STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the nine months ended August 29, 2014 and the fiscal year ended November 29, 2013 was as follows (in thousands):



	2014		2013
Beginning outstanding balance	17,948		18,415
Awarded	4,054		7,236
Released	(7,085	)	(6,224	)
Forfeited	(1,072	)	(1,479	)
Ending outstanding balance	13,845		17,948

Information regarding restricted stock units outstanding at August 29, 2014 and August 30, 2013 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2014
Restricted stock units outstanding	13,845	1.12	$	995.5
Restricted stock units vested and expected to vest	12,367	1.05	$	882.4
2013
Restricted stock units outstanding	18,163	1.29	$	831
Restricted stock units vested and expected to vest	16,159	1.22	$	736.8

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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 August 29, 2014 and August 30, 2013 were $71.90 and $45.75, respectively.

Summary of Performance Shares

On January 24, 2014, our Executive Compensation Committee approved the 2014 Performance Share Program, including the award calculation methodology, under the terms of our 2003 Equity Incentive Plan. Under our 2014 Performance Share Program (“2014 Program”), shares may be earned based on the achievement of an objective relative total stockholder return measured over a three-year performance period. The purpose of the 2014 Program is to help focus key employees on building stockholder value, provide significant award potential for achieving outstanding Company performance and enhance the ability of the Company to attract and retain highly talented and competent individuals. 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, 2017. Participants in the 2014 Program generally have the ability to receive up to 200% of the target number of shares originally granted.

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 relative total stockholder return measured over a three-year performance period. Performance awards were granted under the 2013 Performance Share Program (“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.

As of August 29, 2014, the shares awarded under our 2013 and 2014 Performance Share Programs are yet to be achieved. The following table sets forth the summary of performance share activity under our 2013 and 2014 Performance Share Programs for the nine months ended August 29, 2014 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	854		1,707
Awarded	709		1,417
Forfeited	(46	)	(90	)
Ending outstanding balance	1,517		3,034

In the first quarter of fiscal 2013, the Executive Compensation Committee certified the actual performance achievement of participants in the 2012 Performance Share Program (“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 date, 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 29, 2014 and the fiscal year ended November 29, 2013 (in thousands):



	2014		2013
Beginning outstanding balance	861		388
Achieved	—		1,279
Released	(486	)	(665	)
Forfeited	(21	)	(141	)
Ending outstanding balance	354		861

Information regarding performance shares outstanding at August 29, 2014 and August 30, 2013 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2014
Performance shares outstanding	354	0.41	$	25.4
Performance shares vested and expected to vest	339	0.41	$	24.2
2013
Performance shares outstanding	868	0.83	$	39.7
Performance shares vested and expected to vest	804	0.81	$	36.7

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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 August 29, 2014 and August 30, 2013 were $71.90 and $45.75, respectively.

Summary of Stock Options

There were no option grants during the three and nine months ended August 29, 2014 and the three months ended August 30, 2013. The assumptions used to value the option grants during the nine months ended August 30, 2013 were as follows:



	Nine Months
	2013
Expected life (in years)	3.2
Volatility	27	%
Risk free interest rate	0.36	%

Option activity for the nine months ended August 29, 2014 and the fiscal year ended November 29, 2013 was as follows (in thousands):



	2014		2013
Beginning outstanding balance	7,359		24,517
Granted	—		25
Exercised	(3,585	)	(15,872	)
Cancelled	(134	)	(1,584	)
Increase due to acquisition	—		273
Ending outstanding balance	3,640		7,359

Information regarding stock options outstanding at August 29, 2014 and August 30, 2013 is summarized below:



	Number of Shares (thousands)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2014
Options outstanding	3,640	$	28.98	3.33	$	156.2
Options vested and expected to vest	3,610	$	29.08	3.31	$	154.5
Options exercisable	3,056	$	30.26	2.99	$	127.3
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

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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 29, 2014 and August 30, 2013 were $71.90 and $45.75, respectively.

Summary of Employee Stock Purchase Plan Shares

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 29, 2014 and August 30, 2013 were as follows:



	Three Months		Nine Months
	2014	2013	2014	2013
Expected life (in years)	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0	0.5 - 2.0
Volatility	26 - 27%	27 - 29%	26 - 28%	26 - 30%
Risk free interest rate	0.06 - 0.47%	0.09 - 0.34%	0.06 - 0.47%	0.09 - 0.34%

Employees purchased 2.9 million shares at an average price of $34.76 and 3.4 million shares at an average price of $25.71 for the nine months ended August 29, 2014 and August 30, 2013, respectively. The intrinsic value of shares purchased during the nine months ended August 29, 2014 and August 30, 2013 was $93.4 million and $58.5 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 29, 2014, there was $468.0 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 1.7 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 August 29, 2014 and August 30, 2013 were as follows (in thousands):



	2014				2013
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	$	458	$	1,451	$	380	$	1,245
Cost of revenue—services and support	1,064		1,666		878		2,609
Research and development	4,151		26,100		4,786		25,736
Sales and marketing	4,492		25,447		4,617		24,309
General and administrative	1,682		16,502		1,858		14,606
Total	$	11,847	$	71,166	$	12,519	$	68,505

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the nine months ended August 29, 2014 and August 30, 2013 were as follows (in thousands):



	2014				2013
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	$	1,424	$	4,261	$	1,463	$	3,489
Cost of revenue—services and support	2,759		4,886		2,559		7,419
Research and development	12,397		78,567		15,340		74,677
Sales and marketing	13,571		76,541		16,177		72,087
General and administrative	4,962		49,443		6,518		44,361
Total	$	35,113	$	213,698	$	42,057	$	202,033