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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark One)

[X]	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the Fiscal Year Ended March 31, 2000

OR

[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

COMMISSION FILE NO. 000-22688

MACROMEDIA, INC.
(A Delaware Corporation)

I.R.S. Identification No. 94-3155026

600 Townsend Street
San Francisco, California 94103
Telephone: (415)252-2000

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [   ]

Aggregate market value of the voting stock held by non-affiliates of the Registrant as of June 9, 2000: $5,221 million. Common stock outstanding as of June 9, 2000: 51,696,228. See definition of affiliate in Rule 405, 17 (FR 230.405).

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the documents listed below have been incorporated by reference into the indicated parts of this report, as specified in the responses to the item numbers involved.

	(1)		Designated portions of the Proxy Statement relating to the 2000
			Annual Meeting of Shareholders:	Part III (Items 10, 11, 12 and 13)

MACROMEDIA, INC. AND SUBSIDIARIES

FORM 10-K
ANNUAL REPORT
For the Year Ended March 31, 2000

MACROMEDIA, INC. AND SUBSIDIARIES

FORM 10-K
ANNUAL REPORT
For the Year Ended March 31, 2000

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Table of Contents

PART I

      Except for historical financial information contained herein, the matters discussed in this annual report may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding our intent, belief or current expectations and those of our management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks, uncertainties and other factors, some of which are beyond our control; actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) those risks and uncertainties identified under “Risk Factors that May Affect Future Results of Operations” in Item 7 and the other risks detailed from time to time in our reports and registration statements filed with the Securities and Exchange Commission.

Table of Contents

ITEM 1. BUSINESS

Overview

      Macromedia, Inc. develops, markets and supports software products, technologies and services that enable people to define what the Web can be. Our customers, from developers to enterprises, use Macromedia solutions to help build compelling and effective Web sites and eBusiness applications. We were incorporated in Delaware on February 25, 1992, and have acquired several other businesses since our incorporation. Our principal executive office is located at 600 Townsend Street, San Francisco, California 94103 and our telephone number is 415/252-2000. Our common stock is listed on the Nasdaq National Market under the symbol MACR. Our World Wide Web site can be accessed at www.macromedia.com.

      We are a software company based in San Francisco, California with more than 1,000 employees worldwide working with industry partners to deliver compelling and effective Web experiences.

      We have two primary business segments in which we operate today, the Software business and shockwave.com. Our Software business’ products enable rich, engaging, and personalized Web experiences. From stand-alone products for Web authoring and graphics creation to integrated solutions for mission-critical eBusiness applications, we have the technology and services that enable developers and enterprises to create Web sites. Our consumer business, shockwave.com, Inc., provides a leading entertainment experience on the Web by means of content, products and technologies that give consumers a next-generation Web experience at www.shockwave.com. (For financial information regarding our business segments, please refer to Note 19 to our Notes to Consolidated Financial Statements on page F-35).

Market Opportunity

      The Internet has experienced dramatic growth since the advent of the World Wide Web, a graphically rich environment made accessible to millions of consumers by the combination of advanced networking technologies, inexpensive, multimedia-capable computers and Web browser technology. In just a few years, the Web has become a powerful business software platform allowing companies to communicate with their customers, vendors and employees using standard formats and protocols. For businesses, Web technology provides an alternative to existing mainstream computing platforms and creates new opportunities for commerce and information exchange. For consumers, the Web is quickly becoming a viable medium for communication, community and entertainment.

      We see five central market trends that will continue to drive large and growing market opportunities for our software and services:

(a)

As the Web matures, eBusinesses increasingly are focused on providing higher quality customer experiences, differentiating and expressing their brand identity, and attracting and engaging new and existing customers. Multimedia technologies that enable a richer and more compelling experience through

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			audio, animation, graphics, and interactivity are critical to this effort. While these higher quality Web experiences are already possible in today’s Internet environment, the growth of high bandwidth Internet access will only help accelerate this trend.
	(b)		Since the advent of the World Wide Web, there has been a dramatic increase in the number of people around the globe with Web-connected, multimedia-capable PCs. The Web is now just at the beginning of an expansion in the number and variety of Web-connected, multimedia capable devices, from set-top boxes, to handheld devices, to wireless phones. This proliferation will serve to increase the opportunities for businesses to leverage the Web for new applications and increase the importance of technologies for developing, managing, personalizing and analyzing Web applications across platforms.
	(c)		As the importance of the Web to a wide range of business practices has increased, the number of people involved in creating Web sites and Web-based applications at a given enterprise, and the complexity of building effective and engaging Web experiences has also increased.
	(d)		With the increase in both the importance and complexity of building eBusiness applications, the importance of integrated solutions that tie together tools, application servers and databases to create dynamic applications is increasing.
	(e)		The market for digital media entertainment has grown dramatically with the increasing proliferation and sophistication of personal computers, and with the expanding varieties of content and services available on the Internet.

      With these five trends, we see large and growing market opportunities for software solutions and services that enable developers and enterprises to create effective and engaging Web experiences and eBusiness applications.

SOFTWARE BUSINESS

      Our vision is a family of software products that will work together as a solution to streamline Web workflow from concept to design, development to production. Our products enable businesses to dramatically reduce the time it takes to develop their Web sites and provide mission critical solutions including Web measurement, analysis, and personalization solutions. Our line of software products allows us to deliver integrated solutions for our Web Content Lifecycle product solutions.

      We describe the Web Content Lifecycle as the five key areas of focus for the creation and management of Web sites: Build, Manage, Engage, Personalize and Analyze. These words represent the key steps in the Web Content Lifecycle necessary for the creation of effective and engaging eBusiness applications. Our software, together with future initiatives such as Project Whirlwind and in conjunction with companies with which we do business, enables customers to:

	•		Build sites efficiently
	•		Manage the production process
	•		Engage their customers
	•		Personalize their experience
	•		Analyze the results

      The graphic below illustrates how our software products are used to enable our customers to efficiently deliver compelling and effective Web experiences on multiple platforms through integration.

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	•		Macromedia Dreamweaver® - The solution for professional Web site design and production.
	•		Macromedia Fireworks® - The solution for professional Web graphics design and production.
	•		Macromedia Dreamweaver® UltraDev™ - The solution that allows developers, programmers, and designers to visually create and edit data-driven Web applications on multiple server platforms.
	•		Macromedia Flash® - The solution for producing high impact, vector based Web sites.
	•		Macromedia FreeHand® - The most powerful design tool for print and Internet graphics.
	•		Macromedia Director® - The standard for creating and delivering powerful multimedia.
	•		Macromedia Authorware® 5.1 - The solution for producing rich-media training and learning applications.
	•		Macromedia CourseBuilder for Dreamweaver® - An extension application which enables professional Web developers and subject matter experts to quickly and cost-effectively author engaging training content in a visual environment, without requiring programming knowledge.
	•		Macromedia Generator™ and Macromedia Generator EE™ - The solution for automated and personalized Web site graphics.
	•		Macromedia ARIA® - The solution enabling e-marketers to analyze users’ online behavior and gain a clearer understanding of their most valuable customers. ARIA automatically captures registration form data for demographic and geographic reports.
	•		Macromedia LikeMinds™ - The solution for real-time personalization of Web sites. LikeMinds automatically updates as new customers visit, existing customers’ tastes evolve, new products are introduced, and existing products are discontinued, without requiring constant updates from the

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Web staff. With each interaction, LikeMinds learns more about customers and products, continually becoming more accurate with its recommendations.

      Our unique Web Content Lifecycle approach to the creation of Web sites and applications is essential now that eBusiness is a critical component of any successful enterprise. Integrating Web content authoring with real-time analysis and personalization is critical to maintaining a competitive market edge and accurately measuring return on investment.

      Product Development

      Our business strategy emphasizes developing products and services that help customers take advantage of opportunities on the Internet. We aim to solve the problems customers face as they create and deliver content on a new medium with multiple standards, multiple browsers, and different bandwidth rates.

      As the software industry is characterized by rapid technological change, a continuous high level of expenditure is required to enhance existing products and develop new products. We plan to continue internal product development efforts and, as appropriate, acquire additional software and system technologies that we consider critical to meeting the needs of Internet developers, consumers, and the enterprise.

      We believe that our future success depends on our ability to enhance existing products, and develop and introduce new products on a timely basis. It is critical that new products and enhancements keep pace with the constantly evolving network infrastructure, Internet technology, and competitive offerings. We continue to adapt our products to new hardware and software platforms and to embrace emerging industry standards.

      For fiscal year 1998, 1999, and 2000, research and development expenses were $36.8 million, $41.6 million, and $53.5 million, respectively.

      Acquisitions

      In December 1999, we acquired Andromedia, Inc. (“Andromedia”) by exchanging all of the outstanding capital stock, options, and warrants of Andromedia for approximately 5.2 million shares of common stock, options, and warrants of Macromedia. The transaction was valued at approximately $210.0 million based on our stock price over a period of time at the initiation of the agreement. The transaction was accounted for as a pooling-of-interests, and all historical financial information presented has been restated to include the accounts and results of operations of Andromedia. The ARIA and LikeMinds product lines from Andromedia are now a critical part of our eBusiness infrastructure, and integrated with our products, allow developers to create content that has built-in tracking, profiling, modeling, analysis, personalization, and reporting capabilities.

      In September 1999, we acquired ESI Software, Inc., (“ESI”) by exchanging all of the outstanding capital stock, options, and warrants of ESI for approximately 635,000 shares of common stock, options, and warrants of Macromedia. The transaction was valued at approximately $24.1 million and was accounted for as a pooling-of-interests.

      Competition

      Our Software business competes in a highly competitive market characterized by pressure to incorporate new features and accelerate the release of new product versions and enhanced services. These market factors represent both opportunities and competitive threats to us. Some of our competitors do not offer as wide a breadth of solutions as we do. A number of our competitors, including Adobe Systems Inc., Corel Corporation, Accrue Software, Inc. and Net Perceptions, Inc., currently offer products and services that compete directly or indirectly with one or more of our software products. In addition, several of our current and potential competitors have greater financial, marketing and technical resources than we do. As we compete with larger competitors such as Adobe across a broader range of product lines and different platforms, we may face increasing competition from such companies.

      We believe that the principal competitive factors in the markets in which our Software business presently competes and may compete in the future are:

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	•		functionality;
	•		ability to provide efficient solutions;
	•		ability to timely introduce new product versions;
	•		ability to evolve with changing technology and customer requirements;
	•		performance of products;
	•		ability to provide enhanced solutions and support;
	•		ability to provide added value features;
	•		price; and
	•		market presence.

      Operations and Manufacturing

      We are dependent on a sole source, Modus Media, to manufacture and ship our finished products. The manufacturing of our products typically consists of pressing CD-ROMs, printing manuals, and packaging and assembling finished products, all according to our specifications and forecasts. Manufacturing is currently done at three Modus facilities worldwide: in Preston, Washington for the Americas, in Apeldorn, Netherlands for Europe, and in Singapore for the Asia Pacific market. We perform quality assurance testing at Modus facilities. Modus operates multiple facilities around the world that are capable of serving our needs, and we believe alternative sources could be implemented without significant interruption to our business. To date, we have not experienced any significant difficulties or delays in the manufacturing or assembly of our products or any significant returns due to product defects.

      In addition, we license and distribute our software products directly to end-users over the Internet through our Web site. We continue to invest in technologies and infrastructure to support electronic software distribution and online documentation, which are becoming an increasingly important and cost-effective way to deliver our products.

      Marketing and Distribution

      We extend our brand worldwide through creative marketing communications, our Web sites, www.macromedia.com and www.shockwave.com, public relations activities, customer seminars, advertising both on the Web and in print, and national and regional trade shows. We also use direct mail, both e-mail and print, to introduce new products and upgrades, to cross-sell products to current customers, and to educate and inform. In addition, we distribute a variety of interactive multimedia demonstration materials directly to prospective customers and follow up through outbound telemarketing during business hours.

      A substantial portion of our revenue is derived from the sale of our products worldwide through a variety of distribution channels, including traditional software distributors, electronic commerce on the Web, direct sales, mail order, educational distributors, value-added resellers (“VAR”s), original equipment manufacturers (“OEM”s), hardware and software superstores, and retail dealers. We also sell directly to large corporate and educational institutions, with volume licensing programs under which the customer receives a volume discount and has the right to reproduce and use our software.

      Internationally, our products are sold both directly to end users and through distributors. With distributors in more than 50 countries around the world, international sales accounted for 42% of total revenues during fiscal year 2000. In certain cases, distributors have exclusive distribution rights to certain products in their respective countries. In spite of economic difficulties in some regions, we believe that international markets for our products present a strategic opportunity, and expect international sales to continue to generate a significant percentage of our total revenues. (For financial information regarding our business segments, please refer to Note 19 to our Notes to Consolidated Financial Statements on page F-35).

      Customer Support

      We provide complimentary technical support to customers by phone and fax for a period of 90 days after the first technical support contact by a customer. After the 90-day period, we offer a paid technical support plan, Priority

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Access™, that provides the customer with access to a toll-free support line; priority in the call queue; priority response to e-mail, mail, and fax inquiries; and 24-hour voicemail messaging. We also offer high-end developer support.

      Millions of customers depend on our worldwide network of value-added resellers, training centers, and developers. In addition, our User Groups located in dozens of cities throughout the world, provide customers with ways to share information, network with developers, and keep in touch with us. We provide support through marketing collateral, guest speakers, product giveaways, and more.

      Our beta program enlists customers to conduct real-world tests on pre-release software, as well as provide feedback on features and software stability. The most informative beta sites receive free software.

      Macromedia’s Authorized Training Program is a worldwide network of professional trainers and educators who provide Macromedia customers with the highest-quality training on our products.

      Proprietary Rights and Licenses

      We rely on a combination of patents, copyrights, trade secrets, and trademark laws, as well as employee and third-party nondisclosure agreements, to protect our intellectual property rights and products. We distribute software under signed license agreements and a shrink-wrapped license agreement that customers accept when they open physical or electronic copies of our products. Policing unauthorized use of products is difficult, and while we cannot determine the extent to which software piracy of our products exists, it can be expected to be a persistent problem. We have established dedicated resources to focus on piracy and belong to key industry groups to further these efforts. In addition, the laws of certain countries in which products are or may be distributed do not protect our products and intellectual rights to the same extent as the laws of the United States.

      Venture Investments

      Macromedia Ventures focuses on finding, funding, and helping to develop companies that we believe will define the next generation of Internet and are complementary to our core product strategy. Macromedia Ventures targets companies growing Web software infrastructure and the rich-media, broadband, multi-device Internet. Macromedia Ventures will invest primarily in early stage companies that require not only capital, but also the unique technical and market development capabilities that we can provide.

SHOCKWAVE.COM BUSINESS

      shockwave.com is pioneering the next wave of consumer entertainment on the Internet. We are leveraging leading content brands and innovative content development and distribution models to create some of the best entertainment experiences on the Web. We offer these experiences through a variety of forms, including brand name and original cartoons; a variety of engaging and highly entertaining new and classic games; animated greeting cards which feature well known properties; and innovative music content, including an MP3 music directory. The content included in our offerings presently consists of a mix of licensed products, including such popular franchises as Comedy Central’s South Park and United Media’s Peanuts and Dilbert; popular games such as Frogger and Centipede; and newly created games, applications and properties.

      shockwave.com consists of a cutting-edge entertainment center, www.shockwave.com, and the Shockmachine, a versatile digital “media jukebox” that consumers can use to play, save, organize and access a wide range of content. As of March 31, 2000, we had registered over 15.3 million members and are growing rapidly with as many as 70,000 new members registering each day.

      In connection with the incorporation of shockwave.com, shockwave.com issued its Series A Preferred Stock to Macromedia. On January 14, 2000, shockwave.com issued and sold to various investors in a private placement, its Series B Preferred Stock which, together with the Series A Preferred Stock issued to Macromedia, represented all of the shares of its capital stock then issued and outstanding.

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      The shockwave.com Opportunity

      We provide compelling content and personalized experiences to consumers and opportunities to advertisers, merchandisers and content creators.

      Furthermore, shockwave.com enables content providers to create and distribute online entertainment brands and experiences over the Internet. Because of our significant audience reach and technological advantages, shockwave.com is an innovative way for content owners to introduce new properties, enhance exposure to existing properties and rejuvenate classic brands. We allow content creators to launch new properties, get instant feedback and make revisions so that these properties can grow and develop. We also allow creators the opportunity to participate in e-commerce and advertising opportunities. We believe that this cost-effective and practical approach to content distribution is unique in the industry.

      Strategy for shockwave.com

      Our objective is to be a leading interactive entertainment center for consumers worldwide. We plan to attract the highest quality entertainment properties by enabling content creators and owners to reach a large, loyal audience and to have access to our tracking and e-commerce infrastructure.

      In fiscal year 2000, there were 15.3 million members registered. This volume of traffic and the size of registered user base of shockwave.com, combined with rich media capabilities, provide advertisers and merchandisers with a highly desirable platform for promotion. Unlike most Web sites that must create partnerships or spend millions of dollars to drive traffic to their sites, we have a built-in mechanism to drive millions of potential users to our site. That mechanism is the registration process required as part of the download process of obtaining the Shockwave Player. When users download, activate or upgrade the Shockwave Player, they are directed to the shockwave.com site. Further, due to the interactive nature of the site, we expect to create a one-to-one relationship with millions of users, which will provide a greater value proposition for advertisers and merchandisers. Finally, since all of our users have Shockwave and Flash, they are able to experience rich media messages, rich media banners, sponsored content and integrated branding. Therefore, we believe that we can accomplish compelling advertising beyond simple banner ads more effectively than elsewhere on the Web.

      We also plan to promote membership growth by leveraging built-in traffic mechanisms and increasing traffic with marketing, distribution partnerships and international expansion. We expect to increase membership usage by offering and adding new, high-quality and engaging content to the site. In addition, we intend to build a community of users who will return to the site on a regular basis and who will advance our brand name through grass roots promotion. We expect to accomplish this by providing community features, including an editorialized directory of thousands of Shockwave content titles located throughout the Web, a featured “shocked” site of the day that highlights high quality content on the Web and e-mail capabilities that allow users to send content URLs with one click.

      Furthermore, we intend to capitalize on our large and rapidly growing user base by offering high-value advertising and to generate additional revenue through a mix of e-commerce activities, including premium content, an upgraded version of the Shockmachine and related products and merchandise. In addition, we enhance traditional banner advertising through rich media content, product tie-ins, co-branded games and applications and other forms of unique sponsorships. We believe shockwave.com offers far more effective rich media banner, sponsored content and integrated branding opportunities for advertisers and merchandisers, due to the fact that all visitors are rich media enabled with Shockwave and Flash technology. We also expect to take advantage of the digital entertainment medium to produce additional e-commerce revenue streams. For example, fans of the properties and characters featured on shockwave.com will be able to purchase a range of related merchandise, videos, books and other branded products.

      Competition

      We compete with a number of companies engaged in entertainment businesses of various kinds:

•

Major media and entertainment companies: Two major entertainment companies, Disney and AOL/Time Warner, currently operate entertainment sites, which exploit their library of characters. In

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			addition, as the Internet and other interactive systems, such as cable and satellite systems, converge with traditional television broadcasting and traditional cable networks, significant competition may come from other traditional media companies.
	•		Casual gaming communities: A wide variety of casual gaming businesses target a similar demographic to our own, such as HearMe.com, Pogo and Uproar.
	•		Internet search engines and portals: The major online aggregators of content and communities, including AOL, Excite@Home, Lycos and Yahoo! and Microsoft, are attempting to develop compelling overall interactive entertainment offerings which will compete for audience.
	•		New entertainment dotcom startups: Companies such as z.com, pop.com, Egreetings.com and many others are creating original entertainment specifically for the Internet. These companies’ products will compete with us for audience and advertising dollars.

      We also compete for visitors, advertisers and advertising revenues with thousands of other content providers as well as traditional forms of media and entertainment such as television, radio and magazines. We compete for gaming software revenues with PC-based and non-PC based entertainment software companies, including Electronic Arts, Midway Games, Nintendo, Sega and Sony.

      Content

      We offer a complete range of entertainment and interactive experiences through our site by developing the content and applications internally, licensing third party brands and programs and developing strategic relationships to create co-branded sections of the site. Currently, our site features well known cartoons and animated comic books featuring such well-known properties as South Park, Peanuts, Dilbert and Spiderman, as well as a range of new properties, several of which have developed loyal audiences. We also have contracted with several well-known artists such as David Lynch, Tim Burton, James Brooks, Stan Lee, Matt Stone and Trey Parker to create new, original programming exclusive to shockwave.com. The site’s game offerings include a wide range of arcade, action, adventure, card, puzzle and sports games, including online versions of well-known classics such as Frogger, Centipede and Missile Command and original games based on the cartoon properties licensed by us and a host of newly developed games. We plan to maintain a steady flow of new properties to encourage repeat visits by our users. In addition, we have launched animated greeting cards as our first interactive creative application. Animated greeting cards feature the characters from many of the properties licensed for either cartoons or games.

      Strategic Alliances

      We have entered into strategic alliances with leading media and technology companies to increase membership and usage, build brand recognition, accelerate product development and acquire content. For example, we have entered into numerous content license arrangements with content providers such as Comedy Central, Fox Interactive, Hasbro Interactive and Marvel Enterprises, whereby we are typically granted an exclusive period followed by a non-exclusive period to deliver the content in return for up-front development or licensing fees and ongoing revenue sharing arrangements. We have also entered into a number of distribution agreements with content distributors such as Excite@Home, Looksmart and Intel, whereby we manage, host and serve a co-branded area in cooperation with the distributor and, in return, establish prominent links throughout the distributor’s site to the co-branded area.

      Back-End Infrastructure

      We have made a significant investment in creating a scalable, robust back-end infrastructure to enable it to serve millions of users, to track personal preferences, to store individual usage behavior and to conduct e-commerce activities. When a consumer downloads Shockwave, a registration mechanism will ensure that their name, e-mail and some preferences are captured. Every user automatically becomes a member of our site and will be greeted by name when they visit the front page. A “welcome” e-mail provides additional information about our services and the technology they have downloaded.

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      Sales and Marketing

      We intend to be a leading destination site on the Web, with substantial reach into the consumer market. With this traffic potential come opportunities to monetize that traffic through advertising, sponsorships, integrated branding and transactional partnership. Our revenues have been generated to date primarily from the sale of advertisements. Our advertising products currently consist of banner advertisements and higher profile promotional sponsorships that appear on pages within our Web site. Hypertext links are embedded in each advertisement to provide the user with instant access to the advertiser’s Web site, to obtain additional information, or to purchase products and services. We have deployed a direct sales force dedicated to partner with consumer advertisers and agencies to deliver on the potential of Web advertising and to offer advertisers a wide range of targeted placement options. We believe that we offer components important to advertisers looking to reach the mass consumer audience: critical mass, a loyal user base, rich media opportunities, creative sponsorships, integrated branding capabilities and offline awareness. In addition, we expect to leverage our growing and loyal user base to generate additional revenues through e-commerce activities directly on our Web site, including offering of premium content, an upgraded version of Shockmachine and related products and merchandise and long-term participation in multiple revenue sources from the content and characters.

Risk Factors

	See Risk Factors that May Affect Future Results of Operations in Management’s Discussion and Analysis of Financial Condition and Results of Operations on Page F-6.

Year 2000 Compliance

	See Year 2000 Compliance in Management’s Discussion and Analysis of Financial Condition and Results of Operations on Page F-10.

Employees

      As of March 31, 2000, we had 1,003 full-time employees and 229 contractors worldwide, with the majority working in California, followed by Texas, the United Kingdom, Japan, and Australia, among other international offices. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good.

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ITEM 2. PROPERTIES

      A significant portion of our United States operations is located in various buildings in San Francisco, California. We lease approximately 248,500 square feet of space in San Francisco, 25,000 of which is not currently occupied by us and is sub-leased. Our leases expire between July 2004 and May 2010, and we have options to renew for successive five-year terms at 95 percent of the then current fair market value of the space. We also own a four-story 100,000 square foot facility, located on land purchased in Redwood City, California. We occupy 50,000 square feet of this space and lease the remaining 50,000 square feet, with the intention to occupy additional space over time. We also lease 25,000 square feet at a facility in Richardson, Texas. In addition, we lease space in North America for field sales offices, in Berkshire, England, for our European operations, Victoria, Australia, for our Asia Pacific operations and in Tokyo, Japan, for our Japanese operations. We believe our facilities are adequate for current and near-term needs and that additional space is available to provide for anticipated growth during the life of the leases.

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ITEM 3. LEGAL PROCEEDINGS

      On July 31, 1997, a complaint entitled Rosen et al. v. Macromedia, Inc. et al., (Case No. 988526) was filed in the Superior Court for San Francisco, California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of California Corporations Code Sections 25400 and 25500 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding our financial results and prospects. Four similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in San Francisco Superior Court, and consolidated for pre-trial purposes

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with Rosen. Defendants filed demurrers to the complaint and other motions, which were argued on December 9, 1997 and January 5, 1998. Before the demurrers could be heard, one defendant, Richard Wood, died in an automobile accident. In March 1998, the Courts sustained in part and overruled in part the demurrers. Claims against Susan Bird were dismissed and the Court overruled the demurrers as to Macromedia, John Colligan, James Von Her, II, and Kevin Crowder. In May 1999, the Court granted plaintiffs’ motion for certification of a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. Trial has been set for March 12, 2001. On April 20, 2000, the parties proposed that the Court continue the trial date to September 10, 2001.

      On September 25, 1997, a complaint entitled City Nominees v. Macromedia, Inc et al., (Case No. C-97-3521-SC) was filed in the United States District Court for the Northern District of California. The complaint alleges that Macromedia and five of its former or current officers and directors engaged in securities fraud in violation of Sections 10 and 20(a) of the Securities and Exchange Act of 1934 by seeking to inflate the value of Macromedia stock by issuing statements that were allegedly false or misleading (or omitted material facts necessary to make any statements made not false or misleading) regarding our financial results and prospects. Plaintiffs seek to represent a class of all persons who purchased Macromedia common stock from April 18, 1996 through January 9, 1997. Three similar complaints by persons seeking to represent the same class of purchasers subsequently have been filed in United States District Court for the Northern District of California. All of these cases have been consolidated. Lead plaintiffs and lead counsel have been appointed under the provisions of the Private Securities Law Reform Act by the District Court. A consolidated complaint was filed in February 1998. Defendants moved to dismiss that complaint on the grounds that plaintiffs’ claims were barred by the applicable statute of limitations. In May 1998, the United States District Court for the Northern District of California granted defendants’ motion to dismiss with prejudice, and entered judgment in favor of defendants. Plaintiffs have appealed to the United States Court of Appeals for the Ninth Circuit, which reversed on April 21, 2000 and remanded the action to the District Court for further proceedings.

      All complaints seek damages in unspecified amounts, as well as other forms of relief. We believe the complaints are without merit and intend to vigorously defend the actions.

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

      No matters were submitted during the fourth quarter of fiscal year 2000 to a vote of security holders through solicitation of proxies or otherwise.

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PART II

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ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

      The information required is set forth under “Quarterly Results and Stock Market Data” tabulations, on page F-38 of this report.

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ITEM 6. SELECTED FINANCIAL DATA

      The information required is set forth under “Selected Consolidated Financial Data”, on page F-2 of this report.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

      The information required is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, on page F-3 of this report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      The information required is set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, on page F-3 of this report.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The information required by this item are set forth under “Independent Auditors’ Report,” Consolidated Balance Sheets,” “Consolidated Statements of Operations,” “Consolidated Statements of Stockholders’ Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements,” on pages F-12 to F-38 of this report.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

      Not applicable.

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PART III

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ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

      The information concerning our directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Proposal No. 1 — Election of Directors.”

      The information concerning our executive officers required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Executive Officers.”

      The information concerning compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to section in our Proxy Statement entitled “Section 16(a) Beneficial Ownership Reporting Compliance.”

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ITEM 11. EXECUTIVE COMPENSATION

      The information concerning executive compensation required by this Item is incorporated by reference to the sections in our Proxy Statement entitled “Executive Compensation”, “Compensation of Directors”, “Employment Agreements”, and “Compensation Committee Interlocks and Insider Participation.”

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information concerning executive compensation required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information concerning certain relationships and related transactions required by the Item is incorporated by reference to Sections in our Proxy Statement entitled “Employment Agreement” and “Certain Transactions.”

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PART IV

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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(A)

The following documents are filed as part of this Report:

1.

Financial Statements. The following Consolidated Financial Statements of Macromedia, Inc. and Subsidiaries are incorporated by reference from Part II, Item 8 of this Form 10-K:

	Independent Auditors’ Report
	Consolidated Balance Sheets — March 31, 2000 and 1999
	Consolidated Statements of Operations —Years Ended March 31, 2000, 1999, and 1998
	Consolidated Statements of Cash Flows —Years Ended March 31, 2000, 1999, and 1998
	Consolidated Statements of Stockholders’ Equity —Years Ended March 31, 2000, 1999 and 1998
	Notes to Consolidated Financial Statements

2.

Financial Statement Schedule. The following financial statement schedule of Macromedia, Inc. and Subsidiaries for the fiscal years ended March 31, 2000, 1999 and 1998 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Macromedia, Inc. and Subsidiaries.

      Schedule II: Valuation and Qualifying Accounts

      Schedules not listed above have been omitted because they are not applicable or are not required or the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto.

3.

Exhibits

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(B)

Reports on Form 8-K:

1.

An amended Current Report on Form 8-K/A, dated December 1, 1999 was filed by the Company on February 14, 2000. In this amended report, the Company filed the information pursuant to Item 7 of Form 8-K. Under Item 7, the Company filed the 1998 financial statements of Andromedia, Inc., an acquired business, and the pro forma financial information resulting from the acquisition.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: June 21, 2000

POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert K. Burgess and Elizabeth A. Nelson, jointly and severally, his attorneys-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitutes, may do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and dates indicated.

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MACROMEDIA, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
March 31, 2000

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MACROMEDIA, INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA
(in thousands, except earnings per share data)

      All income per share amounts reflect a two-for-one stock split which became effective October 16, 1995 and have been restated to reflect the adoption of SFAS 128 in December 1997.

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MACROMEDIA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

      We have two primary business segments in which we operate today, the Software business and shockwave.com. Our Software business develops software that creates Web site layout, graphics and rich media content for Internet users and develops solutions for analyzing Web traffic and personalizing Web sites. Our consumer business, shockwave.com, Inc. (“shockwave.com”) designs, develops and markets aggregated content to provide online entertainment on the Web. We sell our software through a network of distributors, value-added resellers (“VARs”) and our own sales force and Web site, and to original equipment manufacturers (“OEMs”) in North America, Europe, Asia Pacific and Latin America. We derive additional revenues from advertising on our Web site, and from software maintenance and technology licensing agreements. shockwave.com derives revenues from advertising and sponsorships on its Web site.

      During fiscal year 2000, revenue for both our Software business and shockwave.com grew substantially, resulting in increased profitability on a consolidated basis. During the year, we completed two strategic acquisitions, Andromedia, Inc. and ESI Software, Inc., both accounted for as poolings-of-interests. These acquisitions have enabled us to provide integrated eBusiness applications and additional solutions for developing dynamic Web sites. Additionally, during fiscal year 2000, shockwave.com received equity financing from outside resources to further expand the business. As of March 31, 2000, total cash, cash equivalents and short-term investments totaled $187.0 million and we remained debt free.

      Additional information about Macromedia, our products, sales and marketing, and investor information can be found on the Web at www.macromedia.com. Financial information included on our Web site shall not be deemed to be a part of this filing.

Results of Operations

      The following table sets forth certain financial data as a percentage of revenues for the years ended March 31, 2000, 1999 and 1998.

      Revenues — Revenues were $264.2 million in fiscal year 2000, an increase of 72% over fiscal year 1999 revenues of $153.2 million.

      Revenues from the Software business grew by 67% in fiscal year 2000 to $255.9 million, compared to $153.2 million in fiscal year 1999, primarily due to increased sales of Dreamweaver, Fireworks and Flash. This was

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partially offset by a decline in sales of Freehand and Authorware, due to differences in product cycle timing year over year.

      Revenues in fiscal year 1999 were $153.2 million, up 35% from revenues of $113.8 million in fiscal year 1998, also due to new releases of our software products.

      International revenues represented 42% of software revenues in fiscal years 2000 and 1999 compared to 48% of revenues in fiscal year 1998. Sales from our Asia Pacific, European and Latin American regions showed consistent revenue growth in fiscal year 2000, as compared to fiscal year 1999. See “Risk Factors That May Affect Future Results of Operations” —“Risks of International Operations” for additional information.

      The shockwave.com segment contributed $8.2 million to our revenues in fiscal year 2000. The revenues consisted primarily of advertising and sponsorship revenues in North America. (See Note 19 to the Notes to Consolidated Financial Statements).

      Cost of revenues — Cost of revenues for the Software business includes cost of materials and manufacturing, salaries and other costs incurred during consulting and training projects, royalties paid to third parties for licensing of developed technology, costs related to language translation of our software products, costs associated with order fulfillment, and costs incurred in providing technical support to customers. Cost of revenues for shockwave.com include revenue sharing paid to content developers and commission expense for the sale of Web advertising space. Cost of revenues increased from $15.6 million in fiscal year 1999 to $28.8 million in fiscal year 2000, and gross margin decreased slightly from 90% in the prior year to 89% for the year ended March 31, 2000. The increase of costs in absolute dollars is primarily due to increased consulting and training expenses associated with sales of our new eBusiness products, ARIA and LikeMinds. Consulting and training expenses will continue to increase as revenues for the ARIA and LikeMinds products grow. Gross margins may be adversely affected from time to time by our mix of distribution channels, mix of products sold, and mix of international versus domestic revenues. In the future, shockwave.com will continue to incur fees for the development of entertainment content.

      Cost of revenues increased slightly in absolute dollars from fiscal year 1998 to 1999, however gross margins improved from 87% to 90%. This improvement in gross margins was attributable to effective cost-control programs and inventory review procedures resulting in lower product cost and less inventory scrap.

      Sales and marketing — Sales and marketing expenses for the Software business consist primarily of compensation and benefits, infrastructure costs, advertising, tradeshow and seminar expenses, mail order advertising costs, and other marketing costs. Sales and marketing expenses for shockwave.com consist primarily of compensation and benefits and marketing consultation expenses. Sales and marketing expenses decreased as a percentage of revenue from 48% in fiscal year 1999 to 43% in fiscal year 2000, but increased $39.9 from fiscal year 1999 to fiscal year 2000. The increase in sales and marketing expenses in absolute dollars is primarily due to increased compensation, benefit, and infrastructure expenses as our sales and marketing employee headcount continues to grow to support our increasing revenues. Additionally, we offered a greater number of customer seminars in fiscal year 2000 as compared to 1999, contributing to the increase in expenses year over year. As a percent of revenue, sales and marketing expenses decreased from 53% in fiscal year 1998 to 48% in fiscal year 1999, but increased $12.8 million year over year due to increased advertising and promotional costs and costs associated with the increasing number of employees. We expect sales and marketing expenses to increase in absolute dollars in fiscal year 2001 as we continue to invest in various sales and marketing programs to support increased revenue growth in both the Software business and shockwave.com.

      Research and development — Research and development expenses for the Software business consist primarily of compensation and benefits, and infrastructure and overhead costs to support our continued investment in product development. shockwave.com research and development costs are comprised primarily of compensation and benefits and fees paid to developers of entertainment content for the Web site. As a percent of revenues, research and development costs decreased year over year from 27% to 25%. In absolute dollars, research and development expenses increased $24.2 million to $65.7 million from fiscal year 1999 to fiscal year 2000. Our continued investment in additional headcount and supporting infrastructure for both the Software business and shockwave.com has contributed to the increase in absolute dollars. Research and development expenses increased $4.7 million from

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fiscal year 1998 to fiscal year 1999, primarily due to increased compensation and benefit expenses. We expect research and development expenses to increase in absolute dollars as we continue to invest in product and content development.

      General and administrative — General and administrative expenses for both the Software business and shockwave.com consist mainly of compensation and benefits, overhead and infrastructure costs, and fees for professional services. General and administrative expenses increased from $13.2 million in fiscal year 1998, to $16.7 million in fiscal year 1999, and to $24.6 million in fiscal year 2000. As a percentage of revenues, general and administrative costs have decreased from 12% in fiscal year 1998 to 11% in fiscal year 1999 to 9% in fiscal year 2000. The increase in absolute dollars is primarily due to increased headcount and infrastructure costs to support the growth of the business. We expect general and administrative expenses to increase in absolute dollars in fiscal 2001.

      Acquisition related expenses — We incurred acquisition related expenses of $11.5 million during the year ended March 31, 2000 for the acquisitions of ESI Software, Inc., Andromedia, Inc. and Time4.com. These acquisition expenses include investment banker fees, legal and other professional fees, severance and personnel relocation costs. Acquisition costs also include expenses related to a technology purchase from Starbase Corporation. Acquisition expenses for the year ended March 31, 1999 related to Andromedia’s acquisition of LikeMinds. (See Note 4 to the Notes to Consolidated Financial Statements). In fiscal year 1998, we incurred one-time merger costs associated with the acquisition of Solis Design, Inc.

      Non-cash compensation — Non-cash compensation increased $10.8 million from fiscal year 1999 to $11.1 million, and increased approximately $200,000 from 1998 to $287,000. The increase from fiscal year 1999 to 2000 is primarily related to compensation expenses incurred with the issuance of shockwave.com warrants and options. We issued warrants in connection with content development agreements entered into with non-employees. We also issued shockwave.com options to employees that had, for accounting purposes, an exercise price less than the fair value of the underlying common stock at the date of grant. We will continue to incur expenses associated with amortization of deferred compensation from the issuance of options. (See Note 14 to the Notes to Consolidated Financial Statements).

      Amortization of intangibles — Amortization of intangibles increased approximately $800,000 from fiscal year 1999 to 2000, and primarily consists of amortization of goodwill and other intangibles arising from purchase transactions. (See Note 2 to the Notes to Consolidated Financial Statements).

      Other income — Other income consists primarily of earnings on our cash and short-term investments and foreign exchange gains and losses, net of fees. Other income was $6.2 million in fiscal year 2000, up from $5.0 million in fiscal year 1999 and $4.6 million in fiscal year 1998, resulting from greater investment and interest income.

      Provision for income taxes — We recorded a tax provision of $12.0 million in fiscal year 2000, compared to a tax provision of $7.6 million in fiscal year 1999 and $828,000 in fiscal year 1998. The overall effective tax rate for the provision as of March 31, 2000 was 58%, which includes the effect of the pre-merger net losses of Andromedia, Inc. and ESI Software, Inc. and the minority interest portion of the net loss of shockwave.com. The effective tax rate on normalized operations, which excludes these items, was 26% for the year ended March 31, 2000. The effective tax rate on normalized operations for the provision as of March 31, 1999 and 1998 was 28% and 36%, respectively. The decrease in the effective tax rate reflects the utilization of research and experimentation tax credits and foreign operating results that were taxed at rates lower than the U.S. statutory rate. (See Note 10 to the Notes to Consolidated Financial Statements).

F-5

Liquidity and Capital Resources

	The following table summarizes our cash flow activities for the periods indicated (in thousands):

      Operating activities for fiscal year 2000 provided $35.9 million, a 154% increase from 1999, primarily due to the increase in net income, partially offset by a minority interest gain in shockwave.com from its venture investors, and increased accounts receivable and other assets. For the year ended March 31, 2000, cash used in investing activities was $36.4 million, representing an increase of 83% compared to the same period in fiscal year 1999. Cash was primarily used to purchase and develop equipment and software for infrastructure growth and to invest in various companies that produce content for shockwave.com such as Mondo Media Productions, Inc. and Stan Lee Media, Inc. and other investments. Financing activities for fiscal year 2000 provided $90.0 million, an increase of 342% from fiscal year 1999, primarily from proceeds received from venture investors for shockwave.com’s Preferred Series B stock offering, the exercise of common stock options, offset by the acquisition of treasury stock.

      In fiscal year 2000, we made investments in property and equipment totaling $33.9 million. This amount includes $25.5 million for equipment and software for additional computer infrastructure, including $9.7 million for a new internal use Web infrastructure for sales and marketing, customer support, on-line product distribution, and technical support. The additional capitalized costs for this new Web infrastructure consist primarily of consulting fees for software development and related hardware. In fiscal 2001, we anticipate spending approximately $60.0 million on capital expenditures, primarily relating to information technology infrastructure, equipment and leasehold improvements.

      As of March 31, 2000, cash, cash equivalents, and short-term investments were $187.0 million and working capital was $182.2 million. As of March 31, 2000, cash, cash equivalents, and short-term investments increased by $75.9 million and working capital increased by $76.8 million as compared to March 31, 1999.

      The treasury stock program approved by the Board of Directors in July 1997 and October 1998 provided for purchases of up to 4.0 million shares of our common stock. During fiscal year 2000, we repurchased 198,000 common shares, for $8.2 million, compared to 1.1 million common shares for $20.3 million in 1999. In connection with the acquisition of ESI Software, Inc., the Board of Directors rescinded the repurchase program.

      In fiscal year 2000, our subsidiary, shockwave.com, issued Series B Preferred Stock in exchange for approximately $43.3 million, net of issuance costs. We received the funding from various venture investors and issued 18.2 million preferred shares.

      We continue to evaluate current and forecasted cash flow as a basis for financing operating requirements and capital expenditures. We believe that we will have sufficient liquidity from cash flow from operations, access to capital markets and working capital to finance anticipated capital expenditures and to fund working capital requirements for the next twelve months.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

      Except for the historical information contained in this Annual Report, the matters discussed herein are forward-looking statements that involve risks and uncertainties, including those detailed below, and from time to time in our other reports filed with the Securities and Exchange Commission. The actual results that we achieve may differ materially from any forward-looking statements due to such risks and uncertainties.

F-6

      Intense Competition — The markets for our products are highly competitive and characterized by pressure to reduce prices, incorporate new features, and accelerate the release of new product versions and enhanced services. A number of companies currently offer products and services that compete directly or indirectly with one or more of our products. With respect to our Software business, competitors include Adobe Systems Inc., Corel Corporation, Accrue Software, Inc. and Net Perceptions, Inc. As we compete with larger competitors such as Adobe across a broader range of product lines and different platforms, we may face increasing competition from such companies. In addition, our shockwave.com subsidiary competes with a number of other Internet community, gaming and entertainment sites, including Disney, Gamesville, AOL/Time Warner, and Yahoo!. Many of these businesses are much larger than our consumer business, and they have more resources devoted to these business efforts. It is anticipated that our consumer business will face competition from these other Web sites both for consumers and for advertising and other future revenue sources on which the future success of the consumer business is dependent.

      Rapidly Changing Technology — The developing digital media, Internet and online services markets, and the personal computer industry are characterized by rapidly changing technology, resulting in short product life cycles and rapid price declines. We must continuously update our existing products, services and content to keep them current with changing technology and consumer tastes and must develop new products, services and content to take advantage of new technologies and consumer preferences that could render our existing products obsolete. Our future prospects are highly dependent on our ability to increase functionality of existing products and services in a timely manner and to develop new products and services that address new technologies and achieve market acceptance. New products and enhancements must keep pace with competitive offerings, adapt to new platforms and emerging industry standards, and provide additional functionality. There can be no assurance that we will be successful in these efforts.

      Fluctuations of Operating Results; Product Introduction Delays — Our quarterly operating results may vary significantly depending on the timing of new product introductions and enhancements. A substantial portion of our revenue is derived from our products. We have in the past experienced delays in the development of new products and enhancement of existing products, and such delays may occur in the future. In addition, we have only recently entered the eBusiness software products market through our acquisition of Andromedia in December 1999 and have not released new versions or enhancements of these products to date. If we were unable, due to resource constraints or technological or other reasons, to develop and introduce products in a timely manner, this inability could have a material adverse effect on our results of operations. If we do not ship new versions of our products as planned, sales of existing versions decline, or new products do not receive market acceptance, our results of operations in a given quarter could be materially adversely affected as they were during the fourth quarter of fiscal year 1997 when we delayed shipment of a new version of Director to the following quarter. Furthermore, our success depends upon our ability to attract and retain a larger number of consumers on our shockwave.com Web site by delivering original and compelling content and services. If we are unable to do so, advertising revenue will decline and the economic value of the properties may be affected.

      Our quarterly results of operations also may vary significantly depending on the impact of any of the following: the timing of product and service introductions by competitors, changes in pricing, execution and volume of technology licensing agreements, the volume and timing of orders received during the quarter for software products, which are difficult to forecast, expenses related to the expansion of shockwave.com, and finally, any acquisitions of other companies or technologies. Our future operating results may fluctuate as a result of these and other factors, including our ability to continue to develop or acquire innovative products and services, its product, service, and customer mix, and the level of competition. Our results of operations may also be affected by seasonal trends. A significant portion of our operating expenses is relatively fixed, and planned expenditures are based primarily on sales forecasts. As a result, if revenues do not meet our forecasts, operating results may be materially adversely affected. There can be no assurance that sales of our existing products will either continue at historical rates or increase, or that new products introduced by us, whether developed internally or acquired, will achieve market acceptance. Our historical rates of growth should not be taken as indicative of growth rates that can be expected in the future.

      Unproven Business Model — Our shockwave.com business model depends upon its ability to leverage its existing and future Web traffic and consumer audience to grow revenues and in the future, generate multiple revenue streams. The potential profitability of this business model is unproven, and to be successful, we must, among other things, develop and market content that achieves broad market acceptance by our user community,

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Internet advertisers and commerce vendors. There can be no assurance that the consumer business will be able to effectively implement this business model, and even if the implementation is successful, there can be no assurance that the business model will prove to be able to sustain revenue growth or generate significant profits, if any. Furthermore, for the foreseeable future, we anticipate that the shockwave.com business will require significant expenditures, particularly related to sales and marketing and brand promotion, and that such expenditures may or may not result in revenue growth. Given our limited operating experience related to the shockwave.com business, the prediction of future revenue growth or operating performance for the consumer business is difficult at best. In addition to the foregoing, the shockwave.com business will depend in part on success in building strategic alliances with other Internet companies and media companies in order to be able to grow the user base and to provide compelling content to attract and maintain the user base. There can be no assurances that such alliances can be created or maintained over an extended period of time.

      Dependence on Distributors — A substantial majority of our revenue is derived from the sale of our software products through a variety of distribution channels, including traditional software distributors, mail order, educational distributors, VARs, OEMs, hardware and software superstores, retail dealers, and direct sales. Domestically, our products are sold primarily through distributors, VARs, and OEMs. In particular, one distributor, Ingram Micro, Inc., accounted for 28% of revenues in fiscal years 2000 and 1999. In addition, the next three distributors combined, two of which are international distributors, accounted for 18% of revenues in fiscal year 2000. In fiscal year 1999, in addition to Ingram Micro, Inc., three distributors, including two international distributors, accounted for approximately 21% of total revenues. Internationally, our products are sold through distributors. Our resellers generally offer products of several different companies, including in some cases, products that are competitive with our products. There can be no assurance that our software resellers will continue to purchase our products or provide them with adequate levels of support. In addition, we believe that certain distributors are reducing their inventory in the channel and returning unsold products to better manage their inventories. Distributors are increasingly seeking to return unsold product, particularly when a new version or upgrade of a product has superseded such products. If our distributors were to seek to return increasing amounts of products, such returns could have a material adverse effect on our revenues and results of operations. The loss of, or a significant reduction in sales volume to, a significant reseller could have a material adverse effect on our results of operations.

      The success of our Software and shockwave.com businesses is dependent upon the existence and future growth of the Internet as a business, entertainment and communications platform. A change in the Internet or the technology used for operation of the Internet or a decline in the growth of the Internet could have a material adverse effect on our results of operations.

      Risks of International Operations — For fiscal year 2000, we derived approximately 41% of our revenues from international sales. We expect that international sales will continue to generate a significant percentage of our revenues. We rely primarily on distributors for sales of our software products in foreign countries and, accordingly, are dependent on their ability to promote and support our software products, and in some cases, to translate them into foreign languages. International business is subject to a number of special risks, including: foreign government regulation; general geopolitical risks such as political and economic instability, hostilities with neighboring countries and changes in diplomatic and trade relationships; more prevalent software piracy; unexpected changes in, or imposition of, regulatory requirements, tariffs, import and export restrictions and other barriers and restrictions; longer payment cycles, greater difficulty in accounts receivable collection, potentially adverse tax consequences, the burdens of complying with a variety of foreign laws; foreign currency risk; and other factors beyond our control.

      We enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in various European currencies and Japanese Yen. As of March 31, 2000, the notional principal of forward contracts outstanding amounted to $21.6 million. There can be no assurance that such contracts will adequately hedge our exposure to currency fluctuations.

      Euro Currency — On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the Euro as the common legal currency and established fixed rates of conversion between their existing sovereign currencies and the Euro. The Euro trades on currency exchanges and is available for non-cash transactions. A three-year transition period is underway during which transactions can be made in the old currencies. The conversion to the Euro has alleviated currency exchange risk between the member counties.

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      We do not anticipate any future material impact from the Euro conversion as our financial information system can accommodate multiple currencies. In addition, we have confirmed with our international financial institutions that they have the ability to process transactions in either Euros or sovereign currency. However, there can be no assurance that all issues related to the Euro conversion have been identified, and we may be at risk if any of our principal suppliers are unable to deal with the impact of the Euro conversion. To date, none of our international suppliers have expressed an intention to invoice in Euros.

      Risk Associated with Acquisitions — We have grown in part because of business combinations with other companies. We recently closed our acquisitions of Andromedia, Inc. and ESI Software, Inc. and we may make further material acquisitions in the future. Acquisitions involve significant risks including difficulties in the assimilation of the operations, services, technologies and corporate culture of the acquired companies, diversion of management’s attention from other business concerns and overvaluation of the acquired companies. Furthermore, because our recent acquisitions have been related to the eBusiness market, we are also subject to the risks associated with the acceptance of the acquired companies’ products and services by our customers. In addition, further acquisitions would likely result in the incurrence of dilution, if stock is issued, or debt and contingent liabilities and an increase in amortization expenses related to goodwill and other intangible assets, which could have a material adverse effect on our financial condition, results of operations and liquidity. For all these reasons, any future acquisitions or failure to effectively integrate acquired companies could result in a material adverse effect on our results of operations.

      Management of Growth. — Both our shockwave.com business and our Software business have experienced and may continue to experience rapid growth, which has placed, and could continue to place, a significant strain on our managerial, financial and operational resources. Our workforce grew from 553 full-time employees as of March 31, 1999 to 1,003 full-time employees as of March 31, 2000. shockwave.com alone grew its workforce from 30 employees as of March 31, 1999 to 128 employees as of March 31, 2000, representing a growth rate of more than 326%. We expect that the number of our employees will continue to increase for the foreseeable future. We anticipate that we will need to implement a variety of new and upgraded operational and financial systems, procedures and controls, including the ongoing improvement of our accounting and other internal management systems. We also will need to continue to expand, train, manage and motivate our workforce. All of these endeavors will require substantial management effort. In the future, we may need to expand our facilities or relocate some or all of our employees or operations from time to time to support our growth. These relocations could result in temporary disruptions of our operations or a diversion of management’s attention and resources. If we are unable to effectively manage expanding operations, our business, financial condition and results of operations could be materially and adversely affected.

      Furthermore, shockwave.com continues to depend on Macromedia for its administrative, financial, marketing and human resources functions, and may not be able to perform these functions independently in a timely fashion. shockwave.com must continue to improve its operational and financial systems and managerial controls and procedures, and will need to continue to expand, train and manage its workforce. shockwave.com’s systems, procedures or controls may not be adequate to support its operations or Macromedia may not be able to manage growth of shockwave.com effectively. For example, Macromedia expects that the variety of shockwave.com’s revenue generating lines of business will expand, increasing demands on the shockwave.com’s billing and collection systems and requiring additional resources to properly determine pricing and discounting structures. If shockwave.com does not manage growth effectively, the shockwave.com business would be harmed.

      Volatility of Stock — Our future earnings and stock price may be subject to significant volatility, particularly on a quarterly basis. Any shortfall in revenue or earnings from levels expected by securities analysts could have an immediate and significant adverse effect on the trading price of our common stock in any given period. Additionally, we may not learn of such shortfalls until late in the fiscal quarter, which could result in an even more immediate and adverse effect on the trading price of our common stock. Finally, we participate in a highly dynamic industry. In addition to factors specific to us, changes in analysts’ earnings estimates for us or our industry and factors affecting the corporate environment or the securities markets in general will often result in significant volatility of our common stock price.

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      Generally Accepted Accounting Principles — We prepare our financial statements in conformity with generally accepted accounting principles (“GAAP”). GAAP are subject to interpretation by the American Institute of Certified Public Accountants, the Securities and Exchange Commission, and various bodies formed to interpret and create appropriate accounting policies. A change in these policies can have a significant effect on our reported results, and may even affect the reporting of transactions completed prior to the announcement of a change.

Year 2000 Compliance

      The “Year 2000 problem” refers to the fact that some computer hardware, software and embedded systems were designed to read and store dates using only the last two digits of the year. As of June 21, 2000, we are not aware of any Year 2000 problem in any of our critical corporate applications, non-information technology/embedded systems, end-user computing systems or business partners’ and vendors’ systems. In addition, we have not received any notification from any of our critical business partners or vendors of any Year 2000-related disruption in their business. However, the success to date of our Year 2000 efforts and the efforts of our critical third party vendors or business partners cannot guarantee that there will not be a material adverse effect on our business should a Year 2000 problem manifest or become apparent in the future.

      Although we have not experienced and do not foresee having a Year 2000 problem, if our systems encounter unforeseen Year 2000 problems, or if one or more of our significant third party business partners or vendors is unable to provide services due to a Year 2000 problem, we could experience a disruption of operations resulting in increased operating costs, loss of revenues and other adverse effects, but we do not expect any of these circumstances will have a material adverse effect on our financial position or results of operations.

Interest Rate Risk

      Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. As stated in our policy, we are adverse to principal loss and ensure the safety and preservation of our invested funds by limiting default and market risks. We place our investments with high credit-quality issuers, and the portfolio includes only high quality marketable securities with active secondary or resale markets to ensure portfolio liquidity. We do not use derivative financial instruments in our investment portfolio. All investments have a fixed or floating interest rate and are carried at market value, which approximates cost.

      The table below represents carrying amounts, fair value and related weighted average effective interest rates by year of maturity for our investment portfolio as of March 31, 2000 (in thousands).

      We also have loans outstanding to related parties totaling $9.9 million as of March 31, 2000. The stated loan amounts approximate fair value.

Foreign Currency Risk

      We enter into forward contracts to reduce our exposure to foreign currency fluctuations involving probable anticipated, but not firmly committed, transactions and transactions with firm foreign currency commitments occurring within a 90-day period. We do not enter into derivative financial instruments for trading purposes.

      As a result of this activity, we had outstanding forward contracts in various European currencies and Japanese Yen outstanding as of March 31, 2000. The forward contracts are accounted for on a mark-to-market basis, with realized gains or losses recognized in the consolidated statement of operations. As of March 31, 2000 and 1999, the contract amount of the forward contracts amounted to $21.6 million and $10.2 million, respectively. The future

F-10

value of these contracts is subject to market risk resulting from foreign exchange rate volatility. Current market rates at the consolidated balance sheet date were used to estimate the fair value of foreign currency forward contracts.

      The table below provides information about our outstanding forward contracts as of March 31, 2000. The information is provided in US dollar equivalents, in thousands. The table presents the notional amount of the respective contracts and their fair value (at rates in effect as of March 31, 2000):

      We are exposed to credit loss in the event of nonperformance by counterparties but we do not anticipate nonperformance by these counterparties.

Disclosure of limitations of the tabular presentation

      As the tables above incorporate only those exposures that exist as of March 31, 2000, it does not consider those exposures or positions that could arise after that date. Also, because the foreign currency denominated financial assets, and anticipated transactions are not presented in the table above, the information presented has limited predictive value. As a result, our ultimate realized gain or loss with respect to foreign currency fluctuations will depend on the exposures that arise during the period, our hedging strategies at the time, and foreign currency rates.

Market Price Risk

      We are exposed to market risk from changes in the price of our equity securities available-for-sale, which were recorded at a fair value of approximately $982,000 at March 31, 2000. The equity investments held by us have exposure to price risk, which is estimated as the potential loss in fair value due to a hypothetical change of 10% in quoted market prices. This hypothetical change would reduce our investments as well as unrealized gains on investment securities available for sale, which are included as a component of stockholders’ equity. This hypothetical change would have an immaterial effect on the recorded value of our investment securities available for sale.

F-11

Independent Auditors’ Report

The Board of Directors
Macromedia, Inc. and Subsidiaries:

      We have audited the accompanying consolidated balance sheets of Macromedia, Inc. and subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2000. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed in the accompanying index in Item 14 (a) 2 herein. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Macromedia, Inc. and subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

San Francisco, California
April 24, 2000

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MACROMEDIA, INC. AND SUBSIDIARIES

Consolidated Balance Sheets
(in thousands, except per share data)

See accompanying notes to consolidated financial statements.

F-13

MACROMEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Operations
(in thousands, except per share data)

See accompanying notes to consolidated financial statements.

F-14

MACROMEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(in thousands)

See accompanying notes to consolidated financial statements.

F-15

MACROMEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders’ Equity
(in thousands)

			Common Stock								Treasury Stock								Additional
																			Paid-In				Deferred
			Shares				Amount				Shares				Amount				Capital				Compensation
Balances as of March 31, 1997				38,751			$	39				—			$	—			$	149,626			$	(149	)
Comprehensive loss:
	Net loss
	Unrealized loss on available-for-sale securities, net of tax
Total comprehensive loss
Common stock issued by acquired company																				46
Preferred Shares issued by acquired companies																				8,656
Exercise of stock options				573				1												2,384
Issuance of warrants to purchase common stock by acquired company																				182
Common stock issued under ESPP				195				—												1,469
Tax benefit from stock plans																				240
Common stock issued under purchase of Solis				300				—												3,975
Purchase of treasury stock												(510	)			(5,139	)
Non-cash compensation																				(13	)			62
Balances as of March 31, 1998				39,819				40				(510	)			(5,139	)			166,565				(87	)
Comprehensive income:
	Net income
	Unrealized loss on available-for-sale securities, net of tax
Total comprehensive income
Preferred Shares issued by acquired companies																				6,416
Issuance of common stock upon acquisition of LikeMinds, Inc. by Andromedia, Inc.				458				—												2,608
Exercise of stock options				3,168				3												22,546
Common stock issued under ESPP				145				—												1,618
Purchase of treasury stock												(1,110	)			(20,306	)
Preferred stock accretion																				(104	)
Tax benefit from stock plans																				4,439
Non-cash compensation																				2,352				(1,457	)
Adjustment to conform acquired company’s year end (Note 4)																				(3,009	)
Balances as of March 31, 1999				43,590				43				(1,620	)			(25,445	)			203,431				(1,544	)
Comprehensive income:
	Net income
	Unrealized gain on available-for-sale securities, net of tax
Total comprehensive income
Preferred Shares issued by acquired companies																				520
Exercise of stock options				3,725				4												36,842
Common stock issued under ESPP				84				—												2,445
Common stock exchanged for preferred stock of pooled entities				3,231				4												31,403
Purchase of treasury stock												(198	)			(8,204	)
Preferred stock accretion																				(2,538	)
Tax benefit from stock plans																				8,714
Non-cash compensation																				33,251				(21,747	)
Gain on sale of subsidiary stock																				21,109
Adjustment to conform acquired company’s year end (Note 4)				44				—												320				(174	)
Balances as of March 31, 2000				50,674			$	51				(1,818	)		$	(33,649	)		$	335,497			$	(23,465	)