Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the Fiscal Year Ended March 31, 2004

OR

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of September 30, 2003, the last business day of the Registrant’s most recently completed second fiscal quarter: $1.6 billion (based on the closing sales price of the Registrant’s common stock on that date). See definition of affiliate in Rule 12b-2 of the Exchange Act. As of June 2, 2004, there were 70.9 million shares of the Registrant’s common stock, $0.001 par value per share, outstanding, including 1.8 million shares held in treasury.

DOCUMENTS INCORPORATED BY REFERENCE

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

Table of Contents

MACROMEDIA, INC.

FORM 10-K

ANNUAL REPORT

FOR THE FISCAL YEAR ENDED MARCH 31, 2004

TABLE OF CONTENTS

2

Table of Contents

PART I

Except for historical financial information contained herein, the matters discussed in this Form 10-K 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 (“SEC”). 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.

ITEM 1.    BUSINESS

Overview

We are an independent software company providing software that empowers designers, developers and business users to create and deliver effective user experiences on the Internet, fixed media, and wireless and digital devices. Our integrated family of technologies enables the development of a wide range of internet solutions including websites, rich media content and Internet applications across multiple platforms and devices.

We were incorporated in Delaware in February 1992. Our principal executive offices are located at 600 Townsend Street, San Francisco, California 94103.

We file our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 with the SEC electronically. The public may read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC. The address of that site is http://www.sec.gov. We also make available free of charge copies of our SEC filings and submissions on our website, www.macromedia.com, as soon as practicable after electronically filing or furnishing such documents to the SEC.

Market Opportunity

Several broad industry trends in the development of software systems for corporations, government and educational institutions shape the market opportunities for our products.

First, the digital world has come to understand what the physical world has known for some time: great experiences build great businesses. Organizations are increasingly focused on providing great experiences for their customers, partners and employees both in the physical and digital worlds.

Second, as technologies evolve to meet user demands, the web environment is evolving from a flat text oriented web to a rich multimedia web with the use of images, animation, voice and increasingly, video.

Third, whereas, in the past, business users hired technical users to write to the web, trends suggest that business users increasingly want the flexibility to write to the web themselves. These trends are creating new market opportunities for applications that facilitate the creation and posting of information to websites.

3

Table of Contents

Fourth, the market for wireless and digital devices, including Internet-connected devices, cellular phones, personal digital assistants, game consoles and home entertainment systems continues to expand. This expansion increases the opportunities for applications that build on these evolving platforms and user experiences.

Fifth, organizations are continuing to adopt internet technologies as a primary mechanism for deploying content and applications to end-users. This trend began in the mid 1990s and is continuing today as more and more organizations recognize the benefits of using internet technologies to communicate and interact with employees, customers and partners, moving the development of websites from smaller design firms to integral functions within Information Technology (“IT”) departments.

Sixth, large organizations are migrating existing business systems to a new generation of application-server technologies such as Java application servers and the Microsoft .NET framework.

In the context of these broad industry trends, we believe there is a significant opportunity for software that makes it easier and more cost-effective to create content and applications that provide great user experiences. Creating high-quality, responsive and effective interfaces for users requires a combination of client software for enabling the display of information and user interactions, server software that can extend application server communications technologies to handle the unique needs of generating a high-quality user experience and development tools that can be used to design content, develop interactions and integrate content and application functionality.

The current trends in the business and government sectors continue to influence the long-term demands for specialized computing skills in the labor force. As a result, educational institutions in both the K-12 and higher education markets are seeking to incorporate technology into their curricula that enables students to learn professional skills and gain general computer competencies through the use of software. The demand for technology in the education market represents another opportunity for us to sell our products directly to educational institutions, instructional program designers and students.

Products

Macromedia serves three broad markets, the Designer and Developer, the Business User and the Consumer, with its product offerings as follows:

DESIGNER AND DEVELOPER MARKET

Products marketed to Designers and Developers include web development tools, multimedia and graphics software tools and servers for creating rich internet applications (“RIAs”). These products are primarily comprised of our MX family of products which provide a complete, integrated solution for building internet

4

Table of Contents

applications that combine the interactivity of multimedia and desktop applications, the multi-way communication capabilities of collaborative computing systems and the flexible deployment characteristics of web applications. The products in the Macromedia MX family include Macromedia Dreamweaver MX, Macromedia Flash MX, Macromedia Flash MX Professional and Macromedia Fireworks MX. These products are licensed individually and together in a suite, Macromedia Studio MX, which also includes Macromedia FreeHand MX and a development license of ColdFusion MX Server Professional Edition. A substantial portion of our revenues are derived from licensing the software products included in our Macromedia MX product family.

Our server software, which includes Macromedia ColdFusion MX and Macromedia JRun, is used by thousands of companies worldwide to develop and deploy web applications. Adding to our server software product portfolio, we introduced Macromedia Flex in March 2004 for enterprise programmers. Our server products are available across multiple platforms including the leading server Operating Systems (“OS”) and Unix NT platforms.

We also offer client software which is enabling technology allowing users to view content created in our Flash and Shockwave formats. We distribute our client software for the personal computing platform directly through downloads from our websites at no charge and through original equipment manufacturers (“OEMs”) such as Microsoft Corporation (“Microsoft”), Apple Computer, Inc. (“Apple”) and Dell Inc. (“Dell”). In addition, we also license our client software for non-personal computing platforms on a fee per license basis to OEMs including Casio Computer Co., Ltd., Nokia Corporation and Sony Corporation. Our two primary client software products are Macromedia Flash Player and Macromedia Shockwave Player. Depending on the end user of our licensed client software, we reflect related revenues as part of either our Designer and Developer market or our Consumer market.

Macromedia Studio MX—Macromedia Studio MX is a suite of integrated application tools for developing the full spectrum of internet solutions, from simple HTML to the emerging class of RIAs. Macromedia Studio MX includes Macromedia Dreamweaver MX, Macromedia Flash MX, Macromedia Fireworks MX, Macromedia FreeHand MX and a developer edition of ColdFusion MX. Studio MX is also available with Flash MX Professional.

Macromedia Dreamweaver MX—Macromedia Dreamweaver MX is a leading professional software development environment for creating websites and applications. It includes capabilities for visually designing HTML pages, coding HTML and application logic and working with application server technologies. Macromedia Dreamweaver MX is used by designers and developers to create a broad range of web solutions for publishing online commerce, customer service and online educational content. Macromedia Dreamweaver MX is available for both the Microsoft Windows and Apple OS X operating systems.

Macromedia Flash MX—Macromedia Flash MX and Flash MX Professional provide development environments for creating internet user experiences that integrate animations, motion graphics, sound, text, video and application functionality. Solutions built with Macromedia Flash MX are deployed via the web to browsers and Internet-connected devices that run Macromedia Flash Player. Macromedia Flash MX and Flash MX Professional are part of the Macromedia MX product family, which are designed to work with and complement the other Macromedia MX products, including integration on the server side with Macromedia ColdFusion MX. Macromedia Flash MX and Flash MX Professional are available for both the Microsoft Windows and Apple OS X operating systems.

Macromedia Fireworks MX—Macromedia Fireworks MX is a professional graphics design tool for building interactive web graphics. Macromedia Fireworks MX gives professional designers, as well as developers who need to create graphics for websites and applications, tools for creating images that can be deployed to web browsers and Macromedia Flash Player. Macromedia Fireworks MX integrates with Macromedia Flash MX and Macromedia Dreamweaver MX. Macromedia Fireworks MX is available for both the Microsoft Windows and Apple OS X operating systems.

5

Table of Contents

Macromedia FreeHand MX—Macromedia FreeHand MX is a professional vector graphics tool that designers and illustrators use to create high quality images that can be scaled. Macromedia FreeHand MX supports developing images for print, the web and the Macromedia Flash Player and is available for both the Microsoft Windows and Apple OS X operating systems.

Macromedia Director MX—Macromedia Director MX is a tool for creating professional multimedia content that combines images, text, audio and video into presentations and interactive experiences. For websites, Macromedia Director MX provides a powerful solution for delivering multimedia content that supports three dimensional images and animations for use in various markets, including education, games and commerce. In addition, Macromedia Director MX enables the creation of fixed-media content for CD titles and DVD titles in the entertainment, education and corporate training markets. Macromedia Director MX is available for both the Microsoft Windows and Apple OS X operating systems.

Macromedia RoboHelp—Macromedia RoboHelp (“RoboHelp”) is a help authoring tool used by developers and technical writers to create professional help systems and documentation for desktop and web-based applications. RoboHelp users can leverage support for XML, portable document format (“PDF”) import/export, content management, distributed workforces, team authoring capabilities, as well as the newly released JavaHelp 2.0 from Sun Microsystems, Inc. RoboHelp is available for both the Microsoft Windows operating system.

Macromedia RoboInfo—Macromedia RoboInfo (“RoboInfo”) is a tool which enables organizations to easily and cost-effectively publish and manage policies and procedures online. Information technology managers, human resources professionals and call center managers use RoboInfo to deliver information online, from employee manuals and reference materials to policies and procedures.

Macromedia Authorware—Macromedia Authorware is a rich media authoring tool used to develop caption based e-learning on Windows and Mac based platforms. Uses of Macromedia Authorware range from creating web-based tutorials to simulations incorporating audio and video. Applications developed with Macromedia Authorware can be delivered on the web, over corporate networks or on CD-ROM. Macromedia Authorware is available for both the Microsoft Windows and Apple OS X operating systems.

Macromedia ColdFusion MX—Macromedia ColdFusion MX provides a server-scripting environment and a set of features for building database-driven applications that are accessible through web browsers and Macromedia Flash Player. ColdFusion MX is used by organizations that need a way to quickly build scalable business applications. Macromedia ColdFusion MX is built on an open Java technology architecture. As a result, it can be deployed on third-party Java application servers that support the Java 2, Enterprise Edition (“J2EE”) specification, including Macromedia JRun, International Business Machine Corporation’s (“IBM”) WebSphere and Sun’s SunONE application servers.

Macromedia JRun—Macromedia JRun is a Java application server based on the J2EE specification. While not part of the Macromedia MX product family, Macromedia JRun integrates with our development tool offerings and is designed to compete at the mid-range of the Java application server market through ease-of-use and price. Macromedia JRun is used to deploy applications for functions such as online banking and customer service.

Macromedia Flex—Released in March 2004, our newest server product, Macromedia Flex (“Flex”), provides a solution for enterprise programmers that build and deploy enterprise class RIAs and leverage Macromedia’s widely used Flash Player technology. Flex is a presentation server and application framework that helps developers put more effective interfaces on critical business applications. With Flex, enterprise-class applications are able to combine the rich user interface of desktop software with the reach and ease of deployment of the web.

Macromedia Flash Player—Macromedia Flash Player is the most widely distributed rich client software on the Internet. The player provides a runtime environment for text, graphics, animations, sound, video, application

6

Table of Contents

forms and two-way communications. According to a March 2004 survey conducted by The NPD Group, Inc. (“The NPD Group”), a provider of global information for measuring product movement and consumer behavior in a variety of industries, 98% of worldwide web users, which represents approximately 482 million personal computing devices, could view content created for the Flash Player. The Flash Player is also available on a wide range of Internet-connected devices such as wireless and handheld devices, interactive TV and game consoles.

Macromedia Shockwave Player—Macromedia Shockwave Player is a rich media player used for deploying multimedia content for use in Internet solutions including education, training, games and commerce. According to a survey conducted by The NPD Group, at March 31, 2004, Macromedia Shockwave Player was available to approximately 61% of worldwide web users, which represents approximately 298 million personal computing devices.

BUSINESS USER MARKET

We introduced products which address the needs of non-technical business users to communicate, create and deliver information over the Internet into the market place in fiscal year 2003. In fiscal years 2004 and 2003, these revenues comprised 6% and 1% of total net revenues, respectively. Products which address the needs of non-technical business users include the following:

Macromedia Contribute—Macromedia Contribute is an easy way to update, add and publish web content. With Macromedia Contribute, non-technical business users can make changes to intranet and Internet websites while automatically maintaining site standards for style, layout and code. Macromedia Contribute enables content providers and web professionals to save time and streamline the web-content maintenance process.

Macromedia Breeze—Macromedia Breeze solutions enable organizations to quickly provide customers, partners and employees with consistent, just-in-time education and training online using Macromedia Flash content and Microsoft PowerPoint to author their content. Macromedia Breeze consists of the core Breeze Platform and modules that provide specific application functionality, including Breeze Training and Breeze Live. Breeze can be deployed with either some or all of these components together. Breeze Training allows the user to build a complete online training system with PowerPoint presentations that include surveys, tracking, analysis, course administration and content management. Breeze Live allows users to meet instantly with colleagues in virtual online meetings, to provide seminar and training sessions as well as to conduct business presentations through the web.

Macromedia RoboDemo—Macromedia RoboDemo (“RoboDemo”) is a tool which enables users to create interactive demonstrations and software simulations in Flash format. RoboDemo records users’ actions in any application and instantly creates Flash simulations with visible and audible mouse movements. The small file size and high resolution make RoboDemo simulations and demos easy to publish online or burn onto a CD for use in training, sales, marketing or user support.

CONSUMER MARKET

Our strategy in addressing the Consumer Market is to license our Flash Player technology (described above in our Designer and Developer products) to device manufacturers, telecommunications carriers and news and entertainment networks who embed our technology on their platforms, enabling them to provide multimedia content to their customers. As Flash Player technology penetrates digital devices and platforms, millions of developers are able to use the Flash MX authoring products to create both engaging consumer content and rich mobile business applications. In fiscal years 2004, 2003 and 2002, Consumer revenues comprised 3%, 1% and 1% of total net revenues, respectively.

Macromedia Flash Lite—Macromedia Flash Lite is a new Macromedia Flash profile specifically developed for mobile phones. This profile is designed to require fewer device resources and to operate in most mass-market phones shipping this year. Beginning with the NTT DoCoMo 505i series mobile phones, every i-mode handset has the embedded Macromedia Flash profile available for use from within the browser and the ability to have Flash based screen savers.

7

Table of Contents

Product Development

We perform the majority of our research and product development in the United States. Development teams or contractors in various countries perform quality and assurance, testing, translation and localization of foreign-language versions of certain products.

The following table summarizes our consolidated research and development expenses for fiscal years 2004, 2003 and 2002:

In addition, amortization of capitalized software costs related to localization activities of $3.6 million, $4.6 million and $4.0 million were recognized in fiscal years 2004, 2003 and 2002, respectively, and included in cost of net revenues.

Because the software industry is characterized by rapid technological change, a continuously high level of expenditure is required to enhance existing products and develop new products. We believe that our future success depends on our ability to enhance existing products as well as develop and introduce new products on a timely basis. It is critical that new products and enhancements keep pace with constantly evolving network infrastructure, internet technology and competitive offerings. We continue to adapt our products to new hardware and software platforms in order to embrace industry standards and, therefore, we will continue to incur significant operating expenses in the future for product research and development. As part of this effort, we may, as appropriate, acquire additional software and system technologies that we consider critical to meet the needs of web developers, business users and consumers.

Independent firms and contractors perform some of our product development activities, while other technologies used in our products are licensed from third parties. We either own or license the software developed by third parties. As qualified development personnel are in high demand, independent developers, including those who currently develop products for us, may not be able to provide development support to us in the future. Similarly, we may not be able to obtain and renew existing license agreements on favorable terms, if at all, and any failure to do so could harm our business.

Marketing and Sales

Our customer-related operations are divided into three primary geographic regions, North America, Europe and Asia Pacific and Other, and are supported by global marketing and sales organizations. Through these organizations, we extend our brand worldwide through various marketing techniques, including direct mailing and advertising both on the web and in print, customer seminars and trade shows. We also work directly with our distributors, resellers and OEMs on cooperative advertising, promotions and trade show presentations.

A substantial portion of our revenues is derived from the sale of our software products through a variety of distribution channels, including traditional software distributors, catalogs, value-added resellers (“VARs”), electronic commerce through our websites, OEMs, hardware and software superstores and retail dealers.

Our ability to effectively distribute our products, particularly in the international markets we serve, depends in part upon the financial and business condition of our distributor network. From time-to-time, computer software distributors experience financial and operating difficulties, particularly during times of economic contraction and may do so in the future. Moreover, the changing distribution models resulting from our increased focus on direct sales to major accounts and the use of electronic commerce through our websites, may impact our distributor network in the future.

8

Table of Contents

One distributor, Ingram Micro, Inc. accounted for 21%, 28%, and 28% of our consolidated net revenues in fiscal years 2004, 2003, and 2002, respectively. A second distributor, Tech Data Corporation accounted for 13%, 8% and 8% of our consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively. The loss of these distributors or a significant reduction in business with these or other major distributor could harm our business.

We also sell our products directly to large corporate and educational institutions, typically under volume licensing agreements where customers have the right to reproduce and use our software products. We expect that our direct sales force will continue to grow in conjunction with expansion in our Business User and Consumer markets.

Internationally, our products are sold through our distributor network and directly to users. Sales outside of North America accounted for approximately 44%, 42% and 40% of our consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively. In certain cases, distributors have exclusive distribution rights to certain products in their respective territories.

We typically ship products shortly after receipt of an order, which is a common practice in the computer software industry. As a result, backlog on any particular date may not be indicative of actual sales during any succeeding period.

Customer Support and Training

We believe that providing a high level of customer service and technical support is necessary to achieve rapid product implementation that, in turn, is essential to customer satisfaction and continued license sales and revenue growth. Our customers have a broad choice of support options depending on the level of service they desire. We provide free access to a wide range of technical information on our websites, as well as online forums for each of our products. For our Designer and Developer and Business User products, we offer complimentary 90-day technical support for end-users who have registered their products with us via email or over the phone.

In addition, we offer a number of paid support and maintenance options for our end-users, including consumers, professionals and enterprise-level customers. These options include single incident-based support options, annual support plans with configurable service levels, as well as access on a “24 by 7” basis to production assistance support. Optionally, these programs include Macromedia DevNet Subscriptions (“DevNet”) that we introduced in March 2003. Our DevNet Professional program offers a comprehensive set of tools, servers, extensions, components and other resources over a one-year subscription period.

Our customers also depend on support from our worldwide network of VARs, OEMs, training centers and third-party developers. We offer several programs that provide marketing, sales and technical support to augment services provided by our global partner network.

We offer both online and classroom-based training as well as formal certification for our Designer and Developer products through a worldwide network of authorized third-party training centers and certified Macromedia instructors. In addition, training and instruction on the use of Macromedia products is provided by high schools, colleges and technical schools throughout the world. We encourage the expanded use of Macromedia products for classroom training by providing approved curricula and through reducing the pricing on the products we license to schools and students.

Production and Suppliers

Production of our finished products sold primarily through distributors involves replication of the software, the printing of user manuals and product assembly. The production and distribution of finished goods is performed by a third-party manufacturer. A significant amount of our product manufacturing is currently performed by this vendor at facilities located in the United States, the Netherlands and Singapore. Our current vendor operates multiple facilities around the world that are capable of serving additional needs that we may

9

Table of Contents

have. In addition, these facilities could serve as viable back-ups in the event manufacturing difficulties arise at the existing facilities used to support our business. Further, we believe there are other third-party vendors capable of fulfilling our production and distribution requirements. To date, we have not experienced any difficulties or delays in the production of our software and documentation or in the distribution of finished products.

We also license and distribute our software products directly to end-users through a volume-licensing program. The management, tracking and fulfillment of the volume license orders are performed by a third party at its facilities located in the United States and France.

In addition, we license and distribute our software products directly to end-users over the Internet through our websites. With an increase in revenues derived from online sales, customer access to our websites affects the volume of software products we sell and thus affects our consolidated net revenues. A third party hosts the primary computer equipment and communications systems that we use to run our websites. We have also developed applications internally that we use to run some of our websites and other non-customer facing e-commerce platforms. To prevent system interruptions and to ensure integration with our other business systems, we, as well as our third-party service providers, periodically upgrade software, hardware and network infrastructures used in the operation of our websites to accommodate increased traffic and sales volume on our websites.

Competition

We operate in a highly competitive market characterized by market and customer expectations to incorporate new features and to accelerate the release of new products. These market factors represent both opportunities and competitive threats to us.

In the Designer and Developer market, we compete directly and indirectly with major vendors including Microsoft, International Business Machines (“IBM”) and Adobe Systems, Inc. (“Adobe”). The web application development tools market is very competitive. While we believe that we are a leader in the market for professional web development tools with Macromedia Dreamweaver MX, we face competition from Adobe GoLive as well as competition from mid-range products, such as Microsoft’s FrontPage. We believe our ability to compete favorably in this market in the future will require continued product development and innovation to produce new functionality that can integrate with our existing products so that we can offer our customers a more comprehensive suite of products and solutions.

Our server products compete in a highly competitive and rapidly changing market for application server technologies. We face competition from major vendors including Microsoft, IBM, BEA Systems, Inc. (“BEA”) and Sun Microsystems, Inc. (“Sun”). In addition, Macromedia ColdFusion MX competes with several technologies available today at no cost including the PHP and PERL programming environments that are available for the Apache web server. Macromedia JRun competes with large Java application server vendors as well as products available at no cost including the Tomcat Java Servlet Engine provided by the Apache Foundation. Also, our newest server product, Flex provides a solution to Java, C++ and C Sharp programmers wanting to deploy Enterprise class, rich web applications and leverages the ubiquitous Flash Player technology. We believe our future results largely depend on our ability to innovate by developing new products and providing enhancements and upgrades of current product offerings that compete favorably with respect to reliability, performance, ease of use and pricing.

Today our client technologies, Macromedia Flash Player and Shockwave Player, command leadership positions in their respective categories. For animation and application user interfaces, Macromedia Flash Player is the most widely distributed web browser plug-in worldwide. We distribute our client technologies through OEM agreements with a number of major operating system vendors and hardware manufacturers. For application development, Macromedia Flash Player faces competition from new vendors and technology providers. The on-going success of Macromedia Flash Player could be threatened by new capabilities added to web browsers or

10

Table of Contents

by alternatives provided by major operating system vendors including Microsoft and Apple. We believe that our existing market penetration and user acceptance provides our client technologies with a competitive advantage over other competing technologies.

Our Business User market addresses the needs of a much broader set of customers. Competition for the non-technical business user comes from a much broader range of companies. Generally, these products target a specific business work flow such as updating content on a website or using the Internet to communicate with a company’s customers, partners and employees. Companies in this market space include Microsoft, IBM and WebEx Communications, Inc.

In our Consumer market, there are many alternative and overlapping technologies such as Java, MPEG-4 or SVG, which may slow the adoption of our Flash Player. Additionally, there are a number of companies that are attempting to build competing or clone animation players.

Proprietary Rights and Licenses

We rely on a combination of copyright, patent, trade secret and trademark laws, as well as employee and third-party nondisclosure agreements, to protect our intellectual property rights and products. We generally license our software to end-users under “shrink-wrap” license agreements that the end-users accept when they install our products or activate electronic versions of our products. Despite our efforts to protect our intellectual property rights and products, certain of our intellectual property rights may not be successfully asserted in the future or may be invalidated or challenged. In addition, the laws of certain countries in which our products are or may be distributed do not protect our products and intellectual property rights to the same extent as the laws of the United States. Furthermore, the enforceability of “shrink-wrap” licenses has not been conclusively determined. Our inability to adequately protect and enforce our proprietary rights could harm our business.

Policing unauthorized use of our software products is difficult. We have dedicated resources to focus on software piracy and participate in industry groups to further police unauthorized use of our software. In addition, we are developing and implementing activation technology designed to reduce unauthorized use of our products. While we have recovered some revenue resulting from the unauthorized use of our software products, we cannot determine the extent to which software piracy of our products exists. We anticipate that software piracy will continue to be a persistent issue in the software industry.

Employees

At March 31, 2004, we had 1,213 full-time employees worldwide with 1,063 of these employees located in the United States. None of our employees is subject to a collective bargaining agreement and we have not experienced any work stoppages. We believe that our relations with our employees and contingent workers are good. Our future success is highly dependent on our ability to attract, retain and motivate highly skilled employees.

11

Table of Contents

ITEM 2.    PROPERTIES

As of March 31, 2004, we leased the major facilities described below:

All of our leased facilities are leased under operating leases. We have an additional 16 field support offices in various locations within the United States, Canada, Latin America, Europe and Asia Pacific. All our support offices are leased with lease terminations between 2004 and 2006. In aggregate, total lease obligations through termination for these 16 leases were less than $1.0 million as of March 31, 2004.

In addition, in August 2003, we exercised options to purchase three properties, which consist of a parking structure and two office buildings, and are in immediate proximity to our current headquarters in San Francisco, California. We purchased two of these properties for $14.7 million and title to these properties was transferred to us as of March 31, 2004. For the third property, we deposited $2.7 million into escrow in August 2003, and paid the remaining $37.7 million of the purchase price in April 2004. These properties will serve as our corporate headquarters where we conduct various corporate, product development and operational activities. We are currently utilizing the parking structure and expect to occupy the third property in the fourth quarter of fiscal year 2005. We expect to begin occupying the second office building based on future headcount and operational needs subsequent to fiscal year 2005. We believe our facilities are adequate for our current and near term needs.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, Macromedia is involved in various disputes and litigation matters that arise in the ordinary course of business. These include disputes and lawsuits related to intellectual property, mergers and acquisitions, licensing, contract law, distribution arrangements and employee relation matters.

As of the time of this Annual Report, there were no material pending legal proceedings other than ordinary routine litigation incidental to our business, to which we or any of our subsidiaries are a party or of which any of our property is subject.

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

No matters were submitted to a vote of our security holders during the fourth quarter of fiscal year 2004.

12

Table of Contents

PART II

ITEM 5.    MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Macromedia’s common stock is traded on the NASDAQ National Market under the symbol “MACR.” The Company’s closing stock price was $24.87 on June 2, 2003 and there were 542 stockholders of record as of that date, excluding stockholders whose shares were held in nominee or street name by brokers. The Company has not paid any cash dividends and does not currently have plans to do so in the foreseeable future.

The following table sets forth the high and low sales price per share for Macromedia’s common stock for the periods indicated:

13

Table of Contents

ITEM 6.    SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data presented below is derived from our Consolidated Financial Statements and related notes thereto. This selected consolidated financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Consolidated Financial Statements and related Notes thereto included in Item 15 of this Form 10-K. Historical results are not necessarily indicative of future performance.

14

Table of Contents

The following discussion of our financial condition and results of operations should be read in conjunction with the five-year summary of selected financial data and the Consolidated Financial Statements and notes thereto included elsewhere in this Annual Report on Form 10-K. All references to years represent fiscal years unless otherwise noted. Except for the historical information contained in this Annual Report on Form 10-K, the following discussion contains forward-looking statements based on current expectations that involve certain risks and uncertainties, including, without limitation, statements regarding the extent and timing of future revenues and expenses, customer demand, statements regarding the deployment of our products, statements regarding our reliance on third-parties and other statements using words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plan,” “should,” “will,” “would” and words of similar importance. These statements are predictions based upon Macromedia’s current expectations about future events and speak only as of the date of this Annual Report on Form 10-K and we assume no obligation to update any such forward-looking statements. Actual results could vary materially as a result of certain factors, including, but not limited to, those expressed in these statements. Readers are referred to “Critical Accounting Policies,” “Results of Operations,” “Liquidity and Capital Resources,” “Risk Factors That May Affect Future Results of Operations,” and “Disclosures About Market Risk” sections contained in this Annual Report on Form 10-K and the risks discussed in our other SEC filings, which identify important risks and uncertainties that could cause actual results to differ from those contained in the forward-looking statements. Unless specifically noted, references to Macromedia in this Annual Report on Form 10-K are references to Macromedia, Inc. and its subsidiaries.

Overview

We are an independent software company providing software that empowers designers, developers and business users to create and deliver effective user experiences on the Internet, fixed media and wireless and digital devices. Our integrated family of technologies enables the development of a wide range of internet solutions including websites, rich media content and Internet applications across multiple platforms and devices.

Strategy

Macromedia has been recognized as a leader in multimedia and web development technologies for over a decade. Through our MX family of products, including Dreamweaver, Flash, Fireworks, ColdFusion and the Studio suite, we have enabled millions of professional Designers and Developers to create rich, engaging, interactive web content and applications. Our growth strategy is to leverage the assets we have built in that core business—principally our technology, our brands and our worldwide distribution engine—to grow into even larger markets serving non-technical professionals. In fiscal year 2004, we began to see a return on our investment in these new markets, with the introduction of new products for two distinct markets: Business Users, who are non-technical knowledge workers, trainers or business decisions makers who want to communicate and collaborate via the Internet, and Consumers, who increasingly expect a rich user experience on digital devices such as personal digital assistants (PDAs) and cellular phones. Our strategy to reach the Business User is to provide complete solutions like Breeze and Contribute that leverage the power of our technology platform in an integrated delivery platform. To reach the Consumer, we are licensing our Flash player technology to leading telecommunications service providers and consumer electronics companies that are embedding it in their devices to enable multimedia functionality. We believe that these two new markets offer the potential for significant

15

Table of Contents

growth for the company over the next decade. Our primary products and the markets that they serve are broken down as follows:

Industry and Economic Overview

During fiscal year 2004, we observed some strengthening in the demand for software products, with increases in several key indicators of demand such as broadband penetration, on-line advertising spending and broad indicators of IT spending. While the business environment showed some improvement as compared to prior years, customer budgets remained tight and we note that corporations, government agencies, educational institutions and independent developers worldwide are increasingly focused on the return on investment they can generate from their spending. Accordingly, we have maintained our focus on controlling costs, while continuing to invest in the research and development activities required to drive innovation and growth.

Product Update

In fiscal year 2004, we launched a significant number of new products and new versions of existing products, including new versions of our MX family of products: Macromedia Dreamweaver MX 2004, Macromedia Flash MX 2004, Macromedia ColdFusion MX, Macromedia Fireworks MX 2004, Macromedia FreeHand MX 2004, Macromedia Director MX 2004 and Macromedia Studio MX 2004. In addition, we added Macromedia RoboDemo 5, Macromedia RoboInfo 5, and Macromedia RoboHelp X5 to our product portfolio through the acquisition of eHelp Corporation (“eHelp”) in December 2003. We also launched Macromedia Flex, our newest server product, in March 2004 to provide a solution for enterprise programmers who build and deploy rich internet applications (“RIAs”).

Financial Highlights for Fiscal Year 2004

16

Table of Contents

Throughout fiscal years 2004, 2003 and 2002, we operated in one business segment, the Software segment.

Results of Operations

Net Revenues

Net revenues are comprised primarily of license fees, as well as revenues from maintenance, training, technical and other support services. Maintenance, training and other support services comprised less than 10% of our net revenues in fiscal years 2004, 2003 and 2002. Fluctuations in net revenues can be attributed to changes in product and customer mix, general trends in IT spending, as well as to geographic fluctuations and corresponding changes in foreign exchange rates. Further, product life cycles impact revenues period to period as new products and versions are released.

Net Revenues by Market

Fiscal Year 2004 versus Fiscal Year 2003

Net revenues increased 10% from fiscal year 2003 to fiscal year 2004. The increase in our net revenues in the current fiscal year reflects revenue growth from our product offerings marketed to Consumers and Business

17

Table of Contents

users, the favorable impact of strengthening foreign currencies as more fully described below under “Net Revenues by Geography,” and to a lesser degree, the incremental product revenues resulting from our acquisition of eHelp, partially offset by lower than expected sales of our MX 2004 products following their initial release in the second quarter of fiscal year 2004. Net revenues from our products marketed to our Business Users, including Breeze and Contribute, which were introduced during the last half of fiscal year 2003, comprised 6% of net revenues for fiscal year 2004 as compared to 1% in fiscal year 2003. Net revenues from products marketed to Consumers consist primarily of royalties earned from OEMs for the license of our Flash technology for use on various mobile devices and platforms and comprised 3% of net revenues in fiscal year 2004 compared to 1% in fiscal year 2003. The revenue growth in our Designer and Developer products reflects the favorable impact of strengthening foreign currencies, growth in educational sales and net revenues from our learning and help products resulting from the acquisition of eHelp.

We have a history of introducing new or enhanced product offerings that impact our reported net revenues. For example, we released English language versions of our primary MX products in the second quarter of fiscal year 2004 and foreign language versions of these products in the third quarter of fiscal year 2004. The initial demand for these products was below anticipated amounts based on historical analysis of revenue performance following the release of earlier product versions. In the fourth quarter of fiscal year 2004, we experienced revenue growth resulting from new versions of RoboHelp X5 and RoboInfo 5.0. 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.

Fiscal Year 2003 versus Fiscal Year 2002

Net revenues increased 3% from fiscal year 2002 to fiscal year 2003. The increase was primarily due to the successful launch of our new products and new versions of existing products. However, we also believe our net revenues in fiscal year 2003 were adversely impacted by the weakness in IT and web developer spending.

Net revenues from our Designer and Developer market grew 6% from $300.3 million in fiscal year 2002 to $317.6 million in fiscal year 2003 due primarily to the introduction of our MX product family. Macromedia Studio MX, which was launched in the first quarter of fiscal year 2003, represented approximately 31% of our net revenues in fiscal year 2003. Although sales of Macromedia Studio MX resulted in a decrease in sales of our stand-alone products that are included in our Studio MX bundle, aggregate sales from all of our MX products increased by 13% in fiscal year 2003 as compared to fiscal year 2002. This increase was partially offset by a decline in net revenues from server products, primarily Macromedia ColdFusion MX. Revenues from our server products decreased to $53.0 million in fiscal year 2003, as compared to $60.1 million in fiscal year 2002. This decrease was primarily due to continued pricing pressures resulting from a very competitive market environment, partially offset by releases of new versions of existing products in fiscal year 2003.

Net Revenues by Geography

18

Table of Contents

Fiscal Year 2004 versus Fiscal Year 2003

North American net revenues increased by 5% in fiscal year 2004 as compared to fiscal year 2003, primarily reflecting an increase in net revenues from our business user products and to a lesser extent, the impact of our acquisition of eHelp in December 2004.

The 17% increase in international revenues in fiscal year 2004 as compared to fiscal year 2003 is primarily due to the impact of strengthening foreign currencies against the U.S. Dollar combined with the introduction of new product offerings in our Consumer market, especially in Asia Pacific. The strengthening of international currencies relative to the U.S. dollar in fiscal year 2004 as compared to fiscal year 2003 had a favorable impact on operating income of approximately $10.6 million. Had exchange rates in fiscal year 2003 been in effect during fiscal year 2004, translated international net revenues billed in local currencies would have been $13.9 million lower and operating expenses would have been $3.3 million lower.

Changes in the value of the U.S. dollar may have a significant impact on net revenues and operating expenses in future periods. To minimize the impact of currency fluctuations on certain foreign currency net revenues and expenses, primarily denominated in the Euro, Japanese Yen and British Pound, we utilize foreign exchange forward contracts to provide greater predictability of the affect of currency fluctuations on net revenue and operating expenses of certain forecasted transactions over our fiscal year. (See “Risk Factors That May Affect Future Results of Operations—Risks Associated With Our International Operations” for additional information).

Fiscal Year 2003 versus Fiscal Year 2002

North American net revenues in fiscal year 2003 remained flat with fiscal year 2002. Increases in net revenues related to the launch of our new products and new versions of our existing products in North America were offset by continued weakness in IT and web developer spending.

The 8% increase in international net revenues in fiscal year 2003 as compared to fiscal year 2002 primarily resulted from our increased sales efforts in new international markets and from the launch of new products and new versions of existing products, partially offset by the weakness in certain foreign economic environments in fiscal year 2003 compared to fiscal year 2002. The strengthening of international currencies relative to the U.S. dollar in fiscal year 2003 as compared to fiscal year 2002 also had a favorable impact on operating income and revenues in fiscal year 2003 as compared to fiscal year 2002. The fluctuation in foreign currencies resulted in a favorable $4.7 million impact on operating income. Had exchange rates in fiscal year 2002 been in effect during fiscal year 2003, translated international net revenues billed in local currencies would have been $6.3 million lower and operating expenses would have been $1.6 million lower.

Cost of Revenues

19

Table of Contents

Cost of net revenues includes cost of materials, royalties paid to third-parties for the licensing of developed technology, product assembly and distribution costs, costs incurred in providing training and technical support to customers and business partners and costs to translate our software into various foreign languages.

Fiscal Year 2004 versus Fiscal Year 2003

Cost of net revenues decreased to $30.6 million and represented 8% of net revenues in fiscal year 2004 from $36.1 million or 11% of net revenues in fiscal year 2003. The 15% decrease in cost of net revenues in fiscal year 2004 as compared to fiscal year 2003 reflects a greater percentage of net revenues from volume and OEM license sales, which typically have lower material and distribution costs than our traditional boxed-product sales. This decrease also resulted from lower inventory charges for obsolescence in fiscal year 2004 as compared to the prior fiscal year. The beneficial impact of our volume and OEM license sales and lower inventory charges for obsolescence were partially offset by additional costs incurred to outsource portions of our e-commerce operations to a third party.

Amortization of acquired developed technology from acquisitions decreased to $2.0 million in fiscal year 2004 as compared to $6.1 million in fiscal year 2003. The decrease was mainly due to the impairment of acquired technology from our Allaire acquisition during the second quarter of fiscal year 2003, partially offset by the amortization of acquired technology from our eHelp acquisition incurred in the third quarter of fiscal year 2004. Following our acquisition of eHelp, amortization of acquired developed technology increased as we amortize acquired developed technology recorded as a result of our purchase over an estimated useful life of four years. At March 31, 2004, the remaining acquired developed technology balance is $9.9 million, which will be amortized through fiscal year 2008.

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.

Fiscal Year 2003 versus Fiscal Year 2002

Cost of net revenues was $36.1 million or 11% of net revenues in fiscal year 2003, as compared to $44.1 million or 14% of net revenues in fiscal year 2002. Cost of net revenues decreased as a percentage of net revenues in fiscal year 2003 as compared to fiscal year 2002 due to decreases in cost of materials, training costs and royalties paid to third-parties for the licensing of developed technology. In addition, during fiscal year 2003, we had a greater percentage of net revenues from volume license sales, which have a higher gross margin than our traditional box-product sales. These savings were partially offset by an increase in inventory charges for obsolescence of $2.0 million in fiscal year 2003 as compared to the prior fiscal year due to the launch of the MX product family.

In the second quarter of fiscal year 2003, we performed an impairment analysis on the acquired developed technology asset associated with our acquisition of Allaire Corporation (“Allaire”) in fiscal year 2001 under SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. As a result of this analysis, we 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 net realizable value.

Amortization of acquired developed technology decreased to $6.1 million in fiscal year 2003 as compared to $11.3 million in fiscal year 2002. The decrease was mainly due to the impairment of acquired technology from our Allaire acquisition recorded during the second quarter of fiscal year 2003.

20

Table of Contents

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, marketing and advertising expenses, activities which support product launches and direct sales efforts, including travel, and allocated expenses for our facilities and IT infrastructure to support marketing activities. Sales and marketing expenses increased $10.7 million to $156.0 million in fiscal year 2004 from $145.3 million in fiscal year 2003. The increase primarily resulted from an increase in compensation-related expense resulting from an increase in headcount, higher net revenues and increases in product marketing and advertising activities. Compensation-related expenses increased $7.2 million in fiscal year 2004 compared to fiscal year 2003 resulting from an increase in headcount and higher commissions related to increased net revenues and the costs associated with our acquisition of eHelp in December 2003. Product marketing and advertising expenditures increased $2.3 million in fiscal year 2004 compared to fiscal year 2003 reflecting higher expenditures related to the launch of Macromedia Studio MX 2004 as compared to marketing expenditures related to the launch of Macromedia MX in the prior fiscal year and expenditures related to the launch of RoboHelp X5 and RoboInfo 5.0. In addition, travel and other expenses related to higher sales volume and product launch-related activities increased by $2.4 million in fiscal year 2004 from fiscal year 2003.

Sales and marketing expenses decreased $25.6 million to $145.3 million in fiscal year 2003, as compared to $170.9 million in fiscal year 2002. The decrease is primarily due to reductions in allocated facility and IT expenses of $9.9 million resulting from our fiscal year 2002 restructuring and lower compensation expenses of $8.0 million.

We expect to continue investing in sales and marketing of our products as we continue to launch and sell new products, develop market opportunities and promote our competitive position. As a result, 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.

21

Table of Contents

Research and development expenses decreased $1.2 million to $91.2 million in fiscal year 2004 from $92.4 million in fiscal year 2003. The decrease primarily resulted from a reduction in depreciation expense and facilities charges of $2.4 million in fiscal year 2004 as compared to fiscal year 2003. In addition, compensation charges decreased by $1.6 million from fiscal year 2003 to fiscal year 2004 due to lower average headcount in the current period. These decreases were partially offset by an increase in contract personnel and temporary labor spending of $2.7 million primarily related to the introduction of the MX 2004 products in the second quarter of fiscal year 2004.

Research and development expenses decreased $17.7 million to $92.4 million in fiscal year 2003 from $110.1 million in fiscal year 2002. The decrease resulted primarily from a reduction in allocated facility and IT expenses of $10.1 million resulting from our fiscal year 2002 restructuring and lower compensation expenses of $8.1 million.

During fiscal year 2004, we released version upgrades to our MX family of products as well as introduced Macromedia Flex in March 2004. We anticipate continuing to invest significant resources into research and development activities in order to develop new products, enhance the technology in our existing products and to develop new technologies.

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 to support general and administrative activities.

General and administrative expenses increased $1.2 million to $37.4 million in fiscal year 2004 from $36.2 million in fiscal year 2003. Compensation-related expenses increased $2.3 million in fiscal year 2004 compared to fiscal year 2003 resulting from an increase in headcount, primarily in compliance functions. Other employee costs, which include temporary staffing, training, recruiting and relocation costs, also increased by $1.2 million in fiscal year 2004 compared to fiscal year 2003 as a result of supporting increased staffing needs. Partially offsetting these increases, professional legal fees decreased by $3.1 million from fiscal year 2003 to fiscal year 2004 following the settlement of certain legal matters (see “Litigation Settlements”).

General and administrative expenses decreased $7.5 million to $36.2 million in fiscal year 2003 as compared to $43.7 million in fiscal year 2002. The decrease was primarily due to decreases in allocated facility and IT expenses of $3.0 million resulting from our fiscal year 2002 restructuring and a $2.9 million decrease in professional fees primarily related to various legal matters settled in fiscal year 2002.

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 stock market, including costs to hire additional personnel and use additional accounting and advisory services.

Amortization and Impairment of Intangible Assets.    We amortize intangible assets with estimated useful lives. Amortization of intangible assets decreased to $1.1 million in fiscal year 2004 as compared to $1.6 million in fiscal year 2003. The decrease was mainly due to the impairment of certain intangible assets recorded during the second quarter of fiscal year 2003 as more fully described below, partially offset by the amortization of intangible assets recorded as a result of our eHelp acquisition in the third quarter of fiscal year 2004.

Amortization of intangible assets decreased to $1.6 million in fiscal year 2003 as compared to $103.2 million in fiscal year 2002. The decrease was mainly due to our adoption of SFAS No. 142, Goodwill and Other Intangible Assets, on April 1, 2002 following which goodwill is no longer amortized.

Following the results obtained from our impairment analysis of our acquired developed technology asset in the second quarter of fiscal year 2003 (see discussion in “Cost of revenues”), we performed an impairment analysis on the trade name associated with our fiscal year 2001 acquisition of Allaire. We performed our analysis

22

Table of Contents

under SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, initially comparing the estimated undiscounted cash flows of the trade name to its carrying value. As a result of this analysis, we recorded an impairment charge of $1.7 million for the trade name asset in fiscal year 2003. This charge represented the amount by which the carrying value of the trade name asset exceeded its fair value, estimated by calculating its discounted cash flows.

In-Process Research and Development.    In fiscal year 2004, we recorded $2.0 million of in-process research and development attributable to certain technologies in connection with our acquisition of eHelp. The acquired technology was recognized as in-process research and development as the technology had not reached technological feasibility at the time eHelp was acquired and had no alternative future use. In fiscal year 2003, we recorded $357,000 of in-process research and development attributable to certain technologies recorded in connection with our fiscal year 2003 acquisitions. Such technologies were recognized as in-process research and development as they had not reached technological feasibility at the time they were acquired and had no alternative future uses.

Restructuring Expenses.    In fiscal year 2002, we executed a restructuring plan to deliver cost synergies associated with our fiscal year 2001 acquisition of 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 exit costs to cancel or vacate approximately 450,000 square feet of facility space held under our operating leases and to 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. We continually review our restructuring accrual to determine its appropriateness and reasonableness. No significant changes have been made to these estimates in fiscal years 2004 or 2003.

Other Income (Expense)

Interest Income.    Interest income consists primarily of interest earned on interest-bearing cash, cash equivalents and available-for-sale short-term investments.

Interest income was $3.7 million in fiscal year 2004 as compared to $4.1 million in fiscal year 2003 and $6.5 million in fiscal year 2002. The decline in our interest income in fiscal year 2004 and in fiscal year 2003 is primarily due to lower yields on our cash, cash equivalent and short-term investment balances as compared to the respective prior fiscal years, partially offset by higher average balances of cash, cash equivalents and short-term investments.

Gain (Loss) on Investments and Other, net.    Gain (loss) on investments and other, net includes the gains and losses on the sale or other-than-temporary declines in the value of our available-for-sale investments in the common stock of public companies and on our investments in the common stock of privately held companies.

23

Table of Contents

Gain (loss) on investments and other, net was $0.9 million in fiscal years 2004 and 2003 and $(7.0) million in fiscal year 2002.

Historically, we held common stock in public companies that were accounted for as available-for-sale investments. It is our 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. We have recorded realized gains and losses upon the subsequent sales of these publicly-traded equity securities determined as the difference between the sales price and the carrying value in fiscal years 2004 and 2003. At March 31, 2004, we no longer held any available-for-sale investments in the common stock of public companies.

We have 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. We have recorded realized gains and losses from privately-held equity securities in fiscal years 2004 and 2003 at the time the investments were sold when such investments were sold at a value exceeding the carrying value and/or upon the receipt of cash proceeds from distributions made by the entity. At March 31, 2004, we held equity interests in several privately-held companies for which no carrying value was recorded on our consolidated balance sheet.

In fiscal year 2003, we also recorded a gain on the sale of acquired technology of $1.0 million. The net carrying value of the technology, which was previously acquired in connection with an acquisition during fiscal year 2000, had already been fully amortized on its consolidated balance sheet as of the date of sale. This gain represented the net amount of the proceeds.

In fiscal year 2002, we recorded impairment losses on strategic investments of $7.6 million. These losses represented write offs or write downs of the carrying amount of these investments and were determined after considering, among other factors, the investees’ current and projected operating results, including estimated liquidation value and the inability of the investees to obtain additional financing. During fiscal year 2002, we received cash proceeds totaling $0.6 million, representing our portion of the liquidated assets of two investees whose investment balances were previously written off during fiscal year 2001 in accordance with our accounting policy.

Loss on Equity Affiliate.    We recorded losses from our investment in AtomShockwave, accounted for under the equity method, of $36.0 million in fiscal year 2002. The charge reflected our share of AtomShockwave’s losses recorded in the period, as well as the write-down of our investment and the write off of certain receivables in the prior fiscal year. Our investment balance in AtomShockwave since September 30, 2001 has been zero. Accordingly, we have not recognized our share of AtomShockwave’s profits or losses since September 30, 2001, although we held approximately 33% of the outstanding voting shares of AtomShockwave at March 31, 2004. While we have ongoing agreements with AtomShockwave relating to distribution of the Macromedia Shockwave Player and use of the Shockwave trademark, we have no obligation to fund or otherwise support the activities of AtomShockwave.

Litigation Settlements, net.    In fiscal year 2003, we reimbursed $2.5 million to one of the insurers in a securities litigation against us and certain of our former officers and directors, which was settled in fiscal year 2002. In fiscal year 2003, we also recorded a litigation settlement charge of $1.5 million related to securities litigation against us and certain of Allaire’s officers and directors. Partially offsetting these charges, we reversed a litigation judgment charge of $2.8 million related to patent claims recorded in fiscal year 2002 following the subsequent settlement of the claims with no payment obligation in fiscal year 2003.

In fiscal year 2002, we signed a stipulation of settlement with lead plaintiffs that resolved securities litigation pending against us and certain of our former officers and directors since 1997. The settlement amount

24

Table of Contents

was $48.0 million, of which $19.5 million was initially recovered from insurance, net of reimbursable legal fees. As a result, we recorded a $28.5 million charge as a component of other income (expense) in our consolidated statements of operations during fiscal year 2002. Of the $19.5 million of insurance coverage, we subsequently paid $2.5 million to RLI Corporation as a result of the RLI settlement in fiscal year 2003. In fiscal year 2002, we also recorded a charge of $2.8 million, relating to the settlement of outstanding patent claims between Adobe and Macromedia that was reversed in fiscal year 2003 as noted above.

Other, net.    Other, net, consists primarily of investment management and banking fees, foreign currency transaction gains and losses and other non-operating transactions not separately disclosed. Other, net, was a $1.0 million loss in fiscal year 2004, as compared to a $0.4 million loss in fiscal year 2003. We recorded a $0.4 million loss in other, net in fiscal year 2003, as compared to $0.1 million in fiscal year 2002. The increase in the loss of other, net, is primarily due to the impact of foreign currency remeasurement losses, principally related to those currencies that are not hedged and fees related to increased banking services.

Provision for Income Taxes.

We recorded income tax provisions of $11.6 million, $3.4 million and $2.3 million in fiscal years 2004, 2003 and 2002, respectively. Current taxes are primarily due the affect of net operating loss carryforwards associated with purchase business combinations which are recorded as a reduction to our goodwill balance instead of our provision for income taxes, and taxable income in certain foreign jurisdictions where we operate. Deferred taxes are primarily due to a change in deferred tax assets, which are related to domestic temporary differences. A deferred tax asset valuation allowance has been established and is determined by assessing whether it is more likely than not the Company will realize the tax benefits of its deferred tax assets in the future.

At March 31, 2004, we had available federal and state net operating loss carryforwards of $525.9 million and $428.7 million, respectively. We also had unused research credit carryforwards of $29.1 million and $26.2 million for federal and California tax purposes, respectively. If not utilized, federal and state net operating loss and federal research credit carryforwards will expire in fiscal year 2005 through 2024. The California research credits may be carried forward indefinitely.

Liquidity and Capital Resources

Cash Flow

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

At March 31, 2004, we had cash, cash equivalents and short-term investments of $282.7 million, a 31% increase from the March 31, 2003 balance of $215.6 million. Working capital increased to $237.8 million at March 31, 2004, a 49% increase from the March 31, 2003 balance of $159.6 million.

Cash provided by operating activities in fiscal year 2004 was $41.9 million, as compared to cash provided by operating activities of $40.0 million in fiscal year 2003. Cash provided by operating activities in fiscal year 2003 was $40.0 million, as compared to cash used in operating activities of $42.0 million in fiscal year 2002. Cash provided by operating activities in fiscal year 2004 resulted primarily from adjusting our net income for non-cash depreciation and amortization expense of $18.5 million, partially offset by an increase in net operating

25

Table of Contents

assets and liabilities of $13.0 million, including payments recorded against our restructuring accrual. Cash provided by operating activities in fiscal year 2003 resulted primarily from adjusting our net income for the following: non-cash depreciation and amortization expense of $26.4 million; impairment of long-lived assets of $19.2 million, primarily resulting from a $17.3 million impairment charge of the intangible assets acquired in connection with our 2001 acquisition of Allaire; and a $1.7 million write-down of internally developed software that was previously capitalized. These amounts were partially offset by a decrease in net other operating assets of $6.4 million, including payments recorded against our restructuring accrual. Cash used in operating activities in fiscal year 2002 resulted primarily from adjusting our net loss of $308.8 million for the following: non-cash depreciation and amortization expense of $151.4 million, reflecting the amortization of goodwill prior to the adoption of SFAS 142; a $36.0 million loss on our equity affiliate, reflecting our portion of the losses incurred by AtomShockwave; and $24.7 million in write-offs of fixed assets relating primarily to our restructuring.

Cash used in investing activities in fiscal year 2004 was $102.0 million, as compared to $26.4 million in fiscal year 2003. In fiscal year 2004, cash used in investing activities was primarily due to the net purchases of available-for-sale securities of $72.0 million and the purchase of property and equipment of $25.7 million, including the purchase of land and buildings. In August 2003, we exercised the options to purchase property of three contiguous buildings in San Francisco, California for a total purchase price of $55.0 million. We funded $14.7 million purchase price for two of these properties, and deposited $2.7 million into escrow for the third property in fiscal year 2004. The remaining purchase price of $37.7 million for the third building was funded in April 2004. In fiscal year 2004, cash provided through investing activities also included $15.2 million cash acquired in connection with the acquisition of eHelp offset by $4.9 million in cash paid to the eHelp shareholders net of acquisition costs paid. In fiscal year 2004, cash provided in investing activities was reduced by an increase in restricted cash of $14.5 million for the establishment of escrow funds related to the eHelp acquisition. Cash used in investing activities in fiscal year 2003 was $26.4 million, as compared to $28.7 million in fiscal year 2002. In fiscal year 2003, cash used in investing activities was primarily due to net purchases of available-for-sale short-term investments of $23.9 million, purchases of property and equipment of $6.2 million and cash used to pay for acquisitions of $4.5 million, partially offset by cash proceeds resulting from repayments of non-executive related-party loans of $5.1 million. In fiscal year 2002, cash used in investing activities was primarily used for net purchases of available-for–sale short-term investments of $34.1 million and property and equipment of $17.4 million. These payments were partially offset by proceeds from the December 2001 sale-leaseback of an office facility in Redwood Shores, California of $22.1 million and collections on non-executive related party loans.

Cash provided by financing activities in fiscal years 2004 and 2003 was $55.9 million and $16.4 million, respectively. Cash provided by financing activities primarily relates to proceeds received from the exercise of common stock options and purchases under our Employee Stock Purchase Plans. 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.

In fiscal year 2004, we made capital expenditures of $25.7 million, including the purchase of land and buildings more fully described above. In fiscal year 2005, we anticipate spending between $70.0 million to $80.0 million on capital expenditures, primarily relating to the purchase and build-on of a building property more fully described below (see Purchase commitments) for which we used available cash of $37.7 million in April 2004. We expect that for the foreseeable future, our operating expenses and investing activities as they relate to the associated costs of furnishing and improving our newly purchased office buildings 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 the next twelve months.

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.

26

Table of Contents

We enter into foreign exchange forward contracts to reduce economic exposure associated with revenues, expenses and asset balances primarily denominated in the Euros, Japanese Yen and British Pound. At March 31, 2004, the net notional amount of forward contracts outstanding in U.S. Dollar using the spot exchange rates in effect at March 31, 2004 amounted to $40.9 million (see “Item 7A—Quantitative and Qualitative Disclosures About Market Risk” for additional information).

Commitments

Contractual Obligations

The following table summarizes our significant financial contractual obligations at March 31, 2004 and the effect such obligations are expected to have on our liquidity and cash flows in future periods. This table excludes amounts already recorded on our consolidated balance sheets, except for Obligations included in restructuring accrual (in millions):

Operating Lease Obligations—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.

Obligations Included in Restructuring Accrual—We lease office space under operating leases that have been recognized in our restructuring liabilities on our consolidated balance sheets. We sublease a portion of this restructured space. As a result, the restructuring liability on our consolidated balance sheets reflects our obligation net of contractual and estimated sublease income. Obligations included in restructuring accrual in the above table reflect our lease obligations gross of contractual and estimated sublease income.

Property Purchase Obligations—In August 2003, we exercised our 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 our current headquarters, consist of a parking structure and two office buildings. We have fully paid two of these properties and title to these properties was transferred to us as of March 31, 2004. For the third property, we deposited $2.7 million into escrow in August 2003 and paid the remaining $37.7 million of the purchase price upon closing of the purchase and upon transfer of title on April 30, 2004. We are currently utilizing the parking structure. We will begin building out the third facility at the end of the first quarter of fiscal year 2005 and the remaining facility based on future headcount and operational needs, which we anticipate occur subsequent to fiscal year 2005.

Other Purchase Obligations—Other significant purchase obligations represent minimum non-cancelable financial commitments made for which the respective goods or services have not been received as of March 31, 2004. The majority of our other purchase obligations relate to commitments related to information technology and telecommunication services.

27

Table of Contents

Other Commitments

Letters of Credit—We obtained letters of credit from financial institutions totaling $9.4 million as of March 31, 2004, in lieu of security deposits for leased office space. No amounts have been drawn against the letters of credit.

Intellectual Property Indemnification Obligations—The terms of our distribution agreements with our first-tier distributors, including OEMs, and our license agreements with our direct customers, generally provide for a limited indemnification of such distributors and customers 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 date, we have not had to reimburse any of our distributors or customers 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 and customers, we cannot determine the maximum amount of potential future payments, if any, related to such indemnification provisions.

Other Contingent Liabilities and Commitments—In the normal course of our 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 balance sheets with respect to those indemnification agreements or guarantees.

Off-Balance-Sheet Arrangements.

We do not have off-balance-sheet arrangements with unconsolidated entities or with related parties, nor do we use other forms to off-balance-sheet arrangements such as research and development arrangements. As of March 31, 2004, we did not have any off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

We make certain estimates, assumptions and judgments when preparing our consolidated financial statements. These estimates, assumptions and judgments can have a significant impact on our consolidated financial statements including the value of certain assets and liabilities on our consolidated balance sheets as well as the amounts of net revenues, operating income and net income on our 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; and income taxes.

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 product resellers, commonly referred to as 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, and typically do, return 100% of their inventory balance of obsolete products within a limited time after the release of a new version of that software product. 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 online 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.

28

Table of Contents

We review our allowance for sales returns on an ongoing basis. At March 31, 2004, our sales returns reserve totaled $5.1 million and included $0.9 million of requested and authorized returns by our distributors primarily related to our Studio MX product upgrade during fiscal year 2004. In estimating our allowance for sales returns, we evaluate the following factors:

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 future 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. As a result, 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 March 31, 2004, our channel inventory, net of related reserves, remained within the estimated channel inventory range noted above.

In fiscal years 2004, 2003 and 2002, product returns, consisting principally of stock rotation for obsolete products, totaled $28.3 million, $22.7 million and $27.8 million, or 8%, 7% and 9% of net revenues, respectively. In fiscal years 2004 and 2003, our product returns were impacted by transition and upgrade cycles associated with the launch of our MX product family in the first quarter of fiscal year 2003 and the upgrade of our MX product family to MX 2004 in the second quarter of fiscal year 2004. Similarly, fiscal year 2002 product returns were impacted by new product offerings. 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.

Allowance for Doubtful Accounts.    We make judgments as to our ability to collect outstanding accounts receivable and provide an allowance for a portion of our accounts receivable when collection becomes doubtful.

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 credit losses. However, since we cannot predict changes in the financial stability of our customers, we cannot guarantee that our allowance will continue to be sufficient. If actual credit losses are significantly greater

29

Table of Contents

than the allowance that we have established, this would increase our operating expenses and reduce our reported net income. Our allowance for doubtful accounts amounted to $1.9 million, or 4% of gross accounts receivable, at March 31, 2004 and $3.2 million, or 8% of total gross accounts receivable, at March 31, 2003. The lower balance of the allowance for doubtful accounts as a percentage of gross accounts receivable at March 31, 2004 as compared to March 31, 2003 was based on improvement in certain accounts receivable metrics, most notably the aging of our receivable portfolio.

Distributors account for a significant portion of our net revenues and accounts receivable balances and comprise several individually large accounts. One of these distributors represented 21%, 28% and 28% of consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively, and 19% and 16% of our gross accounts receivable balances at March 31, 2004 and 2003, respectively. A second distributor represented 13%, 8% and 8% of our consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively, and 14% and 4% of our gross accounts receivable at March 31, 2004 and 2003, respectively. If the credit exposure associated with a large distributor relationship increased, 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 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 real estate brokers. 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, lease terms and 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. 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 March 31, 2004. 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.

As of March 31, 2004, our restructuring accrual balance included future minimum gross lease obligations for our restructured facilities extending through 2011. These future minimum gross lease obligations amounted to $69.4 million, which will be offset by future sublease income of $38.9 million to be received under contractual sublease arrangements. In addition, our restructuring accrual balance is offset by estimated future sublease income of $11.9 million. The estimated future sublease balance is impacted by fluctuations in the demand in commercial real estate markets where we have significant operating lease obligations, notably the Newton, Massachusetts commercial real estate market. Accrued restructuring costs related to the Newton lease represented 56% of our total accrued restructuring at March 31, 2004. Our Newton space covers 348,000 square feet held under operating leases through 2010, of which we currently occupy 86,000 square feet and sublease 262,000 square feet to existing subtenants. Of the 262,000 square feet that we currently sublease to existing

30

Table of Contents

tenants, subleases covering 86,000 square feet will expire at various dates commencing in July 2004. Should the Newton, Massachusetts commercial real estate market deteriorate, we may not be able to find acceptable tenants at the rates or timing consistent with what we used in estimating our restructuring accrual.

Income Taxes.    In preparing our 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 are often complex and can require several years to resolve. Accruals for tax contingencies require management to estimate the actual outcome of any such audits. Actual results 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.

Recent Accounting Standards

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS No. 149”). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is generally effective for contracts entered into or modified after September 30, 2003 and for hedging relationships designated after September 30, 2003. We adopted SFAS No. 149 in fiscal year 2004. The adoption of this standard did not have an impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). SFAS No. 150 requires that certain financial instruments, which under previous guidance were accounted for as equity, must now be accounted for as liabilities. The financial instruments affected include mandatory redeemable stock, certain financial instruments that require or may require the issuer to buy back some of its shares in exchange for cash or other assets and certain obligations that can be settled with shares of stock. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. We did not enter into or modify any financial instruments after May 31, 2003. We adopted SFAS No. 150 effective July 1, 2003. The adoption of this standard did not have an impact on our consolidated financial statements.

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Multiple Deliverable Revenue Arrangement” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. It also addresses when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. The guidance in EITF 00-21 is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003, with early application permitted. Companies may elect to report the change in accounting as a cumulative effect of a change in accounting principle in accordance with APB Opinion 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements (an amendment of APB Opinion No. 28).” We adopted the provisions of EITF 00-21 for transactions to which SOP 97-2 does not apply, such as sales of on-line subscription software applications in the quarter ended September 30, 2003. The adoption of EITF 00-21 did not have a significant impact our consolidated financial statements.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 applied immediately to variable interest entities (“VIEs”) created after January 31, 2003. The adoption of FIN 46 had no impact on us as we have no special purpose entities. We are continuing to evaluate the provisions of FIN 46R, which updates FIN 46, and is effective for periods ending after March 15, 2004, related to VIEs, created prior to February 2003, and their effects on our consolidated financial statements.

31

Table of Contents

Risk Factors That May Affect Future Results of Operations

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

Our new product and version releases may not be successful and as a result our results of operations could be materially and adversely affected—A substantial portion of our revenues is derived from license sales of new software products and new versions of existing software products. The success of new products and new versions of existing products, including the MX 2004 family of products released in fiscal 2004, depends on the timing, market acceptance and performance of new products or new versions of existing products. In the past we have experienced delays in the development of new products and enhancement of existing products and such delays may occur in the future. If we are unable, due to resource constraints or technological reasons, to develop and introduce products in a timely manner, such inability could have a significantly adverse effect on our results of operations, including, in particular, our quarterly results. In addition, market acceptance of our new product or version releases will be dependent on our ability to include functionality and usability in such releases that address the requirements of customer demographics with which we may have limited prior experience. We must update our existing products and services to keep them current with changing technology, competitive offerings and consumer preferences and must develop new products and services to take advantage of new technologies that could otherwise render our existing products, or existing versions of such products, obsolete. Furthermore, our new product or version releases may contain undetected errors or “bugs,” which may result in product failures or security breaches or otherwise fail to perform in accordance with customer expectations. In addition, such releases may not effectively guard against harmful or disruptive codes, including “virus” codes, new versions of which appear periodically, which may target files or programs created using our products. The occurrence of errors or harmful codes could result in loss of market share, diversion of development resources, injury to our reputation and the reputation of our products, or damage to our efforts to build positive brand awareness, any of which could have a material adverse effect on our business, operating results and financial condition. If we do not ship new products or new versions of our existing products as planned, if new product or version releases do not achieve adequate market acceptance, if new products or version releases fail to perform properly, or if we are unsuccessful in penetrating our Business User and Consumer markets, our results of operations could be materially and adversely affected.

Our future operating results are difficult to predict and our future operating results and our stock price are subject to volatility—Our operating results for a particular period are extremely difficult to predict. Our net revenues depend significantly on general domestic and global economic conditions and the demand for software products in the markets in which we compete. Uncertainty about future economic conditions makes it difficult to forecast operating results and any delays or reductions in information technology spending could result in a material and adverse effect on our operations. Our revenues may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. We have also experienced variability in revenue trends during our quarters, noting an increase in revenues in the last month of each quarter. Our efforts to manage our operating expenses may hinder our ability to achieve growth in our business and revenues. Any shortfall in revenues or results of operations from levels expected by securities analysts, general declines in economic conditions, or significant reductions in spending by our customers, could have an immediate and materially adverse effect on the trading price of our common stock in any given period. In addition to factors specific to us, changes in analysts’ earnings estimates for us or our industry and factors affecting the corporate environment, our industry, or the securities markets in general may result in significant volatility in the trading price of our common stock.

We implemented a new integrated enterprise resource planning (“ERP”) application which is scheduled to be operational in the first quarter of fiscal year 2005—During the first quarter of fiscal year 2005, we replaced our legacy ERP applications used to support a substantial portion of our worldwide operations with an integrated ERP application from a major enterprise software vendor. This integrated ERP application supports

32

Table of Contents

our management of inventory, order processing, shipping, accounting and human resource (“HR”) functions. We may experience disruptions with our new integrated ERP application that could prevent us from taking customer orders, shipping products or billing customers that could harm our business and our reputation. In addition, our new ERP application requires the services of employees with extensive knowledge of the specific business application we license and the business environment in which we operate. In order to successfully operate our ERP application, we must be able to attract new employees and retain a significant number of existing employees. If we fail to attract and retain the highly skilled personnel required to maintain and operate our ERP applications systems, our business could suffer.

We face intense competition—We operate in a highly competitive market characterized by market and customer expectations to incorporate new features and to accelerate the release of new products. These market factors represent both opportunities and competitive threats to us. With respect to competitive threats:

Introduction of new products, or introduction of new functionalities in current products, by us or by other companies may intensify our current competitive pressures. Some of our current and potential competitors have greater financial, marketing, technical and intellectual property resources than we do.

Furthermore, we have a number of strategic alliances with large and complex organizations, some of which may compete with us in certain markets. These arrangements are generally limited to specific projects, the goal of which is generally to achieve product compatibility, promote product adoption, or facilitate product distribution. If successful, these relationships may be mutually beneficial. However, these alliances carry an element of risk because, in most cases, we must compete in some business areas with a company with which we also have a strategic alliance and, at the same time, cooperate with that company in other business areas. If these companies fail to perform or if these relationships fail to materialize as expected, we could suffer delays in product development, encounter barriers to product adoption and distribution or fail to realize the anticipated economic benefit of the strategic alliance.

We may not be able to successfully defend or enforce our intellectual property rights—Because we are a software company, our business is dependent on our ability to protect our intellectual property rights. We rely on a combination of patent, copyright, trade secret and trademark laws, as well as employee and third-party nondisclosure agreements and license agreements, to protect our intellectual property rights and products. Policing unauthorized use of products and fully protecting our proprietary rights are difficult and we cannot guarantee that the steps we have taken to protect our proprietary rights will be successful. In addition, effective patent, copyright, trade secret and trademark protection may not be available in every country in which our products are distributed or used. In particular, while we are unable to determine the exact extent of piracy of our software products, software piracy may depress our revenues. While this would also adversely affect domestic revenue, revenue loss from piracy of our software products is believed to be even more significant outside of the United States, particularly in countries where laws provide less protection of intellectual property rights. Protection of our intellectual property rights also is difficult in situations where the Company has taken certain actions to promote broader adoption of our technology. For instance, in an effort to promote broader adoption of

33

Table of Contents

our technology, in particular the Macromedia Flash Player and the Macromedia Shockwave Player, we publish and grant industry standard-setting organizations, user groups and third parties the right to use certain Macromedia product specifications, file formats, application programming interfaces (“APIs”), and other information. These specifications, file formats, APIs and other information could be used to produce products that compete with and reduce demand for Macromedia’s own products. Our intellectual property enforcement rights may be diminished because of our decision to publish or license certain intellectual property in an effort to promote its adoption.

We may be subject to intellectual property litigation—From time to time, we are involved in legal disputes relating to the validity or alleged infringement of our, or of a third party’s, intellectual property rights. Intellectual property litigation is typically extremely costly, unpredictable and can be disruptive to our business operations by diverting the attention and energies of our management and key technical personnel. In addition, any adverse decisions, including injunctions or damage awards entered against us, could subject us to significant liabilities, require us to seek licenses from others, prevent us from distributing or licensing certain of our products, or cause severe disruptions to our operations or the markets in which we compete, any one of which could adversely impact our business and results of operations.

Risk associated with acquisitions—We have entered into business combinations with other companies in the past, including our acquisition of eHelp in December 2003, and two acquisitions in the fourth quarter of fiscal year 2003 and may make additional acquisitions in the future. Acquisitions generally involve significant risks, including difficulties in the assimilation of the operations, business strategy, services, technologies and corporate culture of the acquired companies, diversion of management’s attention from other business concerns, overvaluation of the acquired companies and the acceptance of the acquired companies’ products and services by our customers. In addition, future acquisitions would likely result in dilution to existing stockholders, if stock or stock options are issued, or the assumption of debt and contingent liabilities, which could have a material adverse effect on our financial condition, results of operations and liquidity. Accordingly, any future acquisitions could result in a material adverse effect on our results of operations.

Risks associated with international operations—International net revenues outside of North America accounted for approximately 44%, 42% and 40% of our consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively. We expect that international sales will continue to represent a significant percentage of our revenues. We rely primarily on third parties, including distributors, for sales and support of our software products in foreign countries and, accordingly, are dependent on their ability to promote and support our software products and in some cases, to translate them into foreign languages. In addition, we have and may continue to, outsource specific development and quality assurance testing activities for certain of our software products to various foreign, independent third-party contractors. International business and operations are subject to a number of special risks, including:

34

Table of Contents

Additionally, we are uncertain whether the weaknesses experienced in certain foreign economies will continue in the foreseeable future due to, among other things, possible currency devaluation, liquidity problems and political and continued military hostilities.

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 March 31, 2004, the net notional amount of forward contracts outstanding in U.S. Dollars using the spot exchange rates in effect at March 31, 2004 amounted to $40.9 million. However, there can be no assurance that such contracts will adequately manage our exposure to currency fluctuations in the long-term, as the average maturity of these foreign exchange forward contracts is less than twelve months.

Our operating results are dependent, in part, on our distribution channels—A substantial portion of our net revenues are derived from the sale of our software products through a variety of distribution channels, including traditional software distributors, educational distributors, VARs, hardware and software superstores, retail dealers and OEMs. Although we have not experienced any material problems with our distribution channels, computer software dealers and distributors are typically not highly capitalized and have experienced difficulties during times of economic contraction and may do so in the future. Our ability to effectively distribute products depends in part upon the financial and business conditions of our distribution channels. In addition, one distributor represented 21%, 28% and 28% of consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively. A second distributor represented 13%, 8% and 8% of our consolidated net revenues in fiscal years 2004, 2003 and 2002, respectively. The loss of, or a significant reduction in business, with any one of our major distributors could have a material adverse effect on our business and consolidated results of operations in future periods. Furthermore, the terms of the arrangement with a distributor, OEM or reseller may result in us deferring recognition of revenue from such arrangement due to various factors, including future delivery and other obligations that we may have under such arrangement or failure by such party to comply with the reporting and payment obligations under such arrangement. Our revenues generated through our OEM channels may also be impacted by the marketability and success of the corresponding OEM products offered by these third parties.

While our products are marketed and sold through different levels of distribution channels, we maintain direct contractual relationships primarily with the first-tier distributors, generally relying on such distributors to manage the relationship with second-tier distributors and resellers with respect to the distribution, marketing and promotion of our licenses. Although we receive periodic reports from most of the distributors and resellers of our products, our reliance on our first-tier distributors to assist us in managing the lower level distribution channels limits our ability to (i) anticipate and respond to excess inventory levels of, or change in demand for, our products by lower-tier distributors or resellers; (ii) directly manage the marketing or promotion of our products by such lower-tier distributors or resellers; and (iii) monitor the adequacy of training received with respect to our products by employees of such lower-tier distributors or resellers. Therefore, if our first-tier distributors are unable to continue to effectively assist us in marketing and selling our products to the lower-tier distribution channels, the demand for and reputation of, our products may decrease and our operations and our financial results may be materially and adversely effected.

Product returns could exceed our estimates and harm our net revenues—The primary sales channels into which we sell our products throughout the world are a network of distributors and VARs. Agreements with our distributors and VARs contain specific product return privileges for stock rotation and obsolete products. In general, we expect 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 resellers seek to reduce their inventory levels of the prior version of a product in advance of receiving the new version. Similarly, we expect that product inventory held by our distributors and resellers would increase following the successful introduction

35

Table of Contents

of new or upgraded products, as these resellers stock the new version in anticipation of end-user demand, which would result in a decrease in our allowance for sales returns. As part of our revenue recognition practices, we have established a reserve for estimated sales returns. These reserves are based on a number of factors, including channel inventory levels and the timing of new product introductions. Actual product returns in excess of our reserve estimates would have an adverse effect on our net revenues and our results of operations.

Changing our pricing and business model could adversely affect our business—We periodically make changes to our product pricing or offer alternative methods of licensing our product, based on market conditions, customer demands, or in connection with marketing activities. Such increases in the pricing of our products may cause our customers to seek lower-priced alternatives, decrease the aggregate demand for such products and have an adverse effect on our results of operations. In addition, competition in our various markets may require us to reduce prices on certain products in such markets. In the event that we are required to reduce the pricing of our products, we may not be able to offset the lower unit price with increased demand for the corresponding products. Furthermore, any changes in pricing of products in general may result in delays in transactions as our customers and our sales force adapt to such price changes and may have an adverse effect on our results of operations. Moreover, customer demand and competition in the market may require us to offer alternative methods of licensing our products. In the event that we offer alternative methods of licensing our products, the revenues generated from licenses based on such alternative methods may not offset the loss of revenues from our existing method of licensing our products in any given period and may have an adverse effect on our results of operations.

Changes or disruptions in services provided by third parties could disrupt our business—We rely primarily on a single independent third party to produce and distribute our products. If there is a temporary or permanent disruption of our supply from such manufacturer, we may not be able to replace the supply in sufficient time to meet the demand for our products. Any such failure to meet the demand for our products would adversely affect our revenues and might cause some users to purchase licenses to our competitors’ products to meet their requirements.

We rely on a limited number of independent third parties to provide support services to our customers. If any of these third-party service providers terminates its relationship with us or ceases to be able to continue to maintain such relationship with us, we may not have sufficient notice or time to avoid serious disruption to our business. Furthermore, if any such third-party service providers fail to provide adequate or satisfactory support for our products, our reputation as well as the success of our products may be adversely affected.

Moreover, we have and may continue to outsource specific development and quality assurance activities for certain of our products. If such third-party developers are not able to complete the development activities on time, the release of the corresponding new product or a new version may be delayed. In addition, since we are unable to control the development activities outsourced by us to third parties, the portions of our product developed by such third parties may contain significant errors or “bugs.”

Termination of licenses for technologies from third parties could cause delays, increased costs or reduced functionality that may result in a material reduction in our net revenues and higher costs—We license and distribute third-party technologies that are bundled with or embedded in our products. If any of these licenses from third parties were terminated or were not renewed, or the third-party technology were to become subject to an intellectual property dispute, we might not be able to ship our products in which these technologies are bundled or embedded. We would then have to seek an alternative to such third party technology to the extent that such an alternative exists. This could result in delays in releasing and/or shipping our products, increased costs or reduced functionality of our products and material reduction in our net revenues.

Adverse economic conditions in the commercial real estate market may affect our ability to sublease vacated portions of properties held under sublease—In fiscal year 2002, we executed a restructuring plan to deliver cost synergies associated with our prior acquisitions and to better align our cost structure with the weaker

36

Table of Contents

business environment. During fiscal year 2002, our restructuring expenses included, among other things, costs related to canceling or vacating approximately 450,000 square feet of facility space held under our operating leases. We currently lease 390,000 square feet of space in Northern California under operating leases which expire between 2004 and 2011, of which 124,000 square feet of space is not currently occupied by us and is currently subleased or being marketed for sublease. Furthermore, we lease 348,000 square feet of space in Newton, Massachusetts, which expires in June 2010, of which 262,000 square feet is currently subleased. We also lease 55,000 square feet at a facility in Richardson, Texas, of which 27,000 square feet is currently being subleased. Our restructuring expenses and accruals involve significant estimates made by management using the best information available at the time that the estimates were made, including market data obtained from real estate brokers in the local markets. These estimates include evaluating the timing and market conditions of rental payments and sublease income. Any reductions in our operations, including staff reductions, may result in us vacating additional portions of properties held under operating leases prior to the expiration of the corresponding lease agreements. The general adverse economic conditions in the areas in which we have significant leased properties have resulted in a surplus of business facilities making it difficult to sublease properties. There can be no assurance that market conditions will improve during our lease period. If market conditions deteriorate, we may be unable to sublease our excess leased properties at all or on terms acceptable to us, or we may not meet our expected estimated levels of subleasing income and our results of operations could be adversely affected.

System failures or system unavailability could harm our business—We rely on our network infrastructure, internal technology systems and our websites for our development, marketing, operational, support and sales activities. The hardware and software systems related to such activities are subject to damage from earthquakes, floods, fires, power loss, telecommunication failures, computer viruses and other similar events. They are also subject to acts such as computer viruses, physical or electronic vandalism or other similar disruptions could also cause system interruptions, delays and loss of critical data and could prevent us from fulfilling our customers’ orders. We have developed disaster recovery plans and backup systems to reduce the potentially adverse effect of such events, as they could impact our sales and damage our reputation and the reputation of our products. We may, however, have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. Any event that causes failures or interruption in our hardware or software systems could result in disruption in our business operations, loss of revenues or damage to our reputation.

We may not be able to attract or retain key personnel—Our future growth and success depend, in part, on the continued service of our highly skilled employees, including, but not limited to, our management team and sales personnel. Our ability to attract and retain employees is dependent on a number of factors, including our continued ability to provide stock incentive awards, competitive cash compensation and cash bonuses. The loss of key employees or an inability to effectively recruit new employees, as needed, could have a material adverse affect on our business and our ability to grow in the future.

Legislative actions may cause our operating expenses to increase—The Sarbanes-Oxley Act of 2002 and newly proposed or enacted rules and regulations of the Securities and Exchange Commission (“SEC”) and the NASDAQ stock market impose new duties on us and our executives, directors, attorneys and independent auditors. In order to comply with the Sarbanes-Oxley Act and any new rules promulgated by the SEC or NASDAQ, we may be required to hire additional personnel and use additional outside legal, accounting and advisory services. Any of these developments could materially increase our operating expenses and adversely affect our results of operations.

Future impairment assessments on certain intangible assets may result in additional impairment charges—In fiscal year 2003, we adopted SFAS No. 142, Goodwill and Other Intangible Assets. As a result, our goodwill and other intangible assets that have an indefinite useful life are no longer amortized, but instead, reviewed at least annually for impairment. 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 intangible assets. In particular, if there is (i) a significant and other than temporary decline in the market value of our common stock; (ii) a decrease in the market value of a particular asset; and (iii) operating or cash

37

Table of Contents

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.

Changes in generally accepted accounting principles (“GAAP”) may affect our reported results—We prepare our financial statements in conformity with GAAP. GAAP is subject to interpretation by the SEC and various bodies formed to interpret and create appropriate accounting policies. Of particular significance are the GAAP relating to the accounting treatment of employee stock options and the recognition of revenue in software licensing transactions. A change in these policies could have a significant effect on our reported results and may affect the reporting of transactions completed prior to the announcement of a change.

Changes in tax laws and regulations may increase our expenses and the cost of our products—In October 1998, the federal Internet Tax Freedom Act (“ITFA”) was enacted. The ITFA imposed a three-year moratorium on state and local taxes related to internet access and discriminatory taxes on electronic commerce that expired October 20, 2001. In November 2001, the moratorium was extended another two years until November 2003. In September 2003, the House passed legislation (H.R. 49) that would permanently extend the moratorium. On April 29, 2004, the Senate approved the extension of the moratorium for another four years. The House and Senate bills must be reconciled before legislation can be enacted, the timing of which is unclear. If the ITFA is not extended or permanently enacted, state and local jurisdictions may seek to impose taxes on internet access or electronic commerce within their jurisdictions that could increase the selling costs of our products.

Also, on July 1, 2003, the European Union enacted legislation requiring all non-European Union vendors to collect Value Added Tax (“VAT”) on all electronically supplied goods or services sold to consumers in the European Union. Compliance with this new European Union tax legislation has increased the cost of our products to consumers in the European Union and could decrease the demand for our products in that region.

Changes in our tax rates could affect our future results—Our future effective tax rates could be favorably or unfavorably affected by changes in the mix of earnings in countries with differing statutory tax rates, by changes in the valuation of our deferred tax assets and liabilities, or by changes in tax laws or their interpretations. In addition, we are subject to examination of our tax returns by the tax authorities.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We invest our cash, cash equivalents and short-term investments in a variety of financial instruments, consisting primarily of U.S. Dollar-denominated U.S. treasury securities, U.S. government agency securities, commercial paper, highly liquid corporate debt securities, money market funds and interest-bearing accounts with financial institutions. Cash balances in foreign currencies are primarily invested in money market funds and interest-bearing bank accounts with financial institutions.

We account for our short-term investments in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Cash equivalents and all of our short-term investments are recorded as “available-for-sale” and accordingly are classified as current assets on our balance sheets. Securities with original maturities less than three months are classified as cash equivalents.

Cash equivalents and short-term investments include primarily fixed-rate and floating-rate interest earning instruments, which carry a degree of interest rate risk. Fixed-rate securities may have their market value adversely impacted due to a rise in interest rates, while floating-rate securities may produce less income than expected if interest rates decline. We mitigate interest rate volatility by investing in instruments with short maturities. We ensure the safety and preservation of our invested funds by placing these investments with high credit-quality issuers. We maintain portfolio liquidity by ensuring that underlying investments have active secondary or resale markets.

38

Table of Contents

The table below represents cost, carrying amounts and the related weighted average effective interest rates by year of maturity for our cash equivalents and short-term investments as of March 31, 2004. The table does not include cash of $9.3 million held in deposit accounts as of March 31, 2004.

Foreign Currency Risk

Our international operations are subject to risks typical of an international business, including, among other factors: differing economic conditions; changes in political climate; differing tax structures; other regulations and restrictions; and foreign exchange volatility. As a result, our future results could be materially impacted by changes in these or other factors.

We sell our products internationally in U.S. Dollars and certain foreign currencies, primarily the Euro, Japanese Yen and British Pound. We regularly enter into foreign exchange forward contracts to offset the impact of currency fluctuations on certain foreign currency revenues and operating expenses as well as subsequent receivables and payables. Our management’s present strategy is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates over our fiscal year. We account for derivative instruments and hedging activities in accordance with SFAS No. 133. SFAS No. 133 requires that all derivatives be recorded on the balance sheet at fair value.

Our exposure to foreign exchange rate fluctuations results from the sale of products internationally in foreign currencies and from expenses in foreign currencies to support those sales. We have a risk management program to reduce the effect of foreign exchange transaction gains and losses from recorded foreign currency-denominated assets and liabilities. This program involves the use of foreign exchange forward contracts in certain currencies, primarily the Euro, Japanese Yen and British Pound. A foreign exchange forward contract obligates us to exchange predetermined amounts of specified foreign currencies at specified exchange rates on specified dates. Under this program, increases or decreases in our foreign currency transactions are partially offset by gains and losses on the foreign exchange forward contracts, so as to mitigate the income statement impact of significant foreign currency exchange rate movements. We do not use foreign exchange forward contracts for speculative or trading purposes.

Cash Flow Hedging.    We designate and document foreign exchange forward contracts related to forecasted transactions as cash flow hedges and as a result, we apply 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 the 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”). We record any ineffective portion of the hedging instruments, which was immaterial in fiscal year 2004, in other income (expense) on our consolidated statements of operations. When the underlying forecasted transactions occur and impact earnings, the related gain or loss on the cash flow hedge is reclassified to net revenues or expenses. In the event it becomes probable that the forecasted transactions will not occur, the gain or loss on the related cash flow hedges would be reclassified from AOCI to other income (expense) at that time. All values reported in AOCI at March 31, 2004 will be reclassified to earnings in eight months or less. At March 31, 2004, the outstanding cash flow hedging derivatives had maturities of twelve months or less.

39

Table of Contents

Balance Sheet Hedging.    We manage our 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 in other income (expense). These derivative instruments substantially offset the remeasurement gains and losses recorded on identified foreign currency denominated assets and liabilities. At March 31, 2004, our outstanding balance sheet hedging derivatives had maturities of twelve months or less.

Our outstanding net foreign exchange forward contracts at March 31, 2004 are presented in the table below. This table presents the net notional amount in U.S. Dollars using the spot exchange rates in effect at March 31, 2004 and the weighted average forward rates. Weighted average forward rates are quoted using market conventions. All of these forward contracts mature in twelve months or less.

ITEM 8.    CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required is set forth under “Report of Independent Registered Public Accounting Firm,” “Consolidated Balance Sheets,” “Consolidated Statements of Operations,” “Consolidated Statements of Stockholders’ Equity and Comprehensive Income,” “Consolidated Statements of Cash Flows,” “Notes to Consolidated Financial Statements” and “Schedule II—Valuation and Qualifying Accounts” on pages F-2 to F-35 of this report.

Not applicable.

ITEM 9A.    CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.    Based on their evaluation as of the end of the period covered by this Annual Report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

(b) Changes in internal controls.    There were no changes in our internal controls over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

40

Table of Contents

Given the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Further, the design of a control system must reflect the fact that there are resource constraints, and that benefits of controls must be considered relative to their costs. The design of any system of controls is also based in part on certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

We have adopted a written code of ethics for financial employees that applies to our principal executive officer, principal financial officer, principal accounting officer, controller and other employees of the finance department designated by the company’s Chief Financial Officer. This code of ethics, titled the “Code of Ethics for Financial Employees,” is posted on the Investor Relations section of our website at www.macromedia.com/macromedia/ir under the Corporate Governance menu. We have determined that the code complies with the requirements as set forth in Item 406 of Regulation S-K promulgated under the Securities Act and the Exchange Act, as amended.

The information concerning audit committee financial experts required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Audit Committee Financial Experts.” The Company’s Board of Directors has determined that the members of our Audit Committee, which is currently composed of Messrs. Gomo, Harris, Lucas and Welty, are both financial experts and independent as that term is defined under Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.

ITEM 11.    EXECUTIVE COMPENSATION

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

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 AND RELATED STOCKHOLDER MATTERS

The information concerning security ownership and management and related stockholder matters required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

Certain information concerning related stockholder matters required by this Item can be found on page F-24. Additional information required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Equity Compensation Plan Information.”

41

Table of Contents

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information concerning principal accountant fees and services required by this Item is incorporated by reference to the section in our Proxy Statement entitled “Fees Billed by KPMG LLP.”

PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(A) The following documents are filed as part of this Report:

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

2. Financial Statement Schedules. The following financial statement schedule of Macromedia, Inc. for the fiscal years ended March 31, 2004, 2003 and 2002 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Macromedia, Inc.:

Schedule II: Valuation and Qualifying Accounts

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

42

Table of Contents

3. Exhibits.