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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

For the Quarterly Period Ended December 31, 2004

OR

For the Transition Period from              to             

Commission File No. 000-22688

MACROMEDIA, INC.

(Exact name of registrant as specified in its charter)

600 Townsend Street

San Francisco, California 94103

Telephone: (415) 252-2000

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

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

Indicate the number of shares outstanding of each of the Registrant’s classes of common stock, as of the latest practicable date: 75.4 million shares of Common Stock, $0.001 par value per common share, outstanding on January 28, 2005 including 1.8 million shares held in treasury.

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MACROMEDIA, INC.

REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2004

INDEX

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MACROMEDIA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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MACROMEDIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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MACROMEDIA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

See accompanying Notes to Condensed Consolidated Financial Statements.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Nature of Operations

Macromedia, Inc. (the “Company” or “Macromedia”) provides 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. The Company’s 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.

The Company sells its products through a worldwide network of distributors, value-added resellers (“VARs”) and its own sales force and websites. In addition, Macromedia derives revenues from software maintenance and technology licensing agreements that it has with original equipment manufacturers (“OEMs”) and end users.

2. Summary of Significant Accounting Policies

Basis of Presentation. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10-01 of Regulation S-X. Accordingly, they do not include all information and footnotes required by GAAP for annual consolidated financial statements. The interim financial information is unaudited, but reflects all adjustments that are, in the opinion of management, necessary for a fair presentation of Macromedia’s consolidated financial position, operating results and cash flows for the interim periods. These Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes thereto, together with management’s discussion and analysis of financial condition and results of operations, contained in Macromedia’s annual report on Form 10-K for the fiscal year ended March 31, 2004. The results of operations for the three and nine months ended December 31, 2004 are not necessarily indicative of the results for the fiscal year ending March 31, 2005 or any other future periods.

The preparation of Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition. The Company recognizes revenue in accordance with the American Institute of Certified Public Accountants Statement of Position (“SOP”) 97-2, Software Revenue Recognition, as modified by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. In addition, revenue is recognized in accordance with Securities and Exchange Commission Staff Accounting Bulletin No. 104 (“SAB 104”), Revenue Recognition, and Emerging Issues Task Force 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, as applicable.

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

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

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

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

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

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

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

Stock-Based Compensation. As permitted under Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board (“APB”) No. 25, Accounting for Stock Issued to Employees and related interpretations in accounting for stock-based compensation to employees. Accordingly, compensation cost for stock options is measured as the excess, if any, of the market price of the Company’s common stock at the date of grant over the stock option exercise price. Compensation costs are amortized on a straight-line basis over the expected service period, which is generally the vesting period of the stock-based awards.

Pursuant to SFAS No. 148, Accounting for Stock-Based Compensation— Transition and Disclosure, the Company is required to disclose the pro forma effects of stock-based compensation on net income and net income per share as if the Company had elected to use the fair value approach to account for all of its employee stock-based compensation plans. Had compensation cost for the Company’s plans been determined with the fair value approach in accordance with SFAS No. 123, the Company’s pro forma net income (loss) and pro forma net income (loss) per share during the periods indicated below would have been (in thousands, except per share amounts):

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

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The fair value of the Company’s stock options granted under its stock-based compensation plans was estimated on the date of grant using the Black-Scholes option-pricing model and the following weighted average assumptions for grants during the three and nine months ended December 31, 2004 and 2003:

Using the Black-Scholes option-pricing model and the above assumptions, the weighted average fair value of Macromedia stock options granted during the three months ended December 31, 2004 and 2003 was $17.31 and $11.08, respectively. The weighted average fair value of Macromedia stock options granted during the nine months ended December 31, 2004 and 2003 was $12.93 and $10.98, respectively. In periods in which employees enroll in the Company’s Employee Stock Purchase Plans (“ESPPs”), the fair value of shares to be issued under these ESPPs is also calculated. Employees are only allowed to enroll in the Company’s 2003 Employee Stock Purchase Plan in February and August. During the three months ended December 31, 2004 and 2003, there was no new enrollment in any of the Company’s ESPPs. During the nine months ended December 31, 2004 and 2003, the weighted average fair value of purchase rights granted under the ESPPs was $7.84 and $8.52 per right, respectively.

Other Significant Accounting Policies. For all other significant accounting policies, please refer to the Company’s Form 10-K for the year ended March 31, 2004.

3. Business Combinations

eHelp Corporation—In December 2003, the Company acquired all of the outstanding stock of privately-held eHelp Corporation (“eHelp”), a provider of rich media help authoring software applications. The purchase price of eHelp was $66.2 million. In the nine months ended December 31, 2004, the current portion of Restricted cash was reduced by cash payments to the former eHelp shareholders of $12.0 million following the resolution of certain indemnification obligations of eHelp. As of December 31, 2004, the Company has a remaining Restricted cash balance of $2.5 million related to this acquisition payable in cash, subject to certain remaining indemnification obligations of eHelp. The acquisition was recorded using the purchase method of accounting. The results of eHelp’s operations have been combined with those of the Company from the date of acquisition.

During the three months ended December 31, 2004, the Company reduced the amount of certain estimated liabilities which were recorded during the purchase price allocation period for the Company’s acquisition of eHelp based on the availability of recent information. The decrease in the estimate of these liabilities occurred in a period subsequent to the closing of the purchase price allocation period and therefore resulted in a $1.7 million reduction in General and administrative expenses and a corresponding increase in goodwill.

Other—Related to a business combination completed in fiscal year 2003, payments of earnout provisions approximating $2.6 million for the achievement of certain business objectives were made through the nine months ended December 31, 2004. There are no further earnout provisions relating to this business combination.

4. Purchase of Land and Building

In April 2004, the Company completed its purchase of an office building and land in San Francisco, California, funding the remaining $37.7 million of the $40.4 million purchase price. The Company began occupying this building in January 2005, which will serve as the Company’s corporate headquarters effective April 1, 2005. Costs related to preparing the building for occupancy and the property taxes, insurance and other maintenance costs related to the property incurred through December 31, 2004 have been capitalized in Property and equipment, net and are included as part of the building’s carrying value. The carrying value of the building was reduced by $3.5 million received from a former tenant who paid a lease termination fee in June 2004. At December 31, 2004, total costs capitalized related to this building and included in Construction in process were $48.3 million.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

5. Restructuring

In fiscal year 2002, the Company executed a restructuring plan to deliver cost synergies associated with its fiscal year 2001 acquisition of Allaire and to better align its cost structure with the weaker business environment, which resulted in restructuring expenses totaling $81.8 million. Restructuring expenses primarily represented estimated future costs related to 22 facilities to either cancel or vacate approximately 450,000 square feet of facility space held under the Company’s operating leases as a result of staff reductions and changes in the Company’s business and demise and tenant improvement costs to sublease the facilities, net of deferred rent recorded for the facilities and, to a lesser extent, employee termination and severance costs.

Accrued restructuring balances and net cash payments recorded during the nine months ended December 31, 2004 were as follows (in thousands):

The Company expects to make future facility rent payments, net of estimated sublease income, on its contractual lease obligations for these facilities through the end of each obligation. These net payments will be recorded as a reduction to the Company’s restructuring accrual. As of December 31, 2004, the restructuring accrual balance represented the contractual and estimated lease obligation and related facility costs of seven remaining facilities as well as estimated demise and tenant improvement costs to sublease these facilities, net of estimated sublease income. As of December 31, 2004, future minimum gross lease obligations for the Company’s restructured facilities extending through June 2010 amounted to $58.6 million, which will be offset by future sublease income of $33.8 million, to be received under existing contractual sublease agreements, and $11.9 million estimated to be received from future sublease arrangements.

6. Foreign Currency Forward Contracts

The Company sells its products internationally in U.S. Dollars and certain foreign currencies, primarily the Euro, Japanese Yen and British Pound. The Company regularly enters into foreign exchange forward contracts to offset the impact of currency fluctuations on certain foreign currency revenues and operating expenses as well as subsequent receivables and payables. At December 31, 2004, the net notional amount of forward contracts outstanding in U.S. Dollars using the spot exchange rates in effect at December 31, 2004 amounted to $99.3 million. Management’s strategy is to reduce the risk to earnings and cash flows associated with changes in foreign currency exchange rates.

Cash Flow Hedging. The Company designates and documents foreign exchange forward contracts related to forecasted transactions as cash flow hedges and applies hedge accounting for these contracts. The critical terms of the foreign exchange forward contracts and the forecasted underlying transactions are matched at inception and forward contract effectiveness is calculated, at least quarterly, by comparing the change in the fair value of the contracts to the change in fair value of the forecasted net revenues or expenses, with the effective portion of the fair value of the hedges recorded in Accumulated other comprehensive income (“AOCI”). The Company records any ineffective portion of the hedging instruments in Other income (expense) on its Condensed Consolidated Statements of Income, which was not material during the three and nine months ended December 31, 2004 and 2003. When the underlying forecasted transactions occur and impact earnings, the related gains or losses on the cash flow hedge are reclassified from AOCI to net revenues or expenses. In the event it becomes probable that the forecasted transactions will not occur, the gains or losses on the related cash flow hedges would be reclassified from AOCI to Other income (expense) at that time. All values reported in AOCI at December 31, 2004 will be reclassified to operations in twelve months or less. At December 31, 2004, the outstanding cash flow hedging derivatives had maturities of twelve months or less.

The following table depicts cash flow hedge accounting activity as a component of AOCI in the nine months ended December 31, 2004 (in thousands):

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Balance Sheet Hedging. The Company manages its foreign currency risk associated with foreign currency denominated assets and liabilities using foreign exchange forward contracts. These derivative instruments are carried at fair value with changes in the fair value recorded as a component of Other income (expense) on its Condensed Consolidated Statements of Income. These derivative instruments substantially offset the remeasurement gains and losses recorded on identified foreign currency denominated assets and liabilities. At December 31, 2004, the Company’s outstanding balance sheet hedging derivatives had maturities of twelve months or less.

7. Comprehensive Income

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

8. Gain on Investments

Historically, the Company has held investments in certain companies. Gain on investment includes gains on investments in publicly-traded and privately-held companies. During the three months ended December 31, 2003, the Company sold its remaining shares of common stock held in a publicly-traded company and received net proceeds of $0.7 million. During the nine months ended December 31, 2003, the Company also received cash of $0.1 million from one of its investments in a privately-held company. These investments in publicly-traded and privately-held companies had been previously written off in accordance with the Company’s accounting policy for the treatment of Investments (refer to the Company’s Form 10-K for the year ended March 31, 2004). At December 31, 2004, the Company no longer holds any available-for-sale investments in the common stock of publicly-traded companies, but it retains equity interests in several privately-held companies for which no carrying value was recorded on its Condensed Consolidated Balance Sheet.

During the three months ended December 31, 2004, the Company recorded a $1.4 million gain related to the fair value of a warrant received from a privately-held company. In December 2004, the Company received a warrant exercisable into 1.2 million shares of preferred stock following the recapitalization of this privately-held company in which the Company also holds an investment accounted for under the equity method. These warrants have an exercise price of $3.21 and are exercisable through January 1, 2010 for preferred shares of this company. The Company’s original investment in this entity has a recorded carrying value of zero, resulting from the recognition of its share of the cumulative losses incurred during the Company’s period of ownership. The warrants are being accounted for in accordance with SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities and were valued using the Black-Scholes pricing model. Assumptions used in the calculation of the fair value of the warrant were as follows: a five year expected life; volatility of 77%, a risk-free interest rate of 3.58%, and a dividend rate of zero. The fair value calculated using the Black-Scholes pricing model was then reduced to reflect certain limitations on the warrant including a lack of marketability. In accordance with SFAS No. 133, the Company will be required to revalue the warrant each quarter, reflecting adjustments to fair value, if any, in Gain on investments with a corresponding adjustment to Other assets.

9. Net Income Per Common Share

Basic net income per common share is computed by dividing the net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income for the period by the weighted average number of common and potentially dilutive securities outstanding during the period using the treasury stock method. Potentially dilutive securities are composed of incremental common shares issuable upon the exercise of stock options and the Company’s ESPPs. During the nine months ended December 31, 2004, employees purchased 231,000 shares of common stock for $3.7 million under the Company’s 2003 ESPP.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table sets forth the reconciliation of the numerator and denominator used in the computation of basic and diluted net income per common share (in thousands, except per share amounts):

The table below presents stock options that are excluded from the diluted net income per common share calculation because the exercise prices of the options were greater than the average market price of the Company’s common stock and, therefore, their effects on diluted net income per common share would be anti-dilutive (shares in thousands):

For all periods presented, the Company had 1.8 million shares of its common stock, which were previously repurchased on the open market, classified as treasury stock. These shares are recorded at cost and are shown as a reduction of stockholders’ equity and excluded from the calculations of basic and diluted shares.

10. Commitments and Contingencies

Letters of Credit. The Company has obtained letters of credit from financial institutions totaling approximately $7.8 million as of December 31, 2004 and $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.

Legal. From time to time, the Company 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 Quarterly Report, the Company is party to certain pending litigation matters incidental to its business. In the judgment of the Company, none of these pending legal proceedings is material to the operations of the Company.

Intellectual Property Indemnification Obligations. The terms of the Company’s distribution agreements, reseller agreements, and license agreements with enterprise customers generally provide for a limited indemnification of such distributors, resellers, and customers against losses, expenses and liabilities arising from third-party claims based on alleged infringement by the Company’s products of a third party intellectual property right. The terms of such indemnification often limit the scope of and remedies for such indemnification and generally include a right to replace an infringing product. To date, the Company has not had to reimburse any of its distributors, resellers, or customers for any losses related to these indemnification provisions pertaining to third-party intellectual property infringement claims. For several reasons, including, among other things, 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 the Company’s distributors, resellers, and customers, the Company cannot determine the maximum amount of potential future payments, if any, related to any such indemnification provisions that may be required.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Other Commitment and Contingencies. Through its normal course of business, the Company has also entered into other indemnification agreements that arise in various types of arrangements, including those with financial institutions under banking arrangements. To date, the Company has not made any significant payments under such indemnification agreements. Accordingly, no amount has been accrued in the Company’s Condensed Consolidated Financial Statements with respect to these indemnification agreements.

11. Segment Reporting and Significant Customers

At December 31, 2004, the Company operated in one business segment, the Software segment. The Company’s Software segment provides software that empowers both technical and non-technical individuals to create effective user experiences on the Internet.

The Company’s net product revenues are aligned in three main categories identified by the markets that they serve: Designer and Developer, Business User, and Consumer. In addition, Other is comprised of other miscellaneous revenues, including a portion of revenues related to training, consulting and technical support. The Company’s Chief Executive Officer is the chief operating decision maker who evaluates performance based on net revenues and total operating expenses of the Software segment.

The following table sets forth net revenues by market during the three and nine months ended December 31, 2004 and 2003 (in thousands):

Distributors accounted for a significant portion of the Company’s net revenues and accounts receivable balance and comprise several individually large accounts. The following table sets forth the information about the Company’s two most significant distributors:

12. Cumulative Adjustment to Provision for Income Taxes and Income Taxes Payable

During the third quarter of fiscal year 2005, the Company determined that certain foreign currency-denominated tax liabilities and assets in prior periods had not been properly remeasured in U.S. Dollars in accordance with the Company’s foreign currency remeasurement policies. As a result, our provision for income taxes for the three and nine months ended December 31, 2004 reflects $3.0 million resulting from the remeasurement of our net foreign-currency denominated tax liabilities to U.S. dollars at exchange rates as of December 31, 2004. The cumulative understatement of the provision for income taxes for periods prior to the three months ended December 31, 2004 totaled approximately $1.9 million. The effect of the adjustment was not material to any period previously presented or to the nine months ended December 31, 2004 nor does the Company believe that the amount will be material to the fiscal year ending March 31, 2005 . To correct this error, the Company recorded the cumulative $1.9 million as an increase in the provision for income taxes in the Condensed Consolidated Statement of Income for the three and nine months ended December 31, 2004 and a corresponding $1.9 million increase in income taxes payable in the Condensed Consolidated Balance Sheet as of December 31, 2004. Diluted earnings per share decreased by $0.02 and $0.03 in the three and nine months ended December 31, 2004, respectively, as a result of this adjustment.

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MACROMEDIA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

13. Recent Accounting Pronouncements

In March 2004, the Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 03-01, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The guidance prescribes a three-step model for determining whether an investment is other-than-temporarily impaired and requires disclosures about unrealized losses on investments. In September 2004, the FASB delayed the accounting provisions of EITF No. 03-01; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. In December 2004, the FASB determined that it will reconsider in its entirety EITF No. 03-01 and all other guidance on disclosing, measuring, and recognizing other-than-temporary impairments of debt and equity securities. The Company will evaluate the impact EITF No. 03-01 will have on its Consolidated Financial Statements once final guidance is issued.

In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment: an amendment of FASB Statements No. 123 and 95 (“SFAS No. 123R”) which requires companies to recognize in the Consolidated Statement of Income the grant-date fair value of stock options and other equity-based compensation issued to employees, but expresses no preference for a type of valuation model. SFAS No. 123R is effective for interim or annual periods beginning after June 15, 2005 (the quarter ended September 30, 2005 for Macromedia, Inc.). Companies adopting the new requirements are likely to re-examine their valuation methods and the support for the assumptions that underlie the valuation of the awards. Many are also likely to carefully examine their share based payment programs. SFAS No. 123R sets accounting requirements for “share-based” compensation to employees, including employee stock purchase plans. It carries forward prior guidance on accounting for awards to nonemployees. The Company is currently evaluating the method of adoption and the impact that SFAS No. 123R will have on its Consolidated Financial Statements.

In December 2004, the FASB issued Staff Position SFAS No. 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes (“FSP No. 109-1”) to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 which was signed into law by the President of the United States on October 22, 2004. Companies that qualify for the recent tax law’s deduction for domestic production activities must account for it as a special deduction under SFAS No. 109 and reduce their tax expense in the period or periods the amounts are deductible, according to FSP No. 109-1, effective for the Company in its fiscal year 2006. The FASB’s guidance is not expected to have a material impact to the Company’s financial results.

In December 2004, the FASB also issued Staff Position SFAS No. 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision (“FSP No. 109-2”) within the American Jobs Creation Act of 2004. The Act provides for a one-time deduction of 85 percent of certain foreign earnings that are repatriated in either an enterprise’s last tax year that began before the date of enactment, or the first tax year that begins during the one year period beginning on the date of enactment. FSP No. 109-2 allows companies additional time to evaluate whether foreign earnings will be repatriated under the repatriation provisions of the new tax law and requires specified disclosures for companies needing the additional time to complete the evaluation. The Company is currently evaluating the repatriation provisions of the Act and shall complete its evaluation once guidance has been issued by the Treasury Department on the repatriation provision, which is expected sometime in 2005. The Company is considering repatriating an amount ranging from $0-$70 million in the year ending March 31, 2006. The additional income tax expense resulting from the repatriation would be between $0-$4.0 million.

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

Except for historical financial information contained herein, the matters discussed in this Form 10-Q may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding our intent, belief, or current expectations and those of our management. Prospective

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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.

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 channels—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 in 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 that leverage the power of our technology 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 growth for the company over the next decade. Our primary products and the markets that they serve are broken down as follows:

Financial Highlights for the Three and Nine Months Ended December 31, 2004

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Throughout the three and nine months ended December 31, 2004 and 2003, 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, consulting, technical and other support services. Fluctuations in net revenues can be attributed to changes in product and customer mix, general trends in Information Technology (“IT”) spending, as well as to changes in geographic mix and the corresponding impact of 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

Net revenues increased 15% during the three months ended December 31, 2004 from the same period of last year. The increase in net revenues reflects increased sales in all three markets as follows:

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Net revenues increased 20% during the nine months ended December 31, 2004 from the same period last year. The increase in net revenues reflects increased sales in all three markets as follows:

We have a history of introducing new or enhanced product offerings that affect our reported net revenues. 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. (See “Risk Factors that May Affect Future Results of Operations” for additional information.)

Net Revenues by Geography: