STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the nine months ended August 30, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):



	2013		2012
Beginning outstanding balance	18,415		16,871
Awarded	6,826		9,431
Released	(5,837	)	(5,854	)
Forfeited	(1,241	)	(2,147	)
Increase due to acquisition	—		114
Ending outstanding balance	18,163		18,415

Information regarding restricted stock units outstanding at August 30, 2013 and August 31, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Restricted stock units outstanding	18,163	1.29	$	831.0
Restricted stock units vested and expected to vest	16,159	1.22	$	736.8
2012
Restricted stock units outstanding	18,877	1.55	$	590.3
Restricted stock units vested and expected to vest	16,403	1.45	$	512.1

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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 August 30, 2013 and August 31, 2012 were $45.75 and $31.27, respectively.

Summary of Performance Shares

The following table sets forth the summary of performance share activity under our Performance Share Program for fiscal 2013 (the “2013 Program”) for the nine months ended August 30, 2013 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	—		—
Awarded	946		1,891
Forfeited	(84	)	(168	)
Ending outstanding balance	862		1,723

Effective January 24, 2013, our Executive Compensation Committee modified our Performance Share Program by eliminating the use of qualitative performance objectives, with 100% of shares to be earned based on the achievement of an objective total stockholder return measure over a three-year performance period. Performance awards will be granted under the 2013 Program pursuant to the terms of our 2003 Equity Incentive Plan. The purpose of the 2013 Program is to align key management and senior leadership with stockholders’ interests over the long term and to retain key employees. Performance share awards will be awarded and fully vest upon the Executive Compensation Committee's certification of the level of achievement following the three-year anniversary of the grant date on January 24, 2016. Participants in the 2013 Program generally have the ability to receive up to 200% of the target number of shares originally granted.

In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (the “2012 Program”). Based upon the achievement of specific and/or market-based performance goals outlined in the 2012 Program, participants had the ability to receive up to 150% of the target number of shares originally granted. Actual performance resulted in participants achieving 116% of target or approximately 1.3 million shares for the 2012 Program. One third of the shares under the 2012 Program vested in the first quarter of fiscal 2013 and the remaining two thirds vest evenly on the following two anniversaries of the grant, contingent upon the recipient's continued service to Adobe.

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 anniversaries of the grant, contingent upon the recipient's continued service to Adobe.

The following table sets forth the summary of performance share activity under our 2010, 2011 and 2012 programs, based upon share awards actually achieved, for the nine months ended August 30, 2013 and the fiscal year ended November 30, 2012 (in thousands):



	2013		2012
Beginning outstanding balance	388		405
Achieved	1,279		492
Released	(665	)	(464	)
Forfeited	(134	)	(45	)
Ending outstanding balance	868		388

Information regarding performance shares outstanding at August 30, 2013 and August 31, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Performance shares outstanding	868	0.83	$	39.7
Performance shares vested and expected to vest	804	0.81	$	36.7
2012
Performance shares outstanding	431	0.79	$	13.5
Performance shares vested and expected to vest	401	0.76	$	12.5

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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 August 30, 2013 and August 31, 2012 were $45.75 and $31.27, respectively.

Summary of Stock Options

There were no option grants during the three months ended August 30, 2013 and August 31, 2012. The assumptions used to value option grants during the nine months ended August 30, 2013 and August 31, 2012 were as follows:



	Nine Months
	2013		2012
Expected life (in years)	3.2		3.9 - 4.2
Volatility	27	%	31 - 34%
Risk free interest rate	0.36	%	0.54 - 0.71%

The expected life of the 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 nine months ended August 30, 2013 and August 31, 2012 were as follows:



	Three Months		Nine Months
	2013	2012	2013	2012
Expected life (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Volatility	27 - 29%	30 - 31%	26 - 30%	30 - 36%
Risk free interest rate	0.09 - 0.34%	0.15 - 0.30%	0.09 - 0.34%	0.06 - 0.30%

Option activity for the nine months ended August 30, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):



	2013		2012
Beginning outstanding balance	24,517		34,802
Granted	25		57
Exercised	(13,744	)	(6,754	)
Cancelled	(1,546	)	(4,692	)
Increase due to acquisition	273		1,104
Ending outstanding balance	9,525		24,517

Information regarding stock options outstanding at August 30, 2013 and August 31, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Options outstanding	9,525	$	30.80	3.10	$	142.6
Options vested and expected to vest	9,359	$	30.93	3.05	$	138.9
Options exercisable	7,489	$	32.23	2.49	$	101.5
2012
Options outstanding	26,210	$	31.67	3.01	$	85.8
Options vested and expected to vest	25,724	$	31.75	2.95	$	83.1
Options exercisable	21,312	$	32.91	2.46	$	52.7

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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 August 30, 2013 and August 31, 2012 were $45.75 and $31.27, respectively.

Summary of Employee Stock Purchase Plan Shares

Employees purchased 3.4 million shares at an average price of $25.71 and 3.2 million shares at an average price of $23.81 for the nine months ended August 30, 2013 and August 31, 2012, respectively. The intrinsic value of shares purchased during the nine months ended August 30, 2013 and August 31, 2012 was $58.5 million and $22.8 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.

Compensation Costs

As of August 30, 2013, there was $479.7 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 2.0 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 August 30, 2013 and August 31, 2012 were as follows (in thousands):



	2013				2012
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	$	380	$	1,245	$	769	$	837
Cost of revenue—services and support	878		2,609		1,147		2,167
Research and development	4,786		25,736		7,340		22,536
Sales and marketing	4,617		24,309		8,639		20,194
General and administrative	1,858		14,606		4,001		12,039
Total	$	12,519	$	68,505	$	21,896	$	57,773

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the nine months ended August 30, 2013 and August 31, 2012 were as follows (in thousands):



	2013				2012
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	$	1,463	$	3,489	$	2,212	$	2,154
Cost of revenue—services and support	2,559		7,419		2,965		6,610
Research and development	15,340		74,677		18,756		60,905
Sales and marketing	16,177		72,087		23,806		56,483
General and administrative	6,518		44,361		12,491		36,267
Total	$	42,057	$	202,033	$	60,230	$	162,419