STOCK-BASED COMPENSATION

The assumptions used to value option grants during the three and six months ended June 3, 2011 and June 4, 2010 were as follows:



	Three Months		Six Months
	2011	2010	2011	2010
Expected life (in years)	3.9 - 4.2	3.9 - 5.1	3.8 - 4.2	3.8 - 5.1
Volatility	30 - 31%	29 - 30%	30 - 35%	29 - 36%
Risk free interest rate	1.34 - 1.74%	2.06 - 2.66%	1.34 - 1.74%	1.76 - 2.66%

The expected life of employee stock purchase plan (“ESPP”) shares is the average of the remaining purchase periods under each offering period. The assumptions used to value employee stock purchase rights during the three and six months ended June 3, 2011 and June 4, 2010 were as follows:



	Three Months		Six Months
	2011	2010	2011	2010
Expected life (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Volatility	32 - 34%	32%	32 - 34%	32%
Risk free interest rate	0.19 - 0.61%	0.18 - 1.09%	0.19 - 0.61%	0.18 - 1.09%

Summary of Stock Options

Option activity for the six months ended June 3, 2011 and the fiscal year ended December 3, 2010 was as follows (in thousands):



	2011		2010
Beginning outstanding balance	37,075		41,251
Granted	4,252		3,198
Exercised	(4,469	)	(5,196	)
Cancelled	(878	)	(2,908	)
Increase due to acquisition	130		730
Ending outstanding balance	36,110		37,075

Information regarding stock options outstanding at June 3, 2011 and June 4, 2010 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2011
Options outstanding	36,110	$	31.67	3.70	$	131.1
Options vested and expected to vest	34,746	$	31.72	3.61	$	126.4
Options exercisable	25,790	$	32.55	2.92	$	83.9
2010
Options outstanding	39,288	$	30.52	4.15	$	153.5
Options vested and expected to vest	37,542	$	30.58	4.05	$	145.5
Options exercisable	26,486	$	30.88	3.38	$	96.6

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^(*)The intrinsic value is calculated as the difference between the market value as of the end of the fiscal period and the exercise price of the shares. As reported by the NASDAQ Global Select Market, the market values as of June 3, 2011 and June 4, 2010 were $33.27 and $31.59, respectively.

Summary of Employee Stock Purchase Plan Shares

Employees purchased 1.4 million shares at an average price of $20.61 and 1.3 million shares at an average price of $20.20 for the six months ended June 3, 2011 and June 4, 2010, respectively. The intrinsic value of shares purchased during the six months ended June 3, 2011 and June 4, 2010 was $15.3 million and $21.4 million, respectively. The intrinsic value is calculated as the difference between the market value on the date of purchase and the purchase price of the shares.

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended June 3, 2011 and the fiscal year ended December 3, 2010 was as follows (in thousands):



	2011		2010
Beginning outstanding balance	13,890		10,433
Awarded	7,319		7,340
Released	(2,919	)	(2,589	)
Forfeited	(648	)	(1,294	)
Increase due to acquisition	59		—
Ending outstanding balance	17,701		13,890

Information regarding restricted stock units outstanding at June 3, 2011 and June 4, 2010 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2011
Restricted stock units outstanding	17,701	1.73	$	588.9
Restricted stock units vested and expected to vest	15,128	1.62	$	502.7
2010
Restricted stock units outstanding	14,364	1.88	$	453.8
Restricted stock units vested and expected to vest	11,016	1.71	$	347.8

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^(*)The intrinsic value is calculated as the market value as of the end of the fiscal period. As reported by the NASDAQ Global Select Market, the market values as of June 3, 2011 and June 4, 2010 were $33.27 and $31.59, respectively.

Summary of Performance Shares

Effective January 24, 2011, the Executive Compensation Committee adopted the 2011 Performance Share Program (the "2011 Program"). The purpose of the 2011 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2011 Program is our fiscal 2011 year. All members of our executive management and other key senior management are participating in the 2011 Program. Awards granted under the 2011 Program are granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined performance goals are met, shares of stock will be granted to the recipient, with one third vesting on the later of the date of certification of achievement or the first anniversary date of the grant, and the remaining two thirds vesting evenly on the following two annual anniversary dates of the grant, contingent upon the recipient’s continued service to Adobe. Participants in the 2011 Program have the ability to receive up to 150% of the target number of shares originally granted.

The following table sets forth the summary of performance share activity under our 2011 Program for the six months ended June 3, 2011 (in thousands):



	Shares Granted	Maximum Shares Eligible to Receive
Beginning outstanding balance	—	—
Awarded	425	638
Forfeited	—	—
Ending outstanding balance	425	638

In the first quarter of fiscal 2011, the Executive Compensation Committee certified the actual performance achievement of participants in the 2010 Performance Share Program (the "2010 Program"). Based upon the achievement of goals outlined in the 2010 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 135% of target or approximately 0.3 million shares for the 2010 Program. One third of the shares under the 2010 Program vested in the first quarter of fiscal 2011 and the remaining two thirds vest evenly on the following two annual anniversary dates of the grant, contingent upon the recipient's continued service to Adobe.

The performance metrics under the 2009 Performance Share Program were not achieved and therefore no shares were awarded.

The following table sets forth the summary of performance share activity under our 2007, 2008 and 2010 programs, based upon share awards actually achieved, for the six months ended June 3, 2011 and the fiscal year ended December 3, 2010 (in thousands):



	2011		2010
Beginning outstanding balance	557		950
Achieved	337		—
Released	(427	)	(350	)
Forfeited	(10	)	(43	)
Ending outstanding balance	457		557

Information regarding performance shares outstanding at June 3, 2011 and June 4, 2010 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2011
Performance shares outstanding	457	0.89	$	15.2
Performance shares vested and expected to vest	421	0.87	$	13.8
2010
Performance shares units outstanding	593	1.06	$	18.7
Performance shares vested and expected to vest	509	1.01	$	15.9

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Compensation Costs

As of June 3, 2011, there was $530.3 million of unrecognized compensation cost, adjusted for estimated forfeitures, related to non-vested stock-based awards which will be recognized over a weighted average period of 2.7 years. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures.

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the three months ended June 3, 2011 and June 4, 2010 were as follows (in thousands):



	2011				2010
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—subscription	$	232	$	367	$	341	$	324
Cost of revenue—services and support	1,264		2,299		268		67
Research and development	7,024		19,444		10,871		11,990
Sales and marketing	8,334		20,616		11,773		13,001
General and administrative	5,255		10,024		5,636		5,826
Total	$	22,109	$	52,750	$	28,889	$	31,208

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended June 3, 2011 and June 4, 2010 were as follows (in thousands):



	2011				2010
Income Statement Classifications	Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards		Option Grants and Stock Purchase Rights		Restricted Stock and Performance Share Awards
Cost of revenue—subscription	$	424	$	688	$	680	$	604
Cost of revenue—services and support	2,359		4,374		685		598
Research and development	13,778		40,022		22,925		27,350
Sales and marketing	15,884		37,032		23,520		25,157
General and administrative	11,205		20,085		11,246		11,812
Total	$	43,650	$	102,201	$	59,056	$	65,521