Dear Stockholders:

     You are cordially invited to attend our 2003 Annual Meeting of the Stockholders to be held on April 9, 2003 at 3:30 p.m. at Adobe's headquarters located at 321 Park Avenue, San Jose, California 95110 in the East Tower. We are holding the meeting to:

     1.     Elect four (4) Class II members of the Board of Directors to serve for a two-year term;

     2.     Approve a proposed exchange of stock options issued under Adobe's 1994 Stock Option Plan and 1999 Equity Incentive Plan generally having an exercise price greater than $40.00 for new options to be granted at least six months and one day from the cancellation of the exchanged options;

     3.     Approve the 2003 Equity Incentive Plan. The 2003 Equity Incentive Plan is intended to immediately replace the 1994 Stock Option Plan and the 1999 Equity Incentive Plan without an increase to our aggregate share reserves;

     4.     Consider and vote on a stockholder proposal as described in the attached proxy statement;

     5.     Ratify the appointment of KPMG LLP as our independent auditors for our fiscal year ending on November 28, 2003; and

     6.      Transact any other business that may properly come before the meeting.

     If you owned Adobe common stock at the close of business on Tuesday, February 18, 2003, you may attend and vote at the meeting. If you cannot attend the meeting, you may vote by telephone or by using the Internet as instructed on the enclosed proxy card or by mailing the proxy card in the enclosed postage-paid envelope. Any stockholder attending the meeting may vote in person, even if you have already returned a proxy card. A list of stockholders eligible to vote at the meeting will be available for review during our regular business hours at our headquarters in San Jose for the ten days prior to the meeting for any purpose related to the meeting.

     We look forward to seeing you at the meeting.

                                                                           Sincerely,

                                                                           
                                                                           Karen O. Cottle
                                                                           Senior Vice President, General Counsel & Secretary
                                                                           San Jose, California
March 17, 2003

     Our Board of Directors is soliciting proxies for the 2003 Annual Meeting of Stockholders. This proxy statement contains important information for you to consider when deciding how to vote on the matters brought before the meeting. Please read it carefully.

     Voting materials, which include the proxy statement, proxy card and 2002 Annual Report to Stockholders, will be mailed to stockholders on or about March 17, 2003. Our principal executive offices are located at 345 Park Avenue, San Jose, California 95110. Our telephone number is (408) 536-6000.

     Adobe will pay the costs of soliciting proxies from stockholders. In addition to soliciting stockholders by mail through our employees, we will request banks, brokers and other custodians, nominees and fiduciaries to solicit customers for whom they hold our stock and will reimburse them for their reasonable, out-of-pocket costs. We have also hired Innisfree M&A, Incorporated to help us solicit proxies from brokers, bank nominees and other institutional owners. We expect to pay Innisfree a fee of $7,500 for its services and will reimburse Innisfree for reasonable out-of-pocket expenses, estimated at about $16,350. Directors, officers and regular employees may solicit proxies, either personally or by telephone, on our behalf, without additional compensation.

Q:      Who may vote at the meeting?

A:      The Board set February 18, 2003, as the record date for the meeting. If you owned our common stock at the close of business on February 18, 2003 you may attend and vote at the meeting. Each stockholder is entitled to one vote for each share of common stock held on all matters to be voted on, other than the election of directors. On February 18, 2003, 231,190,975 shares of our common stock were outstanding.

Q:       What is the quorum requirement for the meeting?

A:      A majority of Adobe's outstanding shares as of the record date must be present at the meeting in order to hold the meeting and conduct business. This is called a quorum. If you abstain from voting on any or all proposals, your shares are still counted as present and entitled to vote.

           Shares are counted as present at the meeting if you:

           Each proposal identifies the votes needed to approve the proposed action.

Q:      What proposals will be voted on at the meeting?

A:      There are four Board proposals and one stockholder proposal scheduled to be voted on at the meeting:

Q:      How may I vote my shares in person at the meeting?

A:      Shares held directly in your name as the registered stockholder of record may be voted in person at the meeting. If you choose to attend the meeting, please bring the enclosed proxy card or proof of identification for entrance to the meeting. If you hold your shares in street name, you must request a legal proxy from your stockbroker in order to vote at the meeting.

Q:      How can I vote my shares without attending the meeting?

A:      Whether you hold shares directly as a registered stockholder of record or beneficially in street name, you may vote without attending the meeting. You may vote by granting a proxy or, for shares held in street name, by submitting voting instructions to your stockbroker or nominee. In most cases, you will be able to do this by telephone, by using the Internet or by mail. Please refer to the summary instructions included with your proxy materials and on your proxy card. For shares held in street name, the voting instruction card will be included by your stockbroker or nominee.

         BY TELEPHONE OR THE INTERNET - If you have telephone or Internet access, you may submit your proxy from anywhere in the world by following the instructions with your proxy materials and on your proxy card.

         BY MAIL - You may submit your proxy by mail by signing your proxy card or, for shares held in street name, by following the voting instruction card included by your stockbroker or nominee and mailing it in the enclosed, postage-paid envelope. If you provide specific voting instructions, your shares will be voted as you have instructed.

Q:      How can I change my vote after I return my proxy card?

A:      You may revoke your proxy and change your vote at any time before the final vote at the meeting. You may do this by signing and submitting a new proxy card with a later date, voting by telephone or by using the Internet (your latest telephone or Internet proxy is counted) or by attending the meeting and voting in person. Attending the meeting will not revoke your proxy unless you specifically request it.

Q:      Where can I find the voting results of the meeting?

A:      The preliminary voting results will be announced at the meeting. The final results will be published in our quarterly report on Form 10-Q for the second quarter of fiscal 2003.

     If any nominee is unable or declines to serve as a director, the current Board may designate another nominee to fill the vacancy and the proxy will be voted for that nominee. The term of each person elected as a Class II Director will continue until the 2005 Annual Meeting of Stockholders or until his or her successor has been elected and qualified.

     The Board held 11 meetings and its Committees collectively held a total of 25 meetings in fiscal 2002. Of the meetings held during the fiscal year, each director attended at least 75% of the meetings of the Board and Committees on which such director serves. The Board has an Audit Committee, Executive Compensation Committee, Investment Committee, Nominating and Governance Committee and Technology Committee. In fiscal 2002, we also had an Employee Grant Committee, which the Board terminated in January 2003 when a Management Committee made up of executive officers of Adobe was authorized by the Board to grant stock options to our non-officer employees under the 1999 Equity Incentive Plan.

     The following table sets forth the 2002 Committees of the Board, the members of each Committee during fiscal 2002 and the number of meetings held by the Board and the Committees:

(1)     Mr. Daley became a director and joined the Audit Committee on December 18, 2001.

(2)     Dr. Warnock joined the Investment Committee on September 24, 2002.

(3)     The Employee Grant Committee held no meetings during fiscal 2002. All actions taken by the Employee Grant Committee were taken by Unanimous Written Consent. The Board terminated the Employee Grant Committee in January 2003.

     The Audit Committee's role includes the oversight of the quality of our financial statements and our compliance with legal and regulatory requirements, the appointment, compensation and oversight of our independent auditors, including conducting a review of their independence, reviewing and approving the planned scope of our annual audit, overseeing the independent auditors' audit work, reviewing and pre-approving any non-audit services that may be performed by them, reviewing with management and our independent auditors the adequacy of our internal financial controls, and reviewing our critical accounting policies and the application of accounting principles. See "Report of the Audit Committee" contained in this proxy statement. In February 2003, the Audit Committee revised the Audit Committee Charter. A copy of the revised Audit Committee Charter is attached to this proxy statement as Appendix A. The members of the Audit Committee are all independent directors as defined under both the current and proposed rules of Nasdaq.

     The Executive Compensation Committee sets and administers the policies governing the annual compensation of executive officers, including cash compensation and equity incentive programs, and reviews and establishes annually the compensation of the Chief Executive Officer. See "Report on the Executive Compensation Committee" contained in this proxy statement. The Executive Compensation Committee also reviews and approves equity-based compensation grants to our non-officer employees and consultants, other than stock option grants to our non-officer employees approved by the Management Committee, which is made up of executive officers of Adobe. The members of the Executive Compensation Committee are all independent directors as defined under both the current and proposed rules of Nasdaq

     The Investment Committee evaluates the advisability of Adobe's investing in outside-managed venture capital funds and direct investments by Adobe, focusing on startup companies in businesses strategically related to our markets and technology. The Investment Committee monitors the performance of our direct (non-partnership) investments and performs any tasks required in our role as a limited partner in our Adobe Ventures venture capital limited partnerships, which invest in early stage companies with innovative technologies.

     The Nominating and Governance Committee evaluates, reviews and makes recommendations to the Board on candidates for membership of the Board, composition of the Board, functioning of the Board as an entity, and our corporate governance principles, as well as assisting the Board with its reviews of the performance of the Board and each of its Committees, as requested. The members of the Nominating and Governance Committee are all independent directors as defined under both the current and proposed rules of Nasdaq. Our Amended and Restated Bylaws permit stockholders to nominate directors at an annual meeting of stockholders. In order for our stockholders to make a director nomination at next year's annual meeting, it must be received by us not later than November 18, 2003. In addition, the notice must meet all other requirements contained in our Amended and Restated Bylaws and include any other information required pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended. Our Amended and Restated Bylaws specify additional requirements if stockholders wish to nominate directors at special meetings of stockholders.

     The Technology Committee establishes and reviews our technology plan, including development of goals and targets for expansion and improvement of current product and related technologies, as well as conducting research and making recommendations based on new technologies available to the Company. The members of the Technology Committee are all non-employee directors.

     On February 10, 2003, our Board of Directors authorized, subject to stockholder approval, a program that will permit our eligible employees to exchange options issued under our 1994 Plan and 1999 Plan with an exercise price greater than $40.00 per share (the "Eligible Options"), for a lesser number of options (the "New Options") to be granted at least six months and one day after the cancellation of the Eligible Options (the "Option Exchange Program"). The Option Exchange Program is open to all of our eligible employees and the employees of our participating subsidiaries. Members of our Board and our executive officers will not be eligible to participate. The New Options will have an exercise price per share equal to the closing price of our common stock as reported on the Nasdaq National Market on the date the New Options are granted. The ratio of exchanged options to New Options will vary from 1 to 1 to 2 to 1.

     Approval of the Option Exchange Program requires the affirmative vote of holders of a majority of the votes cast in person or by proxy at the meeting. Neither abstentions nor broker non-votes will have any effect on the outcome of this proposal.

     We believe that to enhance long-term stockholder value we need to implement and maintain competitive employee compensation, incentive and retention programs. Stock options are a critical component of our compensation arrangements for employees and are used to motivate and reward our employees' contributions toward the growth and success of our business. We believe that stock options encourage long-term employment with and commitment to Adobe and help our employees act as owners.

     Like many other companies in the technology industry, our stock price experienced a steep increase in 1999 and 2000, followed by a decline in 2001 and 2002 during the overall stock market downturn. Unfortunately, sustained adverse economic conditions have had a prolonged negative effect on the entire technology sector, including markets in which we operate. Also, as a result of the volatility in our stock price over the past few years, many of our employees hold options with exercise prices significantly higher than the current market price of our common stock. These "out-of-the-money" options are no longer effective as incentives to motivate and retain these employees. We believe the Option Exchange Program will provide an opportunity to inspire our employees to achieve future growth and success for the Company.

     The Option Exchange Program was designed to create a value neutral exchange, which we believe strikes a practical balance between your interests and those of our employees. This is most evident in the manner in which the Eligible Options will be exchanged. Employees participating in the Option Exchange Program will receive New Options for a lesser number of shares than the Eligible Options they surrender, which will reduce the number of shares subject to outstanding options.

     Although your approval of the Option Exchange Program is not required by law or regulation or by the terms of the Option Plans, we believe that sound corporate governance dictates that the Option Exchange Program should be submitted to our stockholders; however, no determination has been made as to what action the Board would take if it is not approved.

Description of the Option Exchange Program

     Implementing the Option Exchange Program. Our Board authorized the Option Exchange Program in February 2003, subject to stockholder approval. If approved, eligible employees will be offered the opportunity to participate in the Option Exchange Program under a tender offer (an "Offer to Exchange") expected to be filed with the Securities and Exchange Commission (the "SEC") sometime in mid-May 2003. Employees will be given at least twenty (20) business days to make an election to cancel all or a portion of their Eligible Options in exchange for New Options. The New Options will not be granted until at least six months and one day after the cancellation of the Eligible Options. We expect to issue the New Options sometime in late December 2003. Even if approved by our stockholders, our Board will retain the authority, in its discretion, to terminate or postpone the Option Exchange Program, at any time prior to the expiration of the Offer to Exchange.

     Outstanding Options Eligible for the Option Exchange Program. As of February 14, 2003, options for approximately 56,739,256 shares were outstanding under all of our equity compensation plans, of which options to purchase approximately 11,939,031 shares of common stock, having exercise prices ranging from $40.12 to $83.19, would be eligible for exchange under the Option Exchange Program. If all of these Eligible Options were exchanged and New Options were granted in accordance with the exchange ratios set forth below, the number of shares underlying outstanding options would be reduced by approximately 5,683,894 shares, or approximately 10% of all
outstanding options.

     Eligibility. The Option Exchange Program will be open to all of our employees and the employees of our participating subsidiaries who hold Eligible Options, except that members of our Board and our executive officers will not be eligible to participate. We may exclude employees in certain non-U.S. jurisdictions from the Option Exchange Program if local law would make their participation infeasible or impractical. To be eligible, an employee must be employed by us or one of our participating subsidiaries at the time the Offer to Exchange commences. Additionally, an eligible employee who surrenders his or her Eligible Options for exchange must also be an employee on the date the New Options are granted in order to receive the New Options. Approximately 2,800 employees hold Eligible Options.

     Exchange Ratios. The following table shows the number of Eligible Options an employee must surrender in order to receive one New Option:

     The exchange ratios were established based on our stock price at the beginning of February 2003 and were determined on the basis of valuations under the Black-Scholes option pricing model as well as a binomial option pricing model. We worked with independent third-party compensation experts to determine the appropriate exchange ratios and terms and conditions of the New Options.

     New Option grants calculated in accordance with the exchange ratios set forth above will be rounded down to the nearest whole share on a grant-by-grant basis.

     Election to Participate. Under the Option Exchange Program, employees may make an election to exchange Eligible Options in exchange for New Options to be granted in accordance with the exchange ratios set forth above. Our closing stock price as of February 14, 2003 was $27.43.

     Participation in the Option Exchange Program will be voluntary. Options granted more than six months before commencement of the Offer to Exchange may be surrendered at the employee's discretion on a grant-by-grant basis. Once an employee elects to participate with respect to some or all Eligible Options, however, he or she must also exchange any options granted in the six months preceding the commencement of the Offer to Exchange so that we may avoid certain unfavorable accounting treatment. The options granted during this six-month "look-back" period will be exchanged for New Options on a 1 to 1 basis.

     Exercise Price of New Options. All New Options will be granted with an exercise price equal to the closing price of our common stock as reported on the Nasdaq National Market on the date of grant of the New Options.

     Vesting of New Options. The New Options will be completely unvested at the time of grant and will vest 25% on the first anniversary of the date of grant, and monthly thereafter such that 50% and 100% of the New Options will be vested on the second and third anniversary of the grant date, respectively.

     Term of the New Options. Each New Option will have a term of six years from the date of grant. This approximates the weighted average remaining term of all Eligible Options rounded to the nearest whole year.

     Other Terms and Conditions of the New Options. The other terms and conditions of the New Options will be set forth in an option agreement to be entered into as of the New Option grant date and will be comparable to the other terms and conditions of the Eligible Options. The New Options will be granted under the 2003 Equity Incentive Plan, if approved by you in Proposal 3, "Approval of Proposed 2003 Equity Incentive Plan;" otherwise, they will be granted under the Option Plans. The New Options will be nonstatutory stock options under U.S. tax laws, regardless of the tax status of the Eligible Options tendered for exchange. The shares of common stock for which the New Options will be exercisable will be registered with the SEC.

     Accounting Treatment. We have structured the Option Exchange Program in a manner which we believe will not trigger any compensation expense for financial reporting purposes under current U.S. generally accepted accounting principles. However, we are aware that accounting standards in this area may change prior to the commencement of the Option Exchange Program or the issuance of the New Options. Accordingly, we may not realize the intended accounting treatment or we may have to modify the Option Exchange Program as necessary to ensure the same accounting treatment or terminate the Option Exchange Program if the desired accounting treatment cannot be obtained.

     U.S. Federal Income Tax Consequences. The exchange of Eligible Options should be treated as a non-taxable exchange and no income should be recognized for U.S. federal income tax purposes by Adobe or our employees upon the grant of the New Options. The tax consequences for participating non-U.S. employees may differ from the U.S. federal income tax consequences.

     Potential Modification to Terms to Comply with Governmental Requirements. The terms of the Option Exchange Program will be described in an Offer to Exchange that will be filed with the SEC. Although we do not anticipate that the SEC would require us to modify the terms materially, it is possible that we will need to alter the terms of the Option Exchange Program to comply with comments from the SEC. In addition, we intend to make the Option Exchange Program available to our employees who are located outside of the United States, where permitted by local law and where we determine it is feasible or practical to do so. It is possible that we may need to make modifications to the terms offered to employees in countries outside the U.S. to comply with local requirements, or for tax or accounting reasons.

     Because the decision whether to participate in the Option Exchange Program is completely voluntary, we are not able to predict who will participate or how many employees will elect to exchange Eligible Options. As discussed above, members of our Board and our executive officers are not eligible to participate in the Option Exchange Program. Of the Eligible Options held by employees as of February 14, 2003, as shown in the table above, the maximum number of shares of common stock underlying Eligible Options which could be exchanged is approximately 11,939,031, the maximum number of shares of common stock underlying the New Options which could be issued using the exchange ratios set forth above is approximately 6,255,137 and the number of shares underlying outstanding options would be reduced by approximately 5,683,894.

Effect on Stockholders

     We are not able to predict the impact the Option Exchange Program will have on your interests as a stockholder as we are unable to predict how many employees will exchange their Eligible Options or what the future market price of our stock will be on the grant date of the New Options. The Option Exchange Program was designed to be value neutral to our stockholders and to avoid the dilution in ownership that normally results from supplemental grants of stock options.

     The Board approved the adoption of the 2003 Equity Incentive Plan (the "2003 Plan") on January 23, 2003, subject to your approval. The 2003 Plan is intended to replace the 1994 Plan and the 1999 Plan and no further awards will be granted under those Option Plans if the stockholders approve the 2003 Plan.

     The Board believes that we must offer a competitive equity incentive program if we are to continue to successfully attract and retain the most qualified candidates for the Company. The Board expects that the 2003 Plan will be an important factor in attracting and retaining the high caliber employees and consultants essential to our success and in motivating these individuals to strive to enhance our growth and profitability.

     The 2003 Plan is also designed to preserve our ability to deduct in full for federal income tax purposes the compensation recognized by our executive officers in connection with certain awards granted under the 2003 Plan. Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), generally denies a corporate tax deduction for annual compensation exceeding $1 million paid to the chief executive officer or to any of the four other most highly compensated officers of a publicly held company. However, certain types of compensation, including performance-based compensation, are generally excluded from this deductibility limit. To enable compensation in connection with stock options, certain stock appreciation rights, certain restricted stock grants, performance shares and performance units awarded under the 2003 Plan to qualify as "performance-based" within the meaning of Section 162(m), the 2003 Plan limits the sizes of such awards as further described below. While we believe that compensation in connection with such awards under the 2003 Plan generally will be deductible by us for federal income tax purposes, under certain circumstances, such as a change in control of the Company, compensation paid in settlement of performance share and performance unit awards may not qualify as "performance-based." By approving the 2003 Plan, you will be approving, among other things, eligibility requirements for participation in the 2003 Plan, financial performance measures upon which specific performance goals applicable to certain awards would be based, limits on the numbers of shares or compensation that could be made subject to certain awards, and the other material terms of the awards described below.

     Currently, we maintain the Option Plans, which would be replaced by the 2003 Plan if approved by our stockholders. Our stockholders previously approved the 1994 Plan, under which we are authorized to grant incentive and nonstatutory stock options to employees and consultants (including officers, but not non-employee directors). The 1994 Plan continues until the earlier of (i) its termination by the Board, (ii) the date on which all of the shares available for issuance have been issued and restrictions on issued shares have lapsed or (iii) December 17, 2003. As of February 14, 2003, options to purchase 18,306,146 shares of common stock were outstanding and 3,902,657 shares remained available for grant under the 1994 Plan. In addition, we currently maintain the 1999 Plan (formerly the 1999 Nonstatutory Stock Option Plan) under which the Board has authorized us to grant to employees and consultants nonstatutory stock options, stock appreciation rights, stock purchase rights, stock bonuses, performance shares and performance units. The 1999 Plan has not been approved by you and therefore excludes from eligibility our officers, directors and any other persons whose eligibility would require stockholder approval. The 1999 Plan continues until the earlier of (i) its termination by the Board or (ii) the date on which all of the shares available for issuance have been issued and restrictions on issued shares have lapsed. As of February 14, 2003, options to purchase 37,304,960 shares were outstanding and 1,475,577 shares remained available for grant under the 1999 Plan.

     If our stockholders approve the adoption of the 2003 Plan, we will not grant any further awards under the Option Plans. The number of shares of our common stock authorized for issuance under the 2003 Plan will include the aggregate number of shares remaining available for grant under the Option Plans. In addition, any shares subject to options outstanding under the Option Plans that expire or terminate unexercised, including any shares canceled in the Option Exchange Program, will automatically become available for issuance under the 2003 Plan. As of February 14, 2003, there were 5,378,234 shares available for grant under the Option Plans which would be available for issuance under the 2003 Plan and 55,859,076 shares subject to options outstanding under the Option Plans, which could become available for issuance under the 2003 Plan to the extent that these options expire or terminate unexercised. In light of historical usage and expected future grants, we anticipate that the number of shares available for grant under the 2003 Plan will be adequate to meet our foreseeable requirements during the next year.

     Approval of the 2003 Plan requires the affirmative vote of holders of a majority of the shares present or represented by proxy and entitled to vote at the meeting. Abstentions will have the same effect as a negative vote. Broker non-votes will have no effect on the outcome of this proposal.

     The following summary of the 2003 Plan is qualified in its entirety by the specific language of the 2003 Plan, a copy of which will be made available to you upon request.

     General. The purpose of the 2003 Plan is to provide an incentive program that will enable us to attract and retain employees and consultants upon whose judgment, interest and contributions our success is dependent and to provide them with an equity interest in our success in order to motivate superior performance. We will provide these incentives through the grant of stock options, stock appreciation rights, stock purchase rights, stock bonuses, performance shares and performance units.

     Shares Subject to Plan. Subject to adjustment as described below, we may issue a maximum of 61,237,310 shares of common stock under the 2003 Plan (the "Share Reserve"). The Share Reserve consists only of the aggregate number of shares subject to outstanding awards or remaining available for grant under the Option Plans as of February 14, 2003. We are not asking you to approve an additional share increase. The Share Reserve available for grant under the 2003 Plan determined at any time will be reduced by (i) the number of shares of stock issued after February 14, 2003 pursuant to the exercise of awards previously granted under the Option Plans and (ii) the number of shares of stock then subject to awards outstanding under the Option Plans. The Option Plans will be terminated and we will not make any further awards under them following approval of the 2003 Plan by our stockholders.

     The terms of the 2003 Plan restrict the maximum number of shares of stock that may be issued pursuant to stock purchase rights, stock bonuses, performance shares and performance units to 1,000,000 shares. If any award granted under the 2003 Plan expires, lapses or otherwise terminates for any reason without having been exercised or settled in full, or if shares subject to forfeiture or repurchase are forfeited or repurchased by Adobe, any such shares subject to a terminated or reacquired award will again become available for issuance under the 2003 Plan. Shares will not be treated as having been issued under the 2003 Plan and will therefore not reduce the number of shares available for grant to the extent an award is settled in cash or such shares are withheld in satisfaction of tax withholding obligations. Appropriate adjustments will be made to the Share Reserve, to the other numerical limits on awards described in this proposal and to outstanding awards in the event of any change in our common 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 our capital structure, or if we make a distribution to you in a form other than common stock (excluding normal cash dividends) that has a material effect on the fair market value of our common stock.

     Administration. The 2003 Plan will be administered by the Board and two committees appointed by the Board to administer the plan, specifically the Executive Compensation Committee and the Management Committee. The Management Committee, made up of executive officers, is authorized by the Board to grant stock options to eligible participants who are not executive officers or consultants. All other awards to these participants will be granted by the Executive Compensation Committee. With respect to eligible participants who are executive officers or consultants, the 2003 Plan will be administered by the Executive Compensation Committee, which consists of at least two directors, each of whom is both a "non-employee director" within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934 and an "outside director" for purposes of Section 162(m) of the Code. (For purposes of this summary, the term "Committee" will refer to either such duly appointed committee or the Board of Directors.) Subject to the provisions of the 2003 Plan, the Committee determines in its discretion the persons to whom and the times at which awards are granted, the types and sizes of such awards, and all of their terms and conditions. The Committee may, subject to certain limitations required by Section 162(m) and the express language in the 2003 Plan that prohibits repricing, amend, modify, extend, cancel or renew any award, waive any restrictions or conditions applicable to any award, and accelerate, continue, extend or defer the vesting of any award. The 2003 Plan provides, subject to certain limitations, for indemnification by us of any director, officer or employee against all reasonable expenses, including attorneys' fees, incurred in connection with any legal action arising from such person's action or failure to act in administering the 2003 Plan. The Committee may establish rules and policies for administration of the 2003 Plan and adopt one or more forms of agreement to evidence awards made under the 2003 Plan. The Committee interprets the 2003 Plan and any agreement used under the 2003 Plan, and all determinations of the Committee will be final and binding on all persons having an interest in the 2003 Plan or any award issued under the 2003 Plan.

     Prohibition of Option Repricing. The 2003 Plan expressly provides that, without the approval of a majority of the votes cast in person or by proxy at a meeting of our stockholders, the Committee may not provide for either the cancellation of outstanding options in exchange for the grant of new options at a lower exercise price or the amendment of outstanding options to reduce the exercise price.

     Eligibility. Under the 2003 Plan, we may grant awards to employees (including officers) and consultants of the Company or any present or future parent or subsidiary corporation or other affiliated entity of the Company. While we may grant incentive stock options only to employees, we may grant nonstatutory stock options, stock appreciation rights, stock awards and performance awards to any eligible participant. As of January 24, 2003, we had a total of 3,341 employees, including 10 executive officers, that are eligible to participate in the 2003 Plan.

     Stock Options. The Committee may grant nonstatutory stock options, incentive stock options within the meaning of Section 422 of the Code, or any combination of these. Subject to appropriate adjustment in the event of any change in our capital structure, we may not grant to any one employee in any fiscal year options which, together with Freestanding SARs (as defined below), cover in the aggregate more than 2,000,000 shares.

     Each option granted under the 2003 Plan must be evidenced by a written agreement between us and the optionee specifying the number of shares subject to the option and the other terms and conditions of the option, consistent with the requirements of the 2003 Plan. The exercise price of each option may not be less than the fair market value of a share of our common stock on the date of grant. However, any incentive stock option granted to a person who at the time of grant owns stock possessing more than 10% of the total combined voting power of all classes of our stock or of any parent or subsidiary corporation (a "Ten Percent Stockholder") must have an exercise price equal to at least 110% of the fair market value of a share of our common stock on the date of grant. On February 14, 2003, the closing price of our common stock on the Nasdaq National Market was $27.43 per share.

     The 2003 Plan provides that the option exercise price may be paid in cash, by check, or in cash equivalent; by means of a broker-assisted cashless exercise; to the extent legally permitted, by tender of shares of common stock owned by the optionee having a fair market value not less than the exercise price; by such other lawful consideration as approved by the Committee, or by any combination of these. Nevertheless, the Committee may restrict the forms of payment permitted in connection with any option grant. No option may be exercised unless the optionee has made adequate provision for federal, state, local and foreign taxes, if any, relating to the exercise of the option, including, if permitted or required by us, through the optionee's surrender of a portion of the option shares to the Company.

     Options become vested and exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The maximum term of any option granted under the 2003 Plan is eight years, provided that an incentive stock option granted to a Ten Percent Stockholder must have a term not exceeding five years. Subject to the term of the option, an option generally will remain exercisable for three months following the optionee's termination of service, except that if service terminates as a result of the optionee's death or disability, the option generally will remain exercisable for twelve months, or if service is terminated for cause, the option will terminate immediately. The Committee, in its discretion, may provide longer post-termination exercise periods, but in any event the option must be exercised no later than its expiration date.

     Incentive stock options are nontransferable by the optionee other than by will or by the laws of descent and distribution, and are exercisable during the optionee's lifetime only by the optionee. Nonstatutory stock options granted under the 2003 Plan may be assigned or transferred to the extent permitted by the Committee and set forth in the option agreement.

     Stock Appreciation Rights. The committee may grant stock appreciation rights either in tandem with a related option (a "Tandem SAR") or independently of any option (a "Freestanding SAR"). A Tandem SAR requires the option holder to elect between the exercise of the underlying option for shares of common stock or the surrender of the option and the exercise of the related stock appreciation right. A Tandem SAR is exercisable only at the time and only to the extent that the related stock option is exercisable, while a Freestanding SAR is exercisable at such times or upon such events and subject to such terms, conditions, performance criteria or restrictions as specified by the Committee. The exercise price of each SAR may not be less than the fair market value of a share of our common stock on the date of grant. Subject to appropriate adjustment in the event of any change in our capital structure, we may not grant to any one employee in any fiscal year Freestanding SARs which, together with options, cover in the aggregate more than 2,000,000 shares.

     Upon the exercise of any stock appreciation right, the participant is entitled to receive an amount equal to the excess of the fair market value of the underlying shares of common stock as to which the right is exercised over the aggregate exercise price for such shares. At the Committee's discretion, we may make payment of this stock price appreciation in cash or in shares of common stock whose fair market value on the exercise date equals the payment amount. We may make payment in a lump sum or we may defer payment in accordance with the terms of the participant's award agreement. The maximum term of any stock appreciation right granted under the 2003 Plan is eight years.

     Stock Awards. Stock awards may be granted under the 2003 Plan in the form of either a stock bonus or a stock purchase right. The purchase price for shares issuable under each stock purchase right will be established by the Committee in its discretion and may be paid in cash, by check, in cash equivalent or by such other lawful consideration as approved by the Committee. No monetary payment is required for receipt of shares pursuant to a stock bonus, the consideration for which is services rendered by the participant, except that the participant must furnish consideration in the form of cash or past services rendered having a value not less than the par value of the shares acquired. Stock awards may be granted by the Committee subject to such restrictions for such periods as determined by the Committee and set forth in a written agreement between the Company and the participant, and the shares acquired pursuant to the award may not be sold or otherwise transferred or pledged until the restrictions lapse or are terminated. Restrictions may lapse in full or in installments on the basis of the participant's continued service or other factors, such as the attainment of performance goals (see discussion under "Performance Awards" below) established by the Committee. Unless otherwise provided by the Committee, a participant will forfeit any shares acquired under a stock award as to which the restrictions have not lapsed prior to the participant's termination of service. Participants holding restricted stock will have the right to vote the shares and to receive all dividends and other distributions, except that any dividends or other distributions in shares will be subject to the same restrictions on transferability as the original award. Subject to appropriate adjustment in the event of any change in our capital structure, we may not grant to any one employee in any fiscal year stock awards for more than 100,000 shares subject to restrictions based on the attainment of performance goals.

     Performance Awards. The Committee may grant performance awards subject to such conditions and the attainment of such performance goals over such periods as the Committee determines in writing and sets forth in a written agreement between the Company and the participant. These awards may be designated as performance shares or performance units. Performance shares and performance units are unfunded bookkeeping entries generally having initial values, respectively, equal to the fair market value determined on the grant date of a share of common stock and $100 per unit. Performance awards will specify a predetermined amount of performance shares or performance units that may be earned by the participant to the extent that one or more predetermined performance goals are attained within a predetermined performance period. We may settle performance awards to the extent earned in cash, shares of our common stock (including shares of restricted stock) or any combination thereof. Subject to appropriate adjustment in the event of any change in our capital structure, for each fiscal year within the applicable performance period, we may not grant performance shares to any one employee that could result in the employee receiving more than 100,000 shares of common stock or performance units to any one employee that could result in the employee receiving more than $2,500,000. A participant may receive only one performance award with respect to any performance period.

     Prior to the beginning of the applicable performance period or such later date as permitted under Section 162(m) of the Code, the Committee will establish one or more performance goals applicable to the award. These goals will be based on the attainment of specified levels with respect to one or more measures of our business or financial performance and of each parent and subsidiary corporation consolidated with our results for financial reporting purposes, or such division or business unit of ours as may be selected by the Committee. The Committee, in its discretion, may base performance goals on one or more of the following measures: growth in revenue, growth in market price of our common stock, operating margin, gross margin, operating income, pre-tax profit, earnings before interest, taxes and depreciation, net income, total return on shares of our common stock relative to the increase in an appropriate index selected by the Committee, earnings per share, return on stockholder equity, return on net assets, expenses, return on capital, economic value added, market share, or cash flow, as indicated by book earnings before interest, taxes, depreciation and amortization. The target levels with respect to these performance measures may be expressed on an absolute basis or relative to a standard specified by the Committee. The degree of attainment of performance measures will, according to criteria established by the Committee, be computed before the effect of changes in accounting standards, restructuring charges and similar extraordinary items occurring after the establishment of the performance goals applicable to a performance award.

     Following completion of the applicable performance period, the Committee will certify in writing the extent to which the applicable performance goals have been attained and the resulting value to be paid to the participant. The Committee retains the discretion to eliminate or reduce, but not increase, the amount that would otherwise be payable on the basis of the performance goals attained to a participant who is a "covered employee" within the meaning of Section 162(m) of the Code. However, no such reduction may increase the amount paid to any other participant. The Committee may make positive or negative adjustments to performance award payments to participants other than covered employees to reflect the participant's individual job performance or other factors determined by the Committee. In its discretion, the Committee may provide for the payment to a participant awarded performance shares of dividend equivalents with respect to cash dividends paid on our common stock. The Committee may provide for performance award payments in lump sums or installments. If any payment is to be made on a deferred basis, the Committee may provide for the payment of dividend equivalents or interest during the deferral period. No performance award may be sold or transferred other than by will or the laws of descent and distribution prior to the end of the applicable performance period.

     Change in Control. The Plan defines a "Change in Control" of the Company as any of the following events (or series of related events) in which the stockholders of the Company immediately prior to the event do not retain immediately after the event direct or indirect beneficial ownership of more than 50% of the total combined voting power of the outstanding voting securities of the Company or the entity to which the assets of the Company were transferred: (i) the direct or indirect sale or exchange by the stockholders 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; or (iv) a liquidation or dissolution of the Company. If a Change in Control occurs, the surviving, continuing, successor or purchasing entity or its parent may, without the consent of any participant, either assume all outstanding options and stock appreciation rights or substitute substantially equivalent options or rights for its stock. If the outstanding options and stock appreciation rights are not assumed or replaced, then all unexercised and unvested portions of such outstanding awards will become immediately exercisable and vested in full. Any stock options or stock appreciation rights which are not assumed in connection with a Change in Control or exercised prior to the Change in Control will terminate effective as of the time of the Change in Control. In addition, the Committee may provide in any stock award agreement for the acceleration of vesting of the award effective as of the date of the Change in Control and in any performance award agreement for payment of the award to such extent as determined by the Committee.

     Termination or Amendment. The 2003 Plan will continue in effect until the first to occur of (i) its termination by the Committee or (ii) the date on which all shares available for issuance under the 2003 Plan have been issued and all restrictions on such shares under the terms of the 2003 Plan and the agreements evidencing awards granted under the 2003 Plan have lapsed. However, no incentive stock option may be granted under the 2003 Plan after January 22, 2013. The Committee may terminate or amend the 2003 Plan at any time, provided that without stockholder approval the plan cannot be amended to increase the Share Reserve, change the class of persons eligible to receive incentive stock options or effect any other change that would require stockholder approval under any applicable law. No termination or amendment may affect any outstanding award unless expressly provided by the Committee, and, in any event, may not adversely affect an outstanding award without the consent of the participant unless necessary to comply with any applicable law.

Summary of Federal Income Tax Consequences of the 2003 Equity Incentive Plan

     The following summary is intended only as a general guide to the U.S. federal income tax consequences under current law of participation in the 2003 Plan and does not attempt to describe all possible federal or other tax consequences of such participation or tax consequences based on particular circumstances. Furthermore, the tax consequences are complex and subject to change, and a taxpayer's particular situation may be such that some variation of the described rules is applicable.

     Incentive Stock Options. A participant recognizes no taxable income for regular income tax purposes as a result of the grant or exercise of an incentive stock option qualifying under Section 422 of the Code. Participants who neither dispose of their shares within two years following the date the option was granted nor within one year following the exercise of the option will normally recognize a capital gain or loss equal to the difference, if any, between the sale price and the purchase price of the shares. If a participant satisfies such holding periods upon a sale of the shares, we will not be entitled to any deduction for federal income tax purposes. If a participant disposes of shares within two years after the date of grant or within one year after the date of exercise (a "disqualifying disposition"), the difference between the fair market value of the shares on the date of option exercise and the option exercise price (not to exceed the gain realized on the sale if the disposition is a transaction with respect to which a loss, if sustained, would be recognized) will be taxed as ordinary income at the time of disposition. Any gain in excess of that amount will be a capital gain. If a loss is recognized, there will be no ordinary income, and such loss will be a capital loss. Any ordinary income recognized by the participant upon the disqualifying disposition of the shares generally should be deductible by us for federal income tax purposes, except to the extent such deduction is limited by applicable provisions of the Code.

     The difference between the option exercise price and the fair market value of the shares on the exercise date of an incentive stock option is treated as an adjustment in computing the participant's alternative minimum taxable income and may be subject to an alternative minimum tax which is paid if such tax exceeds the regular tax for the year. Special rules may apply with respect to certain subsequent sales of the shares in a disqualifying disposition, certain basis adjustments for purposes of computing the alternative minimum taxable income on a subsequent sale of the shares and certain tax credits which may arise with respect to participant s subject to the alternative minimum tax.

     Nonstatutory Stock Options. Options not designated or qualifying as incentive stock options will be nonstatutory stock options having no special tax status. A participant generally recognizes no taxable income as the result of the grant of such an option. Upon exercise of a nonstatutory stock option, the participant normally recognizes ordinary income in the amount of the difference between the option exercise price and the fair market value of the shares purchased. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. Upon the sale of stock acquired by the exercise of a nonstatutory stock option, any gain or loss, based on the difference between the sale price and the fair market value on the exercise date, will be taxed as capital gain or loss. No tax deduction is available to us with respect to the grant of a nonstatutory stock option or the sale of the stock acquired pursuant to such grant. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant as a result of the exercise of a nonstatutory stock option, except to the extent such deduction is limited by applicable provisions of the Code.

     Stock Appreciation Rights. A Participant recognizes no taxable income upon the receipt of a stock appreciation right. Upon the exercise of a stock appreciation right, the participant will recognize ordinary income in an amount equal to the excess of the fair market value of the underlying shares of common stock on the exercise date over the exercise price. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant in connection with the exercise of the stock appreciation right, except to the extent such deduction is limited by applicable provisions of the Code.

     Stock Awards. A participant acquiring restricted stock generally will recognize ordinary income equal to the difference between the fair market value of the shares on the "determination date" (as defined below) and their purchase price, if any. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. The "determination date" is the date on which the participant acquires the shares unless they are subject to a substantial risk of forfeiture and are not transferable, in which case the determination date is the earlier of (i) the date on which the shares become transferable or (ii) the date on which the shares are no longer subject to a substantial risk of forfeiture. If the determination date is after the date on which the participant acquires the shares, the participant may elect, pursuant to Section 83(b) of the Code, to have the date of acquisition be the determination date by filing an election with the Internal Revenue Service no later than 30 days after the date the shares are acquired. Upon the sale of shares acquired pursuant to a restricted stock award, any gain or loss, based on the difference between the sale price and the fair market value on the determination date, will be taxed as capital gain or loss. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant on the determination date, except to the extent such deduction is limited by applicable provisions of the Code.

     Performance Awards. A participant generally will recognize no income upon the grant of a performance share or performance units award. Upon the settlement of such awards, participants normally will recognize ordinary income in the year of receipt in an amount equal to the cash received and the fair market value of any nonrestricted shares received. If the participant is an employee, such ordinary income generally is subject to withholding of income and employment taxes. If the participant receives shares of restricted stock, the participant generally will be taxed in the same manner as described under "Stock Awards." Upon the sale of any shares received, any gain or loss, based on the difference between the sale price and the fair market value on the "determination date", will be taxed as capital gain or loss. We generally should be entitled to a deduction equal to the amount of ordinary income recognized by the participant on the determination date, except to the extent such deduction is limited by applicable provisions of
the Code.

     No awards will be granted under the 2003 Plan prior to its approval by our stockholders. Awards under the 2003 Plan will be granted at the discretion of the Committee, and, accordingly, are not yet determinable. In addition, benefits under the 2003 Plan will depend on a number of factors, including the fair market value of our common stock on future dates, our actual performance against performance goals established with respect to performance awards and decisions made by the participants. Consequently it is not possible to determine the benefits that might be received by participants under the 2003 Plan.

     The following table gives information about our common stock that may be issued under our existing equity compensation plans as of November 29, 2002, including our 1984 Stock Option Plan, as amended, 1994 Plan, Amended 1994 Performance and Restricted Stock Plan, 1996 Outside Directors Stock Option Plan, as amended, 1997 Employee Stock Purchase Plan, and 1999 Plan: