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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended December 31, 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: 69.1 million shares of Common Stock, $0.001 par value per common share, outstanding on January 26, 2004, including 1.8 million shares held in treasury.

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MACROMEDIA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 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 Consolidated Statements of Operations

(In thousands, except per share data)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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MACROMEDIA, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

See accompanying notes to condensed consolidated financial statements.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Macromedia, Inc. (the “Company” or “Macromedia”) provides software that enables software and website developers, website designers and business users to create and more effectively deliver content to users through the Internet, fixed media, wireless and digital devices. The Company’s integrated family of technologies enables the development of a wide range of digital experiences 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 licensing agreements with original equipment manufacturers (“OEM”s), device manufacturers and media carriers.

In accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, a reclassification was made on the Company’s condensed consolidated statements of operations for the three and nine months ended December 31, 2002 to include the amortization and impairment of acquired developed technology as a component of cost of revenues. Historically, the Company had classified the amortization and impairment of acquired developed technology as a component of operating expenses. As a result of the reclassification, reported amounts for cost of revenues increased and operating expenses decreased by $0.2 million and $21.5 million for the three and nine months ended December 31, 2002, respectively.

Certain other reclassifications have been made to the condensed consolidated statements of operations as of December 31, 2002 and for the three and nine months then ended to conform to the presentation at December 31, 2003. These include the Company’s adoption of two accounting pronouncements in fiscal year 2003 which resulted in reclassifications to net revenues for 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. These reclassifications did not impact the Company’s previously reported net income (loss) but increased net revenues by $0.6 million and $1.6 million for the three and nine months ended December 31, 2002, respectively.

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

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

fiscal year ended March 31, 2003. The results of operations for the three and nine months ended December 31, 2003 are not necessarily indicative of the results for the fiscal year ending March 31, 2004 or any other future periods.

Software Revenue Recognition.    The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.

Revenues recognized from software licenses are recognized upon shipment provided that persuasive evidence of an arrangement exists, collection of the resulting receivables is deemed probable and the payment terms are fixed and determinable. The Company also maintains allowances for anticipated product returns and rebates to distributors. Revenues from consulting, training and other services are generally recognized as the services are performed. When shrink-wrap software licenses are sold together with services, revenues are allocated to each element of the arrangement based on the relative fair values of the elements, such as software products, maintenance, support and training.

The determination of fair value is based on objective evidence that is specific to the Company, commonly referred to as vendor-specific objective evidence (“VSOE”). Fair value for the Company’s software products, maintenance, support and training is based on prices charged when the element is sold separately. In certain instances where an element has not been sold separately and the VSOE of fair value is unavailable, fair value is established by a price determined by the Company’s management, if it is probable that the price, once established, will not change before the separate introduction of the element into the marketplace. If such evidence of fair value for each element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that evidence of fair value does exist or until all elements of the arrangement are delivered. If the only remaining undelivered element is maintenance and support, revenue for all elements would be recognized ratably over the period of maintenance and support. If in a multiple element arrangement, fair value does not exist for one or more of the delivered elements in the arrangement, but fair value does exist for all undelivered elements, then the residual method of accounting is applied. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.

The Company licenses products to OEMs or provides end-user customers the right to use multiple copies. These arrangements generally provide for nonrefundable fixed fees. Revenues are recognized upon delivery of the product master or the first copy, provided all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed and determinable and collection is probable. Per-copy royalties in excess of the fixed minimum amounts are recognized as revenues when earned. If maintenance and support is included in the contract, it is unbundled from the license fee using the Company’s objective evidence of the fair value of the maintenance and support. If objective evidence of the fair value of the maintenance and support is not available, the revenues from the entire arrangement are recognized ratably over the maintenance and support term.

Fees from volume licenses are recognized as revenues upon shipment provided that all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed and determinable, collection is probable and the arrangement does not involve services that are essential to the functionality of the software. Fees from licenses sold together with consulting services are generally recognized upon shipment provided that the above criteria have been met and payment of the licenses is not dependent upon the performance of consulting services. Revenues from maintenance and support are recognized on a straight-line basis over the term of the contract.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

During periods of product transition when upgraded versions of existing products are being introduced and released for commercial shipment, we provide eligible end-user customers who purchase the older product version during a specified time frame the right to receive the upgrade version of the licensed product at no additional charge. Such transactions are multiple-element arrangements under which we defer revenue equal to the fair value of the specified upgrade, reduced by the estimated percentage of customers who will not exercise the upgrade right in the specified time period. Estimates of customers not exercising the upgrade right are based upon historical analyses. The actual percentage of customers not exercising the upgrade right has been materially consistent with our estimates.

For desktop software products, the Company offers complimentary 90-day technical support to end-user customers who have registered their products via e-mail or over the phone. This cost is included as part of the initial license fee charged to the customer. The Company has determined that the cost to provide this support is insignificant. In addition, no product updates are provided during this period. As a result, the Company does not defer any portion of the license fee related to this support.

Stock-Based Compensation.    In fiscal year 2003, the Company adopted the disclosure provisions in Statement of Financial Accounting Standard (“SFAS”) No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment to SFAS No. 123, Accounting for Stock-Based Compensation. The Company accounts for its stock option plans and employee stock purchase plans using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, 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 a 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 (in thousands, except per share data):

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

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 and nine months ended December 31, 2003 and 2002.

On December 19, 2003, the Company acquired all of the outstanding stock of privately-held eHelp Corporation (“eHelp”), a provider of rich media help authoring software applications. By combining eHelp solutions with the Macromedia authoring family and with its business solutions products, developers will be able to create and deliver rich user assistance and tutorial content. The purchase price of eHelp was $65.7 million, including direct transaction costs of approximately $0.7 million. The purchase price was comprised of the issuance of approximately 2.4 million shares of the Company’s common stock valued at $42.3 million (based on the average of the closing prices of the Company’s common stock on the date the number of shares to be issued was determined and the two trading days before and the two trading days after such date), $18.4 million in cash, of which $4.9 million was paid, the balance of which remains payable subject to certain indemnification obligations of eHelp, and the assumption of converted options to purchase 423,000 shares of the Company’s common stock with a Black-Scholes fair value of $4.3 million. The corresponding obligations have been included in current liabilities as acquisition-related accrued liabilities. In connection with the acquisition, the Company acquired net tangible assets of $8.2 million, including $15.2 million of cash. The acquisition was recorded using the purchase method of accounting. The results of eHelp’s operations were combined with those of the Company from the date of acquisition and were not material for the three and nine months ended December 31, 2003.

The preliminary purchase price has been allocated based on the estimated fair value of net tangible assets and appraised values of intangible assets acquired as follows (in thousands):

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The acquired net tangible assets of eHelp were allocated in the accompanying condensed consolidated balance sheets as follows (in thousands):

The value allocated to developed technology and trade name and customer list will be amortized over four years. The acquired in-process technology was immediately expensed because technological feasibility had not been established and no future alternative use exists. The value allocated to goodwill of $44.0 million will not be amortized in accordance with SFAS No. 142, Goodwill and Other Intangible Assets (see Note 6) and is attributable to the premium paid for the opportunity for enhanced revenue growth in the automated user assistance software market. Pro forma information has not been provided as the acquisition is not material to the Company’s consolidated operating results.

In August 2003, the Company exercised its option to purchase certain real property, including land, buildings and related improvements, in San Francisco, California, for a total purchase price of $55.0 million. The new facilities, which are in immediate proximity to the Company’s current headquarters, consist of a parking structure and two office buildings. These premises will serve as Macromedia’s corporate headquarters where it will conduct various corporate, product development and operational activities.

The Company purchased two of the three properties for $14.7 million during August 2003, funding the purchase with available cash. Of these properties, the parking structure was placed into service during the three months ended September 30, 2003 and is being depreciated over an estimated useful life of 40 years. The second property, an office building, has been recorded in construction in process, on the Company’s condensed consolidated balance sheet within property and equipment, net, as the Company prepares the structure for future occupancy. For the third property, the Company deposited $2.7 million into escrow, and will fund the remaining $37.6 million of the purchase price with available cash upon closing, which is anticipated to occur on or before April 30, 2004. These properties will also be depreciated over an estimated useful life of 40 years.

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 $242.3 million and $201.4 million at December 31, 2003 and March 31, 2003, respectively. The Company continues to amortize its other intangible assets, including acquired developed technologies, over their estimated useful lives. The amortization of acquired developed technologies, which is a component of cost of revenues, was $0.4 million and $0.2 million during the three months ended December 31, 2003 and 2002, respectively. During the nine months ended December 31, 2003 and 2002, the amortization of acquired developed technology was $1.0 million and $5.8 million, respectively. The amortization of other intangible assets, excluding acquired developed technology, was $0.3 million and $0.2 million during the three months ended December 31, 2003 and 2002, respectively, and $0.8 million and $1.3 million during the nine months ended December 31, 2003 and 2002, respectively.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 December 31, 2003 and March 31, 2003, intangible assets consisted of the following (in thousands):

During the nine months ended December 31, 2002, the Company performed an impairment analysis on the acquired developed technology asset associated with its fiscal year 2001 acquisition of Allaire Corporation (“Allaire”) under the guidance of SFAS No. 86. As a result of this analysis, the Company recorded an impairment charge of $15.7 million, which represented the amount by which the carrying value of the acquired developed technology asset exceeded its fair value, using the asset’s net realizable value as the fair value. As a result of this impairment, the Company also performed an impairment analysis on the trade name associated with the Allaire acquisition under the guidance of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This analysis resulted in an impairment charge of $1.7 million, which primarily represented the amount by which the carrying value of the ColdFusion trade name intangible asset exceeded its fair value, estimated by calculating its discounted cash flows.

At December 31, 2003, the goodwill balance increased by $40.9 million from the March 31, 2003 balance of $201.4 million. The increase was due to an addition of $44.0 million related to the December 2003 acquisition of eHelp, offset by a $3.1 million reduction in goodwill related to the utilization of various tax assets resulting from a business combination conducted in prior periods. Because these tax benefits had been fully reserved when initially recorded, SFAS No. 109, Accounting for Income Taxes, requires that recognition of such benefit be reflected as a reduction of goodwill rather than a reduction to the Company’s provision for income tax.

The following table summarizes the estimated future amortization charges from the Company’s amortizable intangible assets at December 31, 2003 (in thousands):

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 (“SAB”) 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, included in operating expenses.

Details of the accrued restructuring balances and payment activity recorded during the nine months ended December 31, 2003 are presented in the following table (in thousands):

At December 31, 2003, future minimum gross lease obligations for the Company’s restructured facilities extending through fiscal year 2011 amounted to $73.3 million. The accrued restructuring balance at December 31, 2003 also reflects future sublease income of $40.7 million to be received under contractual sublease arrangements and estimated future sublease income of $11.7 million.

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 (loss) (“AOCI”) on its Condensed Consolidated Balance Sheets. The Company records any ineffective portion of the hedging instruments in other income (expense), net on its condensed consolidated statements of operations, which amounts were immaterial during the three and nine months ended December 31, 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 amounts reported in AOCI at December 31, 2003 will be reclassified to operations in eight months or less. At December 31, 2003, the outstanding cash flow hedging derivatives had maturities of twelve months or less.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table depicts cash flow hedge accounting activity as a component of AOCI for the nine months ended December 31, 2003 (in thousands):

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), net on its Condensed Consolidated Statements of Operations. These derivative instruments substantially offset the remeasurement gains and losses recorded on identified foreign currency denominated assets and liabilities. At December 31, 2003, the Company’s outstanding balance sheet hedging derivatives had maturities of twelve months or less.

The Company has recognized gains and losses on its publicly-traded and privately-held investments and on the sale of acquired technology as follows (in thousands):

The Company has held common stock in publicly-traded companies that are accounted for as available-for-sale investments. It is the Company’s accounting policy to record impairment losses on investments in publicly-traded equity securities when it is determined that there has been a decline in the fair market value of the investment that is other-than-temporary. The Company has recorded realized gains upon the subsequent sales of these publicly-traded equity securities determined as the difference between the market (sales) price and the carrying value. At December 31, 2003, the Company had no remaining publicly-traded equity securities.

The Company has also historically held investments in the common and preferred stock of certain privately-held companies that are accounted for under the cost method, reviewing such investments for factors which indicate that declines in value may be other-than-temporary and recording impairment charges when declines in value are deemed to be other than temporary. These factors include evaluating, as available, the cash flows and profitability of the investee, general economic conditions, trends in the investee’s industry and trends in publicly-traded peers of the investee. Gains from privately-held equity securities are recorded at the time the investments

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

are sold if such investments are sold at a value exceeding the carrying value and/or upon the receipt of cash proceeds from distributions made by the entity. At December 31, 2003 and 2002, the Company held various interests in privately-held companies for which no carrying value was recorded on the Company’s Condensed Consolidated Balance Sheet.

In July 2002, the Company entered into a settlement agreement with Adobe Systems, Inc. (“Adobe”), whereby the outstanding patent claims between the parties were dismissed with prejudice. Accordingly, the Company’s condensed consolidated statements of operations for the three and nine months ended December 31, 2002 reflects the reversal of $2.8 million in damages originally awarded to Adobe and recorded by the Company in its fiscal year 2002 consolidated financial statements. Offsetting this amount, the Company reached a settlement in the amount of $2.5 million with RLI Corporation in the nine months ended December 31, 2002.

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 common shares outstanding during the period plus potentially dilutive common shares from outstanding options and warrants to purchase common stock. 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 (in thousands, except per share data):

At March 31, 2003 and December 31, 2003, the Company has classified 1.8 million shares of its common stock as treasury stock. These shares were previously repurchased on the open market. These shares are recorded at cost and are shown as a reduction of stockholders’ equity and excluded from the basic weighted-average number of common shares outstanding.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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 (in thousands, except per share data):

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. All outstanding stock options during the nine months ended December 31, 2002 were excluded from the diluted earnings per share computation because the Company reported net losses for that period.

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 (in thousands):