STOCK-BASED COMPENSATION

The assumptions used to value option grants during the three and six months ended June 1, 2012 and June 3, 2011 were as follows:



	Three Months			Six Months
	2012		2011	2012	2011
Expected life (in years)	4.2		3.9 - 4.2	3.9 - 4.2	3.8 - 4.2
Volatility	31	%	30 - 31%	31 - 34%	30 - 35%
Risk free interest rate	0.71	%	1.34 - 1.74%	0.54 - 0.71%	1.34 - 1.74%

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 1, 2012 and June 3, 2011 were as follows:



	Three Months			Six Months
	2012		2011	2012		2011
Expected life (in years)	0.5 - 2.0		0.5 - 2.0	0.5 - 2.0		0.5 - 2.0
Volatility	36	%	32 - 34%	36	%	32 - 34%
Risk free interest rate	0.06 - 0.27%		0.19 - 0.61%	0.06 - 0.27%		0.19 - 0.61%

Summary of Stock Options

Option activity for the six months ended June 1, 2012 and the fiscal year ended December 2, 2011 was as follows (in thousands):



	2012		2011
Beginning outstanding balance	34,802		37,075
Granted	57		4,507
Exercised	(4,804	)	(4,987	)
Cancelled	(3,767	)	(2,268	)
Increase due to acquisition	1,104		475
Ending outstanding balance	27,392		34,802

Information regarding stock options outstanding at June 1, 2012 and June 3, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2012
Options outstanding	27,392	$	31.26	3.27	$	87.0
Options vested and expected to vest	26,741	$	31.38	3.20	$	82.9
Options exercisable	21,503	$	32.82	2.63	$	47.0
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

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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 1, 2012 and June 3, 2011 were $29.82 and $33.27, respectively.

Summary of Employee Stock Purchase Plan Shares

Employees purchased 1.1 million shares at an average price of $23.64 and 1.4 million shares at an average price of $20.61 for the six months ended June 1, 2012 and June 3, 2011, respectively. The intrinsic value of shares purchased during the six months ended June 1, 2012 and June 3, 2011 was $5.0 million and $15.3 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 1, 2012 and the fiscal year ended December 2, 2011 was as follows (in thousands):



	2012		2011
Beginning outstanding balance	16,871		13,890
Awarded	8,129		8,180
Released	(5,059	)	(3,819	)
Forfeited	(1,381	)	(1,587	)
Increase due to acquisition	114		207
Ending outstanding balance	18,674		16,871

Information regarding restricted stock units outstanding at June 1, 2012 and June 3, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2012
Restricted stock units outstanding	18,674	1.74	$	555.6
Restricted stock units vested and expected to vest	15,949	1.64	$	473.7
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

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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 1, 2012 and June 3, 2011 were $29.82 and $33.27, respectively.

Summary of Performance Shares

Effective January 24, 2012, the Executive Compensation Committee adopted the 2012 Performance Share Program (the “2012 Program”). The purpose of the 2012 Program is to align key management and senior leadership with stockholders’ interests and to retain key employees. The measurement period for the 2012 Program is our fiscal 2012 year. Members of our executive management and other key senior management are participating in the 2012 Program. Awards granted under the 2012 Program are granted in the form of performance shares pursuant to the terms of our 2003 Equity Incentive Plan. If pre-determined Adobe specific or market-based 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 2012 Program generally 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 2012 Program for the six months ended June 1, 2012 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	—		—
Awarded	1,125		1,652
Forfeited	(9	)	(13	)
Ending outstanding balance	1,116		1,639

In the first quarter of fiscal 2012, the Executive Compensation Committee certified the actual performance achievement of participants in the 2011 Performance Share Program (the “2011 Program”). Based upon the achievement of goals outlined in the 2011 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 130% of target or approximately 0.5 million shares for the 2011 Program. One third of the shares under the 2011 Program vested in the first quarter of fiscal 2012 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, 2010 and 2011 programs, based upon share awards actually achieved, for the six months ended June 1, 2012 and the fiscal year ended December 2, 2011 (in thousands):



	2012		2011
Beginning outstanding balance	405		557
Achieved	492		337
Released	(461	)	(436	)
Forfeited	(2	)	(53	)
Ending outstanding balance	434		405

Information regarding performance shares outstanding at June 1, 2012 and June 3, 2011 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2012
Performance shares outstanding	434	1.03	$	12.9
Performance shares vested and expected to vest	394	1.01	$	11.7
2011
Performance shares outstanding	457	0.89	$	15.2
Performance shares vested and expected to vest	421	0.87	$	13.8

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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 1, 2012 and June 3, 2011 were $29.82 and $33.27, respectively.

Compensation Costs

As of June 1, 2012, there was $540.6 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 2.6 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 1, 2012 and June 3, 2011 were as follows (in thousands):



	2012				2011
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	$	701	$	714	$	232	$	367
Cost of revenue—services and support	702		2,373		1,264		2,299
Research and development	4,217		20,288		7,024		19,444
Sales and marketing	6,387		19,373		8,334		20,616
General and administrative	3,990		12,654		5,255		10,024
Total	$	15,997	$	55,402	$	22,109	$	52,750

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended June 1, 2012 and June 3, 2011 were as follows (in thousands):



	2012				2011
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	$	1,443	$	1,317	$	424	$	688
Cost of revenue—services and support	1,818		4,443		2,359		4,374
Research and development	11,416		38,369		13,778		40,022
Sales and marketing	15,167		36,289		15,884		37,032
General and administrative	8,490		24,228		11,205		20,085
Total	$	38,334	$	104,646	$	43,650	$	102,201