercise of the Option within the applicable time periods set forth in Section 8.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until three (3) months after the date the Participant is notified by the Company that the Option is exercisable, but in any event no later than the Option Expiration Date.

8.3           Extension if Participant Subject to Section 16(b). Notwithstanding the foregoing, if a sale within the applicable time periods set forth in Section 8.1 of shares acquired upon the exercise of the Option would subject the Participant to suit under Section 16(b) of the Exchange Act, the Option shall remain exercisable until the earliest to occur of (i) the tenth (10th) day following the date on which a sale of such shares by the Participant would no longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day after the Participant’s termination of Service, or (iii) the Option Expiration Date.

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8.4           Termination for Cause. Notwithstanding any other provision of this Option Agreement, if the Participant’s Service is terminated for Cause (as defined below), the Option shall terminate and cease to be exercisable on the effective date of such termination of Service.

8.5           Certain Definitions.

(a)           “Termination After Change in Control” shall mean either of the following events occurring within twelve (12) months after a Change in Control:

(i)            termination by the Participating Company Group of the Participant’s Service for any reason other than for Cause (as defined below); or

(ii)           the Participant’s resignation for Good Reason (as defined below) from all capacities in which the Participant is then rendering Service within a reasonable period of time following the event constituting Good Reason.

(iii)          Notwithstanding any provision herein to the contrary, Termination After Change in Control shall not include any termination of the Participant’s Service which (1) is for Cause (as defined below); (2) is a result of the Participant’s Normal Retirement, Early Retirement, death or Disability; (3) is a result of the Participant’s voluntary termination of Service other than for Good Reason; or (4) occurs prior to the effectiveness of a Change in Control.

(b)           “Cause” shall mean any of the following: (i) the Participant’s conviction of a felony; (ii) the Participant’s material act of fraud, dishonesty or other malfeasance; or (iii) the Participant’s willful, improper disclosure of a Participating Company’s confidential or proprietary information.

(c)           “Good Reason” shall mean any one or more of the following:

(i)            without the Participant’s express written consent, the assignment to the Participant of any duties, or any limitation of the Participant’s responsibilities, substantially inconsistent with the Participant’s positions, duties, responsibilities and status with the Participating Company Group immediately prior to the date of the Change in Control;

(ii)           without the Participant’s express written consent, the relocation by more than 35 miles of the principal place of the Participant’s Service immediately prior to the date of the Change in Control, or the imposition of travel requirements substantially more demanding of the Participant than such travel requirements existing immediately prior to the date of the Change in Control;

(iii)          any failure by the Participating Company Group to pay, or any material reduction by the Participating Company Group of, (1) the Participant’s base salary in effect immediately prior to the date of the Change in Control (unless reductions comparable in amount, or percentage, and duration are concurrently made for all other employees of the Participating Company Group with responsibilities, organizational level and title comparable to the Participant’s), or (2) the Participant’s bonus compensation, if any, in effect immediately prior to the date of the Change in Control (subject to applicable performance requirements with respect to the actual amount of bonus compensation earned by the Participant); or

(iv)          any failure by the Participating Company Group to (1) continue to provide the Participant with the opportunity to participate, on terms no less favorable than those in effect for the benefit of any employee or service provider group which customarily includes a person holding the employment or service provider position or a comparable position with the Participating Company Group then held by the Participant, in any benefit or compensation plans and programs, including, but not limited to, the Participating Company Group’s life, disability, health, dental, medical, savings, profit sharing, stock purchase and retirement plans, if any, in which the Participant was participating immediately prior to the date of the Change in Control, or their equivalent, or (2) provide the Participant with all other fringe benefits (or their equivalent) from time to time in effect for the benefit of any employee or service provider group which customarily includes a person holding the employment or service provider position or a comparable position with the Participating Company Group then held by the Participant.

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9.             CHANGE IN CONTROL.

9.1           Definitions.

(a)           An “Ownership Change Event” shall be deemed to have occurred if any of the following occurs with respect to the Company: (i) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company); or (iv) a liquidation or dissolution of the Company.

(b)           A “Change in Control” shall mean an Ownership Change Event or series of related Ownership Change Events (collectively, a “Transaction”) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company or, in the case of an Ownership Change Event described in Section 9.1(a)(iii), the entity to which the assets of the Company were transferred.

9.2           Effect of Change in Control on Option. In the event of a Change in Control, the surviving, continuing, successor, or purchasing entity or parent thereof, as the case may be (the “Acquiror”), may, without the consent of Participant, either assume the Company’s rights and obligations under outstanding the Option or substitute for the Option a substantially equivalent option for the Acquiror’s stock. In the event the Acquiror elects not to assume or substitute for the Option in connection with a Change in Control, the Committee shall provide that any unexercised and/or unvested portions of the Option shall be immediately exercisable and vested in full as of the date thirty (30) days prior to the date of the Change in Control. Any exercise of the Option that was permissible solely by reason of this Section 9.2 shall be conditioned upon the consummation of the Change in Control. The Option shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control to the extent that the Option is neither assumed by the Acquiror in connection with the Change in Control nor exercised as of the time of consummation of the Change in Control.

10.           ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.

                                In the event of any change in the Stock through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate adjustments shall be made in the number, Exercise Price and class of shares subject to the Option. If a majority of the shares which are of the same class as the shares that are subject to the Option are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the “New Shares”), the Committee may unilaterally amend the Option to provide that the Option is exercisable for New Shares. In the event of any such amendment, the Number of Option Shares and the Exercise Price shall be adjusted in a fair and equitable manner, as determined by the Committee, in its discretion. Notwithstanding the foregoing, any fractional share resulting from an adjustment pursuant to this Section 10 shall be rounded down to the nearest whole number, and in no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The adjustments determined by the Committee pursuant to this Section 10 shall be final, binding and conclusive.

11.           RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT.

                                The Participant shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 10. If the Participant is an Employee, the Participant understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Participant, the Participant’s employment is “at will” and is for no

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specified term. Nothing in this Option Agreement shall confer upon the Participant any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Participant’s Service as an Employee or Consultant, as the case may be, at any time.

12.           MISCELLANEOUS PROVISIONS.

12.1         Designation of Beneficiary. Subject to local laws and procedures, the Participant may file with the Company a written designation of a beneficiary who, in the event of the death of the Participant, shall thereafter be entitled to exercise the Option to the extent that it remains exercisable in accordance with this Option Agreement. Each designation will revoke all prior designations by the Participant, shall be in a form prescribed by the Company, and shall be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If the Participant is married and designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If the Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Option may be exercised by the Participant’s legal representative to the extent that it remains exercisable in accordance with this Option Agreement. If the designated beneficiary survives the Participant but dies before exercising the Option to the full extent that it remains exercisable in accordance with this Option Agreement, then the Option shall be exercisable by the legal representative of such deceased designated beneficiary to the extent that it remains exercisable in accordance with this Option Agreement. The determination of the Company as to which person, if any, qualifies as a designated beneficiary shall be final, conclusive and binding on all persons.

12.2         Binding Effect. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.

12.3         Termination or Amendment. The Committee may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 9.2 in connection with a Change in Control, no such termination or amendment may adversely affect the Option or any unexercised portion hereof without the consent of the Participant unless such termination or amendment is necessary to comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing.

12.4         Delivery of Documents and Notices. Any document relating to participating in the Plan and/or notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, electronic delivery, or upon deposit in the U.S. Post Office or foreign postal service, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the e-mail address, if any, provided for the Participant by a Participating Company or at the address shown below that party’s signature to this Option Agreement or at such other address as such party may designate in writing from time to time to the other party.

(a)           Description of Electronic Delivery. The Plan documents, which may include but do not necessarily include: the Plan Prospectus, this Option Agreement and U.S. financial reports of the Company, may be delivered to the Participant electronically. In addition, the Participant may deliver electronically the notice called for by Section 4.2 (the “Notice of Exercise”) to the Company or to such third party involved in administering the Plan as the Company may designate from time to time. Such means of delivery may include but do not necessarily include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Committee’s discretion.

(b)           Consent to Electronic Delivery. The Participant acknowledges that the Participant has read Section 12.4 of this Option Agreement and consents to the electronic delivery of the Plan documents and the delivery of the Notice of Exercise, as described in Section 12.4(a) of this Option Agreement. The Participant acknowledges that he or she may receive from the Company a paper copy of any documents delivered electronically at no cost if the Participant contacts the Company by telephone, through a postal service or electronic mail at equity@adobe.com. The Participant further acknowledges that the Participant will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, the Participant understands that the Participant must provide the Company or any designated third party with a paper copy of any documents delivered electronically if electronic delivery fails. Also, the Participant understands that the

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Participant’s consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if Participant has provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at equity@adobe.com. Finally, the Participant understands that he or she is not required to consent to electronic delivery.

12.5         Data Privacy Consent. The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant’s personal data as described in this document by and among the members of the Participating Company Group for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan.

                                The Participant understands that the Company and the Participating Company Group hold certain personal information about the Participant, including, but not limited to, the Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of Stock or directorships held in the Company, details of all Options or any other entitlement to shares of Stock awarded, canceled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). The Participant understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participant’s country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting the Participant’s local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Participant may elect to deposit any shares of Stock acquired upon exercise of the Option. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Participant’s local human resources representative. The Participant understands, however, that refusing or withdrawing the Participant’s consent may affect the Participant’s ability to participate in the Plan. For more information on the consequences of the Participant’s refusal to consent or withdrawal of consent, the Participant understands that he or she may contact the Participant’s local human resources representative.

12.6         Integrated Agreement. This Option Agreement, together with the Superseding Agreement, if any, constitutes the entire understanding and agreement of the Participant and the Participating Company Group with respect to the subject matter contained herein and supersedes any prior agreements, understandings, restrictions, representations, or warranties among the Participant and the Participating Company Group with respect to such subject matter other than those as set forth or provided for herein. To the extent contemplated herein, the provisions of this Option Agreement shall survive any exercise of the Option and shall remain in full force and effect.

12.7         Applicable Law. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California.

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12.8         Counterparts. This Option Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

ADOBE SYSTEMS INCORPORATED

By:

Murray J. Demo

Title:

Senior Vice President, Chief Financial Officer

Address:

345 Park Avenue
San Jose, CA 95110-2704

                The Participant represents that the Participant is familiar with the terms and provisions of this Option Agreement and hereby accepts the Option subject to all of the terms and provisions thereof. The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under this Option Agreement.

PARTICIPANT

Date:

Signature

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ADOBE SYSTEMS INCORPORATED

RESTRICTED STOCK AGREEMENT

                THIS RESTRICTED STOCK AGREEMENT (the “Agreement”) is made and entered into as of the Date of Grant by and between Adobe Systems Incorporated and

                                                                                                (the “Participant”). The Company has granted to the Participant pursuant to the Adobe Systems Incorporated 2003 Equity Incentive Plan (the “Plan”) an award of certain shares of Stock (the “Award”), upon the terms and conditions set forth in this Agreement, but subject in any event to the Superseding Agreement, if any, described below.

13.           Definitions and Construction.

13.1         Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a)           “Date of Grant” means

(b)           “Total Number of Shares” means                   shares of Stock, as adjusted from time to time pursuant to Section 8.

(c)           “Vested Shares” means, on any relevant date and provided that the Participant’s Service has not terminated prior to such date, a number of shares of Stock determined as follows:

Vesting Date

No. Shares Vesting

Cumulative
No. Shares Vested

(d)           “Affiliate” means (i) an entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) an entity, other than a Subsidiary Corporation, that is controlled by the Company directly, or indirectly through one or more intermediary entities. For this purpose, the term “control” (including the term “controlled by”) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of the relevant entity, whether through the ownership of voting securities, by contract or otherwise; or shall have such other meaning assigned such term for the purposes of registration in the United States (“U.S.”) on Form S-8 under the Securities Act.

(e)           “Board” means the Board of Directors of the Company.

(f)            “Change in Control” means an Ownership Change Event or series of related Ownership Change Events (collectively, a “Transaction”) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction, direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding voting securities of the Company or, in the case of an Ownership Change Event described in Section 1.1(p)(iii) below, the entity to which the assets of the Company were transferred.

(g)           “Code” means the U.S. Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(h)           “Committee” the Executive Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. If no

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committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(i)            “Company” means Adobe Systems Incorporated, a Delaware corporation, or any successor corporation thereto.

(j)            “Consultant” means a person engaged to provide consulting or advisory services (other than as an Employee or a member of the Board) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on a Form S-8 Registration Statement under the Securities Act.

(k)           “Disability” means the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code.

(l)            “Employee” means any person treated as an employee (including an Officer or a member of the Board who is also treated as an employee) in the records of a Participating Company; provided, however, that neither service as a member of the Board nor payment of a director’s fee shall be sufficient to constitute employment.

(m)          “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

(n)           “Officer” means any person designated by the Board as an officer of the Company.

(o)           “Ownership Change Event” means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange by the stockholders of the Company of all or substantially all of the voting stock of the Company; (ii) a merger or consolidation in which the Company is a party; (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company); or (iv) a liquidation or dissolution of the Company.

(p)           “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(q)           “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(r)            “Participating Company Group” means, at any point in time, all corporations collectively which are then Participating Companies.

(s)           “Service” means the Participant’s employment or service with the Participating Company Group as an Employee or a Consultant, whichever such capacity the Participant held on the Date of Grant or, if later, the date on which the Participant commenced Service. The Participant’s Service shall be deemed to have terminated if the Participant ceases to render Service to the Participating Company Group in such initial capacity. However, the Participant’s Service shall not be deemed to have terminated merely because of a change in the Participating Company for which the Participant renders Service in such initial capacity, provided that there is no interruption or termination of the Participant’s Service. Furthermore, the Participant’s Service with the Participating Company Group shall not be deemed to have terminated if the Participant takes any bona fide leave of absence approved by the Company of ninety (90) days or less. In the event of a leave in excess of ninety (90) days, the Participant’s Service shall be deemed to terminate on the ninety-first (91st) day of the leave unless the Participant’s right to return to Service with the Participating Company Group is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, a leave of absence shall not be treated as Service for purposes of determining vesting under the Agreement. The Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the corporation for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of such termination.

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(t)            “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 8.

(u)           “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

(v)           “Superseding Agreement” means the Adobe Systems Incorporated Executive Severance Plan in the Event of a Change in Control or any successor plan or agreement in which the Participant is a participant or to which the Participant is a party (in each such instance, the “Severance Plan”), or any agreement to which the Participant is a party which, by its existence alone, prevents the Participant from being eligible to participate in the Severance Plan. The terms and conditions of any such Superseding Agreement shall, notwithstanding any provision of this Agreement to the contrary, supersede any inconsistent term or condition set forth in this Agreement to the extent intended by such Superseding Agreement.

13.2         Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

14.           The Award.

14.1         Grant and Issuance of Shares. On the Date of Grant, the Participant shall acquire and the Company shall issue, subject to the provisions of this Agreement, a number of shares of Stock equal to the Total Number of Shares (the “Shares”). As a condition to the issuance of the Shares, the Participant shall execute and deliver to the Company: (a) the Joint Escrow Instructions in the form attached hereto as Exhibit A and (b) the Assignment Separate from Certificate duly endorsed (with date and number of shares blank) in the form attached hereto as Exhibit B.

14.2         No Monetary Payment Required. The Participant is not required to make any monetary payment (other than applicable tax withholding, if any) as a condition to receiving the Shares, the consideration for which shall be past services actually rendered to a Participating Company or for its benefit.

14.3         Certificate Registration. The certificate for the Shares shall be registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.

14.4         Issuance of Shares in Compliance with Law. The issuance of the Shares shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. No Shares shall be issued hereunder if their issuance would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance of any Shares shall relieve the Company of any liability in respect of the failure to issue such Shares as to which such requisite authority shall not have been obtained. As a condition to the issuance of the Shares, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

15.           Vesting of Shares.

15.1         Normal Vesting. Except as provided in Section 3.2, the Shares shall vest and become Vested Shares as provided in Section 1.1(c) above. No additional Shares will become Vested Shares following the Participant’s termination of Service for any reason.

15.2         Acceleration of Vesting Upon a Change in Control. In the event of a Change in Control, the vesting of the Shares shall be accelerated in full and the Total Number of Shares shall be deemed Vested Shares effective as of the date of the Change in Control, provided that the Participant’s Service has not terminated prior to such date.

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15.3         Federal Excise Tax Under Section 4999 of the Code.

(a)           Excess Parachute Payment. In the event that any acceleration of vesting pursuant to this Agreement and any other payment or benefit received or to be received by the Participant would subject the Participant to any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting, payment or benefit as an excess parachute payment under Section 280G of the Code, the Participant may elect, in his or her sole discretion, to reduce the amount of any acceleration of vesting called for under this Agreement in order to avoid such characterization.

(b)           Determination by Independent Accountants. To aid the Participant in making any election called for under Section 3.3(a), upon the occurrence of any event that might reasonably be anticipated to give rise to the application of Section 3.2 (an “Event”), the Company shall promptly request a determination in writing by independent public accountants selected by the Company (the “Accountants”). Unless the Company and the Participant otherwise agree in writing, the Accountants shall determine and report to the Company and the Participant within twenty (20) days of the date of the Event the amount of such acceleration of vesting, payments and benefits which would produce the greatest after-tax benefit to the Participant. For the purposes of such determination, the Accountants may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make their required determination. The Company shall bear all fees and expenses the Accountants may reasonably charge in connection with their services contemplated by this Section 3.3(b).

16.           Company Reacquisition Right.

16.1         Grant of Company Reacquisition Right. Except as otherwise provided by a Superseding Agreement, if any, in the event that (a) the Participant’s Service terminates for any reason or no reason, with or without cause, or (b) the Participant, the Participant’s legal representative, or other holder of the Shares, attempts to sell, exchange, transfer, pledge, or otherwise dispose of (other than pursuant to an Ownership Change Event), including, without limitation, any transfer to a nominee or agent of the Participant, any Shares which are not then Vested Shares (the “Unvested Shares”), the Company shall automatically reacquire the Unvested Shares, and the Participant shall not be entitled to any payment therefor (the “Company Reacquisition Right”).

16.2         Ownership Change Event. Upon the occurrence of an Ownership Change Event, any and all new, substituted or additional securities or other property to which the Participant is entitled by reason of the Participant’s ownership of Unvested Shares shall be immediately subject to the Company Reacquisition Right and included in the terms “Shares,” “Stock” and “Unvested Shares” for all purposes of the Company Reacquisition Right with the same force and effect as the Unvested Shares immediately prior to the Ownership Change Event. For purposes of determining the number of Vested Shares following an Ownership Change Event, credited Service shall include all Service with any entity which is a Participating Company at the time the Service is rendered, whether or not such entity is a Participating Company both before and after the Ownership Change Event.

17.           Tax Matters.

17.1         Tax Withholding.

(a)           In General. Regardless of any action taken by the Participating Company Group with respect to any or all income tax, social insurance, payroll tax, payment on account or other tax-related withholding (“Tax-Related Items”), the Participant acknowledges that the ultimate liability for all Tax-Related Items legally due by the Participant is and remains the Participant’s responsibility and that the Participating Company Group (i) makes no representations or undertakings regarding the treatment of any Tax-Related Items in connection with any aspect of the Award, including the grant or vesting of the Award, the subsequent sale of Shares acquired pursuant to the Award, or the receipt of any dividends and (ii) does not commit to structure the terms of the grant or any other aspect of the Award to reduce or eliminate the Participant’s liability for Tax-Related Items. The Participant shall pay or make adequate arrangements satisfactory to the Participating Company Group to satisfy all withholding obligations of the Participating Company Group. In this regard, at the time that this Agreement is executed, or at any time thereafter as requested by a Participating Company, the Participant hereby authorizes withholding of all applicable Tax-Related Items from payroll and any other amounts payable to the Participant, and

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otherwise agrees to make adequate provision for withholding of all applicable Tax-Related Item withholding obligations of the Participating Company, if any, which arise in connection with the Award, including, without limitation, obligations arising upon (a) the transfer of Shares to the Participant, (b) the lapsing of any restriction with respect to any Shares, (c) the filing of an election to recognize tax liability, or (d) the transfer by the Participant of any Shares. Alternatively, or in addition, if permissible under applicable law, the Participating Company Group may sell or arrange for the sale of Shares acquired by the Participant to meet the withholding obligation of Tax-Related Items. Finally, the Participant shall pay to the Participating Company Group any amount of the Tax-Related Items that the Participating Company Group may be required to withhold as a result of the Participant’s participation in the Plan that cannot be satisfied by the means previously described. The Company shall have no obligation to deliver the Shares or to release any Shares from an escrow established pursuant to this Agreement until the obligations in connection with the Tax-Related Items described in this section have been satisfied by the Participant.

(b)           Withholding in Shares. Subject to approval by the Company, in its discretion, the Participant may satisfy all or any portion of the Participating Company’s Tax-Related Item withholding obligations by requesting the Company to withhold a number of whole, Vested Shares otherwise deliverable to the Participant pursuant to this Agreement or by tendering to the Company a number of whole, vested shares of Stock acquired pursuant to this Agreement or otherwise having in any such case a fair market value, as determined by the Company as of the date on which the Tax-Related Item withholding obligations arise, not in excess of the amount of such tax withholding obligations determined by the applicable minimum statutory withholding rates. Any adverse consequences to the Participant resulting from the procedure permitted under this Section, including, without limitation, tax consequences, shall be the sole responsibility of the Participant.

17.2         Election Under Section 83(b) of the Code.

(a)           The Participant understands that Section 83 of the Code taxes as ordinary income the difference between the amount paid for the Shares, if anything, and the fair market value of the Shares as of the date on which the Shares are “substantially vested,” within the meaning of Section 83. In this context, “substantially vested” means that the right of the Company to reacquire the Shares pursuant to the Company Reacquisition Right has lapsed. The Participant understands that he or she may elect to have his or her taxable income determined at the time he or she acquires the Shares rather than when and as the Company Reacquisition Right lapses by filing an election under Section 83(b) of the Code with the Internal Revenue Service no later than thirty (30) days after the date of acquisition of the Shares. The Participant understands that failure to make a timely filing under Section 83(b) will result in his or her recognition of ordinary income, as the Company Reacquisition Right lapses, on the difference between the purchase price, if anything, and the fair market value of the Shares at the time such restrictions lapse. The Participant further understands, however, that if Shares with respect to which an election under Section 83(b) has been made are forfeited to the Company pursuant to its Company Reacquisition Right, such forfeiture will be treated as a sale on which there is realized a loss equal to the excess (if any) of the amount paid (if any) by the Participant for the forfeited Shares over the amount realized (if any) upon their forfeiture. If the Participant has paid nothing for the forfeited Shares and has received no payment upon their forfeiture, the Participant understands that he or she will be unable to recognize any loss on the forfeiture of the Shares even though the Participant incurred a tax liability by making an election under Section 83(b).

(b)           The Participant understands that he or she should consult with his or her tax advisor regarding the advisability of filing with the Internal Revenue Service an election under Section 83(b) of the Code, which must be filed no later than thirty (30) days after the date of the acquisition of the Shares pursuant to this Agreement. Failure to file an election under Section 83(b), if appropriate, may result in adverse tax consequences to the Participant. The Participant acknowledges that he or she has been advised to consult with a tax advisor regarding the tax consequences to the Participant of the acquisition of Shares hereunder. ANY ELECTION UNDER SECTION 83(b) THE PARTICIPANT WISHES TO MAKE MUST BE FILED NO LATER THAN 30 DAYS AFTER THE DATE ON WHICH THE PARTICIPANT ACQUIRES THE SHARES. THIS TIME PERIOD CANNOT BE EXTENDED. THE PARTICIPANT ACKNOWLEDGES THAT TIMELY FILING OF A SECTION 83(b) ELECTION IS THE PARTICIPANT’S SOLE RESPONSIBILITY, EVEN IF THE PARTICIPANT REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO FILE SUCH ELECTION ON HIS OR HER BEHALF.

(c)           The Participant will notify the Company in writing if the Participant files an election pursuant to Section 83(b) of the Code. The Company intends, in the event it does not receive from the

17

Participant evidence of such filing, to claim a tax deduction for any amount which would otherwise be taxable to the Participant in the absence of such an election.

18.           Escrow.

18.1         Establishment of Escrow. To ensure that Shares subject to the Company Reacquisition Right will be available for reacquisition, the Participant agrees to deliver to and deposit with an escrow agent designated by the Company the certificate evidencing the Shares, together with an Assignment Separate from Certificate with respect to such certificate duly endorsed (with date and number of shares blank) in the form attached to this Agreement as Exhibit B, to be held by the agent under the terms and conditions of the Joint Escrow Instructions in the form attached to this Agreement as Exhibit A (the “Escrow”). The Company shall bear the expenses of the escrow.

18.2         Delivery of Shares to Participant. Whenever the Participant or the Participant’s legal representative proposes to sell, exchange, transfer, pledge or otherwise dispose of (other than pursuant to an Ownership Change Event) any Shares subject to the Escrow, the Participant shall so notify the Company. As soon as practicable thereafter, the Company shall determine, in its sole discretion, whether (a) such proposed disposition would not cause the Company to automatically reacquire such Shares pursuant to the Company Reacquisition Right and (b) the Participant has made adequate provision for the tax withholding obligations, if any, pursuant to Section 5. If both conditions (a) and (b) set forth in the preceding sentence are satisfied, the Company shall, as soon as practicable, so notify the Participant and give to the escrow agent a written notice directing the escrow agent to deliver such Shares to the Participant. As soon as practicable after receipt of such notice, the escrow agent shall deliver to the Participant the Shares specified in such notice, and the Escrow shall terminate with respect to such Shares.

19.           Nature of the Award.

                                In accepting the Award, the Participant acknowledges that:

19.1         the Plan is established voluntarily by the Company; it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Agreement;

19.2         the grant of the Award is voluntary and occasional and does not create any contractual or other right to receive future grants of Awards, or benefits in lieu of Awards, even if Awards have been granted repeatedly in the past;

19.3         all decisions with respect to future Award grants, if any, will be at the sole discretion of the Company;

19.4         the Participant’s participation in the Plan shall not create a right to further employment with the Participating Company Group and shall not interfere with the ability of the Participating Company Group to terminate the Participant’s employment relationship at any time with or without cause;

19.5         the Participant is voluntarily participating in the Plan;

19.6         the Award is not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

19.7         in the event that the Participant is not an employee of the Company, the Award grant will not be interpreted to form an employment contract or relationship with the Company; and furthermore, the Award grant will not be interpreted to form an employment contract with the other members of the Participating Company Group;

19.8         the future value of the Shares is unknown and cannot be predicted with certainty; and

19.9         no claim or entitlement to compensation or damages arises from termination of the Award or diminution in value of the Award resulting from termination of the Participant’s Service with the

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Participating Company Group (for any reason whether or not in breach of applicable labor laws), and the Participant irrevocably releases the Participating Company Group from any such claim that may arise. If, notwithstanding the foregoing, any such claim is found by a court of competent jurisdiction to have arisen then, by signing this Agreement, you shall be deemed irrevocably to have waived your entitlement to pursue such a claim.

20.           Adjustments for Changes in Capital Structure.

                                In the event of any change in the Stock through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares or similar change in the capital structure of the Company, appropriate adjustments shall be made in the number and class of shares subject to this Agreement. Any and all new, substituted or additional securities or other property to which Participant is entitled by reason of his or her ownership of the Shares will be immediately subject to the provisions of this Agreement and the Escrow on the same basis as all Shares originally acquired hereunder and will be included in the terms “Shares” and “Stock” for all purposes of this Agreement and the Escrow with the same force and effect as the Shares presently subject thereto. The adjustments determined by the Committee pursuant to this Section shall be final, binding and conclusive.

21.           Legends.

                                The Company may at any time place legends referencing the Company Reacquisition Right and any applicable federal, state or foreign securities law restrictions on all certificates representing the Shares. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing the Shares in the possession of the Participant in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following:

“THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS SET FORTH IN AN AGREEMENT BETWEEN THIS CORPORATION AND THE REGISTERED HOLDER, OR HIS PREDECESSOR IN INTEREST, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THIS CORPORATION.”

22.           Transfers in Violation of Agreement.

                                No Shares may be sold, exchanged, transferred (including, without limitation, any transfer to a nominee or agent of the Participant), assigned, pledged, hypothecated or otherwise disposed of, including by operation of law, in any manner which violates any of the provisions of this Agreement and, except pursuant to an Ownership Change Event, until the date on which such shares become Vested Shares, and any such attempted disposition shall be void. The Company shall not be required (a) to transfer on its books any Shares which will have been transferred in violation of any of the provisions set forth in this Agreement or (b) to treat as owner of such Shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such Shares will have been so transferred. In order to enforce its rights under this Section, the Company shall be authorized to give a stop transfer instruction with respect to the Shares to the Company’s transfer agent.

23.           Rights as a Stockholder.

                                The Participant shall have no rights as a stockholder with respect to any Shares subject to the Award until the date of the issuance of a certificate for such Shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such certificate is issued, except as provided in Section 8. Subject the provisions of this Agreement, the Participant shall exercise all rights and privileges of a stockholder of the Company with respect to Shares deposited in the Escrow pursuant to Section 6.

24.           Rights as Employee or Consultant.

                                If the Participant is an Employee, the Participant understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Participant, the Participant’s employment is “at will” and is for no specified term. Nothing in this Agreement shall

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confer upon the Participant any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Participant’s Service at any time.

25.           Miscellaneous Provisions.

25.1         Administration. All questions of interpretation concerning this Agreement shall be determined by the Committee. All determinations by the Committee shall be final and binding upon all persons having an interest in the Award. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or election.

25.2         Termination or Amendment. The Committee may terminate or amend the Plan or this Agreement at any time; provided, however, that no such termination or amendment may adversely affect the Participant’s rights under this Agreement without the consent of the Participant unless such termination or amendment is necessary to comply with applicable law or government regulation. No amendment or addition to this Agreement shall be effective unless in writing.

25.3         Binding Effect. This Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer set forth herein, be binding upon the Participant and the Participant’s heirs, executors, administrators, successors and assigns.

25.4         Fractional Shares. The Company shall not be required to issue fractional shares in connection with the Award.

25.5         Nontransferability of the Award. The right to acquire Shares pursuant to the Award may not be assigned or transferred in any manner except by will or by the laws of descent and distribution. During the lifetime of the Participant, all rights with respect to this Award shall be exercisable only by the Participant.

25.6         Further Instruments. The parties hereto agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Agreement.

25.7         Delivery of Documents and Notices. Any document relating to participating in the Plan and/or notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, electronic delivery, or upon deposit in the U.S. Post Office or foreign postal service, by registered or certified mail, with postage and fees prepaid, addressed to the other party at the address shown below that party’s signature or at such other address as such party may designate in writing from time to time to the other party.

(a)           Description of Electronic Delivery. The Plan documents, which may include but do not necessarily include: the Plan Prospectus, this Agreement and U.S. financial reports of the Company, may be delivered to the Participant electronically. Such means of delivery may include but do not necessarily include the delivery of a link to a Company intranet or the internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other delivery determined at the Committee’s discretion.

(b)           Consent to Electronic Delivery. The Participant acknowledges that the Participant has read Section 13.7 of this Agreement and consents to the electronic delivery of the Plan documents, as described in Section 13.7(a) of this Agreement. The Participant acknowledges that he or she may receive from the Company a paper copy of any documents delivered electronically at no cost if the Participant contacts the Company by telephone, through a postal service or electronic mail at equity@adobe.com. The Participant further acknowledges that the Participant will be provided with a paper copy of any documents delivered electronically if electronic delivery fails; similarly, the Participant understands that the Participant must provide the Company or any designated third party with a paper copy of any documents delivered electronically if electronic delivery fails. Also, the Participant understands that the Participant’s consent may be revoked or changed, including any change in the electronic mail address to which documents are delivered (if Participant has provided an electronic mail address), at any time by notifying the Company of such revised or revoked consent by telephone, postal service or electronic mail at equity@adobe.com. Finally, the Participant understands that he or she is not required to consent to electronic delivery.

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25.8         Data Privacy Consent. The Participant hereby explicitly and unambiguously consents to the collection, use and transfer, in electronic or other form, of the Participant’s personal data as described in this document by and among the members of the Participating Company Group for the exclusive purpose of implementing, administering and managing the Participant’s participation in the Plan.

                                The Participant understands that the Company and the Participating Company Group hold certain personal information about the Participant, including, but not limited to, the Participant’s name, home address and telephone number, date of birth, social insurance number or other identification number, salary, nationality, job title, any shares of Stock or directorships held in the Company, details of all Awards or any other entitlement to shares of Stock awarded, canceled, exercised, vested, unvested or outstanding in the Participant’s favor, for the purpose of implementing, administering and managing the Plan (“Data”). The Participant understands that Data may be transferred to any third parties assisting in the implementation, administration and management of the Plan, that these recipients may be located in the Participant’s country or elsewhere, and that the recipient’s country may have different data privacy laws and protections than the Participant’s country. The Participant understands that he or she may request a list with the names and addresses of any potential recipients of the Data by contacting the Participant’s local human resources representative. The Participant authorizes the recipients to receive, possess, use, retain and transfer the Data, in electronic or other form, for the purposes of implementing, administering and managing the Participant’s participation in the Plan, including any requisite transfer of such Data as may be required to a broker or other third party with whom the Participant may elect to deposit any shares of Stock acquired pursuant to the Award. The Participant understands that Data will be held only as long as is necessary to implement, administer and manage the Participant’s participation in the Plan. The Participant understands that he or she may, at any time, view Data, request additional information about the storage and processing of Data, require any necessary amendments to Data or refuse or withdraw the consents herein, in any case without cost, by contacting in writing the Participant’s local human resources representative. The Participant understands, however, that refusing or withdrawing the Participant’s consent may affect the Participant’s ability to participate in the Plan. For more information on the consequences of the Participant’s refusal to consent or withdrawal of consent, the Participant understands that he or she may contact the Participant’s local human resources representative.

25.9         Integrated Agreement. This Agreement, together with the Superseding Agreement, if any, constitutes the entire understanding and agreement of the Participant and the Participating Company Group with respect to the subject matter contained herein and supersedes any prior agreements, understandings, restrictions, representations, or warranties among the Participant and the Company with respect to such subject matter other than those as set forth or provided for herein.

25.10       Applicable Law. The Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California.

25.11       Counterparts. The Notice may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

ADOBE SYSTEMS INCORPORATED

By:

Murray J. Demo

Title:

Senior Vice President, Chief Financial Officer

Address:

345 Park Avenue
San Jose, CA 95110-2704

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The Participant represents that the Participant is familiar with the terms and provisions of this Agreement and hereby accepts the Award subject to all of the terms and provisions thereof. The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under this Agreement.

PARTICIPANT

Date:

Signature

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EX-10.14 6 a2144543zex-10_14.htm EXHIBIT 1.14

EXHIBIT 10.14

SECOND AMENDED AND RESTATED
MASTER LEASE OF LAND AND IMPROVEMENTS

By and Between

SMBC LEASING AND FINANCE, INC.,
a Delaware corporation,

as Landlord,

and

ADOBE SYSTEMS INCORPORATED,
a Delaware corporation,

as Tenant

THIS LEASE IS NOT INTENDED TO CONSTITUTE A TRUE LEASE
FOR INCOME TAX PURPOSES. SEE SECTION 21.2

SECOND AMENDED AND RESTATED
MASTER LEASE OF LAND AND IMPROVEMENTS

THIS SECOND AMENDED AND RESTATED MASTER LEASE OF LAND AND IMPROVEMENTS (this “Lease”) is by and between SMBC LEASING AND FINANCE, INC. (formerly known as Sumitomo Bank Leasing and Finance, Inc.), a Delaware corporation (“Landlord”), and ADOBE SYSTEMS INCORPORATED, a Delaware corporation (“Tenant”), and is entered into as of the date set forth in Article I and shall be effective and binding upon the parties hereto as of such date. Capitalized terms used in this Lease shall have the definitions set forth in Appendix A or in the text of this Lease.

RECITALS:

WHEREAS, Landlord and Tenant are parties to that certain Amended, Restated and Consolidated Master Lease of Land and Improvements, dated as of August 11, 1999, as amended by that certain Amendment No. 1, dated as of October 8, 1999, and by that certain Amendment No. 2, dated as of August 9, 2000 (as amended, the “Restated Lease”), which Restated Lease amended, restated and consolidated and replaced in their entirety (a) that certain Sublease of the Land and Lease of the Improvements, dated October 12, 1994, between Landlord and Tenant, as amended by that certain First Amendment to Sublease of the Land and Lease of the Improvements, dated August 15, 1996; and (b) that certain Sublease of the Land and Lease of the Improvements, dated August 15, 1996, between Landlord and Tenant (collectively, the “Original Leases”), pursuant to which Original Leases Landlord funded advances for the construction of improvements on the land described therein;

WHEREAS, in connection with execution of the Original Leases, Tenant, as trustor, executed in favor of Landlord, as beneficiary (a) that certain Deed of Trust, Financing Statement, Security Agreement and Fixture Filing (with Assignment of Rents and Leases), dated and recorded October 12, 1994, in the Official Records as Document No. 12684590, as amended by a First Amendment to Deed of Trust, Financing Statement, Security Agreement and Fixture Filing (with Assignment of Rents and Leases), dated and recorded August 15, 1996, in the Official Records as Document No. 13410225, and by a Second Amendment to Deed of Trust, Financing Statement, Security Agreement and Fixture Filing (with Assignment of Rents and Leases), dated and recorded August 11, 1999, in the Official Records as Document No. 14936872; and (b) that certain Deed of Trust, Financing Statement, Security Agreement and Fixture Filing (with Assignment of Rents and Leases), dated and recorded August 15, 1996, in the Official Records as Document No. 13410223, as amended by a First Amendment to Deed of Trust, Financing Statement, Security Agreement and Fixture Filing (with Assignment of Rents and Leases), dated and recorded August 11, 1999, in the Official Records as Document No. 14935443 (collectively, the “Original Deeds of Trust”);

WHEREAS, in connection with the execution of the Restated Lease, Landlord and Tenant entered into (a) that certain Lease Supplement No. 1, dated as of August 11, 1999, and that certain Memorandum of Amended, Restated and Consolidated Master Lease — Lease Supplement No. 1, dated and recorded August 11, 1999, in the Official Records as Document No. 14936871 (collectively, “Original Lease Supplement No. 1”), and (b) that certain Lease

Supplement No. 2, dated as of August 11, 1999, and that certain Memorandum of Amended, Restated and Consolidated Master Lease — Lease Supplement No. 2, dated and recorded August 11, 1999, in the Official Records as Document No. 14935442 (collectively, “Original Lease Supplement No. 2”) (Original Lease Supplement No. 1 and Original Lease Supplement No. 2 are referred to collectively as the “Original Lease Supplements”); and

WHEREAS, Landlord and Tenant wish to further amend the transactions described in the above Recitals by amending and restating in its entirety the Restated Lease (including the Original Lease Supplements) by the execution and delivery of this Lease and the Lease Supplements referred to herein and by amending the Original Deeds of Trust by the execution, delivery and recordation in the Official Records of certain amendments thereto dated of even date herewith (as so amended, the “Amended Deeds of Trust”)..

AGREEMENT:

NOW, THEREFORE, in consideration of the Base Rent reserved herein, and the terms, covenants and conditions set forth below, Landlord and Tenant hereby agree as follows, which agreement shall amend and restate the Restated Lease in full:

ARTICLE I

BASIC LEASE PROVISIONS

1.1

Date of Lease

August 11, 2004

1.2

Landlord:

SMBC Leasing and Finance, Inc., a Delaware corporation.

1.3

Tenant:

Adobe Systems Incorporated, a Delaware corporation.

1.4

Administrative Agent:

SMBC Leasing and Finance, Inc., a Delaware corporation.

1.5

Land:

Each tract of land more particularly described on Schedule 1 to a particular Lease Supplement, executed and delivered pursuant to this Lease, together with all easements, rights of way, appurtenances and other rights and benefits belonging or pertaining to such tract of land. Landlord makes no representations as to the accuracy of the description of any Land. Land may be subject to a Ground Lease, as further described in the Lease Supplement applicable thereto.

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1.6

Parcels:

The Land and the Improvements located thereon.

1.7

Term:

The term of this Lease (“Master Lease Term”) shall commence on the Date of Lease set forth in Section 1.1 above and shall expire five (5) years from the Date of Lease (the “Expiration Date”). The term of each Lease Supplement (“Lease Supplement Term”) shall commence on the date set forth in the applicable Lease Supplement and expire on the Expiration Date. The Expiration Date of the Master Lease Term may be extended by Tenant for an additional period of five (5) years, subject to and in accordance with the terms of Section 4.3(a) below (the “First Extension Term”); and the Expiration Date of the First Extension Term may thereafter be extended based upon terms that are mutually agreeable to Landlord, Tenant, Administrative Agent and each Rent Purchaser (the “Subsequent Extension Term”) and in accordance with Section 4.3(b) below. The Master Lease Term, the First Extension Term, the Subsequent Extension Term and Lease Supplement Term are sometimes collectively referred to herein as the “Term.” The Term shall cease upon, and shall not refer to any period of time after, termination of this Lease or, with respect to any Lease Supplement, the termination of such Lease Supplement (whether pursuant to the terms of this Lease or such Lease Supplement, by operation of law, or otherwise).

1.8

Base Rent:

As described in Appendix A.

1.9

Appraisal:

The appraisal of Landlord’s interest in the Parcels described in Lease Supplement No. 1 (in the form of Exhibit A attached hereto) and Lease Supplement No. 2 (in the form of Exhibit B attached hereto) executed as of the Date of Lease and made by Cushman & Wakefield of California prior to the Date of Lease to determine the fair market value of Landlord’s interest in such Parcels as of the Date of Lease (the “Present Value”) and the fair market value of such interest of Landlord

3

estimated as of the Expiration Date (the “Estimated Future Value”), and which appraisal shall comply with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Legal Requirements.

1.10

Addresses for Notices:

LANDLORD AND
ADMINISTRATIVE AGENT:

TENANT:

SMBC Leasing and Finance, Inc
277 Park Avenue
New York, NY 10172
Attention: Chief Credit Officer

Adobe Systems Incorporated
151 Almaden Boulevard
San Jose, CA 95110
Attention: Treasurer

With a copy to:

With a copy to:

Clifford Chance US LLP
31 West 52^nd Street
New York, NY 10019
Attention: Jay Gavigan, Esq.

Adobe Systems Incorporated
151 Almaden Boulevard
San Jose, CA 95110
Attention: General Counsel

This Article I is intended to supplement and/or summarize the provisions set forth in the balance of this Lease. If there is any conflict between any provisions contained in this Article I and the balance of this Lease, the balance of this Lease shall control.

ARTICLE II

DEFINITIONS

All defined terms for the Operative Documents are contained in Appendix A.

ARTICLE III

DEMISE

3.1          Parcels. Subject to the terms, covenants and conditions contained herein and in each Lease Supplement, Landlord shall, upon delivery of a Lease Supplement executed by Tenant, agree to lease to Tenant the Parcel covered by such Lease Supplement and Tenant agrees to lease from Landlord the Parcel covered by such Lease Supplement, together with all rights, privileges, easements and appurtenances relating to the Parcels. Without limitation of Section 23.6, Tenant agrees that it shall use the Parcels in accordance with all of the terms and conditions

4

of the Ground Lease, if applicable, and shall comply with all terms and conditions of the Ground Lease.

ARTICLE IV

TERM

4.1          Term.   The Term of this Lease is specified in Article I.

4.2          Holding Over. If Tenant remains in possession of a Parcel after the expiration of the Term without executing a new lease, such holding over shall be construed as a tenancy from month-to-month, subject to all terms, covenants and conditions herein contained and in the applicable Lease Supplement. The Base Rent shall be calculated based upon the Default Rate and shall be required to be paid by Tenant during such holding over in the same manner as during the Term. The foregoing notwithstanding, Tenant shall not be permitted to remain in possession of any Parcel after the expiration of the Term without Landlord’s consent; and in the event Tenant shall remain in possession of any Parcel after the expiration of the Term without Landlord’s consent, Landlord shall be entitled to exercise any and all remedies available to Landlord as a consequence thereof.

4.3          Extension of Term.

(a)           First Extension Term.

(i)            Conditions. Landlord agrees to extend the Term of this Lease for the First Extension Term subject to the fulfillment of the following conditions:

(A)          Tenant shall have delivered written notice to Landlord requesting such extension not less than sixty (60) days prior to the Expiration Date;

(B)           No Default shall have occurred and be continuing at the time of such request or on the Expiration Date;

(C)           The Administrative Agent and each Rent Purchaser shall have consented to such extension; provided that if the same Entity is then Landlord and Administrative Agent, the consent of the Administrative Agent shall not be required; and

(D)          On or prior to the Expiration Date, Tenant shall have delivered or caused to be delivered to Landlord a Letter of Credit in an amount not less than the sum of (A) the Lease Investment Balance Equity and (B) the amount of Base Rent that would accrue on the Lease Investment Balance Equity during a period of 100 days at the Assumed Rate in effect on the date of issuance of the Letter of Credit, computed on the basis of a year of 360 days.

(ii)           Adjustments in Terms. If the Term is extended for the First Extension Term, then as of the first day of the First Extension Term:

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(A)          the Pricing Grid shall be eliminated, the Landlord Contribution Rate - Libor Rate Margin shall be 1.0%, the Landlord Contribution Rate - Base Rate Margin shall be 0%, the Rent Purchasers’ Contribution Rate - Libor Rate Margin shall be 0%, and the Rent Purchasers’ Contribution Rate - Base Rate Margin shall be 0%.

(B)           Sections 21.21 (other than Section 21.21(d)(v)(B)(2)) and 21.22 of this Lease shall no longer be in effect:

(iii)          Additional Event of Default. If the Term is extended for the First Extension Term, the following additional Events of Default shall be in effect and shall be deemed to be added to Section 19.1:

                                                (o)           Invalidity, Repudiation. The L/C Issuer shall directly or indirectly contest the validity of the Letter of Credit in any manner in any court of competent jurisdiction, or shall repudiate, or purport to discontinue or terminate, the Letter of Credit or the Letter of Credit shall cease to be a legal, valid and binding obligation of the L/C Issuer or shall cease to be in full force and effect against the L/C Issuer for any reason; or

                                                (p)           Rating of L/C Issuer. The L/C Issuer shall be rated below A+ by S&P or below A1 by Moody’s and the L/C Issuer shall not have been replaced by an Entity that qualifies as an “L/C Issuer” within fifteen (15) Business Days of the first day upon which the L/C Issuer is so rated; or

                                                (q)           Assumed Rate. Base Rent with respect to the Landlord Contribution shall accrue at a rate per annum that is greater than the Assumed Rate in effect on the date of issuance of the Letter of Credit (or any later date upon which the amount of the Letter of Credit shall have been increased) and the stated amount of the Letter of Credit shall not have been increased, within ten (10) Business Days of the first day upon which Base Rent shall so accrue, to an amount equal to the sum of (i) the Lease Investment Balance Equity and (ii) the amount of Base Rent that would accrue on the Lease Investment Balance Equity during a period of 100 days at the Assumed Rate in effect on the date of such increase, computed on the basis of a year of 360 days;

                                                (r)           Non-Extension. If the Letter of Credit has a stated expiration date that is prior to the date that is 100 days after the last day of the Term (after giving effect to the First Extension Term), Tenant shall have failed to deliver or cause to be delivered to Landlord, on or prior to the date that is 100 days prior to the stated expiration date of the Letter of Credit, (i) evidence of the extension thereof or (ii) an instrument constituting a “Letter of Credit” (as defined in Section 4.3(a)(v)) as of the date of issuance of such instrument.

(iv)          Letter of Credit. If a Letter of Credit has been issued, the following provisions shall be in effect with respect thereto:

(A)          If Tenant pays an amount (a “Lease Payment Amount”) under this Lease to Landlord and Landlord, within ninety (90) days of the date of such payment and following the commencement of a proceeding under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect by or against Tenant, makes demand for payment under a Letter of Credit of such amount, Landlord will hold

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the amount paid under such Letter of Credit (a “Letter of Credit Payment Amount”) in escrow pursuant to the terms of this section. Each Letter of Credit Payment Amount held pursuant to this section shall bear interest at a rate equal to the rate determined from time to time as the rate applicable to overnight deposits with Landlord. Each Letter of Credit Payment Amount shall be deemed to include such earnings thereon.

(B)           If Landlord is required by a court of competent jurisdiction to return as a preference or otherwise a Lease Payment Amount (or any portion thereof), Landlord shall immediately apply the corresponding Letter of Credit Payment Amount (or a corresponding portion thereof), in place of such returned Lease Payment Amount (or portion thereof) (and, to the extent that such court requires the return of amounts constituting a deemed rate of interest on a Lease Payment Amount or any similar charge, cost or expense, Landlord shall apply a corresponding portion of the Letter of Credit Payment Amount in place of such deemed interest, charge, cost or expense), and Tenant shall remain liable for any deficiency. If all of a Lease Payment Amount has been returned, Landlord has applied the corresponding Letter of Credit Payment Amount in place of such Lease Payment Amount and, following such application, Landlord continues to hold any portion of such Letter of Credit Payment Amount, Landlord shall promptly pay such portion to Tenant or as shall be directed by a court of competent jurisdiction.

(C)           If (I) it is determined by a final, non-appealable order by a court of competent jurisdiction that a Lease Payment Amount (or any portion thereof not theretofore returned) need not be returned as a preference or otherwise or (II) the period during which a claim, action or other proceeding asserting that a Lease Payment Amount (or any portion thereof not theretofore returned) should be returned as a preference or otherwise avoided may be commenced under applicable law has expired (after giving effect to all applicable tolling agreements, stipulations, court orders and similar agreements, instruments and orders), Landlord shall promptly pay the Letter of Credit Payment Amount (or portion thereof) corresponding to such Lease Payment Amount (or portion thereof) to Tenant or as shall be directed by a court of competent jurisdiction.

(v)           Defined Terms. As used in this Section 4.3(a):

(A)          “Assumed Rate” shall mean, as of any date of determination, a per annum rate equal to the sum of (i) the LIBOR Rate for a Rental Period of 12 months commencing on such date, (ii) the applicable margin on such date for the Landlord Contribution as set forth in the Pricing Grid adjusted as provided for in Section 4.3(a)(ii), and (iii) 2.0%.

(B)           “L/C Issuer” shall mean a commercial bank acceptable to Landlord and rated AA- or higher by S&P or Aa3 or higher by Moody’s.

(C)           “Letter of Credit” shall mean a clean, irrevocable standby letter of credit in favor of Landlord that:

(1)           is issued by an L/C Issuer with respect to the obligations of Tenant under the Lease;

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(2)           is drawable by Landlord (i) upon the occurrence of an Event of Default; and (ii) if, following a payment by Tenant under the Lease, within ninety (90) days of the date of such payment, a proceeding under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect is commenced by or against Tenant;

(3)           either (i) has a stated expiration date that is on or after the date that is 100 days after the last day of the Term (after giving effect to the First Extension Term) or (ii) has a stated expiration date that is prior to the date that is 100 days after the last day of the Term (after giving effect to the First Extension Term) and is drawable by Landlord if not renewed on or prior to the date that is 100 days prior to its stated expiration date; and

(4)           is otherwise in form and substance reasonably acceptable to Landlord.

(D)          “Moody’s” shall mean Moody’s Investors Service, Inc.

(E)           “S&P” shall mean Standard & Poor’s Ratings Services, a division of the McGraw Hill Companies, Inc.

(b)           Subsequent Extension of Term. Provided that (i) no Default or Event of Default has occurred and is continuing hereunder, and (ii) Landlord, in its sole and absolute discretion, consents, Tenant may request, upon not less than twelve (12) months prior written notice to Landlord and Administrative Agent, the extension of the Term of this Lease beyond the First Extension Term for an additional period under terms which must be mutually agreeable to Landlord and Tenant. Landlord’s consent to the terms of such extension shall be conditioned upon the approval of Administrative Agent and each Rent Purchaser, which may be granted or withheld by such entity in its sole discretion.

ARTICLE V

IMPROVEMENTS

5.1          Improvements. Tenant has continuously been in possession and occupancy of all Improvements existing on Land covered by Lease Supplement No. 1 and Lease Supplement No. 2 since the construction thereof under the terms of the Original Leases and the Restated Lease. Tenant represents and warrants that all such Improvements were constructed in accordance with the Original Leases and the Original Construction Management Agreements.

5.2          Title to and Nature of Improvements. Subject to the provisions of this Lease, including, without limitation, Section 21.2, Tenant agrees that any and all Improvements of whatever nature at any time constructed, placed or maintained on the Land shall be and remain the property of Landlord, subject to Tenant’s rights under this Lease and the rights of Administrative Agent and Rent Purchasers under the Operative Documents.

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ARTICLE VI

FUNDING

6.1          Funding.

On the Funding Date, the entire Commitment Amount shall have been funded. Landlord, Administrative Agent and all Rent Purchasers shall have no obligation to fund any further Advances to Tenant after the Date of Lease.

ARTICLE VII

RENT

7.1          Base Rent.

(a)           The Base Rent to be paid by Tenant under each Lease Supplement shall begin to accrue on the Rent Commencement Date as specified in such Lease Supplement and shall be determined based upon the Pricing Grid attached hereto as Exhibit C. Tenant shall pay Base Rent by wire transfer in accordance with the terms of the Participation Agreement. Tenant shall be supplied with such bank account information as Tenant shall require to enable payment by wire transfer of federal funds. Tenant shall wire transfer to such account in accordance with the terms of the Participation Agreement until notified of any account change. Base Rent payments shall be due and payable in arrears (i) on the last day of each Rental Period selected by Tenant for a Portion (except that, with respect to any Rental Period of six (6), nine (9) or twelve (12) months, Base Rent with respect thereto shall be due and payable at the end of each three (3) month period during such Rental Period or, if such day is not a Business Day, the following Business Day), (ii) on any date on which this Lease shall terminate as to any Parcel, and (iii) on any other date on which all or any portion of the Lease Investment Balance is paid, except that the last installment of Base Rent shall be payable on the last day of the Term (each such date shall be a “Rent Payment Date”), and Base Rent payments shall be made to Landlord and Administrative Agent in accordance with the terms of the Participation Agreement. No sooner than thirty (30) days or later than ten (10) days prior to the due date for any installment of Base Rent hereunder with respect to any Portion, Landlord and Administrative Agent each shall deliver to Tenant notices indicating the exact dollar amount of the Base Rent that is due on such due date to Landlord or Administrative Agent, as applicable, with respect to such Portion (an “Invoice”). If either Landlord or Administrative Agent fails to send an Invoice, Tenant shall pay the amount shown on the previous Invoice applicable to such portion from such Entity in accordance with the terms of the Participation Agreement. If Tenant’s payment of the amount shown on the previous Invoice is less than the Base Rent then due such Entity, Tenant shall pay the difference within ten (10) days after receipt of notice from such Entity of such shortfall. If Tenant’s payment of the amount shown on the previous Invoice exceeds the Base Rent then due such Entity, then (provided that no Event of Default has occurred and is continuing), such excess amount shall be credited to the next installment of Base Rent due to such Entity with respect to such Portion.

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(b)           Tenant may select the number and amounts of the Portions into which the Lease Investment Balance is to be divided and the Rental Period for each such Portion by delivering to Administrative Agent and Landlord, not less than three (3) Business Days prior to the Date of Lease and thereafter the last day of each Rental Period for a Portion and in accordance with Section 21.3, an irrevocable written notice in the form of Exhibit D, appropriately completed (a “Notice of Rental Period Selection”), subject to the following:

(i)            No Portion shall combine the Landlord Contribution with any part of the Rent Purchasers’ Contribution.

(ii)           Each Portion shall be in a minimum amount of $2,500,000 or an integral multiple of $500,000 in excess thereof (except as otherwise provided below); provided, however, that the total number of Portions outstanding at any time shall not exceed eight (8) with respect to the Rent Purchasers’ Contribution and three (3) with respect to the Landlord Contribution (and, in the case of both the Rent Purchasers’ Contribution and the Landlord Contribution, one such Portion may be in the amount of the remaining balance of the Rent Purchasers’ Contribution or the Landlord Contribution, as the case may be, if such balance is less than $2,500,000 or is not an integral multiple of $500,000).

(iii)          The initial and each subsequent Rental Period selected by Tenant for each Portion shall be one (1), two (2), three (3), six (6), nine (9) or twelve (12) months; provided, however, that (A) each Rental Period shall begin and end on the eleventh (11th) day of the month or, if such day is not a Business Day, on the next following Business Day; (B) no Rental Period shall end after the Expiration Date; (C) no Rental Period shall be longer than one (1) month if a Default has occurred and is continuing at the time the Notice of Rental Period Selection is required to be delivered in accordance with this Section 7.1(b); and (D) each Rental Period for which Tenant fails to make a selection by delivering a Notice of Rental Period Selection in accordance with this Section 7.1(b) shall be deemed to be one (1) month.

7.2          Proration. If the Term for any Lease Supplement or this Lease expires or is otherwise terminated on other than a regularly scheduled Rent Payment Date, then Base Rent shall be prorated for the period from the immediately preceding Rent Payment Date until the end of the Term on an Actual/360 Basis.

7.3          No Abatement of Rent. Except as a consequence of a reduction in the Lease Investment Balance, Tenant shall not be entitled to any abatement, diminution, reduction, setoff or postponement of Base Rent as a consequence of any inconvenience to, interruption or cessation of or loss of Tenant’s use or enjoyment of the Parcels or as a result of any reason whatsoever, including without limitation, the breach by Landlord of this Lease or the breach by Landlord or any other Entity of any Operative Document.

7.4          Delinquent Rent. Any Base Rent or Additional Rent not paid when due shall accrue interest at the Default Rate from the date such Base Rent or Additional Rent was originally due until the date such Base Rent or Additional Rent is paid. All interest accrued on past due Base Rent or Additional Rent shall be due and payable by Tenant at the time the Base Rent or Additional Rent is paid, or upon demand by Landlord or Administrative Agent, if earlier.

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7.5          Additional Rent.

(a)           Break Funding Costs. In the event that Landlord, Administrative Agent or any Rent Purchaser incurs Break Funding Costs, Tenant agrees to pay to Landlord, Administrative Agent or such Rent Purchaser any Break Funding Costs claimed by such Entity. The Entity claiming such Break Funding Costs shall deliver to Tenant a statement setting forth in reasonable detail the calculation used to determine the Break Funding Costs claimed by such Entity. The agreements in this Section 7.5(a) shall survive the termination of this Lease with respect to any Break Funding Costs on payments that become due during the Term.

(b)           Other Additional Rent. Tenant agrees to pay all other Additional Rent when it becomes due and payable under this Lease, any Lease Supplement or any other Operative Document.

7.6          Rent Upon Default. Tenant agrees to pay, and Landlord agrees to accept, the entire Lease Investment Balance as Additional Rent upon an Event of Default pursuant to Section 19.1 below. If Tenant pays the entire Lease Investment Balance, and any other sums owing Landlord, Administrative Agent and each Rent Purchaser, pursuant to Section 7.5 above and Section 19.1 below, Landlord shall reconvey the applicable Security Instruments to Tenant and Landlord shall deliver to Tenant a duly executed and acknowledged grant deed conveying title to each of the Parcels to Tenant or Tenant’s designee.

ARTICLE VIII

TAXES; ADDITIONAL CHARGES; GROSS UP

8.1          Real Estate Taxes.

(a)           From and after the date of each Lease Supplement, Tenant shall pay during the Term directly to the appropriate taxing authority all Real Estate Taxes (as defined below) and provide Landlord and Administrative Agent a certified copy of an original official receipt received by Tenant showing payment thereof. If the date of each Lease Supplement occurs on, or the Lease Supplement Term expires or otherwise terminates on, any date other than the beginning or end of a taxable year, Tenant’s obligation to pay Real Estate Taxes shall be prorated on the basis of a 365-day year, so as to include only that portion of the taxable year which is a part of the Lease Supplement Term. Unless a termination of the Lease results from the purchase of the Parcels pursuant to Article XX below, any Real Estate Taxes levied against the Parcels which accrue during the Term of this Lease but which would not be due and payable to the appropriate taxing authority until after the expiration of the Term of this Lease (as the same may be extended) shall be paid by Tenant to Landlord upon such termination. Landlord shall pay such amounts to the appropriate taxing authority on a timely basis.

(b)           Except to the extent that Real Estate Tax bills and statements are sent directly to Tenant by the taxing authority, upon receipt by Landlord of the tax bills or statements, Landlord will use reasonable efforts to promptly advise Tenant in writing of all Real Estate Taxes and shall deliver copies of all applicable tax bills or statements to Tenant. Tenant shall pay directly to the taxing authority all Real Estate Taxes prior to the later of (i) thirty (30) days

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after receipt by Tenant from Landlord of a copy of such bills and statements referred to above, or (ii) five (5) Business Days prior to delinquency. As used herein, the term “Real Estate Taxes” shall mean any and all taxes, governmental fees and similar charges or assessments levied or assessed against the Improvements and/or the Land including, without limitation, ad valorem taxes and special assessments applicable to real property specifically set forth in a Ground Lease; provided, however, that Real Estate Taxes shall not include any Landlord Taxes (as defined below). Real Estate Taxes shall also include any and all documentary, transfer, sales, mortgage, recording or similar taxes imposed on Landlord or Tenant in connection with the transactions contemplated by the Operative Documents or any sale of the Parcels to a third party in accordance with this Lease following an Event of Default by Tenant or in a transaction to which Tenant is a party. As used herein, the term “Landlord Taxes” shall mean any and all franchise, gains, gift, succession, excess profits, gross receipts, revenue, income or similar taxes or taxes in lieu thereof imposed upon Landlord or any party other than Tenant (or an affiliate thereof) and any withholding tax imposed as a collection device for, in lieu of, or otherwise related to any of the foregoing without regard to whether such tax is required to be collected by Tenant and without regard to whether Tenant would be liable for such withholding tax in the event it failed to so withhold, but excluding any such tax or withholding imposed on Landlord by a state (or any local taxing authority thereof or therein) where a Parcel is located unless Landlord was subject to such tax in such jurisdiction without regard to the transactions contemplated by the Operative Documents. For purposes of the foregoing, an income tax shall include, without limitation, any tax imposed under the United States Internal Revenue Code, as well as any tax which could qualify as an “income tax” under United States Treasury Regulation Section 1.901-2 (except to the extent any such statute or regulation is subsequently modified to include a tax or other governmental charge of a materially different type and nature from the taxes currently described therein) and any income tax which may be payable under the laws of any jurisdiction either now or in the future, provided Landlord was subject to tax in such jurisdiction without regard to the transactions contemplated by the Operative Documents. Real Estate Taxes for any given tax year shall exclude assessment installments that are not due and payable during such tax year.

8.2          Personal Property Taxes. Tenant shall pay directly to the appropriate taxing authorities prior to delinquency any and all taxes and assessments levied or assessed during the Term upon or against Tenant’s furniture, equipment, trade fixtures and any other personal property in the Parcels.

8.3          Right to Contest. Tenant shall not be required to pay any Real Estate Taxes or any other taxes for which Tenant is liable hereunder (including, without limitation, any taxes for which Tenant is required to indemnify Landlord under Section 22.1) (including penalties and interest), so long as (i) Tenant shall contest the same or the validity thereof by appropriate legal proceedings in such a manner to prevent the sale, forfeiture or loss of any portion of the Parcels or any Rent and (ii) the position to be taken by Tenant pursuant to such contest would have a realistic possibility of success if litigated. For purposes of this Lease, Tenant may conclusively establish that a position to be taken in a contest would have a realistic possibility of success if litigated by providing to Landlord a letter from counsel stating an opinion to such effect. In the event of any such contest, Tenant shall, within thirty (30) days after the final determination thereof, pay and discharge the amounts determined to be due in accordance therewith and with the provisions of this Lease, together with any penalties, fines, interest, costs and expenses that

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may have accrued thereon or that may have resulted from Tenant’s contest. Tenant also shall have a right to contest any taxes for which it is liable hereunder, but with regard to which the position to be taken pursuant to such contest would not have a realistic possibility of success if litigated, provided that Tenant pays such taxes on or prior to the date upon which such taxes are asserted to be due by the relevant governmental authority. Notwithstanding the foregoing provisions of this Section 8.3, Tenant shall have an unconditional right to contest (without prior payment) any taxes imposed by law upon Tenant rather than upon Landlord. Tenant’s decision to pay any taxes prior to contesting its or another party’s underlying liability therefor shall not be deemed to imply or suggest that the position to be taken in such contest would not have a realistic possibility of success if litigated. Landlord shall, at Tenant’s sole cost and expense, cooperate fully with Tenant in connection with the exercise of Tenant’s right of contest contained herein, and in the event that applicable law shall require that Landlord, rather than Tenant, pursue legal proceedings for such contest, Landlord will initiate and pursue such contest upon Tenant’s request and in accordance with Tenant’s instructions (including, without limitation, Tenant’s instructions as to the selection of legal counsel and matters of strategy or settlement); provided, however, that Landlord shall not be subject to any liability for the payment of any costs or expenses in connection with any such contest or proceedings, and Tenant will indemnify and save harmless Landlord from any such costs and expenses (including, without limitation, attorneys’ fees, costs of court and appraisal costs), reimbursing Landlord therefor upon demand (or paying such costs and expenses directly when due, all as directed by Landlord). Tenant shall be entitled to any refund of any taxes and penalties or interest from any governmental authority to the extent the refund represents moneys paid to the governmental authority by Tenant or paid by Landlord and reimbursed by Tenant.

8.4          Additional Charges. All payments made by Tenant under this Lease and each other Operative Document shall be made free and clear of, and without reduction or withholding for or on account of, any present, or future taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed pursuant to any Legal Requirement, excluding, however, any Landlord Taxes (all such nonexcluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called “Additional Charges”). Tenant shall be responsible for the payment of any such Additional Charges; and if any such Additional Charges are required to be withheld from any amounts payable to Landlord, Administrative Agent or any Rent Purchaser hereunder or under any other Operative Document, then the amounts so payable to Landlord, Administrative Agent or such Rent Purchaser shall be increased by an amount (“Additional Amount”) necessary to yield to Landlord, Administrative Agent or such Rent Purchaser (after payment of all Additional Charges) the Base Rent, Additional Rent and other amounts payable hereunder or under any other Operative Document at the rates or in the amounts specified in this Lease or such other Operative Document. Whenever any Additional Charges are required to be withheld by Tenant, such Additional Charges shall be deducted or withheld by Tenant, and shall be paid by Tenant to the appropriate governmental authority in accordance with applicable Legal Requirements. As promptly as possible thereafter, Tenant shall send to Landlord and Administrative Agent for their own accounts a copy of an original official receipt (or other evidence of payment) received by Tenant showing payment thereof. If Tenant is required to pay Landlord, Administrative Agent or any Rent Purchaser any Additional Amount, Landlord shall, and shall request that Administrative Agent and the applicable Rent Purchaser, use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions) to change the jurisdiction in which it

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books this transaction if the making of such a change would avoid the need for, or reduce the amount of, any such Additional Amount which may thereafter accrue and would not, in the reasonable judgment of Landlord, Administrative Agent or such Rent Purchaser, be otherwise disadvantageous to it. The agreements in this Section 8.4 shall survive the termination of this Lease with respect to any Additional Charges or payments that become due during the Term.

ARTICLE IX

INSURANCE

9.1          Liability Insurance. At all times during the Term, Tenant shall obtain at Tenant’s sole cost and expense a policy or policies of commercial general liability insurance on an “occurrence” basis against claims for “personal injury” liability, including bodily injury, death or property damage liability. The liability insurance policy shall contain coverage of at least $10,000,000 combined single limit per occurrence.

9.2          Builders’ Risk Insurance. With respect to any Improvements which may be under construction and not yet covered by insurance under the terms of Section 9.3, Tenant shall maintain or cause to be maintained at Tenant’s sole cost and expense a policy or policies of builders’ risk insurance in an amount equal to the value upon completion of the work (exclusive of land, foundation, excavation, grading, landscaping, architectural and development fees and other items customarily excluded from such coverage), insuring against the risks customarily insured against under such insurance, including fire, vandalism, malicious mischief, sprinkler leakage, lightning, and windstorm.

9.3          All-Risk Insurance. With respect to any Improvements now or hereafter situated on the Land, at all times, Tenant shall, at Tenant’s sole cost and expense, obtain and maintain, or cause to be obtained and maintained, (a) a policy or policies of all-risk insurance covering the Improvements, providing coverage against loss or damage by fire, vandalism, malicious mischief, sprinkler leakage, lightning, windstorm, and other insurable perils, as, under good insurance practice, from time to time are insured against under all-risk coverage for properties of similar character, age and location in an amount or amounts not less than one hundred percent (100%) of the then actual replacement cost (exclusive of land, foundation, excavations, grading, landscaping, architectural and development fees and other items customarily excluded from such coverage and without any deduction for depreciation); and (b) if any Parcel is determined to be in a flood zone, standard flood coverage. Tenant will self-insure against loss or damage to any Improvements caused by an earthquake; and Tenant shall not be required to maintain other earthquake insurance, but may elect to do so in its sole discretion.

9.4          General Requirements. The insurance required under this Article IX may be furnished under a “primary” policy and an “umbrella” policy or policies. Landlord, Administrative Agent and each Rent Purchaser shall be named as an additional insured under Tenant’s policy of insurance required under Section 9.1; and such policies shall contain cross-liability coverage. Landlord shall be named as loss payee with respect to all insurance required under Sections 9.2 and 9.3. Tenant shall furnish Landlord and Administrative Agent with certificates from Tenant’s insurers with respect to the insurance required to be carried hereunder on or before the date such insurance is required to be carried. The certificates shall state that

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such insurance is in full force and effect and that coverage will not be reduced below the amounts required under this Article IX or otherwise limited or canceled without thirty (30) days’ prior written notice to Landlord and Administrative Agent. Renewal certificates shall be furnished to Landlord and Administrative Agent within five (5) days following the expiration of each such policy. Any blanket insurance policy or policies that insure Tenant against the risks and for the amounts herein specified shall be deemed to satisfy the obligation of Tenant hereunder, provided that Landlord, Administrative Agent and each Rent Purchaser shall be named as additional insured parties thereunder as their interest may appear and that the coverage afforded Landlord, Administrative Agent and each Rent Purchaser will not be reduced or diminished by reason of the use of such blanket policy of insurance, and provided further that the requirements set forth herein are otherwise satisfied, and provided that any such policy of blanket insurance shall specify the amount of the total insurance allocated to the risks required to be insured hereunder and such allocated amount meets the requirements of this Article IX. All insurance required by this Article IX shall be with an insurance company licensed to do business in the state in which the Parcel is located with a general policyholder’s rating, as rated by the most current available “Best” Insurance Reports, of no less than A- and a financial size rating of at least VII; provided, however, that such rating shall not be required with respect to any insurance required by this Article IX if on any date such insurance is underwritten by a Captive Insurance Subsidiary of Tenant, so long as Tenant’s Debt/EBITDA Ratio for the consecutive four-quarter period ending most recently prior to such date is 2.00 to 1.00 or less.

9.5          Waiver of Subrogation. Notwithstanding anything to the contrary contained herein, to the extent permitted by law and so long as any insurance coverage maintained by Tenant is not diminished by reason thereof, Tenant hereby (a) releases and waives any rights it may have against Landlord, Administrative Agent, any Rent Purchaser and their respective officers, agents and employees on account of any loss or damages occasioned to Tenant, its property or the Parcels, and arising from any risk covered by any fire and extended coverage insurance maintained by Tenant, whether or not due to the negligence of Landlord, Administrative Agent, any Rent Purchaser, or their respective agents, employees, contractors, licensees, invitees or other persons, and (b) waives on behalf of any insurer providing such insurance to Tenant any right of subrogation that any such insurer may have or acquire against Landlord, Administrative Agent, any Rent Purchaser or such persons by virtue of payment of any loss under such insurance. Tenant shall cause its insurance policies to contain a waiver of subrogation clause in accordance with the foregoing.

9.6          Indemnity. Tenant shall protect, defend, indemnify, hold and save Landlord, Administrative Agent and each Rent Purchaser harmless from and against any and all losses, costs, liabilities or damages (including reasonable attorneys’ fees and disbursements and court costs) arising by reason of: (i) any failure of Tenant to maintain insurance for the benefit of Landlord, Administrative Agent and each Rent Purchaser as required pursuant to this Article IX, (ii) the failure to obtain the waiver of subrogation clause required by Section 9.5 hereof, or (iii) the invalidation of such insurance policy required to be obtained by Tenant hereunder by Tenant’s insurer. Tenant’s duty to indemnify Landlord, Administrative Agent and each Rent Purchaser under this Section 9.6 shall survive the expiration or earlier termination of this Lease with respect to events occurring during the Term.

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ARTICLE X

USE

10.1        Use.

(a)           Permitted. Tenant may use the Parcels for any lawful purpose, which shall at all times be subject to the Ground Lease.

(b)           Environmental Compliance.

(i)            Defined Terms. The term “Applicable Environmental Laws” shall mean any applicable laws, regulations or ordinances pertaining to health or the environment, including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 or otherwise (as amended, hereinafter called “CERCLA”), the Resource Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act of 1980, the Solid Waste Disposal Act Amendments of 1980, the Hazardous and Solid Waste Amendments of 1984 or otherwise (as amended, hereinafter called “RCRA”), and the California Health & Safety Code Section 25501(j). The terms “hazardous substance” and “release” as used in this Lease shall have the meanings specified in CERCLA, and the terms “solid waste” and “disposal” (or “disposed”) shall have the meanings specified in RCRA; provided, in the event either CERCLA or RCRA is amended or superseded by other laws so as to broaden the meaning of any term defined thereby, such broader meaning shall apply subsequent to the effective date of such amendment or other laws; and, provided further, to the extent that the laws of any state in which a Parcel is located establish a meaning for “hazardous substance,” “release,” “solid waste,” or “disposal” which is broader than that specified in either CERCLA or RCRA, such broader meaning shall apply.

(ii)           Tenant’s Covenants. Tenant will not cause or permit the Parcels to be in violation of, or do anything or permit anything to be done which subjects Landlord, Administrative Agent, any Rent Purchaser, Tenant or the Parcels to any remedial obligations under or which creates a claim or cause of action against Landlord, Administrative Agent, any Rent Purchaser, Tenant (in each case relating to the Parcels) or the Parcels under any Applicable Environmental Laws, including, without limitation, CERCLA, RCRA, and the environmental laws of the state in which the Parcels are located assuming disclosure to the applicable governmental authorities of all relevant facts, conditions and circumstances, if any, pertaining to the Parcels, and Tenant will promptly notify Landlord and Administrative Agent in writing of any existing, pending or threatened investigation, claim or inquiry of which Tenant has knowledge by any governmental authority in connection with any Applicable Environmental Laws. Tenant shall obtain any permits, licenses or similar authorizations to construct, occupy, operate or use any improvements, fixtures and equipment at any time located on the Parcels by reason of any Applicable Environmental Laws. Tenant will not use the Parcels in a manner which will result in the unlawful disposal or other unlawful release of any hazardous substance or solid waste on or to the Parcels and covenants and agrees to keep or cause the Parcels to be free of any unlawful hazardous substance, solid waste or environmental contaminants (including, without limitation, arsenic in soil and friable asbestos and any substance containing asbestos

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deemed hazardous and unlawful by any Applicable Environmental Law), and to remove the amounts of the same (or if removal is prohibited by law, to take whatever action is required by law) promptly upon discovery at Tenant’s sole expense to the extent required by Applicable Environmental Law. Tenant shall promptly notify Landlord and Administrative Agent in writing of any unlawful disposal or other unlawful release of any hazardous substance, environmental contaminants or solid wastes on or to the Parcels in violation of Applicable Environmental Law. In the event Tenant fails to comply with or perform any of the foregoing covenants and obligations, after thirty (30) days’ prior written Notice to Tenant, Landlord or Administrative Agent may, but shall be under no obligation to, cause the Parcels to be freed from such unlawful hazardous substance, unlawful solid waste or unlawful environmental contaminants (or if removal is prohibited by law, to take whatever action is required by law) and the cost of the removal or such other action shall be a demand obligation owing by Tenant to the remediating party pursuant to this Lease. Notwithstanding the foregoing, Landlord and Administrative Agent shall have no right to cause the removal of such materials so long as Tenant both: (1) is diligently and in good faith proceeding to comply with Tenant’s obligation to remove such unlawful amounts of such materials; and (2) has the financial ability to so comply. Subject to the foregoing, Tenant grants to Landlord, and to the extent permitted by the Operative Documents, Administrative Agent and their respective agents and employees access to the Parcels, and the license to remove the unlawful hazardous substance, unlawful solid waste or environmental contaminants (or if removal is prohibited by law, to take whatever action is required by law); and agrees to indemnify and save Landlord, Administrative Agent and all Rent Purchasers harmless from all costs and expenses involved and from all claims (including consequential damages) asserted or proven against Landlord, Administrative Agent or any Rent Purchaser by any party in connection therewith. Upon reasonable request by Landlord or, to the extent permitted by the Operative Documents, Administrative Agent for “good cause” (defined below), at any time and from time to time during the Term, Tenant will provide at Tenant’s sole expense an inspection or audit of the Parcels from an engineering or consulting firm approved by the Entity making such request, indicating the presence or absence of any hazardous substance, solid waste or environmental contaminants located on the Parcels. If Tenant fails to provide same after sixty (60) days’ notice, the Entity making such request may order same, and Tenant grants to such Entity and its respective employees and agents access to the Parcels and a license to undertake any testing reasonably required to obtain such inspection or audit. The cost of obtaining such inspection or audit and any expenses incurred by such Entity in connection therewith shall be a demand obligation owing by Tenant to such Entity pursuant to this Lease. For purposes of this Section 10.1(b)(2), “good cause” shall mean that the Entity requesting such inspection or audit shall have reasonable grounds to believe that an unlawful release or an unlawful disposal of hazardous substances or solid wastes has occurred on the Parcels.

(c)           Compliance With Legal Requirements. Tenant shall at all times comply with all material Legal Requirements applicable to the Land or any improvements now or hereafter situated on the Land and/or the use thereof.

10.2        Contest of Legal Requirements. Tenant shall have the right at its sole cost and expense to contest the validity of any Legal Requirements applicable to the Parcels by appropriate proceedings diligently conducted in good faith; and upon the request of Tenant and at Tenant’s sole cost and expense, Landlord will join and cooperate with Tenant in such proceedings. Subject to Section 8.3, and any other provision of this Lease to the contrary

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notwithstanding, Tenant’s right to contest Legal Requirements must be exercised in such a manner as to avoid any exposure of the Parcels or any part thereof to foreclosure or execution sale or exposure of Landlord, Administrative Agent or any Rent Purchaser to civil or criminal penalties arising from Tenant’s non-compliance with such Legal Requirements. Tenant shall defend and indemnify Landlord, Administrative Agent and each Rent Purchaser against, and hold Landlord, Administrative Agent and each Rent Purchaser harmless from, any and all liability, loss, cost, damage, injury or expense (including, without limitation, attorneys’ fees and costs) which Landlord, Administrative Agent or any Rent Purchaser may sustain or suffer by reason of Tenant’s failure or delay in complying with, or Tenant’s contest of, any such Legal Requirements (or Landlord’s contest, if requested in writing by Tenant), and Tenant’s duty to indemnify Landlord, Administrative Agent and each Rent Purchaser under this Section 10.2 shall survive the expiration or earlier termination of this Lease.

ARTICLE XI

UTILITIES AND SERVICES

11.1        Services to the Parcels. At Tenant’s sole cost and expense, Tenant shall make its own arrangements for the provision of all utilities and services to be provided to or consumed on the Parcels, including, without limitation, air conditioning and ventilation service contracts, heating, electric power, telephone, water (both domestic and fire protection), sanitary sewer, storm drain, natural gas and janitorial services, including for the installation, maintenance and repair of service lines and meters to measure Tenant’s consumption of such utilities.

ARTICLE XII

MAINTENANCE AND REPAIRS SURRENDER OF THE PARCELS

12.1        Tenant Obligations. Landlord shall have no obligation to maintain the Parcels. Tenant shall at all times and at Tenant’s sole cost and expense maintain the Parcels in good repair, normal wear and tear excepted.

12.2        Surrender of the Parcels. Except as provided in Section 20.1 below, upon the expiration or earlier termination of the Term, Tenant shall surrender each Parcel to Landlord in its then condition, subject to compliance by Tenant on or prior to such date with its obligations under this Lease and the other Operative Documents, but including any condition resulting from: (i) normal wear and tear; (ii) obsolescence; (iii) damage that is caused by Landlord or its agents, employees or contractors; and (iv) any improvements, alterations, additions, repairs, replacements or decorations in, to or of the Parcels or on the Land which are not Tenant’s Property which Tenant may elect to remain on the Land or the Parcels. Title to all Tenant’s Property shall be and remain in Tenant throughout the Term, and at any time during the Term of this Lease, the same may be removed by Tenant, or, at Tenant’s abandonment or written election, surrendered with the Parcels, in which event title to such surrendered property shall, if Landlord so elects in Landlord’s sole discretion, be deemed transferred to Landlord. Any of such property that is not removed from the Parcels on or prior to the expiration or early termination of this Lease or any Lease Supplement shall be considered abandoned and Landlord may deal with it as Landlord elects.

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ARTICLE XIII

LIENS

13.1        Pay and Discharge Liens.

(a)           Tenant shall not directly or indirectly create or allow to remain, and shall promptly discharge at its sole cost and expense, any Lien, attachment or levy upon any Parcel or any Lien, attachment or levy with respect to Base Rent or Additional Rent, other than any Lien specified as a permitted title exception in Schedule 2 attached to a Lease Supplement or any Landlord Lien. Notwithstanding the foregoing, Tenant shall not be required to discharge or remove any Lien on any Parcel, so long as no Event of Default has occurred and is continuing and, in the opinion of Tenant’s counsel, Tenant shall have a realistic possibility of success in contesting the existence, amount, applicability or validity thereof by appropriate proceedings, which proceedings (i) shall not involve any material danger that any Parcel or any Base Rent or Additional Rent would be subject to sale, forfeiture or loss, (ii) shall not affect the payment of any Base Rent or Additional Rent or result in any such amounts being payable to any Person other than Landlord or the Administrative Agent, (iii) will not place Landlord, the Administrative Agent or any Rent Purchaser in any danger of civil or criminal liability and (iv) shall be permitted under and be conducted in accordance with the provisions of any other instrument to which Tenant or such Parcel is subject and shall not constitute a default thereunder.

(b)           Nothing contained in this Lease shall be construed as constituting the consent or request of Landlord, expressed or implied, to or for the performance by any contractor, mechanic, laborer, materialman, supplier or vendor of any labor or services or for the furnishing of any materials for any construction, modification, addition, repair or demolition of or to any Parcel or any part thereof. NOTICE IS HEREBY GIVEN THAT LANDLORD IS NOT AND SHALL NOT BE LIABLE FOR ANY LABOR, SERVICES OR MATERIALS FURNISHED OR TO BE FURNISHED TO TENANT, OR TO ANYONE HOLDING ANY PARCEL OR ANY PART THEREOF THROUGH OR UNDER TENANT, AND THAT NO MECHANIC’S OR OTHER LIENS FOR ANY SUCH LABOR, SERVICES OR MATERIALS SHALL ATTACH TO OR AFFECT THE INTEREST OF LANDLORD IN AND TO ANY PARCEL.

ARTICLE XIV

ASSIGNMENT BY LANDLORD

14.1        Further Mortgages or Encumbrances by Landlord. Except for the Security Instruments and the Rent Purchasers’ Deed of Trust, and any amendments thereto, Landlord shall not cause or create any mortgages, deeds of trust, encumbrances or exception to exist with respect to the Parcels at any time. Landlord agrees that it will not materially modify any Security Instrument nor will it cause any new bonds or assessments to encumber the Parcels without Tenant approval.

14.2        Landlord’s Right to Sell. Subject to Tenant’s Purchase Option set forth in Article XX hereof and without limitation of Landlord’s rights and remedies under Article XIX

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hereof, Landlord may transfer all or any portion of its right, title and interest in any Parcel to Administrative Agent, any Rent Purchaser or any other financial institution having a minimum capitalization and surplus of at least $50,000,000, so long as such transfer (i) does not cause Tenant to be identified as the ‘primary beneficiary’ of the transactions contemplated by this Lease and the Operative Documents under the relevant provisions of FASB Interpretation No. 46 (rev. December 2003), as hereafter amended or replaced, or otherwise require the transferee Entity and Tenant to be consolidated for financial accounting purposes under then applicable accounting standards or otherwise prevent Tenant from utilizing operating lease accounting with respect to this Lease, and (ii) would not result in an increase in the amount of Real Estate Taxes payable with respect to such Parcel as a consequence of a reassessment thereof. Any sale or transfer by Landlord pursuant to this section shall by its express terms recognize and confirm the right of possession of Tenant to the Parcels and Tenant’s other rights arising out of this Lease shall not be affected or disturbed in any way by any such sale, transfer, assignment or conveyance (except for any disturbance resulting from a foreclosure sale conducted pursuant to the laws of the state where each Parcel is located at which independent third party bids were permitted pursuant to the applicable Security Instruments all subject to the terms of Section 19.2), and any transferee shall expressly assume in writing all obligations of Landlord to be performed following the date of transfer. Nothing in this Section 14.2 shall prohibit Landlord from selling rents to any financial institution pursuant to the Participation Agreement and/or the Rent Purchase Agreement executed by and between Landlord, Administrative Agent and the Rent Purchasers (without transferring Landlord’s interest in the Parcels) or from granting a security interest to the Rent Purchasers as additional inducement to participate in this transaction.

14.3        Transfer of Funds and Property. At each time Landlord sells, assigns, transfers or conveys the entire right, title and estate of Landlord in any Parcel and in this Lease, Landlord shall turn over to the transferee any funds or other property then held by Landlord under this Lease and thereupon all the liabilities and obligations on the part of the Landlord under this Lease arising after the effective date of such sale, assignment, transfer or conveyance shall terminate as to the transferor and be binding upon the transferee.

ARTICLE XV

ASSIGNMENT AND SUBLEASING

15.1        Right to Assign.

(a)           Tenant’s Right. Provided that there is not an Event of Default under this Lease which is continuing and uncured or if there is such an Event of Default, provided that Tenant cures the Event of Default in connection with the assignment, Tenant shall have the right, at any time and from time to time during the Term, to assign all of its right, title and estate in a Parcel and in this Lease with the prior written approval of Landlord and Administrative Agent, which consent shall not be unreasonably withheld. Any such assignee, immediate or remote, shall have the same right of assignment. Any such assignment shall be evidenced by a written instrument, properly executed and acknowledged by all parties thereto and, at Tenant’s election, duly recorded in the Official Records, wherein and whereby the assignee assumes all of the obligations of Tenant under this Lease. Notwithstanding any such assignment and assumption,

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Tenant shall remain primarily liable for all obligations and liabilities on the part of Tenant theretofore or thereafter arising under this Lease and all Lease Supplements.

(b)           Notice. Tenant shall, promptly after execution of each assignment, notify Landlord and Administrative Agent of the name and mailing address of the assignee and shall, on demand, permit Landlord and Administrative Agent to examine and copy the assignment agreement.

15.2        Right to Sublet.

(a)           Tenant’s Right. Provided that there is not an Event of Default under this Lease which is continuing and uncured or if there is such an Event of Default, provided that Tenant cures the Event of Default in connection with the sublease, Tenant shall have the right, at any time and from time to time during the Term, to sublet all or any portion of the Parcels and to extend, modify or renew any sublease without the approval of Landlord; provided that, except as specified hereinbelow with respect to any Retail Leases, no sublease shall have a term that extends beyond the Expiration Date. Notwithstanding any such sublease, Tenant shall remain primarily liable for all obligations and liabilities on the part of Tenant theretofore or thereafter arising under this Lease and all Lease Supplements. It is expressly understood that Tenant may lease to third parties, in arms-length transactions and on then current fair market terms, certain ground floor space constructed for retail use and currently existing in the Improvements (“Qualifying Retail Leases”) without the consent of Landlord or Administrative Agent, and any such Qualifying Retail Lease may have a maturity date which extends beyond the Expiration Date.

(b)           Notice. Tenant shall, promptly after execution of each sublease, notify Landlord and Administrative Agent of the name and mailing address of the subtenant and shall, on demand, permit Landlord and Administrative Agent to examine and copy the sublease.

(c)           Nondisturbance Agreement. Upon Tenant’s request, Landlord shall enter into a non-disturbance and attornment agreement with any subtenant of Tenant under any Qualifying Retail Lease. Such agreement shall provide that Landlord shall recognize such Qualifying Retail Lease and not disturb the subtenant’s possession thereunder so long as such subtenant shall not be in default under such Qualifying Retail Lease. Tenant shall immediately reimburse Landlord on demand for all reasonable out-of-pocket costs and expenses incurred by Landlord in complying with Landlord’s obligations under this Section 15.2.

15.3        Mortgage by Tenant. Tenant shall not have the right to mortgage, pledge or otherwise encumber all or any portion of the right, title and estate of Tenant in any Parcel or in this Lease, without the prior written consent of Landlord and Administrative Agent.

ARTICLE XVI

EMINENT DOMAIN

16.1        Total or Substantial Taking. If title or access is taken for any public or quasi-public use, or under any statute or by right of condemnation or eminent domain, or by sale in lieu thereof (a “Taking”) with respect to any or all of a Parcel, or if title to so much of the Parcel or

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access thereto is Taken, or if the Parcel or access thereto is damaged, blocked or impaired by the Taking, so that, in Tenant’s sole discretion, such Parcel or access thereto, even after a reasonable amount of reconstruction thereof, will no longer be suitable for the conduct of Tenant’s (and/or Tenant’s subtenants’) business, then in any such event, the Lease Supplement relating to such Parcel shall terminate on the date of such Taking, and, to the extent the compensation for such Taking payable to Landlord pursuant to Section 16.4 is less than the Purchase Price for such Parcel, Tenant shall pay the balance of the Purchase Price for such Parcel into escrow as provided in the Participation Agreement for distribution as provided in the Rent Purchase Agreement. Landlord shall not exercise any right to terminate a Ground Lease without Tenant’s prior approval, in Tenant’s sole discretion. Tenant shall restore the Parcels to the extent provided in a Ground Lease in the event the applicable Lease Supplement and Ground Lease are terminated. The provisions of Section 16.4 shall be applicable only as to the compensation allocated to the ground lessee under a Ground Lease in the event of a Taking.

16.2        Partial Taking. If any part of a Parcel, or access thereto, shall be subject to a Taking, and the Parcel or the remaining part thereof and access thereto will be, in Tenant’s reasonable discretion, suitable for the conduct of Tenant’s (and/or Tenant’s subtenants’) business in a manner consistent with the conduct of such business prior to such Taking, all of the terms, covenants and conditions of this Lease and the Lease Supplement covering such Parcel shall continue, except that Base Rent shall be adjusted to reflect the decreased Lease Investment Balance remaining after application thereto of the award made to Landlord for such Taking.

16.3        Temporary Taking. If the whole or any part of any Parcel is subject to a Taking for temporary use or occupancy, this Lease shall not terminate by reason thereof and Tenant shall continue to pay, in the manner and at the times herein specified, the full amount of the Base Rent payable by Tenant hereunder, and, except only to the extent that Tenant may be prevented from so doing by reason of such Taking, Tenant shall continue to perform and observe all of the other terms, covenants and conditions hereof on the part of Tenant to be performed and observed, as though the Taking had not occurred. In the event of any such temporary Taking, Tenant shall be entitled to receive the entire amount of the award made for the Taking, whether paid by way of damages, rent or otherwise. If the temporary Taking is for a term in excess of thirty (30) days, then the Taking shall be treated as a permanent Taking and be governed by Section 16.1 or 16.2, as applicable.

16.4        Damages. The compensation attributable to the Parcels (in each case the compensation or value shall be determined as of the date of the Taking) awarded or paid upon any Taking (other than a temporary Taking, which shall be governed by Section 16.3), whether awarded to Landlord, Tenant, or any of them, shall be held by the Escrow Agent described in Section 17.3(b), and distributed in the same manner as insurance proceeds pursuant to Section 17.3. For purposes of this Section 16.4, references to the term “casualty” or similar terms in Section 17.3 shall be deemed to refer to “Taking.” Any portion of such compensation which Tenant does not want to use for any construction, restoration or reconstruction shall be paid as follows (the order of payment as set forth below shall be the “Distribution Formula”): (i) to Landlord (but only to the extent of the then-existing Lease Investment Balance and all accrued and unpaid Base Rent and Additional Rent); and (ii) with any remaining excess to be paid to Tenant. Any compensation in excess of the Lease Investment Balance, plus all accrued and unpaid Base Rent and Additional Rent, shall be paid to Tenant. Any compensation payable

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to Landlord shall be deposited in escrow as provided in the Participation Agreement and distributed as provided in the Rent Purchase Agreement.

16.5        Notice and Execution. Immediately upon service of process upon Landlord or Tenant in connection with any Taking relating to any Parcel or any portion thereof or access thereto, each party shall give the other Notice thereof. Each party agrees to execute and deliver to the other all instruments that may be required to effectuate the provisions of this Article XVI. Tenant reserves the right to appear in and to contest any proceedings in connection with any such Taking. Tenant shall immediately reimburse Landlord on demand for all reasonable out-of-pocket costs and expenses incurred by Landlord in complying with Landlord’s obligations under this Section 16.5.

16.6        Terms of SJRDA Ground Leases. Notwithstanding any of the foregoing provisions of this Article XVI, Landlord and Tenant acknowledge that in the event of any inconsistency between the foregoing terms of this Article XVI and Article XI of the SJRDA Ground Leases, the terms of Article XI of the SJRDA Ground Leases shall control; and Tenant shall have no right to terminate this Lease (or a Lease Supplement) as a consequence of a Taking unless Landlord shall also have the right to terminate the SJRDA Ground Leases (or the corresponding SJRDA Ground Lease in the case of termination of a Lease Supplement) as a consequence thereof (provided that Tenant may exercise the Purchase Option under Section 20.1 at any time); Landlord shall not exercise any right to terminate either of the SJRDA Ground Leases without Tenant’s prior approval, in Tenant’s sole discretion; Tenant shall restore the Parcels to the extent provided in the SJRDA Ground Leases in the event this Lease (or applicable Lease Supplement) and the SJRDA Ground Leases (or corresponding SJRDA Ground Lease) are not terminated; and the provisions of Section 16.4 above shall be applicable only to the compensation allocated to the ground lessee under the terms of an SJRDA Ground Lease in the event of a Taking.

ARTICLE XVII

DAMAGE OR DESTRUCTION

17.1        Casualty. If any of the improvements now or hereafter situated on a Parcel (including the Improvements) are damaged or destroyed by fire or other casualty, except as provided to the contrary in Section 17.2, this Lease and corresponding Lease Supplement shall continue in full force and effect without any abatement or reduction in Base Rent, and Tenant, at Tenant’s election, shall either (a) restore such improvements substantially to their condition prior to the damage or destruction, subject to Landlord’s approval in accordance with the terms of an applicable construction management agreement, if any, which shall not be unreasonably withheld, of the plans and general contractor’s construction contract; or (b) not restore such improvements and terminate the Lease Supplement for such Parcel as provided in Section 17.2. Notwithstanding the foregoing, Tenant shall be required to perform, or cause to be performed, at Tenant’s sole cost and expense, any work or service required by any Legal Requirement for the protection of persons or property from any risk, or for the abatement of any nuisance, created by or arising from the casualty or the damage or destruction caused thereby.

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17.2        Termination of Lease Supplement. In the case of: (a) any damage or casualty of any Improvements located on a particular Parcel, which in the good faith judgment of Tenant’s Board of Directors would render the Improvements either unsuitable or uneconomic for restoration or continued use by Tenant; (b) the damage or destruction of all or substantially all (as determined in good faith by Tenant’s Board of Directors) of the Improvements; or (c) the damage or destruction of the Improvements where restoration cannot (as determined in good faith by Tenant’s Board of Directors) reasonably be completed either within 365 days or prior to the Expiration Date, then Tenant shall be deemed to have elected to terminate the Lease Supplement and exercise the Purchase Option for such Parcel. In the event Tenant terminates the Lease Supplement pursuant to the preceding sentence, Tenant shall purchase Landlord’s interest in such Parcel for a purchase price equal to the Purchase Price for the Parcel as such Purchase Price shall have the meaning set forth in Section 20.1. The purchase of Landlord’s interest in the Parcel shall be pursuant to the terms of Section 20.1, as applicable to the Parcel. Upon the completion of such purchase, the Lease Supplement and all obligations with respect to the purchased Parcel shall terminate.

17.3        Insurance Proceeds. In the event of any fire or other casualty, the proceeds of any insurance policies maintained by Tenant pursuant to Section 9.2 or 9.3 shall be held, applied and dealt with as follows:

(a)           If no Event of Default has occurred and is continuing, and provided that Tenant has not terminated the applicable Lease Supplement pursuant to Section 17.2, any proceeds (per occurrence) of such policies attributable to the Improvements below the amount of Two Million Dollars ($2,000,000.00) or any proceeds directly attributable to improvements constructed on the Property by Tenant solely with its own funds shall be paid directly to Tenant and applied and used as Tenant may direct in its sole discretion for any construction, restoration or reconstruction purposes in connection with any improvements located on the Land which were destroyed, damaged or affected by such casualty; provided, however, that at such time no Event of Default has occurred and is continuing. Any portion of such proceeds which Tenant does not want to use (subject to the terms of Section 17.3(c)) for any construction, restoration or reconstruction shall be paid in accordance with the Distribution Formula set forth in Section 16.4 above.

(b)           If no Event of Default has occurred and is continuing, any proceeds (per occurrence) of such policies attributable to the Improvements greater than Two Million Dollars ($2,000,000.00) shall be paid to an escrow agent (“Escrow Agent”) mutually agreeable to the parties (but such escrow agent shall not be a party which is related to or affiliated with either of the parties to this Lease, but shall be bound by the terms of this Article XVII). Such proceeds shall be invested by the Escrow Agent as Tenant may direct (provided, however, that such proceeds may not be invested in any securities or any debt obligations issued by Tenant). Such proceeds shall be paid by the Escrow Agent to Tenant (or to third parties as Tenant may direct), as Tenant may direct from time to time as restoration, construction or rebuilding progresses to pay the cost of any restoration, construction or rebuilding on the Land required by Section 17.1 or any Improvements located upon the Land, so long as Landlord reasonably determines that the following conditions are satisfied at the time of such request for payment by Tenant: (i) the sum requested has been paid or is then due and payable or will become due and payable within thirty (30) days; (ii) Tenant has the financial ability (taking into account the insurance proceeds held by

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the Escrow Agent) to complete the restoration, construction or rebuilding required by Section 17.1; (iii) Landlord has approved the plans, if any, relating to the restoration of Improvements (which approval shall not be unreasonably withheld or delayed); and (iv) in Landlord’s reasonable judgment, such restoration work required by Section 17.1 in connection with the Improvements can be completed at least nine (9) months prior to the expiration of the Term. Landlord shall promptly upon request instruct the Escrow Agent to make the payments requested by Tenant unless an Event of Default has occurred and is continuing or any of the four (4) conditions described above is not satisfied at the time of such request. Any excess insurance proceeds existing after Tenant’s completion of the restoration, construction or rebuilding which Tenant elects to perform, and all insurance proceeds if an Event of Default has occurred and is continuing or any of the four (4) conditions described above is not satisfied, shall be paid pursuant to the Distribution Formula.

(c)           If Tenant elects to terminate the applicable Lease Supplement, Tenant may use any insurance proceeds to pay the Purchase Price described in Section 17.2, and all rights of Landlord in insurance proceeds not used to pay the Purchase Price shall be assigned to Tenant by Landlord at the time Tenant purchases Landlord’s interest in the Parcel covered by such Lease Supplement. If either: (1) Tenant has not delivered written notice to Landlord within ninety (90) days after reaching final written settlement with all insurance companies regarding the amount of proceeds to be paid for the casualty in question, pursuant to which notice Tenant elects to either exercise its termination rights under Section 17.2 and/or to fully repair or restore pursuant to Section 17.1; or (2) Landlord reasonably believes that Tenant has abandoned reconstruction or restoration work required by Section 17.1 (and Tenant shall have failed to diligently recommence reconstruction or restoration work which Tenant is then able to perform within thirty (30) days after Tenant’s receipt from Landlord of a Notice of Landlord’s belief of Tenant’s abandonment of the reconstruction or restoration work); then, in either case, the proceeds attributable to the Improvements shall be paid pursuant to the Distribution Formula.

(d)           Any insurance proceeds payable to Landlord under this Article XVII shall be deposited into escrow as provided in the Participation Agreement and applied pursuant to the Rent Purchase Agreement to reduce the Lease Investment Balance for such Parcel by a like amount.

(e)           Notwithstanding any of the foregoing provisions of this Article XVII, Landlord and Tenant acknowledge that in the event of any inconsistency between the foregoing terms of this Article XVII and the terms of the SJRDA Ground Leases, the terms of the SJRDA Ground Leases shall control, and Tenant shall have no right to terminate this Lease (or a Lease Supplement) as a consequence of any damage or destruction unless Landlord shall also have the right to terminate the SJRDA Ground Leases (or the corresponding SJRDA Ground Lease in the case of termination of a Lease Supplement) as a consequence thereof (provided that Tenant may exercise the Purchase Option under Section 20.1 at any time); Landlord shall not exercise any right to terminate either of the SJRDA Ground Leases without Tenant’s prior approval, in Tenant’s sole discretion; Tenant shall restore or rebuild the Parcels in the manner and subject to the terms of the SJRDA Ground Leases in the event this Lease (or applicable Lease Supplement) and the SJRDA Ground Leases (or corresponding SJRDA Ground Lease) are not terminated; and the provisions regarding the application of insurance proceeds provided in Section 17.3 above

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shall be subject to the terms of any SJRDA Ground Lease and the allocation of insurance proceeds between the ground lessor and ground lessee if provided for therein.

ARTICLE XVIII

QUIET ENJOYMENT

18.1        Quiet Enjoyment. Landlord covenants to secure to Tenant the quiet possession of the Parcels for the full Term against all persons claiming the same, by, through or in the right of Landlord, subject to Landlord’s rights and remedies under Article XIX upon an Event of Default by Tenant. The existence of any Permitted Title Exceptions shall not be deemed to constitute a breach of Landlord’s obligations hereunder. Tenant shall, immediately upon demand, reimburse Landlord for all reasonable costs, expenses and damages incurred or paid by Landlord in the performance of Landlord’s obligations under this Article XVIII (except for any costs, expenses or damages arising from any Landlord Liens or Landlord’s willful breach of this Lease). Landlord agrees that, so long as no Event of Default has occurred and is continuing, Landlord shall not exercise the right to terminate any Ground Lease.

ARTICLE XIX

DEFAULT

19.1        Default. Each of the following events shall constitute an event of default (“Event of Default”) by Tenant:

(a)           Non-Payment. Tenant shall (i) fail to pay on the Expiration Date any amounts payable by Tenant under this Lease or any of the other Operative Documents, or (ii) fail to pay within five (5) days after the same becomes due, any Base Rent, Additional Rent or other amounts required under the terms of this Lease or any of the other Operative Documents; or

(b)           Specific Defaults. (i) Tenant shall fail to carry any policy of insurance required by Article IX, or (ii) Tenant or any of its Subsidiaries shall fail to perform any covenant, obligation, condition or agreement set forth in Sections 21.21 or 21.22; or

(c)           Other Defaults. Tenant or any of its Subsidiaries shall fail to observe or perform any other covenant, obligation, condition or agreement contained in this Lease or the other Operative Documents and such failure shall continue for fifteen (15) Business Days after the earlier of (i) Tenant’s written acknowledgment of such failure and (ii) written notice to Tenant by Landlord, Administrative Agent or any Rent Purchaser of such failure; or

(d)           Representations and Warranties. Any written representation, warranty, certificate, information or other statement (financial or otherwise) made or furnished by Tenant or any of its Subsidiaries to Landlord, Administrative Agent or any Rent Purchaser in or in connection with this Lease or any of the other Operative Documents shall be false, incorrect, incomplete or misleading in any material respect when made or furnished and either:

(i)            Tenant has acknowledged that such representation, warranty, certificate, information or other statement was false, incorrect, incomplete or misleading in any

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material respect when made or furnished, or Landlord, Administrative Agent or any Rent Purchaser has delivered to Tenant written notice to such effect and such representation, warranty, certificate, information or other statement cannot be remedied; or

(ii)           Such representation, warranty, certificate, information or other statement continues to be false, incorrect, incomplete or misleading in any material respect thirty (30) days after the earlier of (A) Tenant’s written acknowledgment that such representation, warranty, certificate, information or other statement was false, incorrect, incomplete or misleading in any material respect when made or furnished, and (B) written notice to Tenant by Landlord, Administrative Agent or any Rent Purchaser to such effect; or

(e)           Cross-Default. (i) Tenant or any of its Subsidiaries shall fail to make any payment on account of any Indebtedness of such Entity (other than the Obligations) when due (whether at scheduled maturity, by required prepayment, upon acceleration or otherwise) and such failure shall continue beyond any period of grace provided with respect thereto, if the amount of such Indebtedness exceeds $25,000,000 or the effect of such failure is to cause, or permit the holder or holders thereof to cause, Indebtedness of Tenant and its Subsidiaries (other than the Obligations) in an aggregate amount exceeding $25,000,000 to become redeemable, due or otherwise payable (whether at scheduled maturity, by required prepayment, upon acceleration or otherwise) and/or to be secured by cash collateral or (ii) Tenant or any of its Subsidiaries shall otherwise fail to observe or perform any agreement, term or condition contained in any agreement or instrument relating to any Indebtedness of such Entity (other than the Obligations), or any other event shall occur or condition shall exist, if the effect of such failure, event or condition is to cause, or permit the holder or holders thereof to cause, Indebtedness of Tenant and its Subsidiaries (other than the Obligations) in an aggregate amount exceeding $25,000,000 to become redeemable, due or otherwise payable (whether at scheduled maturity, by required prepayment, upon acceleration or otherwise) and/or to be secured by cash collateral; or

(f)            Insolvency, Voluntary Proceedings. Tenant or any of its Material Subsidiaries shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of it or any of its creditors, (iv) except as otherwise provided in Section 21.21 (d) below, be dissolved or liquidated in full or in part, (v) become insolvent (as such term may be defined or interpreted under any applicable statute), (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it, or (vi) take any action for the purpose of effecting any of the foregoing; or

(g)           Involuntary Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Tenant or any of its Material Subsidiaries or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Tenant or any of its Material Subsidiaries or the debts thereof under any bankruptcy, insolvency or other similar law now or

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hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement; or

(h)           Judgments. (i) One or more judgments, orders, decrees or arbitration awards requiring Tenant and/or its Subsidiaries to pay an aggregate amount of $25,000,000 or more (exclusive of amounts covered by insurance issued by (y) an insurer not an Affiliate of Tenant or (z) a Captive Insurance Subsidiary) shall be rendered against Tenant and/or any of its Subsidiaries in connection with any single or related series of transactions, incidents or circumstances and the same shall not be satisfied, vacated or stayed for a period of ten (10) consecutive days; or (ii) any judgment, writ, assessment, warrant of attachment, tax lien or execution or similar process shall be issued or levied against a substantial part of the property of Tenant and its Subsidiaries taken as a whole and the same shall not be released, stayed, vacated or otherwise dismissed within ten (10) days after issue or levy; or

(i)            Operative Documents. The Operative Documents, taken as a whole, shall cease to provide Landlord, Administrative Agent or any Rent Purchaser the practical realization of the material rights and remedies intended to be provided thereunder; or any Operative Document shall be asserted by Tenant or any of its Subsidiaries not to be a legal, valid and binding obligation of Tenant or any of its Subsidiaries enforceable in accordance with its terms; or

(j)            Employee Benefit Plans. Any Reportable Event which constitutes grounds for the termination of any Employee Benefit Plan by the PBGC or for the appointment of a trustee by the PBGC to administer any Employee Benefit Plan shall occur, or any Employee Benefit Plan shall be terminated within the meaning of Title IV of ERISA or a trustee shall be appointed by the PBGC to administer any Employee Benefit Plan; or

(k)           Reserved.

(l)            Reserved.

(m)          Ground Lease Default. Tenant shall fail to observe or perform any covenant, obligation, condition or agreement in any Ground Lease or any Ground Lease shall expire, terminate or otherwise be extinguished; or

(n)           Default in Payment of Purchase Price or Guaranteed Residual Value. Failure of Tenant to (a) complete the Purchase Option after election (or deemed election pursuant to Section 17.2 or otherwise) to do so and pay amounts due in connection therewith when due, (b) perform all of its obligations pursuant to the Termination Option if Tenant has elected to exercise the Termination Option (defined in Section 20.2) (and has not rescinded its election to exercise such option) set forth in Section 20.2, including, without limitation, the obligations to make the payments required pursuant to Sections 20.2(b), (d) and (e) when due, or (c) pay the Purchase Price when due upon a Taking pursuant to Section 16.1.

19.2        Landlord’s Remedies. Upon the occurrence and during the continuation of an Event of Default, Landlord shall have the remedies specified below:

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(a)           Continue Lease. After the occurrence of an Event of Default, Landlord shall have the right to enforce, by suit or otherwise, all other covenants and conditions hereof to be performed or complied with by Tenant and to exercise all other remedies permitted by the laws of the state in which the Parcel is located. Upon application by Landlord, a receiver may be appointed to take possession of such Parcel and exercise all rights granted to Landlord as set forth in this Section 19.2.

(b)           Terminate Lease. In connection with an Event of Default, Landlord may terminate this Lease or any Lease Supplement by giving Tenant Notice thereof at any time after the occurrence of such Event of Default. In such event Tenant shall be obligated to purchase the Parcel (if Landlord has terminated only the Lease Supplement for such Parcel) or all of the Parcels (if Landlord has terminated this Lease) for an amount equal to the Purchase Price for such Parcel or all of the Parcels, as applicable, described in the Purchase Option contained in Section 20.1 below (that is, all accrued Base Rent, Additional Rent and the Lease Investment Balance under each Lease Supplement); provided that if this Lease is being terminated with respect to a Parcel on the basis of an Event of Default under Section 19.1(e) of this Lease relating to a failure, event or condition arising solely as a consequence of the breach or alleged breach of a “material adverse effect” or “material adverse change” clause or other similar clause with respect to the relevant Indebtedness, then Tenant shall pay, in lieu of the Lease Investment Balance component of the Purchase Price for such Parcel, the Guaranteed Residual Value for such Parcel. In such event, the leasehold interest in such Parcel and title to the Improvements thereon shall remain with Landlord and, at the request of Landlord or the Administrative Agent, Tenant will remarket the Parcel on behalf of Landlord, the Administrative Agent and the Rent Purchasers as provided in Section 20.2(c) and (d) of this Lease (except that Tenant shall be deemed to have paid the Guaranteed Residual Value for such Parcel to the extent it has paid such amount hereunder). Landlord shall also have its other remedies at law (including its rights under the Security Instruments).

(c)           Landlord’s Continuing Obligation to Sell. Except in the case of a foreclosure under the applicable Security Instruments, in the event Landlord obtains possession of a Parcel pursuant to the terms of this Lease (because of Tenant’s default, Lease expiration, or otherwise), Landlord shall be under a continuing obligation to use its commercially reasonable efforts to sell such Parcel to one or more unrelated third parties; provided, however, that Landlord shall not be required to sell or attempt to sell any portion of such Parcel (i) in a manner, or under circumstances, that could materially impair Landlord’s ability to enforce any of its rights or remedies under the Operative Documents (as determined in Landlord’s sole discretion), or (ii) at a time when market conditions render it inadvisable to sell or attempt to sell such Parcel (as determined in Landlord’s sole discretion). Upon the occurrence of any such sale, Landlord shall be obligated to pay to Tenant any excess of the amount realized by Landlord in connection with such sale over the Purchase Price. For purposes of the preceding sentence, the amount realized by Landlord upon a sale of a Parcel shall be net of Landlord’s sale expenses and other expenses incurred by Landlord to consummate such sale. Landlord’s obligation to pay such excess to Tenant shall survive any termination of this Lease and shall remain subject to the terms of the Rent Purchase Agreement or Participation Agreement. Tenant agrees that the Landlord will be deemed to be acting in good faith if it refuses to sell its interest for less than the excess of the Lease Investment Balance over the Guaranteed Residual Value.

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19.3        No Waiver. No failure by Landlord or Tenant to insist upon the strict performance of any term, covenant or condition of this Lease or to exercise any right or remedy consequent upon a breach thereof and no acceptance of full or partial Base Rent or Additional Rent during the continuance of any breach shall constitute a waiver of any such breach or of the term, covenant, or condition. No term, covenant or condition of this Lease to be performed or complied with by Tenant or Landlord, and no breach thereof, shall be waived, terminated, altered or modified except by a written instrument executed by Landlord and Tenant. No waiver of any breach shall affect or alter this Lease, but each and every term, covenant, and condition of this Lease shall continue in full force and effect with respect to any other then existing subsequent breach thereof.

19.4        Effect of Assignment. Notwithstanding an Entity’s prior assignment or transfer of its interest as Tenant under this Lease, so long as Landlord and Administrative Agent have been given Notice of such assignment pursuant to Section 15.1 and Section 21.3, Landlord shall give such Entity copies of all Notices required by this Article XIX in connection with any Event of Default, and such Entity shall have the period granted hereunder to Tenant to cure such Event of Default, unless such Entity shall have been released from all obligations arising under this Lease and all Operative Documents. Landlord may not assert any rights against such Entity in the absence of such Notice and opportunity to cure, so long as Landlord and Administrative Agent have been given Notice of such assignment pursuant to Sections 15.1 and 21.3.

19.5        Landlord Right to Perform. If Tenant fails to perform any covenant or agreement to be performed by Tenant under this Lease, and if the failure or default continues for thirty (30) days after Notice to Tenant (except for emergencies and except for payment of any lien or encumbrance threatening the imminent sale of any Parcel or any portion thereof, in which case payment or performance may be made as soon as necessary to minimize the damage to person or property caused by such emergency or to prevent any such sale), Landlord may, but shall have no obligation to, pay the same and perform such covenant or agreement on behalf of and at the expense of Tenant and do all reasonably necessary work and make all reasonably necessary payments in connection therewith including, but not limited to, the payment of reasonable attorneys’ fees and disbursements incurred by Landlord. Notwithstanding the foregoing, Landlord shall have no right to perform on behalf of Tenant so long as Tenant: (1) is diligently and in good faith attempting to cure such matter and prosecuting such cure to completion; (2) has the financial ability to so comply; and (3) commenced cure of such matter within thirty (30) days after Tenant’s receipt of Notice thereof from Landlord. Failure by Tenant to comply with the above shall allow Landlord to commence in a reasonable and customary manner and in good faith to attempt to cure such matter. Upon demand, Tenant shall reimburse Landlord for the reasonable amount so paid, together with interest at the Default Rate from the date incurred until the date repaid. Neither the performance by Landlord pursuant to this Section 19.5 nor the exercise by Landlord of any of its other rights and remedies shall constitute a cure or waiver of any Event of Default or nullify any Notice of Default or sale, unless and until all obligations under the Operative Documents are paid in full.

19.6        Landlord’s Default. If Landlord fails to perform any covenant or agreement to be performed by Landlord under Section 14.1, Section 16.4, Article XX, Article XXI, or Section 21.8 of this Lease, and if the failure or default continues for thirty (30) days after Notice to Landlord (except for emergencies and except for payment of any lien or encumbrance

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threatening the imminent sale of the Parcels or any portion thereof, in which case payment or cure may be made as soon as necessary to minimize the damage to person or property caused by such emergency or to prevent any such sale), Tenant may, but shall have no obligation to, pay the same and cure such default on behalf of and, so long as such failure to perform arises due to Landlord’s gross negligence, willful misconduct, or willful breach of this Lease, at the expense of Landlord and do all reasonably necessary work and make all reasonably necessary payments in connection therewith including, but not limited to, the payment of reasonable attorneys’ fees and disbursements incurred by Tenant. Notwithstanding the foregoing, Tenant shall have no right to cure any such failure to perform by Landlord so long as Landlord is diligently and in good faith attempting to cure such matter. Notwithstanding anything to the contrary, Landlord’s liability under this Lease shall in all events be limited as provided in Section 21.13 below, or as otherwise indicated in this Lease.

ARTICLE XX

TENANT’S OPTION TO PURCHASE OR TERMINATE

20.1        Option To Purchase Parcels.

(a)           Purchase Option. Provided no Event of Default has occurred and is continuing, on any Rent Payment Date during the Term, Tenant shall have the option (“Purchase Option”) to purchase all, but not less than all of the Parcels covered by all Lease Supplements. The purchase price (“Purchase Price”) for the Parcels shall be the sum of accrued and unpaid Base Rent, any accrued and unpaid Additional Rent, plus the Lease Investment Balance under all Lease Supplements and expenses incurred by Landlord in consummating the transfer of the Parcels pursuant to this Article XX. The Purchase Price shall be deposited by Tenant in escrow as provided in the Participation Agreement and distributed as provided in the Rent Purchase Agreement.

(b)           Purchase Option Exercise Notice. If Tenant desires to exercise the Purchase Option, Tenant shall deliver to Landlord and Administrative Agent thirty (30) days’ prior written notice (“Purchase Option Exercise Notice”) of Tenant’s election. If Tenant does not exercise the Termination Option with respect to the Parcels as provided in Section 20.2 below it shall be deemed to have exercised the Purchase Option with respect to the Parcels.

(c)           Transfer. If Tenant exercises the Purchase Option with respect to a Parcel, the purchase and sale of the Parcels shall be consummated as follows:

(i)            Landlord shall grant and convey the Parcels to Tenant, its authorized agent or assignee, pursuant to a duly executed and acknowledged assignment and assumption of leasehold interest (as to the Land) and a grant deed as to the Parcels (collectively herein the “Deed”), free and clear of all liens, encumbrances, deeds of trust, mortgages, rights-of-way and restrictive covenants or conditions, of record, placed against the Parcels by Landlord except for (A) the Permitted Title Exceptions (but not the Security Instruments), and (B) any UCC-1 filed or recorded which evidences security interests encumbering the Parcels or any part thereof in favor of Landlord, which security interests Landlord shall cause to be released so that they no longer affect the Parcels (“Landlord Liens”).

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(ii)           The Purchase Price shall be paid to Landlord upon delivery of the Deed and any other documents reasonably requested by Tenant (the “Additional Documents”) to evidence the transfer of the Parcels subject to the Permitted Title Exceptions (excluding the Security Instruments, and any UCC-1 filed or recorded which evidences security interests encumbering the Parcels or any part thereof in favor of Landlord, which security interests Landlord shall cause to be released so that they no longer affect the Parcels). In the event that Tenant elects to assign the Purchase Option pursuant to Section 20.1(d) below, and Tenant’s assignee pays an amount less than the Purchase Price for the Parcels, Tenant shall pay to Landlord any excess of the Purchase Price over the amount paid by such assignee. Landlord shall deliver the Deed and the Additional Documents to Tenant or Tenant’s assignee on the date for closing specified by Tenant in the Purchase Option Exercise Notice. The closing shall take place at the location and in the manner reasonably set forth by Tenant or Tenant’s Assignee in the Purchase Option Exercise Notice; provided that the date of closing shall occur no later than the last day of the Term of the Lease.

(iii)          If Landlord shall fail to remove all Landlord Liens within the time herein prescribed for the delivery of the Deed, then Tenant shall have the right (in addition to all other rights provided by law or in equity) by a written notice to Landlord: (1) to extend the time (notwithstanding the Expiration Date of this Lease) in which Landlord shall remove all Landlord Liens and deliver the Deed and Additional Documents, during which extension this Lease shall remain in full force and effect, except Tenant shall be released from its obligation to pay Base Rent and Additional Rent during the extension; (2) to accept delivery of the Deed and Additional Documents subject to such Landlord Liens not cleared by Landlord; or (3) to accept delivery of the Deed and the Additional Documents and if any Landlord Lien is curable by the payment of money, Tenant may make such payment and such payment shall be a credit against the Purchase Price in favor of Tenant.

(iv)          Base Rent shall be prorated and paid and all Additional Rent which is then due and payable shall be paid as of the date title to the Parcel is vested of record in Tenant. Tenant shall pay the escrow fees; the recorder’s fee for recording the Deed; the premium for the title insurance policy; all documentary transfer taxes; Tenant’s attorneys’ fees; Landlord’s reasonable attorneys’ fees; all other costs and expenses incurred by Tenant in consummating the transfer of the Parcel; and all reasonable expenses (except as specified in the next sentence) incurred by Landlord in consummating the transfer of the Parcel pursuant to this Section 20.1. Landlord shall pay the costs and expenses of removing Landlord Liens.

(d)           Assignment. Tenant shall have the right, after giving notice to Landlord, but without Landlord’s consent, to assign this Purchase Option, in whole, to any Entity at any time, whether or not Tenant also assigns its interest in the Lease. Notwithstanding any such assignment, Tenant shall remain primarily liable for all obligations and liabilities on the part of Tenant theretofore or thereafter arising under this Lease and all Lease Supplements.

20.2        Termination Option.

(a)           Notice. Provided that no Default or Event of Default has occurred and is then continuing and subject to the conditions in Section 20.2(e), unless Tenant has notified Landlord and Administrative Agent prior to such date that it elects the Purchase Option, Tenant

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may, on or before the date which is nine (9) months prior to the expiration of the Term, exercise an option (“Termination Option”) to sell all but not less than all the Parcels; provided, however, that at any time Tenant can rescind its election to exercise its Termination Option if it then exercises its Purchase Option pursuant to Section 20.1 above, and in the event of any such rescission by Tenant, Tenant shall be responsible for payment of any fees and expenses incurred in connection therewith or resulting therefrom, including any such fees and expenses incurred by or on behalf of Landlord.

(b)           Termination Option. After giving the notice set forth in Section 20.2(a) above Tenant shall then use its best efforts to sell the Parcels for cash to a third party purchaser (who is not an affiliate of Tenant within the meaning of Rule 405 under the Securities Act of 1933) and, if the Parcels are not conveyed to such purchaser prior to the expiration of the Term, Landlord may, at its option, either allow the Tenant to holdover pursuant to Section 4.2 above, or terminate the Lease, in which case Tenant shall immediately vacate the Parcels and quitclaim all interest of Tenant, if any, therein to Landlord. Tenant shall pay to Landlord, on the last day of the Term, any Base Rent or Additional Rent due and owing under the applicable Lease Supplement, this Lease or any other Operative Document.

(c)           Termination Option Procedures. In the event that Tenant elects the Termination Option with respect to the Parcels, Tenant shall use its best efforts to obtain a purchaser for the Parcels. Tenant shall notify Landlord promptly upon receipt of any bid for the Parcels. Except as otherwise provided below, any sale by Tenant shall be for the highest cash bid submitted to Tenant, including any cash bid submitted by or through Landlord. The determination of the highest bid shall be made by Landlord. Notwithstanding the above provisions, Tenant may accept any cash bid which exceeds the Lease Investment Balance. If Landlord undertakes any sales efforts, Tenant shall promptly reimburse Landlord for any reasonable charges, costs and expenses incurred in such effort, including any commissions, allocated time charges, costs and expenses of internal counsel, external counsel or other attorneys’ fees. If the Parcels have not been sold by the end of the Term, then Tenant shall pay to Landlord on the last day of the Term the amount of the Guaranteed Residual Value with respect thereto and shall continue Tenant’s sales efforts for the Parcels.

(d)           Payments under the Termination Option. If Tenant elects the Termination Option with respect to the Parcels, any sale pursuant to the Termination Option that results from acceptance of a bid prior to the end of the Term shall be consummated on the last day of the Term. On the last day of the Term, the proceeds (“Proceeds”) of the sale of the Parcels pursuant to the Termination Option shall be paid in accordance with the Distribution Formula. If the Proceeds are less than the Lease Investment Balance applicable thereto (a “Shortfall”), then Landlord shall receive such Proceeds and the Tenant shall make an additional payment to the Landlord equal to such Shortfall, but not more than the Guaranteed Residual Value applicable to all Parcels minus the reasonable and documented out-of-pocket expenses incurred by the Tenant in connection with the sale of the Parcels, and Tenant shall also pay to Landlord any other amount owing by Tenant under any Operative Document. If a sale is consummated after the end of the Term and Tenant has already paid the Guaranteed Residual Value as required by Section 20.2(c) above, then the Proceeds shall be paid to Landlord to the extent of the difference between the Guaranteed Residual Value amount already paid by Tenant and the applicable Lease Investment Balance, and any excess Proceeds shall be paid to Tenant

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after Tenant has paid to Landlord any other amount owing by Tenant under any Operative Document.

(e)           Termination Conditions. Each of the following conditions must be met by Tenant in connection with the exercise of the Termination Option with respect to each Parcel:

(i)            Not more than one hundred eighty (180) and not less than ninety (90) days prior to the Expiration Date, Tenant shall deliver to Landlord a Phase One environmental site assessment for such Parcel prepared by an environmental consultant selected by Tenant and approved in advance by Landlord, which shall contain conclusions reasonably satisfactory to Landlord as to the environmental status of such Parcel. If such environmental site assessment indicates any exceptions, Tenant shall have also delivered a Phase Two environmental assessment by such environmental consultant prior to the Expiration Date showing the completion of the remediation of such exceptions in compliance with all requirements of law.

(ii)           On the Expiration Date, no Default or Event of Default shall have occurred and be continuing and Tenant shall not be conducting any contest pursuant to this Lease in connection with such Parcel.

(iii)          On the Expiration Date, Tenant shall be in compliance in all material respects with its obligations under Articles X through XIII, XVI and XVII with respect to such Parcel.

(iv)          In connection with any such sale of Landlord’s interest in any Parcel, Tenant will provide to the purchaser all customary “seller’s” indemnities, representations and warranties regarding absence of Liens (except Landlord Liens) and the condition of such Parcel, including an environmental indemnity for such Parcel, to the extent the same are required by the purchaser. Tenant shall have obtained, at its cost and expense, all required governmental and regulatory consents and approvals and shall have made all filings as required by applicable law in order to carry out and complete the transfer of such Parcel. As to Landlord, any such sale of Landlord’s interest in a Parcel shall be made on an “as is, with all faults” basis without representation or warranty by Landlord other than the absence of Landlord Liens. Any agreement as to such sale shall be made subject to Landlord’s rights hereunder.

(v)           Tenant shall pay all prorations, credits, costs and expenses of the sale of Landlord’s interest in such Parcel, whether incurred by Landlord or Tenant, including the cost of all title insurance, surveys, environmental reports, appraisals, transfer taxes, Landlord’s reasonable attorneys’ fees, Tenant’s attorneys’ fees, commissions, escrow fees, recording fees, and all applicable documentary and other transfer taxes.

(vi)          Tenant shall pay to Landlord on or prior to such Expiration Date, the amount, if any, by which the fair market sales value of such Parcel has been reduced by excess wear and tear. If the Guaranteed Residual Value plus the sales proceeds to be retained by Landlord is less than the Lease Investment Balance of such Parcel, then Landlord may cause an appraisal to be made, at the expense of Tenant, to determine the amount of such reduction due to excess wear and tear.

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If Tenant does not comply with any of the conditions or any of its obligations under this Article XX with respect to a Parcel, then Landlord may declare by written notice to Tenant the Termination Option with respect to all Parcels to be null and void, in which event all of Tenant’s rights under this Article XX shall immediately terminate and Tenant shall be obligated to purchase Landlord’s interest in all Parcels as if it had exercised the Purchase Option under Section 20.1 on the Expiration Date.

ARTICLE XXI

MISCELLANEOUS

21.1        Relationship. Neither this Lease nor any other Operative Documents or transactions contemplated hereby or thereby shall in any respect be interpreted, deemed or construed as constituting Landlord, Rent Purchasers, Administrative Agent and Tenant as partners or joint venturers, one with the other, or as creating any partnership, joint venture, association or, except as set forth in Section 21.2 below, any other relationship other than that of landlord and tenant; and, except as set forth in Section 21.2 below, both Landlord and Tenant agree not to make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal proceeding involving either Landlord or Tenant or the subject matter of this Lease.

21.2        Form of Transaction; Certain Tax Matters.

(a)           Landlord and Tenant hereby agree and declare that the transactions contemplated by this Lease are intended to constitute, both as to matters of form and substance:

(i)            an operating lease for financial accounting purposes, and

(ii)           a financing arrangement secured by the Parcels (and not a “true lease”) for purposes of Federal, state and local income tax, commercial law and other legal purposes, including bankruptcy.

Accordingly, and notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant agree and declare that (A) the transactions contemplated hereby are intended to have a dual, rather than single, form and (B) all references in this Lease to the “Lease” of the Parcels which fail to reference such dual form do so as a matter of convenience only and do not reflect the intent of Landlord and Tenant as to the true form of such arrangements.

(b)           Landlord and Tenant agree that, in accordance with their intentions and the substance of the transactions contemplated hereby, Tenant (and not Landlord) shall be treated as the owner of the Parcels for Federal, state, local income tax purposes and this Lease shall be treated as a financing arrangement secured by the Parcels. Tenant shall be entitled to take any deduction, credit allowance or other reporting, filing or other tax position consistent with such characterizations. Landlord shall not file any Federal, state or local income tax returns, reports or other statements in a manner which is inconsistent with the foregoing provisions of this Section 21.2.

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(c)           Tenant acknowledges that it has retained accounting, tax and legal advisors to assist it in structuring this Lease and Tenant is not relying on any advice from or representations of Landlord regarding the proper treatment of this transaction for accounting, income tax or any other purpose.

21.3        Notices. Each Notice shall be in writing and shall be sent by personal delivery, overnight courier (charges prepaid or billed to the sender) or by the deposit of such with the United States Postal Service, or any official successor thereto, designated as registered or certified mail, return receipt requested, bearing adequate postage and in each case addressed as provided in Section 1.10. Each Notice shall be effective upon being personally delivered or actually received. The time period in which a response to any such Notice must be given or any action taken with respect thereto shall commence to run from the date of personal delivery or receipt of the Notice by the addressee thereof, as reflected on the return receipt of the Notice. Rejection or other refusal to accept shall be deemed to be receipt of the Notice sent. By giving to the other party at least thirty (30) days’ prior Notice thereof, either party to this Lease shall have the right from time to time during the Term of this Lease to change the address(es) thereof and to specify as the address(es) thereof any other address(es) within the continental United States of America.

21.4        Severability of Provisions. If any term, covenant or condition of this Lease shall be invalid or unenforceable, the remainder of this Lease, or the application of such term, covenant or condition to Entities or circumstances other than those as to which it is invalid or unenforceable, shall not be affected thereby.

21.5        Entire Agreement; Amendment. This Lease and each other Operative Document constitutes the entire agreement of Landlord, Administrative Agent, each Rent Purchaser and Tenant with respect to the subject matter hereof and thereof. Neither this Lease nor any provision hereof may be changed, waived, discharged or terminated orally, but only by an instrument in writing signed as set forth in the Rent Purchase Agreement.

21.6        Memorandum of Amended and Restated Lease. Neither party shall record this Lease. However, concurrently with the execution of any Lease Supplement, Landlord and Tenant shall execute a Memorandum of Lease (“Memorandum of Lease”) in the form attached to each Lease Supplement and by this reference made a part hereof, which Memorandum of Lease shall be promptly recorded in the Official Records.

21.7        Successors and Assigns. Subject to Articles XIV and XV, this Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective heirs, executors, legal representatives, successors and assigns. Whenever in this Lease a reference to any Entity is made, such reference shall be deemed to include a reference to the heirs, executors, legal representatives, successors and permitted assigns of such Entity.

21.8        Commissions. Landlord and Tenant each represent and warrant that neither has dealt with any broker in connection with this transaction and that no real estate broker, salesperson or finder has the right to claim a real estate brokerage, salesperson’s commission or finder’s fee by reason of contact between the parties brought about by such broker, salesperson or finder. Each party shall hold and save the other harmless of and from any and all loss, cost,

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damage, injury or expense arising out of or in any way related to claims for real estate broker’s or salesperson’s commissions or fees based upon allegations made by the claimant that it is entitled to such a fee from the indemnified party arising out of contact with the indemnifying party or alleged introductions of the indemnifying party to the indemnified party.

21.9        Attorneys’ Fees. In the event any action is brought by Landlord or Tenant against the other to enforce or for the breach of any of the terms, covenants or conditions contained in this Lease, the prevailing party shall be entitled to recover reasonable attorneys’ fees to be fixed by the court, together with costs of suit therein incurred. Tenant shall pay the reasonable attorneys’ fees incurred by Landlord for the review and negotiation of this Lease.

21.10      Governing Law. This Lease and the obligations of the parties hereunder shall be governed by and interpreted, construed and enforced in accordance with the laws of the State of California.

21.11      Counterparts. This Lease may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall comprise but a single instrument.

21.12      Time Is of the Essence. Time is of the essence of this Lease, and of each provision hereof.

21.13      Limitations on Recourse. The obligations of Tenant and Landlord under this Lease shall be without recourse to any partner, officer, trustee, beneficiary, shareholder, director or employee of Tenant or Landlord. Except for the gross negligence or willful misconduct of Landlord or for breach of Landlord’s obligations to fund pursuant to Article VI above, Landlord’s liability to Tenant for any default by Landlord under this Lease: (1) shall be limited to Landlord’s interest in the Parcels; and (2) shall extend to any actual damages of Tenant, but shall not extend to any foreseeable or unforeseeable consequential damages.

21.14      Estoppel Certificates. Within thirty (30) days after request therefor by either party, the non-requesting party shall deliver, in recordable form, a certificate to any proposed mortgagee, purchaser, sublessee or assignee and to the requesting party, certifying (if such be the case) that this Lease is in full force and effect, the date of Tenant’s most recent payment of Base Rent, that, to the best of its knowledge, the non-requesting party has no defenses or offsets outstanding, or stating those claimed, and any other information reasonably requested. Failure to deliver said statement in time shall be conclusive upon the non-requesting party that: (a) this Lease is in full force and effect, without modification except as may be represented by the requesting party; (b) there are no uncured defaults in the requesting party’s performance and the non-requesting party has no right of offset, counterclaim or deduction against the non-requesting party’s obligations hereunder; (c) no more than one month’s Base Rent has been paid in advance; and (d) any other matters reasonably requested in such certificate.

21.15      As-Is Lease. Landlord makes no representations or warranties concerning the condition, suitability or any other matters relating to the Parcels, and Tenant hereby acknowledges that Tenant leases the Parcels from Landlord on an “as is” basis.

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21.16      Net Lease. Except as otherwise provided in this Lease, Tenant agrees that this Lease is an absolute net Lease, and the Base Rent called for hereunder shall be paid as required inclusive of all expenses associated with the Parcels, including without limitation, Real Estate Taxes and insurance premiums for the insurance required to be carried hereunder, and all other reasonable and customary costs and expenses incurred by Landlord, in connection with the Parcels or this Lease, all of which shall be paid or reimbursed by Tenant unless otherwise specifically provided herein. Tenant agrees to reimburse Landlord, within five (5) Business Days following receipt of any written demand therefor, for all reasonable and customary fees, late charges, title endorsements, and other costs and expenses charged to Landlord which accrue during any period.

21.17      Landlord’s Representations and Warranties. Landlord hereby represents and warrants that:

(a)           Landlord has the full right and authority to enter into this Lease, consummate the sale, transfers and assignments contemplated herein and otherwise perform its obligations under this Lease;

(b)           the person or persons signatory to this Lease and any document executed pursuant hereto on behalf of Landlord have full power and authority to bind Landlord;

(c)           the execution and delivery of this Lease and the performance of Landlord’s obligations hereunder do not and shall not result in the violation of Landlord’s organizational documents or any material contract or agreement to which Landlord may be a party;

(d)           Landlord is duly organized and existing under the laws of the jurisdiction in which it is formed, and is qualified to do business in the State of California; and

(e)           as of the Date of Lease and at all times thereafter during the Term, the fair value of the Parcels is and shall be less than half of the fair value of the total assets of Landlord and no more than 95% of the Lease Investment Balance is or shall be financed or encumbered by (i) non-recourse debt and/or (ii) equity that does not participate in all of the profits and losses of Landlord.

21.18      Tenant’s Representations and Warranties. In order to induce Landlord, Administrative Agent and each Rent Purchaser to enter into the Operative Documents, Tenant represents and warrants to Landlord, Administrative Agent and each Rent Purchaser as follows:

(a)           Due Incorporation, Qualification, etc. Each of Tenant and Tenant’s Material Subsidiaries (i) is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of organization; (ii) has the power and authority to own, lease and operate its properties and carry on its business as now conducted; and (iii) is duly qualified, licensed to do business and in good standing as a foreign corporation in each jurisdiction where the failure to be so qualified or licensed is reasonably likely to have a Material Adverse Effect. Tenant is organized under the laws of the State of Delaware and is a “registered entity” under the laws of the State of Delaware. Tenant’s exact name is as set forth in the preamble to this Lease.

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The chief executive office and principal place of business of Tenant is located at 345 Park Avenue, San Jose, California.

(b)           Authority. The execution, delivery and performance by Tenant of each Operative Document executed, or to be executed, by Tenant and the consummation of the transactions contemplated thereby (i) are within the power of Tenant and (ii) have been duly authorized by all necessary actions on the part of Tenant.

(c)           Enforceability. Each Operative Document executed, or to be executed, by Tenant has been, or will be, duly executed and delivered by Tenant and constitutes, or will constitute, a legal, valid and binding obligation of Tenant, enforceable against Tenant in accordance with its terms, except as limited by bankruptcy, insolvency or other laws of general application relating to or affecting the enforcement of creditors’ rights generally and general principles of equity.

(d)           Non-Contravention. The execution and delivery by Tenant of the Operative Documents executed by Tenant and the performance and consummation of the transactions contemplated thereby do not (i) violate any Legal Requirement applicable to Tenant; (ii) violate any provision of, or result in the breach or the acceleration of, or entitle any other Entity to accelerate (whether after the giving of notice or lapse of time or both), any Contractual Obligation of Tenant or the SJRDA Ground Leases; or (iii) result in the creation or imposition of any Lien (or the obligation to create or impose any Lien) upon any property, asset or revenue of Tenant (except such Liens as may be created in favor of Landlord, Administrative Agent or any Rent Purchaser pursuant to this Lease or the other Operative Documents).

(e)           Approvals. No consent, approval, order or authorization of, or registration, declaration or filing with, any Governmental Authority is required in connection with the execution and delivery of the Operative Documents executed by Tenant or the performance or consummation of the transactions contemplated thereby, except for those which have been made or obtained and are in full force and effect and except for the filing of the Operative Documents with the SEC as material agreements of Tenant, which SEC filing will be made by Tenant in the ordinary course of its SEC filings.

(f)            No Violation or Default. Neither Tenant nor any of its Subsidiaries is in violation of or in default with respect to (i) any Legal Requirement applicable to such Entity or (ii) any Contractual Obligation of such Entity (nor is there any waiver in effect which, if not in effect, would result in such a violation or default), where, in each case, such violation or default is reasonably likely to have a Material Adverse Effect. Without limiting the generality of the foregoing, neither Tenant nor any of its Subsidiaries (A) has violated any Applicable Environmental Laws, (B) has any liability under any Applicable Environmental Laws or (C) has received notice or other communication of an investigation or is under investigation by any Governmental Authority having authority to enforce Applicable Environmental Laws, where such violation, liability or investigation is reasonably likely to have a Material Adverse Effect. No Default has occurred and is continuing.

(g)           Litigation. No action (including derivative actions), suit, proceeding or investigation is pending or, to the knowledge of Tenant, threatened against Tenant or any of its

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Subsidiaries at law or in equity in any court or before any other Governmental Authority which (i) seeks to enjoin, either directly or indirectly, the execution, delivery or performance by Tenant of the Operative Documents or the transactions contemplated thereby, or (ii) except as disclosed in the 10-K report filed by Tenant with the Securities and Exchange Commission for the fiscal year ended November 28, 2003, is reasonably likely (alone or in the aggregate) to have a Material Adverse Effect.

(h)           Title; Possession Under Leases. Tenant and its Material Subsidiaries own and have good and marketable title, or a valid leasehold interest in, or licenses with respect to, all their respective properties and assets as reflected in the most recent Financial Statements delivered to Landlord and Administrative Agent (except those assets and properties disposed of in the ordinary course of business or otherwise in compliance with this Lease since the date of such Financial Statements) and all respective assets and properties acquired by Tenant and its Material Subsidiaries since such date (except those disposed of in the ordinary course of business or otherwise in compliance with this Lease). Such assets and properties are subject to no Lien, except for Permitted Liens. Each of Tenant and its Material Subsidiaries has complied with all material obligations under all material leases to which it is a party and enjoys peaceful and undisturbed possession under such leases subject only to rights of sublessees of Tenant or its Material Subsidiaries.

(i)            Financial Statements. The audited Financial Statements dated November 28, 2003, and the unaudited Financial Statements for the fiscal quarter ended June 4, 2004, furnished by Tenant to Landlord and Administrative Agent prior to the date hereof, (i) are in accordance with the books and records of Tenant and its Subsidiaries, which have been maintained in accordance with good business practice; (ii) have been prepared in conformity with GAAP; and (iii) fairly present in all material respects the financial conditions and results of operations of Tenant and its Subsidiaries as of the date thereof and for the period covered thereby. Neither Tenant nor any of its Subsidiaries has any Contingent Obligations, liability for taxes or other outstanding obligations which are material in the aggregate, except as disclosed in such Financial Statements; and, since June 4, 2004, there has been no development or event that is reasonably likely to have a Material Adverse Effect.

(j)            Equity Securities. All Equity Securities of Tenant have been offered and sold in compliance with all federal and state securities laws and all other Legal Requirements, except where any failure to comply is not reasonably likely to have a Material Adverse Effect.

(k)           No Agreements Regarding Mergers; Etc. Neither Tenant nor any of its Subsidiaries has any legal obligation, absolute or contingent, to any Entity to effect any merger, consolidation or other reorganization of Tenant or any of its Subsidiaries (except as permitted by Section 21.21(d)) or to enter into any agreement with respect thereto.

(l)            Employee Benefit Plans.

(i)            Based upon the latest valuation of each Employee Benefit Plan that either Tenant or any ERISA Affiliate maintains or contributes to, or has any obligation under (which occurred within twelve months of the date of this representation), the aggregate benefit liabilities of such plan within the meaning of § 4001 of ERISA did not exceed the aggregate

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value of the assets of such plan. Neither Tenant nor any ERISA Affiliate has any liability with respect to any post-retirement benefit under any Employee Benefit Plan which is a welfare plan (as defined in section 3(1) of ERISA), other than liability for health plan continuation coverage described in Part 6 of Title I(B) of ERISA, which liability for health plan contribution coverage is not reasonably likely to have a Material Adverse Effect.

(ii)           Each Employee Benefit Plan complies, in both form and operation, in all material respects, with its terms, ERISA and the IRC, and no condition exists or event has occurred with respect to any such plan which would result in the incurrence by either Tenant or any ERISA Affiliate of any material liability, fine or penalty. Each Employee Benefit Plan, related trust agreement, arrangement and commitment of Tenant or any ERISA Affiliate is legally valid and binding and in full force and effect. No Employee Benefit Plan is being audited or investigated by any government agency or is subject to any pending or threatened claim or suit. Neither Tenant nor any ERISA Affiliate nor any fiduciary of any Employee Benefit Plan has engaged in a prohibited transaction under section 406 of ERISA or section 4975 of the IRC.

(iii)          Neither Tenant nor any ERISA Affiliate contributes to or has any material contingent obligations to any Multiemployer Plan. Neither Tenant nor any ERISA Affiliate has incurred any material liability (including secondary liability) to any Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan under Section 4201 of ERISA or as a result of a sale of assets described in Section 4204 of ERISA. Neither Tenant nor any ERISA Affiliate has been notified that any Multiemployer Plan is in reorganization or insolvent under and within the meaning of Section 4241 or Section 4245 of ERISA or that any Multiemployer Plan intends to terminate or has been terminated under Section 4041A of ERISA.

(m)          Other Regulations. Tenant is not subject to regulation under the Investment Company Act of 1940, the Public Utility Holding Company Act of 1935, the Federal Power Act, the Interstate Commerce Act, any state public utilities code or to any other Governmental Rule limiting its ability to incur indebtedness.

(n)           Patent and Other Rights. Except as disclosed in the 10-Q report filed by Tenant with the Securities and Exchange Commission for the fiscal quarter ended June 4, 2004, Tenant and its Material Subsidiaries own, license or otherwise have the full right to use, under validly existing agreements, all patents, licenses, trademarks, trade names, trade secrets, service marks, copyrights and all rights with respect thereto, which are material to the conduct of their businesses taken as a whole.

(o)           Governmental Charges. Tenant and its Subsidiaries have filed or caused to be filed all tax returns or requests for extension which are required to be filed by them. Tenant and its Subsidiaries have paid, or made provision for the payment of, all taxes and other Governmental Charges which have or may have become due pursuant to said returns or otherwise and all other indebtedness, except such Governmental Charges or indebtedness, if any, which are being contested in good faith and as to which adequate reserves (determined in accordance with GAAP) have been provided or which are not reasonably likely to have a Material Adverse Effect if unpaid.

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(p)           Margin Securities. No part of the Commitment Amount will be used directly or indirectly for the purpose of purchasing or carrying, or for payment in full or in part of debt that was incurred for the purposes of purchasing or carrying, any margin security as such term is defined in Section 207.2 of Regulation G of the Board of Governors of the Federal Reserve System (12 C.F.R., Chapter 11, Part 207).

(q)           SJRDA Ground Leases. Each SJRDA Ground Lease is in full force and effect and no default has occurred and is continuing under either SJRDA Ground Lease.

(r)            Solvency, Etc. On the Date of Lease and after the execution and delivery of the Operative Documents and the consummation of the transactions contemplated thereby, (i) the fair value of the property of Tenant is greater than the fair value of the liabilities (including contingent, subordinated, matured and unliquidated liabilities) of Tenant, (ii) the present fair saleable value of the assets of Tenant is greater than the amount that will be required to pay the probable liability of Tenant on its debts as they become absolute and matured, (iii) Tenant does not intend to, and does not believe that it will, incur debts or liabilities beyond Tenant’s ability to pay as such debts and liabilities mature and (iv) Tenant is not engaged in or about to engage in business or transactions for which Tenant’s property would constitute an unreasonably small capital.

(s)           Catastrophic Events. Neither Tenant nor any of its Subsidiaries and none of their properties is or has been affected by any fire, explosion, accident, strike, lockout or other labor dispute, drought, storm, hail, earthquake, embargo, act of God or other casualty that is reasonably likely to have a Material Adverse Effect. There are no disputes presently subject to grievance procedure, arbitration or litigation under any of the collective bargaining agreements, employment contracts or employee welfare or incentive plans to which Tenant or any of its Subsidiaries is a party, and there are no strikes, lockouts, work stoppages or slowdowns, or, to the best knowledge of Tenant, jurisdictional disputes or organizing activities occurring or threatened which alone or in the aggregate are reasonably likely to have a Material Adverse Effect.

(t)            Obligations. The obligations of Tenant hereunder and under the other Operative Documents to which it is a party (i) rank at least pari passu in right of payment with all other unsecured and unsubordinated Indebtedness of Tenant and (ii) constitute “senior debt” for purposes of any subordinated Indebtedness of Tenant.

(u)           Reserved.

(v)           Accuracy of Information Furnished. The Operative Documents and the other certificates and written statements and information (excluding projections and analyst reports) prepared by and furnished by Tenant and its Subsidiaries to Landlord, Administrative Agent and the Rent Purchasers in connection with the Operative Documents and the transactions contemplated thereby, taken as a whole, do not contain any untrue statement of a material fact and do not omit to state any material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. All projections furnished by Tenant and its Subsidiaries to Landlord, Administrative Agent and the Rent Purchasers in connection with the Operative Documents and the transactions contemplated thereby have been based upon

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reasonable assumptions and represent, as of their respective dates of presentations, Tenant’s and its Subsidiaries’ reasonable estimates of the future performance of Tenant and its Subsidiaries.

(w)          Offer of Securities, etc. Neither the Tenant nor any person authorized to act on the Tenant’s behalf has, directly or indirectly, offered any interest in any Parcels or any other interest similar thereto (the sale or offer of which would be integrated with the sale or offer of such interest in a Parcel), for sale to, or solicited any offer to acquire any of the same from, any person other than the Landlord and other “accredited investors” (as defined in Regulation D of the Securities and Exchange Commission).

(x)            Parcels. To the best of Tenant’s knowledge, the Parcels will comply in all material respects with all material requirements of law (including, without limitation, all zoning and land use laws and environmental laws) and insurance requirements.

(y)           Flood Hazard Areas. To the best of Tenant’s knowledge, except as otherwise identified on the survey delivered to Landlord in connection with the Original Leases, no portion of any Parcel is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency. If any Parcel is located in an area identified as a special flood hazard area by the Federal Emergency Management Agency or other applicable agency, then flood insurance has been obtained for such Parcel in accordance with Article IX and in accordance with the National Flood Insurance Act of 1968, as amended.

(z)            Lease. Upon the execution and delivery of each Lease Supplement, (i) the Tenant will have unconditionally accepted the Parcel covered by such Lease Supplement (provided that nothing contained herein shall be deemed a waiver by the Tenant of any right of action against persons with respect to title to and condition of the Parcel on the Rent Commencement Date other than the Landlord), (ii) no right of offset will exist with respect to any Base Rent or other sums payable under this Lease, and (iii) no Base Rent under this Lease will have been prepaid.

21.19      Capital Adequacy. If, after the date hereof, Landlord, Administrative Agent or any Rent Purchaser shall have reasonably determined that the adoption after the date hereof of any Legal Requirement regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy, whether or not having the force of law, of any such Governmental Authority, has or would have the effect of reducing the rate of return on the capital of Landlord or any Rent Purchaser as a consequence of its obligations hereunder to a level below that which Landlord or any Rent Purchaser could have achieved but for such adoption, change or compliance (taking into consideration Landlord’s and Rent Purchasers’ policies with respect to capital adequacy), then from time to time, within fifteen (15) days after written demand (which demand shall be accompanied by a statement setting forth the basis for such demand) delivered to Tenant by Landlord, Administrative Agent or any Rent Purchaser, Tenant shall pay to Landlord, Administrative Agent and/or such Rent Purchaser such additional amount or amounts as will compensate Landlord, Administrative Agent and/or any Rent Purchaser for such reduction.

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21.20      Affirmative Covenants of Tenant. Until the termination of this Lease and the satisfaction in full by Tenant of all Obligations, Tenant will comply, and will cause compliance, with the following affirmative covenants, unless Landlord and Majority Rent Purchasers shall otherwise consent in writing:

(a)           Financial Statements, Reports, etc. Tenant shall furnish to Landlord and Administrative Agent, with sufficient copies for each Rent Purchaser, the following, each in such form and such detail as Landlord, Administrative Agent or Majority Rent Purchasers shall reasonably request:

(i)            As soon as available and in no event later than forty-five (45) days after the last day of each of the first three (3) fiscal quarters of Tenant, a copy of the Financial Statements of Tenant and its Subsidiaries (prepared on a consolidated basis) for such quarter and for the fiscal year to date, certified by the chief executive officer or chief financial officer of Tenant to present fairly in all material respects the financial condition, results of operations and other information reflected therein and to have been prepared in accordance with GAAP (subject to normal year-end audit adjustments);

(ii)           As soon as available and in no event later than ninety (90) days after the close of each fiscal year of Tenant, (A) copies of the audited Financial Statements of Tenant and its Subsidiaries (prepared on a consolidated basis) for such year, audited by KPMG LLP or other independent certified public accountants of recognized national standing acceptable to Landlord and Administrative Agent, and (B) copies of the unqualified opinions (or qualified opinions reasonably acceptable to Landlord and Administrative Agent) and, to the extent delivered and within ten (10) days after delivery, final management letters delivered by such accountants to the Audit Committee of the Board of Directors in connection with all such Financial Statements;

(iii)          Contemporaneously with the quarterly and year-end Financial Statements required by the foregoing clauses (i) and (ii), a compliance certificate of the chief executive officer, chief financial officer or treasurer of Tenant (a “Compliance Certificate”) which (A) states that no Default has occurred and is continuing, or, if any such Default has occurred and is continuing, a statement as to the nature thereof and what action Tenant proposes to take with respect thereto; and (B) sets forth, for the quarter, year or other applicable period covered by such Financial Statements or as of the last day of such quarter or year (as the case may be), the calculation of the financial ratios and tests provided in Section 21.22;

(iv)          [Reserved];

(v)           As soon as possible and in no event later than thirty (30) Business Days after any officer of Tenant knows of the occurrence or existence of (A) any Reportable Event under any Employee Benefit Plan or Multiemployer Plan; (B) any actual litigation, suits or claims against Tenant or any of its Subsidiaries which individually asserts a claim for monetary damages payable by Tenant or its Subsidiaries of $25,000,000 or more; or (C) any other event or condition which is reasonably likely to have a Material Adverse Effect; or (D) any Default; the statement of the chief executive officer, chief financial officer or treasurer of Tenant setting forth

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details of such event, condition or Default and the action which Tenant proposes to take with respect thereto;

(vi)          As soon as available and in no event later than five (5) Business Days after they are sent, made available or filed, copies of (A) all registration statements and reports filed by Tenant or any of its Subsidiaries with any securities exchange or the United States Securities and Exchange Commission (including, without limitation, all 10-Q, 10-K and 8-K reports); (B) all reports, proxy statements and financial statements sent or made available by Tenant to its security holders; and (C) all press releases concerning any material developments in the business of Tenant made available by Tenant to the public generally; and

(vii)         Such other instruments, agreements, certificates, statements, documents and information relating to the operations or condition (financial or otherwise) of Tenant or its Subsidiaries, and compliance by Tenant with the terms of this Lease and the other Operative Documents as Landlord and Administrative Agent may from time to time reasonably request.

The requirements of clauses (i), (ii) and (vi) above may be satisfied by (i) the posting of such documents on Tenant’s internet homepage located at www.adobe.com or the SEC’s EDGAR database (located at www.sec.gov) no later than the next Business Day after such documents have been filed with the SEC; provided that such documents shall be in a format that is downloadable and printable; or (ii) the delivery of such documents via electronic format by e-mail or otherwise.

(b)           Books and Records. Tenant and its Subsidiaries shall at all times keep proper books of record and account in which full, true and correct entries will be made of their transactions in accordance with GAAP.

(c)           Inspections. Tenant and its Subsidiaries shall permit Landlord, Administrative Agent and each Rent Purchaser, or any agent or representative thereof, upon reasonable notice and during normal business hours and to the extent reasonably necessary for the administration of the Obligations, to visit and inspect any of the properties and offices of Tenant and its Material Subsidiaries, to examine the books and records of Tenant and its Subsidiaries and make copies thereof, and to discuss the affairs, finances and business of Tenant and its Subsidiaries with, and to be advised as to the same by, their officers and, after prior written notice to Tenant, their auditors and accountants, all at such times and intervals as Landlord, Administrative Agent and each Rent Purchaser may reasonably request; provided, however, (i) unless an Event of Default shall have occurred and be continuing, any such visit and inspection shall be made at the sole expense of Landlord or Administrative Agent whose agent or representative is making such visit and inspection and (ii) when an Event of Default exists, any such visit and inspection shall be made at the sole expense of Tenant.

(d)           Insurance. Without limiting Article IX, Tenant and its Material Subsidiaries shall:

(i)            Carry and maintain insurance of the types and in the amounts customarily carried from time to time during the term of this Lease by others engaged in

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substantially the same business as such Entity and operating in the same geographic area as such Entity, including, but not limited to, fire, commercial general liability, property damage and worker’s compensation;

(ii)           Carry and maintain each policy for such insurance with (A) a company which is rated A- or better by A.M. Best and Company at the time such policy is placed and at the time of each annual renewal thereof, or (B) a Captive Insurance Subsidiary, so long as Tenant’s Debt/EBITDA Ratio for the consecutive four-quarter period ending most recently prior to the date any such insurance is placed with such captive insurance Subsidiary is 2:00 to 1:00 or less, or (C) an other insurer which is reasonably satisfactory to Landlord and Administrative Agent; and

(iii)          Deliver to Landlord and Administrative Agent upon request not more than once each year schedules setting forth all insurance then in effect.

(e)           Governmental Charges and Other Indebtedness. Tenant and its Subsidiaries shall promptly pay and discharge when due (i) all taxes and other Governmental Charges prior to the date upon which penalties accrue thereon, (ii) all Indebtedness which, if unpaid, could become a Lien upon the property of Tenant or its Material Subsidiaries and (iii) subject to any subordination provisions applicable thereto, all other Indebtedness which in each case, if unpaid, is reasonably likely to have a Material Adverse Effect, except such Indebtedness as may in good faith be contested or disputed, or for which arrangements for deferred payment have been made, provided that in each such case appropriate reserves are maintained to the reasonable satisfaction of Landlord and Administrative Agent.

(f)            General Business Operations. Other than as permitted by Section 21.21(d), each of Tenant and its Subsidiaries shall (i) preserve and maintain its corporate existence and all of its rights, privileges and franchises reasonably necessary to the conduct of its business, (ii) conduct its business activities in compliance with all Legal Requirements and Contractual Obligations applicable to such Entity and (iii) keep all property useful and necessary in its business in good working order and condition, ordinary wear and tear excepted, except, in each case, where any failure is not reasonably likely to have a Material Adverse Effect. Other than as permitted by Section 2.21(d), Tenant shall maintain its chief executive office and principal place of business in the United States.

(g)           Obligations. Tenant will ensure that its obligations hereunder and under the other Operative Documents to which it is a party (i) rank at least pari passu in right of payment with all other unsecured and unsubordinated Indebtedness of Tenant and (ii) constitute “senior debt” for purposes of any subordinated Indebtedness of Tenant.

21.21      Negative Covenants of Tenant. Until the termination of this Lease and the satisfaction in full by Tenant of all Obligations, Tenant will comply, and will cause compliance, with the following negative covenants, unless Landlord and Majority Rent Purchasers shall otherwise consent in writing:

(a)           Reserved.

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(b)           Liens. Neither Tenant nor any of its Subsidiaries shall create, incur, assume or permit to exist any Lien on or with respect to any of its assets or property of any character, whether now owned or hereafter acquired, except for the following (“Permitted Liens”):

(i)            Liens in favor of Landlord, Administrative Agent or any Rent Purchaser securing the Obligations;

(ii)           Liens listed on Schedule 2 to any Lease Supplement as approved by Landlord and Administrative Agent or listed on Exhibit E and existing on the Date of Lease;

(iii)          Liens for taxes or other Governmental Charges not at the time delinquent or thereafter payable without penalty or being contested in good faith, provided that adequate reserves for the payment thereof have been established in accordance with GAAP;

(iv)          Liens of carriers, warehousemen, mechanics, materialmen, vendors, and landlords and other similar Liens imposed by law incurred in the ordinary course of business for sums not overdue more than 45 days or being contested in good faith, provided that adequate reserves for the payment thereof have been established in accordance with GAAP;

(v)           Deposits under workers’ compensation, unemployment insurance and social security laws or to secure the performance of bids, tenders, contracts (other than for the repayment of borrowed money) or leases, or to secure statutory obligations of surety or appeal bonds or to secure indemnity, performance or other similar bonds in the ordinary course of business;

(vi)          Zoning restrictions, easements, rights-of-way, title irregularities and other similar encumbrances, which alone or in the aggregate are not substantial in amount and do not materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of Tenant or any of its Subsidiaries;

(vii)         Banker’s Liens and similar Liens (including set-off rights) in respect of bank deposits;

(viii)        Liens on any property or assets acquired, or on the property or assets of any Entities acquired by Tenant or any of its Subsidiaries after the Date of Lease pursuant to Section 21.21(d), provided that (A) such Liens exist at the time such property or assets or such Entities are so acquired and (B) such Liens were not created in contemplation of such acquisitions;

(ix)           Judgment Liens, provided that such Liens do not constitute an Event of Default under Section 19.1(h);

(x)            Liens in favor of customs and revenue authorities arising as a matter of law to secure payment of customs duties and in connection with the importation of goods in the ordinary course of Tenant’s and its Subsidiaries’ businesses;

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(xi)           Liens securing purchase money loans and Capital Leases incurred by Tenant and its Subsidiaries to finance their acquisition of real property, fixtures or equipment provided that (A) in each case, the Indebtedness secured by such Liens (1) is incurred by such Entity at the time of, or not later than ninety (90) days after, the acquisition by such Entity of the property so financed, and (2) does not exceed the purchase price of the property so financed; and (B) in each case, such Lien (1) covers only those assets, the acquisition of which was financed by such Indebtedness, and (2) secures only such Indebtedness;

(xii)          Liens on the property or assets of any Subsidiary of Tenant in favor of Tenant or any other Subsidiary of Tenant;

(xiii)         Liens incurred in connection with the extension, renewal or refinancing of the Indebtedness secured by the Liens described in clause (ii) or (xi) above, provided that any extension, renewal or replacement Lien (A) is limited to the property covered by the existing Lien and (B) secures Indebtedness which is no greater in amount and has material terms no less favorable to Landlord or the Rent Purchasers than the Indebtedness secured by the existing Lien;

(xiv)        Liens securing Indebtedness of (A) up to $50,000,000 on Tenant’s facility in India, and (B) up to $75,000,000 on Tenant’s facility in Seattle, Washington; and

(xv)         Other Liens, provided that the aggregate principal amount of the Indebtedness secured by such other Liens that is outstanding at any time does not exceed twenty percent (20%) of Tenant’s Net Worth determined as of the last day of the immediately preceding fiscal quarter.

Notwithstanding the foregoing, with respect to the Parcels only, the Liens described in clauses (i) through (iv) (other than those listed on Exhibit E) shall be considered “Permitted Liens.”

(c)           Reserved.

(d)           Mergers, Acquisitions, Etc. Neither Tenant nor any of its Subsidiaries shall consolidate with or merge into any other Entity or permit any other Entity to merge into it, acquire any Entity as a new Subsidiary, or acquire all or substantially all of the assets of any other Entity, and Tenant shall not sell all or substantially all of its assets to any other Entity, except as follows:

(i)            Any Subsidiary of Tenant may merge or consolidate with any other Subsidiary of Tenant, and the Tenant or any Subsidiary of Tenant may establish new Subsidiaries;

(ii)           Any Subsidiary of Tenant and its Subsidiaries may merge or consolidate with Tenant, provided that no Event of Default has occurred and is continuing and Tenant is the surviving corporation;

(iii)          Any Subsidiary of Tenant may dissolve after transferring or distributing its assets to Tenant or any of its Subsidiaries, provided that no Event of Default has

48

occurred and is continuing on the date of, or will result after giving effect to, any such dissolution;

(iv)          Any Subsidiary of Tenant may merge or consolidate with any other Entity (other than Tenant or a Subsidiary), whether or not such other Entity becomes a Subsidiary of Tenant, or acquire any Entity as a Subsidiary or acquire all or substantially all of the assets of any other Entity, provided, that no Event of Default has occurred and is continuing and Tenant shall continue to be in compliance with each of the financial covenants set forth in Section 21.22 hereof immediately following any such merger, consolidation or acquisition (notwithstanding the determination dates otherwise in effect under Section 21.22) and after giving effect thereto on a pro forma basis; and, with respect to any such transaction in which the consideration being paid by Tenant or any of its Subsidiaries exceeds $50,000,000, the chief executive officer, chief financial officer or treasurer of Tenant shall have delivered a compliance certificate as of the date of such merger, consolidation or acquisition certifying that no Event of Default has occurred and is continuing and as to such compliance and showing the calculation of the financial ratios and tests specified in such financial covenants; and

(v)           Tenant may merge or consolidate with any other Entity or acquire any Entity as a new Subsidiary or acquire all or substantially all of the assets of any other Entity or sell all or substantially all of its assets to any Entity, provided that:

(A)          in the case of any merger or consolidation, either (1) Tenant is the surviving corporation or (2) the surviving Entity (x) is a solvent Entity organized under the laws of a country member to the Organization for Economic Cooperation and Development, or Bermuda, Barbados or the Cayman Islands, and (y) assumes all of the obligations of Tenant in a manner acceptable to the Landlord and, if requested by Landlord, delivers one or more opinions of counsel from counsel acceptable to Landlord as to the enforceability of the Obligations against the surviving Entity and such other matters as Landlord may reasonably request;

(B)           in the case of any merger or consolidation, if Tenant is not the surviving Entity, or in the case of a disposition of all or substantially all of Tenant’s assets, the surviving or acquiring Entity, after giving effect to such merger or consolidation or such acquisition of Tenant’s assets:

(1)           shall have a rating of its unsecured and non-credit enhanced senior obligations of at least BBB+ from S&P or Baa1 from Moody’s; provided that if such obligations are not rated by S&P or Moody’s, Tenant or the surviving or acquiring Entity shall have presented evidence reasonably satisfactory to Landlord that such obligations are rated, pursuant to the internal scoring or rating procedures of an internationally recognized financial institution not an Affiliate of Tenant or Landlord, at a level not less than the equivalent of BBB+ by S&P or Baa1 by Moody’s; and

(2)           shall present an acceptable exposure to Landlord, in accordance with Landlord’s then current guidelines regarding Landlord’s existing outstanding credits to such surviving or acquiring Entity, the industry that constitutes such Entity’s primary business activities, and the country(ies) in which such Entity conducts its primary business

49

activities, based on Landlord’s exposures at the time of such merger, consolidation or disposition of assets;

(C)           in each case, no Event of Default shall have occurred and be continuing at the date of such merger, consolidation, acquisition or disposition or shall occur as a result of giving effect thereto;

(D)          in each case, Tenant or the surviving Entity, as the case my be, shall be in compliance with Section 21.22 determined as of the date of such merger, consolidation or acquisition (notwithstanding the determination dates otherwise in effect under Section 21.22) and after giving effect thereto on a pro forma basis; and

(E)           in each case in which the consideration being paid by Tenant or any of its Subsidiaries exceeds $50,000,000 or in which Tenant is not the surviving Entity, the chief executive officer, chief financial officer or treasurer of Tenant (or of the surviving Entity, if Tenant is not the surviving Entity) shall have delivered a compliance certificate as of the date of such merger, consolidation or acquisition certifying as to the matters in clause (C) above and showing the calculation of the financial ratios and tests referred to in clause (D) above.

(e)           Reserved.

(f)            Reserved.

(g)           Change in Business. Neither Tenant nor any of its Subsidiaries shall engage in any business substantially different from its present business, as described in the 10-K report filed by Tenant with the Securities and Exchange Commission for the fiscal year ended November 28, 2003, and other internet-related services for its customers; provided, however, that Tenant may at any time form a Captive Insurance Subsidiary.

(h)           Employee Benefit Plans.

(i)            Neither Tenant nor any ERISA Affiliate shall (A) adopt or institute any Employee Benefit Plan that is an employee pension benefit plan within the meaning of Section 3(2) of ERISA, (B) take any action which will result in the partial or complete withdrawal, within the meanings of sections 4203 and 4205 of ERISA, from a Multiemployer Plan, (C) engage or permit any Entity to engage in any transaction prohibited by section 406 of ERISA or section 4975 of the IRC involving any Employee Benefit Plan or Multiemployer Plan which would subject Tenant or any ERISA Affiliate to any tax, penalty or other liability including a liability to indemnify, (D) incur or allow to exist any accumulated funding deficiency (within the meaning of section 412 of the IRC or section 302 of ERISA), (E) fail to make full payment when due of all amounts due as contributions to any Employee Benefit Plan or Multiemployer Plan, (F) fail to comply with the requirements of section 4980B of the IRC or Part 6 of Title I(B) of ERISA, or (G) adopt any amendment to any Employee Benefit Plan which would require the posting of security pursuant to section 401(a)(29) of the IRC, where singly or cumulatively, the above would be reasonably likely to have a Material Adverse Effect.

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(ii)           Neither Tenant nor any of its Subsidiaries shall (A) engage in any transaction prohibited by any Governmental Rule applicable to any Foreign Plan, (B) fail to make full payment when due of all amounts due as contributions to any Foreign Plan or (C) otherwise fail to comply with the requirements of any Governmental Rule applicable to any Foreign Plan, where singly or cumulatively, the above would be reasonably likely to have a Material Adverse Effect.

(i)            Transactions With Affiliates. Neither Tenant nor any of its Subsidiaries shall enter into any Contractual Obligation with any Affiliate (other than Tenant or one of its Subsidiaries) or engage in any other transaction with any Affiliate except (i) for agreements with officers and directors of Tenant or its Subsidiaries for indemnification or participation under Tenant’s equity plans and loans to or retention or severance agreements with officers and directors of Tenant or its Subsidiaries, each as approved by the Board of Directors of Tenant; (ii) upon terms at least as favorable to Tenant or such Subsidiary as an arms-length transaction with unaffiliated Entities; or (iii) for transactions with a Captive Insurance Subsidiary or with Affiliates in which Tenant or its Subsidiaries have venture capital investments.

(j)            Accounting Changes. Neither Tenant nor any of its Subsidiaries shall change its accounting practices except as required by GAAP.

21.22      Financial Covenants. Until the termination of this Lease and the satisfaction in full by Tenant of all Obligations, Tenant will comply, and will cause compliance, with the following financial covenants, unless Landlord and Majority Rent Purchasers shall otherwise consent in writing:

(a)           Quick Ratio. Tenant shall not permit its Quick Ratio to be less than 1.00 on the last day of any fiscal quarter.

(b)           Debt/EBITDA Ratio. Tenant shall not permit its Debt/EBITDA Ratio for any consecutive four-quarter period to be greater than 3.00.

(c)           Fixed Charge Coverage Ratio. Tenant shall not permit its Fixed Charge Coverage Ratio for any consecutive four-quarter period to be less than 2.25.

(d)           Leverage Ratio. Tenant shall not permit its Leverage Ratio to be greater than 0.60 to 1.00 on the last day of any fiscal quarter.

21.23      Nonmerger of Estates. If both Landlord’s and Tenant’s estates in the Parcels become vested in the same owner, this Lease shall nevertheless not be destroyed by application of the doctrine of merger except at the express election of Landlord and the consent of Administrative Agent.

21.24      Title to and Nature of Improvements. Subject to the provisions of Sections 12.2 and as otherwise appropriate in this Lease, Tenant agrees that any and all Improvements of whatever nature at any time constructed, placed or maintained upon any part of the Land shall be and remain the property of the Landlord, subject to Tenant’s rights under this Lease, including, without limitation, Section 21.2, and the rights of Administrative Agent and the Rent Purchasers under the Operative Documents.

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21.25      Nondiscrimination. Tenant hereby covenants by and for itself, its heirs, executors, administrators and assigns, and all persons claiming under or through it, and this Lease is made and accepted upon and subject to the following conditions: that there shall be no discrimination against or segregation of any person or group of persons on account of race, color, creed, religion, sex, age, handicap, marital status, ancestry or national origin in the leasing, subleasing, transferring, use, occupancy, tenure or enjoyment of the Parcels herein leased, nor shall Tenant itself, or any person claiming under or through it establish or permit any such practice or practices of discrimination or segregation with reference to the selection, location, number, use or occupancy of tenants, lessees, subtenants, sublessees or vendees in the Parcels herein leased.

ARTICLE XXII

INDEMNIFICATION

22.1        Tax Indemnity. Notwithstanding anything in Article VIII to the contrary, Tenant shall protect and defend Landlord, Administrative Agent and Rent Purchasers from and against all criminal prosecution regarding and shall indemnify and hold Landlord, Administrative Agent and Rent Purchasers harmless from and against any and all losses, costs, liabilities or damages (including reasonable attorneys’ fees and disbursements and court costs) arising by reason of:

(a)           Any and all U.S. Federal, state or local income taxes imposed upon Landlord, Administrative Agent or Rent Purchasers in consequence of Landlord, Administrative Agent or Rent Purchasers being treated as the owner or lessor of the Parcels (or any part thereof) for such tax purposes to the extent such taxes exceed such entity’s tax liability under this transaction if such entity were not treated as the owner or lessor of the Parcels (but as lender) for tax purposes; provided Landlord has fully complied with Section 21.2;

(b)           Any and all taxes imposed upon Tenant (except to the extent of Landlord Taxes or to the extent that such taxes are imposed upon Tenant as a result of Landlord’s failure to comply with its obligations under this Lease);

(c)           Any and all taxes required to be withheld from payments made by Tenant to a third party not related to or affiliated with Landlord;

(d)           Any and all Real Estate Taxes;

(e)           Any and all taxes owed by Landlord, Administrative Agent or any Rent Purchaser (other than Landlord Taxes) as a result of payment made by Tenant to such entity pursuant to Tenant’s indemnity obligations under this Section 22.1; and

(f)            Any and all costs, liabilities or damages (including reasonable attorneys’ fees) incurred by Landlord, Administrative Agent or any Rent Purchaser in obtaining indemnification payments from Tenant under the provisions of this Section 22.1.

Tenant’s duty to indemnify Landlord, Administrative Agent and each Rent Purchaser under this Section 22.1 shall apply only to taxes arising during the Term or after the Term while Landlord has record title to and Tenant is occupying the Parcels (whether or not due and payable

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at the conclusion of the Term), but shall otherwise survive the expiration or earlier termination of this Lease.

22.2        Indemnification Concerning the Parcels. Tenant will defend, protect, indemnify and save harmless Landlord, Administrative Agent and each Rent Purchaser from and against all liabilities, obligations, claims, damages, causes of action, costs and expenses, imposed upon or incurred by Landlord, Administrative Agent and each Rent Purchaser by reason of the occurrence or existence of any of the following during the Term, except to the extent caused by the willful misconduct, gross negligence, or willful breach of contract of such Entity or its respective agents: (a) any accident, injury to or death of persons or loss of or damage to property occurring on or about the Parcels or Improvements; (b) performance of any labor or services or the furnishing of any materials or other property in respect of the Parcels or the Improvements; (c) the negligence or willful misconduct on the part of Tenant or any of its agents, invitees, employees or contractors or any other persons entering onto the Parcels or the Improvements at the request, behest or with the permission of Tenant; (d) the use or occupancy of the Improvements; or (e) the use of the Land. Tenant’s duty to indemnify Landlord, Administrative Agent and each Rent Purchaser under this Section 22.2 shall survive the expiration or earlier termination of this Lease with respect to events occurring during the Term or after the Term while Landlord has record title to and Tenant is occupying the Parcels.

22.3        Environmental Indemnity. Tenant agrees to indemnify and hold Landlord, Administrative Agent and each Rent Purchaser harmless from and against, and to reimburse Landlord, Administrative Agent and each Rent Purchaser with respect to, any and all claims, demands, causes of action, losses, damages, liabilities, costs and expenses (including attorneys’ fees and court costs), fines and/or penalties of any and every kind or character, known or unknown, fixed or contingent, asserted or potentially asserted against or incurred by Landlord, Administrative Agent or such Rent Purchaser at any time and from time to time by reason of, in connection with or arising out of (a) the failure of Tenant to perform any obligation herein required to be performed by Tenant regarding Applicable Environmental Laws, (b) any violation of any Applicable Environmental Law by Tenant with respect to the Parcels or any disposal or other release by Tenant or with respect to the Parcels of any hazardous substance, environmental contaminants or solid waste on or to the Parcels, whether or not resulting in a violation of any Applicable Environmental Law, (c) any act, omission, event or circumstance by Tenant or with any respect to the Parcels which constitutes or has constituted violation of any Applicable Environmental Law with respect to the Parcels, regardless of whether the act, omission, event or circumstance constituted a violation of any Applicable Environmental Law at the time of its existence or occurrence, and (d) any and all claims or proceedings (whether brought by private party or governmental agencies) for bodily injury, property damage, abatement or remediation, environmental damage or impairment or any other injury or damage resulting from or relating to any hazardous or toxic substance or contaminated material located upon or migrating into, from or through the Parcels (whether or not the release of such materials was caused by Tenant, a subtenant, a prior owner of the Parcels or any other Entity) which Landlord, Administrative Agent or such Rent Purchaser may incur. Tenant’s duty to indemnify Landlord, Administrative Agent or such Rent Purchaser under this Section 22.3 shall survive the expiration or earlier termination of the Lease or applicable Lease Supplement with respect to events occurring during or prior to the Term or after the Term while Landlord has record title to and Tenant is occupying the Parcels.

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22.4        General Indemnity. Except to the extent of the gross negligence or willful misconduct of the Entity seeking such indemnification, Tenant shall defend, indemnify, and hold Landlord, Administrative Agent and each Rent Purchaser harmless from and against any and all losses, costs, expenses, liabilities, claims, causes of action and damages of all kinds that may result to Landlord, Administrative Agent or any Rent Purchaser, including reasonable attorneys’ fees and disbursements incurred by Landlord, Administrative Agent or any Rent Purchaser, in any way relating to or arising out of this Lease or the other Operative Documents executed by Tenant in connection with this Lease or the transactions contemplated hereby or thereby or the enforcement against Tenant of any of the terms hereof or thereof. Tenant’s duty to indemnify Landlord, Administrative Agent and each Rent Purchaser under this Lease shall survive the expiration or earlier termination of this Lease.

ARTICLE XXIII

COVENANTS OF LANDLORD

23.1        Title. In the event Tenant so requests in writing (and so long as either Tenant agrees to indemnify Landlord to Landlord’s satisfaction from any liabilities or obligations in connection therewith, or Landlord does not incur any liabilities or obligations in connection therewith), Landlord shall execute all documents, instruments and agreements reasonably requested by Tenant in order to accomplish any of the following in the manner reasonably requested by Tenant and within the time parameters reasonably requested by Tenant: (1) remove exceptions to title to or affecting the Parcels; (2) create exceptions to title (including, without limitation, easements and rights of way) to or affecting the Parcels; or (3) modify any then-existing exception to title. Tenant shall promptly reimburse Landlord for, or at Landlord’s request, pay directly in advance, all reasonable costs, expenses and other amounts incurred or required to be expended by Landlord in order to comply with Tenant’s requests made in accordance with the preceding sentence, and the failure of Tenant to reimburse or pay any such amounts shall result in the suspension of Landlord’s obligations under such sentence with respect to that particular request until the amounts required to be paid by Tenant under this sentence have been paid.

23.2        Land Use. Except where requested by Tenant pursuant to this Section 23.2, Landlord shall not cause or give its written consent to any land use or zoning change affecting the Parcels or any changes of street grade. In the event Tenant so requests in writing (and so long as either Tenant agrees to indemnify Landlord to Landlord’s satisfaction, from any liabilities or obligations in connection therewith, or Landlord does not incur any liabilities or obligations in connection therewith), Landlord shall execute all documents, instruments and agreements reasonably requested by Tenant in order to accomplish any of the following in the manner reasonably requested by Tenant and within the time parameters reasonably requested by Tenant: (1) cause a change in any land use restriction or law affecting the Parcels; (2) cause a change in the zoning affecting a Parcels; or (3) cause a change in the street grade with respect to any street in the vicinity of a Parcels. Tenant shall promptly reimburse Landlord for, or at Landlord’s request, pay directly in advance, all reasonable costs, expenses and other amounts incurred or required to be expended by Landlord in order to comply with Tenant’s requests made in accordance with the preceding sentence, and the failure of Tenant to reimburse or pay any such amounts shall result in the suspension of Landlord’s obligations under such sentence with

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respect to that particular request until the amounts required to be paid by Tenant under this sentence have been paid. In any event, all land usage shall remain subject to the terms of the Ground Lease, if applicable to a particular Lease Supplement.

23.3        Transfer of Property Interests. Except as requested by Tenant pursuant to this Lease, Landlord shall not transfer to any third party any rights inuring to or benefits associated with the Parcels (including, without limitation, zoning rights, development rights, air space rights, mineral, oil, gas or water rights). Nothing in this Section 23.3 shall limit Landlord’s right to transfer Landlord’s interest in this Lease to a third party or its rights to transfer the Parcels pursuant to Section 14.2; provided that as to a transfer under Section 14.2 any purchaser of Landlord’s interest in the Parcels shall be bound by the terms of this Lease, including without limitation the terms of this Section 23.3).

23.4        No Impairment of Value. No action shall be taken under Section 23.1, 23.2 or 23.3 which would impair the value, utility or useful life of the Improvements without the prior written consent of Administrative Agent and the Rent Purchasers as provided in the Rent Purchase Agreement.

23.5        Purchase Option Under SJRDA Ground Leases. Landlord shall not exercise any of the purchase option rights under any SJRDA Ground Lease affecting any Lease Supplement without Tenant’s prior written consent, in Tenant’s sole discretion. Upon the request of Tenant, Landlord shall, at no cost or expense to Landlord, cooperate with Tenant so as to permit Tenant acquire the ground lessors’ interest in the Land that is subject to a SJRDA Ground Lease pursuant to any purchase option rights under any such SJRDA Ground Lease, including either by assigning such purchase option rights to Tenant or by exercising such purchase option rights on behalf of and for the benefit of Tenant; provided, however, that Landlord shall have no obligation or liability with respect to the purchase of any such Land, and Tenant shall indemnify and hold Landlord harmless from and against any and all loss, cost, liability, claim, damage or expense suffered or incurred by Landlord (including attorneys’ fees and costs) as a consequence of or in any way related to the assignment to Tenant or exercise of any such purchase option rights or any actions taken by Landlord with respect thereto.

23.6        Leasehold Interests Under Ground Leases. The following provisions relate to each Ground Lease:

(a)           Tenant covenants and agrees to perform and to observe all of the terms, covenants, provisions, conditions and agreements of each Ground Lease on Landlord’s part as tenant thereunder to be performed and observed (including, without limitation, payment of all rent, additional rent and other amounts payable by Landlord as tenant under such Ground Lease) to the end that all things shall be done which are necessary to keep unimpaired the rights of Landlord as tenant under any Ground Lease. Tenant further covenants that it shall cause to be exercised any renewal option contained in a Ground Lease which relates to renewal occurring in whole or in part during the term of this Lease.

(b)           Without limitation of Article XXII, Tenant covenants and agrees to indemnify and hold harmless Landlord, Administrative Agent and each Rent Purchaser from and against any and all liability, loss, damage, suits, penalties, claims and demands of every kind and

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nature (including, without limitation, reasonable attorneys’ fees and expenses) by reason of Tenant’s failure to comply with any Ground Lease or the provisions of this Section 23.6.

(c)           Landlord and Tenant agree that Landlord shall have no obligation or responsibility to provide services or equipment required to be provided or repairs or restorations required to be made in accordance with the provisions of any Ground Lease by Landlord thereunder. Landlord shall in no event be liable to Tenant nor shall the obligations of Tenant hereunder be impaired or the performance thereof excused because of any failure or delay on the part of Landlord under any Ground Lease in providing such services or equipment or making such restorations or repairs and such failure or delay shall not constitute a basis for any claim against Landlord or any offset against any amount payable to Landlord under this Lease.

IN WITNESS WHEREOF, the parties hereto have duly executed this Lease as of the day and year first above written.

TENANT:

ADOBE SYSTEMS INCORPORATED,

a Delaware corporation

By:

/s/ Bruce R. Chizen

Bruce R. Chizen

President and Chief Executive Officer

By:

/s/ Murray J. Demo

Murray J. Demo

Senior Vice President and Chief
Financial Officer

LANDLORD:

SMBC LEASING AND FINANCE, INC.,

a Delaware corporation

By:

/s/ William M. Ginn

Name:

William M. Ginn

Its:

Chairman

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APPENDIX A

I.              DEFINITIONS

Acquisition Price. “Acquisition Price” shall mean, as to any Rent Purchaser an amount equal to such Rent Purchaser’s Percentage of the Commitment Amount.

Actual/360 Basis. “Actual/360 Basis” shall mean interest calculated on the basis of a 360-day year and charged on the basis of actual days elapsed for any whole or partial period in which interest is being calculated.

Additional Amount. “Additional Amount” shall have the meaning set forth in Section 8.4 of the Lease.

Additional Charges. “Additional Charges” shall have the meaning set forth in Section 8.4 of the Lease.

Additional Documents. “Additional Documents” shall have the meaning set forth in Section 20.1(c)(ii) of the Lease.

Additional Rent. “Additional Rent” shall mean any amounts, other than Base Rent, which are payable by Tenant to Landlord, Administrative Agent or any other Entity as required under the Lease, any Lease Supplement or any other Operative Document, specifically including, but without limitation, any rent or other amounts payable by the ground lessee under any Ground Lease, payment of interest on any overdue payments of Tenant to either Landlord or Administrative Agent on behalf of the Rent Purchasers, payment of the Guaranteed Residual Value, the Purchase Price, all indemnification payments payable by Tenant, and all Break Funding Costs.

Administrative Agent. “Administrative Agent” shall mean SMBC Leasing and Finance, Inc., as agent for the Rent Purchasers, collectively, and its successors and permitted assigns in interest.

Administrative Agent’s Wire Transfer Instructions. “Administrative Agent’s Wire Transfer Instructions” shall mean the following with respect to payments to be made to Administrative Agent:

Citibank, N.A., New York

ABA No.: 021000089

A/C Name: Sumitomo Mitsui Banking Corporation

A/C No.: 36023837

Further Credit to: SMBC Leasing and Finance, Inc.

Account No.:283572

Advance. “Advance” shall mean, with respect to Lease Supplement No. 1 and Lease Supplement No. 2 executed as of the Date of Lease, the Commitment Amount, which shall

APPENDIX A-1

include (a) costs incurred in connection with the making of the Lease and paid by Landlord or Administrative Agent (including reasonable attorneys’ fees and costs in connection with preparation of the Operative Documents), transaction costs (including title charges and professional fees and expenses) and other reasonable professional fees, arrangement fees, appraisal fees, inspection, testing and permitting fees, reasonable travel expense for inspections and insurance; and (b) all amounts previously advanced pursuant to the Restated Lease.

Affiliate. “Affiliate” shall mean, with respect to any Entity, (a) each Entity that, directly or indirectly, owns or controls, whether beneficially or as a trustee, guardian or other fiduciary, ten percent (10%) or more of any class of Equity Securities of such Entity, (b) each Entity that controls, is controlled by or is under common control with such Entity or any Affiliate of such Entity or (c) each of such Entity’s officers, directors, general partners and, if such Entity is a joint venture organized as a separate legal entity, joint venturers having powers comparable to a general partner; provided, however, that in no case shall any of the following Entities be deemed to be an Affiliate of Tenant or any of its Subsidiaries for purposes of the Operative Documents: (i) Landlord or Administrative Agent, or (ii) the general partner of any venture capital partnership which would otherwise be deemed an Affiliate solely because it acts as general partner and controls such venture capital partnership. For the purposes of this definition, “control” of an Entity shall mean the possession, directly or indirectly, of the power to direct or cause the direction of its management or policies.

Amended Deeds of Trust. “Amended Deeds of Trust” shall have the meaning set forth in the Recitals to the Lease.

Applicable Environmental Laws. “Applicable Environmental Laws” shall have the meaning set forth in Section 10.1 (b) of the Lease.

Appraisal. “Appraisal” shall have the meaning set forth in Section 1.9 of the Lease.

Assignee Rent Purchaser. “Assignee Rent Purchaser” shall have the meaning set forth in Section 7.4(b) of the Rent Purchase Agreement.

Assignor Rent Purchaser. “Assignor Rent Purchaser” shall have the meaning set forth in Section 7.4(b) of the Rent Purchase Agreement.

Assignment. “Assignment” shall have the meaning set forth in Section 7.4(b) of the Rent Purchase Agreement.

Assignment Agreement. “Assignment Agreement” shall have the meaning set forth in Section 7.4(b) of the Rent Purchase Agreement.

Assignment Effective Date. “Assignment Effective Date” shall have the meaning set forth in Section 2 of the Rent Purchase Agreement.

Assumed Rate. “Assumed Rate” shall have the meaning set forth in Section 4.3(a)(v) of the Lease.

APPENDIX A-2

Base Rate. “Base Rate” shall mean, on any day, the greater of (a) the “Reference Rate,” which is the per annum rate publicly announced by Bank of America at its San Francisco office as in effect on such date and is determined by Bank of America from time to time as a means of pricing credit extensions to some customers and is neither directly tied to any external rate of interest or index nor necessarily the lowest rate of interest charged by Bank of America at any given time for any particular class of customers or credit extensions, and (b) one-half percent (0.50%) plus the “Federal Funds Rate” for such day, which Federal Funds Rate for such day is the per annum rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Board of Governors of the Federal Reserve System (including any such successor publication, “H.15 (519)”) for such day opposite the caption “Federal Funds (Effective)” for such day. If on any relevant day, a rate is not yet published in H.15 (519), the Federal Funds Rate for such day shall be the rate set forth in the daily statistical release designated as the Composite 3:30 p.m. Quotations for U.S. Government Securities, or any successor publication, published by the Federal Reserve Bank of New York (including any such successor publication, the “Composite 3:30 p.m. Quotations”) for such day under the caption “Federal Funds Effective Rate”. If on any relevant day, a rate is not yet published in either H.15 (519) or the Composite 3:30 p.m. Quotations, the Federal Funds Rate for such day shall be the arithmetic mean, as determined by Administrative Agent, of the rates quoted to Administrative Agent for such day by three (3) Federal funds brokers of recognized standing selected by Administrative Agent, and Administrative Agent shall promptly provide written evidence of such calculation to Tenant. Any change in the Base Rate resulting from a change in the Prime Rate shall become effective on the Business Day on which each change in the Prime Rate occurs.

Base Rent. “Base Rent” shall mean, as of a Rent Payment Date, that amount equal to the following:

(a)           for each Portion of the then outstanding Rent Purchasers’ Contribution, the product obtained by multiplying the Rent Purchasers’ Contribution Rate for such Portion by the amount of such Portion, which amount is then prorated for the rental period in question on an Actual/360 Basis; plus

(b)           for each Portion of the then outstanding Landlord Contribution, the product obtained by multiplying the Landlord Contribution Rate for such Portion by the amount of such Portion, which amount is then prorated for the rental period in question on an Actual/360 Basis.

Basic Lease Provisions. “Base Lease Provisions” shall have the meaning set forth in Article I of the Lease.

Break Funding Costs. “Break Funding Costs” shall mean all costs, losses and expenses of Landlord, Administrative Agent or any Rent Purchaser (including all such costs, losses and expenses in respect of any interest paid or premium or penalty incurred by such Entity to lenders or otherwise), as a result of any payment made by Tenant or the exercise of the Purchase Option pursuant to Section 20.1 of the Lease, other than on a Rent Payment Date (including as a result of the exercise by Landlord of rights and remedies under the Operative Documents), and which may include losses incurred by Landlord, Administrative Agent or such Rent Purchaser as a result of funding and other contracts entered into by Landlord, Administrative Agent or such

APPENDIX A-3

Rent Purchaser in connection with the transactions contemplated under the Operative Documents, or such costs, losses and expenses of Landlord resulting from any payment as such payments relate to any Rate Contracts in effect upon the Date of Lease for the Landlord Contribution.

Building. “Building” shall mean any building or buildings, structures and facilities now or hereafter located on the Land covered by a Lease Supplement.

Business Days. “Business Days” shall mean every day of the week excepting Saturday and Sunday, and excluding holidays when banks in California and New York are generally closed for business, unless otherwise expressly stated and, if such Business Day is relating to the LIBOR Rate or the calculation of the LIBOR Rate, a day that dealings in U.S. Dollar Deposits are carried out in the London Interbank market.

Capital Leases. “Capital Leases” shall mean any and all lease obligations that, in accordance with GAAP, are required to be capitalized on the books of a lessee.

Captive Insurance Subsidiary. “Captive Insurance Subsidiary” shall mean a Subsidiary of Tenant that is (i) primarily engaged in the business of providing insurance to Tenant and/or its other Subsidiaries; (ii) subject to regulation as a provider of insurance in the jurisdiction where it is organized and in each jurisdiction where it provides insurance; and (iii) in good standing and in compliance with all Legal Requirements (including without limitation Legal Requirements relating to capital adequacy) in each jurisdiction where it is subject to regulation as a provider of insurance.

CERCLA. “CERCLA” shall have the meaning set forth in Section 10.1(b)(i) of the Lease.

Change of Law. “Change of Law” shall have the meaning set forth in the definition of “Landlord Contribution Rate.”

Commitment Amount. “Commitment Amount,” as of the Date of Lease, shall mean One Hundred Forty-Three Million Two Hundred Thousand and no/100 Dollars ($143,200,000.00).

Contingent Obligation. “Contingent Obligation” shall mean, with respect to any Entity, (a) any Guaranty Obligation of that Entity; and (b) any direct or indirect obligation or liability, contingent or otherwise, of that Entity (i) in respect of any Surety Instrument (as defined in the definition of “Indebtedness”) issued for the account of that Entity or as to which that Entity is otherwise liable for reimbursement of drawings or payments, (ii) as a partner or joint venturer in any partnership or joint venture, (iii) to purchase any materials, supplies or other property from, or to obtain the services of, another Entity if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, (iv) in respect to any Rate Contract that is not entered into in connection with a bona fide hedging operation that provides offsetting benefits to such Entity, or (v) to purchase or sell Equity Securities or other securities of any Entity. The amount of any Contingent Obligation shall

APPENDIX A-4

(subject, in the case of Guaranty Obligations, to the last sentence of the definition of “Guaranty Obligation”) be deemed equal to the maximum reasonably anticipated liability in respect thereof; provided, that (A) in the case of item (b)(v) of this definition, the amount of the Contingent Obligation with respect to the purchase or sale of such Equity Securities or other securities shall be the net settlement amount to be paid in cash or securities, and (B) in the case of item (b)(iv) of this definition, the Contingent Obligation with respect to such Rate Contracts shall be marked to market on a current basis.

Contractual Obligation. “Contractual Obligation” of any Entity shall mean, any indenture, note, lease, loan agreement, security, deed of trust, mortgage, security agreement, guaranty, instrument, contract, agreement or other form of contractual obligation or undertaking to which such Entity is a party or by which such Entity or any of its property is bound.

Date of Lease. “Date of Lease” shall have the meaning set forth in Section 1.1 of the Lease.

Debt/EBITDA Ratio. “Debt/EBITDA Ratio” shall mean, with respect to Tenant for any consecutive four-quarter period, the ratio, determined on a consolidated basis in accordance with GAAP, of:

(a)           The total Indebtedness of Tenant and its Subsidiaries on the last day of such period, excluding any Indebtedness under or with respect to currency exchange Rate Contracts;

to

(b)           The EBITDA of Tenant and its Subsidiaries for such period.

Deed. “Deed” shall have the meaning set forth in Section 20.1(c)(i) of the Lease.

Default. “Default” shall mean an Event of Default or any event or circumstance not yet constituting an Event of Default which, with the giving of any notice or the lapse of any period of time or both, would become an Event of Default.

Default Amounts. “Default Amounts” shall mean all amounts paid by Tenant or otherwise realized by Landlord as a result of the exercise of Landlord’s remedies during the continuance of an Event of Default under the Lease.

Default Rate. “Default Rate” shall mean the per annum rate equal to the sum of two hundred basis points plus (a) in the case of any payment of Base Rent on any Portion of the Lease Investment Balance after an Event of Default, the Landlord Contribution Rate or the Rent Purchasers’ Contribution Rate applicable to such Portion immediately prior to such Event of Default, or (b) in the case of any other payment, the Base Rate.

Distribution Formula. “Distribution Formula” shall have the meaning set forth in Section 16.4 of the Lease.

EBITDA. “EBITDA” shall mean, with respect to Tenant for any period, the sum, determined on a consolidated basis in accordance with GAAP, of the following:

APPENDIX A-5

(a)           The net income or net loss of Tenant and its Subsidiaries for such period before provision for income taxes;

plus

(b)           The sum (to the extent deducted in calculating net income or loss in clause (a) above) of (i) all Interest Expenses of Tenant and its Subsidiaries for such period, (ii) all depreciation and amortization expenses of Tenant and its Subsidiaries for such period, and (iii) all non-cash charges taken by Tenant and its Subsidiaries during such period for in-process research and development.

Eligible Assignee. “Eligible Assignee” shall mean an Entity that is a commercial bank or another financial institution which (i) the lessor under the Ground Leases has confirmed is a responsible bona fide institutional lender, as defined in Section 907 of the Ground Leases, (ii) is a qualified institutional buyer as defined in Rule 144A under the Securities Act of 1933, as amended, (iii) has a combined capital and surplus of at least $50,000,000, and (iv) is acting through a branch, agency or office located in the United States.

Employee Benefit Plan. “Employee Benefit Plan” shall mean any employee benefit plan within the meaning of section 3(3) of ERISA maintained or contributed to by Tenant or any ERISA Affiliate, other than a Multiemployer Plan.

Entity. “Entity” shall mean any person, corporation, partnership (general or limited), joint venture, association, limited liability company, joint stock company, trust or other business entity or organization.

Equity Securities. “Equity Securities” of any Entity shall mean (a) all common stock, preferred stock, participations, shares, partnership interests or other equity interests in and of such Entity (regardless of how designated and whether or not voting or nonvoting) and (b) all warrants, options and other rights to acquire or sell any of the foregoing.

ERISA. “ERISA” shall mean the Employee Retirement Income Security Act of 1974.

ERISA Affiliate. “ERISA Affiliate” shall mean any Entity which is treated as a single employer with Tenant under Section 414 of the IRC.

Escrow Agent. “Escrow Agent” shall have the meaning set forth in Section 17.3(b) of the Lease.

Estimated Future Value. “Estimated Future Value” shall have the meaning set forth in Section 1.9 of the Lease.

Event of Default. “Event of Default” shall have the meaning set forth in Section 19.1 of the Lease.

Expiration Date. “Expiration Date” shall have the meaning set forth in Section 1.7 of the Lease.

APPENDIX A-6

Extension Term. “Extension Term” shall have the meaning set forth in Section 1.7 of the Lease.

Federal Funds Rate. “Federal Funds Rate” shall have the meaning set forth in the definition of “Base Rate.”

Financial Statements. “Financial Statements” shall mean, with respect to any accounting period for any Entity, statements of income, shareholders’ equity and cash flows of such Entity for such period, and a balance sheet of such Entity as of the end of such period, setting forth in each case in comparative form figures for the corresponding period in the preceding fiscal year if such period is less than a full fiscal year or, if such period is a full fiscal year, corresponding figures from the preceding annual audit, all prepared in reasonable detail and in accordance with GAAP.

First Extension Term. “First Extension Term” shall have the meaning set forth in Section 1.7 of the Lease.

Fixed Charge Coverage Ratio. “Fixed Charge Coverage Ratio” shall mean, with respect to Tenant for any consecutive four-quarter period, the ratio, determined on a consolidated basis in accordance with GAAP, of:

(a)           The sum of (i) the net income of Tenant and its Subsidiaries for such period, plus (ii) to the extent deducted in calculating such net income, (A) all Interest Expenses of Tenant and its Subsidiaries for such period, (B) all income tax expenses of Tenant and its Subsidiaries for such period, (C) all rental expenses of Tenant and its Subsidiaries for such period, (D) all non-cash charges taken by Tenant and its Subsidiaries during such period for in-process research and development, and (E) all amortization charges for goodwill taken by Tenant and its Subsidiaries during such period;

to

(b)           The sum of (i) all Interest Expenses of Tenant and its Subsidiaries for such period, plus (ii) all rental expenses of Tenant and its Subsidiaries for such period, plus (iii) the current portion of all long-term Indebtedness of Tenant and its Subsidiaries appearing on the consolidated balance sheet of Tenant on the last day of such period, plus without duplication, (iv) twenty percent (20%) of all synthetic lease Indebtedness of Tenant and its Subsidiaries under clause (b) of the definition of Indebtedness on the last day of such period; provided, however, that any Indebtedness under or with respect to currency exchange Rate Contracts shall be excluded for purposes of the calculation under this paragraph (b).

Foreign Plan. “Foreign Plan” shall mean any employee benefit plan maintained by Tenant or any of its Subsidiaries which is mandated or governed by any Governmental Rule of any Governmental Authority other than the United States.

Funding. “Funding” shall mean the payment of the applicable Acquisition Price by any Rent Purchaser on the Funding Date.

APPENDIX A-7

Funding Date. “Funding Date” shall mean the date upon which the entire Commitment Amount is funded to Tenant by Landlord and each Rent Purchaser pursuant to the terms of the Lease, the Participation Agreement and the Rent Purchase Agreement.

GAAP. “GAAP” shall mean generally accepted accounting principles and practices as in effect in the United States of America from time to time, consistently applied.

Governmental Authority. “Governmental Authority” shall mean any nation or government, any state, county, city or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government.

Governmental Charges. “Governmental Charges” shall mean, with respect to any Entity, all levies, assessments, fees, claims or other charges imposed by any Governmental Authority upon such Entity or any of its property or otherwise payable by such Entity.

Governmental Rule. “Governmental Rule” shall mean any law, rule, regulation, ordinance, order, code interpretation, judgment, decree, directive, guidelines, policy or similar form of decision of any Governmental Authority which is made publicly available.

Ground Lease and SJRDA Ground Leases. “Ground Lease” shall mean any ground lease or other agreement pursuant to which Land described in a Lease Supplement is leased to Landlord, as ground lessee, by a ground lessor, including, without limitation (i) that certain Ground Lease dated as of October 12, 1994, between Redevelopment Agency of the City of San Jose (“SJRDA”), as landlord, and Landlord, as tenant, and (ii) that certain Ground Lease dated as of August 15, 1996, between SJRDA, as landlord, and Landlord, as tenant (collectively, the “SJRDA Ground Leases”).

Guaranteed Residual Value. “Guaranteed Residual Value” shall mean an amount which is indicated on each Lease Supplement as of the Date of Lease.

Guaranty Obligation. “Guaranty Obligation” shall mean, with respect to any Entity, any direct or indirect liability of that Entity with respect to any indebtedness, lease, dividend, letter of credit or other obligation (the “primary obligations”) of another Entity (the “primary obligor”), including any obligation of that Entity, whether or not contingent, (a) to purchase, repurchase or otherwise acquire such primary obligations or any property constituting direct or indirect security therefor, or (b) to advance or provide funds (i) for the payment or discharge of any such primary obligation, or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, or (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof. The amount of any Guaranty Obligation shall be deemed equal to the stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof.

APPENDIX A-8

Improvements. “Improvements” shall mean any Building located on any Land described in a Lease Supplement and all related improvements, fixtures and equipment now or hereafter installed in such Building or on the Land on which such Building is located.

Indebtedness. “Indebtedness” of any Entity shall mean, without duplication:

(a)           All obligations of such Entity evidenced by notes, bonds, debentures or other similar instruments and all other obligations of such Entity for borrowed money (including obligations to repurchase receivables and other assets sold with recourse);

(b)           All obligations of such Entity for the deferred purchase price of property or services (including obligations under letters of credit and other credit facilities which secure or finance such purchase price and obligations under “synthetic” leases);

(c)           All obligations of such Entity under conditional sale or other title retention agreements with respect to property acquired by such Entity (to the extent of the value of such property if the rights and remedies of the seller or lender under such agreement in the event of default are limited solely to repossession or sale of such property);

(d)           All obligations of such Entity as lessee under or with respect Capital Leases;

(e)           All non-contingent payment or reimbursement obligations of such Entity under or with respect to all letters of credit (including standby and commercial), banker’s acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments (hereinafter “Surety Instruments”);

(f)            All net obligations of such Entity, contingent or otherwise, under or with respect to Rate Contracts;

(g)           All Guaranty Obligations of such Entity with respect to the obligations of other Entities of the types described in clauses (a) - (f) above and all other Contingent Obligations of such Entity; and

(h)           All obligations of other Entities of the types described in clauses (a) - (f) above to the extent secured by (or for which any holder of such obligations has an existing right, contingent or otherwise, to be secured by) any Lien in any property (including accounts and contract rights) of such Entity, even though such Entity has not assumed or become liable for the payment of such obligations.

Insurance and Condemnation Payments. “Insurance and Condemnation Payments” shall mean the portion of all compensation attributable to the Parcels and awarded or paid upon any Taking, as described in Section 16.4 of the Lease, and paid to Landlord pursuant to the Distribution Formula set forth in Section 16.4 of the Lease, plus the portion of all proceeds of insurance paid to Landlord pursuant to the Distribution Formula set forth in Section 16.4 of the Lease, as described in Section 17.3 of the Lease.

Interest Expenses. “Interest Expenses” shall mean, with respect to any Entity for any period, the sum, determined on a consolidated basis in accordance with GAAP, of (a) all interest

APPENDIX A-9

on the Indebtedness of such Entity paid or accrued during such period (including interest attributable to Capital Leases) plus (b) all fees in respect of outstanding letters of credit paid or accrued by such Entity during such period.

Invoice. “Invoice” shall have the meaning set forth in Section 7.1 of the Lease.

IRC. “IRC” shall mean the Internal Revenue Code of 1986.

L/C Issuer. “L/C Issuer” shall have the meaning set forth in Section 4.3(a)(v) of the Lease.

Land. “Land” shall have the meaning set forth in Section 1.5 of the Lease.

Landlord. “Landlord” shall mean SMBC Leasing and Finance, Inc. (formerly known as Sumitomo Bank Leasing and Finance, Inc.) and its successors and permitted assigns.

Landlord Contribution. “Landlord Contribution,” for any Lease Supplement at the time of the relevant calculation, shall mean the amount specified as the Landlord Contribution in such Lease Supplement, less all amounts applied to reduce the Lease Investment Balance with respect to such Lease Supplement which are distributed to Landlord in accordance with the Rent Purchase Agreement.

Landlord Contribution Rate. “Landlord Contribution Rate” for any Rental Period and Portion applicable to the Landlord Contribution, shall be equal to the per annum rate equal to the sum of the LIBOR Rate for such Rental Period or Portion plus the applicable margin set forth in the Pricing Grid under the heading “Landlord Contribution Rate - Libor Rate Margin,” such rate to change from time to time during such period as the applicable margin shall change. Notwithstanding the foregoing:

(a)           If, on or before the first day of any Rental Period for any Portion, (1) Landlord shall determine that the LIBOR Rate for such Rental Period cannot be adequately and reasonably determined due to the unavailability of funds in or other circumstances affecting the London interbank market or (ii) Landlord determines that the rate of interest for such Portion does not adequately and fairly reflect the cost to Landlord of funding its share of such Portion, Landlord shall immediately give notice of such condition to Tenant. After the giving of any such notice by Landlord and until Landlord shall otherwise notify Tenant that the circumstances giving rise to such condition no longer exist, the Landlord Contribution Rate for each new Rental Period shall be the Base Rate, plus the applicable margin set forth in the Pricing Grid under the heading “Landlord Contribution Rate - Base Rate Margin.”

(b)           If, after the date of the Lease, the adoption of any Governmental Rule, or any change in any Governmental Rule or the application or requirements thereof (whether such change occurs in accordance with the terms of such Governmental Rule as enacted, as a result of amendment or otherwise) or any change in the interpretation or administration of any Governmental Rule by any Governmental Authority, or compliance by Landlord with any request or directive (whether or not having the force of law) of any Governmental Authority (a “Change of Law”), shall make it unlawful or impossible for Landlord to make or maintain any part of the Lease Investment Balance at the LIBOR Rate, Landlord shall immediately notify

APPENDIX A-10

Tenant of such Governmental Rule or Change of Law. After the giving of any such notice by Landlord and until Landlord shall otherwise notify Tenant that such Change of Law or Governmental Rule is no longer in effect with respect to Landlord, the Landlord Contribution Rate for each new Rental Period shall be the Base Rate, plus the applicable margin set forth in the Pricing Grid under the heading “Landlord Contribution Rate - Base Rate Margin.”

(c)           Subject to other provisions relating to payment of the Default Rate, if a Default has occurred and is continuing at the time the Notice of Rental Period Selection is required to be delivered in accordance with Section 7.1(b) of the Lease, the Landlord Contribution Rate for each new Rental Period shall be the Base Rate plus the applicable margin set forth in the Pricing Grid under the heading “Landlord Contribution Rate - Base Rate Margin” until such Default has been cured or waived.

Landlord Liens. “Landlord Liens” shall have the meaning set forth in Section 20.1(c)(i) of the Lease.

Landlord Taxes. “Landlord Taxes” shall have the meaning set forth in Section 8.1(b) of the Lease.

Landlord’s Additional Rent Interest. “Landlord’s Additional Rent Interest” shall mean the respective amount owed to Landlord for Additional Rent, excluding the Purchase Price, the Guaranteed Residual Value, the Termination Amount, Insurance and Condemnation Payments and Default Amounts, but including, without limitation, any Break Funding Costs, Additional Charges and Additional Amounts payable pursuant to Section 8.4 of the Lease, claims for indemnification amounts payable by Tenant under the Operative Documents, and all other fees, costs and expenses payable or reimbursable by Tenant under the Operative Documents.

Landlord’s Base Rent Interest. “Landlord’s Base Rent Interest” shall mean the sum of (a) the portion of each payment of Base Rent attributable to the Landlord Contribution calculated in accordance with clause (b) of the definition of “Base Rent;” plus (b) the same portion of each payment of interest paid by Tenant at the Default Rate on Base Rent.

Landlord’s Default Interest. “Landlord’s Default Interest” shall mean Landlord’s right to receive and retain, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Default Amounts that does not exceed the then outstanding balance of Landlord Contribution plus all other amounts then due and owing to Landlord under the Lease and the other Operative Documents.

Landlord’s Insurance and Condemnation Interest. “Landlord’s Insurance and Condemnation Interest” shall mean Landlord’s right to receive and retain, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Insurance and Condemnation Payments that does not exceed the Landlord’s Percentage of the Insurance and Condemnation Payments.

Landlord’s Interests. “Landlord’s Interests” shall mean, with respect to a Parcel, the Landlord’s Base Rent Interest, the Landlord’s Default Interest, the Landlord’s Insurance and Condemnation Interest, the Landlord’s Purchase Price Interest, Landlord’s Additional Rent

APPENDIX A-11

Interest, the Landlord’s Guaranteed Residual Value Interest and the Landlord’s Termination Option Interest.

Landlord’s Percentage. “Landlord’s Percentage” shall mean the percentage that the Landlord Contribution represents of the Lease Investment Balance, as such amounts are reduced by any payments applied to the Lease Investment Balance.

Landlord’s Purchase Price Interest. “Landlord’s Purchase Price Interest” shall mean Landlord’s right to receive and retain, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Purchase Price payable by Tenant under Section 20.1 of the Lease that exceeds the Rent Purchasers’ Purchase Price Interest.

Landlord’s Termination Option Interest. “Landlord’s Termination Option Interest” shall mean Landlord’s right to receive and retain, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Termination Amount that does not exceed the then outstanding balance of Landlord Contribution (after taking into account any prior reductions in the outstanding amount of Landlord Contribution) plus all other amounts then due and owing to Landlord under the Lease and the other Operative Documents.

Landlord’s Wire Transfer Instructions. “Landlord’s Wire Transfer Instructions” shall mean the following with respect to payments to be made to the Landlord:

Citibank, N.A., New York

ABA No.: 021000089

A/C Name: Sumitomo Mitsui Banking Corporation

A/C No.: 36023837

Further Credit to: SMBC Leasing and Finance, Inc.

A/C No.: 283572

Lease. “Lease” shall mean that certain Second Amended and Restated Master Lease of Land and Improvements dated as of August 11, 2004, by and between Landlord and Tenant.

Lease Extension Request. “Lease Extension Request” shall have the meaning set forth in Section 6.2 of the Rent Purchase Agreement.

Lease Investment Balance. “Lease Investment Balance” shall mean, for any Lease Supplement, at the time in question, (a) the amount specified in such Lease Supplement as the original Lease Investment Balance; reduced by (b) the following, to the extent that the following relate to the Land and Improvements described in such Lease Supplement: (i) the aggregate of all amounts received by Landlord pursuant to the following provisions of the Lease: Article XVI (Eminent Domain), and Article XVII (Damage or Destruction), Section 19.2 (Landlord’s Remedies), Section 20.1 (Option to Purchase Parcels), and/or Section 20.2 (Termination Option); and (ii) the aggregate of all amounts received by Landlord or Administrative Agent in respect of the Lease or any other Operative Document that are not otherwise applied to reduce the Lease Investment Balance relating to such Lease Supplement and which constitute a repayment or reduction of the amounts placed at risk by or through the Landlord, excluding for purposes of this clause amounts paid as Base Rent under the Lease and reimbursement or payment for expenses, fees, indemnification payments and similar items payable by Tenant to Landlord,

APPENDIX A-12

Administrative Agent, any Rent Purchaser or any other Entity under the Lease, any Lease Supplement, or any other Operative Document.

Lease Investment Balance Debt. “Lease Investment Balance Debt” shall mean the portion of the Lease Investment Balance not invested by Landlord. As of the Date of Lease, the Lease Investment Balance Debt shall not exceed $126,800,000.00.

Lease Investment Balance Equity. “Lease Investment Balance Equity” shall mean the portion of the Lease Investment Balance invested by Landlord. On the Date of Lease, the Lease Investment Balance Equity shall be $16,400,000.00.

Lease Payment Amount. “Lease Payment Amount” shall have the meaning set forth in Section 4.3(a)(iv) of the Lease.

Lease Supplement. “Lease Supplement” shall mean either or both of Lease Supplement No. 1 (attached to the Lease as Exhibit A) or Lease Supplement No. 2 (attached to the Lease as Exhibit B).

Lease Supplement Term. “Lease Supplement Term” shall have the meaning set forth in each Lease Supplement.

Legal Requirements. “Legal Requirements” shall mean all statutes, codes, laws, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all federal, state, county, municipal and other governments, departments, commissions, boards, courts, authorities, officials and officers, which now or at any time hereafter are applicable to the Lease or applicable to and enforceable against any Parcel or any part thereof, as applicable.

Letter of Credit. “Letter of Credit” shall have the meaning set forth in Section 4.3(a)(v) of the Lease.

Letter of Credit Payment Amount. “Letter of Credit Payment Amount” shall have the meaning set forth in Section 4.3(a)(iv) of the Lease.

Leverage Ratio. “Leverage Ratio” shall mean, with respect to Tenant and its Subsidiaries, as of the last day of a fiscal quarter, the ratio of (a) the total Indebtedness of Tenant and its Subsidiaries, to (b) the total capitalization of Tenant and its Subsidiaries (i.e., total Indebtedness plus the book value of Tenant’s equity).

LIBOR Rate. “LIBOR Rate” shall mean, with respect to each Rental Period for a Portion, a rate per annum equal to the quotient (rounded upward if necessary to the nearest 1/100 of one percent) of:

(a)           The British Banker’s Association LIBOR Rate (rounded upward if necessary to the nearest 1/100 of one percent) as quoted on the BBAM 1 screen on Bloomberg (or, if at any time such quotes are unavailable from Bloomberg, on Bridge Telerate (Page 3750)) on the second Business Day prior to the first day of such Rental Period at or about 11:00 a.m. (London

APPENDIX A-13

time) (for delivery on the first day of such Rental Period) for a term comparable to such Rental Period;

divided by

(b)           One minus the Reserve Requirement for such Portion in effect from time to time.

If, for any reason, the LIBOR Rate is not available from the aforementioned sources for any Rental Period, Landlord shall determine the LIBOR Rate for such Rental Period based upon the rates per annum at which Dollar deposits are offered to Landlord in the London interbank market on the second Business Day prior to the first day of such Rental Period at or about 11:00 a.m. (London time) (for delivery on the first day of such Rental Period) in an amount equal to such Portion and for a term comparable to such Rental Period.

The LIBOR Rate shall be adjusted automatically as to all outstanding Portions then calculated on the basis of the LIBOR Rate as of the effective date of any change in the Reserve Requirement.

Lien. “Lien” shall mean, with respect to any property, any security interest, mortgage, pledge, lien, charge or other encumbrance in, of, or on such property or the income therefrom, including, without limitation, the interest of a vendor or lessor under a conditional sale agreement, Capital Lease or other title retention agreement, or any agreement to provide any of the foregoing, and the filing of any financing statement or similar instrument under the Uniform Commercial Code or comparable law of any jurisdiction other than filings made for notice purposes only in connection with true leases (which would not include “synthetic” leases).

Majority Rent Purchasers. “Majority Rent Purchasers” shall mean those Rent Purchasers representing an aggregate interest in the Lease Investment Balance Debt in excess of sixty-six and two-thirds percent (66 2/3%), excluding from the “Lease Investment Balance Debt” that portion thereof attributed to any Rent Purchaser that is in default under the terms of the Rent Purchase Agreement or the Participation Agreement.

Master Lease Term. “Master Lease Term” is defined in Section 1.7 of the Lease.

Material Adverse Effect. “Material Adverse Effect” shall mean a material adverse effect on (a) the business, assets, operations, or financial condition of Tenant and its Subsidiaries, taken as a whole; (b) the ability of Tenant to pay or perform the Obligations in accordance with the terms of the Lease and the other Operative Documents; or (c) practical realization of the material rights and remedies of Landlord, Administrative Agent or any Rent Purchaser intended to be provided under the Operative Documents.

Material Subsidiary. “Material Subsidiary” shall mean any Subsidiary that had revenues during the immediately preceding fiscal year equal to or greater than five percent (5%) of the consolidated gross revenues of Tenant and its Subsidiaries during such year.

Memorandum of Lease. “Memorandum of Lease” shall have the meaning set forth in Section 21.6 of the Lease.

APPENDIX A-14

Moody’s. “Moody’s” shall have the meaning set forth in Section 4.3(a)(v) of the Lease.

Multiemployer Plan. “Multiemployer Plan” shall mean any multiemployer plan within the meaning of section 3(37) of ERISA maintained or contributed to by Tenant or any ERISA Affiliate.

Net Worth. “Net Worth” shall mean, with respect to Tenant at any time, the remainder at such time, determined on a consolidated basis in accordance with GAAP, of (a) the total assets of Tenant and its Subsidiaries at such time, minus (b) the sum (without limitation and without duplication of deductions) of the total liabilities of Tenant and its Subsidiaries at such time and all reserves of Tenant and its Subsidiaries at such time for anticipated losses and expenses (to the extent not deducted in calculating total assets in clause (a) above).

Notice. “Notice” shall mean a written advice, request, demand or notification required or permitted by the Lease, as more particularly provided in Section 21.3 of the Lease.

Notice of Rental Period Selection. “Notice of Rental Period Selection” shall have the meaning set forth in Section 7.1(b) of the Lease.

Obligations. “Obligations” shall mean and include, with respect to Tenant, all loans, advances, debts, liabilities, and obligations, howsoever arising, owed by Tenant to Landlord, Administrative Agent or any Rent Purchaser of every kind and description (whether or not evidenced by any note or instrument and whether or not for the payment of money), direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising pursuant to the terms of the Lease and the other Operative Documents, including, without limitation, all Base Rent and Additional Rent, interest, fees, charges, expenses, attorneys’ fees and accountants’ fees chargeable to Tenant or payable by Tenant under the Lease or the other Operative Documents.

Official Records. “Official Records” shall mean the official records of Santa Clara County.

Operative Documents. “Operative Documents” shall mean the Lease, the Lease Supplements, the Security Instruments, the Participation Agreement, the Rent Purchase Agreement, the Rent Purchasers’ Deed of Trust and all other documents, instruments and agreements delivered to Landlord, Administrative Agent or any Rent Purchaser pursuant to the terms of any of the foregoing documents.

Original Construction Management Agreements. “Original Construction Management Agreements” shall mean each of the Construction Management Agreements entered into by Landlord and Tenant at the time of and in connection with the execution of each of the Original Leases.

Original Deeds of Trust. “Original Deeds of Trust” shall have the meaning set forth in the Recitals to the Lease.

APPENDIX A-15

Original Lease Supplements, Original Lease Supplement No. 1 and Original Lease Supplement No. 2. “Original Lease Supplements,” “Original Lease Supplement No. 1” and “Original Lease Supplement No. 2” shall have the meanings set forth in the Recitals to the Lease.

Original Leases. “Original Leases” shall have the meaning set forth in the Recitals to the Lease.

Original Participation Agreement. “Original Participation Agreement” shall have the meaning set forth in the Recitals of the Participation Agreement.

Original Rent Purchase Agreement. “Original Rent Purchase Agreement” shall have the meaning set forth in the recitals of the Rent Purchase Agreement.

Parcel. “Parcel” shall have the meaning set forth in Section 1.6 of the Lease.

Participation Agreement. “Participation Agreement” shall mean that certain Amended and Restated Participation Agreement dated as of August 11, 2004, executed by and among Tenant, Landlord, Administrative Agent and Rent Purchasers in the form attached to the Lease as Exhibit C.

PBGC. “PBGC” shall mean the Pension Benefit Guaranty Corporation.

Permitted Liens. “Permitted Liens” shall have the meaning set forth in Section 21.21(b) of the Lease.

Permitted Title Exceptions. “Permitted Title Exceptions” shall mean the following: (a) the exceptions set forth in each Lease Supplement or in any title insurance delivered in connection with the Operative Documents; (b) taxes and assessments (excluding Landlord Taxes as defined in Section 8.1 of the Lease) not yet due and payable; (c) the Security Instruments; (d) all title defects, liens, encumbrances, deeds of trust, mortgages, rights-of-way, and restrictive covenants and conditions affecting the Land except to the extent any of the foregoing arise as a result of Landlord’s actions or with Landlord’s written consent (unless such actions taken or consent given by Landlord are requested in writing by Tenant); and (e) the Lease and all Lease Supplements.

Present Value. “Present Value” shall have the meaning set forth in Section 1.9 of the Lease.

Portion. “Portion” shall mean a portion of the Lease Investment Balance for which a Landlord Contribution Rate or a Rent Purchasers’ Contribution Rate is determined.

Pricing Grid. “Pricing Grid” shall mean that certain pricing grid attached to the Lease as Exhibit C.

Proceeds. “Proceeds” shall have the meaning set forth in Section 20.2(d) of the Lease.

Purchase Option. “Purchase Option” shall have the meaning set forth in Section 20.1(a) of the Lease.

APPENDIX A-16

Purchase Option Exercise Notice. “Purchase Option Exercise Notice” shall have the meaning set forth in Section 20.1(b) of the Lease.

Purchase Price. “Purchase Price” shall have the meaning set forth in Section 20.1(a) of the Lease.

Qualifying Retail Leases. “Qualifying Retail Leases” shall have the meaning set forth in Section 15.2(a) of the Lease.

Quick Ratio. “Quick Ratio” shall mean, with respect to Tenant and its Subsidiaries at any time, the ratio, determined on a consolidated basis in accordance with GAAP, of:

(a)           The sum at such time, to the extent unencumbered and unrestricted, of all (i) cash of Tenant and its Subsidiaries; (ii) cash equivalents of Tenant and its Subsidiaries; (iii) short-term investments of Tenant and its Subsidiaries which comply with the investment policy of Tenant; and (iv) accounts receivable of Tenant and its Subsidiaries, net of appropriate loss and other reserves therefor;

to

(b)           The sum at such time of all (i) current liabilities of Tenant and its Subsidiaries; and (ii) to the extent not included in such current liabilities under the preceding clause (i), the current portion of all Indebtedness of the types described in clauses (a) - (d) of the definition of “Indebtedness.”

Rate Contracts. “Rate Contracts” shall mean swap agreements (as that term is defined in Section 101 of the Federal Bankruptcy Reform Act of 1978, as amended) and any other agreements or arrangements designed to provide protection against fluctuations in interest or currency exchange rates.

RCRA. “RCRA” shall have the meaning set forth in Section 10.1(b)(i) of the Lease.

Real Estate Taxes. “Real Estate Taxes” shall have the meaning set forth in Section 8.1(b) of the Lease.

Register. “Register” shall have the meaning set forth in Section 7.4(b)(ii) of the Rent Purchase Agreement.

Rent Commencement Date. “Rent Commencement Date” shall have the meaning set forth in the Lease Supplements.

Rent Payment Date. “Rent Payment Date” shall have the meaning set forth in Section 7.1 of the Lease.

Rent Purchase Agreement. “Rent Purchase Agreement” shall mean that certain Amended and Restated Rent Purchase Agreement, dated as of August 11, 2004, executed by and among Landlord, Administrative Agent and Rent Purchasers and acknowledged by Tenant.

APPENDIX A-17

Rent Purchasers. “Rent Purchasers” shall have the meaning set forth in the Participation Agreement.

Rent Purchasers’ Additional Rent Interest. “Rent Purchasers’ Additional Rent Interest” shall mean the respective amount owed to each of the Rent Purchasers for Additional Rent, excluding the Purchase Price, the Guaranteed Residual Value, Insurance and Condemnation Payments and Default Amounts, but including, without limitation, any Break Funding Costs, Additional Charges and Additional Amounts payable pursuant to Section 8.4 of the Lease, claims for indemnification amounts payable by Tenant under the Operative Documents, and all other fees, costs and expenses payable or reimbursable by Tenant under the Operative Documents.

Rent Purchasers’ Base Rent Interest. “Rent Purchasers’ Base Rent Interest” shall mean the sum of (a) the portion of each payment of Base Rent attributable to the Rent Purchasers’ Contribution calculated in accordance with clause (a) of the definition of “Base Rent;” plus (b) the same portion of each payment of interest paid by Tenant at the Default Rate on Base Rent.

Rent Purchaser’s Commitment. “Rent Purchaser’s Commitment” shall mean the commitment of any Rent Purchaser as specified in Section 2.2 of the Participation Agreement and on such Rent Purchaser’s counterpart signature page of the Participation Agreement.

Rent Purchasers’ Contribution. “Rent Purchasers’ Contribution,” for any Lease Supplement at the time of the relevant calculation, shall mean the Lease Investment Balance for such Lease Supplement as of the date of such calculation, less the Landlord Contribution for such Lease Supplement as of such date.

Rent Purchasers’ Contribution Rate. “Rent Purchasers’ Contribution Rate” shall mean, for any Rental Period and Portion applicable to the Rent Purchasers’ Contribution, the per annum rate equal to the sum of the LIBOR Rate for such Rental Period and Portion plus the applicable margin set forth in the Pricing Grid under the heading “Rent Purchasers’ Contribution Rate - Libor Rate Margin,” such rate to change from time to time during such period as the applicable margin shall change. Notwithstanding the foregoing:

(a)           If, on or before the first day of any Rental Period for any Portion, (i) any Rent Purchaser shall advise Administrative Agent that the LIBOR Rate for such Rental Period cannot be adequately and reasonably determined due to the unavailability of funds in or other circumstances affecting the London interbank market or (ii) Majority Rent Purchasers shall advise Administrative Agent that the rate of interest for such Portion does not adequately and fairly reflect the cost to such Rent Purchasers of funding their respective share of such Portion, Administrative Agent shall immediately give notice of such condition to Tenant and the other Rent Purchasers. After the giving of any such notice by Administrative Agent and until Administrative Agent shall otherwise notify Tenant that the circumstances giving rise to such condition no longer exist, the Rent Purchasers’ Contribution Rate for each new Rental Period shall be the Base Rate, plus the applicable margin set forth in the Pricing Grid under the heading “Rent Purchasers’ Contribution Rate - Base Rate Margin.”

APPENDIX A-18

(b)           If, after the date of the Lease, the adoption of any Governmental Rule or any Change of Law shall make it unlawful or impossible for any Rent Purchaser to make or maintain any part of the Lease Investment Balance at the LIBOR Rate, such Rent Purchaser shall immediately notify Administrative Agent and Tenant of such Governmental Rule or Change of Law. After the giving of any such notice by any Rent Purchaser and until Administrative Agent shall otherwise notify Tenant that such Governmental Rule or Change of Law is no longer in effect with respect to any Rent Purchaser, the Rent Purchasers’ Contribution Rate for each new Rental Period shall be the Base Rate, plus the applicable margin set forth in the Pricing Grid under the heading “Rent Purchasers’ Contribution Rate - Base Rate Margin.”

(c)           If a Default has occurred and is continuing at the time the Notice of Rental Period Selection is required to be delivered in accordance with Section 7.1(b) of the Lease, the Rent Purchasers’ Contribution Rate for each new Rental Period shall be the Base Rate, plus the applicable margin set forth in the Pricing Grid under the heading “Rent Purchasers’ Contribution Rate - Base Rate Margin” until such Default has been cured or waived.

Rent Purchasers’ Deed of Trust. “Rent Purchasers’ Deed of Trust” shall mean those certain Deeds of Trust granted by Landlord in favor of Administrative Agent to secure Landlord’s obligations to Administrative Agent and the Rent Purchasers pursuant to the Operative Documents.

Rent Purchasers’ Default Interest. “Rent Purchasers’ Default Interest” shall mean the right of the Rent Purchasers to receive, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Default Amounts that does not exceed the then outstanding balance of Rent Purchasers’ Contribution plus all other amounts then due and owing to the Rent Purchasers under the Lease and the other Operative Documents.

Rent Purchasers’ Insurance and Condemnation Interest. “Rent Purchasers’ Insurance and Condemnation Interest” shall mean the right of the Rent Purchasers to receive, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Insurance and Condemnation Payments that does not exceed the Rent Purchasers’ Percentage of the Insurance and Condemnation Payments.

Rent Purchasers’ Interests. “Rent Purchasers’ Interests” shall mean, with respect to a Parcel, the Rent Purchasers’ Base Rent Interest, the Rent Purchasers’ Additional Rent Interest, the Rent Purchasers’ Default Interest, the Rent Purchasers’ Insurance and Condemnation Interest, the Rent Purchasers’ Purchase Price Interest and the Rent Purchasers’ Guaranteed Residual Value Interest with respect to such Parcel.

Rent Purchasers’ Percentage. “Rent Purchasers’ Percentage” shall mean the percentage that the Rent Purchasers’ Contribution represents of the Lease Investment Balance as such amounts are reduced by any payments applied to the Lease Investment Balance. As to any individual Rent Purchaser, “Rent Purchaser’s Percentage” shall mean the percentage that such Rent Purchaser’s Commitment represents of the Lease Investment Balance as such amounts are reduced by any payments applied to the Lease Investment Balance.

APPENDIX A-19

Rent Purchasers’ Purchase Price Interest. “Rent Purchasers’ Purchase Price Interest” shall mean the right of the Rent Purchasers to receive, in the order of priority set forth in Section 3.2 of the Rent Purchase Agreement, so much of the Purchase Price payable by Tenant to Landlord pursuant to an election under Section 20.1 of the Lease that does not exceed (a) the Rent Purchasers’ Percentage of the Purchase Price, plus (b) the same portion of each payment of interest paid by Tenant at the Default Rate on the Purchase Price.

Rental Period. “Rental Period” shall mean, with respect to any Portion, initially, the period commencing on the Rent Commencement Date and ending on the Rent Payment Date selected by Tenant for such Portion pursuant to Section 7.1 of the Lease and, thereafter, each period commencing on a Rent Payment Date and ending on the Rent Payment Date selected by Tenant for such Portion pursuant to Section 7.1 of the Lease.

Reportable Event. “Reportable Event” shall have the meaning given to that term in ERISA and applicable regulations thereunder.

Reserve Requirement. “Reserve Requirement” shall mean, with respect to any day in any Rental Period, the aggregate of the reserve requirement rates (expressed as a decimal) in effect on such day for eurocurrency funding (currently referred to as “Eurocurrency liabilities” in Regulation D of the Board of Governors of the Federal Reserve System) maintained by a member bank of the Federal Reserve System. As used herein, the term “reserve requirement” shall include, without limitation, any basic, supplemental or emergency reserve requirements imposed on any Rent Purchaser or Landlord by any Governmental Authority.

Restated Lease. “Restated Lease” shall have the meaning set forth in the Recitals to the Lease.

Returned Amount. “Returned Amount” shall have the meaning set forth in Section 4.4(c) of the Rent Purchase Agreement.

S&P. “S&P” shall have the meaning set forth in Section 4.3(a)(v) of the Lease.

Security Instruments. “Security Instruments” shall mean the deed of trust, mortgage, financing statement and/or any other security document or instrument in favor of, and in form and substance satisfactory to, Landlord and Administrative Agent, executed by Tenant in favor of Landlord and encumbering the Parcel described in a Lease Supplement or encumbering any other property of Tenant to secure Tenant’s obligations to Landlord under the Lease and any other Operative Document, including, without limitation, the Amended Deeds of Trust.

Shortfall. “Shortfall” shall have the meaning set forth in Section 20.2(d)(i) of the Lease.

Subparticipant. “Subparticipant” shall have the meaning set forth in Section 7.4(d) of the Rent Purchase Agreement.

Subsequent Extension Term. “Subsequent Extension Term” shall have the meaning set forth in Section 1.7 of the Lease.

APPENDIX A-20

Subsidiary. “Subsidiary” of any Entity shall mean (a) any corporation of which more than 50% of the issued and outstanding Equity Securities having ordinary voting power to elect a majority of the Board of Directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned or controlled by such Entity, by such Entity and one or more of its other Subsidiaries or by one or more of such Entity’s other Subsidiaries, (b) any partnership, joint venture, limited liability company or other association of which more than 50% of the equity interest having the power to vote, direct or control the management of such partnership, joint venture or other association is at the time owned and controlled by such Entity, by such Entity and one or more of the other Subsidiaries or by one or more of such Entity’s other Subsidiaries or (c) any other Entity whose results of operations are included in the Financial Statements of such Entity on a consolidated basis.

Surety Instruments. “Surety Instruments” shall have the meaning set forth in the definition of “Indebtedness.”

Taking. “Taking” shall have the meaning set forth in Section 16.1 of the Lease.

Tenant. “Tenant” shall mean Adobe Systems Incorporated, a Delaware corporation, and its successors and permitted assigns in interest.

Tenant’s Property. “Tenant’s Property” shall mean any process equipment, fixtures, furniture, furnishings, personal property or trade fixtures located in any Improvements and readily removable therefrom without causing injury to such Improvements.

Term. “Term” shall have the meaning set forth in Section 1.7 of the Lease.

Termination Amount. “Termination Amount” shall mean Proceeds and the Shortfall amount received in connection with the sale of any Parcel under Section 20.2 of the Lease upon exercise of the Termination Option.

Termination Option. “Termination Option” shall have the meaning set forth in Section 20.2(a) of the Lease.

II.            RULES OF CONSTRUCTION

All personal pronouns used in the Operative Documents shall include all other genders. The singular shall include the plural and the plural shall include the singular. Titles of Articles, Sections and Subsections in the Operative Documents are for convenience only and neither limit nor amplify the provisions of the Operative Documents, and all references in any Operative Document to Articles, Sections or Subsections shall refer to the corresponding Article, Section or Subsection of such Operative Documents unless specific reference is made to the articles, sections or other subdivisions of another document or instrument. Unless otherwise specified in any Operative Document, all accounting terms used in the Operative Documents shall be interpreted, all accounting determinations under the Operative Documents shall be made, and all Financial Statements required to be delivered under the Operative Documents shall be prepared in accordance with GAAP, applied on a basis consistent with the most recent audited consolidated Financial Statements of the Tenant and its Subsidiaries delivered to Landlord or

APPENDIX A-21

Administrative Agent. All references to any agreement, including, without limitation, the Operative Documents, shall include such agreement as amended, modified or supplemented from time to time; and all references to any law, statute, ordinance or governmental rule or regulation shall include any amendments thereto.

APPENDIX A-22

EXHIBIT A

Lease Supplement No. 1

SECOND AMENDED AND RESTATED MASTER LEASE

AMENDED AND RESTATED LEASE SUPPLEMENT NO. 1

THIS AMENDED AND RESTATED LEASE SUPPLEMENT NO. 1 (“Lease Supplement No. 1”), dated as of August 11, 2004, is executed by and between SMBC LEASING AND FINANCE, INC. (formerly known as Sumitomo Bank Leasing and Finance, Inc.), a Delaware corporation (“Landlord”), and ADOBE SYSTEMS INCORPORATED, a Delaware corporation (“Tenant”).

Pursuant to (i) that certain Amended, Restated and Consolidated Master Lease of Land and Improvements, dated as of August 11, 1999, between Landlord and Tenant, as amended by that certain Amendment No. 1, dated as of October 8, 1999, and by that certain Amendment No. 2, dated as of August 9, 2000 (as amended, the “Restated Lease”) (which Restated Lease amended and restated, and replaced in its entirety, among other things, that certain Sublease of the Land and Lease of the Improvements, dated October 12, 1994, between Landlord and Tenant, as amended by that certain First Amendment to Sublease of the Land and Lease of the Improvements, dated August 15, 1996), and (ii) that certain Lease Supplement No. 1, dated as of August 11, 1999, between Landlord and Tenant (the “Original Lease Supplement”), Landlord leased to Tenant certain land and improvements in the City of San Jose, County of Santa Clara, State of California (as specified below, the “Parcel”).

Landlord and Tenant have now entered into that certain Second Amended and Restated Master Lease of Land and Improvements dated as of August 11, 2004 (herein called the “Lease” and the defined terms therein being hereinafter used with the same meanings), which Lease amends and restates, and replaces in its entirety, the Restated Lease. In connection therewith, Landlord and Tenant are entering into this Lease Supplement No. 1, which Lease Supplement No. 1 amends and restates, and replaces in its entirety, the Original Lease Supplement, for the purpose of leasing the Parcel to Tenant pursuant to the Lease.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, Landlord and Tenant hereby agree as follows:

(a)           Landlord hereby delivers and leases to Tenant under the Lease, and Tenant accepts and leases from Landlord under the Lease, the Parcel described in Schedule 1 attached hereto.

(b)           The Permitted Title Exceptions are described in Schedule 2 attached hereto.

(c)           The Lease Investment Balance for this Lease Supplement No. 1 is $67,029,787.00, the Landlord Contribution for this Lease Supplement No. 1 is $7,676,596.00, and the Guaranteed Residual Value for this Lease Supplement No. 1 is (i) $59,353,191.00 for the

EXHIBIT A-1

stated five (5) year Term hereof, and (ii) $59,581,343.00 for the First Extension Term, if exercised by the Tenant.

(d)           The Lease Supplement Term commenced as of the date hereof and will expire on August 11, 2009; provided, however, that the Lease Supplement Term may be extended in accordance with Section 4.3 of the Lease.

(e)           The Rent Commencement Date for this Lease Supplement No. 1 is August 11, 2004. Tenant hereby confirms its agreement to pay Base Rent and Additional Rent for the Parcel during the Lease Supplement Term in accordance with Article VII of the Lease.

(f)            Tenant hereby confirms to Landlord that Tenant has accepted the Parcel and agrees that it shall be incorporated into the Lease.

(g)           The Land upon which the Improvements have been constructed and which is a part of this Lease Supplement No. 1 is subject to that certain Ground Lease between Landlord, as ground lessee, and the Redevelopment Agency of the City of San Jose, as ground lessor, dated October 12, 1994, a memorandum of which has been recorded with the Santa Clara County Recorder as Document No. 12684585.

(h)           This Lease Supplement No. 1 may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

(i)            This Lease Supplement No. 1 is being delivered in the State of California and in all respects shall be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance.

IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease Supplement No. 1 to be duly executed on the day and year first above written.

LANDLORD:

SMBC LEASING AND FINANCE, INC.,
a Delaware corporation

By:

/s/ William M. Ginn

Name:

William M. Ginn

Its:

Chairman

EXHIBIT A-2

TENANT:

ADOBE SYSTEMS INCORPORATED, a Delaware corporation

By:

/s/ Bruce R. Chizen

Bruce R. Chizen

President and Chief Executive Officer

By:

Murray J. Demo

Murray J. Demo

Senior Vice President and Chief Financial Officer

EXHIBIT A-3

EXHIBIT B

Lease Supplement No. 2

SECOND AMENDED AND RESTATED MASTER LEASE

AMENDED AND RESTATED LEASE SUPPLEMENT NO. 2

THIS AMENDED AND RESTATED LEASE SUPPLEMENT NO. 2 (“Lease Supplement No. 2”), dated as of August 11, 2004, is executed by and between SMBC LEASING AND FINANCE, INC. (formerly known as Sumitomo Bank Leasing and Finance, Inc.), a Delaware corporation (“Landlord”), and ADOBE SYSTEMS INCORPORATED, a Delaware corporation (“Tenant”).

Pursuant to (i) that certain Amended, Restated and Consolidated Master Lease of Land and Improvements, dated as of August 11, 1999, between Landlord and Tenant, as amended by that certain Amendment No. 1, dated as of October 8, 1999, and by that certain Amendment No. 2, dated as of August 9, 2000 (as amended, the “Restated Lease”) (which Restated Lease amended and restated, and replaced in its entirety, among other things, that certain Sublease of the Land and Lease of the Improvements, dated August 15, 1996, between Landlord and Tenant), and (ii) that certain Lease Supplement No. 2, dated as of August 11, 1999, between Landlord and Tenant (the “Original Lease Supplement”), Landlord leased to Tenant certain land and improvements in the City of San Jose, County of Santa Clara, State of California (as specified below, the “Parcel”).

Landlord and Tenant have now entered into that certain Second Amended and Restated Master Lease of Land and Improvements dated as of August 11, 2004 (herein called the “Lease” and the defined terms therein being hereinafter used with the same meanings), which Lease amends and restates, and replaces in its entirety, the Restated Lease. In connection therewith, Landlord and Tenant are entering into this Lease Supplement No. 2, which Lease Supplement No. 2 amends and restates, and replaces in its entirety, the Original Lease Supplement, for the purpose of leasing the Parcel to Tenant pursuant to the Lease.

NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, Landlord and Tenant hereby agree as follows:

(a)           Landlord hereby delivers and leases to Tenant under the Lease, and Tenant accepts and leases from Landlord under the Lease, the Parcel described in Schedule 1 attached hereto.

(b)           The Permitted Title Exceptions are described in Schedule 2 attached hereto.

(c)           The Lease Investment Balance for this Lease Supplement No. 2 is $76,170,213.00, the Landlord Contribution for this Lease Supplement No. 2 is $8,723,404.00, and the Guaranteed Residual Value for this Lease Supplement No. 2 is (i)

EX. B-1

$67,446,809.00 for the stated five (5) year Term hereof, and (ii) $67,706,072.00 for the First Extension Term, if exercised by the Tenant.

(d)           The Lease Supplement Term commenced as of the date hereof and will expire on August 11, 2009; provided, however, that the Lease Supplement Term may be extended in accordance with Section 4.3 of the Lease.

(e)           The Rent Commencement Date for this Lease Supplement is August 11, 2004. Tenant hereby confirms its agreement to pay Base Rent and Additional Rent for the Parcel during the Lease Supplement Term in accordance with Article VII of the Lease.

(f)            Tenant hereby confirms to Landlord that Tenant has accepted the Parcel and agrees that it shall be incorporated into the Lease.

(g)           The Land upon which the Improvements have been constructed and which is a part of this Lease Supplement No. 2 is subject to that certain Ground Lease between Landlord, as ground lessee, and the Redevelopment Agency of the City of San Jose, as ground lessor, dated August 15, 1996, a memorandum of which has been recorded with the Santa Clara County Recorder as Document No. 13410218.

(h)           This Lease Supplement No. 2 may be executed by the parties hereto in separate counterparts, each of which when so executed and delivered shall be an original, but all such counterparts shall together constitute but one and the same instrument.

(i)            This Lease Supplement No. 2 is being delivered in the State of California and in all respects shall be governed by, and construed in accordance with, the laws of the State of California, including all matters of construction, validity and performance.

IN WITNESS WHEREOF, Landlord and Tenant have caused this Lease Supplement No. 2 to be duly executed on the day and year first above written.

LANDLORD:

SMBC LEASING AND FINANCE, INC.,
a Delaware corporation

By:

/s/ William M. Ginn

Name:

William M. Ginn

Its:

Chairman

TENANT:

ADOBE SYSTEMS INCORPORATED, a Delaware corporation

By:

/s/ Bruce R. Chizen

Bruce R. Chizen

President and Chief Executive Officer

By:

/s/ Murray J. Demo

Murray J. Demo

Senior Vice President and Chief Financial Officer

EX-31.1 7 a2144543zex-31_1.htm EXHIBIT 31.1
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EXHIBIT 31.1

CERTIFICATION

        I, Bruce R. Chizen, Chief Executive Officer of the registrant, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Adobe Systems Incorporated;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: October 7, 2004 /s/  BRUCE R. CHIZEN
Bruce R. Chizen
President and Chief Executive Officer

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EXHIBIT 31.1
CERTIFICATION

EX-31.2 8 a2144543zex-31_2.htm EXHIBIT 31.2
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EXHIBIT 31.2

CERTIFICATION

        I, Murray J. Demo, Chief Financial Officer of the registrant, certify that:

1.
I have reviewed this quarterly report on Form 10-Q of Adobe Systems Incorporated;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal controls over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Dated: October 7, 2004 /s/  MURRAY J. DEMO
Murray J. Demo
Senior Vice President and Chief Financial Officer

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EXHIBIT 31.2
CERTIFICATION

EX-32.1 9 a2144543zex-32_1.htm EXHIBIT 32.1
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EXHIBIT 32.1

CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Adobe Systems Incorporated (the "Registrant") on Form 10-Q for the quarterly period ended September 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Bruce R. Chizen, President and Chief Executive Officer of the Registrant, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

        (1)   The Report, to which this certification is attached as Exhibit 32.1, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: October 7, 2004 /s/  BRUCE R. CHIZEN
Bruce R. Chizen
President and Chief Executive Officer

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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EXHIBIT 32.1

CERTIFICATION PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
EX-32.2 10 a2144543zex-32_2.htm EXHIBIT 32.2
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EXHIBIT 32.2

CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the Quarterly Report of Adobe Systems Incorporated (the "Registrant") on Form 10-Q for the quarterly period ended September 3, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Murray J. Demo, Senior Vice President and Chief Financial Officer of the Registrant, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

        (1)   The Report, to which this certification is attached as Exhibit 32.2, fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934; and

        (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Registrant.

Dated: October 7, 2004 /s/  MURRAY J. DEMO
Murray J. Demo
Senior Vice President and Chief Financial Officer

A signed original of this written statement required by Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 has been provided to the Registrant and will be retained by the Registrant and furnished to the Securities and Exchange Commission or its staff upon request.

This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of the Registrant under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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EXHIBIT 32.2

CERTIFICATION PURSUANT TO RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934 AND 18 U.S.C. SECTION 1350
-----END PRIVACY-ENHANCED MESSAGE-----

ADOBE SYSTEMS INCORPORATED		PARTICIPANT

By:		By:
	(Signature)		(Signature)

Title:	Senior Vice President, Chief Financial Officer	Name:
			(Print)

Name:	Murray J. Demo
	(Print)
	345 Park Avenue
	San Jose, CA 95110
	(Address)		(Address)

		Vested Percentage

Prior to Initial Vesting Date.		0%

On and after Initial Vesting Date, provided Optionee’s Service is continuous from Date of Option Grant until Initial Vesting Date.		25%

On and after the day immediately preceding the day of the second annual meeting of the shareholders of the Company provided Optionee’s Service is continuous from Initial Vesting Date until such date.		50%

On and after the day immediately preceding the day of the third annual meeting of the shareholders of the Company provided Optionee’s Service is continuous from Initial Vesting Date until such date.		100%

	ADOBE SYSTEMS INCORPORATED

	By:
		Murray J. Demo
		Senior Vice President
		Chief Financial Officer

		Vested Percentage

Prior to Initial Vesting Date		0

On Initial Vesting Date, provided the Participant’s Service has not terminated prior to such date		25%

Plus:

For each of the next 12 full months of the Participant’s continuous Service from the Initial Vesting Date		2.08%

Plus:

For each of the next 12 full months of the Participant’s continuous Service from the Initial Vesting Date until the Vested Percentage equals 100%		4.17%

	ADOBE SYSTEMS INCORPORATED

	By:
		Murray J. Demo
	Title:	Senior Vice President, Chief Financial Officer

	Address:	345 Park Avenue San Jose, CA 95110-2704

Vesting Date	No. Shares Vesting	Cumulative No. Shares Vested

1.1	Date of Lease	August 11, 2004

1.2	Landlord:	SMBC Leasing and Finance, Inc., a Delaware corporation.

1.3	Tenant:	Adobe Systems Incorporated, a Delaware corporation.

1.4	Administrative Agent:	SMBC Leasing and Finance, Inc., a Delaware corporation.

1.5	Land:	Each tract of land more particularly described on Schedule 1 to a particular Lease Supplement, executed and delivered pursuant to this Lease, together with all easements, rights of way, appurtenances and other rights and benefits belonging or pertaining to such tract of land. Landlord makes no representations as to the accuracy of the description of any Land. Land may be subject to a Ground Lease, as further described in the Lease Supplement applicable thereto.

1.6	Parcels:	The Land and the Improvements located thereon.

1.7	Term:	The term of this Lease (“Master Lease Term”) shall commence on the Date of Lease set forth in Section 1.1 above and shall expire five (5) years from the Date of Lease (the “Expiration Date”). The term of each Lease Supplement (“Lease Supplement Term”) shall commence on the date set forth in the applicable Lease Supplement and expire on the Expiration Date. The Expiration Date of the Master Lease Term may be extended by Tenant for an additional period of five (5) years, subject to and in accordance with the terms of Section 4.3(a) below (the “First Extension Term”); and the Expiration Date of the First Extension Term may thereafter be extended based upon terms that are mutually agreeable to Landlord, Tenant, Administrative Agent and each Rent Purchaser (the “Subsequent Extension Term”) and in accordance with Section 4.3(b) below. The Master Lease Term, the First Extension Term, the Subsequent Extension Term and Lease Supplement Term are sometimes collectively referred to herein as the “Term.” The Term shall cease upon, and shall not refer to any period of time after, termination of this Lease or, with respect to any Lease Supplement, the termination of such Lease Supplement (whether pursuant to the terms of this Lease or such Lease Supplement, by operation of law, or otherwise).

1.8	Base Rent:	As described in Appendix A.

1.9	Appraisal:	The appraisal of Landlord’s interest in the Parcels described in Lease Supplement No. 1 (in the form of Exhibit A attached hereto) and Lease Supplement No. 2 (in the form of Exhibit B attached hereto) executed as of the Date of Lease and made by Cushman & Wakefield of California prior to the Date of Lease to determine the fair market value of Landlord’s interest in such Parcels as of the Date of Lease (the “Present Value”) and the fair market value of such interest of Landlord

		estimated as of the Expiration Date (the “Estimated Future Value”), and which appraisal shall comply with all of the provisions of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, as amended, the rules and regulations adopted pursuant thereto, and all other applicable Legal Requirements.

1.10	Addresses for Notices:

LANDLORD AND ADMINISTRATIVE AGENT:		TENANT:

SMBC Leasing and Finance, Inc 277 Park Avenue New York, NY 10172 Attention: Chief Credit Officer		Adobe Systems Incorporated 151 Almaden Boulevard San Jose, CA 95110 Attention: Treasurer

With a copy to:		With a copy to:

Clifford Chance US LLP 31 West 52^nd Street New York, NY 10019 Attention: Jay Gavigan, Esq.		Adobe Systems Incorporated 151 Almaden Boulevard San Jose, CA 95110 Attention: General Counsel

TENANT:	ADOBE SYSTEMS INCORPORATED,
	a Delaware corporation

	By:	/s/ Bruce R. Chizen
		Bruce R. Chizen
		President and Chief Executive Officer

	By:	/s/ Murray J. Demo
		Murray J. Demo
		Senior Vice President and Chief Financial Officer

LANDLORD:	SMBC LEASING AND FINANCE, INC.,
	a Delaware corporation

	By:	/s/ William M. Ginn
	Name:	William M. Ginn
	Its:	Chairman

LANDLORD:	SMBC LEASING AND FINANCE, INC., a Delaware corporation

	By:	/s/ William M. Ginn
	Name:	William M. Ginn
	Its:	Chairman

1. DEFINITIONS AND CONSTRUCTION.

1.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a) “Date of Option Grant” means

(b) “Number of Option Shares” means shares of Stock, as adjusted from time to time pursuant to Section 10.

(c) “Exercise Price” means $ per share of Stock, as adjusted from time to time pursuant to Section 10.

(d) “Initial Vesting Date” means the date occurring one (1) year after the Date of Option Grant.

(e) “Vested Shares” means, on any relevant date, that portion (disregarding any fractional share) of the Number of Option Shares determined by multiplying the Number of Option Shares by the “Vested Percentage” determined as of such date as follows:

(g) “Board” means the Board of Directors of the Company.

(h) “Code” means the U.S. Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(j) “Company” means Adobe Systems Incorporated, a Delaware corporation, or any successor corporation thereto.

(l) “Disability” means the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code.

(n) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

(o) “Fair Market Value” means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

If, on such date, the Stock is not listed on a national or regional securities exchange or market system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse.

(p) “Officer” means any person designated by the Board as an officer of the Company.

(q) “Option Expiration Date” means the date seven (7) years after the Date of Option Grant.

(r) “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(s) “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(t) “Participating Company Group” means, at any point in time, all corporations collectively which are then Participating Companies.

(u) “Securities Act” means the U.S. Securities Act of 1933, as amended.

(w) “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 10.

(x) “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

2. TAX STATUS OF OPTION.

3. ADMINISTRATION.

4. EXERCISE OF THE OPTION.

4.3 Payment of Exercise Price.

4.7 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise of the Option.

5. NONTRANSFERABILITY OF THE OPTION.

6. NATURE OF OPTION.

6.1 the Plan is established voluntarily by the Company; it is discretionary in nature and it may be modified, amended, suspended or terminated by the Company at any time, unless otherwise provided in the Plan and this Option Agreement;

6.2 the grant of the Option is voluntary and occasional and does not create any contractual or other right to receive future grants of Options, or benefits in lieu of Options, even if Options have been granted repeatedly in the past;

6.3 all decisions with respect to future Option grants, if any, will be at the sole discretion of the Company;

6.5 the Participant is voluntarily participating in the Plan;

6.6 the Option is not part of normal or expected compensation or salary for any purpose, including, but not limited to, calculating any severance, resignation, termination, redundancy, end-of-service payments, bonuses, long-service awards, pension or retirement benefits or similar payments;

6.8 the future value of the underlying shares is unknown and cannot be predicted with certainty;

6.9 if the underlying shares do not increase in value, the Option will have no value;

6.10 if the Participant exercises the Option and obtains shares, the value of those shares acquired upon exercise may increase or decrease in value, even below the Option price; and

7. TERMINATION OF THE OPTION.

8. EFFECT OF TERMINATION OF SERVICE.

8.1 Option Exercisability.

8.4 Termination for Cause. Notwithstanding any other provision of this Option Agreement, if the Participant’s Service is terminated for Cause (as defined below), the Option shall terminate and cease to be exercisable on the effective date of such termination of Service.

8.5 Certain Definitions.

(a) “Termination After Change in Control” shall mean either of the following events occurring within twelve (12) months after a Change in Control:

(i) termination by the Participating Company Group of the Participant’s Service for any reason other than for Cause (as defined below); or

(ii) the Participant’s resignation for Good Reason (as defined below) from all capacities in which the Participant is then rendering Service within a reasonable period of time following the event constituting Good Reason.

(c) “Good Reason” shall mean any one or more of the following:

9. CHANGE IN CONTROL.

9.1 Definitions.

10. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.

11. RIGHTS AS A STOCKHOLDER, EMPLOYEE OR CONSULTANT.

12. MISCELLANEOUS PROVISIONS.

12.2 Binding Effect. This Option Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, successors and assigns.

12.7 Applicable Law. This Option Agreement shall be governed by the laws of the State of California as such laws are applied to agreements between California residents entered into and to be performed entirely within the State of California.

12.8 Counterparts. This Option Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

13. Definitions and Construction.

13.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

(a) “Date of Grant” means

(b) “Total Number of Shares” means shares of Stock, as adjusted from time to time pursuant to Section 8.

(c) “Vested Shares” means, on any relevant date and provided that the Participant’s Service has not terminated prior to such date, a number of shares of Stock determined as follows:

(e) “Board” means the Board of Directors of the Company.

(g) “Code” means the U.S. Internal Revenue Code of 1986, as amended, and any applicable regulations promulgated thereunder.

(h) “Committee” the Executive Compensation Committee or other committee of the Board duly appointed to administer the Plan and having such powers as shall be specified by the Board. If no

committee of the Board has been appointed to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

(i) “Company” means Adobe Systems Incorporated, a Delaware corporation, or any successor corporation thereto.

(k) “Disability” means the permanent and total disability of the Participant within the meaning of Section 22(e)(3) of the Code.

(m) “Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.

(n) “Officer” means any person designated by the Board as an officer of the Company.

(p) “Parent Corporation” means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

(q) “Participating Company” means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

(r) “Participating Company Group” means, at any point in time, all corporations collectively which are then Participating Companies.

(t) “Stock” means the common stock of the Company, as adjusted from time to time in accordance with Section 8.

(u) “Subsidiary Corporation” means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

14. The Award.

14.2 No Monetary Payment Required. The Participant is not required to make any monetary payment (other than applicable tax withholding, if any) as a condition to receiving the Shares, the consideration for which shall be past services actually rendered to a Participating Company or for its benefit.

14.3 Certificate Registration. The certificate for the Shares shall be registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.

15. Vesting of Shares.

15.1 Normal Vesting. Except as provided in Section 3.2, the Shares shall vest and become Vested Shares as provided in Section 1.1(c) above. No additional Shares will become Vested Shares following the Participant’s termination of Service for any reason.

15.3 Federal Excise Tax Under Section 4999 of the Code.

16. Company Reacquisition Right.

17. Tax Matters.