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

FORM 10-K



|(Mark One) | 
|---------- | 

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

For the Fiscal Year Ended March 31, 2000

OR

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

COMMISSION FILE NO. 000-22688

MACROMEDIA, INC.
(A Delaware Corporation)

I.R.S. Identification No. 94-3155026

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

|                                                            |  |                                         
|----------------------------------------------------------- |  | ----------------------------------------
|Securities registered pursuant to Section 12(b) of the Act: |  | NONE                                    
|                                                           
|                                                           
|                                                           
|                                                           
|Securities registered pursuant to Section 12(g) of the Act: |  | COMMON STOCK, PAR VALUE
$0.001 PER SHARE

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

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

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

DOCUMENTS INCORPORATED BY REFERENCE

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



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



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MACROMEDIA, INC. AND SUBSIDIARIES

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




TABLE OF CONTENTS




|                                                                 |                                                                                               |  |  |  |  |  |  | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                                          
|                                                                 | ITEM 1. BUSINESS                                                                             
|                                                                 | ITEM 2. PROPERTIES                                                                           
|                                                                 | ITEM 3. LEGAL PROCEEDINGS                                                                    
|                                                                 | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|PART II                                                         
|                                                                 | ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS            
|                                                                 | ITEM 6. SELECTED FINANCIAL DATA                                                              
|                                                                 | ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                                                 | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                          
|                                                                 | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                          
|                                                                 | ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
|PART III                                                        
|                                                                 | ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT                                            
|                                                                 | ITEM 11. EXECUTIVE COMPENSATION                                                              
|                                                                 | ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|                                                                 | ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV                                                         
|                                                                 | ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                     
|SIGNATURES                                                      
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND OTHER INFORMATION
|EX-10.15 Lease Agreement                                        
|EX-10.16 First Amendment to Lease Agreement                     
|EX-10.17 Lease Agreement-Oelsner Commercial Prop.               
|EX-10.18 Employment Agreement-Brian Allum                       
|EX-21.01 List of Registrant's Subsidiaries                      
|EX-23.01 Consent of KPMG LLP                                    
|EX-27.01 Financial Data Schedule-Year End 3/31/00               
|EX-27.02 Restated FDS - Year Ended 3/31/1999                    
|EX-27.03 Restated FDS - Year Ended 3/31/1998                    
|EX-27.04 Restated FDS - 3 Months Ended 6/30/1999                
|EX-27.05 Restated FDS - 6 Months Ended 9/30/1999                
|EX-27.06 Restated FDS - 3 Months Ended 6/30/1998                
|EX-27.07 Restated FDS - 6 Months Ended 9/30/1998                
|EX-27.08 Restated FDS - 9 Months Ended 12/31/1998               



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MACROMEDIA, INC. AND SUBSIDIARIES

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



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|PART I                                                                                       
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|Item 1. Business                                                                              |  |  | 3    | 
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|Item 2. Properties                                                                            |  |  | 11   | 
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|Item 3. Legal Proceedings                                                                     |  |  | 11   | 
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|Item 4. Submission of Matters To a Vote of Security Holders                                   |  |  | 12   | 
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|PART II                                                                                      
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|Item 5. Market for the Registrants Common Equity and Related Stockholder Matters             |  |  | 12   | 
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|Item 6. Selected Financial Data                                                               |  |  | 12   | 
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|Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations |  |  | 12   | 
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|Item 7a. Quantitative and Qualitative Disclosures about Market Risk                           |  |  | 13   | 
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|Item 8. Financial Statements and Supplementary Data                                           |  |  | 13   | 
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|Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures |  |  | 13   | 
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|PART III                                                                                     
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|Item 10. Directors and Executive Officers of the Registrant                                   |  |  | 13   | 
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|Item 11. Executive Compensation                                                               |  |  | 13   | 
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|Item 12. Security Ownership of Certain Beneficial Owners and Management                       |  |  | 13   | 
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|Item 13. Certain Relationships and Related Party Transactions                                 |  |  | 13   | 
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|PART IV                                                                                      
|                                                                                             
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|Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |  |  | 14   | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Signatures                                                                                    |  |  | 16   | 
|                                                                                             
|                                                                                             
|                                                                                             
|                                                                                             
|Index to Consolidated Financial Statements and Other Information                              |  |  | F-1  | 

2



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##### Table of Contents



PART I

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




##### Table of Contents



ITEM 1. BUSINESS

Overview

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

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

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

Market Opportunity

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

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



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

3



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

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

SOFTWARE BUSINESS

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

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



| |  |  | Build sites efficiently      
| | - |  | -----------------------------
| |  |  | Manage the production process
| |  |  | Engage their customers       
| |  |  | Personalize their experience 
| |  |  | Analyze the results          

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

4



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

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

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

Product Development

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

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

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

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

Acquisitions

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

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

Competition

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

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

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

Operations and Manufacturing

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

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

Marketing and Distribution

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

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

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

Customer Support

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

7



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

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

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

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

Proprietary Rights and Licenses

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

Venture Investments

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

SHOCKWAVE.COM BUSINESS

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

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

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

8



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The shockwave.com Opportunity

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

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

Strategy for shockwave.com

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

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

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

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

Competition

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



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

9



---





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

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

Content

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

Strategic Alliances

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

Back-End Infrastructure

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

10



---



Sales and Marketing

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

Risk Factors



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

Year 2000 Compliance



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

Employees

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




##### Table of Contents



ITEM 2. PROPERTIES

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




##### Table of Contents



ITEM 3. LEGAL PROCEEDINGS

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

11



---



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

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

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




##### Table of Contents



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

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




##### Table of Contents



PART II




##### Table of Contents



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

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




##### Table of Contents



ITEM 6. SELECTED FINANCIAL DATA

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




##### Table of Contents



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

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

12



---






##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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




##### Table of Contents



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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




##### Table of Contents



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

Not applicable.




##### Table of Contents



PART III




##### Table of Contents



ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT

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

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

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




##### Table of Contents



ITEM 11. EXECUTIVE COMPENSATION

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




##### Table of Contents



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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




##### Table of Contents



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

13



---






##### Table of Contents



PART IV




##### Table of Contents



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



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



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



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



| | 2. |  | Financial Statement Schedule. The following financial statement
schedule of Macromedia, Inc. and Subsidiaries for the fiscal years ended
March 31, 2000, 1999 and 1998 is filed as part of this Report and should
be read in conjunction with the Consolidated Financial Statements of
Macromedia, Inc. and Subsidiaries.
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Schedule II: Valuation and Qualifying Accounts

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



| | 3. |  | Exhibits
| | -- |  | --------

|        |  |                                                                                                                                                                                                                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT
|NUMBER  |  | EXHIBIT TITLE                                                                                                                                                                                                                                                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                                                                         
|2.01    |  | Amended and Restated Agreement and Plan of Reorganization by and among Registrant,
ESI Software, Inc. and Dynamo Acquisition Corp. dated July 8, 1999 as amended August
30, 1999. (a)                                                                                                                                                                                   
|       
|       
|       
|       
|2.02    |  | Amended and Restated Agreement and Plan of Reorganization by and among Registrant,
Andromedia, Inc. and Peak Acquisition Corp. dated October 6, 1999 as amended November
23, 1999. (b)                                                                                                                                                                                  
|       
|       
|       
|       
|3.01    |  | Registrants Amended and Restated Certificate of Incorporation. (c)                                                                                                                                                                                                                                                                                                     
|       
|       
|       
|       
|3.02    |  | Certificate of Amendment of Registrants Amended and Restated Certificate of
Incorporation. (d)                                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|3.03    |  | Registrants Bylaws. (e)                                                                                                                                                                                                                                                                                                                                                
|       
|       
|       
|       
|3.04    |  | Amendment to Registrants Bylaws effective October 15, 1993. (e)                                                                                                                                                                                                                                                                                                        
|       
|       
|       
|       
|10.01   |  | 1992 Equity Incentive Plan and related documents, as amended to date. (l)                                                                                                                                                                                                                                                                                               
|       
|       
|       
|       
|10.02   |  | 1993 Directors Stock Option Plan and related documents, as amended to date. (f)                                                                                                                                                                                                                                                                                         
|       
|       
|       
|       
|10.03   |  | Non-Plan Form Agreements. (j)                                                                                                                                                                                                                                                                                                                                           
|       
|       
|       
|       
|10.04   |  | Registrants Form of Non-Plan Stock Option Grant. (l)                                                                                                                                                                                                                                                                                                                   
|       
|       
|       
|       
|10.05   |  | ESI Software, Inc. 1996 Equity Incentive Plan. (l)                                                                                                                                                                                                                                                                                                                      
|       
|       
|       
|       
|10.06   |  | Registrants 1999 Stock Option Plan. (m)                                                                                                                                                                                                                                                                                                                                
|       
|       
|       
|       
|10.07   |  | Andromedia, Inc. 1996 Stock Option Plan. (m)                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.08   |  | Andromedia, Inc. 1997 Stock Option Plan. (m)                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.09   |  | Andromedia, Inc. 1999 Stock Option Plan. (m)                                                                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.10   |  | Form of Indemnification Agreement entered into by Registrant with its directors and
executive officers. (e)                                                                                                                                                                                                                                                             
|       
|       
|       
|       
|10.11   |  | Twelfth Amendment to Lease Agreement by and between Registrant and Toda Development,
Inc. dated November 26, 1996 and Thirteenth Amendment to Lease Agreement by and
between Registrant and Toda Development, Inc. dated February 25, 1997 and Fourteenth
Amendment to Lease Agreement by and between Registrant and Toda Development, Inc.
dated February 25, 1997. (g)
|       
|       
|       
|       
|10.12   |  | Employment Agreement between the Registrant and Robert K. Burgess dated August 25,
1996. (h)                                                                                                                                                                                                                                                                            
|       
|       
|       
|       
|10.13   |  | Loan Agreement between Registrant and Brian and Sharon Allum, dated July 15, 1997. (i)                                                                                                                                                                                                                                                                                  

14



---



|        |  |                                                                                                       
|------- |  | ------------------------------------------------------------------------------------------------------
|EXHIBIT
|NUMBER  |  | EXHIBIT TITLE                                                                                         
|        |  |                                                                                                       
|       
|       
|       
|       
|10.14   |  | Loan Agreement between Registrant and Steven A. and Nancy M. Elop, dated April 24,
1998. (k)          
|       
|       
|       
|       
|10.15   |  | Lease Agreement by and between Registrant and Zoro LLC, dated April 15, 1999.*                        
|       
|       
|       
|       
|10.16   |  | First Amendment to Lease agreement by and between Registrant and Zoro LLC,
dated July 1, 1999.*       
|       
|       
|       
|       
|10.17   |  | Lease Agreement by and between Registrant and Oelsner Commercial Properties,
dated February 28, 2000.*
|       
|       
|       
|       
|10.18   |  | Employment Agreement between the Registrant and Brian Allum dated July 22, 1997. *                    
|       
|       
|       
|       
|21.01   |  | List of Registrants subsidiaries (see page F-40 of this Form 10-K).                                  
|       
|       
|       
|       
|23.01   |  | Consent of KPMG LLP, Independent Auditors (see page
F-41 of this Form 10-K).                          
|       
|       
|       
|       
|24.01   |  | Power of Attorney (see page 16 of this Form 10-K).                                                    
|       
|       
|       
|       
|27.01   |  | Financial Data Schedules (see page F-42 to
F-49 of this report).                                      



---

|(a) |  | Incorporated by reference to the Registrants Current Report on
Form 8-K/A filed on October 26, 1999.                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(b) |  | Incorporated by reference to the Registrants Current Report on
Form 8-K/A filed February 14, 2000.                                                 
|   
|   
|   
|   
|(c) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 (Registration Statement No. 33-89092).                             
|   
|   
|   
|   
|(d) |  | Incorporated by reference to the Registrants Amendment No. 1 to
Registration Statement on Form 8-A filed on October 5, 1995.                       
|   
|   
|   
|   
|(e) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-1 (Registration Statement No. 33-70624).                             
|   
|   
|   
|   
|(f) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 filed on September 24, 1998 (Registration
Statement No. 333-64141).
|   
|   
|   
|   
|(g) |  | Incorporated by reference to the Registrants Annual Report on Form
10-K for the fiscal year ended March 31, 1997.                                  
|   
|   
|   
|   
|(h) |  | Incorporated by reference to the Registrants Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1996.                        
|   
|   
|   
|   
|(i) |  | Incorporated by reference to the Registrants Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1997.                        
|   
|   
|   
|   
|(j) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 filed on October 31, 1997 (Registration Statement
No. 333-39285).  
|   
|   
|   
|   
|(k) |  | Incorporated by reference to the Registrants Quarterly Report on
Form 10-Q for the fiscal quarter ended September 30, 1998.                        
|   
|   
|   
|   
|(l) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 filed on October 18, 1999 (Registration Statement
No. 333-89247).  
|   
|   
|   
|   
|(m) |  | Incorporated by reference to the Registrants Registration
Statement on Form S-8 filed on December 07, 1999 (Registration
Statement No. 333-92233). 
|   
|   
|   
|   
|*   |  | Filed herewith.                                                                                                                                     



|(B) |  | Reports on Form 8-K:
|--- |  | --------------------



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

15



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##### Table of Contents



SIGNATURES

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

Dated: June 21, 2000

| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | MACROMEDIA, INC.By:   /s/  Robert K. Burgess
Robert K. Burgess
Chief Executive Officer, President and Director




POWER OF ATTORNEY

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

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

|                                             |  |                                                                                                               |  |              
|-------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------------
|SIGNATURE                                    |  | TITLE                                                                                                         |  | DATE         
|                                             |  |                                                                                                               |  |              
|                                            
|/s/  Robert K. Burgess
Robert K. Burgess     |  | President, Chief Executive Officer, and
Chairman of the Board of Directors
(Principal Executive Officer)      |  | June 21, 2000
|                                            
|/s/  Elizabeth A. Nelson
Elizabeth A. Nelson |  | Executive Vice President, Chief Financial
Officer, and Secretary
(Principal Financial and Accounting Officer) |  | June 21, 2000
|                                            
|/s/  John (Ian) Giffen
John (Ian) Giffen     |  | Director                                                                                                      |  | June 21, 2000
|                                            
|/s/  Mark Kvamme
Mark Kvamme                 |  | Director                                                                                                      |  | June 21, 2000
|                                            
|/s/  Donald L. Lucas
Donald L. Lucas         |  | Director                                                                                                      |  | June 21, 2000
|                                            
|/s/  Alan Ramadan
Alan Ramadan               |  | Director                                                                                                      |  | June 21, 2000
|                                            
|/s/  William B. Welty
William B. Welty       |  | Director                                                                                                      |  | June 21, 2000

16



---



MACROMEDIA, INC. AND SUBSIDIARIES

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




##### Table of Contents



|                                                                                                   |  |         |      | 
|-------------------------------------------------------------------------------------------------- |  | ------- | ---- | 
|                                                                                                   |  | Page(s)
|                                                                                                   |  |        
|Selected Consolidated Financial Data                                                               |  |         | F-2  | 
|                                                                                                  
|Managements Discussion and Analysis of Financial Condition
and Results of Operations              |  |         | F-3  | 
|                                                                                                  
|Independent Auditors Report                                                                       |  |         | F-12 | 
|                                                                                                  
|Consolidated Balance Sheets as of March 31, 2000 and 1999.                                         |  |         | F-13 | 
|                                                                                                  
|Consolidated Statements of Operations for the Years Ended March 31, 2000,
1999 and 1998.           |  |         | F-14 | 
|                                                                                                  
|Consolidated Statements of Cash Flows for the Years Ended March 31, 2000,
1999 and 1998.           |  |         | F-15 | 
|                                                                                                  
|Consolidated Statements of Stockholders Equity for the Years Ended
March 31, 2000, 1999 and 1998. |  |         | F-16 | 
|                                                                                                  
|Notes to Consolidated Financial Statements                                                         |  |         | F-17 | 
|                                                                                                  
|Schedule II: Valuation and Qualifying Accounts                                                     |  |         | F-39 | 

F-1



---






MACROMEDIA, INC. AND SUBSIDIARIES

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

|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |        |        |        | 
|-------------------------------------------------------------- | ---------------------------- | ------------------------------------ | --------------------------------------------------------------- | ------- | --------------------- | ------ | ------- | ------ | ------- | ----- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------ | ------ | 
|                                                               |                              |                                      |                                                                 |         | Years ended March 31,
|                                                               |                              |                                      |                                                                 |         |                      
|                                                               |                              |                                      |                                                                 |         | 2000                  |        | 1999    |        | 1998    |       | 1997    |        | 1996   
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |        
|STATEMENT OF OPERATIONS DATA:                                  |                             
|                                                              
|                                                              
|                                                              
|                                                              
|Revenues                                                       |                              | $                                    | 264,159                                                         |         |                       | $      | 153,243 |        |         | $     | 113,803 |        |         | $       | 108,954 |        |         | $       | 119,579 |       
|                                                              
|                                                              
|                                                              
|                                                              
|Cost of revenues                                               |                              |                                      | 28,829                                                          |         |                       |        | 15,625  |        |         |       | 15,107  |        |         |         | 24,085  |        |         |         | 21,098  |       
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |       
|                                                               |                              | Gross profit                         |                                                                 |         | 235,330               |        |         |        | 137,618 |       |         |        | 98,696  |         |         |        | 84,869  |         |         |        | 98,481 |       
|                                                              
|                                                              
|                                                              
|                                                              
|Operating expenses:                                            |                             
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Sales and marketing          |                                      |                                                                 | 113,005 |                       |        |         | 73,153 |         |       |         | 60,379 |         |         |         | 61,076 |         |         |         | 42,544 |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Research and development     |                                      |                                                                 | 65,739  |                       |        |         | 41,551 |         |       |         | 36,829 |         |         |         | 33,333 |         |         |         | 21,717 |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | General and administrative   |                                      |                                                                 | 24,610  |                       |        |         | 16,740 |         |       |         | 13,231 |         |         |         | 9,313  |         |         |         | 6,190  |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Acquisition related expenses |                                      |                                                                 | 11,516  |                       |        |         | 454    |         |       |         | 7,658  |         |         |         | 350    |         |         |         | 2,525  |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Non-cash compensation        |                                      |                                                                 | 11,071  |                       |        |         | 287    |         |       |         | 49     |         |         |         |       |         |         |         |       |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Amortization of intangibles  |                                      |                                                                 | 1,013   |                       |        |         | 248    |         |       |         |       |         |         |         |       |         |         |         |       |       
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |       
|                                                               |                              | Total operating expenses             |                                                                 |         | 226,954               |        |         |        | 132,433 |       |         |        | 118,146 |         |         |        | 104,072 |         |         |        | 72,976 |       
|                                                              
|                                                              
|                                                              
|                                                              
|Operating income (loss)                                        |                              |                                      | 8,376                                                           |         |                       |        | 5,185   |        |         |       | (19,450 | )      |         |         | (19,203 | )      |         |         | 25,505  |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                              | Total other income                   |                                                                 |         | 6,187                 |        |         |        | 5,037   |       |         |        | 4,637   |         |         |        | 5,309   |         |         |        | 4,026  |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                              | Minority interest                    |                                                                 |         | 6,179                 |        |         |        |        |       |         |        |        |         |         |        |        |         |         |        |       |       
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |       
|                                                               |                              | Income (loss) before income taxes    |                                                                 |         | 20,742                |        |         |        | 10,222  |       |         |        | (14,813 | )       |         |        | (13,894 | )       |         |        | 29,531 |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                              | Provision (benefit) for income taxes |                                                                 |         | 11,975                |        |         |        | 7,612   |       |         |        | 828     |         |         |        | (3,477  | )       |         |        | 8,779  |       
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |       
|                                                               |                              |                                      | Net income (loss)                                               |         |                       | 8,767  |         |        |         | 2,610 |         |        |         | (15,641 | )       |        |         | (10,417 | )       |        |        | 20,752 | 
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |                              |                                      | Accretion on mandatorily redeemable
convertible preferred stock |         |                       | (2,538 | )       |        |         | (104  | )       |        |         |        |         |        |         |        |         |        |        |       | 
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |       
|                                                               |                              |                                      | Net income (loss) applicable to
common stockholders             |         | $                     | 6,229  |         |        | $       | 2,506 |         |        | $       | (15,641 | )       |        | $       | (10,417 | )       |        | $      | 20,752 | 
|                                                               |                              |                                      |                                                                 |         |                       |        |         |        |         |       |         |        |         |         |         |        |         |         |         |       
|Net income (loss) applicable to
common stockholders per share: |                             
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Basic                        |                                      | $                                                               | 0.14    |                       |        | $       | 0.06   |         |       | $       | (0.40  | )       |         | $       | (0.27  | )       |         | $       | 0.53   |       
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Diluted                      |                                      | $                                                               | 0.12    |                       |        | $       | 0.05   |         |       | $       | (0.40  | )       |         | $       | (0.27  | )       |         | $       | 0.53   |       

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

|                                                   |  |                 |         |      |  |      |         |      |  |      |         |  |  |   |         |  |  |   |         | 
|-------------------------------------------------- |  | --------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- |  |  | - | ------- | 
|                                                   |  | As of March 31,
|                                                   |  |                
|                                                   |  | 2000            |         | 1999 |  | 1998 |         | 1997 |  | 1996
|                                                   |  |                 |         |      |  |      |         |      |  |     
|BALANCE SHEET DATA:                                | 
|                                                  
|                                                  
|                                                  
|                                                  
|Cash, cash equivalents, and short-term investments |  | $               | 187,036 |      |  | $    | 111,157 |      |  | $    | 88,940  |  |  | $ | 102,929 |  |  | $ | 116,679 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Working capital                                    |  |                 | 182,150 |      |  |      | 105,367 |      |  |      | 83,525  |  |  |   | 92,805  |  |  |   | 117,952 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Total assets                                       |  |                 | 339,359 |      |  |      | 202,495 |      |  |      | 158,126 |  |  |   | 157,844 |  |  |   | 155,950 | 
|                                                  
|                                                  
|                                                  
|                                                  
|Long-term liabilities                              |  |                 | 321     |      |  |      | 687     |      |  |      | 653     |  |  |   |        |  |  |   | 201     | 
|                                                  
|                                                  
|                                                  
|                                                  
|Mandatorily redeemable convertible preferred stock |  |                 |        |      |  |      | 13,591  |      |  |      | 3,548   |  |  |   |        |  |  |   |        | 
|                                                  
|                                                  
|                                                  
|                                                  
|Total stockholders equity                         |  | $               | 254,276 |      |  | $    | 147,031 |      |  | $    | 127,240 |  |  | $ | 131,268 |  |  | $ | 132,255 | 

F-2



---






MACROMEDIA, INC. AND SUBSIDIARIES

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

Overview

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

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

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

Results of Operations

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

|                           |                              |                          |                   |    |      |   |      |    |      |   |     |    |     |     |  
|-------------------------- | ---------------------------- | ------------------------ | ----------------- | -- | ---- | - | ---- | -- | ---- | - | --- | -- | --- | --- | -
|                           |                              |                          |                   |    | 2000 |   | 1999 |    | 1998
|                           |                              |                          |                   |    |      |   |      |    |     
|Revenues                   |                              |                          | 100               | %  |      |   | 100  | %  |      |   | 100 | % 
|                          
|                          
|                          
|                          
|Cost of revenues           |                              |                          | 11                |    |      |   | 10   |    |      |   | 13  |   
|                          
|                          
|                          
|                          
|                           |                              | Gross margin             |                   |    | 89   |   |      |    | 90   |   |     |    | 87  |    
|                          
|                          
|                          
|                          
|Operating expenses:       
|                          
|                          
|                          
|                          
|                           | Sales and marketing          |                          |                   | 43 |      |   |      | 48 |      |   |     | 53 |    
|                          
|                          
|                          
|                          
|                           | Research and development     |                          |                   | 25 |      |   |      | 27 |      |   |     | 32 |    
|                          
|                          
|                          
|                          
|                           | General and administrative   |                          |                   | 9  |      |   |      | 11 |      |   |     | 12 |    
|                          
|                          
|                          
|                          
|                           | Acquisition related expenses |                          |                   | 4  |      |   |      |   |      |   |     | 7  |    
|                          
|                          
|                          
|                          
|                           | Non-cash compensation        |                          |                   | 4  |      |   |      |   |      |   |     |   |    
|                          
|                          
|                          
|                          
|                           | Amortization of intangibles  |                          |                   |   |      |   |      |   |      |   |     |   |    
|                          
|                          
|                          
|                          
|                           |                              | Total operating expenses |                   |    | 85   |   |      |    | 86   |   |     |    | 104 |    
|                          
|                          
|                          
|                          
|Operating margin           |                              |                          | 4                 |    |      |   | 4    |    |      |   | (17 | ) 
|                          
|                          
|                          
|                          
|Minority interest          |                              |                          | 2                 |    |      |   |     |    |      |   |    |   
|                          
|                          
|                          
|                          
|Other income, net          |                              |                          | 2                 |    |      |   | 3    |    |      |   | 4   |   
|                          
|                          
|                          
|                          
|Provision for income taxes |                              |                          | 5                 |    |      |   | 5    |    |      |   | 1   |   
|                          
|                          
|                          
|                          
|                           |                              |                          | Net income (loss) |    |      | 3 |      |    |      | 2 |     |    |     | (14 | )

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

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

F-3



---






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

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

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

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

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

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

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

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

F-4



---



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

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

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

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

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

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

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

F-5



---



Liquidity and Capital Resources



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

|                 |                      |       |   |                       |        |      |   |         |        |  |   |        |        |  
|---------------- | -------------------- | ----- | - | --------------------- | ------ | ---- | - | ------- | ------ |  | - | ------ | ------ | -
|                 |                      |       |   | Years Ended March 31,
|                 |                      |       |   |                      
|                 |                      |       |   | 2000                  |        | 1999 |   | 1998   
|                 |                      |       |   |                       |        |      |   |        
|Cash flows from: |                     
|                
|                
|                
|                
|                 | Operating activities |       | $ | 35,907                |        |      | $ | 14,158  |        |  | $ | (8,930 | )     
|                
|                
|                
|                
|                 | Investing activities |       |   | (36,433               | )      |      |   | (19,897 | )      |  |   | (9,424 | )     
|                
|                
|                
|                
|                 | Financing activities |       |   | 89,977                |        |      |   | 20,337  |        |  |   | 15,256 |       
|                 |                      |       |   |                       |        |      |   |         |        |  |   |       
|                 |                      | Total |   | $                     | 89,451 |      |   | $       | 14,598 |  |   | $      | (3,098 | )
|                 |                      |       |   |                       |        |      |   |         |        |  |   |       

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

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

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

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

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

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




RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

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

F-6



---



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

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

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

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

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

F-7



---



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

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

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

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

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

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

F-8



---



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

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

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

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

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

F-9



---



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




Year 2000 Compliance

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

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

Interest Rate Risk

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

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

|                       |                       |   |        |         |      |  |            |        |       |  |            |   |  |   |        |         |   |   |        |         | 
|---------------------- | --------------------- | - | ------ | ------- | ---- |  | ---------- | ------ | ----- |  | ---------- | - |  | - | ------ | ------- | - | - | ------ | ------- | 
|                       |                       |   |        |         |      |  |            |        |       |  | 2003 and  
|                       |                       |   | 2001   |         | 2002 |  | thereafter |        | Total |  | Fair Value
|                       |                       |   |        |         |      |  |            |        |       |  |           
|Cash equivalents       |                       | $ | 87,352 |         |      |  |           |        |       |  |           |   |  | $ | 87,352 |         |   | $ | 87,352 |        
|                      
|                      
|                      
|                      
|                       | Average interest rate |   |        | 6.08    | %    |  |            |       |       |  |            |  |  |   |        | 6.08    | %
|                      
|                      
|                      
|                      
|Short-term investments |                       |   | 46,377 |         |      |  | 24,937     |        |       |  |           |   |  |   | 71,314 |         |   |   | 70,970 |        
|                      
|                      
|                      
|                      
|                       | Average interest rate |   |        | 6.21    | %    |  |            | 6.32   | %     |  |            |  |  |   |        | 6.15    | %
|                       |                       |   |        |         |      |  |            |        |       |  |            |   |  |   |        |         |   |   |        |        
|                       | Total investments     |   | $      | 133,729 |      |  | $          | 24,937 |       |  |            |  |  |   | $      | 158,666 |   |   | $      | 158,322 | 
|                       |                       |   |        |         |      |  |            |        |       |  |            |   |  |   |        |         |   |   |        |        

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

Foreign Currency Risk

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

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

F-10



---



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

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

|               |       |   |          |        |            |   |        |        | 
|-------------- | ----- | - | -------- | ------ | ---------- | - | ------ | ------ | 
|               |       |   | Notional
|               |       |   | Amount   |        | Fair Value
|               |       |   |          |        |           
|British Pounds |       | $ | 1,479    |        |            | $ | 1,434  |       
|              
|              
|              
|              
|Euro           |       |   | 1,961    |        |            |   | 1,931  |       
|              
|              
|              
|              
|Japanese Yen   |       |   | 18,127   |        |            |   | 18,541 |       
|               |       |   |          |        |            |   |        |       
|               | Total |   | $        | 21,567 |            |   | $      | 21,906 | 
|               |       |   |          |        |            |   |        |       

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

Disclosure of limitations of the tabular
presentation

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

Market Price Risk

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

F-11



---






Independent Auditors Report

The Board of Directors
Macromedia, Inc. and Subsidiaries:

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

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

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

| |             
| | ------------
| | /s/ KPMG LLP

San Francisco, California
April 24, 2000

F-12



---






MACROMEDIA, INC. AND SUBSIDIARIES

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

|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |        |         |         | 
|------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ------ | --------- | ------- | ---- | ------ | ------- | ------- | 
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        | March 31,
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |          
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        | 2000      |         | 1999
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |     
|Assets                               |                                                                                                                                                                                                                                                
|                                    
|                                    
|                                    
|                                    
|                                     | Current assets                                                                                                                                                                                                                                  |                                                                                                                                                                 |                                            |        |          
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Cash, cash equivalents, and short-term investments                                                                                                              |                                            | $      | 187,036   |         |      | $      | 111,157 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Accounts receivable, less allowance for returns and doubtful
accounts of $10,880 and $9,599, respectively                                                       |                                            |        | 41,883    |         |      |        | 13,971  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Inventory, net                                                                                                                                                  |                                            |        | 1,349     |         |      |        | 615     |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Prepaid expenses and other current assets                                                                                                                       |                                            |        | 12,944    |         |      |        | 13,911  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Deferred tax assets, short-term                                                                                                                                 |                                            |        | 7,812     |         |      |        | 6,899   |        
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 | Total current assets                       |        |           | 251,024 |      |        |         | 146,553 | 
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Land and building, net                                                                                                                                          |                                            |        | 18,982    |         |      |        | 19,945  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Other fixed assets, net                                                                                                                                         |                                            |        | 41,871    |         |      |        | 22,868  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Related party loans                                                                                                                                             |                                            |        | 9,944     |         |      |        | 10,099  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Other long-term assets                                                                                                                                          |                                            |        | 17,538    |         |      |        | 3,030   |        
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 | Total assets                               |        | $         | 339,359 |      |        | $       | 202,495 | 
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                    
|                                    
|                                    
|                                    
|Liabilities and Stockholders Equity
|                                    
|                                    
|                                    
|                                    
|                                     | Current liabilities                                                                                                                                                                                                                             |                                                                                                                                                                
|                                     |                                                                                                                                                                                                                                                 | Accounts payable                                                                                                                                                |                                            | $      | 4,988     |         |      | $      | 5,995   |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Accrued liabilities                                                                                                                                             |                                            |        | 53,842    |         |      |        | 27,701  |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Unearned revenue                                                                                                                                                |                                            |        | 10,044    |         |      |        | 7,490   |        
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 | Total current liabilities                  |        |           | 68,874  |      |        |         | 41,186  | 
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     | Other long-term liabilities                                                                                                                                                                                                                     |                                                                                                                                                                 |                                            | 321    |           |         |      | 381    |        
|                                    
|                                    
|                                    
|                                    
|                                     | Deferred tax liabilities, long-term                                                                                                                                                                                                             |                                                                                                                                                                 |                                            |       |           |         |      | 306    |        
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 | Total liabilities                          |        |           | 69,195  |      |        |         | 41,873  | 
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     | Minority interest                                                                                                                                                                                                                               |                                                                                                                                                                 |                                            | 15,888 |           |         |      |       |        
|                                    
|                                    
|                                    
|                                    
|                                     | Mandatorily redeemable convertible preferred stock, par value
$0.001 per share: 0 and 2,310 shares authorized; 0 and 1,216
issued and outstanding (aggregate liquidation preference of $0
and $27,014 at March 31, 2000 and 1999, respectively) |                                                                                                                                                                 |                                            |       |           |         |      | 13,591 |        
|                                    
|                                    
|                                    
|                                    
|                                     | Stockholders equity:                                                                                                                                                                                                                           |                                                                                                                                                                
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Common stock, par value $0.001 per share: 80,000 shares
authorized, 50,674 and 43,590 shares issued and outstanding
as of March 31, 2000 and 1999, respectively |                                            |        | 51        |         |      |        | 43      |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Treasury stock, at cost; 1,818 and 1,620 shares as of March
31, 2000 and 1999, respectively                                                                     |                                            |        | (33,649   | )       |      |        | (25,445 | )      
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Additional paid-in capital                                                                                                                                      |                                            |        | 335,497   |         |      |        | 203,431 |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Deferred compensation                                                                                                                                           |                                            |        | (23,465   | )       |      |        | (1,544  | )      
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Accumulated other comprehensive income                                                                                                                          |                                            |        | 393       |         |      |        | 38      |        
|                                    
|                                    
|                                    
|                                    
|                                     |                                                                                                                                                                                                                                                 | Accumulated deficit                                                                                                                                             |                                            |        | (24,551   | )       |      |        | (29,492 | )      
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 | Total stockholders equity                 |        |           | 254,276 |      |        |         | 147,031 | 
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 | Total liabilities and stockholders equity |        | $         | 339,359 |      |        | $       | 202,495 | 
|                                     |                                                                                                                                                                                                                                                 |                                                                                                                                                                 |                                            |        |           |         |      |       

See accompanying notes to consolidated financial statements.

F-13



---






MACROMEDIA, INC. AND SUBSIDIARIES

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

|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |        |        |        |         |  
|--------------------------------------------------------------- | ------- | ----------------------------------- | ------------ | -------------------------- | ------- | --------------------- | ------- | ------ | ------ | ------- | ------- | ------ | ------ | ------ | ------- | -
|                                                                |         |                                     |              |                            |         | Years Ended March 31,
|                                                                |         |                                     |              |                            |         |                      
|                                                                |         |                                     |              |                            |         | 2000                  |         | 1999   |        | 1998   
|                                                                |         |                                     |              |                            |         |                       |         |        |        |        
|Revenues                                                        |         | $                                   | 264,159      |                            |         | $                     | 153,243 |        |        | $       | 113,803 |       
|                                                               
|                                                               
|                                                               
|                                                               
|Cost of revenues                                                |         |                                     | 28,829       |                            |         |                       | 15,625  |        |        |         | 15,107  |       
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|                                                                |         |                                     | Gross profit |                            |         | 235,330               |         |        |        | 137,618 |         |        |        | 98,696 |        
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|Operating expenses:                                            
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Sales and marketing                 |              |                            | 113,005 |                       |         |        | 73,153 |         |         |        | 60,379 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Research and development            |              |                            | 65,739  |                       |         |        | 41,551 |         |         |        | 36,829 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | General and administrative          |              |                            | 24,610  |                       |         |        | 16,740 |         |         |        | 13,231 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Acquisition related expenses        |              |                            | 11,516  |                       |         |        | 454    |         |         |        | 7,658  |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Non-cash compensation               |              |                            | 11,071  |                       |         |        | 287    |         |         |        | 49     |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Amortization of intangibles         |              |                            | 1,013   |                       |         |        | 248    |         |         |        |       |       
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|                                                                |         |                                     |              | Total operating expenses   |         |                       | 226,954 |        |        |         | 132,433 |        |        |        | 118,146 |  
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|                                                                |         |                                     |              | Operating income (loss)    |         |                       | 8,376   |        |        |         | 5,185   |        |        |        | (19,450 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Other income (expense):                                         |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Interest and investment income, net |              |                            | 6,626   |                       |         |        | 1,215  |         |         |        | 4,687  |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Foreign exchange (loss) gain        |              |                            | (321    | )                     |         |        | (110   | )       |         |        | 243    |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                |         | Other                               |              |                            | (118    | )                     |         |        | 3,932  |         |         |        | (293   | )     
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|                                                                |         |                                     |              | Total other income         |         |                       | 6,187   |        |        |         | 5,037   |        |        |        | 4,637   |  
|                                                               
|                                                               
|                                                               
|                                                               
|Minority interest                                               |         |                                     | 6,179        |                            |         |                       |        |        |        |         |        |       
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|                                                                |         |                                     |              | Income (loss) before taxes |         |                       | 20,742  |        |        |         | 10,222  |        |        |        | (14,813 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Provision for income taxes                                      |         |                                     | 11,975       |                            |         |                       | 7,612   |        |        |         | 828     |       
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|                                                                |         |                                     |              | Net income (loss)          |         |                       | 8,767   |        |        |         | 2,610   |        |        |        | (15,641 | )
|                                                               
|                                                               
|                                                               
|                                                               
|Accretion on mandatorily redeemable convertible preferred stock |         |                                     | (2,538       | )                          |         |                       | (104    | )      |        |         |        |       
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|Net income (loss) applicable to common stockholders             |         | $                                   | 6,229        |                            |         | $                     | 2,506   |        |        | $       | (15,641 | )     
|                                                                |         |                                     |              |                            |         |                       |         |        |        |         |         |       
|Net income (loss) applicable to common stockholders per share  
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Basic   |                                     | $            | 0.14                       |         |                       | $       | 0.06   |        |         | $       | (0.40  | )     
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Diluted |                                     | $            | 0.12                       |         |                       | $       | 0.05   |        |         | $       | (0.40  | )     
|                                                               
|                                                               
|                                                               
|                                                               
|Weighted average common share outstanding                       |        
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Basic   |                                     |              | 44,601                     |         |                       |         | 40,045 |        |         |         | 38,988 |       
|                                                               
|                                                               
|                                                               
|                                                               
|                                                                | Diluted |                                     |              | 52,270                     |         |                       |         | 47,242 |        |         |         | 38,988 |       

See accompanying notes to consolidated financial statements.

F-14



---






MACROMEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(in thousands)

|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |   |        |  
|---------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------- | --------------------- | ------- | ---- | -------- | ---- | ------- | - | -------- | - | ------ | -
|                                                                             |                                                                                                    |                                                                        |          | Years Ended March 31,
|                                                                             |                                                                                                    |                                                                        |          |                      
|                                                                             |                                                                                                    |                                                                        |          | 2000                  |         | 1999 |          | 1998
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |     
|Cash flows from operating activities:                                        |                                                                                                   
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net income (loss)                                                            |                                                                                                    | $                                                                      | 8,767    |                       |         | $    | 2,610    |      |         | $ | (15,641  | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             | Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities: |                                                                       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Depreciation and amortization                                          |          |                       | 16,477  |      |          |      | 8,797   |   |          |   | 7,085  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Write off of fixed assets related to merger                            |          |                       | 191     |      |          |      |        |   |          |   |       |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Deferred income taxes                                                  |          |                       | (1,583  | )    |          |      | 1,955   |   |          |   | (41    | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Tax benefit from employee stock plans                                  |          |                       | 8,714   |      |          |      | 4,439   |   |          |   | 240    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Minority interest                                                      |          |                       | (6,179  | )    |          |      |        |   |          |   |       |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Non-cash compensation                                                  |          |                       | 9,719   |      |          |      | 607     |   |          |   |       |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Deferred compensation amortization                                     |          |                       | 1,957   |      |          |      | 288     |   |          |   | 49     |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Changes in operating assets and liabilities, net of effect of mergers: |         
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Accounts receivable, net                                               |          |                       | (27,912 | )    |          |      | (6,014  | ) |          |   | (5,565 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Inventory, net                                                         |          |                       | (734    | )    |          |      | 128     |   |          |   | 1,139  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Prepaid expenses and other current assets                              |          |                       | 967     |      |          |      | (9,889  | ) |          |   | 617    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Other long-term assets                                                 |          |                       | (2,387  | )    |          |      | (2,471  | ) |          |   | 2,559  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Accounts payable                                                       |          |                       | (1,007  | )    |          |      | 1,211   |   |          |   | (2,359 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Accrued liabilities                                                    |          |                       | 26,363  |      |          |      | 7,557   |   |          |   | 2,919  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Unearned revenue                                                       |          |                       | 2,554   |      |          |      | 5,418   |   |          |   | (455   | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|                                                                             |                                                                                                    | Other long-term liabilities                                            |          |                       |        |      |          |      | (478    | ) |          |   | 523    |  
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |  
|                                                                             |                                                                                                    | Net cash provided by (used in) operating activities                    |          |                       | 35,907  |      |          |      | 14,158  |   |          |   | (8,930 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash flows from investing activities:                                        |                                                                                                   
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from sale of fixed assets                                           |                                                                                                    |                                                                        | 625      |                       |         |      | 961      |      |         |   |         |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of short-term investments                                          |                                                                                                    |                                                                        | (117,457 | )                     |         |      | (133,549 | )    |         |   | (444,824 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Maturities of short-term investments                                         |                                                                                                    |                                                                        | 127,558  |                       |         |      | 128,005  |      |         |   | 455,465  |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Acquisition of property and equipment                                        |                                                                                                    |                                                                        | (33,934  | )                     |         |      | (12,655  | )    |         |   | (12,622  | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Purchases of third party investments                                         |                                                                                                    |                                                                        | (13,300  | )                     |         |      |         |      |         |   | (2,500   | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Acquisition of intangible assets                                             |                                                                                                    |                                                                        | (80      | )                     |         |      |         |      |         |   |         |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Loan receivable                                                              |                                                                                                    |                                                                        | 155      |                       |         |      | (2,659   | )    |         |   | (4,943   | )
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |  
|                                                                             |                                                                                                    | Net cash used in investing activities                                  |          |                       | (36,433 | )    |          |      | (19,897 | ) |          |   | (9,424 | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash flows from financing activities:                                       
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from issuance of mandatorily redeemable
convertible preferred stock |                                                                                                    |                                                                        |         |                       |         |      | 9,937    |      |         |   | 3,548    |  
|Proceeds from issuance of preferred stock                                    |                                                                                                    |                                                                        | 59,029   |                       |         |      | 3,407    |      |         |   | 8,702    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Proceeds from issuance of common stock                                       |                                                                                                    |                                                                        | 39,434   |                       |         |      | 26,777   |      |         |   | 8,011    |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Borrowings on capital lease                                                  |                                                                                                    |                                                                        | 999      |                       |         |      | 1,355    |      |         |   | 201      |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Payments on capital lease                                                    |                                                                                                    |                                                                        | (1,281   | )                     |         |      | (833     | )    |         |   | (67      | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Acquisition of treasury stock                                                |                                                                                                    |                                                                        | (8,204   | )                     |         |      | (20,306  | )    |         |   | (5,139   | )
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |  
|                                                                             |                                                                                                    | Net cash provided by financing activities                              |          |                       | 89,977  |      |          |      | 20,337  |   |          |   | 15,256 |  
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Net increase (decrease) in cash and cash equivalents                         |                                                                                                    |                                                                        | 89,451   |                       |         |      | 14,598   |      |         |   | (3,098   | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Adjustment to conform acquired companies year end                           |                                                                                                    |                                                                        | (3,826   | )                     |         |      | 2,084    |      |         |   |         |  
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |  
|Total                                                                        |                                                                                                    |                                                                        | 85,625   |                       |         |      | 16,682   |      |         |   | (3,098   | )
|                                                                            
|                                                                            
|                                                                            
|                                                                            
|Cash and cash equivalents, beginning of year                                 |                                                                                                    |                                                                        | 29,459   |                       |         |      | 12,777   |      |         |   | 15,875   |  
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |  
|Cash and cash equivalents, end of year                                       |                                                                                                    | $                                                                      | 115,084  |                       |         | $    | 29,459   |      |         | $ | 12,777   |  
|                                                                             |                                                                                                    |                                                                        |          |                       |         |      |          |      |         |   |          |  

See accompanying notes to consolidated financial statements.

F-15



---






MACROMEDIA, INC. AND SUBSIDIARIES

Consolidated Statements of Stockholders Equity
(in thousands)

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

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                                 |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   |         |         |  
|-------------------------------------------------------------------------------- | ------------------------------------------------------------ | - | ------------- | ---- | ------------- | - | -------- | ------- | ------------- | - | ------- | ------- | - | - | ------- | ------- | -
|                                                                                 |                                                              |   | Accumulated   |      |               |   |          |         | (Accumulated 
|                                                                                 |                                                              |   | Other         |      |               |   |          |         | Deficit)      |   | Total  
|                                                                                 |                                                              |   | Comprehensive |      | Comprehensive |   | Retained |         | Stockholders'
|                                                                                 |                                                              |   | Income (Loss) |      | Income (Loss) |   | Earnings |         | Equity       
|                                                                                 |                                                              |   |               |      |               |   |          |         |              
|Balances as of March 31, 1997                                                    |                                                              | $ | 297           |      |               |   |          |         |               | $ | (18,545 | )       |   | $ | 131,268 |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Comprehensive loss:                                                             
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Net loss                                                     |   |               |      |               |   | $        | (15,641 | )             |   |         | (15,641 | ) |   |         | (15,641 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Unrealized loss on available-for-sale securities, net of tax |   |               | (250 | )             |   |          | (250    | )             |   |         |         |   |   |         | (250    | )
|                                                                                 |                                                              |   |               |      |               |   |          |        
|Total comprehensive loss                                                         |                                                              |   |               |      |               | $ | (15,891  | )       |              
|                                                                                 |                                                              |   |               |      |               |   |          |        
|Common stock issued by acquired company                                          |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 46      |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred Shares issued by acquired companies                                    |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 8,656   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Exercise of stock options                                                        |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 2,385   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of warrants to purchase common stock
by acquired company                |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 182     |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued under ESPP                                                   |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 1,469   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Tax benefit from stock plans                                                     |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 240     |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued under purchase of Solis                                      |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 3,975   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of treasury stock                                                       |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | (5,139  | )      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Non-cash compensation                                                            |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 49      |        
|                                                                                 |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   |         |        
|Balances as of March 31, 1998                                                    |                                                              |   | 47            |      |               |   |          |         |               |   | (34,186 | )       |   |   | 127,240 |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Comprehensive income:                                                           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Net income                                                   |   |               |      |               |   | $        | 2,610   |               |   |         | 2,610   |   |   |         | 2,610   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Unrealized loss on available-for-sale securities, net of tax |   |               | (9   | )             |   |          | (9      | )             |   |         |         |   |   |         | (9      | )
|                                                                                 |                                                              |   |               |      |               |   |          |        
|Total comprehensive income                                                       |                                                              |   |               |      |               | $ | 2,601    |         |              
|                                                                                 |                                                              |   |               |      |               |   |          |        
|Preferred Shares issued by acquired companies                                    |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 6,416   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of common stock upon acquisition of LikeMinds,
Inc. by Andromedia, Inc. |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 2,608   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Exercise of stock options                                                        |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 22,549  |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued under ESPP                                                   |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 1,618   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of treasury stock                                                       |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | (20,306 | )      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock accretion                                                        |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | (104    | )      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Tax benefit from stock plans                                                     |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 4,439   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Non-cash compensation                                                            |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 895     |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Adjustment to conform acquired
companys year end (Note 4)                       |                                                              |   |               |      |               |   |          |         |               |   | 2,084   |         |   |   | (925    | )      
|                                                                                 |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   |         |        
|Balances as of March 31, 1999                                                    |                                                              |   | 38            |      |               |   |          |         |               |   | (29,492 | )       |   |   | 147,031 |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Comprehensive income:                                                           
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Net income                                                   |   |               |      |               |   | $        | 8,767   |               |   |         | 8,767   |   |   |         | 8,767   |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|                                                                                 | Unrealized gain on available-for-sale securities, net of tax |   |               | 365  |               |   |          | 365     |               |   |         |         |   |   |         | 365     |  
|                                                                                 |                                                              |   |               |      |               |   |          |        
|Total comprehensive income                                                       |                                                              |   |               |      |               | $ | 9,132    |         |              
|                                                                                 |                                                              |   |               |      |               |   |          |        
|Preferred Shares issued by acquired companies                                    |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 520     |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Exercise of stock options                                                        |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 36,846  |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock issued under ESPP                                                   |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 2,445   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Common stock exchanged for preferred stock of pooled entities                    |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 31,407  |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Purchase of treasury stock                                                       |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | (8,204  | )      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Preferred stock accretion                                                        |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | (2,538  | )      
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Tax benefit from stock plans                                                     |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 8,714   |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Non-cash compensation                                                            |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 11,504  |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Gain on sale of subsidiary stock                                                 |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   | 21,109  |        
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Adjustment to conform acquired
companys year end (Note 4)                       |                                                              |   | (10           | )    |               |   |          |         |               |   | (3,826  | )       |   |   | (3,690  | )      
|                                                                                 |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   |         |        
|Balances as of March 31, 2000                                                    |                                                              | $ | 393           |      |               |   |          |         |               | $ | (24,551 | )       |   | $ | 254,276 |        
|                                                                                 |                                                              |   |               |      |               |   |          |         |               |   |         |         |   |   |         |        

See accompanying notes to consolidated financial statements.

F-16



---






MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000

1. Nature of Operations

Macromedias Software business develops software that creates Web site
layout, graphics and rich media content for Internet users and develops
solutions for analyzing Web traffic and personalizing Web sites. Additionally,
the Companys consumer business, shockwave.com, Inc. (shockwave.com),
designs, develops and markets aggregated content to provide and expand online
entertainment on the Web. Macromedia sells its products through a network of
distributors, value-added resellers (VARs) and its own sales force and Web
site, and to original equipment manufacturers (OEMs) in North America,
Europe, Asia Pacific and Latin America. In addition, Macromedia derives
revenues from advertising on its Web sites, and from software maintenance and
technology licensing agreements. shockwave.com derives revenues from
advertising and sponsorship on its Web sites. Macromedia, Inc. and its
subsidiaries are hereinafter collectively referred to as the Company or
Macromedia.




2. Summary of Significant Accounting Policies

Principles of Consolidation The consolidated financial statements
include all domestic and foreign subsidiaries that are more than 50% owned and
controlled. All significant intercompany transactions and balances have been
eliminated.

Use of Estimates The preparation of consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ materially
from those estimates.

Revenue Recognition The Company recognizes revenue from the license of
software products (shrinkwrap products and volume applications) to end users
and OEMs, service transactions, advertising and sponsorships. The Company
recognizes revenue from shrinkwrap software at shipment based on the fair value
of the element provided that collection of the resulting receivable is deemed
probable, in accordance with Statement of Position (SOP) 97-2, Software
Revenue Recognition, issued by the American Institute of Certified Public
Accountants. The Company also maintains an allowance for potential credit
losses and an allowance for anticipated returns on products sold to
distributors and direct customers. The allowance for sales returns is
estimated based on a calculation of forecast sales to the end user by
distributors in relation to estimated current channel inventory levels.
Revenues from multiple element software arrangements are allocated to each
element of the arrangement based on the relative fair values of the elements,
such as software products, upgrades, enhancements, post contract customer
support (PCS), installation, or training. The determination of fair value is
based on objective evidence that is specific to the Company. 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. Revenue from
PCS contracts is recognized on a straight-line basis over the term of the
contract, generally one year. Revenue from consulting, training, and other
services is generally recognized as the services are performed.

In December 1998, SOP 98-9 Software Revenue Recognition, with Respect to
Certain Arrangementswas issued. SOP 98-9 requires recognition of revenue
using the residual method in a multiple element arrangement when fair value
does not exist for one or more of the delivered elements in the arrangement.
Under the residual method, total fair value of the undelivered elements is
deferred and subsequently recognized in accordance with SOP 97-2. The adoption
of SOP 98-9 did not have a material effect on the Companys results of
operations when adopted on April 1, 1999.

The Company has entered into agreements whereby it licenses products to
OEMs or provides customers the right to multiple copies. These agreements
generally provide for nonrefundable fixed fees that are recognized at delivery
of the product master or the first copy. If PCS is not included, per copy
royalties in excess of the fixed minimum amounts and refundable license fees
are recognized as earned. If PCS 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/or services

F-17



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

represented by the Companys customary pricing for such maintenance and/or
services. If objective evidence of the fair value of the maintenance is not
available, the revenues from the entire arrangement are recognized ratably over
the maintenance term.

The Company has entered into end user software license agreements for the
Companys products that provide for an initial fee to use the products in
perpetuity up to a maximum number of users. These volume license arrangements
are multiple element arrangements consisting of license fees, consulting fees
and PCS. Some arrangements involve services that are essential to the
functionality of the software. Fees from licenses are recognized as revenue
upon shipment, provided 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 the consulting services. Revenues from PCS are recognized
on a straight-line basis over the term of the contract. In instances where the
arrangement involves services that are essential to the functionality of the
software, both the license and consulting fees are recognized under the
percentage of completion method of contact accounting in accordance with SOP
81-1.

Progress towards completion is generally measured based on the estimated
number of hours to complete the specific projects. In the event the costs to
complete a contract are expected to exceed anticipated revenues, a loss is
accrued. In certain circumstances where the Company is unable to estimate the
amount of effort required to customize or implement the software license,
revenue is recognized using the completed contract method. As of March 31,
2000, no amounts have been recognized under the completed contract method.

Advertising revenues are derived from the sale of banner advertisements
and sponsorships on the Companys Web sites under short and long-term
contracts, net of commissions. Through March 31, 2000, the Companys
advertising contracts have been principally less than one year. Advertising
revenues on banner contracts and sponsorships are recognized based on delivery
in the period in which the advertisement is displayed, provided that no
significant obligations remain and collection of the resulting receivable is
probable. Company obligations typically include the guarantee of a minimum
number of impressions or times that an advertisement appears in pages viewed
by the users of the Companys Web sites. To the extent minimum guaranteed
impressions are not met, the Company defers recognition of the corresponding
revenue until the remaining guaranteed impression levels are achieved.

Cash Equivalents and Short-term Investments Cash equivalents consist of
highly liquid investments with a stated effective maturity of three months or
less at the time of purchase. Short-term investments consist of readily
marketable securities with a maturity of more than three months from time of
purchase. Where the maturity is more than one year, the securities are
classified as short-term as the Companys intention is to convert them into
cash for operations as needed.

Cash equivalents and all of the Companys short-term investments are
classified as available-for-sale under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Investments in Debt and Equity Securities.

The amortized cost of available-for-sale securities is adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in net investment income. As required by SFAS No. 115,
available-for-sale securities are recorded at fair value. Unrealized gains and
losses are reported as a separate component of accumulated other comprehensive
income (loss) in stockholders equity. Realized gains and losses, and declines
in value judged to be other than temporary on available-for-sale securities,
are included in other income (expense). The cost of securities sold is based on
the specific identification method. Interest and dividends on securities
classified as available-for-sale are included in interest income, net.

Investments The Company holds strategic investments in several companies.
When the investments do not represent a greater than 20% voting interest in the
investee and the Company does not have the ability to

F-18



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

significantly influence the investees management, the investments are
accounted for on the cost basis. When the Company does own greater than 20%
but less than 50% voting interest in an investee, or has the ability to exert
significant influence over the investees management, the Company accounts for
the investment using the equity method of accounting. Investments to date have
been accounted for using the cost basis.

Inventory Inventory consists primarily of software media, hardware
product components, manuals, and related packaging materials. Inventory is
recorded at the lower of cost or market value, determined on a first-in,
first-out basis.

Concentrations of Credit Risk Distributors comprise a significant
portion of the Companys revenues and trade receivables. The Company controls
credit risk through credit approvals, credit limits and monitoring procedures.
The Company performs in-depth credit evaluations of all new customers and
requires letters of credit or bank guarantees, if deemed necessary, but
generally requires no collateral. For the years ended March 31, 2000, 1999, and
1998, sales to one distributor, Ingram Micro, accounted for 28% of each
respective years consolidated revenues. Accounts receivable relating to this
customer were $16.0 million and $8.0 million as of March 31, 2000 and 1999,
respectively. These sales to Ingram Micro are included in the Companys
Software business (See Note 19). Three distributors accounted for an
additional 18% of revenues for the year ended March 31, 2000.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash equivalents, short-term
investments, trade receivables and forward contracts used in hedging
activities. The Company places its cash equivalents, short-term investments,
and forward contracts with major financial institutions of high credit
standing. The Company does not believe there is significant risk of
non-performance by these institutions because the Company monitors their credit
ratings and limits the financial exposure to any one commercial issuer and any
one type of investment. The fair value of the Companys cash, accounts
receivable, accounts payable, and employee loans approximated their carrying
values due to their short maturity or rate structure.

Property and Equipment Property and equipment are recorded at cost.
Buildings are depreciated over thirty years, and tenant improvements over ten
years, using the straight-line method. Depreciation of equipment, furniture,
and fixtures is provided over estimated useful lives ranging from three to five
years using the straight-line method. Leasehold improvements are amortized on a
straight-line basis over the lesser of the lease term or the estimated useful
life of the related assets, ranging from three to ten years.

Intangible Assets Intangible assets consist of a trademark license and
goodwill related to acquisitions accounted for under the purchase method of
accounting. Amortization of the trademark license is calculated on a
straight-line basis over an estimated useful life of 7 years. Goodwill is
amortized on a straight-line basis over an estimated useful life of
approximately 3 years. Accumulated amortization of intangibles was $1.7
million and $300,000 at March 31, 2000 and 1999, respectively. The Company
identifies and records impairment losses on intangible and other assets when
events and circumstances indicate that such assets might be impaired. The
Company considers factors such as significant changes in the business climate
and projected cash flows from the respective asset. Impairment losses are
measured as the amount by which the carrying amount of the asset exceeds the
fair value of the asset.

Software Costs SFAS No. 86, Accounting for the Costs of Computer
Software to Be Sold, Leased, or Otherwise Marketed, provides for capitalization
of certain software development costs once technological feasibility is
established. The Company believes that software development costs incurred
subsequent to technological feasibility have not been material, other than the
costs paid to third parties to develop localized versions of its software,
which are capitalized and amortized to cost of sales on a straight-line basis
over the lesser of estimated product life or 12 months. Software costs also
include amounts paid for purchased software to be sold and outside development
on products that have reached technological feasibility. The amounts
capitalized under SFAS No. 86 were immaterial.

F-19



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

Software for Internal Use The Company capitalizes costs of software,
consulting services, hardware and payroll related costs incurred to purchase or
develop internal-use software in accordance with SOP 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. The Company
expenses costs incurred during preliminary project assessment, research and
development, re-engineering, training and application maintenance. Capitalized
software for internal use is generally amortized over three years.

Foreign Currency Translation The functional currency of the Companys
foreign subsidiaries is the U.S. dollar. Assets and liabilities denominated in
foreign currencies are translated using the exchange rates at the balance sheet
date. Revenues and expenses are translated using average exchange rates during
the year. Translation adjustments are recorded in the consolidated statements
of operations.

Foreign Exchange Forward Contracts The Company uses foreign exchange
forward contracts to hedge its net monetary asset positions in foreign
currencies. The Companys forward contracts do not qualify as accounting
hedges. The Company marks-to-market the forward contracts and includes
unrealized gains and losses in current period net income or loss as a component
of other income (expense). The Company may from time to time adjust its
foreign exchange position by entering into additional contracts or by
terminating or offsetting existing foreign currency forward contracts. Gains
and losses on terminated or offset contracts are recognized in income in the
period of contract termination or offset.

Minority Interest in Subsidiary  As of March 31, 2000, the Company had one
subsidiary owned less than 100%, shockwave.com. Gains or losses from the sale
of subsidiary capital stock are recorded in additional paid-in-capital, net of
tax (See Note 11).

Stock Based Compensation As permitted under SFAS No. 123, Accounting for
Stock-Based Compensation, the Company has elected to follow Accounting
Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for stock-based awards to
employees (See Note 14). 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. Warrants
issued to non-employees are accounted for using the fair value method of
accounting as prescribed by SFAS 123, utilizing the Black-Scholes model and
volatility factors for comparable public companies. Compensation costs are
amortized on a straight-line basis over the vesting period of the securities.

Comprehensive Income (Loss) In fiscal year 1999, the Company adopted
SFAS No. 130, Reporting Comprehensive Income. SFAS 130 establishes standards
of reporting and displaying comprehensive income and its components of net
income and other comprehensive income in a full set of general-purpose
financial statements. Other comprehensive income refers to revenues,
expenses, gains and losses that are not included in net income but rather are
recorded directly in stockholders equity. The adoption of SFAS 130 had no
impact on the Companys net income or loss or stockholders equity. Prior year
financial statements have been reclassified to conform to the requirements of
SFAS 130. The sole component of other comprehensive income for the years ended
March 31, 2000, 1999 and 1998 was unrealized gains or losses from the Companys
available-for-sale securities.

Marketing Programs The Company reimburses certain qualified customers
for a portion of the costs related to their promotion of the Companys
products. The Companys liability for reimbursement is accrued at the time
revenue is recognized as a percentage of the qualified customers net revenue
derived from the Companys products. The Company also subsidizes other
marketing activities through cooperative arrangements with its customers, and
accrues the expense as the advertising occurs.

Advertising Costs Advertising expenditures are charged to operations as
incurred. Advertising expense for the year ended March 31, 2000, 1999, and
1998 was $8.3 million, $8.2 million, and $4.7 million, respectively.

Income Taxes The Company utilizes SFAS No. 109, Accounting for Income Taxes.
SFAS No. 109 requires the use of the asset and liability method of accounting
for income taxes. Under this method, deferred income taxes are provided for the
temporary differences between the financial reporting basis and the tax basis
of the Companys

F-20



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

assets and liabilities. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.

Future Adoption of New Accounting Standards In June 1998, the Financial
Accounting Standards Board issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS 133, as amended by SFAS 137, Deferral
of Effective Date of Statement 133, is effective for all quarters of fiscal
years beginning after June 15, 2000. The Company has not completed an
assessment of the impact of SFAS 133 on the consolidated results of operations
and financial position. SFAS 133 requires the recognition of all derivatives on
the balance sheet at fair value.

Reclassification Certain amounts in the accompanying fiscal year 1999
and fiscal year 1998 consolidated financial statements have been reclassified
in order to conform with the presentation of the 2000 consolidated financial
statements.

3. Supplemental Statements of Cash Flows Information

Supplemental cash flow information and non-cash investing activities for
the years ended March 31, 2000, 1999 and 1998 are as follows (in thousands):

|                                                  |                                                         |  |      |     |      |  |      |       |   |  |   |       |  
|------------------------------------------------- | ------------------------------------------------------- |  | ---- | --- | ---- |  | ---- | ----- | - |  | - | ----- | -
|                                                  |                                                         |  | 2000 |     | 1999 |  | 1998
|                                                  |                                                         |  |      |     |      |  |     
|Supplemental disclosure of cash flow information: |                                                        
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Interest paid                                           |  | $    | 76  |      |  | $    | 43    |   |  | $ | 16    |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Income taxes paid                                       |  |      | 126 |      |  |      |      |   |  |   |      |  
|                                                 
|                                                 
|                                                 
|                                                 
|Non-cash investing and financing activities:     
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock issued in exchange for LikeMinds           |  | $    |    |      |  | $    | 2,600 |   |  | $ |      |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Common stock issued in exchange for Solis               |  |      |    |      |  |      |      |   |  |   | 3,975 |  
|                                                 
|                                                 
|                                                 
|                                                 
|                                                  | Unrealized gain (loss) on available-for-sale securities |  |      | 355 |      |  |      | (9    | ) |  |   | (250  | )




4. Business Combinations

Poolings-of-Interest

Andromedia, Inc.On October 6, 1999, Macromedia, Inc., Andromedia, Inc.
(Andromedia), and Peak Acquisition Corp., a wholly-owned subsidiary of
Macromedia (Peak Acquisition), entered into an Agreement and Plan of
Reorganization under which Macromedia acquired Andromedia by exchanging all of
the outstanding capital stock, options, and warrants of Andromedia for
approximately 5.2 million shares of common stock, options, and warrants of
Macromedia. The merger closed on December 1, 1999. As a result of the
acquisition of Andromedia, Peak Acquisition was merged with and into Andromedia
and Andromedia remains as the surviving corporation and wholly-owned subsidiary
of Macromedia. The transaction was accounted for as a pooling-of-interests,
and accordingly, the consolidated financial statements for periods prior to the
combination have been restated to include the accounts and results of
operations for Andromedia. Andromedia develops e-marketing software that
enables companies to implement an integrated solution to analyze the success of
their Web marketing efforts and to personalize their e-commerce offering based
on customers needs in real-time.

In conjunction with the merger, the Company incurred direct merger-related
expenses of approximately $1.5 million, including investment banker fees, legal
and other professional fees, and severance. The Company also incurred costs of
$2.3 million relating to Andromedias public offering process, which was
terminated upon the merger with Macromedia. These costs included investment
banker fees, legal and other professional fees, and printing costs. At March
31, 2000, approximately $1.5 million of these costs remained in accrued
liabilities for acquisition related expenses.

Prior to the combination, Andromedias fiscal year ended on December 31. In
restating the financial statements for the pooling-of-interests combination,
Andromedias financial statements for the twelve months ended March 31, 2000,
December 31, 1998 and December 31, 1997 were combined with Macromedias
financial statements for the years ended March 31, 2000, 1999 and 1998,
respectively. The combined balance sheet as of March 31, 1999

F-21



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

combines the assets, liabilities and stockholders equity of Macromedia on
that date with Andromedias balance sheet as of December 31, 1998. An
adjustment has been made to the consolidated statements of stockholders equity
and cash flows to include Andromedias results of operations for the three
months ended March 31, 1999 which were not included in the period ended March
31, 2000. Andromedias revenue and net loss for the three months ended March
31, 1999 was $1.1 million and $3.8 million, respectively. There were no
conforming accounting adjustments for Andromedia and there were no intercompany
transactions between the entities prior to the combination.

ESI Software, Inc.On July 8, 1999, Macromedia, Inc., ESI Software, Inc.,
a California corporation (ESI), and Dynamo Acquisition Corp., a Delaware
corporation and a wholly-owned subsidiary of Macromedia (Dynamo), entered
into an Agreement and Plan of Reorganization, under which Macromedia acquired
ESI by exchanging all of the outstanding capital stock, options and warrants of
ESI for approximately 635,000 shares of common stock, options and warrants of
Macromedia (as valued on July 8, 1999). The merger closed on September 30,
1999. As a result of the acquisition of ESI, Dynamo was merged with and into
ESI and ESI remains as the surviving corporation and a wholly-owned subsidiary
of Macromedia. The transaction has been accounted for as a
pooling-of-interests and is a tax-free reorganization. ESI develops and
markets software that enables users to build advanced, interactive,
business-oriented Web applications.

In conjunction with the merger, the Company incurred direct merger-related
expenses of approximately $3.1 million, including expenses for bonuses
contingent upon closing of the merger agreement, legal and other professional
fees, personnel severance and relocation of employees, during the year ended
March 31, 2000.

Prior to the combination, ESIs fiscal year ended on June 30. The
financial statements of Macromedia have been restated to include the financial
position and results of operations of ESI for all periods presented. The
restated statements of operations for the years ended March 31, 2000 and 1999
include Macromedias and ESIs results of operations for those periods. The
restated statement of operations for the year ended March 31, 1998 combines
Macromedias year ended March 31, 1998 with ESIs year ended June 30, 1998.
For the three months ended June 30, 1998, ESI had revenues and a net loss of
$93,000 and $2.1 million, respectively. The combined balance sheets as of
March 31, 2000 and 1999
combines the assets, liabilities and stockholders
equity of Macromedia with ESI on those dates. An adjustment has been made to
the consolidated statements of stockholders equity and cash flows to exclude
ESIs results of operations for the three months ended June 30, 1998 which were
included in the period ended March 31, 1999. During the year ended March 31,
2000, the Company purchased product from ESI pursuant to a distribution
agreement. This transaction was eliminated upon consolidation. There were no
conforming accounting adjustments for ESI upon acquisition.

F-22



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below. Revenues and net loss for Andromedia
subsequent to December 1, 1999 are included with Macromedias financial
results. Revenue and net loss for ESI subsequent to September 30, 1999 are
included with Macromedias financial results (in thousands).

|                                |                      |              |          |   |                     |         |      |   |         |         |  |   |         |         |  
|------------------------------- | -------------------- | ------------ | -------- | - | ------------------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | -
|                                |                      |              |          |   | For the Years Ended
|                                |                      |              |          |   | March 31,          
|                                |                      |              |          |   |                    
|                                |                      |              |          |   | 2000                |         | 1999 |   | 1998   
|                                |                      |              |          |   |                     |        
|Revenues:                       |                      |              |          |   |                    
|                                |                      | Macromedia   |          | $ | 257,289             |         |      | $ | 149,886 |         |  | $ | 113,086 |        
|                               
|                               
|                               
|                               
|                                |                      | Andromedia   |          |   | 4,611               |         |      |   | 1,969   |         |  |   | 449     |        
|                               
|                               
|                               
|                               
|                                |                      | ESI Software |          |   | 2,259               |         |      |   | 1,388   |         |  |   | 268     |        
|                                |                      |              |          |   |                     |         |      |   |         |         |  |  
|                                |                      |              | Combined |   | $                   | 264,159 |      |   | $       | 153,243 |  |   | $       | 113,803 |  
|                                |                      |              |          |   |                     |         |      |   |         |         |  |  
|Net Income (Loss) Applicable to
|                               
|                               
|                               
|                               
|                                | Common Stockholders: |             
|                               
|                               
|                               
|                               
|                                |                      | Macromedia   |          | $ | 23,864              |         |      | $ | 19,784  |         |  | $ | (6,187  | )      
|                               
|                               
|                               
|                               
|                                |                      | Andromedia   |          |   | (15,555             | )       |      |   | (9,660  | )       |  |   | (3,350  | )      
|                               
|                               
|                               
|                               
|                                |                      | ESI Software |          |   | (2,080              | )       |      |   | (7,618  | )       |  |   | (6,104  | )      
|                                |                      |              |          |   |                     |         |      |   |         |         |  |  
|                                |                      |              | Combined |   | $                   | 6,229   |      |   | $       | 2,506   |  |   | $       | (15,641 | )
|                                |                      |              |          |   |                     |         |      |   |         |         |  |  

Technology Purchase Transactions

Starbase CorporationIn July 1999, the Company acquired certain
technology rights and other related software products from Starbase Corporation
for $2.8 million. The Company intends to utilize these assets in the research
and development of a single future research and development project. As a
result of the acquisition, the Company wrote off the entire $2.8 million to
acquisition related expenses in the year ended March 31, 2000 as the Company
determined that the technology did not have any alternative future uses.

Time4.comOn December 22, 1999, the Company acquired certain technology
rights of Time4.com, Inc. (Time4), a software development company located in
Minnesota, for $1.9 million in cash. The acquisition was accounted for under
the purchase method; accordingly, the results of operations of Time4 have been
included in the Companys consolidated financial statements from the date of
acquisition. As a result of the acquisition, the Company wrote off
approximately $1.8 million of rights relating to Time4s preliminary technology
as the Company determined that the technology does not have any alternative
future uses. The Company has capitalized approximately $100,000 associated
with the workforce in place and non-compete agreements for Time4s principal
employees and is amortizing these intangible assets on a straight-line method
over a period of 3.5 years.

5. Agreement with Lotus Development Corporation

In fiscal year 2000, the Company closed a series of agreements with Lotus
Development Corporation (Lotus), the combined effect of which was to: (i)
sell certain tangible and intangible assets relating to the Companys Pathware
product line to Lotus, (ii) result in Lotus acting as a distributor of the
Companys products, and (iii) cause the Company and Lotus to cooperate with
respect to certain future development activities related to the Companys and
Lotus products. The Company is to receive a minimum of $30.0 million in
revenue over the next three years as a result of the terms of the agreements.

F-23



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

6. Cash, Cash Equivalents and Short-Term Investments

The following is a summary of cash, cash-equivalents and short-term
investments at March 31, 2000 and 1999 (in thousands):

|                                                         |                                 |                                 |         |        |         |      |         |        |        | 
|-------------------------------------------------------- | ------------------------------- | ------------------------------- | ------- | ------ | ------- | ---- | ------- | ------ | ------ | 
|                                                         |                                 |                                 |         | 2000   |         | 1999
|                                                         |                                 |                                 |         |        |         |     
|Cash and cash equivalents:                               |                                
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Cash                            |                                 | $       | 27,732 |         |      | $       | 22,538 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Money market funds              |                                 |         | 8,729  |         |      |         | 1,629  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Commercial paper                |                                 |         | 64,674 |         |      |         | 5,032  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Certificates of deposit         |                                 |         | 1,999  |         |      |         | 260    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Government securities           |                                 |         | 11,950 |         |      |         |       |       
|                                                         |                                 |                                 |         |        |         |      |         |       
|                                                         |                                 | Total cash and cash equivalents |         |        | 115,084 |      |         |        | 29,459 | 
|                                                         |                                 |                                 |         |        |         |      |         |       
|Short-term investments:                                 
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Corporate equity securities     |                                 | $       | 982    |         |      | $       | 3,020  |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Corporate notes                 |                                 |         |       |         |      |         | 501    |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Corporate bonds                 |                                 |         | 27,378 |         |      |         |       |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Commercial paper                |                                 |         | 3,976  |         |      |         | 35,349 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | U.S. government debt securities |                                 |         | 33,128 |         |      |         | 42,828 |       
|                                                        
|                                                        
|                                                        
|                                                        
|                                                         | Certificate of deposit          |                                 |         | 6,488  |         |      |         |       |       
|                                                         |                                 |                                 |         |        |         |      |         |       
|                                                         |                                 | Total short-term investments    |         |        | 71,952  |      |         |        | 81,698 | 
|                                                         |                                 |                                 |         |        |         |      |         |       
|Total cash, cash equivalents, and
short-term investments |                                 | $                               | 187,036 |        |         | $    | 111,157 |       
|                                                         |                                 |                                 |         |        |         |      |         |       

Short-term investments consisted of the following, by contractual maturity
as of March 31, 2000 and 1999 (in thousands):

|                          |  |      |        |      |  |   |        | 
|------------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                          |  | 2000 |        | 1999
|                          |  |      |        |     
|Due in one year or less   |  | $    | 28,449 |      |  | $ | 61,750 | 
|                         
|                         
|                         
|                         
|Due in one to three years |  |      | 43,503 |      |  |   | 19,948 | 
|                          |  |      |        |      |  |   |        | 
|                          |  | $    | 71,952 |      |  | $ | 81,698 | 
|                          |  |      |        |      |  |   |        | 

The Companys available-for-sale securities are carried at market value.
Unrealized gains were $355,000 and losses were $9,000, net of tax, at March 31,
2000 and 1999, respectively.

7. Property and Equipment

Property and equipment as of March 31, 2000 and 1999, consisted of the
following (in thousands):

|                                               |  |      |         |      |  |   |         |  
|---------------------------------------------- |  | ---- | ------- | ---- |  | - | ------- | -
|                                               |  | 2000 |         | 1999
|                                               |  |      |         |     
|Land and building                              |  | $    | 21,280  |      |  | $ | 21,270  |  
|                                              
|                                              
|                                              
|                                              
|Computer equipment                             |  |      | 40,259  |      |  |   | 26,292  |  
|                                              
|                                              
|                                              
|                                              
|Computer software                              |  |      | 20,535  |      |  |   | 9,051   |  
|                                              
|                                              
|                                              
|                                              
|Office equipment and furniture                 |  |      | 15,463  |      |  |   | 10,522  |  
|                                              
|                                              
|                                              
|                                              
|Leasehold improvements                         |  |      | 7,847   |      |  |   | 5,447   |  
|                                               |  |      |         |      |  |   |         |  
|                                               |  |      | 105,384 |      |  |   | 72,582  |  
|                                              
|                                              
|                                              
|                                              
|Less accumulated depreciation and amortization |  |      | (44,531 | )    |  |   | (29,769 | )
|                                               |  |      |         |      |  |   |         |  
|                                               |  | $    | 60,853  |      |  | $ | 42,813  |  
|                                               |  |      |         |      |  |   |         |  

Depreciation and amortization expense for the years ended March 31, 2000,
1999, and 1998 was $14.8 million, $8.4 million, and $7.8 million,
respectively.

Included in computer software is approximately $15.6 million related to
the continuing development of an internal use information technology
infrastructure for sales and marketing, customer support, on-line product
distribution, and technical support. At March 31, 2000 accumulated
amortization of this software was approximately $3.4 million.

F-24



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

8. Investments

In fiscal year 2000, the Company made strategic preferred stock
investments in several companies, including Stan Lee Media, Inc., Mondo Media
Productions, Inc., Spiderdance, Inc., iHarvest Corporation and Context Media,
Inc. These investments are included in the other assets component of the
consolidated balance sheets. The cost method is used to record these
investments, as the Company holds less than 20% of the voting rights of each of
these investees and does not have the ability to significantly influence the
investees. The Company determines the fair value of the investment based on
current market price, or if the investment is not publicly traded, considers
among other factors, pricing of current financing rounds. As of March 31,
2000, the investment costs approximated their fair values.

9. Accrued Liabilities

Accrued liabilities as of March 31, 2000 and 1999, consisted of the
following (in thousands):

|                              |                           |   |        |        |      |   |        |        | 
|----------------------------- | ------------------------- | - | ------ | ------ | ---- | - | ------ | ------ | 
|                              |                           |   | 2000   |        | 1999
|                              |                           |   |        |        |     
|Accrued compensation          |                           | $ | 5,172  |        |      | $ | 1,756  |       
|                             
|                             
|                             
|                             
|Accrued marketing development |                           |   | 2,789  |        |      |   | 2,078  |       
|                             
|                             
|                             
|                             
|Accrued fringe benefits       |                           |   | 4,822  |        |      |   | 2,670  |       
|                             
|                             
|                             
|                             
|Accrued payroll taxes         |                           |   | 9,113  |        |      |   | 2,939  |       
|                             
|                             
|                             
|                             
|Accrued income taxes          |                           |   | 8,782  |        |      |   | 4,139  |       
|                             
|                             
|                             
|                             
|Other accrued expenses        |                           |   | 23,164 |        |      |   | 14,119 |       
|                              |                           |   |        |        |      |   |        |       
|                              | Total accrued liabilities |   | $      | 53,842 |      |   | $      | 27,701 | 
|                              |                           |   |        |        |      |   |        |       




10. Income Taxes

The components of the provision for income taxes for the years ended March
31, 2000, 1999 and 1998, are as follows (in thousands):

|                                                             |         |                |       |       |       |        |       |       |       |       |     |      |     |     | 
|------------------------------------------------------------ | ------- | -------------- | ----- | ----- | ----- | ------ | ----- | ----- | ----- | ----- | --- | ---- | --- | --- | 
|                                                             |         |                |       |       | 2000  |        | 1999  |       | 1998 
|                                                             |         |                |       |       |       |        |       |       |      
|Current:                                                     |         |                |       |       |       |        |       |       |       |       |     |     
|                                                             | Federal | $              |      |       |       | $      |      |       |       | $     |    |     
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | State   |                |       |      |       |        |       |      |       |       |     |     |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Foreign |                |       | 2,651 |       |        |       | 2,331 |       |       |     | 323  |    
|                                                             |         |                |       |       |       |        |       |       |       |       |     |     
|                                                             |         | Total Current  |       |       | 2,651 |        |       |       | 2,331 |       |     |      | 323 |    
|                                                            
|                                                            
|                                                            
|                                                            
|Deferred:                                                   
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | Federal |                |       | 416   |       |        |       | 949   |       |       |     | 829  |    
|                                                            
|                                                            
|                                                            
|                                                            
|                                                             | State   |                |       | 194   |       |        |       | (107  | )     |       |     | (564 | )  
|                                                             |         |                |       |       |       |        |       |       |       |       |     |     
|                                                             |         | Total Deferred |       |       | 610   |        |       |       | 842   |       |     |      | 265 |    
|                                                            
|                                                            
|                                                            
|                                                            
|Charge in lieu of
taxes attributable to
employee stock plans |         |                | 8,714 |       |       |        | 4,439 |       |       |       | 240 |     
|                                                             |         |                |       |       |       |        |       |       |       |       |     |     
|                                                             |         |                | Total |       | $     | 11,975 |       |       | $     | 7,612 |     |      | $   | 828 | 
|                                                             |         |                |       |       |       |        |       |       |       |       |     |     

F-25



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

The provision for income taxes differs from the expected tax expense
amount computed by applying the statutory federal income tax rate of 35% to
income before income taxes for the years ended March 31, 2000 and 1999, and 34%
for the year ended March 31, 1998, as a result of the following (in thousands):

|                                                                      |  |      |        |      |  |      |        |   |  |   |        |  
|--------------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | -
|                                                                      |  | 2000 |        | 1999 |  | 1998
|                                                                      |  |      |        |      |  |     
|Computed tax (benefit) at
statutory rate                              |  | $    | 7,213  |      |  | $    | 9,590  |   |  | $ | (1,822 | )
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|State taxes (net)                                                     |  |      | 602    |      |  |      | 387    |   |  |   | 151    |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Nondeductible pooling and
acquisition costs and
goodwill              |  |      | 10,442 |      |  |      | 32     |   |  |   | 2,412  |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Foreign benefits provided for
at rates other than U.S
statutory rates |  |      | (4,286 | )    |  |      | (725   | ) |  |   |       |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Research and other tax credits                                        |  |      | (2,413 | )    |  |      | (1,543 | ) |  |   |       |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Other, net                                                            |  |      | 417    |      |  |      | (129   | ) |  |   | 87     |  
|                                                                      |  |      |        |      |  |      |        |   |  |   |        |  
|Total                                                                 |  | $    | 11,975 |      |  | $    | 7,612  |   |  | $ | 828    |  
|                                                                      |  |      |        |      |  |      |        |   |  |   |        |  

The tax effect of temporary differences that give rise to deferred tax
assets (liabilities) as of March 31, 2000 and 1999, is as follows (in
thousands):

|                                         |                                            |                           |        |          |         |      |       |         |        |  
|---------------------------------------- | ------------------------------------------ | ------------------------- | ------ | -------- | ------- | ---- | ----- | ------- | ------ | -
|                                         |                                            |                           |        | 2000     |         | 1999
|                                         |                                            |                           |        |          |         |     
|Deferred tax assets:                     |                                           
|                                        
|                                        
|                                        
|                                        
|                                         | Reserves, accruals and other               |                           | $      | 9,333    |         |      | $     | 6,899   |       
|                                        
|                                        
|                                        
|                                        
|                                         | Net operating loss carryforwards (federal) |                           |        | 79,857   |         |      |       | 25,197  |       
|                                        
|                                        
|                                        
|                                        
|Net operating loss carryforwards (state) |                                            |                           | 21,797 |          |         |      | 2,983 |        
|                                        
|                                        
|                                        
|                                        
|                                         | Credit for research activities             |                           |        | 16,330   |         |      |       | 13,207  |       
|                                        
|                                        
|                                        
|                                        
|                                         | Other credits                              |                           |        | 3,339    |         |      |       | 588     |       
|                                         |                                            |                           |        |          |         |      |       |        
|                                         |                                            | Total deferred tax assets |        |          | 130,656 |      |       |         | 48,874 |  
|                                        
|                                        
|                                        
|                                        
|                                         | Less valuation allowance                   |                           |        | (122,844 | )       |      |       | (41,975 | )     
|                                         |                                            |                           |        |          |         |      |       |        
|                                         | Net deferred tax assets                    |                           |        | 7,812    |         |      |       | 6,899   |       
|                                        
|                                        
|                                        
|                                        
|Deferred tax liabilities:               
|                                        
|                                        
|                                        
|                                        
|                                         | Depreciation                               |                           |        |         |         |      |       | (306    | )     
|                                         |                                            |                           |        |          |         |      |       |        
|                                         |                                            | Total deferred            |        |          |        |      |       |         | (306   | )
|                                         |                                            |                           |        |          |         |      |       |        
|Net deferred tax asset                   |                                            | $                         | 7,812  |          |         | $    | 6,593 |        
|                                         |                                            |                           |        |          |         |      |       |        

As of March 31, 2000, the Company had available federal and state net
operating loss carryforwards of approximately $255.0 million and $111.0
million, respectively. The Company also had unused research credit
carryforwards of approximately $10.1 million and $6.2 million for federal and
California tax purposes, respectively. If not utilized, net operating loss and
federal research credit carryforwards will expire in fiscal years 2002 through
2020. The California research credits may be carried forward indefinitely.

Approximately $102.0 million of the valuation allowance for deferred tax
assets is attributable to employee stock option deductions, the benefit from
which will be allocated to paid-in capital rather than current earnings when
subsequently recognized. Approximately $16.3 million of the valuation allowance
for deferred tax assets relates to research and experimentation credits, of
which approximately $10.6 million will be allocated to paid-in capital rather
than current earnings when subsequently recognized.

Cumulative undistributed earnings of international subsidiaries amounted
to $24.0 million as of March 31, 2000, which are intended to be permanently
reinvested. The amount of income tax liability that would result had such
earnings been repatriated is estimated to be approximately $8.8 million.

F-26



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

The utilization of research and experimentation credits is limited by
current tax regulations. These research and experimentation credits will be
utilized in future periods if sufficient income is generated. The Companys
ability to utilize certain loss carryforwards and certain research credit
carryforwards are subject to limitations pursuant to the ownership change rules
of Internal Revenue Code Section 382.

The Company believes it is more likely than not that future operations
will generate sufficient taxable income to realize the net deferred tax assets
recognized by the Company.




11. Minority Interest in Subsidiary

During fiscal year 2000, the Companys consolidated subsidiary,
shockwave.com, issued 18.2 million shares of Preferred Series B stock to
parties other than Macromedia for cash consideration of $2.50 per share. This
represented 34.6% of shockwave.coms preferred stock at March 31, 2000. Prior
to the transaction, the Company held 100% of the equity of shockwave.com in the
form of Preferred Series A stock. Preferred Series A and B stock both have
identical rights and privileges. The proportionate value offered to the third
parties in the Series B offering was in excess of the Companys average
carrying amount. As a result of the transaction, the Company recorded $21.1
million in its consolidated statement of stockholders equity in order to
adjust its investment in shockwave.com stock to reflect its share of the net
assets of shockwave.com. In addition, the Company considers shockwave.com a
start up, and as such, no gain was recognized by the Company.

shockwave.com is authorized to issue 107.2 million shares of convertible
preferred stock. Of this, 69.2 million shares are Series A Convertible
Preferred Stock and 38.0 million shares are Series B Convertible preferred
stock, both with a par value of $0.001 per share. The rights and privileges of
Preferred Series A and B entitle the holder of each share to receive
non-cumulative dividends when and if declared by the Company and also allow for
liquidation preferences for an amount per share equal to the original issue
price for each series of preferred stock, plus any declared but unpaid
dividends. The shares are convertible either at the option of the holder, or
upon a public offering of shockwave.com common stock. Upon conversion, each
preferred share is convertible into shockwave.com common shares based on a
price determined at the conversion date.

12. Mandatorily Redeemable Convertible Preferred Stock

At the consummation of the merger between the Company and Andromedia,
Andromedia had 2.3 million shares of mandatorily redeemable convertible
preferred stock outstanding. These shares were redeemable at the higher of
original issuance price plus declared but unpaid dividends or fair market value
at or any time after February 1, 2004. Accordingly, the Company increased the
carrying amount of the instruments through periodic accretions, so that the
carrying amount would equal the mandatory redemption amount at February 1,
2004. Mandatorily redeemable preferred stock consisted of the following (in
thousands):

|                                                    |  |             |        |        |  |   |         |  
|--------------------------------------------------- |  | ----------- | ------ | ------ |  | - | ------- | -
|                                                    |  | Shares     
|                                                    |  | Outstanding |        | Amount
|                                                    |  |             |        |       
|Issuance of Series C Preferred Stock                |  |             | 401    |        |  | $ | 3,548   |  
|                                                    |  |             |        |        |  |   |         |  
|Balance as of March 31, 1998.                       |  |             | 401    |        |  |   | 3,548   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Issuance of Series D Preferred Stock                |  |             | 815    |        |  |   | 9,927   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Issuance of Series D Preferred Stock Warrants       |  |             |       |        |  |   | 12      |  
|                                                   
|                                                   
|                                                   
|                                                   
|Preferred Stock accretion                           |  |             |       |        |  |   | 104     |  
|                                                    |  |             |        |        |  |   |         |  
|Balance as of March 31, 1999.                       |  |             | 1,216  |        |  |   | 13,591  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Issuance of Series E Preferred Stock                |  |             | 1,055  |        |  |   | 14,914  |  
|                                                   
|                                                   
|                                                   
|                                                   
|Issuance of Series C and E Preferred Stock Warrants |  |             |       |        |  |   | 360     |  
|                                                   
|                                                   
|                                                   
|                                                   
|Preferred Stock accretion                           |  |             |       |        |  |   | 2,538   |  
|                                                   
|                                                   
|                                                   
|                                                   
|Conversion into Macromedia Common Stock             |  |             | (2,271 | )      |  |   | (31,403 | )
|                                                    |  |             |        |        |  |   |         |  
|Balance as of March 31, 2000.                       |  |             |       |        |  | $ |        |  
|                                                    |  |             |        |        |  |   |         |  

On December 1, 1999, Macromedia completed its merger with Andromedia upon
which all outstanding mandatorily redeemable preferred shares of Andromedia
automatically converted into Macromedia common stock.

F-27



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

The holders of Mandatorily Redeemable Convertible Preferred Stock had the
following rights and preferences as follows:

Redemption  Upon written notice of at least a majority of the holders of
Series C, Series D or Series E Convertible Preferred Stock, at any time
subsequent to February 1, 2004, the Company must have redeemed a specified
percentage of Series C, D and E Convertible Preferred Stock at a price equal to
the greater of (i) $8.92 (Series C), $12.28 (Series D) and $14.32 (Series E)
per share, respectively, plus all declared but unpaid dividends on such shares
or (ii) the per share fair market value as determined by mutual agreement
between a majority of the holders of the applicable series of redeemable
preferred and a majority of the Board of Directors.

Dividends  Holders of Series C, D and E Convertible Preferred Stock were
entitled to receive non-cumulative dividends at the per annum rate of $0.45,
$0.61 and $0.73 per share, respectively, when and if declared by the Board of
Directors. The holders of Series C, D and E Convertible Preferred Stock were
also entitled to participate in dividends on Common Stock, when and if declared
by the Board of Directors, based on the number of shares of Common Stock held
on an as-if converted basis. No dividends were declared by the Board from
inception through December 1, 1999.

13. Stockholders Equity

As a result of the Companys poolings-of-interests, various issuances of
stock of the acquired entities were issued and outstanding during fiscal year
2000, 1999 and 1998. For presentation purposes, the Company has shown the
activity and outstanding preferred share balances of the acquired entities as a
component of additional paid-in-capital in the Companys statements of
stockholders equity. The following table summarizes the activity and shares
outstanding of Andromedia and ESI as of March 31, 2000, 1999 and 1998. All
Andromedia and ESI preferred shares are shown as if converted into the
Companys common stock and have a par value of $0.001 (in thousands):

|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  
|-------------------------------------------------------------------------------- |  | ---------- | --- | ---------- |  | --------- | ---- | --------- |  | --------- | --- | ---------- |  | ------- | -- | - |  |  | ---- | - |  |  | ---- | - |  | - | ------ | -
|                                                                                 |  | Preferred  |     | Preferred  |  | Preferred |      | Preferred |  | Preferred |     | Preferred 
|                                                                                 |  | Stock      |     | Stock      |  | Stock     |      | Stock     |  | Stock     |     | Additional
|                                                                                 |  | Andromedia |     | Andromedia |  | ESI       |      | ESI       |  | ESI       |     | ESI        |  | Paid in
|                                                                                 |  | Series A   |     | Series B   |  | Series A  |      | Series B  |  | Series C  |     | Series D   |  | Capital
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |        
|                                                                                 |  | Shares     |     | Shares     |  | Shares    |      | Shares    |  | Shares    |     | Shares    
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |           
|Balance as of
March 31, 1997.                                                    |  |            | 61  |            |  |           | 90   |           |  |           | 44  |            |  |         | 9  |   |  |  |     |   |  |  |     |   |  | $ | 7,046  |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of
preferred stock                                                      |  |            |    |            |  |           | 33   |           |  |           |    |            |  |         |   |   |  |  | 245  |   |  |  |     |   |  |   | 8,656  |  
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  
|Balance as of
March 31, 1998.                                                    |  |            | 61  |            |  |           | 123  |           |  |           | 44  |            |  |         | 9  |   |  |  | 245  |   |  |  |     |   |  |   | 15,702 |  
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  
|Elimination of ESI
activity for the
duplicated three
months ended
June 30, 1998. |  |            |    |            |  |           |     |           |  |           |    |            |  |         |   |   |  |  | (93  | ) |  |  |     |   |  |   | (3,009 | )
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Issuance of
preferred stock                                                      |  |            |    |            |  |           |     |           |  |           |    |            |  |         |   |   |  |  | 93   |   |  |  | 99   |   |  |   | 6,416  |  
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  
|Balance as of
March 31, 1999.                                                    |  |            | 61  |            |  |           | 123  |           |  |           | 44  |            |  |         | 9  |   |  |  | 245  |   |  |  | 99   |   |  |   | 19,109 |  
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  
|Issuance of
preferred stock                                                      |  |            |    |            |  |           |     |           |  |           |    |            |  |         |   |   |  |  |     |   |  |  | 15   |   |  |   | 520    |  
|                                                                                
|                                                                                
|                                                                                
|                                                                                
|Conversion of
preferred stock to
common upon
acquisition                         |  |            | (61 | )          |  |           | (123 | )         |  |           | (44 | )          |  |         | (9 | ) |  |  | (245 | ) |  |  | (114 | ) |  |   |       |  
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  
|Balance as of
March 31, 2000.                                                    |  |            |    |            |  |           |     |           |  |           |    |            |  |         |   |   |  |  |     |   |  |  |     |   |  | $ | 19,629 |  
|                                                                                 |  |            |     |            |  |           |      |           |  |           |     |            |  |         |    |   |  |  |      |   |  |  |      |   |  |   |        |  

All equity activity other than the share amounts above is included in the
accompanying consolidated statements of stockholders equity.

Preferred Stock. Macromedia is authorized to issue 5.0 million shares of
convertible preferred stock with a par value of $0.001 per share. Holders of
Series A and B Convertible Preferred Stock under Andromedia were entitled to
receive non-cumulative dividends at the per annum rate of $0.97 and $0.41.
Holders of Series A, B, C and D

F-28



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

Convertible Preferred Stock under ESI were entitled to receive
non-cumulative dividends at a per annum rate ranging from $0.90 to $2.82.

Treasury Stock. In July 1997, the Board of Directors authorized the
repurchase of up to 2.0 million shares of the Companys common stock. In
October 1998, the Board of Directors authorized the repurchase of an additional
2.0 million shares of the Companys common stock. During the years ended March
31, 2000 and 1999, the Company purchased 198,000 and 1.1 million shares,
respectively, of its common stock on the open market at an average price of
$41.43 and $18.29 per share, respectively. The shares are recorded at cost and
are shown as a reduction of stockholders equity. In connection with the
acquisition of ESI Software, Inc. (See Note 4), the Company rescinded the
repurchase program.

Stock Based Compensation Plans

Macromedia, Inc. Stock Option Plans. As of March 31, 2000, there are stock
options outstanding in connection with the following stock option and purchase
plans (the Macromedia Plans):



| | (i)    |  | Authorware 1988 Stock Option Plan         
| | ------ |  | ------------------------------------------
| | (ii)   |  | 1992 Equity Incentive Plan (EIP)        
| | (iii)  |  | 1993 Employee Stock Purchase Plan (ESPP)
| | (iv)   |  | 1993 Directors Stock Option Plan          
| | (v)    |  | ESI 1996 Equity Incentive Plan            
| | (vi)   |  | Andromedia 1996 Stock Option Plan         
| | (vii)  |  | Andromedia 1997 Stock Option Plan         
| | (viii) |  | Andromedia 1999 Stock Option Plan         
| | (ix)   |  | Macromedia 1999 Stock Option Plan         

The options outstanding under the plans indicated at (i), (v), (vi), (vii)
and (viii) (the Prior Plans) above were assumed by the Company as a result of
merger activities. The Company assumed certain options granted to former
employees of the acquired companies (the Acquired Options) under these plans.
All of the Acquired Options have been adjusted to give effect to the
respective conversion terms between the Company and companies acquired. Of the
Prior Plans, the Company continues to grant options only from the Andromedia
1999 Stock Option Plan.

The EIP and Andromedia 1999 Stock Plan provide for the grant of several
types of stock based awards including, incentive and nonqualified stock
options, restricted stock, and stock bonuses and purchase rights. The total
number of shares reserved pursuant to these plans as of March 31, 2000, was
15.9 million. Any options granted pursuant to the Authorware 1988 Stock Option
Plan that expire or become unexercisable for any reason without having been
exercised in full shall no longer be available for distribution under the plan,
but shall be available for distribution under the EIP. Similarly, any option
or purchase right under the Andromedia 1999 Stock Option Plan that becomes
unexercisable without having been exercised in full, shall become available for
future grant or sale.

Under the ESPP, 800,000 shares of common stock, are reserved for issuance.
Under the ESPP, and subject to certain limitations, employees may purchase,
through payroll deductions of 2% to 10% of compensation, shares of common stock
at a price per share that is the lesser of 85% of the fair market value as of
the beginning of the offering period or the end of the purchase period. During
the years ended March 31, 2000, 1999, and 1998, the Company issued 84,358,
145,826, and 194,786, shares under the plan at average prices of $28.98,
$11.10, and $7.54, per share, respectively.

Under the 1993 Directors Stock Option Plan and Macromedia 1999 Stock
Option Plan, 700,000 and 1.6 million shares of common stock, respectively, are
reserved for grant as non-qualified stock options.

In fiscal year 2000, the Company granted non-plan options to Company
executives to purchase shares of the Companys common stock. The options were
granted with an exercise price equal to fair market value on the grant date and
have terms similar to the Companys stock option plans.

F-29



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

Stock options under the Macromedia Plans are generally granted at a price
equal to fair market value at the time of the grant and normally vest over four
years from the date of grant. The options expire 10 years from the date of
grant and are normally canceled three months after an employees termination.

The following summarizes the stock option activity for the years ended
March 31, 2000, 1999 and 1998 (in thousands, except per share amounts):

|                                         |           |  |        |        |       |   |                  |       | 
|---------------------------------------- | --------- |  | ------ | ------ | ----- | - | ---------------- | ----- | 
|                                         |           |  |        |        |       |   | Weighted Average
|                                         |           |  |        |        |       |   | Exercise        
|                                         |           |  | Shares |        | Price
|                                         |           |  |        |        |      
|Options outstanding as of March 31, 1997 |           |  | 8,551  |        |       | $ | 12.00            |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |        | 9,633  |       |   |                  | 7.99  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |        | (573   | )     |   |                  | 4.18  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Cancelled |  |        | (6,509 | )     |   |                  | 14.03 | 
|                                         |           |  |        |       
|Options outstanding as of March 31, 1998 |           |  | 11,102 |        |       |   | 7.73             |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |        | 3,636  |       |   |                  | 16.21 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |        | (3,168 | )     |   |                  | 7.04  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Cancelled |  |        | (1,390 | )     |   |                  | 9.02  | 
|                                         |           |  |        |       
|Options outstanding as of March 31, 1999 |           |  | 10,180 |        |       |   | 10.81            |      
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |        | 7,231  |       |   |                  | 49.46 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |        | (3,725 | )     |   |                  | 9.85  | 
|                                        
|                                        
|                                        
|                                        
|                                         | Cancelled |  |        | (2,138 | )     |   |                  | 29.25 | 
|                                         |           |  |        |       
|Options outstanding as of March 31, 2000 |           |  | 11,548 |        |       | $ | 31.92            |      
|                                         |           |  |        |       

On May 6, 1997, the Board of Directors approved a repricing of
approximately 4.9 million outstanding stock options held by existing employees
to the current fair market value of the Companys stock.

shockwave.com, Inc. Stock Option Plan.On December 1, 1999, shockwave.com
adopted the shockwave 1999 Equity Incentive Plan. Under the terms of the plan,
shockwave.com is eligible to grant a total of 17.4 million options of
shockwave.com stock as incentive stock options, non-qualified stock options or
restricted stock options.

Stock options for shockwave.com granted during fiscal year 2000 were
priced at $0.50 per share and vest over four years from the date of grant. The
options expire 10 years from the date of grant and are normally canceled three
months after an employees termination.

The following summarizes the stock option activity for the year ended
March 31, 2000 (in thousands, except per share amounts):

|                                         |           |  |        |        |       |   |                  |      | 
|---------------------------------------- | --------- |  | ------ | ------ | ----- | - | ---------------- | ---- | 
|                                         |           |  |        |        |       |   | Weighted Average
|                                         |           |  |        |        |       |   | Exercise        
|                                         |           |  | Shares |        | Price
|                                         |           |  |        |        |      
|Options outstanding as of March 31, 1999 |           |  |       |        |       | $ |                 |     
|                                        
|                                        
|                                        
|                                        
|                                         | Granted   |  |        | 14,903 |       |   |                  | 0.50 | 
|                                        
|                                        
|                                        
|                                        
|                                         | Exercised |  |        |       |       |   |                  |     | 
|                                        
|                                        
|                                        
|                                        
|                                         | Cancelled |  |        | (189   | )     |   |                  | 0.50 | 
|                                         |           |  |        |       
|Options outstanding as of March 31, 2000 |           |  | 14,714 |        |       | $ | 0.50             |     
|                                         |           |  |        |       




14. Stock Compensation

The Company has recorded deferred compensation or compensation expense for
options issued under the Andromedia, ESI and shockwave.com stock option plans
that were issued with an exercise price less than fair value of the underlying
stock at the date of grant. The fair value of the underlying common stock of
shockwave.com has been determined by the Company based on factors including,
but not limited to, preferred stock sales, comparisons to competitive public
companies, and general market conditions. Fair value for Macromedia stock is
based on the price of the Companys common stock as traded on NASDAQ. The
Company recorded approximately $5.1 million,

F-30



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

$300,000 and $100,000 in fiscal year 2000, 1999 and 1998, respectively, of
compensation expense related to stock option grants by shockwave.com,
Andromedia and ESI.

In connection with certain content development agreements entered into in
fiscal year 2000, warrants for approximately 2.8 million shares of
shockwave.com common stock were issued to non-employees. Each warrant entitles
the holder to purchase one share of shockwave.com common stock at $0.50 per
share. The warrants are immediately exercisable and expire 10 years from the
date of issuance. Under the terms of the agreements, vesting of the warrants
is not contingent upon any future obligations. Furthermore, the warrant
agreements do not contain any vesting clauses. The Company recorded
compensation expense of approximately $6.0 million in connection with the
issuance of the shockwave.com warrants. The fair value of the warrants was
estimated using the Black-Scholes option pricing model with an expected
volatility of 85%, risk-free interest rate of 5.7% and contractual life of 10
years.

Pursuant to SFAS No. 123, Accounting for Stock-Based Compensation, the
Company is required to disclose the pro forma effects on net income (loss) and
net income (loss) per share as if the Company had elected to use the fair value
approach to account for all of its employee stock-based compensation plans. Had
compensation cost for the Companys plans been determined consistently with the
fair value approach enumerated in SFAS No. 123, the Companys pro forma net
income (loss) and pro forma net income (loss) per share for the years ended
March 31, 2000, 1999 and 1998, would have been changed as indicated below (in
thousands, except per share amounts):

|                                                               |          |             |  |      |       |      |  |      |        |   |  |   |         |  
|-------------------------------------------------------------- | -------- | ----------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                               |          |             |  | 2000 |       | 1999 |  | 1998
|                                                               |          |             |  |      |       |      |  |     
|Net income (loss) applicable to
common stockholders:           |         
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |          | As reported |  | $    | 6,229 |      |  | $    | 2,506  |   |  | $ | (15,641 | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |          | Pro-forma   |  | $    | (702  | )    |  | $    | (1,877 | ) |  | $ | (27,790 | )
|                                                              
|                                                              
|                                                              
|                                                              
|Net income (loss) applicable to
common stockholders per share:
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Basic:   |            
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |          | As reported |  | $    | 0.14  |      |  | $    | 0.06   |   |  | $ | (0.40   | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |          | Pro-forma   |  | $    | (0.02 | )    |  |      | (0.05  | ) |  | $ | (0.71   | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               | Diluted:
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |          | As reported |  | $    | 0.12  |      |  | $    | 0.05   |   |  | $ | (0.40   | )
|                                                              
|                                                              
|                                                              
|                                                              
|                                                               |          | Pro-forma   |  | $    | (0.02 | )    |  | $    | (0.05  | ) |  | $ | (0.71   | )

The effects of applying SFAS 123 in this pro-forma disclosure are not
indicative of future amounts.

The weighted-average fair value of Macromedia options granted during the
years ended March 31, 2000, 1999, and 1998 were $26.79, $10.11, and $4.70,
respectively. The weighted average fair value of purchase rights granted under
the ESPP during the years ended March 31, 2000, 1999, and 1998, was $17.92,
$7.53, and $3.74 per right, respectively.

F-31



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

The fair value of Macromedia options and purchase rights granted was
estimated on the date of grant using the Black-Scholes option-pricing model
using the following weighted average assumptions used for grants in 2000, 1999,
and 1998:

|                                |  |                   |      |                              |  |      |      |      |  |      |      |      |  |  |      |   |  |  |      |   |  |  |      |  
|------------------------------- |  | ----------------- | ---- | ---------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | ---- |  |  | ---- | - |  |  | ---- | - |  |  | ---- | -
|                                |  | Stock Option Plan |      | Employee Stock Purchase Plan
|                                |  |                   |      |                             
|                                |  | 2000              |      | 1999                         |  | 1998 |      | 2000 |  | 1999 |      | 1998
|                                |  |                   |      |                              |  |      |      |      |  |      |      |     
|Weighted average risk free rate |  |                   | 6.07 | %                            |  |      | 5.11 | %    |  |      | 6.28 | %    |  |  | 5.49 | % |  |  | 5.08 | % |  |  | 5.35 | %
|                               
|                               
|                               
|                               
|Expected life (Years)           |  |                   | 3.50 |                              |  |      | 3.50 |      |  |      | 3.28 |      |  |  | 0.50 |   |  |  | 0.50 |   |  |  | 0.50 |  
|                               
|                               
|                               
|                               
|Expected volatility             |  |                   | 70   | %                            |  |      | 73   | %    |  |      | 80   | %    |  |  | 70   | % |  |  | 73   | % |  |  | 80   | %

The following table summarizes information about the Macromedias stock
options outstanding as of March 31, 2000 (in thousands, except per share
amounts):

|                         |       |         |                     |        |                     |                |                  |         |           |                |                  |       |  |  |       |       |  |   |       |       | 
|------------------------ | ----- | ------- | ------------------- | ------ | ------------------- | -------------- | ---------------- | ------- | --------- | -------------- | ---------------- | ----- |  |  | ----- | ----- |  | - | ----- | ----- | 
|                         |       |         | Options Outstanding |        | Options Exercisable
|                         |       |         |                     |        |                    
|                         |       |         |                     |        |                     |                | Weighted Average
|                         |       |         |                     |        |                     |                | Remaining       
|                         |       |         | Number of           |        | Contractual         |                | Weighted Average |         | Number of |                | Weighted Average
|Range of Exercise Prices |       | Options |                     | Life   |                     | Exercise Price |                  | Options |           | Exercise Price
|                         |       |         |                     |        |                     |                |                  |         |           |               
|$0.34  $3.00            |       |         | 106                 |        |                     |                | 5.33             |         |           | $              | 1.33             |       |  |  | 75    |       |  | $ | 1.13  |      
|                        
|                        
|                        
|                        
|$3.50  $9.00            |       |         | 2,800               |        |                     |                | 6.61             |         |           |                | 7.54             |       |  |  | 1,768 |       |  |   | 7.45  |      
|                        
|                        
|                        
|                        
|$9.09 $24.50            |       |         | 2,482               |        |                     |                | 8.12             |         |           |                | 13.34            |       |  |  | 924   |       |  |   | 12.95 |      
|                        
|                        
|                        
|                        
|$24.81  $45.31          |       |         | 3,389               |        |                     |                | 9.26             |         |           |                | 33.05            |       |  |  | 449   |       |  |   | 30.09 |      
|                        
|                        
|                        
|                        
|$51.97  $86.38          |       |         | 2,771               |        |                     |                | 9.70             |         |           |                | 73.00            |       |  |  | 45    |       |  |   | 67.11 |      
|                         |       |         |                     |        |                     |                |                  |         |           |                |                  |       |  |  |       |      
|                         | Total |         |                     | 11,548 |                     |                |                  | 8.44    |           |                | $                | 31.93 |  |  |       | 3,261 |  |   | $     | 12.80 | 
|                         |       |         |                     |        |                     |                |                  |         |           |                |                  |       |  |  |       |      

The weighted-average fair value of shockwave.com options granted during
the year ended March 31, 2000 was $1.96.

The fair value of shockwave.com options granted was estimated on the date
of grant using the Black-Scholes option-pricing model using the following
weighted average assumptions for grants in 2000:

|                                |  |      |      |  
|------------------------------- |  | ---- | ---- | -
|                                |  | 2000
|                                |  |     
|Weighted average risk free rate |  |      | 6.63 | %
|                               
|                               
|                               
|                               
|Expected life (Years)           |  |      | 4.0  |  
|                               
|                               
|                               
|                               
|Expected volatility             |  |      | 85   | %

As of March 31, 2000 all shockwave.com options outstanding had weighted
average exercise prices of $0.50 with a weighted average life of 9.88 years.
At March 31, 2000, 10.9 million options are outstanding under the plan,
however, 10.4 million are unvested and subject to repurchase restrictions upon
exercise.

15. Earnings Per Share

The Company computes earnings per share in accordance with SFAS 128,
Earnings Per Share. Under the provisions of SFAS 128, basic net income (loss)
per share is computed by dividing the net income (loss) available to common
stockholders for the period by the weighted average number of common shares
outstanding during the period. Diluted net income (loss) per share is computed
by dividing the net income (loss) applicable to common stockholders for the
period by the weighted average number of common and potentially dilutive
securities outstanding during the period, to the extent such potentially
dilutive securities are dilutive. Potentially dilutive securities are composed
of incremental common shares issuable upon the exercise of stock options and
warrants and upon conversion of Series A, B, C, D and E convertible preferred
stock.

F-32



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

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

|                                              |                                                                                   |                                                     |                                                                     |        |                      |      |      |        |       |      |   |         |         |       |  
|--------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------- | ------------------------------------------------------------------- | ------ | -------------------- | ---- | ---- | ------ | ----- | ---- | - | ------- | ------- | ----- | -
|                                              |                                                                                   |                                                     |                                                                     |        | Year Ended March 31,
|                                              |                                                                                   |                                                     |                                                                     |        |                     
|                                              |                                                                                   |                                                     |                                                                     |        | 2000                 |      | 1999 |        | 1998 
|                                              |                                                                                   |                                                     |                                                                     |        |                      |      |      |        |      
|Basic Net Income (Loss) Per Share Computation |                                                                                  
|                                             
|                                             
|                                             
|                                             
|Numerator:                                   
|                                             
|                                             
|                                             
|                                             
|                                              | Net income (loss)                                                                 |                                                     | $                                                                   | 8,767  |                      |      | $    | 2,610  |       |      | $ | (15,641 | )      
|                                             
|                                             
|                                             
|                                             
|                                              | Accretion of Series C, D and E mandatorily
redeemable convertible preferred stock |                                                     |                                                                     | (2,538 | )                    |      |      | (104   | )     |      |   |        |        
|                                              |                                                                                   |                                                     |                                                                     |        |                      |      |      |        |       |      |   |        
|                                              |                                                                                   | Net income (loss) applicable to common
stockholders |                                                                     | $      | 6,229                |      |      | $      | 2,506 |      |   | $       | (15,641 | )    
|                                              |                                                                                   |                                                     |                                                                     |        |                      |      |      |        |       |      |   |        
|Denominator:                                 
|                                             
|                                             
|                                             
|                                             
|                                              | Weighted average number of common shares
outstanding during the period            |                                                     |                                                                     | 44,601 |                      |      |      | 40,045 |       |      |   | 38,988  |        
|                                             
|                                             
|                                             
|                                             
|                                              |                                                                                   |                                                     | Basic net income (loss) applicable to
common stockholders per share |        | $                    | 0.14 |      |        | $     | 0.06 |   |         | $       | (0.40 | )
|                                              |                                                                                   |                                                     |                                                                     |        |                      |      |      |        |       |      |   |        

|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |        |       |   |        |         |         |  
|--------------------------------------------------------------------- | --------------------------------------------------------------------------------- | --------------------------------------------------- | ------ | -------------------- | ----- | ---- | ------ | ------ | ----- | - | ------ | ------- | ------- | -
|                                                                      |                                                                                   |                                                     |        | Year Ended March 31,
|                                                                      |                                                                                   |                                                     |        |                     
|                                                                      |                                                                                   |                                                     |        | 2000                 |       | 1999 |        | 1998  
|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |       
|Diluted Net Income (Loss) Per Share Computation                       |                                                                                  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|Numerator:                                                           
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Net income (loss)                                                                 |                                                     | $      | 8,767                |       |      | $      | 2,610  |       |   | $      | (15,641 | )      
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Accretion of Series C, D and E mandatorily
redeemable convertible preferred stock |                                                     |        | (2,538               | )     |      |        | (104   | )     |   |        |        |        
|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |        |       |   |        |        
|                                                                      |                                                                                   | Net income (loss) applicable to common
stockholders |        | $                    | 6,229 |      |        | $      | 2,506 |   |        | $       | (15,641 | )
|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |        |       |   |        |        
|Denominator:                                                         
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Weighted average number of common shares
outstanding during the period            |                                                     |        | 44,601               |       |      |        | 40,045 |       |   |        | 38,988  |        
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      | Effect of dilutive securities:                                                   
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                                   | Convertible preferred stock and stock warrants      |        |                      | 532   |      |        |        | 823   |   |        |         |        |  
|                                                                     
|                                                                     
|                                                                     
|                                                                     
|                                                                      |                                                                                   | Stock options and restricted stock                  |        |                      | 7,137 |      |        |        | 6,374 |   |        |         |        |  
|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |        |       |   |        |        
|Total                                                                 |                                                                                   |                                                     | 52,270 |                      |       |      | 47,242 |        |       |   | 38,988 |        
|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |        |       |   |        |        
|Diluted net income (loss) applicable to common
stockholders per share |                                                                                   | $                                                   | 0.12   |                      |       | $    | 0.05   |        |       | $ | (0.40  | )      
|                                                                      |                                                                                   |                                                     |        |                      |       |      |        |        |       |   |        |        

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

|                 |       |  |                      |       |      |  |       |       |  |  |       |       | 
|---------------- | ----- |  | -------------------- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                 |       |  | Year Ended March 31,
|                 |       |  |                     
|                 |       |  | 2000                 |       | 1999 |  | 1998 
|                 |       |  |                      |       |      |  |      
|Preferred stock  |       |  | 1,593                |       |      |  | 1,046 |       |  |  | 840   |      
|                
|                
|                
|                
|Stock options    |       |  | 118                  |       |      |  | 94    |       |  |  | 2,461 |      
|                
|                
|                
|                
|Warrants         |       |  |                     |       |      |  |      |       |  |  | 8     |      
|                
|                
|                
|                
|Restricted stock |       |  |                     |       |      |  |      |       |  |  | 135   |      
|                 |       |  |                      |       |      |  |       |       |  |  |       |      
|                 | Total |  |                      | 1,711 |      |  |       | 1,140 |  |  |       | 3,444 | 
|                 |       |  |                      |       |      |  |       |       |  |  |       |      

16. Employee Benefits

The Company maintains a 401(k) defined contribution benefit plan that covers
all employees who have attained 18 years of age and provide at least 20 hours
of service per week. This plan allows employees to defer up to 15% of their
pretax salary in certain investments at the discretion of the employee.
Employer contributions are made at the

F-33



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

discretion of the Companys Board of Directors. Employer contributions
made to the plan during the years ended March 31, 2000, 1999, and 1998, were
$812,000, $465,000, and $359,000, respectively.

17. Foreign Currency Forward Contracts

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

As a result of this activity, the Company had outstanding forward
contracts in various European currencies and Japanese Yen outstanding as of
March 31, 2000. The forward contracts are accounted for on a mark-to-market
basis, with gains or losses recognized in the consolidated statements of
operations. As of March 31, 2000 and 1999, the contract amount of the forward
contracts amounted to $21.6 million and $10.2 million, respectively. The future
value of these contracts is subject to market risk resulting from foreign
exchange rate volatility. Current market rates at the consolidated balance
sheet dates were used to estimate the fair value of foreign currency forward
contracts.

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

|               |       |   |          |        |            |   |        |        | 
|-------------- | ----- | - | -------- | ------ | ---------- | - | ------ | ------ | 
|               |       |   | Notional
|               |       |   | Amount   |        | Fair Value
|               |       |   |          |        |           
|British Pounds |       | $ | 1,479    |        |            | $ | 1,434  |       
|              
|              
|              
|              
|Euro           |       |   | 1,961    |        |            |   | 1,931  |       
|              
|              
|              
|              
|Japanese Yen   |       |   | 18,127   |        |            |   | 18,541 |       
|               |       |   |          |        |            |   |        |       
|               | Total |   | $        | 21,567 |            |   | $      | 21,906 | 
|               |       |   |          |        |            |   |        |       

The Company is exposed to credit loss in the event of nonperformance by
counterparties but the Company does not anticipate nonperformance by these
counterparties.

18. Related Party Transactions

During fiscal year 2000, the Company made loans totaling $4.1 million to
certain officers and other key employees in conjunction with their hiring and
relocation. The notes bear interest ranging from 5.54% to 6.21% per annum and
mature in 2003 and 2005.

During fiscal year 1999 and 1998, the company made loans to officers of
$8.2 million in conjunction with their hiring and relocation. These loans bear
interest at rates ranging from 5.51% to 6.8% per annum and mature between
fiscal year 2002 and 2005. One of the notes has a zero interest rate for the
first two years of its term. The rate converted to 6.65% in fiscal year 2000.

The total loan amount outstanding as of March 31, 2000 approximated $9.9
million, which reflects payments from certain officers and key employees. As
of March 31, 2000, the stated loan amounts approximated fair value.

All loans outstanding are included in current assets and other long-term
assets. Of the total amount of loans outstanding as of March 31, 2000, $9.3
million are full recourse and secured by the personal properties of the related
parties. These loans are due after termination of the officer or key employee
if termination comes prior to the maturity date of the loan. The principal and
accrued interest are due in full on the maturity dates of these loans.
Interest receivable of $500,000 was due to the Company as of March 31, 2000.

The remaining balance is composed of approximately $100,000 in unsecured loans
to certain key employees. These agreements are entered into as part of the
Companys recruiting efforts. Should employment with the

F-34



---






MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

Company cease before the 3-year service term specified by the loans, the
outstanding balance must be repaid on a pro-rata basis. However, should the
employee complete the 3-year service term, the loan balance is deemed forgiven
by the Company.




19. Segment Reporting and Geographic Information

Macromedia has two segments that offer different product lines: Software
and shockwave.com. The Software segment develops software that creates Web
site layout, graphics and rich media content for Internet users and develops
solutions for analyzing Web traffic and personalizing Web sites. shockwave.com
designs, develops and markets aggregated content to provide online
entertainment on the Web. The Company evaluates operating segment performance
based on net revenues and total operating expenses of the segment. The
operating segments accounting policies are substantially the same as those
described in the summary of accounting policies (See Note 2). The Company did
not have any material intersegment transactions in fiscal year 2000.

Prior to fiscal year 2000, the Company evaluated its business according to
the following two segments: Web Publishing and Learning. As a result of the
sale of the Companys Pathware product (See Note 5), revenues and expenses
related to products remaining in the Learning division after the transaction,
were realigned and are currently evaluated as part of the Software segment.
Prior periods have been restated to reflect this realignment, however, for the
years ended March 31, 1999 and 1998, the Company did not internally report
shockwave.com as a separate segment and restating these periods is currently
impracticable. As a result, for the years ended March 31, 1999 and 1998, there
is only one operating segment, Software. Segment data for the years ended
March 31, 2000, 1999 and 1998 are shown in the following (in thousands):

|                                                          |              |                        |         |               |         |       |        |       |         |   |         |         |         |  
|--------------------------------------------------------- | ------------ | ---------------------- | ------- | ------------- | ------- | ----- | ------ | ----- | ------- | - | ------- | ------- | ------- | -
|Year Ended March 31, 2000                                 |              | Software               |         | shockwave.com |         | Total
|                                                          |              |                        |         |               |         |      
|Revenues                                                  |              | $                      | 255,941 |               |         | $     | 8,218  |       |         | $ | 264,159 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Cost of revenues                                          |              |                        | 27,725  |               |         |       | 1,104  |       |         |   | 28,829  |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|                                                          | Gross margin |                        | $       | 228,216       |         |       | $      | 7,114 |         |   | $       | 235,330 |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|Direct operating expenses                                 |              |                        | 177,498 |               |         |       | 25,856 |       |         |   | 203,354 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Acquisition related
expenses and certain
non-cash charges |              |                        | 13,882  |               |         |       | 9,718  |       |         |   | 23,600  |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|                                                          |              | Total operating income |         | $             | 36,836  |       |        | $     | (28,460 | ) |         | $       | 8,376   |  
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|Total assets                                              |              | $                      | 285,701 |               |         | $     | 53,658 |       |         | $ | 339,359 |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|1999                                                     
|                                                         
|                                                         
|                                                         
|                                                         
|Revenues                                                  |              | $                      | 153,243 |               |         |       |       |       |         | $ | 153,243 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Cost of revenues                                          |              |                        | 15,625  |               |         |       |       |       |         |   | 15,625  |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|                                                          | Gross margin |                        | $       | 137,618       |         |       |        |      |         |   | $       | 137,618 |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|Direct operating expenses                                 |              |                        | 131,444 |               |         |       |        |       |         |   | 131,444 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Acquisition related
expenses and certain
non-cash charges |              |                        | 989     |               |         |       |       |       |         |   | 989     |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|                                                          |              | Total operating income |         | $             | 5,185   |       |        | $     |        |   |         | $       | 5,185   |  
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|Total assets                                              |              | $                      | 202,495 |               |         | $     |       |       |         | $ | 202,495 |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|1998                                                     
|                                                         
|                                                         
|                                                         
|                                                         
|Revenues                                                  |              | $                      | 113,803 |               |         | $     |       |       |         | $ | 113,803 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Cost of revenues                                          |              |                        | 15,107  |               |         |       |       |       |         |   | 15,107  |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|                                                          | Gross margin |                        | $       | 98,696        |         |       | $      |      |         |   | $       | 98,696  |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|Direct operating expenses                                 |              |                        | 110,439 |               |         |       |       |       |         |   | 110,439 |        
|                                                         
|                                                         
|                                                         
|                                                         
|Acquisition related
expenses and certain
non-cash charges |              |                        | 7,707   |               |         |       |       |       |         |   | 7,707   |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|                                                          |              | Total operating loss   |         | $             | (19,450 | )     |        | $     |        |   |         | $       | (19,450 | )
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        
|Total assets                                              |              | $                      | 158,126 |               |         | $     |       |       |         | $ | 158,126 |        
|                                                          |              |                        |         |               |         |       |        |       |         |   |         |        

F-35



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

Operating income (loss) for the periods shown is reconciled to the
consolidated net income before taxes as follows (in thousands):

|                              |  |                      |        |      |  |      |        |  |  |   |         |  
|----------------------------- |  | -------------------- | ------ | ---- |  | ---- | ------ |  |  | - | ------- | -
|                              |  | Year ended March 31,
|                              |  |                     
|                              |  | 2000                 |        | 1999 |  | 1998
|                              |  |                      |        |      |  |     
|Total operating income (loss) |  | $                    | 8,376  |      |  | $    | 5,185  |  |  | $ | (19,450 | )
|                             
|                             
|                             
|                             
|Other income                  |  |                      | 6,187  |      |  |      | 5,037  |  |  |   | 4,637   |  
|                             
|                             
|                             
|                             
|Minority interest             |  |                      | 6,179  |      |  |      |       |  |  |   |        |  
|                              |  |                      |        |      |  |      |        |  |  |   |         |  
|Income (loss) before taxes    |  | $                    | 20,742 |      |  | $    | 10,222 |  |  | $ | (14,813 | )
|                              |  |                      |        |      |  |      |        |  |  |   |         |  

The Companys operations outside the United States consist of sales
offices in Japan, the United Kingdom, the Netherlands, the Republic of Ireland,
and Canada that are wholly-owned subsidiaries and a branch in Australia.
Domestic operations are responsible for the design and development of all
products, as well as shipping to meet worldwide customer commitments. The
foreign sales offices receive a commission on sales within the territory.
Accordingly, for financial statement purposes, it is not meaningful to
segregate operating profit (loss) for the foreign sales offices. Revenues are
attributed to region based on the location of the customer. In 1998, revenue
in Japan accounted for a significant portion of the Companys total revenues.
Outside of the United States, no other individual country contributed more than
10% of total revenues for the years ended March 31, 2000, 1999, and 1998.
Additionally, other than the United States, no individual countrys assets
comprised more than 10% of total assets as of March 31, 2000, 1999, and 1998.

The distribution of net revenues and identifiable assets by geographic
areas for the years ended March 31, 2000, 1999, 1998 are as follows (in
thousands):

|                     |               |   |         |         |      |   |         |         |   |   |         |         |  
|-------------------- | ------------- | - | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                     |               |   | 2000    |         | 1999 |   | 1998   
|                     |               |   |         |         |      |   |        
|Net Revenues:        |              
|                    
|                    
|                    
|                    
|                     | North America |   | $       | 156,494 |      |   | $       | 89,500  |   |   | $       | 59,510  |  
|                    
|                    
|                    
|                    
|                     | Europe        |   |         | 71,324  |      |   |         | 43,243  |   |   |         | 29,300  |  
|                    
|                    
|                    
|                    
|                     | Japan         |   |         | 19,540  |      |   |         | 11,824  |   |   |         | 17,177  |  
|                    
|                    
|                    
|                    
|                     | All Other     |   |         | 16,801  |      |   |         | 8,676   |   |   |         | 7,816   |  
|                     |               |   |         |         |      |   |         |         |   |   |         |        
|Total Revenues       |               | $ | 264,159 |         |      | $ | 153,243 |         |   | $ | 113,803 |        
|                     |               |   |         |         |      |   |         |         |   |   |         |        
|Identifiable Assets: |              
|                    
|                    
|                    
|                    
|                     | North America |   | $       | 315,484 |      |   | $       | 188,668 |   |   | $       | 128,155 |  
|                    
|                    
|                    
|                    
|                     | Europe        |   |         | 80,100  |      |   |         | 31,350  |   |   |         | 28,958  |  
|                    
|                    
|                    
|                    
|                     | All Other     |   |         | 3,123   |      |   |         | 1,622   |   |   |         | 1,185   |  
|                    
|                    
|                    
|                    
|                     | Eliminations  |   |         | (59,348 | )    |   |         | (19,145 | ) |   |         | (172    | )
|                     |               |   |         |         |      |   |         |         |   |   |         |        
|Total                |               | $ | 339,359 |         |      | $ | 202,495 |         |   | $ | 158,126 |        
|                     |               |   |         |         |      |   |         |         |   |   |         |        
|Long-lived assets:   |              
|                    
|                    
|                    
|                    
|                     | United States |   | $       | 77,302  |      |   |         | 45,065  |   |   | $       | 39,594  |  
|                    
|                    
|                    
|                    
|                     | International |   |         | 1,089   |      |   |         | 775     |   |   |         | 866     |  
|                     |               |   |         |         |      |   |         |         |   |   |         |        
|Total                |               | $ | 78,391  |         |      | $ | 45,840  |         |   | $ | 40,460  |        
|                     |               |   |         |         |      |   |         |         |   |   |         |        

20. Commitments and Contingencies

Royalties.The Company has entered into agreements with third parties
that provide for royalty payments based on a per unit wholesale price of
certain products or other agreed-upon terms. Future minimum royalty payments
for the years ending March 31, 2001, 2002, 2003 and thereafter are $860,000,
$360,000, $156,000 and $0, respectively.

Leases.The Company leases office space and certain equipment under
operating leases, certain of which contain renewal and purchase options. In
addition, the Company subleases certain office space that is not currently
occupied by the Company.

F-36



---



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)

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

|                     |                              |          |        |        |  |   |      |      |  
|-------------------- | ---------------------------- | -------- | ------ | ------ |  | - | ---- | ---- | -
|                     |                              | Payments |        | Income
|                     |                              |          |        |       
|Year ended March 31, |                              |          |        |       
|2001                 |                              | $        | 10,099 |        |  | $ | (742 | )   
|                    
|                    
|                    
|                    
|2002                 |                              |          | 9,750  |        |  |   | (48  | )   
|                    
|                    
|                    
|                    
|2003                 |                              |          | 9,820  |        |  |   |     |     
|                    
|                    
|                    
|                    
|2004                 |                              |          | 9,549  |        |  |   |     |     
|                    
|                    
|                    
|                    
|2005                 |                              |          | 8,544  |        |  |   |     |     
|                    
|                    
|                    
|                    
|Thereafter           |                              |          | 19,656 |        |  |   |     |     
|                     |                              |          |        |        |  |   |      |     
|                     | Total minimum lease payments |          | $      | 67,418 |  |   | $    | (790 | )
|                     |                              |          |        |        |  |   |      |     

Rent expense was $7.4 million, $4.5 million, and $4.1 million for the
years ended March 31, 2000, 1999, and 1998, respectively. For the years ended
March 31, 2000, 1999 and 1998, sublease income was $3.0 million, $2.9 million
and $1.9 million, respectively.

Legal.On July 31, 1997, a complaint entitled Rosen et al. v. Macromedia,
Inc. et al., (Case No. 988526) was filed in the Superior Court for San
Francisco, California. The complaint alleges that Macromedia and five of its
former or current officers and directors engaged in securities fraud in
violation of California Corporations Code Sections 25400 and 25500 by seeking
to inflate the value of Macromedia stock by issuing statements that were
allegedly false or misleading (or omitted material facts necessary to make any
statements made not false or misleading) regarding the Companys financial
results and prospects. Four similar complaints by persons seeking to represent
the same class of purchasers subsequently have been filed in San Francisco
Superior Court, and consolidated for pre-trial purposes with Rosen. Defendants
filed demurrers to the complaint and other motions, which were argued on
December 9, 1997 and January 5, 1998. Before the demurrers could be heard, one
defendant, Richard Wood, died in an automobile accident. In March 1998, the
Courts sustained in part and overruled in part the demurrers. Claims against
Susan Bird were dismissed and the Court overruled the demurrers as to
Macromedia, John Colligan, James Von Her, II, and Kevin Crowder. In May 1999,
the Court granted plaintiffs motion for certification of a class of all
persons who purchased Macromedia common stock from April 18, 1996 through
January 9, 1997. Trial has been set for March 12, 2001. On April 20, 2000,
the parties proposed that the Court continue the trial date to September 10,
2001.

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

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

F-37



---






MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2000 (continued)




21. QUARTERLY RESULTS AND STOCK MARKET DATA (unaudited)

Summarized quarterly financial information for fiscal years 2000 and 1999
is as follows (in thousands, except per share data):

|            |                           |                                                     |                                                                         |              |               |             |   |          |        |       |   |   |        |      |  |   |        |      | 
|----------- | ------------------------- | --------------------------------------------------- | ----------------------------------------------------------------------- | ------------ | ------------- | ----------- | - | -------- | ------ | ----- | - | - | ------ | ---- |  | - | ------ | ---- | 
|            |                           |                                                     |                                                                         |              | Quarter ended
|            |                           |                                                     |                                                                         |              |              
|            |                           | June 30                                             |                                                                         | September 30 |               | December 31 |   | March 31
|            |                           |                                                     |                                                                         |              |               |             |   |         
|Fiscal year |                           |                                                     |                                                                         |              |               |             |   |         
|2000       
|           
|           
|           
|           
|            |                           | Total revenues                                      |                                                                         | $            | 51,232        |             |   | $        | 59,313 |       |   | $ | 64,332 |      |  | $ | 89,282 |     
|           
|           
|           
|           
|            |                           | Gross profit                                        |                                                                         |              | 45,478        |             |   |          | 53,384 |       |   |   | 57,479 |      |  |   | 78,989 |     
|           
|           
|           
|           
|            |                           | Operating income                                    |                                                                         |              | 2,897         |             |   |          | 1,256  |       |   |   | 2,529  |      |  |   | 1,694  |     
|           
|           
|           
|           
|            |                           | Net income                                          |                                                                         |              | 1,727         |             |   |          | 225    |       |   |   | 1,272  |      |  |   | 5,543  |     
|           
|           
|           
|           
|            |                           | Net income (loss) applicable to
common stockholders |                                                                         |              | 1,563         |             |   |          | (792   | )     |   |   | (85    | )    |  |   | 5,543  |     
|           
|           
|           
|           
|            |                           |                                                     | Net income (loss)applicable
to common stockholders per
share - basic    |              |               | 0.04        |   |          |        | (0.02 | ) |   |        | 0.00 |  |   |        | 0.12 | 
|           
|           
|           
|           
|            |                           |                                                     | Net income (loss)
applicable to common
stockholders per share -
diluted |              |               | 0.03        |   |          |        | (0.02 | ) |   |        | 0.00 |  |   |        | 0.10 | 
|           
|           
|           
|           
|            | Common Stock Price Range:
|           
|           
|           
|           
|            |                           | High                                                |                                                                         | $            | 50.00         |             |   | $        | 49.25  |       |   | $ | 88.69  |      |  | $ | 100.00 |     
|           
|           
|           
|           
|            |                           | Low                                                 |                                                                         | $            | 32.88         |             |   | $        | 27.38  |       |   | $ | 39.88  |      |  | $ | 62.00  |     
|           
|           
|           
|           
|1999        |                          
|           
|           
|           
|           
|            |                           | Total revenues                                      |                                                                         | $            | 32,747        |             |   | $        | 35,889 |       |   | $ | 38,827 |      |  | $ | 45,780 |     
|           
|           
|           
|           
|            |                           | Gross profit                                        |                                                                         |              | 29,506        |             |   |          | 32,485 |       |   |   | 34,851 |      |  |   | 40,776 |     
|           
|           
|           
|           
|            |                           | Operating income (loss)                             |                                                                         |              | (565          | )           |   |          | 1,033  |       |   |   | 1,350  |      |  |   | 3,367  |     
|           
|           
|           
|           
|            |                           | Net income (loss)                                   |                                                                         |              | (617          | )           |   |          | 463    |       |   |   | 834    |      |  |   | 1,930  |     
|           
|           
|           
|           
|            |                           | Net income (loss) applicable to
common stockholders |                                                                         |              | (617          | )           |   |          | 463    |       |   |   | 782    |      |  |   | 1,878  |     
|           
|           
|           
|           
|            |                           |                                                     | Net income (loss)
applicable to common
stockholders per share -
basic   |              |               | (0.02       | ) |          |        | 0.01  |   |   |        | 0.02 |  |   |        | 0.05 | 
|           
|           
|           
|           
|            |                           |                                                     | Net income (loss)
applicable to common
stockholders per share -
diluted |              |               | (0.02       | ) |          |        | 0.01  |   |   |        | 0.02 |  |   |        | 0.04 | 
|           
|           
|           
|           
|            | Common Stock Price Range: |                                                    
|           
|           
|           
|           
|            |                           | High                                                |                                                                         | $            | 19.31         |             |   | $        | 19.31  |       |   | $ | 35.25  |      |  | $ | 46.06  |     
|           
|           
|           
|           
|            |                           | Low                                                 |                                                                         | $            | 13.75         |             |   | $        | 12.31  |       |   | $ | 12.63  |      |  | $ | 26.38  |     

The Company has not paid cash dividends and has no present plans to do so.
There were 384 stockholders of record as of June 9, 2000, excluding
stockholders whose stock is held in nominee or street name by brokers.

F-38



---






MACROMEDIA, INC. AND SUBSIDIARIES

SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

|                                            |                           |        |                         |          |                     |           |   |        |  |  |                   |        |  |  |   |       | 
|------------------------------------------- | ------------------------- | ------ | ----------------------- | -------- | ------------------- | --------- | - | ------ |  |  | ----------------- | ------ |  |  | - | ----- | 
|                                            |                           |        | Balance at beginning of |          | Charge to costs and |           |   |        |  |  | Balance at end of
|Description                                 |                           | period |                         | expenses |                     | Deduction |   | period
|                                            |                           |        |                         |          |                     |           |   |       
|Allowance for Doubtful Accounts             |                          
|                                            | Year ended March 31, 2000 |        | $                       | 1,122    |                     |           | $ | 801    |  |  | $                 | 264    |  |  | $ | 1,659 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Year ended March 31, 1999 |        |                         | 1,075    |                     |           |   | 125    |  |  |                   | 78     |  |  |   | 1,122 | 
|                                           
|                                           
|                                           
|                                           
|                                            | Year ended March 31, 1998 |        |                         | 972      |                     |           |   | 1,363  |  |  |                   | 1,260  |  |  |   | 1,075 | 
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|                                           
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|                                           
|Allowance for Returns                       |                          
|                                            | Year ended March 31, 2000 |        | $                       | 8,477    |                     |           | $ | 13,641 |  |  | $                 | 12,897 |  |  | $ | 9,221 | 
|                                           
|                                           
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|                                           
|                                            | Year ended March 31, 1999 |        |                         | 6,531    |                     |           |   | 11,958 |  |  |                   | 10,012 |  |  |   | 8,477 | 
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|                                           
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|                                           
|                                            | Year ended March 31, 1998 |        |                         | 6,814    |                     |           |   | 6,983  |  |  |                   | 7,266  |  |  |   | 6,531 | 
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|                                           
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|                                           
|Allowance for Excess and
Obsolete Inventory |                          
|                                            | Year ended March 31, 2000 |        | $                       | 942      |                     |           | $ | 1,551  |  |  | $                 | 1,629  |  |  | $ | 864   | 
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|                                           
|                                           
|                                           
|                                            | Year ended March 31, 1999 |        |                         | 1,143    |                     |           |   | 573    |  |  |                   | 774    |  |  |   | 942   | 
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|                                           
|                                           
|                                           
|                                            | Year ended March 31, 1998 |        |                         | 3,909    |                     |           |   | 1,398  |  |  |                   | 4,164  |  |  |   | 1,143 |