Good afternoon. My name is Ian and I will be your conference facilitator today. At this time I would like to welcome everyone to the Adobe Systems Q2 and fiscal year 2006 earnings conference call. (Operator Instructions) I would now like to pass the call over to Mike Saviage, Vice President of Investor Relations at Adobe Systems. Please go ahead, sir.

Good afternoon and thank you for joining us today. Joining me on the call are Bruce Chizen, our CEO; Shantanu Narayen, President and COO; Randy Furr, Executive Vice President and CFO; and Murray Demo, former CFO. In the call today, we will discuss Adobe’s second quarter fiscal 2006 financial results. By now you should have a copy of our earnings press release which crossed the wire approximately 45 minutes ago. If you need a copy of the press release, you can go to adobe.com under the Company and Press links to find an electronic copy. Before we get started, I want to emphasize that some of the information discussed in this call, particularly our revenue and operating model targets and our forward-looking product plans, is based on information as of today, June 15, 2006, and contains forward-looking statements that involve risk and uncertainty. Actual results may differ materially from those set forth in such statements. For a discussion of these risks and uncertainties you should review Adobe’s SEC filings, including our annual report on Form 10-K for fiscal 2005, and our quarterly reports on Form 10-Q in fiscal 2006. During this call we will discuss non-GAAP financial measures. The GAAP financial measures that correspond to non-GAAP financial measures, as well as the reconciliation between the two, are set forth in a press release issued today, and are available on our website. All participants are advised that the audio of this conference call is being broadcast live over that Internet, and is also being recorded for playback purposes. An archive of this call will be made available in Breeze on Adobe’s Investor Relations website for approximately 45 days, and is the property of Adobe Systems. The audio and archive may not be re-recorded or otherwise reproduced or distributed without prior written permission from Adobe Systems. I would now like to turn the call over to Bruce.

Thanks Mike, and good afternoon. Q2 was a challenging quarter. Revenue was $635.5 million, slightly below the low end of the target range we communicated at the outset of the quarter. While we are disappointed in this lower than expected revenue performance, I am pleased to report we achieved non-GAAP diluted earnings per share of $0.31, which was within our original target range. In addition, our non-GAAP operating margin was 38.3%, which exceeded our target range. We are pleased with the progress we are making on the integration of Macromedia. We have fully integrated their business into ours. Product strategy is set and our engineering and marketing teams are executing against milestones to achieve their objectives. We continue to work on the integration of our sales organization to help maximize the enterprise opportunities. With that said, I am disappointed that Stephen Elop has announced his intent to leave Adobe on December 5 to pursue career aspirations outside of the Company. I will now turn the call over to Murray to provide a review of the Q2 financials. Murray.

Thanks Bruce. Before I review our Q2 financial results, I would like to point out we are not providing combined year ago Adobe and Macromedia results for comparison purposes. As we have previously stated, Adobe and Macromedia reported their results on different fiscal quarters, which limits our ability to provide accurate comparisons. Therefore, today we will compare our Q2 fiscal 2006 financial results to our Q1 fiscal 2006 results, as well as with pre-acquisition Adobe only results in Q2 of fiscal 2005. We also have the challenge of meaningfully comparing our fiscal 2006 results versus our fiscal 2005 results, due to acquisition accounting and the implementation of stock-based compensation under FAS 123-R. For the second quarter of fiscal 2006, Adobe achieved revenue of $635.5 million. This compares to $496 million reported for the second quarter of fiscal 2005, and $655.5 million reported last quarter. GAAP net income for the second quarter of fiscal 2006 was $123.1 million compared to $149.8 million reported in the second quarter of fiscal 2005 and $105.1 million last quarter. Non-GAAP net income was $189.4 million compared to $142.9 million reported in the second quarter of fiscal 2005 and $197.5 million last quarter. Non-GAAP excludes as applicable, Macromedia acquisition costs, restructuring charges related to the Macromedia acquisition, a charge for the purchase of incomplete technology, stock-based compensation, the net tax impact of the repatriation of certain foreign earnings and tax differences due to the timing and deductibility of the Macromedia acquisition costs and related charges, stock-based compensation, and investment gains and losses. GAAP diluted earnings per share for the second quarter of fiscal 2006 were $0.20, based on 613.8 million weighted average shares. This compares with GAAP diluted earnings per share of $0.29, reported in the second quarter of fiscal 2005 based on 508.2 million weighted average shares and GAAP diluted earnings per share of $0.17 reported last quarter, based on 621.8 million weighted average shares. Non-GAAP diluted earnings per share for the second quarter of fiscal 2006 were $0.31. GAAP gross margin for the quarter was 89.7%, compared to 94.5% in the second quarter of fiscal 2005, and 88.1% last quarter. Non-GAAP gross margins, which excludes the amortization of Macromedia acquisition-related costs and stock-based compensation, was 95.4% GAAP operating expenses for the second quarter of fiscal 2006 were $421.9 million. Non-GAAP operating expenses, which exclude Macromedia acquisition costs, restructuring charges related to the Macromedia acquisition, a charge for incomplete technology related to a small acquisition, and stock-based compensation were $363.4 million. Regular employees at the end of the second quarter totaled 5,678 versus 5,480 at the end of the first quarter of fiscal 2006. The majority of the headcount increase from last quarter was in research and development. GAAP and non-GAAP expenses as a percent of revenue break down as follows. Research and development: GAAP, 21%; non-GAAP, 18.1%. Sales and marketing: GAAP, 33.1%; non-GAAP, 30.8%. G&A: GAAP, 9.4%; non-GAAP, 8.3%. GAAP operating income in the second quarter of fiscal 2006 was $147.9 million, or 23.3% of revenue. This compares to GAAP operating income of $182.2 million, or 36.7% of revenue in the second quarter of fiscal 2005, and $130 million or 19.8% of revenue last quarter. Non-GAAP operating income in the second quarter of fiscal 2006 was $243.1 million, or 38.3% of revenue. This compares to non-GAAP operating income of $182.2 million, or 36.7% or revenue in the second quarter of fiscal 2005; and $252.4 million, or 38.5% of revenue last quarter. Other income for the second quarter of fiscal 2006 was $13.9 million. Adobe’s GAAP effective tax rate for the second quarter of fiscal quarter of 2006 was 25.2% and Adobe’s non-GAAP effective tax rate was 26.3%. I will now discuss Adobe’s revenue by business segment. Creative Solutions segment revenue was $357.3 million compared to $379.6 million last quarter. We experienced lower than expected demand for our Creative Suite Premium and Studio products in the second half of the quarter. Knowledge Worker segment revenue was $163 million compared to $168.8 million last quarter. Although we achieved our third best quarter ever for Acrobat Desktop revenue, we experienced a slight sequential decline when compared to Q1 results. Enterprise and Developer segment revenue was $42.8 million compared to $45 million last quarter. Mobile and Device segment revenue was $7.9 million compared to $8.6 million last quarter. While we continue to experience strong demand for our technologies, overall revenue is down from pre-acquisition levels due to loss revenues from acquisition accounting, consistent with our previous comments. Other segment revenue was $64.5 million compared to $53.5 million last quarter. Increased revenue from distribution agreements related to our Adobe Reader and Flash and Shockwave Players contributed to the sequential increase from last quarter. Turning to our geographic segments, the results in Q2 fiscal 2006 on a percent of revenue basis were as follows: The Americas, 48%. Europe, 29%. Asia, 23%. As we commented in our Q2 Intra-Quarter update on May 2, we experienced softer than expected demand for our products in the US and Europe during the spring holiday period in April. While we saw seasonal improvement in May in both geographies, it was below our expectations. Japan experienced solid demand in the quarter consistent with our expectations. Our trade DSO in the second quarter of fiscal 2006 was 40 days. This compares to 32 days in Q2 fiscal 2005 and 39 days last quarter. In regard to our global channel inventory position, we ended the quarter within company policy. At the end of the second quarter of fiscal 2006, cash and short-term investments were $1.8 billion compared to $2.1 billion dollars at the end of the first quarter of fiscal 2006. In regard to share buy back, during the quarter, we repurchased 14.6 million shares at a cost of $514.9 million, as part of our share repurchase programs. This concludes my discussion on second quarter fiscal 2006 results. I would now like to turn the call over to Shantanu.

Thanks Murray. I’ll spend the next few minutes reviewing highlights in each of our major businesses, starting first with Creative Solutions. Our Creative Suite and Studio revenue was impacted in Q2, due to a decline in demand as we head into the next long cycle. One of the contributing factors was the drop in Mac-based revenue, which we attribute to customers waiting for MacTel support in our Creative applications. It also appears that demand for upgrades to the Suites and Studio are tailing off sooner than anticipated. On the positive side, InDesign momentum continued. It was the best revenue quarter since we launched the product more than six years ago. We also continue to achieve key customer adoption with Creative Suite 2, and InDesign. For example, Rodale has switched its magazine, book page and layout processes to Adobe InDesign software and standardized its US-based publishing processes on Creative Suite. Rodale publishes Men’s Health, Prevention, Runner’s World and Women’s Health magazines and is also the largest independent book publisher in North America with a collection of titles, including the South Beach Diet. Turning to our digital video solutions business, our new video [codex] that we launched in Q1 had a combined record revenue quarter in Q2. With Production Studio, our integrated video production offering platform, and the Flash Player for video playback, we are driving increased use of video on the web. Production Studio continues to win accolades in the press. It received numerous awards at the annual NAB conference in Las Vegas in April, including a video award from CMP Entertainment Media, a Pick Hit award from Digital Content Producer and the Innovation and Media award for Content Creation, selected by NAB attendees. In addition to the success of Production Studio, our Flash video technology is rapidly gaining ground with high profile media and Internet companies. Disney-ABC announced that it had served 3 million web video streams off its popular full length episodes encoded in Flash and streamed using our Flash media server. NBC also announced the use of Flash for its TV 360 strategy, blending web video and large high quality ad space within a sophisticated Flash application. Internet sites ranging from MySpace to Google to uTube are also taking advantage of Flash video’s unique capabilities to enhance their brands and user experiences. In our digital imaging business, Photoshop performance remains steady a year after the latest version shipped. In fact, full units of Photoshop grew year-over-year when factoring in sales of Photoshop, Creative Suites, the new bundles and Production Studio. Looking forward we continue to be on track to deliver the next version of Creative Suite in Q2 next year. Turning to our Knowledge Worker Solutions business unit, Acrobat Desktop revenue was solid and in line with our expectations. In terms of mix, the ratio of Acrobat Professional to Acrobat Standard remained at approximately 1:1. Breeze, our rich way of communication and conferencing solution continues to be an exciting opportunity for Adobe, even though today it remains a small part of our business. In a recent Forrestor report [inaudible] that directory general for state modernization or DGME, a government ministry responsible for simplifying and modernizing public sector administration, which is using an Adobe Palm Solution for its e-forms portal. Utilizing LiveCycle, DGME is creating XML enabled forms, enabling off-line capabilities through Adobe Reader, connecting forms to its back end data bases and securing these forms with time stamped and proof-of-sender capabilities. EXA Belgium, part of the Global Financial Services entity AXA Group, which has utilized an Adobe Solution to streamline it’s entire small and medium business insurance contract workflow. This has reduced insurance sale cycles from four weeks to 24 hours dramatically decreasing paperwork, and increasing customer closing rates. In South Africa’s Department of Foreign Affairs, which is responsible for the registration and provision of critical documents for the country’s citizens, the Department will locate self-service and manned kiosks in strategic sights around the country, including Department offices, hospitals and other venues to enable citizens to apply for and receive documents electronically. In the future, this will allow the Department to collect biometric and demographic information in order to issue smart card enabled identification documents. Once the final solution is fully implemented, the Department anticipates processing approximately 100,000 documents and applications daily. In addition, Dexia International Bank of Luxembourg has chosen our Flex Solution to develop a new front end for their private banking applications, which will provide greater performance, efficient collaboration and a superior user experience. In total, the number of transactions in the quarter with licensing revenue greater than $50,000 for our server products, including LiveCycle, Flex, Breeze and Flash Media Server, was 97. LiveCycle also continued its momentum with partners who are helping to drive Vertical Solutions based on Adobe software. In May we announced two milestones in this area. In agreement with Ricoh, a leading provider of digital office solutions to develop and core market document scanning, security and print solutions based on Adobe PDF. The integration of LiveCycle Policy Server, Adobe print and scan technologies, with Ricoh Document Solutions, and its multifunction and laser printing devices will transform the way Knowledge Workers can work paper processes into more secure digital workflows. In cooperation with ACORD, the Association for Cooperative Operations Research and Development to deliver more than 150 ACORD insurance forms in Adobe PDF. Through new ACORD PDF fill able forms, insurance companies, agencies and vendors can automate and simplify customer communication, capture data more accurately and securely, and reducing reeking costs in errors associated with manual data entry. In our Mobile and Device Solutions business, in early April we announced a strategic alliance with Verizon Wireless to start a mobile ecosystem built around Flash technology that will allow developers to create new interactive mobile content experiences for Verizon Wireless customers. Through this agreement, Verizon Wireless is expected the first wireless operator in North America to introduce Flash enabled handsets to deliver a customized user experience. In addition, we announced that more than 2 million mobile phone subscribers have signed up in Japan for NTT DoCoMo’s ichannel news and information delivery service since it was launched in September of 2005. Ichannel is powered by our Flashcast technology, applied server solution that effectively delivers rich data experiences to mobile devices. Finally, our other business segment includes revenue from our Platform business unit, as well as our Print and Classic Publishing business unit. The sequential increase in Q2 was driven by revenue earned through distribution of the Yahoo Toolbar with the Adobe Reader, Flash and Shockwave Players. In addition Postscript revenue was up on both a quarter-over-quarter and year-over-year basis. We are getting strong customer reception to the Adobe PDF Print Engine helping to secure PDF workflows in the printing industry. I will now turn the call over to Randy.

Thanks Shantanu. Before I discuss our Q3 targets, I would like to say that I’m excited to have joined the team at Adobe. This is a company that has many going for it: market leading products and technology, loyal customers, a strong vision for its future, and a great international community of employees. I look forward to contributing and participating in the growth of Adobe in the coming years. I would also like to take this time to thank Murray for helping me through the transition in the past few weeks and to acknowledge his years of service and contributions to Adobe. I will now discuss our Q3 fiscal 2006 targets. We are targeting a Q3 revenue range of approximately range of $580 million to $610 million. In addition, we are targeting our Q3 GAAP operating margin of 16% to 19%. On a non-GAAP basis, which exclude acquisition related costs and stock-based compensation, we are targeting an operating margin range of 33% to 35%. We are targeting our third quarter share count to be approximately 606 million to 608 million shares. For other income we are targeting $13 million to $15 million. For our GAAP and non-GAAP effective tax rates, we are targeting 26%. These targets lead to a GAAP earnings per share target range in Q3 fiscal 2006 of $0.13 to $0.16 per share and non-GAAP earnings per share target range of $0.25 to $0.27. For the full year we are revising our prior year fiscal 2006 targets. We are targeting revenue in the range of $2.54 billion and $2.6 billion in full year 2006 with a targeted GAAP EPS range of $0.70 to $0.76, and a targeted non-GAAP EPS range of $1.20 to $1.25. Our prior targets were revenue of approximately $2.7 billion with GAAP and non-GAAP EPS ranges of $0.74 to $0.82, and $1.26 to $1.30 respectively. The following is factored into our targets for the rest of the year. We expect normal Q3 seasonal weakness in Europe and Japan. We expect the weakness we experienced in Q2 in our Creative business to continue in both Q3 and Q4. We expect typical Q3 seasonal strength with our Education business in North America. In addition to the positive impact of the launch of the next version of Acrobat in Q4, we expect to see normal seasonal strength in the fourth quarter as business rebounds in Europe from Q3. Finally, we also expect seasonal strength in Q4 related to the retail holiday period in the US and Europe and typical end-of-year strength in our Enterprise- focused business. This concludes my comments and I will now turn the call back over to Bruce.

Thanks Randy. As part of my closing remarks today, I would like to comment briefly on an issue that recently surfaced in the press regarding a dispute between Adobe and Microsoft. While it’s unusual for Adobe to publicly comment on business negotiations with other companies, in this case we feel it’s important to clear up some misunderstandings. We have been in discussion with Microsoft for some time regarding issues relating to what we believe to be an abusive, monopoly power with respect to Vista and Office. The issues are different and broader than characterized by Microsoft in the press. Our objective is to address Microsoft’s practice of using it’s monopoly power to undermine cross-platform technologies in favor of proprietary ones. We have made no determination about whether or not to file a formal complaint. As appropriate, Adobe will provide comments and updates on the situation. I want to be clear on this point. We are confident in our ability to successfully compete with Microsoft over the long term when we are on a level playing field. Our motivation in raising this issue with Microsoft, and with regulators has been to help ensure the preservation of innovation and fair competition within the software industry. Now, a few final words about our outlook. As we have said throughout the past year, the market opportunities for Adobe are greater than ever before. The explosion of rich, digital content continues to accelerate, and the desire to access that content across multiple platforms and devices, plays to Adobe’s strengths. With the breath of our solutions, our key strategic partnerships, and incredibly talented employees, we believe we are uniquely positioned to capitalize on these opportunities, and deliver solutions to help customers around the world engage with ideas and information. In closing, I’m excited about the future, and I look forward to providing updates on our progress. Mike.

Thanks Bruce. Before we start Q&A, I would like to go over a few logistical items. We will provide a regular Q3 Intra-Quarter business update press release on Tuesday, August 1, after the market closes. We have posted several documents on our Investor Relations web page related to our earnings report today. They include today’s earnings release, our updated investor data sheet, and a table providing reconciliation for GAAP to non-GAAP financial data. To access these documents and other investor related information, you can go to our website at www.adobe.com/adbe. During the week of August 7, Adobe management will be participating in the Pacific Crest conference in Vale, the Canaccord Adams conference in Boston, and at the CIBC conference in New York City. Dates and webcast access are available on our website. For those who wish to listen to listen to a playback of today’s conference call, a web-based Breeze archive of the call will be available on the Investor Relations page at adobe.com later today. Alternatively, you can listen to a phone replay by 800-642-1687. Use conference ID number 1101546. Again, the phone number is 800-642-1687 with conference ID number 1101546. International callers should dial 706-645-9291. The phone playback service will be available at 4:00 pm Pacific time today and ending at 4:00 pm Pacific time on Monday, June 19, 2006. We will now be happy to take your questions. Operator.

(Operator Instructions) Your first question comes from Thomas Ernst – Deutsche Bank.

Good afternoon, thank you. A question and a follow-up on the guidance. It looks like the guidance reduction relative to I think what I and The Street were looking for, relative to the normal seasonality, took a little bit bigger hit in Q3; and Q4 seems to be quite strong. The first part of the question, with the Acrobat 8 product cycle coming, are you assuming any help from the Acrobat 8 cycle in Q3 in terms of inventory fill? If so, you can help us with what looks like a very strong performance in Q4 please. Particularly if we are experiencing a little bit of a hold-up effect here with Creative Suite, do we have some risk that it intensifies as we head into Q4 or we get closer to the launch?

Regarding the overall targets going forward, we did factor in a somewhat slowing down of the Creative business, factoring out seasonality in Q4, based on the issues surrounding customers either switching to Mactel or looking at switching to Mactel, as well as just a tailing off or a trailing off of the upgrade business. That is already factored into our guidance. We're expecting that Q3, because of seasonality, the Creative business will be down from Q2, but we are expecting it to pick up again in Q4 because of the seasonal impact. Regarding Acrobat 8, we still are on track for Acrobat 8 in Q4. If Q3 is similar to previous quarters before we had a release, it should continue to be another good quarter for Acrobat, other than the fact that we have Q3 seasonality. Because of the Q3 seasonality, we do anticipate Acrobat 7 in Q3 being down a bit.

Perfect. One point of clarification. Is there any inventory shipments or any revenue recognition you expect in Q3 from Acrobat 8?

Absolutely not.

All right. Thanks again.

Our next question comes from John McPeake – Prudential Equity Group.

Historically you have been a little more exposed than other software companies to the economic cycles, because of the graphic artists selling to the print and the other advertising segments. I'm just trying to get a sense as to (a) whether that is playing at all into the lower guidance, and then (b) just generally if you're seeing any kind of a slowdown in your customer base at all, Bruce?

The overall environment for the Creative customers continues -- at least in our view -- continues to be extremely positive because of the diverse set of advertising, the number of platforms in which they have to deliver their content on, and just that overall explosion of content is driving demand for our products. The biggest concern we have around that customer is that many of them are either looking to move to Apple's new platform, or they have new moved to Apple's new platform and our current set of products don't work very well on the Mactel environment. While we're excited about CS3 and we are setting ourselves up for what we believe to be a very, very strong release, we're going to have to manage through that difficult period. Fortunately, Acrobat continues to be strong. Fortunately, our video products are accelerating and there are other aspects of our business that feel pretty good, we think, especially if you look at the increase that we have with the Reader distribution and Player distribution in distributing other people's products. So we think we have a good balance with the release of Acrobat 8 in Q4, along with the other factors, we should have enough to carry us through until that very strong release of CS3.

So Macro Backdrop is still good? It is still strong?

Japan was very solid, a very strong quarter for us. Where we saw most of the weakness was North America and Europe. But we see that predominately being in the Creative area, and we think that is less an economic issue; it is more around the other two factors of people are holding off on upgrades, and then Mactel. The reality is our CS2 business, when we look at it comparing it to CS1, it is up double digits over the life cycle of those products.

Thanks.

Our next question comes from Brent Thill – Citigroup.

Just as a follow-up on CS3, that is still a planned Spring release, is that correct?

That is correct, Brent.

Is there any way that you can alleviate the period between now and that release? Is there anything that you are planning, to help? As you mentioned, the upgrade is starting to trail off.

Brent, as you know, we do a good job of really listening to our customers. What we have found historically is that the customers are really looking for both integration, as well as brand new features in terms of Creative. I think one of the things that characterizes this cycle more than any other cycle is the fact that people are really anticipating us putting together the Adobe and the Macromedia products, which again should all go well for CS3. But our focus right now is on making sure that we deliver really great products that integrate both companies’ products. The other thing that we really want to make sure we do is in the next version not only support Mactel, but also support Vista. Those are the two things that we are really focused on right now. We think that is the right way to serve our customers.

Fortunately we are a diversified business. If I look at Acrobat and how well it is doing, and what we anticipate with Acrobat 8, I think about the video business, I look at the fact that Photoshop full units continue to be up on a year-over-year basis; I look at the additional revenue we are able to obtain from the platform; being able to determine distribute other people's products with the Adobe Reader and Flash Player download. I look at all those factors and I feel pretty good about sustaining our business and growing our business as we get closer to that CS3 timeframe. Clearly when CS3 hits we think that will be a major accelerator.

One final thing I should clarify is that in terms of marketing programs we're going to continue to focus on making sure we demonstrate the benefits of CS2 to a number of customers that are out there.

Just a quick follow-up for Randy. The stock buyback, can you just bring us up to speed on $1 billion buyback? Where we stand today, how much is left?

The stock buyback program we have committed to, basically there's a total of $870 million that we have done this year -- a little over that, $870.3 million. On the $1 billion program there is approximately $345 million left. That program, there are program purchases already in place and will be executed over the foreseeable future here.

Thanks.

Our next question comes from Sasa Zorovic.- Oppenheimer.

My question would be as follows. You were mentioning in terms of giving your guidance that you're following basically the typical seasonal patterns in where you are in at this point of the sale cycle. Now if you look basically at this sell cycle currently, and basically somewhat of a surprise we have just seen in the second quarter -- up until this point then how has this been a product cycle changed, differed from this cycle in the past? Where has the surprise been coming from and why did it occur during this spring holiday season in North America and Europe?

Sasa, firstly, overall, the Creative Suite 2, as well as the Studio set of products has been received really well from our customers. Until the middle of April, if we looked at it from a cycle over cycle basis, we were really running ahead of what we saw in the previous cycles. Even today cumulatively we're clearly running ahead. What we did see was a weakness starting in the middle of April in the holiday season, as we said, in North America and Europe. As Bruce alluded to earlier, we think it is really related to two issues. The first issue is the fact that people who are moving to the Mactel platform are waiting for the next version of our products that support the Mactel platform. But in addition to that, there's a lot of anticipation around how we integrate the Adobe and Macromedia products. We continue to believe that the overall market for these products is very strong. What we are seeing is the confluence of these two other factors that are impacting revenue in the short run.

Briefly let me also ask; your quarters have tended in the past to be very linear, with each week being about 1/13 of the quarterly revenue. Has that changed any?

Can you repeat that question?

In the past your quarters tend to be fairly linear, with revenue being sort of coming at about 1/13 of the quarterly revenue roughly every week. Has that changed any?

This is Murray. If we are talking about Q2, obviously we had the seasonal weakness that happened in the April timeframe that around the holiday period there was a greater weakness than what we had anticipated. But as we become more focused on delivering enterprise solutions and more of a direct sales organization, we can have the tendency to move more revenue toward the final week of the quarter. But we still continue to be a fairly linear company. That is something that you have to look at over a multi-year period with that particular trend on the enterprise selling. The other thing you want to do is for every quarter there tends to be unique patterns because of certain seasonal and business events. If I look at the summer quarter, typically the July and the beginning of August period is very, very slow because a lot of people are off on vacations. We usually get a big uptick at the end of August, both from the Europeans coming back to work as well as students going off to school. Every quarter there tends to be something different. In Q2 we usually anticipate a slowness around the Easter holidays, which this year fell out in April, which meant that we anticipated March and May to be the two stronger months. Yes, on one hand it is somewhat linear; the reality is because of seasonal issues, it is never that linear.

Thank you very much.

Our next question comes from Scott Kessler with Standard & Poor's.

I was curious if you could explain currently how your sales force is organized? And if you have any plans, given the announcement about Stephen departing the Company by the end of year, if you're going to seize upon that opportunity to potentially reallocate the sales force organization in any way that you think would be beneficial for the Company over the longer term?

The only thing that we have decided upon is that upon Stephen's departure, and actually through his transition, we will move the sales organization back under Shantanu, which is where it was prior to the Macromedia acquisition. We think having the synergy between the business units and the sales organization is important, especially as we want to sell more complete solutions to our customers. The reality is that when you look at why people buy our products, what their reason for purchase was, or their decision-making process, where the sales organization has the biggest impact is on the enterprise products. That is where we will continue to focus the efforts and the resources of our sales organization. That is where you will see the biggest impact on our revenues. Today that is a relatively small piece of our overall revenues, this past quarter it was about $42.5 million. Over time we expect that to grow. As we expect that to grow, we will need a seasoned integrated, well-executed sales organization. We are on our way to having that, but we still have a ways to go to be where we fully want to be.

Bruce, if I could follow up, is it your intention as a Company to identify a new leader within the sales organization to essentially step in where Stephen is going to be departing from? Or are there going to be other changes related to the sales force in terms of how it is going to be run?

Yes. We will absolutely look to hire a Senior Vice President of the worldwide sales organization. That search began at probably 2 pm this afternoon, as soon as we announced Stephen's intent to leave at the end of the year. Fortunately, Stephen is not leaving until December 5, so we would have his services and his passion and his energy as we need it through that period.

Thanks a lot.

Our next question comes from Phillip Rueppel - Wachovia Securities.

Thanks very much. First of all, a clarification. From the statements you have made, it sounds like you're not going to be offering native Mactel support until CS3. Is it possible that you could be offering some parts of the Creative Suite with any kind of optimization? Or are you aware of anything from Apple or the Emulator folks that could improve performance between now and a year from now?

Clearly our products work on a number of the Mac platforms; they have continued to ship. As you know, they have introduced notebook versions of the Mactel platform. It is on the notebook versions of the Mactel platform where our Creative Suite products do not run as efficiently, because they have to be run emulated under what is called Rosetta to Apple. So first and foremost, I do want to clarify that our products do continue to run on a number of the new hardware that Apple continues to ship. It is our intent again to focus on the CS3 version where we will provide the entire suite for Mactel, as well as for other operating systems, rather than doing any interim releases; and to continue on focusing on the marketing benefits of CS2 to the existing customer base.

Our Macintosh business is in excess of 20% of our overall business. The percentage is much, much higher for the Creative business. So there are many customers that continue to buy our Macintosh products to run both under their current computers, and they are running them on Mactel systems. The performance is just not as good as we would like to be and it won't get there until we ship CS3. That has been in our plan all along. I suspect that there is not much that we will be able to do until we actually release the CS3 product.

Great. One other question, just regarding some of the newer bundles you introduced earlier in the year, qualitatively how did they perform? As well as the new products, the spins on Acrobat, like Acrobat 3D, etc.?

With respect to the bundles, as we have said earlier, we have three different bundles, the Web bundle, the Design bundle and the Video. The video products did exceedingly well in the quarter. We said we had a record quarter for the combined products that constitute the video portion of our business. But in addition to that, what we do see is that the Web bundle, which is the most expensive bundle, which combines the Creative Suite as well as the Studio products, continues to perform well.

I think what is exciting to us is where we have already taken the steps to begin to integrate the assets that we acquired from Macromedia with the Adobe products. We are already seeing benefits. In the case of the Web bundle we are seeing that. The Production Studio, the fact that we have now take advantage of the Flash Media Server that leverages the Flash player is adding benefit, which makes us very excited about what we could do with Acrobat 8 and Breeze in the fall timeframe, and then what we will be able to do when the CS3 set of products next spring.

Thanks very much.

Our next question comes from Robert Breza with RBC Capital Markets.

Hi, good afternoon. Bill, could you just clarify for us on the Microsoft issue, do you believe that the PDF format will be included in Office? Then for Shantanu, could you help us out with the product release for Acrobat 8 and CS3? Do you see releasing both of us products in staged releases by language, or how should we think about the rollout for Acrobat 8 and CS3? Thanks.

I'm assuming, Robert, your question wasn't for Bill Gates, that it was for me. First of all, it is hard for me to speculate on what Microsoft is or isn't doing. I could tell you what they have stated in the press. What they said in the press was that they were going to include PDF creation in Microsoft Office and based on what they said was our request, they decided to pull it out and then, then, then… Our big issue is much more than PDF. In fact PDF is an open standard. We're concerned about Microsoft taking advantage of their monopoly position. In doing so, we're concerned that they're going to eliminate or reduce innovation and consumer choice in the process by showing preference to their proprietary standards. The reality is when we look at our PDF creation-only product today, Acrobat Element, it represents a small piece of our overall revenue. So our concern around Microsoft is much more about the long-term that they take, or they use, unfair advantage with their monopoly to, over time, leverage and take advantage and showcase their proprietary standards that they're trying to push into the marketplace.

With respect to your second question, Robert, on Acrobat as well as the Creative Suite product schedules, one of the things we realize is that by talking about our schedules for the next releases this early in the cycle, we actually are giving our competitors, as well as the customers, more advanced information. What we are saying is that Acrobat continues to be on track for Q4 -- the English version for sure -- and Creative Suite for Q2. But beyond that, we're not sharing any information about language releases at this point.

Thank you.

Our next question comes from Steve Ashley – Robert W. Baird.

A couple of questions. First of all, with respect to the share repurchase, have you remained active in the market since the end of the second quarter?

Steve, for the most part our stock repurchase programs have been under structured repurchase agreements that are outside of our control. It is really up to the third parties and how they are repurchasing. Obviously, at the Company we are in a position where it is hard for us to do repurchases unilaterally in the market, given quiet periods and things like that.

With respect to the other revenue of $64.5 million -- a nice increase -- you mentioned the Yahoo! toolbar business. How should we think about that going forward? Was that like a one-time event or revenue event or is that something that could be ongoing?

Steve, I can address that. I think with respect to the other segment, which as I said in my prepared remarks, contains both the print and classic publishing which is the Postscript business, as well as some other products like PageMaker and FrameMaker. In the platform business, we have been investing in the platform business, and we have been talking about the Engagement platform being a strategic advantage for us that we can not only build our applications on, but also monetize by having other software distributed through it. I think we demonstrated in this particular quarter that that is starting to bear dividends and we would expect that sequentially it will continue to be in the range that we saw in Q2.

Great. And then just lastly, the FX impact on revenue, any comment on that please?

If you look at what the exchange rates for euro and yen to the dollar were a year ago, and if you would have applied that to this year, we would have had $15 million more in revenue. But it is hard to do the comparison because we weren't a combined Company a year ago. But again, just applying last year's rates to this year, we would have had $15 million more in revenue. It was a negative impact of $15 million, looking at it that way.

Thank you.

Our next question comes from Jay Vleeschhouwer - Merrill Lynch.

Good afternoon. Shantanu, you cited a number of product factors that contributed to the shortfall of revenue. Would it be fair to infer that, at least in proportionate terms, some of the Macromedia products accounted for an inordinate part of the decline? They have been tailing off for a while now and might continue to do so disproportionately? If so, do you think that you have in hindsight cut enough costs post the merger that perhaps there is something more now you need to do anyway because of the updated revenue picture? Secondly, for Bruce perhaps, how do you explain the differences between the Japan performance and the U.S. and Europe? Is it simply that the Japanese macroeconomic recovery is so strong on the consumer and commercial side that it is obscuring what might otherwise be product reciprocal issues? Or do the markets just behave differently at different times in the life of a product?

Let me address the economic observations in Japan. There, at least from our perspective, they are experiencing a strong economy, given that Japan represents a healthy piece of our business. Our brand presence there is very strong; our products are very strong. The March end of year cycle for many of their corporations and institutions is certainly a factor. So stronger economy, the strong month of March, and also some great execution on our side has all attributed to the success that we had in Japan. Just briefly in terms of the cost, I think it is great that we are sitting here today slightly below where we thought we would come in, in terms of the overall range, slightly below on the revenue side what we said the intra quarter, and yet we still ended up delivering operating margin in the 38% plus, and delivered on the original target. I do not think we have an expense problem. We will continue to invest aggressively in the future. The reality is nothing has changed in our business in terms of the long-term opportunity. Everything that we talked about in December, everything we talked about in January, everything we talked about in the March call is still true. There is an explosion of information out there. People need that information to be impactful, reliable, secure, compelling and we have unique solutions leveraging the Engagement platform of the Adobe Reader and the Flash player. So based on that we're going to continue to invest. At the same time, because of our business model, we are able to deliver what we believe are very healthy profits back to our shareholders.

With respect to your first question, the primary revenue shortfall in Q2 was really associated with the Premium Suite, as well as with the Studio products, and the moment we put together the two companies, we have actually really focused on the areas of investment and redone the portfolio. We don't believe that we really need to make any other changes in that. It really is, again, as a result of the shortfall in Premium Suite and Studio that the revenue was a shortfall. We are not seeing it in the individual products.

Let me follow-up on a subject that came up earlier with respect to the various bundles that you have introduced since the merger. The focus of course on CS3 being the largest product next year, but how do you foresee updating, or perhaps further proliferating other bundles besides the ones that you have now? Do think you just simply integrate and update the new bundles that you have? Do you see a further segmentation either on the design side or perhaps even further for Acrobat?

We're doing a fair amount of research and talking to our customers and what we see in talking to the Creative community is certainly there's a number of customers who are focusing on what we call the design elements, but increasingly you are seeing more customers take into account video, take into account mobile, and take into account web. So as it relates to CS3, while we're not making any announcements at this point, we're looking at the best way in which we can take the breadth of products that we have and make sure that we package them appropriately to these set of customers in these four areas. Let's also remember that with PDF Workflow becoming increasingly an important part of how the entire print publishing industry is headed, once we get Acrobat 8 that will also help us with respect to how we segment it. I think what you saw what the Web bundle and design bundle and video bundle was the first step in making sure that we meet the needs of the customers. The big message is we are seeing increasingly them using video and start to think about how they are also for mobile devices.

Thank you.

Our next question comes from Gene Munster - Piper Jaffray.

Good afternoon. As we get closer to CS3, can you talk a little bit about your programs for making sure that we don't hit a rapid drop-off, and maybe some upgrade section plans? Second is that in the quarter before a major upgrade, can you just give us some typical guidance? Because there will still be Q1 of '07 out of CS3, based on Shantanu's earlier comment. Can you just give us an idea of typically there is X% slow down in the core products ahead of that, so we can just really start to conceptualize what that first quarter of '07 is going to look like?

Again, Gene, I think if you look at it historically, prior to our release of CS2, CS1 continued to be very strong. We were having strength in the CS1 product line right through the introduction of CS2. I think that is one important thing to remember. With respect to what we're doing right now from a perspective of protection, so to speak, we have a consistent policy in place and a plan which comes around when we introduce the new product and when the launch it. And at this point we have no plans to change the strategy that we have employed in the past.

Keep in mind there are always customers, regardless of when the next release is coming out, that require the features and the benefits of the existing products. Even though we didn't deliver on what we thought we could this quarter with the Creative business, the fact that we ended up shipping $357 million worth of the product despite the world knowing that CS3 is coming, is validation that customers still want what is available in today's products.

Great, thanks.

Our next question comes from Walter Pritchard - Cowen.

I had two questions. One, I'm just wondering if you could elaborate on the stage of the channel facing organization, if there is any personnel changes or system changes remaining to be made there, or if that is all integrated at this point and it is just the enterprise side that you are still working on?

The channel organization, the channel systems is a very stable piece of our go to market infrastructure. It is very efficient, and we're very pleased. The place where we have been focusing and we will continue to focus is the enterprise side of the go to market strategy, and execution.

Then just one other question, on the margins, I guess you guys are showing pretty good margin here, sort of trailing off in a product cycle, and you are expecting them to go lower. Typically you have seen margins peak up on a new cycle. I'm wondering what you are expecting as we enter this new cycle? Are you going to let margins go higher or do you think you have to invest it at the same levels to continue to build the business going forward?

We haven't talked about guidance for fiscal year '07, nor do we plan to during this call. I think you could figure out through the guidance that we already provided what kind of margins we would be looking at in the Q4 time period and for the whole fiscal year. I think it is pretty clear that for Q3, I think we have given guidance specifics. Q4, you could probably do the math and get there given the EPS targets that we set out. Then we will see from there.

Just one quick one. On the share buyback how many shares did you say you bought back? It was 14.5 million?

14.6 million shares.

Thanks.

Our next question comes from Heather Bellini - UBS.

It is John Stewart here for Heather. A couple of questions. First of all, how long prior to the release of both CS3 and Acrobat 8.0 will you announce the shipment date?

We don't talk about our launch dates. Again, as I said earlier, we were attempting to be more transparent with our product cycle for Wall Street, and at this point the launch is an important part of how we do demand generation, so we're not disclosing that date here.

We think we might have done a favor for the Street and hurt the business at the same time in preannouncing Creative Suite 3. We prefer to reverse that tactic and be a little bit quieter in terms of our overall approach on new products and when we announce them.

The other question is the revenue ramp going from the guidance you have given for August and then doing the math for November, it seems to be fairly steep. What gives you confidence at as far as getting that sequential growth going from August to November for the revenue?

In thinking about Q3 plus, again we have said we typically have a seasonal weakness in Europe and Japan. What we do see typically is that in Q4 we see a seasonal pick up in Europe. That is factor number one that needs to increase revenue in Q4 traditionally. The second thing we do anticipate is the retail holiday period, the seasonal strength in the U.S. that we get. And the third is Acrobat in Q4. Those are the three factors that go into our guidance for Q4.

Thank you.

Our next question comes from Steve Lidberg - Pacific Crest Securities.

Is there any more color that you can provide with regards to the Mac headwinds on the Creative side of the business? Maybe on a sequential basis from February to May with regards to how it trended? And then on the mobile side of the business, as we anniversary the acquisition of Macromedia, does that help relieve some of the headwinds with regards to the revenue recognition that you're having in the mobile line, or are the contracts with the handset vendors and operators such that you will continue to show results that are in the neighborhood of where they are today versus the standalone momentum that Macromedia had?

On the Macintosh side, Steve, as we said we saw a small reduction. And that happened again after the middle of April is when we started to see the Mac tail off. That is probably the only characterization I can do at this point. With respect to the mobile, what we have been able to accomplish is really get the Flash adoption in the handsets. Now our focus is really in continuing to work with the ecosystem vendors. You saw we talked about DoCoMo and the fact that they now have 2 million subscribers or people moving to FlashCast services; as well as we made an announcement with Verizon. So having the entire ecosystem of handset manufacturers carry Flash now enables us to really, both on the offering side as well as on the Flash card side, monetize through new monetization.

Just a quick follow-up with regards to that. Have you changed the traditional monetization approach that Macromedia had employed with regards to royalty fees and focusing more on building out the developer community in adjacent services?

The three real revenue streams that we expect from our mobile business, we have a revenue stream that is associated with royalty of the handset manufacturers, the operator bundling Flash Lite on handsets. That we have stated will be one which will decline over time. We have another revenue stream associated with the mobile manufacturers who are trying to provide a customized user experience for their customers, or for MVNOs, you know, the mobile virtual network operators who are trying to provide a customized experience. Finally, FlashCast which is more on a per subscriber basis. What I would say is we have a more diversified business model as we mature our mobile business.

Because of the value that we deliver in both Flash Lite and the Adobe Reader Lite, we're able to continue to charge royalties for those players, or the Adobe Reader, and that has not changed other then in some cases we're doing deals that are more over time or per unit and doing less upfront deals.

The revenue recognition, Steve, the model has moved somewhat from upfront commitment to when revenue was recognized and players deployed with the shipments at a later date to now recognizing more revenue just when the shipments occur. Yes, as time passes some of the purchase accounting aspects can be beneficial to mobile and devices business unit revenue, but it is more of a transition from upfront payment to more of generating revenue on unit shipments in a normal sort of type royalty type basis. And that will build as we continue to close more deals.

Great, thank you very much.

Operator, we will take one more question.

Our next question comes from Barbara Coffey - Kaufman Brothers.

As we go to dual processing machines will the upgrades of both Acrobat and the soon to come Creative Suite be working on the dual processors as well?

We're definitely taking advantage of the new CPU and graphics capabilities that are available on the new hardware. Just to give you a couple of examples, certainly with 3D, as the size of the models increases, the increased CPU as well as graphics processor capabilities, enable us to take advantage of that. The same is true of images. As images that are being created from digital cameras and video is increasing, anything that we can do to speed that up enables us to deliver more real-time capability to our customers, which makes them more creative and efficient.

Thank you.

With that, this concludes our call, and we thank you for joining us today.

That concludes today's conference. You may now disconnect your lines.