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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended June 30, 2003

OR

For the Transition Period from              to             

Commission File No. 000-22688

MACROMEDIA, INC.

(Exact name of registrant as specified in its charter)

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 whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Act.    Yes  x    No  ¨

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 64.4 million shares of Common Stock, $0.001 par value per common share, outstanding on July 21, 2003, including 1.8 million shares held in treasury.

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MACROMEDIA, INC.

REPORT ON FORM 10-Q

For the Quarter Ended June 30, 2003

INDEX

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MACROMEDIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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MACROMEDIA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations

Macromedia, Inc. (the “Company” or “Macromedia”) provides software that empowers business users, developers and designers to create and deliver effective user experiences on the Internet, fixed media, wireless devices and digital devices. The Company’s integrated family of technologies enables the development of a wide range of Internet applications including websites, rich media content and Internet applications across multiple platforms and devices.

The Company sells its products through a worldwide network of distributors, value-added resellers (“VARs”), its own sales force and its websites. In addition, Macromedia derives revenues from software maintenance and technology licensing agreements, including those directly with original equipment manufacturers (“OEM”s), device manufacturers and media carriers.

2. Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The interim financial information is unaudited, but reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of Macromedia’s consolidated financial position, operating results and cash flows for the interim periods. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.

These condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q, and therefore, do not include all information and notes normally provided in annual financial statements. As a result, these condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in Macromedia’s annual report on Form 10-K for the fiscal year ended March 31, 2003. The results of operations for the three months ended June 30, 2003 are not necessarily indicative of the results for the fiscal year ending March 31, 2004 or any other future periods.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Stock-Based Compensation. In fiscal year 2003, the Company adopted the disclosure provisions in SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment to SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 148”). The Company accounts for its stock option plans and employee stock purchase plan using the intrinsic value method prescribed by APB Opinion No. 25 and allowed by SFAS No. 148. Pursuant to SFAS No. 148, the Company is required to disclose the pro forma effects on net income (loss) and net income (loss) per share as if the Company had elected to use the fair value approach to account for all of its employee stock-based compensation plans. Had compensation cost for the Company’s plans been determined consistently with the fair value approach in accordance with SFAS No. 123, the Company’s pro forma net loss and pro forma net loss per share would have been:

The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.

The fair value of the Company’s stock options, warrants and Employee Stock Purchase Plan (“ESPP”) purchase rights granted under its stock-based compensation plans were estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions for grants during the three months ended June 30, 2003 and 2002.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Reclassifications. Certain reclassifications have been made to the condensed consolidated statement of operations for the three months ended June 30, 2002 in connection with the Company’s adoption of two accounting pronouncements in the fourth quarter of fiscal year 2003. The adoption of these pronouncements resulted in reclassifications of shipping and handling fees billed to customers, which previously were recorded as a reduction of cost of revenues, and certain out-of-pocket expenses reimbursed by customers, which previously were recorded as a reduction of operating expenses, to net revenues. These reclassifications resulted in an increase of $605,000 to net revenues for the three months ended June 30, 2002, but did not impact the Company’s previously reported net loss.

3. Goodwill and Other Intangible Assets

In fiscal year 2003, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, and no longer amortizes goodwill, which had a net book value of $201.4 million at June 30 and March 31, 2003. The Company continues to amortize its other intangible assets with estimated useful lives, which resulted in amortization charges of $566,000 and $3.4 million during the three months ended June 30, 2003 and 2002, respectively.

The Company intends to assess the fair value and recoverability of its goodwill in the fourth quarter of each fiscal year, unless facts and circumstances warrant a review of goodwill for impairment before that time. The Company currently operates in one business segment, the Software segment, and does not have any reporting units lower than the Software segment, to which the Company should allocate goodwill as required by SFAS No. 142.

At June 30, 2003 and March 31, 2003, intangible assets, consisted of the following:

The following table depicts the estimated future amortization charges from its amortizable intangible assets at June 30, 2003:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

5. Restructuring

The Company has accounted for its restructuring charges and accruals in accordance with Emerging Issues Task Force (“EITF”) Issue No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), EITF Issue No. 88-10, Costs Associated with Lease Modification or Termination, and Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges.

In fiscal year 2002, the Company executed a restructuring plan to deliver cost synergies associated with its fiscal year 2001 acquisition of Allaire and to better align its cost structure with the weaker business environment, which resulted in restructuring charges totaling $81.8 million.

Details of the accrued restructuring balances and payment activity recorded during the three months ended June 30, 2003 are presented in the following table:

At June 30, 2003, future minimum lease obligations for the Company’s restructured facilities amounted to $82.9 million. The Company’s accrued restructuring balance at June 30, 2003 also included future sublease income of $38.2 million to be received under contractual sublease arrangements and future estimated sublease income of $16.9 million.

6. Foreign Currency Forward Contracts

The Company sells its products internationally in U.S. Dollars and certain foreign currencies, primarily the Euro, Japanese Yen and British Pound. The Company regularly enters into foreign exchange forward contracts to offset the impact of currency fluctuations on certain foreign currency revenues and operating expenses as well as the related receivables and payables. Management’s strategy is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates. The Company accounts for derivative instruments and hedging activities in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all derivatives be recorded on the balance sheet at fair value.

Cash Flow Hedging. The Company designates and documents foreign exchange forward contracts related to forecasted transactions as cash flow hedges and as a result, applies hedge accounting for these contracts. The critical terms of the foreign exchange forward contracts and the forecasted underlying transactions are matched at inception and forward contract effectiveness is calculated, at least quarterly, by comparing the change in the fair value of the contracts to the change in fair value of the forecasted revenues or expenses, with the effective portion of the fair value of the hedges recorded in accumulated other comprehensive income (“AOCI”). The Company records any ineffective portion of the hedging instruments in other income (expense) on its consolidated statements of operations, which was immaterial during the three months ended June 30, 2003 and 2002. When the underlying forecasted transactions occur and impact earnings, the related gains or losses on the cash flow hedge are reclassified from AOCI to revenues or expenses. In the event it becomes probable that the forecasted transactions will not occur, the gains or losses on the related cash flow hedges would be reclassified from AOCI to other income (expense) at that time. All values reported in AOCI at June 30, 2003 will be reclassified to operations in eight months or less. At June 30, 2003, the outstanding cash flow hedging derivatives had maturities of twelve months or less.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table depicts cash flow hedge accounting activity as a component of AOCI for the three months ended June 30, 2003:

Balance Sheet Hedging. The Company manages its foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts. These derivative instruments are carried at fair value with changes in the fair value recorded as a component of other income (expense) on its consolidated statements of operations. These derivative instruments substantially offset the remeasurement gains and losses recorded on identified foreign currency denominated assets and liabilities. At June 30, 2003, the Company’s outstanding balance sheet hedging derivatives had maturities of twelve months or less.

7. Comprehensive Income (Loss)

Comprehensive income (loss) consists of net income (loss), unrealized gains and losses on short-term investments classified as available-for-sale, and unrealized gains and losses associated with the Company’s cash flow hedges. The following table sets forth the calculation of comprehensive income (loss), net of tax:

8. Litigation Settlement

In fiscal year 2003, the Company entered into a settlement agreement with Adobe Systems Incorporated (“Adobe”), whereby the outstanding patent claims between the parties were dismissed with prejudice. Accordingly, during the three months ended June 30, 2002, the Company recorded a reversal of $2.8 million in damages originally awarded to Adobe and recorded by the Company in its fiscal year 2002 consolidated financial statements.

9. Net Income (Loss) Per Common Share

Basic net income (loss) per common share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed using the treasury stock method by dividing net income (loss) for the period by the weighted average number of potentially dilutive common shares from outstanding options and warrants to purchase common stock.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The following table sets forth the reconciliations of the numerator and denominator used in the computation of basic and diluted net income (loss) per common share:

At June 30, 2003, the Company had 1.8 million shares of its common stock, which were previously repurchased on the open market, classified as treasury stock. These shares are recorded at cost and are shown as a reduction of stockholders’ equity.

The table below presents potentially dilutive securities that are excluded from the diluted net income (loss) per common share calculation because their effects would be antidilutive:

Under the treasury stock method, stock options with exercise prices exceeding the average fair value of the Company’s common stock during the period are excluded from the diluted earnings per share computation. During the three months ended June 30, 2003, these stock options had a weighted-average exercise price of $24.37 per share compared with an average fair value of common stock of $17.32 per share. All outstanding stock options during the three months ended June 30, 2002 were excluded from the diluted earnings per share computation because the Company reported a net loss for that period.

10. Segments Reporting and Significant Customers

At June 30, 2003 and 2002, the Company operated in one business segment, the Software segment. The Company’s Software segment provides software that empowers developers and designers to create effective user experiences on the Internet. The Company’s chief executive officer is the chief operating decision maker and evaluates operating segment performance based on the net revenues and total operating expenses of the Software segment. As such, the Company’s Software segment performance reflects the Company’s consolidated statements of operations for the three months ended June 30, 2003 and 2002.

Distributors comprise a significant portion of the Company’s revenues and trade receivables. During the three months ended June 30, 2003, sales to two distributors accounted for 19% and 13% of consolidated net revenues. At June 30, 2003 receivable balances from these two distributors accounted for 20% and 13% of the Company’s gross accounts receivable outstanding.

During the three months ended June 30, 2002, sales to one distributor accounted for 31% of consolidated net revenues.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

At March 31, 2003, receivable balances from two customers accounted for 16% and 10% of the Company’s gross accounts receivable outstanding.

11. Commitments and Contingencies

Macromedia’s principal commitments at June 30, 2003 consisted of obligations under operating leases for facilities, technology license agreements and letter of credit arrangements.

Leases. The Company leases office space and certain equipment under operating leases, some of which contain renewal and purchase options. In addition, the Company subleases certain office space that it does not currently occupy. For certain of these operating leases, the Company has entered into agreements to indemnify lessors against certain additional costs through the term of the lease. To date, the Company has not made any significant indemnification payments under such agreements and no amount has been accrued in its consolidated financial statements with respect to these indemnification guarantees.

Future minimum payments under operating leases with an initial term of more than one year and future minimum sublease income are summarized as follows:

The Company recorded rent expense of $3.4 million and $3.7 million for the three months ended June 30, 2003 and 2002, respectively. During the three months ended June 30, 2003 and 2002, no sublease income was recorded as an offset to rent expense, as the sublease income received was applied against the Company’s accrued restructuring balance.

Technology Licenses. The Company has entered into license agreements with third parties whose products or technologies are embedded in its software products. These license agreements generally provide for royalty payments on a fixed or per-unit basis.

Letters of Credit and Restricted Cash. The Company obtained letters of credit from financial institutions totaling approximately $12.1 million and $11.8 million as of June 30 and March 31, 2003, respectively, in lieu of security deposits for leased office space. No amounts have been drawn against the letters of credit. The Company pledged, as security in trust for certain of the letters of credit, approximately $10.9 million in cash as of June 30 and March 31, 2003. These funds were invested in money market funds and are classified as non-current restricted cash in its consolidated balance sheets. At June 30, 2003, the Company also had $490,000 held against remaining payment obligations from certain business combinations, which were completed in fiscal year 2003 and are classified as non-current restricted cash in its consolidated balance sheets.

Legal. On and after September 25, 2000, Allaire Corporation (“Allaire”), prior to its acquisition by Macromedia, and certain of Allaire’s officers and directors were named as defendants in several putative class action lawsuits filed in the United States District Court for the District of Massachusetts, each alleging violations of the federal securities laws. On December 5, 2000, the Court consolidated the lawsuits under the caption In re: Allaire Corporation Securities Litig., No. 00-CV-11972 (WGY) (“Class Action”), and appointed lead plaintiffs and counsel

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

for the putative class. On February 23, 2001, the lead plaintiffs, on behalf of a putative class defined as those who purchased Allaire stock between January 26, 2000, and September 18, 2000, filed a Corrected Consolidated Class Action Complaint alleging that Allaire, Joseph J. Allaire, Jeremy Allaire, David A. Gerth, and David J. Orfao, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and are seeking damages, interest, and attorneys’ fees and costs. The defendants filed a motion to dismiss the Class Action. On September 25, 2001, the Court ruled that the complaint in the Class Action did not comply with the pleading standards imposed by the Private Securities Litigation Reform Act of 1995, and permitted plaintiffs to file an amended complaint in accordance with specific requirements imposed by the Court. Plaintiffs filed an amended complaint on November 30, 2001, which asserted similar claims on behalf of a putative class of stockholders who purchased Allaire stock between December 7, 1999 and September 18, 2000. On June 19, 2002 the Court denied defendants’ motion to dismiss the amended complaint, and thereafter set a trial date for the Class Action for November 2003. The parties commenced discovery and thereafter mediated their dispute before a United States Magistrate Judge. On May 21, 2003, the parties executed a Memorandum of Understanding (“MOU”) that sets forth the basic terms of a settlement whereby the plaintiffs agree to dismiss the Class Action and provide a broad release of all claims arising out of their purchase, sale or holding of Allaire stock in exchange for a payment of $12.0 million, $10.5 million of which has been paid by insurers and $1.5 million of which has been paid by Macromedia, in each case, into escrow to be released upon Court approval of the settlement. The $1.5 million settlement payment by Macromedia was recorded as a litigation charge in the fourth quarter of fiscal year 2003. The MOU calls for the parties to negotiate additional terms to be set forth in a Stipulation of Settlement. The parties’ settlement is expressly contingent on Court approval, which may be withheld or, if provided, may be subject to an appeal to, or reversal by, an appellate court.

On April 11, 2001, Allaire, after it was acquired by Macromedia, Joseph J. Allaire, Jeremy Allaire, David A. Gerth, and David J. Orfao were named as defendants in an additional lawsuit alleging violations of the federal securities laws that also was filed in the United States District Court for the District of Massachusetts, Kassin v. Allaire Corporation, et al., No. 01-10600-WGY (“Kassin”). The complaint in Kassin, filed on behalf of an individual, alleges substantially the same violations of the Securities Exchange Act of 1934 as have been asserted in the Class Action, and additional claims for common law fraud and negligent misrepresentation. On May 11, 2001, the Court consolidated the Class Action and Kassin for purposes of briefing and oral argument on the defendants’ motions to dismiss. The defendants filed a motion to dismiss Kassin. On September 25, 2001, the Court consolidated Kassin with the Class Action, and the plaintiff’s claims in Kassin have been included in the amended complaint for the Class Action. The trial for Kassin has been scheduled for November 2003. Kassin is not subject to the MOU concerning a potential settlement of the Class Action and, as discovery is ongoing, we are not able to predict the outcome of the litigation at this time. The Company intends to defend this claim vigorously.

Intellectual Property Indemnification Obligations. The terms of the Company’s distribution agreements with its first-tier distributors, including OEMs, generally provide for a limited indemnification of such distributors against losses, expenses and liabilities arising from third-party claims based on alleged infringement by the Company’s products of an intellectual property right of such third party. The terms of such indemnification often limit the scope of and remedies for, such indemnification obligations and generally include a right to replace an infringing product. To date, the Company has not had to reimburse any of our distributors for any losses related to these indemnification provisions pertaining to third-party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with our distributors, the Company cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Other Contingent Liabilities and Commitments. Through its normal course of business, the Company has also entered into other indemnification agreements or guarantees that arise in various types of arrangements, including those with financial institutions under banking arrangements. To date, the Company has not made any significant payments under such indemnification agreements or guarantees and no amount has been accrued in its condensed consolidated financial statements with respect to those indemnification agreements or guarantees.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Except for historical financial information contained herein, the matters discussed in this Form 10-Q 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” and (iii) the other risks detailed from time-to-time in our reports and registration statements filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

Macromedia provides software that empowers millions of business users, developers and designers to create and deliver effective, compelling and memorable experiences — on the Internet, on fixed media, on wireless and on digital devices. Our integrated family of technologies enables the development of a wide range of internet solutions including website, rich media content and internet applications across multiple platforms and devices. During the three months ended June 30, 2003, we operated in one business segment, the Software segment.

Our design and development tools provide a broad range of capabilities for building cost-effective websites and Internet applications that offer effective end-user experience. Our design and development tools include Macromedia Studio MX, a bundle which includes Macromedia Dreamweaver MX, Macromedia Flash MX, Macromedia Fireworks MX, Macromedia FreeHand MX, Macromedia ColdFusion MX Developer Edition and Macromedia Contribute. Other design and development tools include Macromedia Director MX, Macromedia Authorware, as well as Macromedia JRun Server.

Our Information Convenience family of products enables non-technical business users to create and deliver information without intricate technical training. The products in this family of products include Macromedia Contribute, which is targeted at knowledge workers and content contributors, Macromedia FlashCom Server, which provides rich interactive media experiences on the Internet by integrating audio and video applications directly into websites, and Macromedia Breeze, which enables non-technical business users to educate, train and inform customers using Macromedia Flash and Microsoft PowerPoint to author their content.

Our Mobile family of products is targeted at device manufacturers, carriers and media networks, and includes our Embedded Flash and Flash Lite products. These products leverage off of the sophisticated multimedia and powerful application development features in Macromedia Flash MX, making it easy for Macromedia Flash designers and developers to deliver engaging content and rich mobile business applications to a wide range of Internet-enabled devices and platforms.

Critical Accounting Policies

We make certain estimates, assumptions and judgments when preparing our condensed consolidated financial statements. These estimates, assumptions and judgments can have a significant impact on our condensed consolidated financial statements including the value of certain assets and liabilities on our condensed consolidated balance sheets as well as the amounts of net revenues, operating income and net income (loss) on our condensed consolidated statements of operations. We have identified the following to be critical accounting policies to Macromedia: allowance for sales returns; allowance for doubtful accounts, restructuring expenses and related accruals; goodwill and other intangible assets; and income taxes.

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Allowance for sales returns. The primary sales channels through which we sell our boxed and volume-license products throughout the world are a network of distributors and value-added resellers (“VARs”). Agreements for boxed products with our distributors and VARs contain specific product return privileges for stock rotation and obsolete products that are generally limited to contractual amounts. Product returns are recorded as a reduction of net revenues. Current product returns for stock rotation from distributors are generally limited to 10% of their prior quarter’s purchases, provided they order new products for an amount equal to or exceeding the amount of the requested return. Distributors may typically return 100% of their inventory balance of obsolete products within a limited time after the release of a new version of such software. Under the terms of our distribution agreements, authorized returns of obsolete products require a new order from such distributor at an amount not less than the amount of the requested return. Sales of our volume-licensed products generally do not contain return privileges. Products purchased directly from us by end-users, including sales from our on-line stores have 30-day return rights. As part of our revenue recognition practices, we have established an allowance for sales returns based upon estimated and known returns.

We review our allowance for sales returns on an ongoing basis. In estimating our allowance for sales returns, we evaluate the following factors:

In general, we would expect the allowance for sales returns to increase following the announcement of new or upgraded versions of our products or in anticipation of such product announcements, as our distributors and VARs seek to reduce their inventory levels of the prior version of a product in advance of receiving the new version. Similarly, we would expect that product inventory held by our distributors and VARs would increase following the successful introduction of new or upgraded products, as these resellers stock the new version in anticipation of end-user demand, which would result in a lower allowance for sales returns.

In assessing the appropriateness of product inventory levels held by our resellers and the impact on potential product returns, we may limit sales to our distributors and VARs in order to maintain inventory levels deemed by management to be appropriate. We generally estimate our allowance for sales returns based on channel inventory levels between four to six weeks of expected sales by our first-tier distributors and VARs, based on the criteria noted above. We make these estimates based on channel inventory and sell-through information that we obtain principally from our first-tier distributors and VARs. Product returns from our first-tier distributors and VARs are also impacted by actual product returns they receive directly from lower tiers of distribution for which we receive limited inventory and sell-through information. In addition, our estimates are based on historical product returns and channel inventory levels on a product-by-product basis for each of our primary sales regions. Accordingly, actual product returns in future periods may differ from our estimates and may have a material adverse effect on our net revenues and consolidated results of operations due to factors including, but not limited to, market conditions and product release cycles. At June 30, 2003, our channel inventory, net of related reserves, remained within the estimated channel inventory range noted above.

Allowance for doubtful accounts. We make judgments as to our ability to collect outstanding accounts receivable and provide an allowance for the portion of our accounts receivable when collection becomes doubtful. We initially record our allowance for doubtful accounts based on our historical experience and then adjust this allowance at the end of each reporting period based on an assessment of our accounts receivable and related allowance.

We also make judgments about the creditworthiness of customers based on ongoing credit evaluations and the aging profile of customer accounts receivable, and assess current economic trends that might impact the level of credit losses in the future. Historically, our allowance for doubtful accounts has been sufficient to cover our actual

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credit losses. However, since we cannot predict changes in the financial stability of our customers, we cannot ensure that our allowance will continue to be sufficient. If actual credit losses are significantly greater than the allowance that we have established, this would increase our operating expenses and reduce our reported net income. Distributors account for a significant portion of our net revenues and accounts receivable and comprise several individually large accounts, two of which represented 32% of our consolidated net revenues during the three months ended June 30, 2003 and 33% of our gross accounts receivable at June 30, 2003. If the credit exposure associated with a large distributor relationship deteriorated, affecting its ability to make payments, an additional provision for doubtful accounts may be required. Historically, we have not experienced significant losses related to any particular industry or geographic region.

Restructuring expenses and related accruals. In fiscal year 2002, we executed a restructuring plan to deliver cost synergies associated with our fiscal year 2001 acquisition of Allaire Corporation (“Allaire”) and to better align our cost structure with the weaker business environment. The $81.8 million charge recorded as a result of the restructuring primarily related to facility exit costs to cancel or vacate approximately 450,000 square feet of facility space held under our operating leases and, to a lesser extent, employee termination and severance costs.

Our restructuring expenses and accruals involved significant estimates made by management using the best information available at the time that the estimates were made, some of which we have obtained and verified through third-party advisors. These estimates include: facility exit costs such as demise and lease termination costs; timing and market conditions of rental payments and estimated sublease income; and any fees associated with our restructuring expenses, such as brokerage fees.

On a regular basis we evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals. Such factors include, but are not limited to, market data in order to estimate the likelihood, timing, term and lease rates to be realized from potential subleases of restructured facilities held under operating leases. We also estimate costs associated with terminating certain leases on excess facilities. These estimates involve a number of risks and uncertainties, some of which may be beyond our control and include future real estate conditions and our ability to market and sublease excess facilities on terms acceptable to us, particularly in Newton, Massachusetts, Northern California, Bracknell, United Kingdom, and to a lesser extent in Richardson, Texas and Minneapolis, Minnesota. In addition, our restructuring estimates for facilities could be adversely impacted by the financial condition of sub-lessees and their ability to meet the financial obligations throughout the term of any sublease agreement and estimated costs associated with canceling or vacating such facility leases. At June 30, 2003, we estimated future sublease income of $16.9 million in connection with restructured facilities held under operating leases. The impact of these estimated proceeds and costs are significant factors in determining the appropriateness of our restructuring accrual balance on our consolidated balance sheet at June 30, 2003. Actual results may differ significantly from our estimates and as such, may require adjustments to our restructuring accrual which will impact our operating results in future periods.

The commercial real estate markets where we have significant operating lease obligations, notably the Newton, Massachusetts commercial real estate market may continue to experience weakening demand and excess capacity. At June 30, 2003, our future minimum lease obligation for the portion of the Newton lease related to space that is currently subleased or available for sublease, net of sublease income to be received from existing subtenants, was $33.1 million. The Newton lease represented 53% of our total accrued restructuring at June 30, 2003. Our Newton space covers 350,000 square feet held under operating leases through 2010, of which we currently occupy 88,000 square feet, sublease 220,000 square feet to existing subtenants, and have 42,000 square feet available for sublease. Of the 262,000 square feet that we currently sublease to existing tenants or have available for sublease, existing subleases covering 83,000 square feet will expire prior to our lease termination in 2010. Should the Newton, Massachusetts commercial real estate market deteriorate further, we may not be able to find acceptable tenants at the rates or timing consistent with what we used in estimating our restructuring accrual.

Goodwill and other intangible assets. In fiscal year 2003, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. As a result of adopting this standard, we no longer amortize goodwill, which had a net book value of $201.4 million at June 30 and March 31, 2003. However, under SFAS No. 142 we will continue to amortize our other intangible assets with estimated useful lives. We currently operate in one business segment, the Software segment. As required by SFAS No. 142, when reviewing goodwill for impairment, we assess whether goodwill should be allocated to operating levels lower than our Software segment (termed “reporting units”) for which discrete financial information is available and reviewed for decision-

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making purposes. In addition, the reporting units would have economic characteristics different than the economic characteristics of the other components of the Software segment. Currently, we do not have any reporting units lower than our Software segment that meet the criteria set forth in SFAS No. 142.

In accordance with SFAS No. 142, we perform our annual impairment test in the fourth quarter of each fiscal year by assessing the fair value and recoverability of our goodwill, unless facts and circumstances warrant a review of goodwill for impairment before that time. Changes in market conditions and other business indicators could give rise to factors that would require us to assess whether any of our intangible assets are impaired. Significant changes in demand for our products or changes in market conditions in the principal markets in which we sell our products, could adversely impact the carrying value of these assets. In particular, if there is a significant and other than temporary decline in the market value of our common stock, a decrease in the market value of a particular asset, or operating or cash flow losses combined with forecasted future losses, we could be required to record impairment charges related to goodwill and other intangible assets, which could adversely affect our financial results. In addition, should we develop and manage our business using discrete financial information for reporting units in the future, we may be required to allocate our goodwill balance to those reporting units, which may result in an impairment of part or all of our recorded goodwill.

Income taxes. In preparing our condensed consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process also involves estimating the impact of additional taxes resulting from tax examinations, primarily in foreign jurisdictions. These examinations, which primarily relate to our cost reimbursement arrangements among related entities, are often complex and can require several years to resolve. Accruals for tax contingencies require management to estimate the actual outcome of potential tax audits. Actual taxes and tax settlements could vary from these estimates.

Our provision for income taxes is also dependent upon our estimation of a deferred tax asset valuation allowance and the change in our net deferred tax asset balance at each balance sheet date. Significant judgment is used to determine the likelihood that we will realize our deferred tax assets in the future, and includes our ability to forecast future taxable income. An increase in the valuation allowance could have a material adverse impact on our income tax provision and net income in the period in which such determination is made.

Results of Operations

Net revenues.

Net revenues were $83.1 million during the three months ended June 30, 2003, as compared to $84.3 million for the same period last year. Net revenues during the three months ended June 30, 2003 reflect lower net revenues resulting from the transition and upgrade cycle of a number of our products, including those within our design and development tools, including Macromedia Studio MX (a bundle including Macromedia Dreamweaver MX, Macromedia Flash MX, Macromedia Fireworks MX, Macromedia FreeHand MX, Macromedia ColdFusion MX Developer Edition and Macromedia Contribute), certain stand-alone versions of these products and Macromedia JRun Server. The decrease in net revenues from our design and development tools as compared to those in the same period in the prior fiscal year was offset by net revenues from recent product introductions in our Information Convenience and Mobile product families. Our Information convenience products include Macromedia Contribute, which was released in December 2002 and Macromedia Breeze, which was released in January 2003. Net revenues from our Mobile product family consist primarily of royalties earned from OEM’s for the license of our Flash Player for various devices and platforms, including cellular phones and personal digital assistants.

We have recently released new and upgraded products and intend to continue introducing a number of new and upgraded products throughout fiscal year 2004. Delays in the introduction of planned future product releases, or failure to achieve significant customer acceptance for these new products, may have a material adverse effect on our net revenues and consolidated results of operations in future periods.

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Net Revenues by Geography

North American net revenues decreased to $46.2 million during the three months ended June 30, 2003, as compared to $53.9 million for the same period last year. North American net revenues during the three months ended June 30, 2003 reflect lower net revenues resulting from the transition and upgrade cycle of our products, including those in our design and development tools.

International net revenues increased to $36.9 million during the three months ended June 30, 2003, as compared to $30.4 million for the same period last year. This increase is primarily due to net revenues associated with the introduction of new product offerings in our Mobile product family, partially offset by lower net revenues resulting from the transition and upgrade cycle of the products within the Macromedia MX product family.

Cost of revenues.

Cost of revenues includes cost of materials, product assembly and distribution costs, costs to translate our software into various foreign languages, royalties paid to third parties for the licensing of developed technology and costs incurred in providing training and technical support to customers and business partners. Costs of revenues was $7.3 million or 9% of net revenues during the three months ended June 30, 2003, as compared to $11.1 million or 13% of net revenues for the same period last year. Cost of revenues decreased due to a greater percentage of net revenues from volume and OEM license sales, which typically have higher gross margins than our traditional box sales. Charges for inventory obsolescence were lower during the three months ended June 30, 2003, as compared to the same period last year, resulting from product transition and release cycles associated with the release of our Macromedia MX products during the three months ended June 30, 2002.

In the future, cost of revenues as a percentage of net revenues may be impacted by the mix of product sales, royalty rates for licensed technology and the geographic distribution of sales.

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Operating Expenses.

Selected Operating Expense Categories as a Percent of Net Revenues

Sales and marketing. Sales and marketing expenses consist primarily of the following: compensation and benefits; advertising expenses, mail order advertising, tradeshow and seminar expenses, and other marketing costs; and allocated costs for our facilities and IT infrastructure. Sales and marketing expenses decreased to $34.7 million during the three months ended June 30, 2003, as compared to $37.4 million for the same period last year. The decrease resulted from lower advertising expenses of $2.2 million due to the introduction of our Macromedia MX product family during the three months ended June 30, 2002. This decrease was partially offset by an increase in compensation charges of $0.9 million related to increased headcount.

In the near future, we expect to continue investing in the sales and marketing of our products as we launch and sell our products, develop market opportunities, and promote our competitive position. Accordingly, we expect sales and marketing expenses to continue to constitute a significant portion of our overall spending.

Research and development. Research and development expenses consist primarily of compensation and benefits as well as allocated expenses for our facilities and IT infrastructure to support product development. Research and development expenses decreased to $23.3 million during the three months ended June 30, 2003, as compared to $26.3 million for the same period last year. The decrease primarily resulted from lower compensation charges of $2.5 million due to lower headcount and a reduction of $0.8 million in allocated facility and IT expenses.

We have recently released new and upgraded products and intend to introduce a number of new and upgraded products throughout fiscal year 2004. We anticipate continuing to invest significant resources into research and development activities in order to develop new products, advance the technology in our existing products and to develop new business opportunities.

General and administrative. General and administrative expenses consist primarily of compensation and benefits, fees for professional services and allocated expenses for our facilities and IT infrastructure. General and administrative expenses decreased to $9.7 million during the three months ended June 30, 2003 as compared to $10.6 million for the same period last year. The decrease was primarily due to lower professional fees of $3.1 million related to various legal matters settled in fiscal year 2003. This decrease was partially offset by a special charge of $1.1 million related to statutory reporting obligations in certain foreign jurisdictions and increased professional fees primarily related to compliance with certain provisions of the Sarbanes-Oxley Act.

We anticipate that general and administrative expenses in the near future will continue to include costs to comply with newly-proposed and enacted rules and regulations promulgated by the SEC and the Nasdaq National market, including those to hire additional personnel, as well as outside legal, accounting and advisory services.

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Amortization of intangible assets. As a result of adopting SFAS No. 142, Goodwill and Other Intangible Assets, we no longer amortize goodwill. However, we continue to amortize our other intangible assets with estimated useful lives.

The net book values of our intangible assets and their estimated remaining useful lives at June 30, 2003 were:

Amortization of intangible assets decreased to $0.4 million during the three months ended June 30, 2003 as compared to $3.4 million for the same period last year due to the impairment of certain intangible assets during the second quarter of fiscal year 2003. For the three months ended June 30, 2003, amortization of intangible assets excluded the amortization of certain developed technologies of $0.2 million, which were recorded as a component of cost of revenues.

The following table summarizes our estimated future annual amortization charges from our intangible assets at June 30, 2003:

Other income (expense)

Interest income and other, net. Interest income and other, net, was $0.7 million during the three months ended June 30, 2003, as compared to $1.1 million for the same period last year. Returns from interest-bearing cash, cash equivalents and short-term investments and gains and losses on foreign currency transactions and remeasurements represent the majority of the activity during the three months ended June 30, 2003 and 2002. The decline in our interest income and other, net during the three months ended June 30, 2003 is primarily due to lower yields on our cash, cash equivalent and short-term investment balances as compared to the same period last year, partially offset by higher average balances of cash, cash equivalents and short-term investments.

Gain (loss) on investments. We have historically held non-marketable investments in certain companies that are accounted for on a cost-basis. Impairment losses are recognized on these investments when we determine that there has been a decline in the fair market value of the investment that is other than temporary. During the three months ended June 30, 2003, we received cash of $0.1 million from one of our cost-basis investments. This investment was previously written off in accordance with our accounting policy. During the three months ended June 30, 2002, we recorded impairment losses of $0.4 million on our cost basis investments in accordance with our accounting policy.

We have also held common stock in public companies that are accounted for as available-for-sale investments. During the three months ended June 30, 2002, we wrote off one of these investments, which resulted in a charge of $0.4 million. The write-off resulted from the severe and continued decline in the investee’s common stock price, which was viewed as other than temporary.

Litigation settlement. In fiscal year 2003, we entered into a settlement agreement with Adobe Systems, Inc. (“Adobe”) whereby the claims of both parties were dismissed with prejudice. Accordingly, during the three months

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ended June 30, 2002, we recorded a reversal of $2.8 million in damages originally awarded to Adobe and recorded by us in our fiscal year 2002 consolidated financial statements.

Provision for income taxes. We recorded income tax provisions of $1.7 million and $0.6 million during the three months ended June 30, 2003 and 2002, respectively. Current taxes are primarily due to taxable income in certain foreign jurisdictions where we operate. Our provision for income taxes differs from the tax computed at the federal statutory rate of 35% due to state taxes and earnings considered as permanently reinvested in foreign operations. Future effective tax rates could be adversely affected if earnings are lower than anticipated in countries where we have lower statutory rates or by unfavorable changes in tax laws and regulations.

Under Financial Accounting Standards Board (“FASB”) Statement No. 109, Accounting for Income Taxes (SFAS No. 109”), deferred assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. SFAS No. 109 provides for the recognition of deferred tax assets if realization of such assets is more likely than not. We will continue to evaluate our ability to realize deferred tax assets on a quarterly basis.

At June 30, 2003, we had available federal and state net operating loss carryforwards of $539.6 million and $446.3 million, respectively. We also had unused research credit carryforwards of $32.6 million and $25.8 million for federal and California tax purposes, respectively. If not utilized, federal and state net operating loss and federal research credit carryforwards will expire through 2024. The California research credits may be carried forward indefinitely.

Liquidity and Capital Resources

At June 30, 2003, we had cash, cash equivalents, and short-term investments of $243.1 million, a 13% increase from the March 31, 2003 balance of $215.6 million. Working capital increased to $192.0 million at June 30, 2003, a 16% increase from the March 31, 2003 balance of $165.7 million. The following table summarizes our cash flow activities for the periods indicated:

Cash provided by operating activities during the three months ended June 30, 2003 was $11.1 million, as compared to cash provided by operating activities of $0.4 million for the same period last year. During the three months ended June 30, 2003, cash provided by operating activities resulted primarily from adjusting our net income of $6.7 million for non-cash depreciation and amortization expense of $5.0 million. Cash provided by operating activities during the three months ended June 30, 2002 of $0.4 million primarily resulted from adjusting our net loss of $2.0 million for non-cash depreciation and amortization expense of $8.0 million and net changes in operating assets and liabilities of $6.4 million.

Cash used in investing activities for the three months ended June 30, 2003 was $29.6 million, as compared to cash provided by investing activities of $20.2 million during the same period last year. During the three months ended June 30, 2003, cash used in investing activities was primarily due to net purchases of available-for-sale short-term investments of $29.4 million and property and equipment of $1.4 million. Cash provided by investing activities for the three months ended June 30, 2002 was $20.2 million, primarily due to net maturities and sales of available-for-sale short-term investments of $22.0 million, partially offset by purchases property and equipment of $2.3 million. We anticipate spending $10.0 million to $15.0 million on capital expenditures during the remainder of the current fiscal year.

Cash provided by financing activities during the three months ended June 30, 2003 was $16.8 million, as compared to $8.8 million during the same period last year. Cash provided by financing activities was due to proceeds received from the exercise of common stock options. Our liquidity and capital resources in any period could be impacted by the exercise of outstanding common stock options and cash proceeds upon exercise of these securities and securities reserved for future issuance under our stock option plans.

We expect that for the foreseeable future our operating expenses will constitute a significant use of our cash balances, but that our cash from operations and existing cash, cash equivalents, and available-for-sale short-term investments will be sufficient to meet our operating requirements through at least March 31, 2004. Cash from

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operations could be affected by various risks and uncertainties, including, without limitation, those related to: customer acceptance of new products and services and new versions of existing products; the risk of integrating newly acquired technologies and products; the impact of competition; the risk of delay in product development and release dates; the economic conditions in the domestic and significant international markets where we market and sell our products; quarterly fluctuations of operating results; risks of product returns; risks associated with investment in international sales operations; our ability to successfully contain our costs; and the other risks detailed in the section “Risk Factors That May Affect Future Results of Operations”.

At times, we may require additional liquid capital resources and may seek to raise these additional funds through public or private debt or equity financings. There can be no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders. If additional funds are required at a future date and are not available on acceptable terms, our business and operating results could be adversely affected.

We enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in the Euro, Japanese Yen and British Pound. At June 30, 2003, the net notional amount of forward contracts outstanding amounted to $27.2 million (see “Item 3 – Quantitative and Qualitative Disclosures About Market Risk” for additional information).

Commitments. Our principal commitments as of June 30, 2003 consist of obligations under operating leases for facilities, technology license agreements and letter of credit arrangements. We anticipate fulfilling our obligations under these commitments through our working capital.

Leases—We lease office space and certain equipment under operating leases, some of which contain renewal and purchase options. In addition, we sublease certain office space that we do not expect to occupy prior to lease termination. For certain of these operating leases, we have entered into agreements to indemnify lessors against certain additional costs through the term of the respective leases. To date, we have not made any significant indemnification payments under such agreements and no amount has been accrued in our consolidated financial statements with respect to these indemnification guarantees.

Technology licenses—We have entered into license agreements with third parties whose products or technologies are embedded in our software products. These license agreements generally provide for royalty payments on a fixed or per-unit basis.

The following table summarizes our contractual obligations at June 30, 2003, consisting of future minimum payments under operating leases and fixed minimum technology license payments:

Contractual Obligations

Letters of credit and restricted cash—We obtained letters of credit from financial institutions totaling $12.1 million and $11.8 million as of June 30 and March 31, 2003, respectively, in lieu of security deposits for leased office space. No amounts have been drawn against the letters of credit. We pledged, as security in trust for certain of the letters of credit, $10.9 million as of June 30 and March 31, 2003. These funds were invested in money market funds and are classified as non-current restricted cash in our consolidated balance sheets. We also have $0.5 million held against remaining payment obligations from certain business combinations that were completed in fiscal year 2003 and are classified as non-current restricted cash in our consolidated balance sheets.

Intellectual property indemnification obligations—The terms of our distribution agreements with our first-tier distributors, including OEMs, generally provide for a limited indemnification of such distributors against losses, expenses and liabilities arising from third-party claims based on alleged infringement by our products of an intellectual property right of such third party. The terms of such indemnification often limit the scope of, and remedies for, such indemnification obligations and generally include a right to replace an infringing product. To

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date, we have not had to reimburse any of our distributors for any losses related to these indemnification provisions pertaining to third-party intellectual property infringement claims. For several reasons, including the lack of prior indemnification claims and the lack of a monetary liability limit for certain infringement cases under the terms of the corresponding agreements with our distributors, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Other contingent liabilities and commitments—Through our normal course of business, we have also entered into other indemnification agreements or guarantees that arise in various types of arrangements, including those with financial institutions under banking arrangements. To date, we have not made any significant payments under such indemnification agreements or guarantees and no amount has been accrued on our consolidated financial statements with respect to those indemnification agreements or guarantees.

We anticipate fulfilling our obligations under these commitments through our existing working capital. Our principal commitments have not changed significantly since the time we included the disclosures in our 2003 Annual Report.

Stock-Based Compensation Plans.

Common stock to be issued. At June 30, 2003, we had the following shares available for issuance under our stock option plans (the “Macromedia Plans”), under previous non-plan stock option grants and ESPP:

Stock Option Plans. At June 30, 2003, shares of common stock available to be issued in connection with the Macromedia Plans amounted to:

The options outstanding under the plans indicated at (iii), (iv), (v) and (vii) (the “Prior Plans”) above were assumed by us as a result of merger activities. We assumed certain options granted to former employees of the acquired companies (the “Acquired Options”) under these plans. All of the Acquired Options have been adjusted to give effect to the respective conversion terms between us and companies acquired.

The 1992 Equity Incentive Plan expired in fiscal year 2003 and as such, no new types of stock-based awards will be granted in connection with this Plan. Options outstanding under this Plan will expire in accordance with the terms set forth in individual option agreements. Any option or purchase rights under this plan that become unexercisable, without having been exercised in full, shall not become available for future grants or sales.

The 1993 Directors Stock Option Plan provides for the granting of non-qualified stock option awards to our directors. The 1999 Stock Option Plan provides for the granting of non-qualified stock option awards to our directors, employees and consultants.

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The Allaire 1997, 1998 and 2000 Stock Incentive Plans provide for the granting of incentive and non-qualified stock options and stock bonus awards to our directors, employees and consultants.

The Andromedia 1999 Stock Option Plan provides for the grant of several types of stock-based awards, including incentive and non-qualified stock options, restricted stock and stock purchase rights, to our directors, employees and consultants.

The 2002 Equity Incentive Plan provides for the grant of several types of stock-based awards, including incentive and non-qualified stock options and restricted stock to our directors, employees and consultants.

During the three months ended June 30, 2003, we also granted non-plan stock options to purchase shares of our common stock to certain non-executive management. The stock options were granted with an exercise price equal to fair market value on the grant date and have terms similar to options granted under our stock option plans.

Stock options under the Macromedia Plans are granted at an exercise price equal to fair market value at the time of the grant and typically vest over four years from the date of grant. The stock options expire ten years from the date of grant and are normally canceled three months after an employee’s termination. Any option that becomes unexercisable under the Macromedia Plans, excluding the 1992 Equity Incentive Plan, without having been exercised in full, shall become available for future grant or sale under the respective plan.

The following table summarizes the stock option activity for the three months ended June 30, 2003: