STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended May 31, 2013 and the fiscal year ended November 30, 2012 was as follows (in thousands):



	2013		2012
Beginning outstanding balance	18,415		16,871
Awarded	6,190		9,431
Released	(5,402	)	(5,854	)
Forfeited	(899	)	(2,147	)
Increase due to acquisition	—		114
Ending outstanding balance	18,304		18,415

Information regarding restricted stock units outstanding at May 31, 2013 and June 1, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Restricted stock units outstanding	18,304	1.47	$	785.4
Restricted stock units vested and expected to vest	16,009	1.40	$	684.6
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

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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 May 31, 2013 and June 1, 2012 were $42.91 and $29.82, 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 six months ended May 31, 2013 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	—		—
Awarded	945		1,891
Forfeited	(64	)	(128	)
Ending outstanding balance	881		1,763

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 six months ended May 31, 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	(125	)	(45	)
Ending outstanding balance	877		388

Information regarding performance shares outstanding at May 31, 2013 and June 1, 2012 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2013
Performance shares outstanding	877	1.08	$	37.6
Performance shares vested and expected to vest	793	1.06	$	33.9
2012
Performance shares outstanding	434	1.03	$	12.9
Performance shares vested and expected to vest	394	1.01	$	11.7

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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 May 31, 2013 and June 1, 2012 were $42.91 and $29.82, respectively.

Summary of Stock Options

Option grants during the three and six months ended May 31, 2013 and June 1, 2012 were primarily made to non-employee directors who elected to receive options during the annual equity grant period in the second quarter of each fiscal year. The assumptions used to value option grants during the three and six months ended May 31, 2013 and June 1, 2012 were as follows:



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

There were no stock purchases under the employee stock purchase plan (“ESPP”) during the three months ended May 31, 2013 and June 1, 2012. The assumptions used to value employee stock purchase rights during the six months ended May 31, 2013 and June 1, 2012 were as follows:



	Six Months
	2013	2012
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	26 - 30%	36	%
Risk free interest rate	0.12 - 0.27%	0.06 - 0.27%

The expected life of ESPP shares is the average of the remaining purchase periods under each offering period.

Option activity for the six months ended May 31, 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	(10,462	)	(6,754	)
Cancelled	(1,429	)	(4,692	)
Increase due to acquisition	129		1,104
Ending outstanding balance	12,780		24,517

Information regarding stock options outstanding at May 31, 2013 and June 1, 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	12,780	$	31.84	2.89	$	142.1
Options vested and expected to vest	12,576	$	31.95	2.84	$	138.5
Options exercisable	10,387	$	33.05	2.36	$	102.9
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

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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 May 31, 2013 and June 1, 2012 were $42.91 and $29.82, respectively.

Summary of Employee Stock Purchase Plan Shares

Employees purchased 1.2 million shares at an average price of $25.49 and 1.1 million shares at an average price of $23.64 for the six months ended May 31, 2013 and June 1, 2012, respectively. The intrinsic value of shares purchased during the six months ended May 31, 2013 and June 1, 2012 was $14.5 million and $5.0 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 May 31, 2013, there was $530.5 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 2.2 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 May 31, 2013 and June 1, 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	$	446	$	1,181	$	701	$	714
Cost of revenue—services and support	826		2,360		702		2,373
Research and development	4,734		23,210		4,217		20,288
Sales and marketing	4,893		24,026		6,387		19,373
General and administrative	2,146		15,048		3,990		12,654
Total	$	13,045	$	65,825	$	15,997	$	55,402

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended May 31, 2013 and June 1, 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	$	1,083	$	2,244	$	1,443	$	1,317
Cost of revenue—services and support	1,681		4,810		1,818		4,443
Research and development	10,554		48,941		11,416		38,369
Sales and marketing	11,560		47,778		15,167		36,289
General and administrative	4,660		29,755		8,490		24,228
Total	$	29,538	$	133,528	$	38,334	$	104,646