STOCK-BASED COMPENSATION

Summary of Restricted Stock Units

Restricted stock unit activity for the six months ended May 30, 2014 and the fiscal year ended November 29, 2013 was as follows (in thousands):



	2014		2013
Beginning outstanding balance	17,948		18,415
Awarded	3,654		7,236
Released	(6,520	)	(6,224	)
Forfeited	(785	)	(1,479	)
Ending outstanding balance	14,297		17,948

Information regarding restricted stock units outstanding at May 30, 2014 and May 31, 2013 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2014
Restricted stock units outstanding	14,297	1.28	$	922.7
Restricted stock units vested and expected to vest	12,552	1.22	$	804.0
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

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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 30, 2014 and May 31, 2013 were $64.54 and $42.91, 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 May 30, 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 six months ended May 30, 2014 (in thousands):



	Shares Granted		Maximum Shares Eligible to Receive
Beginning outstanding balance	854		1,707
Awarded	709		1,417
Forfeited	(19	)	(38	)
Ending outstanding balance	1,544		3,086

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 six months ended May 30, 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	(17	)	(141	)
Ending outstanding balance	358		861

Information regarding performance shares outstanding at May 30, 2014 and May 31, 2013 is summarized below:



	Number of Shares (thousands)	Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value^(*) (millions)
2014
Performance shares outstanding	358	0.65	$	23.1
Performance shares vested and expected to vest	335	0.65	$	21.5
2013
Performance shares outstanding	877	1.08	$	37.6
Performance shares vested and expected to vest	793	1.06	$	33.9

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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 30, 2014 and May 31, 2013 were $64.54 and $42.91, respectively.

Summary of Stock Options

There were no option grants during the six months ended May 30, 2014 and May 31, 2013. Option activity for the six months ended May 30, 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	(2,272	)	(15,872	)
Cancelled	(115	)	(1,584	)
Increase due to acquisition	—		273
Ending outstanding balance	4,972		7,359

Information regarding stock options outstanding at May 30, 2014 and May 31, 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	4,972	$	29.37	3.14	$	174.9
Options vested and expected to vest	4,922	$	29.47	3.11	$	172.6
Options exercisable	4,140	$	30.59	2.74	$	140.5
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

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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 30, 2014 and May 31, 2013 were $64.54 and $42.91, respectively.

Summary of Employee Stock Purchase Plan Shares

There were no stock purchases under the employee stock purchase plan (“ESPP”) during the three months ended May 30, 2014 and May 31, 2013. The assumptions used to value employee stock purchase rights during the six months ended May 30, 2014 and May 31, 2013 were as follows:



	Six Months
	2014	2013
Expected life (in years)	0.5 - 2.0	0.5 - 2.0
Volatility	27% - 28%	26 - 30%
Risk free interest rate	0.09% - 0.39%	0.12 - 0.27%

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

Employees purchased 1.2 million shares at an average price of $27.84 and 1.2 million shares at an average price of $25.49 for the six months ended May 30, 2014 and May 31, 2013, respectively. The intrinsic value of shares purchased during the six months ended May 30, 2014 and May 31, 2013 was $39.0 million and $14.5 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 May 30, 2014, there was $509.6 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 1.9 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 30, 2014 and May 31, 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	$	505	$	1,441	$	446	$	1,181
Cost of revenue—services and support	964		1,682		826		2,360
Research and development	3,989		25,910		4,734		23,210
Sales and marketing	4,316		25,363		4,893		24,026
General and administrative	1,494		17,346		2,146		15,048
Total	$	11,268	$	71,742	$	13,045	$	65,825

Total stock-based compensation costs that have been included in our Condensed Consolidated Statements of Income for the six months ended May 30, 2014 and May 31, 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	$	966	$	2,810	$	1,083	$	2,244
Cost of revenue—services and support	1,695		3,220		1,681		4,810
Research and development	8,246		52,467		10,554		48,941
Sales and marketing	9,079		51,094		11,560		47,778
General and administrative	3,280		32,941		4,660		29,755
Total	$	23,266	$	142,532	$	29,538	$	133,528