##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549




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FORM 10-K



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(Mark One)



| |  |                                                     
| |  | ----------------------------------------------------
| |  | 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, 2001

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 
  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 May 23, 2001:
$1,312 million. See definition of affiliate in
Rule 12b-2 of the Exchange Act.

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 2001 Annual Meeting of Stockholders |  | Part III (Items 10, 11, 12 and 13)



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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 Executive 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                     
|SELECTED CONSOLIDATED FINANCIAL DATA                                                 
|MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|INDEPENDENT AUDITORS REPORT                                                         
|CONSOLIDATED BALANCE SHEETS                                                          
|CONSOLIDATED STATEMENTS OF INCOME                                                    
|CONSOLIDATED STATEMENTS OF CASH FLOWS                                                
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY                                      
|SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS                                     
|Exhibit 3.04                                                                         



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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES

FORM 10-K

ANNUAL REPORT


For the Year Ended March 31, 2001


TABLE OF CONTENTS

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

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PART I

Except for historical financial information contained herein,
the matters discussed in this Form 10-K may be considered
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended, and subject to the safe harbor created by the
Securities Litigation Reform Act of 1995. Such statements
include declarations regarding our intent, belief or current
expectations and those of our management. Prospective investors
are cautioned that any such forward-looking statements are not
guarantees of future performance and involve a number of risks,
uncertainties, and other factors, some of which are beyond our
control; actual results could differ materially from those
indicated by such forward-looking statements. Important factors
that could cause actual results to differ materially from those
indicated by such forward-looking statements include, but are
not limited to: (i) that the information is of a
preliminary nature and may be subject to further adjustment,
(ii) those risks and uncertainties identified under
Risk Factors that May Affect Future Results of
Operations in Item 7A, and the other risks detailed
from time-to-time in our reports and registration statements
filed with the Securities and Exchange Commission.




Item 1. Business

Overview

Macromedia, Inc. (Macromedia) 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. Information on our Web
site should not be considered filed with the Securities and
Exchange Commission.

Throughout the majority of fiscal year 2001, we operated in two
segments: the Software segment and shockwave.com, Inc.
(shockwave.com). Our Software segment develops
software that creates Web site layout, graphics and rich media
content for Internet users. shockwave.com designs, develops, and
markets aggregated content to provide online entertainment on
the Web. We currently operate in one primary business segment,
the Software segment, as a result of the deconsolidation of our
previously majority owned subsidiary, shockwave.com, during the
fourth quarter of our fiscal year 2001.

The portfolio of software products Macromedia offers to its
customers today enables our customers to build, rapidly deploy,
and manage relatively simple to sophisticated Web sites that
provide dynamic content, personalized interaction, and secure
business transactions. Our products range from stand-alone
products for Web authoring and graphics creation to products
that provide robust, secure, scalable foundations for building
online applications that support online commerce, strengthen
customer and partner relationships, and automate key business
processes. Companies as varied as Macys, BMW Motorcycles,
Cisco Systems, Compaq, Disney, Hewlett Packard, Williams-Sonoma,
Kaiser Permanente, and autobytel.com have all used Macromedia
products. Companies such as these use our products to design,
build, and manage large-scale, content-rich,
transaction-oriented Web sites and applications.

Recent Events

In December 2000, we announced that our then majority owned
subsidiary, shockwave.com, would acquire Atom Corporation
(AtomFilms). AtomFilms was a privately held company
providing Web-based entertainment focused on marketing and
distributing high-quality short form entertainment to more than
100 partners. shockwave.com completed the acquisition in
January 2001 and issued common stock and options of
shockwave.com equal to approximately 30% of the combined
company, AtomShockwave Corp. (AtomShockwave), on a
fully-diluted basis, in exchange for all of the outstanding
shares of AtomFilms. The transaction was accounted for as a
purchase business combination. As a result of the acquisition,
Macromedia no longer consolidates the financial statements of
AtomShockwave as our ownership interest has declined

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In March 2001, we consummated an acquisition of Allaire
Corporation (Allaire), a publicly held company that
provides Internet software products for companies building their
business on the Web, by issuing cash and stock consideration and
assuming all of the outstanding vested and unvested options and
warrants of Allaire. For accounting purposes, the transaction
was valued at approximately $428.0 million and accounted
for under the purchase method of accounting. As a result of the
Allaire acquisition, the following discussion will consist of
the businesses of Macromedia and Allaire.

Market Opportunity

The Internet has experienced dramatic growth over the last
several years. Today, with the Internet software industry
experiencing standardization and consolidation, many companies
around the world with a Web presence are looking to companies
such as Macromedia to provide rich, comprehensive solutions to
deliver content and applications over the Web in a
cost-effective manner.

For many businesses, Web technology provides an alternative to
existing mainstream computing platforms and creates new
opportunities for commerce and information exchange. The
Internet continues to transform business and communication
within companies, between companies and their customers, and
with other businesses. Web applications on intranets and
extranets automate business processes and facilitate
collaboration, thereby increasing productivity and efficiency,
and creating new value. Internet sites provide a rich vehicle
for communication and direct interaction with customers and
consumers who use the Web as part of their daily routines.
Businesses link to each other along the value chain, automating
processes and streamlining operations. For consumers, the Web is
quickly becoming a viable medium for communication, community,
and entertainment. As a result, the Internet has become an
integral part of how companies in every industry do business.

Macromedia Strategy

Macromedia presents a value proposition to the market by
enabling the best user experiences on the Web at an affordable
price. Creating a good user experience is a simple requirement.
In practice, creating the best user experience requires
knowledge, clear vision, a team of Web professionals, and
technology to enable them.

Although a good user experience may vary depending on the
application, there are some core characteristics that apply
across applications and platforms: a good user experience must
be useful, useable, and valuable, but it also must be reliable,
predictable, and responsive.

The challenge for our core customer, the Web professional, is to
deliver the best user experience across the entire range of
Internet, intranet, and extranet applications. Macromedia
provides technologies to enable Web professionals to create a
user experience with technologies that are cost-effective,
integrated, and approachable.

The long-term business strategy for Macromedia is founded on
trends that are driving the expansion of our markets and the
demand for new technologies within our existing markets. The
first trend is that the amount of content and applications on
the Internet will continue to expand as new geographies,
businesses, and users come online. The second trend tracks the
proliferation of additional Internet-enabled devices. As the
Web-enabled personal computing platform matures, users are
increasingly accessing content and applications through new
devices such as wireless handsets, personal digital assistants,
interactive television, and other Internet-ready appliances.
While this market is still developing, this evolution of the
computing paradigm represents a significant opportunity for
Macromedia over the long term. In the near term, the
proliferation of dynamic, data-driven applications and content
is driven by the cost efficiencies of the Web-based application
and content development model.

The trend towards the proliferation of dynamic content is the
underlying strategic rationale for the acquisition of Allaire.
By adding Allaire server software to the Macromedia family of
development software and media player software, the Macromedia
product line spans the range of needs for producing dynamic

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designed developed deliver displayed





Macromedia makes software to help with each stage of this
process: software tools to designthe interaction and
developthe application logic; servers to manage the
deliveryof that application or content to a user; and
player software to enable the displayof rich content.
Today we have a comprehensive family of software that is
designed to make the process of creating content and
applications as efficient and cost-effective as possible. In the
near term, Macromedia is committed to supporting both de facto
and open standards. In particular, Macromedia has chosen to
build its application server strategy on the Sun Java
2 Enterprise Edition (J2EE) standard.

Macromedia defines its target market as the mass enterprise. The
mass enterprise represents a subset of the overall
Web-development tools and application server software
marketplace. Understanding the mass enterprise market requires
understanding what customers are building and how companies
service them. Mass enterprise projects tend to have requirements
for rapid time to market. They are usually content-centric, and
tend to be focused on end-user and business-user productivity,
rather than enterprise operations or complex backoffice
processing. As mass enterprise applications scale in cost,
complexity, and time of implementation, they approach the
traditional enterprise class solutions provided by
companies such as IBM and BEA Systems.

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Mass enterprise solutions are implemented at every size of
company, particularly when constraints of cost, available
expertise, and time-to-market come into play.

Vendors that service the mass enterprise market tend to have the
following attributes:



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Products priced at $300  $5000;                                           
|
| |  | Broad and efficient channels supporting millions of transactions
	per year;
|
| |  | Short sales cycles (often 90 days or less); and                            
|
| |  | Approachable, easy-to-implement products.                                  

(GRAPHIC)

Macromedias position as a mass enterprise company
committed to the Java platform places Macromedia in a unique
position regarding traditional enterprise software companies.
Because we target a different class of customer and application,
we believe we are capable of partnering with enterprise-class
vendors to enhance their products and services with our
development tools and rich media players. In addition, because
our tools are cross-platform and cross-technology, we believe we
are capable of enhancing the Microsoft .NET platform with
development tools and players.

DESIGN:

(MACROMEDIA FLASH LOGO)

| |   |                                                                
| | - | ---------------------------------------------------------------
| |  | Macromedia Flash  Create animated,
	vector-based Web content.

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(MACROMEDIA DREAMWEAVER LOGO)

| |   |                                                                                                   
| | - | --------------------------------------------------------------------------------------------------
| |  | Macromedia Dreamweaver  Allows for short
	work of Web site development and HTML page production.

(MACROMEDIA FIREWORKS LOGO)

| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Macromedia Fireworks®  Design &
	optimize Web graphics for easy integration into Web sites.

(MACROMEDIA FREEHAND LOGO)

| |   |                                                                                   
| | - | ----------------------------------------------------------------------------------
| |  | Macromedia FreeHand®  Create vector-based
	illustrations for Flash and for print.

DEVELOP:

(MACROMEDIA DREAMWEAVER LOGO)

| |   |                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------
| |  | Macromedia Dreamweaver UltraDev®  Develop
	data-driven Web applications and content on multiple server
	platforms.

(MACROMEDIA DIRECTOR LOGO)

| |   |                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------
| |  | Macromedia Director®  Create interactive,
	rich-media content, including 3D for the 
	 Web, CD-ROMs, DVD-ROMs and more.

(MACROMEDIA AUTHORWARE LOGO)

| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | Macromedia Authorware  Produce rich-media
	training and learning applications.

(MACROMEDIA HOMESITE LOGO)

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| |  | Macromedia HomeSite  Give precise layout
	control and total design flexibility, while delivering full
	access to the latest Web technologies.

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DELIVER:

(MACROMEDIA COLDFUSION LOGO)

| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | Macromedia ColdFusion  Build and deploy
	powerful Web applications.

(MACROMEDIA JRUN LOGO)

| |   |                                                                                      
| | - | -------------------------------------------------------------------------------------
| |  | Macromedia JRun  Develop and deliver
	high-performance, scalable Java applications.

(MACROMEDIA GENERATOR LOGO)

Macromedia Generator


DISPLAY:

(MACROMEDIA FLASH PLAYER LOGO)

| |   |                                                                   
| | - | ------------------------------------------------------------------
| |  | Macromedia Flash Player  View
	high-impact Web animated content.

(MACROMEDIA SHOCKWAVE PLAYER LOGO)

| |   |                                                                          
| | - | -------------------------------------------------------------------------
| |  | Macromedia Shockwave Player  View
	entertaining rich-media Web content.

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 believe
that our future success depends on our ability to enhance
existing products as well as develop and introduce new products
on a timely basis. It is critical that new products and
enhancements keep pace with 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 industry standards. We plan to continue
our 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.

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Our goals are to:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enhance, integrate and extend our design tools;                                                                                            
|
| |  | Enable efficient development and support standard development
	technologies;                                                               
|
| |  | Deliver approachable servers and value added Web services that
	enhance the major software platforms of Sun Java and
	Microsoft .NET; and
|
| |  | Drive ubiquity of our Flash Player and enhance the media
	capabilities of our Shockwave Player.                                            

For fiscal year 2001, 2000, and 1999, consolidated research and
development expenses were $107.7 million,
$65.7 million, and $41.6 million, respectively.

Competition

We operate 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. A number of our competitors, including Adobe, Microsoft, and
Corel currently offer products and services that compete
directly or indirectly with one or more of our software
products. Primary competitors in the high end market of server
based products include large Web and database platform companies
that offer a variety of software products, such as IBM, Oracle,
and Sun Microsystems. We also compete against a number of
companies that offer Web application servers, such as BEA
Systems, Hewlett Packard, SilverStream Software and ATG. In
addition, several of our current and potential competitors have
greater financial, marketing, and technical resources than we
do. As larger companies continue to operate in these markets, we
may face increasing competition.

We believe that the principal competitive factors in the markets
in which we presently compete and may compete in the future are:



| |   |                                                                       
| | - | ----------------------------------------------------------------------
| |  | 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 value added features;                              
|
| |  | Price; and                                                            
|
| |  | Market presence.                                                      

Operations and Manufacturing

We are dependent on two sources, Modus Media and Compaq Software
Publishing Services, 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. Manufacturing at Compaq is
currently performed in Nashua, New Hampshire. We perform quality
assurance testing at our contracted manufacturing facilities.
Both Modus and Compaq operate 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.

7



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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. Although we take precautionary measures,
our Web site may become unavailable from time-to-time due to
factors beyond our control. To date, our business has not
experienced significant interruptions from Web site
accessibility.

Marketing and Distribution

|                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|----------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(MACROMEDIA LOGO) |  | We extend our brand worldwide through creative marketing
	communications, our Web site, 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



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. International sales accounted
for 43% of consolidated revenues during fiscal year 2001.
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-42).

Customer Support and Professional Services

We believe that providing a high level of customer service and
technical support is necessary to achieve rapid product
implementation that, in turn, is essential to customer
satisfaction and continued license sales and revenue growth. Our
customers have a broad choice of support options depending on
the level of service desired. We provide access to a wide range
of technical information on our Web site, as well as online
forums for each of our products. For our HTML and Rich Media
Products, we offer complimentary 90-day technical support for
our registered users via e-mail or phone. In addition, we offer
a number of paid support options, including incident-based
support and annual support subscriptions.

Internationally, we have developed relationships with
third-party support providers to deliver support on behalf of
Macromedia.

We offer Web application consulting services through Macromedia
Professional Services, which focuses on short-term, high-return
projects. We utilize our customers employees throughout
the life of a consulting project to allow us to meet one of our
critical commitments to our partners and customers 
the transfer of knowledge.

Our 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
primarily through marketing collateral, guest speakers, and
product giveaways.

8



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Proprietary Rights and Licenses

We rely on a combination of patent, copyright, trade secret, and
trademark laws, as well as employee and third-party
nondisclosure agreements, to protect our intellectual property
rights and products. We distribute software under license
agreements, including shrink-wrapped license agreements 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 our 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.

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-11.

Employees

As of March 31, 2001, we had 1,761 full-time employees and
119 contractors worldwide, with the majority working in
California, followed by Massachusetts, 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.




Item 2. Properties

A significant portion of our United States operations is located
in various buildings in San Francisco, California. We lease
approximately 320,000 square feet of space in San Francisco,
74,000 of which is not currently occupied by us and is subleased
or in the process of being subleased. Most of the leases expire
between April 2005 and June 2010, and we have renewal options at
favorable rates for successive terms. We currently lease 350,000
square feet of space in Newton, Massachusetts, of which
approximately 225,000 square feet is subleased or in the process
of being subleased. The lease expires in June 2010. We also
lease 55,000 square feet at a facility in Richardson, Texas as
well as space in North America for field sales offices,
Bracknell, England for our European operations, Kew, Australia
for our Asia Pacific operations and Tokyo, Japan for our
Japanese operations.

We own a four-story 100,000 square foot facility in Redwood
City, California. We occupy 43,000 square feet of this space and
lease the remaining 56,000 square feet. 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.




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
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 have been 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 Court sustained the
demurrers as to claims against Susan Bird and overruled the
demurrers as to Macromedia, John Colligan, James Von Ehr, II,
and Kevin Crowder. In May 1999, the Court granted
plaintiffs motion for certification of a class of all
persons who purchased Macromedias common stock from
April 18, 1996 through January 9,

9



---



##### Table of Contents





On August 10, 2000, Adobe Systems, Inc. (Adobe)
filed suit against us in the United States District Court for
the District of Delaware (Case No. 00-743-JJF). On
September 18, 2000, Adobe filed a first amended complaint
in the same action. In the first amended complaint, Adobe
alleges that certain Macromedia products infringe U.S. Patents
Nos. 5,546,528 and 6,084,597. On September 27, 2000,
Macromedia answered the first amended complaint by denying the
allegations and filing counterclaims against Adobe seeking a
declaration that Adobes patents are invalid and
unenforceable, and alleging infringement of three Macromedia
patents. In particular, Macromedia alleges infringement of U.S.
Patent No. 5,467,443 by at least the Adobe Illustrator
product and U.S. Patents Nos. 5,151,998 and 5,204,969 by the
Adobe Premiere product. On October 17, 2000, Adobe filed
its answer denying the allegations in Macromedias
counterclaims. Each party is requesting monetary damages for
infringement of its patents and an injunction against future
infringement. Further, each party is seeking a court declaration
that it is not infringing the other partys patents, that
the other parties patents are invalid and an award of
attorneys fees. Discovery has begun in this matter, and
trial is currently set for April 2002. Although we are not able
to predict the outcome, we intend to vigorously defend the
matter.

On or after September 25, 2000, Allaire Corporation, prior
to its acquisition by Macromedia, and individuals who were
serving as officers or directors of Allaire Corporation during
the periods covered by the complaints, were named as defendants
in eleven virtually identical lawsuits filed in the United
States District Court for the District of Massachusetts:
(i) Krakauer v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11972-WGY;
(ii) Dargenzio v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11973-WGY;
(iii) Gordon v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11974-WGY;
(iv) Large v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11986-WGY;
(v) DiMaggio v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11996-WGY;
(vi) Knorr v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J. Orfao,
Civil Action No. 00-12014-WGY; (vii) Jarvis v.
Allaire Corporation, Joseph J. Allaire, Jeremy Allaire,
David A. Gerth and David J. Orfao, Civil Action
No. 00-12016-WGY; (viii) Cordeiro v. Allaire
Corporation, Joseph J. Allaire, Jeremy Allaire,
David A. Gerth and David J. Orfao, Civil Action
No. 00-12158-WGY; (ix) Fisher v. Allaire
Corporation, Joseph J. Allaire, Jeremy Allaire,
David A. Gerth and David J. Orfao, Civil Action
No. 00-12182-WGY; (x) Crippin v. Allaire
Corporation, Joseph J. Allaire, Jeremy Allaire,
David A. Gerth and David J. Orfao, Civil Action
No. 00-12333-WGY; and (xi) Reagor v. Allaire
Corporation, Joseph J. Allaire, Jeremy Allaire,
David A. Gerth and David J. Orfao, Civil Action
No. 00-12377-WGY (collectively, the initial
complaints). Each of the plaintiffs in each of the actions
purport to bring their complaint on behalf of all purchasers of
Allaire Corporation stock during an alleged class period
(July 20, 2000 and September 18, 2000). The plaintiffs
claim that the defendants violated Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934, and SEC Rule 10b-5,
by virtue of statements that the plaintiffs claim were
materially false or misleading. Plaintiffs seek damages,
interest, costs, and attorneys fees. On December 5,
2000, Chief Judge Young of the District of Massachusetts entered
an order consolidating these initial cases as In re: Allaire
Corporation Securities Litigation, Case
No. 00-CV-11972(WGY). The order appointed lead plaintiffs
for the class and permitted them to file a consolidated
complaint, to be treated as if it were the original complaint in
the consolidated actions. The consolidated complaint was filed
on February 20, 2001.

On April 11, 2001, after Allaire was merged into
Macromedia, a twelfth complaint was filed, Kassin v.
Allaire Corporation, Joseph J. Allaire, Jeremy D.
Allaire, David A. Gerth, and David J. Orfao, Civil
Action No. 01-10600-WGY (the subsequent
complaint). This complaint, filed on behalf of the
plaintiff (and not a class), contains substantially the same
allegations as the initial complaints, but in addition asserts
claims for common law fraud and negligent misrepresentation.

10



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##### Table of Contents



The defendants intend to file a motion to dismiss the
consolidated initial complaints and the subsequent complaint.
The litigation is in its early stages, and we are not able to
predict the outcome of the litigation at this time, but we
intend to defend all of these claims vigorously.




Item 4. Submission of Matters to a Vote of Security
Holders

No matters were submitted during the fourth quarter of fiscal
year 2001 to a vote of security holders through solicitation of
proxies or otherwise.




PART II




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-47 of
this report.




Item 6. Selected Financial Data

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




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.






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.






Item 8. Financial Statements and Supplementary Data


The information required is set forth under Independent
Auditors Report, Consolidated Balance
Sheets, Consolidated Statements of Earnings,
Consolidated Statements of Stockholders
Equity, Consolidated Statements of Cash Flows,
and Notes to Consolidated Financial Statements, on
pages F-17 to F-47 of this report.






Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures


Not applicable.






PART III







Item 10. Directors and Executive Officers of the
Registrant


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

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

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

11



---



##### 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.






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.






Item 13. Certain Relationships and Related
Transactions


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

12



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##### Table of Contents






PART IV






|         |                                                                 
|-------- | ----------------------------------------------------------------
|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 to Part II, Item 8 of this
Form 10-K:

Independent Auditors Report











2. Financial Statement Schedule.The following financial
statement schedule of Macromedia, Inc. and Subsidiaries for the
fiscal years ended March 31, 2001, 2000 and 1999 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  |  |               | Agreement and Plan of Merger dated
	January 16, 2001, as amended and restated January 29,
	2001, by and among Macromedia, Inc., Alaska Acquisition
	Corporation, and Allaire Corporation.(a)
|        | 2.02  |  |               | Agreement and Plan of Reorganization dated
	December 14, 2000, by and among shockwave.com, Inc., a
	Delaware Corporation and Atom Corporation, a Washington
	Corporation.(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  |  |               | Certificate of Amendment of Registrants
	Amended and Restated Certificate of Incorporation.(q)                                                                                             
|        | 3.04  |  |               | Registrants amended and restated Bylaws
	effective May 3, 2001.(*)                                                                                                                         
|        | 10.01 |  |               | 1992 Equity Incentive Plan and related documents,
	as amended to date.(n)(***)                                                                                                              
|        | 10.02 |  |               | 1993 Directors Stock Option Plan and related
	documents, as amended to date.(o)(***)                                                                                                        
|        | 10.03 |  |               | Non-Plan Form Agreements.(i)(***)                                                                                                                                                           
|        | 10.04 |  |               | Registrants Form of Non-Plan Stock Option
	Grant.(n)(***)                                                                                                                                  
|        | 10.05 |  |               | Registrants 1999 Stock Option Plan.(n)(***)                                                                                                                                                
|        | 10.06 |  |               | Andromedia, Inc. 1999 Stock Option Plan.(k)(***)                                                                                                                                            
|        | 10.07 |  |               | Allaire Corporation 1997 Stock Incentive
	Plan.(p)(***)                                                                                                                                     
|        | 10.08 |  |               | Allaire Corporation 1998 Stock Incentive
	Plan.(p)(***)                                                                                                                                     
|        | 10.09 |  |               | Allaire Corporation 2000 Stock Incentive
	Plan.(p)(***)                                                                                                                                     
|        | 10.10 |  |               | Allaire Corporation 1998 Employee Stock Purchase
	Plan.(p)(***)                                                                                                                             
|        | 10.11 |  |               | Allaire Corporation Non-Plan Stock Option
	Grants.(p)(***)                                                                                                                                  
|        | 10.12 |  |               | Form of Indemnification Agreement entered into by
	Registrant with its directors and executive officers.(e)                                                                                 

13



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##### Table of Contents



|        |       |  |               |                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- |  | ------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |              
|Number  |       |  | Exhibit Title
|        |       |  |              
|        | 10.13 |  |               | 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.(f)
|        | 10.14 |  |               | Employment Agreement between the Registrant and
	Robert K. Burgess dated August 25, 1996. (g)(***)                                                                                                                                                                                                                                                                           
|        | 10.15 |  |               | Loan Agreement between Registrant and Brian and
	Sharon Allum, dated July 15, 1997.(h)(***)                                                                                                                                                                                                                                                                                  
|        | 10.16 |  |               | Loan Agreement between Registrant and Steven A.
	and Nancy M. Elop, dated April 24, 1998.(j)(***)                                                                                                                                                                                                                                                                            
|        | 10.17 |  |               | Lease Agreement by and between Registrant and
	Zoro LLC, dated April 15, 1999.(l)                                                                                                                                                                                                                                                                                            
|        | 10.18 |  |               | First Amendment to Lease agreement by and between
	Registrant and Zoro LLC, dated July 1, 1999.(l)                                                                                                                                                                                                                                                                           
|        | 10.19 |  |               | Lease Agreement by and between Registrant and
	Oelsner Commercial Properties, dated February 28, 2000.(l)                                                                                                                                                                                                                                                                    
|        | 10.20 |  |               | Employment Agreement between the Registrant and
	Brian Allum dated July 22, 1997.(l)(***)                                                                                                                                                                                                                                                                                    
|        | 10.21 |  |               | Built to suit lease, dated April 20, 2000
	between the Registrant, Kaufman Family Partnership,
	Ronald H. Kaufman and Barbara Kaufman.(m)                                                                                                                                                                                                                                    
|        | 10.22 |  |               | Distribution Agreement by and between the
	Registrant and Ingram Micro, Inc. dated March 28,
	1996.(r)(**)                                                                                                                                                                                                                                                                   
|        | 21.01 |  |               | List of Registrants subsidiaries (see
	page F-49 of this Form 10-K).                                                                                                                                                                                                                                                                                                        
|        | 23.01 |  |               | Consent of KPMG LLP, Independent Auditors (see
	page F-50 of this Form 10-K).                                                                                                                                                                                                                                                                                                
|        | 24.01 |  |               | Power of Attorney (see page 16 of this
	Form 10-K).                                                                                                                                                                                                                                                                                                                          




|    |                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-4 filed on February 2, 2001
	(Registration Statement No. 333-54930). 
|   
|(b) | Incorporated by reference to the Registrants Current
	Report on Form 8-K filed January 27, 2001.                                                     
|   
|(c) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on (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 Annual Report
	on Form 10-K for the fiscal year ended March 31, 1997.                                   
|   
|(g) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 1996.                        
|   
|(h) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 1997.                        
|   
|(i) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on October 31, 1997
	(Registration Statement No. 333-39285). 
|   
|(j) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 1998.                        
|   
|(k) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on December 07, 1999
	(Registration Statement No. 333-92233).

14



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##### Table of Contents





|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(l) | Incorporated by reference to the Registrants Annual Report
	on Form 10-K for the fiscal year ended March 31, 2000.                                    
|   
|(m) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	June 30, 2000.                              
|   
|(n) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on August 17, 2000
	(Registration Statement No. 333-44016).   
|   
|(o) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on September 24, 1998
	(Registration Statement No. 333-64141).
|   
|(p) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on March 27, 2001
	(Registration Statement No. 333-57708).    
|   
|(q) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 2000.                         
|   
|(r) | Incorporated by reference to the Registrants Annual Report
	on Form 10-K for the fiscal year ended March 31, 1996.                                    



|      |                                                                                                                                                                                                                                                                                                                         
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*)   | Filed herewith.                                                                                                                                                                                                                                                                                                         
|     
|(**)  | Confidential treatment has been granted with respect to certain
	portions of this agreement. Such portions have been redacted and
	marked with a double asterisk. The non-redacted version of this
	agreement was sent to the Securities and Exchange Commission
	pursuant to an application for confidential treatment.
|     
|(***) | Represents a management contract or compensatory plan or
	arrangement.                                                                                                                                                                                                                                                  



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



|   |                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|1. | A Current Report on Form 8-K was filed by the Company on
	January 24, 2001. In this report, under Item 5 of
	Form 8-K, the Company announced that it had entered into a
	definitive agreement to merge with Allaire Corporation.                                                                                                                                                                                          
|  
|2. | A Current Report on Form 8-K was filed by the Company on
	January 27, 2001. In this report, pursuant to the
	requirements of Items 2 and 7 of Form 8-K the Company
	announced the acquisition by its then wholly owned subsidiary,
	shockwave.com, of AtomFilms. The Company indicated that the
	financial information required under Item 7 of
	Form 8-K would be provided no later than 60 days after
	January 27, 2001.
|  
|3. | An amended Current Report on Form 8-K/ A was filed by the
	Company on January  30, 2001. In this amended report, the
	Company revised the announcement of shockwave.coms
	acquisition of AtomFilms pursuant to the requirements of
	Items 2 and 7 of Form 8-K. The Company indicated that
	the financial information required under Item 7 of
	Form 8-K would be provided no later than 60 days after
	January 27, 2001. 
|  
|4. | A Current Report on Form 8-K was filed by the Company on
	March 7, 2001. In this report, under Item 5 of
	Form 8-K, the Company announced that it had been granted
	early termination of the waiting period under the
	Hart-Scott-Rodino Anti-trust improvement act for its acquisition
	of Allaire Corporation.                                                                                                          
|  
|5. | An amended Current Report on Form 8-K/ A, was filed by the
	Company on March  28, 2001. In this amended report,
	pursuant to the requirements of Item 7 of Form 8-K.
	The Company filed AtomFilms audited fiscal year 2000
	financial statements, 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 8, 2001

| |                 
| | ----------------
| | MACROMEDIA, INC.



| |     |                      
| | --- | ---------------------
| | By: | /s/ ROBERT K. BURGESS

| |                                     
| | ------------------------------------
| |                                     
| | Robert K. Burgess                   
| | Chairman and Chief Executive Officer

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. BURGESSRobert K. Burgess     |  | Chairman and Chief Executive Officer (Principal
	Executive Officer)                                           |  | June 8, 2001
|                                          
|/s/ ELIZABETH A. NELSONElizabeth A. Nelson |  | Executive Vice President, Chief Financial Officer
	and Secretary (Principal Financial and Accounting Officer) |  | June 8, 2001
|                                          
|/s/ JOHN (IAN) GIFFENJohn (Ian) Giffen     |  | Director                                                                                                      |  | June 8, 2001
|                                          
|/s/ MARK KVAMMEMark Kvamme                 |  | Director                                                                                                      |  | June 8, 2001
|                                          
|/s/ DONALD L. LUCASDonald L. Lucas         |  | Director                                                                                                      |  | June 8, 2001
|                                          
|/s/ ALAN RAMADANAlan Ramadan               |  | Director                                                                                                      |  | June 8, 2001
|                                          
|/s/ WILLIAM B. WELTYWilliam B. Welty       |  | Director                                                                                                      |  | June 8, 2001

16



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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


AND OTHER INFORMATION


March 31, 2001


|                                                                                                   |  |      |      | 
|-------------------------------------------------------------------------------------------------- |  | ---- | ---- | 
|                                                                                                   |  | Page |     
|                                                                                                   |  |      |     
|Selected Consolidated Financial Data                                                               |  |      | F-2  | 
|Managements Discussion and Analysis of
	Financial Condition and Results of Operations             |  |      | F-3  | 
|Independent Auditors Report                                                                       |  |      | F-17 | 
|Consolidated Balance Sheets as of March 31,
	2001 and 2000                                         |  |      | F-18 | 
|Consolidated Statements of Income for the Years
	Ended March 31, 2001, 2000 and 1999               |  |      | F-19 | 
|Consolidated Statements of Cash Flows for the
	Years Ended March 31, 2001, 2000 and 1999           |  |      | F-20 | 
|Consolidated Statements of Stockholders
	Equity for the Years Ended March 31, 2001, 2000 and 1999 |  |      | F-21 | 
|Notes to Consolidated Financial Statements                                                         |  |      | F-22 | 
|Schedule II: Valuation and Qualifying
	Accounts                                                    |  |      | F-48 | 

F-1



---



##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES






SELECTED CONSOLIDATED FINANCIAL DATA


(in thousands, except income per share data)


|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |         |        |         |         |         |        |         |         | 
|---------------------------------------------------------------- | --------------------------------------------------------------------- | --------------------- | ------------------------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | ------- | ------ | ------- | ------- | 
|                                                                 |                                                                       |                      
|                                                                 |                                                                       | Years Ended March 31, |                         
|                                                                 |                                                                       |                       |                         
|                                                                 |                                                                       | 2001                  |                          |         | 2000    |         |         | 1999    |         |         | 1998    |        |         | 1997    |        
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|Operating Results:                                               |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |         |        |         |         |         |       
|Revenues                                                         |                                                                       | $                     | 389,600                  |         |         | $       | 264,159 |         |         | $       | 153,243 |        |         | $       | 113,803 |        |         | $       | 108,954 |       
|Cost of revenues                                                 |                                                                       |                       | 42,398                   |         |         |         | 28,829  |         |         |         | 15,625  |        |         |         | 15,107  |        |         |         | 24,085  |       
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|                                                                 |                                                                       | Gross profit          |                          |         | 347,202 |         |         |         | 235,330 |         |         |        | 137,618 |         |         |        | 98,696  |         |         |        | 84,869  |        
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|Operating expenses:                                              |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |         |        |         |         |         |       
|                                                                 | Sales and marketing                                                   |                       |                          | 155,453 |         |         |         | 113,005 |         |         |         | 73,153 |         |         |         | 60,379 |         |         |         | 61,076 |        
|                                                                 | Research and development                                              |                       |                          | 107,670 |         |         |         | 65,739  |         |         |         | 41,551 |         |         |         | 36,829 |         |         |         | 33,333 |        
|                                                                 | General and administrative                                            |                       |                          | 39,000  |         |         |         | 24,610  |         |         |         | 16,740 |         |         |         | 13,231 |         |         |         | 9,313  |        
|                                                                 | Acquisition related expenses and in-process
	research and development |                       |                          | 22,774  |         |         |         | 11,516  |         |         |         | 454    |         |         |         | 7,658  |         |         |         | 350    |        
|                                                                 | Non-cash compensation                                                 |                       |                          | 6,000   |         |         |         | 11,071  |         |         |         | 287    |         |         |         | 49     |         |         |         |       |        
|                                                                 | Impairment and amortization of intangibles                            |                       |                          | 9,872   |         |         |         | 1,013   |         |         |         | 248    |         |         |         |       |         |         |         |       |        
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|                                                                 |                                                                       |                       | Total operating expenses |         |         | 340,769 |         |         |         | 226,954 |         |        |         | 132,433 |         |        |         | 118,146 |         |        |         | 104,072 | 
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|Operating income (loss)                                          |                                                                       |                       | 6,433                    |         |         |         | 8,376   |         |         |         | 5,185   |        |         |         | (19,450 | )      |         |         | (19,203 | )     
|                                                                 |                                                                       |                       | Total other income, net  |         |         | 14,178  |         |         |         | 6,187   |         |        |         | 5,037   |         |        |         | 4,637   |         |        |         | 5,309   | 
|Loss on investments                                              |                                                                       |                       | (13,836                  | )       |         |         |        |         |         |         |        |        |         |         |        |        |         |         |        |       
|Minority interest                                                |                                                                       |                       | 15,336                   |         |         |         | 6,179   |         |         |         |        |        |         |         |        |        |         |         |        |       
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|Income (loss) before income taxes                                |                                                                       |                       | 22,111                   |         |         |         | 20,742  |         |         |         | 10,222  |        |         |         | (14,813 | )      |         |         | (13,894 | )     
|Provision (benefit) for income taxes                             |                                                                       |                       | 8,737                    |         |         |         | 11,975  |         |         |         | 7,612   |        |         |         | 828     |        |         |         | (3,477  | )     
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|                                                                 |                                                                       | Net income (loss)     |                          |         | 13,374  |         |         |         | 8,767   |         |         |        | 2,610   |         |         |        | (15,641 | )       |         |        | (10,417 | )      
|Accretion on mandatorily redeemable convertible
	preferred stock |                                                                       |                       |                         |         |         |         | (2,538  | )       |         |         | (104    | )      |         |         |        |        |         |         |        |       
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|Net income (loss) applicable to common
	stockholders             |                                                                       | $                     | 13,374                   |         |         | $       | 6,229   |         |         | $       | 2,506   |        |         | $       | (15,641 | )      |         | $       | (10,417 | )     
|                                                                 |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |        
|Net income (loss) applicable to common
	stockholders per share:  |                                                                       |                       |                          |         |         |         |         |         |         |         |         |        |         |         |         |        |         |         |         |       
|                                                                 | Basic                                                                 |                       | $                        | 0.26    |         |         | $       | 0.14    |         |         | $       | 0.06   |         |         | $       | (0.40  | )       |         | $       | (0.27  | )      
|                                                                 | Diluted                                                               |                       | $                        | 0.24    |         |         | $       | 0.12    |         |         | $       | 0.05   |         |         | $       | (0.40  | )       |         | $       | (0.27  | )      

|                                                   |  |                 |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|-------------------------------------------------- |  | --------------- | ------- |  | ---- | - | ------- | ---- |  | - | ------- |  |  | ---- | ------- |  |  | - | ------- | 
|                                                   |  |                
|                                                   |  | As of March 31, |        
|                                                   |  |                 |        
|                                                   |  | 2001            |         |  | 2000 |   |         | 1999 |  |   | 1998    |  |  | 1997 |        
|                                                   |  |                 |         |  |      |   |         |      |  |   |         |  |  |      |        
|Balance Sheet Data:                                |  |                 |         |  |      |   |         |      |  |   |         |  |  |      |         |  |  |   |         | 
|Cash, cash equivalents, and short-term investments |  | $               | 177,970 |  |      | $ | 187,036 |      |  | $ | 111,157 |  |  | $    | 88,940  |  |  | $ | 102,929 | 
|Working capital                                    |  |                 | 139,497 |  |      |   | 182,150 |      |  |   | 105,367 |  |  |      | 83,525  |  |  |   | 92,805  | 
|Total assets                                       |  |                 | 785,673 |  |      |   | 339,359 |      |  |   | 202,495 |  |  |      | 158,126 |  |  |   | 157,844 | 
|Long-term liabilities                              |  |                 | 1,172   |  |      |   | 321     |      |  |   | 687     |  |  |      | 653     |  |  |   |        | 
|Mandatorily redeemable convertible preferred stock |  |                 |        |  |      |   |        |      |  |   | 13,591  |  |  |      | 3,548   |  |  |   |        | 
|Total stockholders equity                         |  | $               | 668,213 |  |      | $ | 254,276 |      |  | $ | 147,031 |  |  | $    | 127,240 |  |  | $ | 131,268 | 

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MACROMEDIA, INC. AND SUBSIDIARIES






MANAGEMENTS DISCUSSION AND ANALYSIS OF


FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview

Throughout the majority of fiscal year 2001, we operated in two
segments: the Software segment and shockwave.com Inc.
(shockwave.com). Our Software segment develops
software that creates Web site layout, graphics and rich media
content for Internet users. shockwave.com designs, develops, and
markets aggregated content to provide online entertainment on
the Web.

In fiscal year 2001 we experienced a significant growth in our
business. This is reflected in our Software segment revenues of
$376.4 million, a $120.5 million increase from fiscal year
2000 revenues of $255.9 million. Our Software segment
provided approximately 97% of our total consolidated revenues of
$389.6 million.

Our Software segment revenues grew approximately 47% over fiscal
year 2000, even with a reduction in demand for our software
products during our fourth quarter of fiscal year 2001. This
reduction is attributable to lowered Internet technology
spending and to the overall weakening economy. In response to
this tighter economic environment and in order to realize
certain cost synergies resulting from the Allaire acquisition,
we will be restructuring the organization during the first
quarter of fiscal year 2002. This restructuring will involve
layoffs of employees, the termination of facility leases, and
other cost containment strategies. The total expected
restructuring expense is estimated to be in excess of
$15.0 million and will be incurred in the first quarter of
fiscal year 2002.

We continue to sell our software through a network of
distributors, value-added resellers and our own sales force and
Web site, and to original equipment manufacturers 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.

On March 20, 2001 we completed the acquisition of Allaire
Corporation (Allaire), which we accounted for under
the purchase method. Allaires results for the period from
acquisition to March 31, 2001 are included in our overall
results for the year then ended. Beginning in the first quarter
of fiscal year 2002, our consolidated financial statements will
reflect the full impact of Allaires results. We added
Allaires products including JRun, ColdFusion, and HomeSite
to our existing product lines. However, we do not expect to
continue the development of the Spectra and Kawa products as
these products were no longer being developed by Allaire and do
not fall within our product strategy. As a result, we are
planning to re-align our products into new product lines: HTML
Products, including Dreamweaver, UltraDev, Fireworks and
HomeSite; Rich Media Products, including Flash, Director,
FreeHand, Authorware, Flash Player and Shockwave Player; and
Server Products, including ColdFusion, JRun, and Generator.
Additionally, due to the addition of Allaires server
products to our product lines, we expect training, technical
support, and consulting revenues to increase in fiscal year 2002.

Beginning in the fourth quarter of fiscal year 2001, we
deconsolidated shockwave.com from our results due to an
acquisition of Atom Corporation (AtomFilms) by
shockwave.com. Under the terms of the transaction,
AtomFilms stockholders received common stock in the
surviving company, AtomShockwave Corp.
(AtomShockwave), equal to approximately 30% of the
fully diluted equity outstanding. Prior to the transaction, we
invested $15.0 million in the form of convertible
promissory notes which converted into Series D Preferred
Stock upon the closing of AtomShockwaves preferred
Series D financing round on March 15, 2001. After the
acquisition, we began accounting for our investment in
AtomShockwave under the equity method of accounting. Although
our investment in AtomShockwave is accounted for under the
equity method, we are recording our portion of
AtomShockwaves results on a 90-day lag basis due to
AtomShockwaves inability to prepare timely financial
statements. Therefore, our statements of income for fiscal year
2001 do not reflect results from AtomShockwave for the three
months ended March 31, 2001.

During fiscal year 2001 and 2000, our shockwave.com segment
contributed $13.2 million and $8.2 million in revenue,
respectively, and $34.3 million and $28.0 million in
net loss, respectively, to the consolidated

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Additional information about Macromedia, our products, sales and
marketing, and investor information can be found on our Web site
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

Presented below is managements discussion of our operating
results and our consolidated subsidiaries for the periods
therein. Operating results of Allaire from the date of
consummation of the acquisition through March 31, 2001 did
not have a material impact on our consolidated statements of
income.

Revenues

|          |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|--------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(GRAPHIC) |  | Consolidated revenues were
        $389.6 million in fiscal year 2001, an increase of 47% over
        fiscal year 2000 revenues of $264.2 million. Consolidated
        revenues increased $110.9 million from fiscal year 1999 to
        2000, primarily due to increased sales of Dreamweaver,
        Fireworks, and Flash.
             Revenues from the Software segment
        were $376.4 million in fiscal year 2001, an increase of 47%
        over fiscal year 2000 revenues of $255.9  million. This
        increase was primarily due to increased sales of Flash and
        Dreamweaver, new versions of which were released in the second
        and third quarter of fiscal year 2001, respectively. Also contributing to the revenue growth was the
increased revenue for Dreamweaver UltraDev, a new product
introduced by Macromedia in the first quarter of fiscal year
2001.



International revenues represented 45% of the Software segment
revenues in fiscal year 2001 as compared to 42% in fiscal year
2000. In absolute dollars, Europe contributed to the majority of
the international revenue growth; however, Asia Pacific, Latin
America, and Japan had stronger growth as a percentage of
revenue. The stronger growth throughout these regions is the
result of increased sales force and distribution.

Revenues from the shockwave.com segment were $13.2 million
in fiscal year 2001 during the period that shockwave.com was
consolidated and $8.2 million during fiscal year 2000. Due
to our deconsolidation of shockwave.com from Macromedia during
the fourth quarter fiscal year 2001, going forward our revenues
will no longer reflect revenues earned by AtomShockwave.

Cost of Revenues

Consolidated cost of revenues were $42.4 million in fiscal
year 2001, an increase of 47% over fiscal year 2000 cost of
revenues of $28.8 million. Consolidated cost of revenues
increased $13.2 million from fiscal year 1999 to 2000 while
gross margins decreased from 90% to 89%, primarily due to
increased consulting and training expenses.

Gross margins for the Software segment remained relatively
consistent at 89% for both fiscal year 2001 and 2000, however,
cost of revenues increased in absolute dollars from
$27.7 million in fiscal year 2000 to

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Cost of revenues from the shockwave.com segment were
$1.7 million in fiscal year 2001 during the period that
shockwave.com was consolidated and $1.1 million during fiscal
year 2000. Cost of revenues for shockwave.com includes revenue
sharing paid to content developers and commissions expense for
the sale of Web advertising space.

Sales and Marketing

Consolidated sales and marketing expenses were
$155.5 million in fiscal year 2001, an increase of 38% over
fiscal year 2000 sales and marketing expenses of
$113.0 million. Consolidated sales and marketing expenses
increased $39.9 million to $113.0 million from fiscal
year 1999 to fiscal year 2000, primarily due to increased
compensation and benefits year over year.

Sales and marketing expenses for the Software segment during
fiscal year 2001 were $143.7 million, which accounted for
an increase of $42.7 million from fiscal year 2000 to
fiscal year 2001, but decreased slightly as a percentage of
Software revenue from 39% to 38%. Sales and marketing expenses
for the Software segment consist primarily of compensation and
benefits, allocated costs for depreciation, facilities, and our
information technology infrastructure, advertising, co-marketing
development costs, mail order advertising, tradeshow and seminar
expenses, and other marketing costs. The increase in sales and
marketing expenses in absolute dollars is primarily due to the
hiring of additional sales and marketing personnel at the
beginning of the year to support the growth of the business.
Additionally, we incurred greater compensation costs towards the
end of the fourth quarter with the addition of new headcount
from the Allaire acquisition. Also contributing to the increase
in sales and marketing is the increase in facility costs. Sales
and marketing expenses are expected to increase in absolute
dollars in fiscal year 2002 in order to support the expanded
organization resulting from the Allaire acquisition.

Sales and marketing expenses from the shockwave.com segment were
$11.7 million in fiscal year 2001 during the period that
shockwave.com was consolidated and $12.0 million during
fiscal year 2000. Sales and marketing expenses for shockwave.com
consist primarily of compensation and benefits and costs to
support the business infrastructure.

Research and Development

Consolidated research and development expenses were
$107.7 million in fiscal year 2001, an increase of 64% over
fiscal year 2000 research and development expenses of
$65.7 million. Consolidated research and development
expenses increased $24.2 million to $65.7 million from
fiscal year 1999 to fiscal year 2000, due to additional
headcount and supporting infrastructure.

Research and development expenses for the Software segment were
$88.6 million for fiscal year 2001, which accounted for an
increase of $35.1 million from fiscal year 2000 to fiscal
year 2001, and increased as a percentage of Software revenue
from 21% to 24%. Research and development expenses for the
Software segment consist primarily of compensation and benefits,
and infrastructure and overhead costs to support our continued
investment in product development. The increase in the absolute
dollar amount of research and development expenses was primarily
attributable to costs of additional personnel as we continue to
invest in product development. Also contributing to the increase
in research and development is the allocation of increased
facility and information technology infrastructure costs to
support the growth of the business. We

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Research and development expenses for the shockwave.com segment
were $19.0 million in fiscal year 2001 during the period
that shockwave.com was consolidated and $12.2 million
during fiscal year 2000. The increase was primarily due to
increased headcount resulting in greater compensation and
benefits expense.

General and Administrative

Consolidated general and administrative expenses were
$39.0 million in fiscal year 2001, an increase of 58% over
fiscal year 2000 general and administrative expenses of
$24.6 million. Consolidated general and administrative
costs increased $7.9 million to $24.6 million from
fiscal year 1999 to 2000, due to increased headcount and
infrastructure expenses to support the growth of the business.

General and administrative expenses for the Software segment
were $33.6 million for fiscal year 2001, which accounted for an
increase of $10.7 million from fiscal year 2000 to fiscal
year 2001, and remained relatively flat as a percentage of
Software revenue at 9%. General and administrative expenses for
both the Software segment and shockwave.com consist mainly of
compensation and benefits, allocations of overhead and
infrastructure costs, and fees for professional services. The
increase in the absolute dollar amount of general and
administrative expenses was primarily due to increased staffing
and associated infrastructure expenses necessary to manage and
support our increased scale of operations. We believe that
general and administrative expenses will continue to increase in
absolute dollar amount as a result of the growth in operations
from the acquisition of Allaire.

General and administrative expenses for the shockwave.com
segment were $5.4 million in fiscal year 2001 during the
period that shockwave.com was consolidated and $1.7 million
during fiscal year 2000. The increase primarily relates to
increased legal and accounting costs and other general
administrative functions that the segment did not perform in
fiscal year 2000.

Acquisition Related Expenses and In-Process Research and
Development

We incurred consolidated acquisition related expenses of
$1.7 million in fiscal year 2001 related to the acquisition
of Bitcraft, Inc., $11.5 million during fiscal year 2000
related to the acquisitions of Andromedia, Inc., ESI Software,
Inc. and Time4.com, and approximately $454,000 during fiscal
1999. These acquisition related expenses include investment
banker fees, legal and other professional fees, severance and
personnel relocation costs. Acquisition costs during fiscal year
2000 also include expenses related to a technology purchase from
Starbase Corporation. As of March 31, 2000, approximately
$1.6 million of acquisition related expenses were accrued
and subsequently paid out in fiscal year 2001.

We recorded charges of $21.1 million for in-process
research and development resulting primarily from the
acquisition of Allaire in the fourth quarter of fiscal year 2001
and Middlesoft, Inc. (Middlesoft) in the second
quarter of fiscal year 2001.

Approximately $18.0 million of the fiscal year 2001 charges
were attributable to certain technology being developed by
Allaire and was expensed during the fourth quarter as it had not
reached technological feasibility at the time of the acquisition
and had no alternative future uses. The in-process technology
related to projects for ColdFusion Server 5.0 and
JRun 4.0, which were aimed at building various application
services on the Java 2 Enterprise Edition platform. At the
date of acquisition, it was estimated that approximately 75% of
the development effort was complete and that the remaining 25%
would be completed sometime in mid to late calendar year 2001 at
an approximate cost of $2.1 million. The remaining efforts
included finalizing coding and completion testing of the
products and were determined by analyzing efforts incurred on
development up to the point of acquisition. The value of the
acquired in-process research and development resulted from
discounting the estimated future net cash flows upon successful
completion of the acquired technology.

In developing the cash flow projections, revenues were
forecasted based on aggregate revenue growth rates for the
business as a whole, the characteristics and growth rate of the
potential market for the technology, and the anticipated life of
the underlying technology. Projected annual revenues for the
technologies in

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The total purchase price for the Middlesoft acquisition was
$9.0 million, of which $3.1 million was determined to
be in-process research and development for certain intellectual
property related to Embedded Flash technologies. We purchased
these technologies to increase the functionality of existing
Flash technologies in order to allow them to run on multiple
hardware devices. At the date of acquisition, it was estimated
that approximately 50% of the development effort on the
technologies was completed with the remaining 50% expected by
October 2000 for an estimated cost of $500,000. The completion
percentage was determined by comparing the time and manpower
incurred up to the point of acquisition with the estimated
resources and efforts needed to complete the development. The
valuation of the purchased in-process research and development
was based upon the present value of the operating cash flows to
be generated by the current technology after considering the
cost to realize the revenue and the relative risk of the
technology.

The cash flow projections consider the characteristics of the
potential market for the technology and the anticipated life of
the technology. Projected annual revenue for the in-process
technology was expected to be 90% of the forecasted revenues of
the business as a whole within six months of introduction of the
project to market. The projected revenue as a percentage of the
whole business was expected to decrease to 80% in 2003 due to
the release of future development projects. Estimated operating
expenses, income taxes, and contributing asset charges were
deducted from revenue to arrive at an after tax cash flow for
the in-process development project. Operating expenses were
estimated as a percentage of revenue and included marketing and
administrative expenses, depreciation on fixed assets, and
development costs to maintain the technology once it has
achieved technological feasibility. Operating expenses were
forecasted to decrease significantly after the release of the
projects due to the expected deployment of engineer efforts on
future research and development products. These cash flows were
discounted to their net present value using a discount factor of
approximately 22%, which reflects the uncertainty surrounding
the successful development of the project.

Non-Cash Compensation

Consolidated non-cash compensation expenses were
$6.0 million in fiscal year 2001, a decrease of 46% over
fiscal year 2000 non-cash compensation expenses of
$11.1 million. Non-cash compensation expense is primarily
comprised of amortization of deferred compensation associated
with the issuance of shockwave.com stock options. During fiscal
year 2000, shockwave.com issued stock 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.
The amortization of these options continued through
December 31, 2000, at which time shockwave.com was no
longer consolidated with Macromedia. The decrease in expense
year over year is directly attributable to this deconsolidation
of shockwave.com in the fourth quarter. The decrease was
slightly offset by amortization of deferred compensation
incurred as a result of the acquisition of Middlesoft, Inc.
during the year. We incurred additional deferred compensation as
a result of the acquisition of Allaire in the fourth quarter of
fiscal year 2001. Although deferred compensation will decrease
in fiscal year 2002 due to the deconsolidation of shockwave.com,
the decrease will be slightly offset by increases in
amortization from Allaire stock options assumed in the
acquisition.

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Consolidated non-cash compensation expenses increased
$10.8 million from fiscal year 1999 to $11.1 million
during fiscal year 2000, primarily due to compensation expenses
incurred with the issuance of shockwave.com warrants and options.

Impairment and Amortization of Intangibles

Consolidated impairment and amortization of intangibles expenses
were $9.9 million in fiscal year 2001, an increase of 875% over
fiscal year 2000 expenses of $1.0 million. A significant
portion of the increase was due to the impairment and write-off
of goodwill acquired in the Middlesoft acquisition, resulting in
a charge of $4.3 million in the fourth quarter of fiscal
year 2001. We acquired the technologies associated with
Middlesoft in the second quarter of fiscal year 2001. During the
third quarter of fiscal year 2001, we had indications that the
markets we expected would develop were not receptive to our
planned strategy. By the end of the fourth quarter of fiscal
year 2001, the actual results of the operations surrounding the
technology were considerably below our expectations and as a
result, management performed an impairment analysis, which
considered several factors including revenue and cash flow
projections and the realignment of the business strategy into
different product agendas. We also evaluated possible strategies
surrounding the operating contributions of the technology, and
after doing so, determined that they would be prohibitive. As a
result, we abandoned the technology, terminated or reassigned
key employees associated with the original product plan, and
recorded the impairment charge.

We also incurred amortization expense associated with the
purchased intangibles resulting from the Allaire acquisition. A
total of approximately $364.9 million of the purchase
consideration was allocated to intangible assets, including
goodwill of $283.9 million, developed technology of $34.0
million, assembled workforce of $24.0 million, trade name
of $5.0 million, and in-process research and development of
$18.0 million. Amortization of these intangibles is
provided on a straight-line basis over the estimated useful
lives of three years. Total amortization expense for Allaire
intangibles for the year ended March 31, 2001 was
$3.4 million, excluding $18.0 million of in-process
research and development, which was expensed in the fourth
quarter of fiscal year 2001.

The remaining impairment and amortization expense incurred in
fiscal year 2001 consists of regular amortization of the
goodwill and intangibles arising from acquisitions in fiscal
year 2000. Amortization of intangibles in fiscal year 2000 was
primarily attributable to goodwill and other intangible
amortization from prior acquisitions.

Consolidated impairment and amortization of intangibles expenses
increased approximately $765,000 from fiscal year 1999 to 2000,
and primarily consist of amortization of goodwill and other
intangibles arising from purchase transactions.

Interest and Investment Income

Consolidated interest and investment income consists primarily
of earnings on our cash and short-term investments, and
increased $6.8 million in fiscal year 2001 as compared to
fiscal year 2000. The increase is primarily due to higher yields
throughout the first nine months of fiscal year 2001 as well as
higher average cash and investment balances year over year.
Interest and investment income may decline as market yields
continue to decrease.

Consolidated interest and investment income increased
approximately $5.4 million from fiscal year 1999 to 2000,
primarily due to increased cash, cash equivalent, and short-term
investment balances.

Loss on Investments

During fiscal year 2001, we recognized consolidated losses
totaling approximating $13.8 million on various strategic
investments held at cost. The losses represented write-offs or
write-downs of the carrying amount of these investments and were
due to, among other factors, an investees significant
decline in common stock value, the inability for an investee to
obtain additional private financing, the suspension of an
investees current operations, and uncertain financial
conditions of the investees. We have evaluated our

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Foreign Exchange (Loss) Gain

Consolidated foreign exchange gains reflect the net gain and
losses on foreign exchange forward contracts (net of fees),
translation gains and losses from our foreign operations, and
gains and losses from foreign currency transactions. We enter
into foreign exchange forward contracts to reduce economic
exposure associated with sales and asset balances denominated in
various foreign currencies. Due to the relative strength of the
dollar against foreign currencies throughout the first nine
months of fiscal year 2001, our forward contracts resulted in a
gain of $5.3 million for fiscal year 2001, offset by
currency transaction losses of $3.2 million.

Foreign exchange losses during fiscal years 2000 and 1999
remained relatively consistent at approximately $321,000 and
$110,000, respectively.

Other

Other expense increased $1.3 million in fiscal year 2001,
as compared to fiscal year 2000. During fiscal years 2000 and
1999, other expense was approximately $118,000 and other income
was approximately $3.9 million, respectively. Other income
and expense primarily consists of bank fees, investment
management fees, and other miscellaneous non-operating income
and expense items.

Provision for income taxes

We recorded a tax provision of $8.7 million in fiscal year
2001, compared to a tax provision of $12.0 million in
fiscal year 2000 and $7.6 million in fiscal year 1999. The
overall effective tax rate for the provision as of
March 31, 2001 was approximately 40%. The effective tax
rate on normalized operations was 23% for the year ended
March 31, 2001. The effective tax rate on normalized
operations excludes shockwave.com losses, in-process research
and development from acquisitions, impairment of venture
investments, and impairment and amortization of intangibles. The
effective tax rates on normalized operations for the years ended
March 31, 2000 and 1999 were 26% and 28%, respectively. The
decrease in the effective tax rate reflects foreign operating
results that were taxed at rates lower than the U.S. statutory
rate, the utilization of research and experimentation tax
credits, and net operating loss carryforwards.

Liquidity and Capital Resources

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

|                 |                      |                       |   |          |       |  |   |         |        |  |   |         |        | 
|---------------- | -------------------- | --------------------- | - | -------- | ----- |  | - | ------- | ------ |  | - | ------- | ------ | 
|                 |                      |                      
|                 |                      | Years Ended March 31, |  
|                 |                      |                       |  
|                 |                      | 2001                  |   |          | 2000  |  |   | 1999    |       
|                 |                      |                       |   |          |       |  |   |         |       
|Cash flows from: |                      |                       |   |          |       |  |   |         |        |  |   |        
|                 | Operating activities |                       | $ | 66,679   |       |  | $ | 38,294  |        |  | $ | 16,629  |       
|                 | Investing activities |                       |   | (118,196 | )     |  |   | (38,820 | )      |  |   | (22,368 | )     
|                 | Financing activities |                       |   | 59,931   |       |  |   | 89,977  |        |  |   | 20,337  |       
|                 |                      |                       |   |          |       |  |   |         |       
|                 |                      | Total                 |   | $        | 8,414 |  |   | $       | 89,451 |  |   | $       | 14,598 | 
|                 |                      |                       |   |          |       |  |   |         |       

Operating activities for fiscal year 2001 provided
$66.7 million, a 74% increase from 2000, primarily due to
the increase in net income, adjusted for in-process research and
development, depreciation and amortization, impairment of
investments, and other non-cash charges. These were partially
offset by adjustments to net income for minority interest, and
changes in our operating assets and liabilities. For the year
ended March 31, 2001, cash used in investing activities was
$118.2 million, representing an increase of 204% compared
to the same period in fiscal year 2000. Cash from investing
activities was primarily used to purchase and develop

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In fiscal year 2001, we made investments in property and
equipment totaling $65.3 million. This was primarily
related to the build out of facilities and the continued
expansion of information technology infrastructure to support
the overall growth of the business. In fiscal year 2002, we
anticipate spending approximately $35.0 million on capital
expenditures, primarily relating to information technology
infrastructure, equipment, and the build out of facilities.

As of March 31, 2001, cash, cash equivalents, and
short-term investments were $178.0 million and working
capital was $139.5 million. As of March 31, 2001,
cash, cash equivalents, and short-term investments decreased by
$9.1 million and working capital decreased by $42.7 million
as compared to March 31, 2000.

The treasury stock program approved by the Board of Directors in
July 1997 and October 1998 provided for repurchases 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. In connection with the acquisition of ESI
Software, Inc., the Board of Directors rescinded the repurchase
program.

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.

Subsequent Events

Restructuring. In April 2001, we began executing a
restructuring and cost containment plan delivering cost
synergies associated with the Allaire acquisition and aligning
our cost structure with the weaker business environment. In
connection with the restructuring, we terminated approximately
200 employees, primarily in the sales and marketing and general
and administrative functions, and as a result, incurred employee
termination costs such as severance benefits. In addition, we
will incur additional charges associated with vacating certain
facilities and potential asset write-offs. We expect to record
these charges beginning in the first quarter of fiscal year
2002. The total expected restructuring charge is estimated to be
in excess of $15.0 million.

Option Exchange. On May 4, 2001, we announced an
offer for existing stock option holders to exchange outstanding
stock options for new options to be granted in excess of six
months and one day from the date the offer expires, which is
June 4, 2001 (the Option Exchange). Under the
terms of the Option Exchange, option holders will receive an
equal number of options for those they elected to exchange
sometime between December 5, 2001 and January 21, 2002
with exercise prices at the then fair market value. Options that
were granted and are outstanding under the Macromedia, Inc. 1992
Equity Incentive Plan, the Macromedia, Inc. 1999 Stock Option
Plan and the Andromedia, Inc. 1999 Stock Plan, along with some
non-plan option grants that were originally granted by
Macromedia, are eligible under the Option Exchange. In addition,
the vesting period of options exchanged in connection with the
Option Exchange will remain the same as the original grant, with
time between the cancel date and the replacement grant date
under the Option Exchange included in the vesting term. We will
not incur any financial statement impact as a result of the
initial cancellation upon acceptance of the Option Exchange, but
may incur potential dilution of income per share upon the
subsequent issuance of options in the December 2001 and January
2002 time frame.

Amendments to Macromedias Bylaws. In May 2001, our
board of directors adopted amendments to our bylaws to limit the
manner in which a special meeting of the stockholders may be
called, to require an advance notice to the board of directors
of any such special meeting of the stockholders, and to limit
the scope of business that may be brought forth in such meeting.
In addition, the bylaws were further amended to clarify that any
reduction in the number of authorized directorships would not
decrease the remaining terms of then incumbent directors, to
clarify the manner in which the date of each board meeting may
be set, and to grant

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AtomShockwave Restructuring  During the
fourth quarter of fiscal year 2001 we evaluated all of our
strategic investments for impairment, primarily due to the
current economic conditions that existed, as well as known
events which transpired during the fourth quarter of fiscal year
2001. Included in this evaluation was the assessment of our
investment in AtomShockwave. As of March 31, 2001, we
determined that the carrying value of $31.3 million
recorded on our balance sheet was not impaired. Subsequent to
this assessment, AtomShockwave announced on June 1, 2001
that it would be terminating a significant portion of its
workforce and closing several offices in conjunction with a
planned restructuring. As a result, we are currently preparing
an impairment analysis on our investment in AtomShockwave.

RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

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. Our primary competitors include, among others,
Adobe, Microsoft, and Corel. In addition, we may be deemed to
compete with large Web and database platform companies that
offer a variety of software products, such as IBM, Oracle, and
Sun Microsystems, as well as a number of companies that offer
Web application servers, such as BEA Systems, Hewlett Packard,
SilverStream Software and ATG. Several of our current and
potential competitors have greater financial, marketing, and
technical resources than we do. As we compete with larger
competitors across a broader range of product lines and
different platforms, we may face increasing competition from
such companies or from other companies.

Dependence on the Growth of the Internet and the Viability
of Web-based Customers  Our success and the
demand for our products depends largely on the continued
viability of our Web-based customers and the continued growth in
the use of the Internet. Many of these Web-based companies who
purchase licenses to our software products incur net losses from
their operations and rely primarily on outside financing to fund
their continued operations. The availability of such financing
for non-profitable Web-based companies is subject to factors
beyond our control, including, but not limited to, the perceived
viability of the business plan of such companies, the potential
for such companies to realize profits in the foreseeable future,
and the cost of capital. In the event that Web-based companies
who purchase licenses to our software products are unable to
secure the financing necessary to meet their operational and
capital requirements, such customers may cease operations or
materially reduce the purchases of our products. In addition,
issues concerning the commercial use of the Internet including
security, reliability, cost, ease of access, quality of service
and necessary increases in bandwidth availability remain
outstanding and are likely to affect the development of the
market for our products. Further, the rate of development and
adoption of the Internet has been slower outside of the United
States and the cost of bandwidth has been higher. Accordingly,
our continued growth depends in part on the adoption of the
Internet internationally as well as domestically.

Risk Associated with Acquisitions  We
have grown in part because of business combinations with other
companies and we may make further acquisitions in the future. On
March 20, 2001, we consummated an acquisition of Allaire
Corporation. Because of the maturity and the size of Allaire
Corporations operations, the location of its headquarters,
the material differences in the customer base and functionality
of Allaire Corporations and our products, the acquisition
may present a materially higher product, marketing, research and
development, facilities, information systems, accounting,
personnel, and other integration challenges than those we have
faced in connection with our prior acquisitions and may delay or
jeopardize the complete

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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.

The success of our business is especially dependent upon the
existence and future growth of the Internet as a business,
entertainment and communications platform. Many critical issues
concerning the commercial use of the Internet, such as security,
remain unresolved and may affect the growth of Internet use,
together with the software standards employed in such markets.
In addition, the demand for certain of our products, including
Macromedia JRun application, could be harmed if the Java
programming language loses market acceptance. While a number of
companies have introduced Web applications based on Java, the
demand for Java-based applications could decrease, and support
of the Java programming language could decline as alternative
programming languages are introduced. A continued decline in the
growth of the Internet or the Java programming language or any
inability by us to adapt to changes in the Internet or the
technology used for operation of the Internet, including Java,
could have a material adverse effect on our results of
operations.

Fluctuations of Operating Results; Product Introduction
Delays; Product Defects  Our operating
results, especially quarterly results, may vary significantly
depending on the timing of new product introductions and
enhancements. A substantial portion of our revenue is derived
from the introduction of new products or enhancements to
existing products. In the past we have experienced delays in the
development of new products and enhancement of existing
products, and such delays may occur in the future. If we are
unable, due to resource constraints or technological 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, or if new products do not receive market
acceptance, our results of operations could be materially
adversely affected.

Our 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, 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, our product, service, and customer mix, and the
level of our 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 being indicative of growth rates that can be expected in the
future.

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In addition, our business could be adversely affected if any new
products or new version of existing products fail to perform
properly. Software products may contain undetected errors or
bugs, which may result in product failures or
security breaches or otherwise fail to perform in accordance
with customer expectations. The occurrence of errors could
result in loss of or delay in revenue, loss of market share,
failure to achieve market acceptance, diversion of development
resources, injury to our reputation, or damage to our efforts to
build brand awareness, any of which could have a material
adverse effect on our business, operating results, and financial
condition.

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 our direct sales force
and Web site. Domestically, our products are sold primarily
through distributors, VARs, and OEMs. In particular, Ingram
Micro accounted for 28% of revenues for the years ending
March 31, 2001 and 2000. 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 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.

Risks of International Operations  For
the year ended March 31, 2001 we derived approximately
43% of our consolidated revenues from international sales.
We expect that international sales will continue to represent 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. Additionally, we are
uncertain whether the recent weaknesses experienced in foreign
economies will continue in the foreseeable future due to, among
other things, possible currency devaluation and liquidity
problems in these regions.

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, 2001, the notional amount of forward contracts
outstanding amounted to $10.8 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 existing sovereign currencies. The conversion to the
Euro has alleviated currency exchange risk between the member
countries.

There can be no assurance that all issues related to the Euro
conversion have been identified, and we may be at risk if we, or
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.

Management of Growth  We 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 has grown more than 53% over the past year. 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

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Volatility of Stock  Our future
earnings and stock price may be subject to significant
volatility. Any shortfall in revenue or earnings from levels
expected by securities analysts, general decline in economic
conditions, or material reductions in spending by our customers,
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 reporting period, 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, our industry, or the securities
markets in general will often result in significant volatility
of our common stock price.

Intellectual Property Rights  We rely
on a combination of patent, copyright, trade secret, and
trademark laws, as well as employee and third-party
nondisclosure agreements, to protect our intellectual property
rights and products. Policing unauthorized use of products and
fully protecting our proprietary rights are difficult, and we
cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate. In addition, effective
patent, copyright, trade secret, and trademark protection may
not be available in every country in which our products are
distributed.

Further, we are currently, and may in the future, be involved in
legal disputes relating to the validity or alleged infringement
of our, or of a third partys, intellectual property
rights. Intellectual property litigation is typically extremely
costly and can be disruptive to our business operations by
diverting the attention and energies of our management and key
technical personnel. In addition, any adverse decisions could
subject us to significant liabilities, require us to seek
licenses from others, prevent us from manufacturing or licensing
certain of our products, or cause severe disruptions to our
operations or the markets in which we compete, any one of which
could dramatically impact our business and results of operations.

Venture and Equity Investments  We have
invested a substantial amount of capital and time on finding,
funding, and helping to develop certain privately held
companies, many of which can be considered in the start-up or
development stages. These investments are inherently risky as
the market for the technologies or products they have under
development are typically in the early stages and may never
materialize. Therefore, we could lose our entire investment, or
a substantial portion thereof, in one or more of these companies.

Californias Energy Crisis California is currently experiencing an energy crisis
and has recently experienced significant power shortages. As a
result, energy costs in California have risen and may continue
to rise significantly over the next year. Because our principal
operating facilities are located in California, our operating
expenses may increase significantly if this trend continues. In
addition, California has been initiating and may continue to
initiate rolling blackouts through the state. If blackouts
interrupt our power supply, we may be temporarily unable to
operate at full capacity. Moreover, the energy crisis could
cause or contribute to a slowdown in the national economy, which
could cause a reduction in demand for our products, and could in
turn, materially and adversely affect our business.

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
affect the reporting of transactions completed prior to the
announcement of a change.

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

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The table below represents cost and carrying amounts and the
related weighted average effective interest rates by year of
maturity for our investment portfolio as of March 31, 2001.
The table does not include cash and marketable equity securities
as of March 31, 2001 (in thousands).

|                       |                       |                   |        |      |         |          |        |            |        |            |   |   |        |   |        |      |         |   |        |   |         | 
|---------------------- | --------------------- | ----------------- | ------ | ---- | ------- | -------- | ------ | ---------- | ------ | ---------- | - | - | ------ | - | ------ | ---- | ------- | - | ------ | - | ------- | 
|                       |                       |                   |        |      |         | 2004 and |        |            |        | Carrying   |  
|                       |                       | 2002              |        |      | 2003    |          |        | thereafter |        | Total Cost |   |   | Amount |  
|                       |                       |                   |        |      |         |          |        |            |        |            |   |   |        |  
|Cash equivalents       |                       | $                 | 60,376 |      |         | $        |       |            |        | $          |  |   |        | $ | 60,376 |      |         | $ | 60,376 |  
|                       | Average interest rate |                   |        | 5.09 | %       |          |        |           |        |            |   |  |        |   |        | 5.09 | %       |   |        |   |        
|Short-term investments |                       |                   | 47,538 |      |         |          | 13,017 |            |        |            |  |   |        |   | 60,555 |      |         |   | 60,903 |  
|                       | Average interest rate |                   |        | 5.04 | %       |          |        | 6.22       | %      |            |   |  |        |   |        | 5.29 | %       |   |        |   |        
|                       |                       |                   |        |      |         |          |        |            |        |            |   |   |        |   |       
|                       |                       | Total investments |        | $    | 107,914 |          |        | $          | 13,017 |            |   | $ |       |   |        | $    | 120,931 |   |        | $ | 121,279 | 
|                       |                       |                   |        |      |         |          |        |            |        |            |   |   |        |   |       

We also have loans outstanding to related parties totaling
$14.5 million as of March 31, 2001. 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 with firm foreign
currency commitments occurring within one year. We do not enter
into derivative financial instruments for trading purposes.

As a result of this activity, we had outstanding forward
contracts in Euro and Japanese Yen as of March 31, 2001.
The forward contracts are accounted for on a marked-to-market
basis, with realized gains or losses recognized in the
consolidated statements of income. As of March 31, 2001 and
2000, the contract amount of the forward contracts amounted to
$10.8 million and $21.6 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 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, 2001. The information is
provided in U.S. 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, 2001):

|             |       |          |       |        |            |   |        |        |  
|------------ | ----- | -------- | ----- | ------ | ---------- | - | ------ | ------ | -
|             |       | Notional |       |        |           
|             |       | Amount   |       |        | Fair Value |  
|             |       |          |       |        |            |  
|Euro         |       | $        | 3,640 |        |            | $ | (106   | )     
|Japanese Yen |       |          | 7,134 |        |            |   | (1,407 | )     
|             |       |          |       |        |            |  
|             | Total |          | $     | 10,774 |            |   | $      | (1,513 | )
|             |       |          |       |        |            |  

We are exposed to credit loss in the event of nonperformance by
counter-parties, although we do not anticipate nonperformance by
these counter-parties.

Disclosure of limitations of the tabular
presentation

As the tables above incorporate only those exposures that exist
as of March 31, 2001, we do 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.

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Market Price Risk

We are exposed to market risk from changes in the price of our
equity securities held available-for-sale, which were recorded
at a fair market value of approximately $560,000 at
March 31, 2001. The equity investments held by us have
exposure to price risk, which is estimated as the potential loss
in fair market value due to a hypothetical change of 10% in
quoted market prices. This hypothetical change would reduce our
investments as well as any unrealized gains, which are included
as a component of stockholders equity. This hypothetical
change would not have a material effect on the recorded value of
our investments. We have a policy of evaluating the viability of
our investments on a regular basis, primarily by reviewing the
companies stock price activity, as the securities are
traded on a public exchange.

In addition, we have investments in several privately held
companies. These investments are risky due to the
investees start-up technologies, which may never
materialize. Accordingly, we evaluate the viability of these
investments by reviewing, among other things, an investees
cash position, subsequent financing rounds, historical financial
activity, and future operating forecasts. If we believe that
there is an other-than-temporary impairment in value, it is our
policy to write down the investment to its fair value.

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INDEPENDENT AUDITORS REPORT

The Board of Directors



We have audited the accompanying consolidated balance sheets of
Macromedia, Inc. and subsidiaries as of March 31, 2001 and
2000, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the years
in the three-year period ended March 31, 2001. 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, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the
three-year period ended March 31, 2001, in conformity with
accounting principles generally accepted in the United States of
America. Also in our opinion, the related financial statement
schedule, 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

Mountain View, California



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MACROMEDIA, INC. AND SUBSIDIARIES






CONSOLIDATED BALANCE SHEETS


(in thousands, except per share data)


ASSETS

|                                     |                                                                                                                                                   |                                            |       |         |         |  |        |         |         | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | ----- | ------- | ------- |  | ------ | ------- | ------- | 
|                                     |                                                                                                                                                   |                                           
|                                     |                                                                                                                                                   | March 31,                                  |      
|                                     |                                                                                                                                                   |                                            |      
|                                     |                                                                                                                                                   | 2001                                       |       |         | 2000    | 
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|Current assets                       |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                     | Cash, cash equivalents, and short-term investments                                                                                                |                                            | $     | 177,970 |         |  | $      | 187,036 |        
|                                     | Accounts receivable, less allowance for returns
	and doubtful accounts of $13,430 and $10,880, respectively                                       |                                            |       | 37,861  |         |  |        | 41,883  |        
|                                     | Receivable from equity affiliate                                                                                                                  |                                            |       | 2,621   |         |  |        |        |        
|                                     | Inventory                                                                                                                                         |                                            |       | 2,114   |         |  |        | 1,349   |        
|                                     | Prepaid expenses and other current assets                                                                                                         |                                            |       | 22,556  |         |  |        | 12,944  |        
|                                     | Deferred tax assets, short-term                                                                                                                   |                                            |       | 12,663  |         |  |        | 7,812   |        
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|                                     |                                                                                                                                                   | Total current assets                       |       |         | 255,785 |  |        |         | 251,024 | 
|                                     | Land and building, net                                                                                                                            |                                            |       | 18,109  |         |  |        | 18,982  |        
|                                     | Other fixed assets, net                                                                                                                           |                                            |       | 96,495  |         |  |        | 41,871  |        
|                                     | Related party loans                                                                                                                               |                                            |       | 14,175  |         |  |        | 9,944   |        
|                                     | Investment in equity affiliate                                                                                                                    |                                            |       | 31,290  |         |  |        |        |        
|                                     | Intangibles assets, net                                                                                                                           |                                            |       | 345,234 |         |  |        | 2,645   |        
|                                     | Restricted cash                                                                                                                                   |                                            |       | 9,202   |         |  |        |        |        
|                                     | Other long-term assets                                                                                                                            |                                            |       | 15,383  |         |  |        | 14,893  |        
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|                                     |                                                                                                                                                   | Total assets                               |       | $       | 785,673 |  |        | $       | 339,359 | 
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities                  |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                     | Accounts payable                                                                                                                                  |                                            | $     | 8,273   |         |  | $      | 4,988   |        
|                                     | Accrued liabilities                                                                                                                               |                                            |       | 91,033  |         |  |        | 53,842  |        
|                                     | Unearned revenue                                                                                                                                  |                                            |       | 16,982  |         |  |        | 10,044  |        
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|                                     |                                                                                                                                                   | Total current liabilities                  |       |         | 116,288 |  |        |         | 68,874  | 
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|Other long-term liabilities          |                                                                                                                                                   |                                            | 1,172 |         |         |  | 321    |        
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|                                     |                                                                                                                                                   | Total liabilities                          |       |         | 117,460 |  |        |         | 69,195  | 
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|Minority interest                    |                                                                                                                                                   |                                            |      |         |         |  | 15,888 |        
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|Stockholders equity:                |                                                                                                                                                   |                                            |       |         |         |  |        |        
|                                     | Preferred stock, par value $0.001 per share:
	5,000 shares authorized,  shares issued as of
	March 31, 2001 and 2000, respectively               |                                            |       |        |         |  |        |        |        
|                                     | Common stock, par value $0.001 per share: 80,000
	shares authorized, 59,221 and 50,674 shares issued as of
	March 31, 2001 and 2000, respectively |                                            |       | 59      |         |  |        | 51      |        
|                                     | Treasury stock, at cost; 1,818 shares as of
	March 31, 2001 and 2000, respectively                                                                |                                            |       | (33,649 | )       |  |        | (33,649 | )      
|                                     | Additional paid-in capital                                                                                                                        |                                            |       | 713,579 |         |  |        | 335,497 |        
|                                     | Deferred compensation                                                                                                                             |                                            |       | (907    | )       |  |        | (23,465 | )      
|                                     | Accumulated other comprehensive income                                                                                                            |                                            |       | 308     |         |  |        | 393     |        
|                                     | Accumulated deficit                                                                                                                               |                                            |       | (11,177 | )       |  |        | (24,551 | )      
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|                                     |                                                                                                                                                   | Total stockholders equity                 |       |         | 668,213 |  |        |         | 254,276 | 
|                                     |                                                                                                                                                   |                                            |       |         |         | 
|                                     |                                                                                                                                                   | Total liabilities and stockholders equity |       | $       | 785,673 |  |        | $       | 339,359 | 
|                                     |                                                                                                                                                   |                                            |       |         |         | 

See accompanying notes to consolidated financial statements.

F-18



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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF INCOME


(in thousands, except per share data)


|                                                                 |                                              |                       |                          |         |         |         |         |         |         |         |         |        |         |         | 
|---------------------------------------------------------------- | -------------------------------------------- | --------------------- | ------------------------ | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------- | ------ | ------- | ------- | 
|                                                                 |                                              |                      
|                                                                 |                                              | Years Ended March 31, |                         
|                                                                 |                                              |                       |                         
|                                                                 |                                              | 2001                  |                          |         | 2000    |         |         | 1999    |        
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|Revenues                                                         |                                              | $                     | 389,600                  |         |         | $       | 264,159 |         |         | $       | 153,243 |       
|Cost of revenues                                                 |                                              |                       | 42,398                   |         |         |         | 28,829  |         |         |         | 15,625  |       
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|                                                                 |                                              | Gross profit          |                          |         | 347,202 |         |         |         | 235,330 |         |         |        | 137,618 |        
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|Operating expenses:                                              |                                              |                       |                          |         |         |         |         |         |         |         |         |       
|                                                                 | Sales and marketing                          |                       |                          | 155,453 |         |         |         | 113,005 |         |         |         | 73,153 |        
|                                                                 | Research and development                     |                       |                          | 107,670 |         |         |         | 65,739  |         |         |         | 41,551 |        
|                                                                 | General and administrative                   |                       |                          | 39,000  |         |         |         | 24,610  |         |         |         | 16,740 |        
|                                                                 | Acquisition related expenses                 |                       |                          | 1,674   |         |         |         | 11,516  |         |         |         | 454    |        
|                                                                 | Acquired in-process research and development |                       |                          | 21,100  |         |         |         |        |         |         |         |       |        
|                                                                 | Non-cash compensation                        |                       |                          | 6,000   |         |         |         | 11,071  |         |         |         | 287    |        
|                                                                 | Impairment and amortization of intangibles   |                       |                          | 9,872   |         |         |         | 1,013   |         |         |         | 248    |        
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|                                                                 |                                              |                       | Total operating expenses |         |         | 340,769 |         |         |         | 226,954 |         |        |         | 132,433 | 
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|                                                                 | Operating income                             |                       |                          | 6,433   |         |         |         | 8,376   |         |         |         | 5,185  |        
|Other income (expense):                                          |                                              |                       |                          |         |         |         |         |         |         |         |         |       
|                                                                 | Interest and investment income               |                       |                          | 13,474  |         |         |         | 6,626   |         |         |         | 1,215  |        
|                                                                 | Loss on investments                          |                       |                          | (13,836 | )       |         |         |        |         |         |         |       |        
|                                                                 | Foreign exchange (loss) gain                 |                       |                          | 2,129   |         |         |         | (321    | )       |         |         | (110   | )      
|                                                                 | Other                                        |                       |                          | (1,425  | )       |         |         | (118    | )       |         |         | 3,932  |        
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|                                                                 |                                              |                       | Total other income       |         |         | 342     |         |         |         | 6,187   |         |        |         | 5,037   | 
|Minority interest                                                |                                              |                       | 15,336                   |         |         |         | 6,179   |         |         |         |        |       
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|                                                                 |                                              | Income before taxes   |                          |         | 22,111  |         |         |         | 20,742  |         |         |        | 10,222  |        
|Provision for income taxes                                       |                                              |                       | 8,737                    |         |         |         | 11,975  |         |         |         | 7,612   |       
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|                                                                 |                                              | Net income            |                          |         | 13,374  |         |         |         | 8,767   |         |         |        | 2,610   |        
|Accretion on mandatorily redeemable convertible
	preferred stock |                                              |                       |                         |         |         |         | (2,538  | )       |         |         | (104    | )     
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|Net income applicable to common stockholders                     |                                              | $                     | 13,374                   |         |         | $       | 6,229   |         |         | $       | 2,506   |       
|                                                                 |                                              |                       |                          |         |         |         |         |         |        
|Net income applicable to common stockholders per
	share          |                                              |                       |                          |         |         |         |         |         |         |         |         |       
|                                                                 | Basic                                        |                       | $                        | 0.26    |         |         | $       | 0.14    |         |         | $       | 0.06   |        
|                                                                 | Diluted                                      |                       | $                        | 0.24    |         |         | $       | 0.12    |         |         | $       | 0.05   |        
|Weighted average common shares outstanding                       |                                              |                       |                          |         |         |         |         |         |         |         |         |       
|                                                                 | Basic                                        |                       |                          | 50,842  |         |         |         | 44,601  |         |         |         | 40,045 |        
|                                                                 | Diluted                                      |                       |                          | 56,764  |         |         |         | 52,270  |         |         |         | 47,242 |        

See accompanying notes to consolidated financial statements.

F-19



---



##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF CASH FLOWS


(in thousands)


|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |         |         |          |   |         |        |  
|----------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------- | - | -------- | ------ | -------- | ---- | ------- | ------- | -------- | - | ------- | ------ | -
|                                                                              |                                                                                    |                                                                        
|                                                                              |                                                                                    | Years Ended March 31,                                                   |                                          
|                                                                              |                                                                                    |                                                                         |                                          
|                                                                              |                                                                                    | 2001                                                                    |                                           |   | 2000     |        |          | 1999 |        
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        
|Cash flows from operating activities:                                         |                                                                                    |                                                                         |                                           |   |          |        |          |      |         |         |          |  
|Net income                                                                    |                                                                                    | $                                                                       | 13,374                                    |   |          | $      | 8,767    |      |         | $       | 2,610    |  
|                                                                              | Adjustments to reconcile net income to net cash
	provided by operating activities: |                                                                         |                                           |   |          |        |          |      |         |         |          |   |        
|                                                                              |                                                                                    | Depreciation and amortization                                           |                                           |   | 35,910   |        |          |      | 18,434  |         |          |   | 9,085   |       
|                                                                              |                                                                                    | Write-off of fixed assets related to merger                             |                                           |   |         |        |          |      | 191     |         |          |   |        |       
|                                                                              |                                                                                    | Write-off of acquired in-process research and
	development              |                                           |   | 21,100   |        |          |      |        |         |          |   |        |       
|                                                                              |                                                                                    | Loss on investments                                                     |                                           |   | 13,836   |        |          |      |        |         |          |   |        |       
|                                                                              |                                                                                    | Impairment of intangibles                                               |                                           |   | 4,293    |        |          |      |        |         |          |   |        |       
|                                                                              |                                                                                    | Deferred income taxes                                                   |                                           |   | (4,851   | )      |          |      | (1,583  | )       |          |   | 1,955   |       
|                                                                              |                                                                                    | Tax benefit from employee stock plans                                   |                                           |   | 7,820    |        |          |      | 8,714   |         |          |   | 4,439   |       
|                                                                              |                                                                                    | Minority interest                                                       |                                           |   | (15,336  | )      |          |      | (6,179  | )       |          |   |        |       
|                                                                              |                                                                                    | Non-cash compensation                                                   |                                           |   |         |        |          |      | 9,719   |         |          |   | 607     |       
|                                                                              |                                                                                    | Changes in operating assets and liabilities, net
	of effect of mergers: |                                           |   |          |        |          |      |         |         |          |   |         |       
|                                                                              |                                                                                    |                                                                         | Accounts receivable, net                  |   |          | 2,469  |          |      |         | (27,912 | )        |   |         | (6,014 | )
|                                                                              |                                                                                    |                                                                         | Prepaid expenses and other current assets |   |          | (8,613 | )        |      |         | 233     |          |   |         | (9,761 | )
|                                                                              |                                                                                    |                                                                         | Accounts payable                          |   |          | (21    | )        |      |         | (1,007  | )        |   |         | 1,211  |  
|                                                                              |                                                                                    |                                                                         | Accrued liabilities                       |   |          | (4,696 | )        |      |         | 26,363  |          |   |         | 7,557  |  
|                                                                              |                                                                                    |                                                                         | Unearned revenue                          |   |          | 1,163  |          |      |         | 2,554   |          |   |         | 5,418  |  
|                                                                              |                                                                                    |                                                                         | Other long-term liabilities               |   |          | 231    |          |      |         |        |          |   |         | (478   | )
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        
|                                                                              |                                                                                    | Net cash provided by operating activities                               |                                           |   | 66,679   |        |          |      | 38,294  |         |          |   | 16,629  |       
|                                                                             
|Cash flows from investing activities:                                         |                                                                                    |                                                                         |                                           |   |          |        |          |      |         |         |          |  
|Proceeds from sale of fixed assets                                            |                                                                                    |                                                                         |                                          |   |          |        | 625      |      |         |         | 961      |  
|Purchases of short-term investments                                           |                                                                                    |                                                                         | (50,611                                   | ) |          |        | (117,457 | )    |         |         | (133,549 | )
|Proceeds from sales and maturities of short-term
	investments                 |                                                                                    |                                                                         | 57,924                                    |   |          |        | 127,558  |      |         |         | 128,005  |  
|Cash paid for acquisitions, net of cash acquired                              |                                                                                    |                                                                         | (16,686                                   | ) |          |        |         |      |         |         |         |  
|Purchases of property and equipment                                           |                                                                                    |                                                                         | (65,251                                   | ) |          |        | (33,934  | )    |         |         | (12,655  | )
|Purchases of strategic investments                                            |                                                                                    |                                                                         | (28,399                                   | ) |          |        | (13,300  | )    |         |         |         |  
|Loan receivable                                                               |                                                                                    |                                                                         | (4,102                                    | ) |          |        | 155      |      |         |         | (2,659   | )
|Deposits of restricted cash                                                   |                                                                                    |                                                                         | (9,202                                    | ) |          |        |         |      |         |         |         |  
|Additions to other long-term liabilities                                      |                                                                                    |                                                                         | 622                                       |   |          |        |         |      |         |         |         |  
|Purchase of other assets                                                      |                                                                                    |                                                                         | (2,491                                    | ) |          |        | (2,467   | )    |         |         | (2,471   | )
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        
|                                                                              |                                                                                    | Net cash used in investing activities                                   |                                           |   | (118,196 | )      |          |      | (38,820 | )       |          |   | (22,368 | )     
|                                                                             
|Cash flows from financing activities:                                         |                                                                                    |                                                                         |                                           |   |          |        |          |      |         |         |          |  
|Proceeds from issuance of mandatorily redeemable
	convertible preferred stock |                                                                                    |                                                                         |                                          |   |          |        |         |      |         |         | 9,937    |  
|Proceeds from issuance of preferred stock                                     |                                                                                    |                                                                         | 9,384                                     |   |          |        | 59,029   |      |         |         | 3,407    |  
|Proceeds from issuance of common stock                                        |                                                                                    |                                                                         | 50,547                                    |   |          |        | 39,434   |      |         |         | 26,777   |  
|Borrowings on capital lease                                                   |                                                                                    |                                                                         |                                          |   |          |        | 999      |      |         |         | 1,355    |  
|Payments on capital lease                                                     |                                                                                    |                                                                         |                                          |   |          |        | (1,281   | )    |         |         | (833     | )
|Acquisition of treasury stock                                                 |                                                                                    |                                                                         |                                          |   |          |        | (8,204   | )    |         |         | (20,306  | )
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        
|                                                                              |                                                                                    | Net cash provided by financing activities                               |                                           |   | 59,931   |        |          |      | 89,977  |         |          |   | 20,337  |       
|                                                                             
|Net increase in cash and cash equivalents                                     |                                                                                    |                                                                         | 8,414                                     |   |          |        | 89,451   |      |         |         | 14,598   |  
|Deconsolidation of shockwave.com                                              |                                                                                    |                                                                         | (6,991                                    | ) |          |        |         |      |         |         |         |  
|Adjustment to conform acquired companies
	year end                           |                                                                                    |                                                                         |                                          |   |          |        | (3,826   | )    |         |         | 2,084    |  
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        
|Total adjusted increase in cash and cash
	equivalents                         |                                                                                    |                                                                         | 1,423                                     |   |          |        | 85,625   |      |         |         | 16,682   |  
|Cash and cash equivalents, beginning of year                                  |                                                                                    |                                                                         | 115,084                                   |   |          |        | 29,459   |      |         |         | 12,777   |  
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        
|Cash and cash equivalents, end of year                                        |                                                                                    | $                                                                       | 116,507                                   |   |          | $      | 115,084  |      |         | $       | 29,459   |  
|                                                                              |                                                                                    |                                                                         |                                           |   |          |        |          |      |        

See accompanying notes to consolidated financial statements.

F-20



---



##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES






CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


(in thousands)


|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   |        |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------ | ------ |  | -------------- | - | -- | ---------- |  | ----------- | -------- | - | ----- | ------------- | ------- | - | ------------- | - | ------- | ------ |  | - | ------- | - |  | - | --- | --- | - | - | ------ | ------ | -
|                                                                                  |                                                               |              |        |  |                |   |    |            |  | Accumulated |          |   |      
|                                                                                  |                                                               | Common Stock |        |  | Treasury Stock |   |    | Additional |  |             |          |   | Other |               |         |  
|                                                                                  |                                                               |              |        |  |                |   |    | Paid-In    |  |             | Deferred |   |       | Comprehensive |         |   | Comprehensive |  
|                                                                                  |                                                               | Shares       |        |  | Amount         |   |    | Shares     |  |             | Amount   |   |       | Capital       |         |   | Compensation  |   |         | Income |  |   | Income  |  
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Balances as of March  31, 1998                                                    |                                                               |              | 39,819 |  |                | $ | 40 |            |  |             | (510     | ) |       | $             | (5,139  | ) |               | $ | 166,565 |        |  | $ | (87     | ) |  | $ | 47  |     |   |   |        |       
|Comprehensive income:                                                             |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   |        |       
|                                                                                  | Net income                                                    |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   | $      | 2,610  |  
|                                                                                  | Unrealized loss on available-for-sale securities,
	net of tax |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     | (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. |                                                               |              | 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                                |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   | (3,009  | )      |  |   |         |   |  |   |     |     |   |   |        |       
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Balances as of March 31, 1999                                                     |                                                               |              | 43,590 |  |                |   | 43 |            |  |             | (1,620   | ) |       |               | (25,445 | ) |               |   | 203,431 |        |  |   | (1,544  | ) |  |   | 38  |     |   |   |        |       
|Comprehensive income:                                                             |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   |        |       
|                                                                                  | Net income                                                    |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   | $      | 8,767  |  
|                                                                                  | Unrealized gain on available-for-sale securities,
	net of tax |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     | 365 |   |   |        | 365    |  
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Total comprehensive income                                                        |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   | $ | 9,132  |       
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|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                                |                                                               |              | 44     |  |                |   |   |            |  |             |          |   |       |               |         |   |               |   | 320     |        |  |   | (174    | ) |  |   | (10 | )   |   |   |        |       
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Balances as of March 31, 2000                                                     |                                                               |              | 50,674 |  |                |   | 51 |            |  |             | (1,818   | ) |       |               | (33,649 | ) |               |   | 335,497 |        |  |   | (23,465 | ) |  |   | 393 |     |   |   |        |       
|Comprehensive income:                                                             |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   |        |       
|                                                                                  | Net income                                                    |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   |   | $      | 13,374 |  
|                                                                                  | Unrealized loss on available-for-sale securities,
	net of tax |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     | (85 | ) |   |        | (85    | )
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Total comprehensive income                                                        |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |   |  |   |     |     |   | $ | 13,289 |       
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Exercise of stock options and warrants                                            |                                                               |              | 2,835  |  |                |   | 3  |            |  |             |          |   |       |               |         |   |               |   | 42,242  |        |  |   |         |   |  |   |     |     |   |   |        |       
|Common stock issued under ESPP                                                    |                                                               |              | 157    |  |                |   |   |            |  |             |          |   |       |               |         |   |               |   | 5,407   |        |  |   |         |   |  |   |     |     |   |   |        |       
|Common stock issued and warrants and options
	assumed in business combinations    |                                                               |              | 5,555  |  |                |   | 5  |            |  |             |          |   |       |               |         |   |               |   | 337,601 |        |  |   |         |   |  |   |     |     |   |   |        |       
|Tax benefit from stock plans                                                      |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   | 7,820   |        |  |   |         |   |  |   |     |     |   |   |        |       
|Non-cash compensation                                                             |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   | 10,498  |        |  |   | (4,509  | ) |  |   |     |     |   |   |        |       
|Deconsolidation of shockwave.com                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   | (27,067 | )      |  |   | 27,067  |   |  |   |     |     |   |   |        |       
|Gain on sale of subsidiary stock                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   | 1,581   |        |  |   |         |   |  |   |     |     |   |   |        |       
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  
|Balances as of March 31, 2001                                                     |                                                               |              | 59,221 |  |                | $ | 59 |            |  |             | (1,818   | ) |       | $             | (33,649 | ) |               | $ | 713,579 |        |  | $ | (907    | ) |  | $ | 308 |     |   |   |        |       
|                                                                                  |                                                               |              |        |  |                |   |    |            |  |             |          |   |       |               |         |   |               |   |         |        |  |   |         |  

[Additional columns below]

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

|                                                                                  |                                                               |             |         |        |               |   |         |        |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------- | ----------- | ------- | ------ | ------------- | - | ------- | ------ | -
|                                                                                  |                                                               |             |         | Total  |              
|                                                                                  |                                                               | Accumulated |         |        | Stockholders |  
|                                                                                  |                                                               | Deficit     |         |        | Equity        |  
|                                                                                  |                                                               |             |         |        |               |  
|Balances as of March  31, 1998                                                    |                                                               | $           | (34,186 | )      |               | $ | 127,240 |       
|Comprehensive income:                                                             |                                                               |             |         |        |               |   |         |       
|                                                                                  | Net income                                                    |             |         | 2,610  |               |   |         | 2,610  |  
|                                                                                  | Unrealized loss on available-for-sale securities,
	net of tax |             |         |        |               |   |         | (9     | )
|Total comprehensive income                                                        |                                                               |             |         |        |               |   |         |       
|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                                |                                                               |             | 2,084   |        |               |   | (925    | )     
|                                                                                  |                                                               |             |         |        |               |  
|Balances as of March 31, 1999                                                     |                                                               |             | (29,492 | )      |               |   | 147,031 |       
|Comprehensive income:                                                             |                                                               |             |         |        |               |   |         |       
|                                                                                  | Net income                                                    |             |         | 8,767  |               |   |         | 8,767  |  
|                                                                                  | Unrealized gain on available-for-sale securities,
	net of tax |             |         |        |               |   |         | 365    |  
|Total comprehensive income                                                        |                                                               |             |         |        |               |   |         |       
|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                                |                                                               |             | (3,826  | )      |               |   | (3,690  | )     
|                                                                                  |                                                               |             |         |        |               |  
|Balances as of March 31, 2000                                                     |                                                               |             | (24,551 | )      |               |   | 254,276 |       
|Comprehensive income:                                                             |                                                               |             |         |        |               |   |         |       
|                                                                                  | Net income                                                    |             |         | 13,374 |               |   |         | 13,374 |  
|                                                                                  | Unrealized loss on available-for-sale securities,
	net of tax |             |         |        |               |   |         | (85    | )
|Total comprehensive income                                                        |                                                               |             |         |        |               |   |         |       
|Exercise of stock options and warrants                                            |                                                               |             |         |        |               |   | 42,245  |       
|Common stock issued under ESPP                                                    |                                                               |             |         |        |               |   | 5,407   |       
|Common stock issued and warrants and options
	assumed in business combinations    |                                                               |             |         |        |               |   | 337,606 |       
|Tax benefit from stock plans                                                      |                                                               |             |         |        |               |   | 7,820   |       
|Non-cash compensation                                                             |                                                               |             |         |        |               |   | 5,989   |       
|Deconsolidation of shockwave.com                                                  |                                                               |             |         |        |               |   |        |       
|Gain on sale of subsidiary stock                                                  |                                                               |             |         |        |               |   | 1,581   |       
|                                                                                  |                                                               |             |         |        |               |  
|Balances as of March 31, 2001                                                     |                                                               | $           | (11,177 | )      |               | $ | 668,213 |       
|                                                                                  |                                                               |             |         |        |               |  

See accompanying notes to consolidated financial statements.

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2001


1. Nature of Operations

Macromedia develops software that creates Web site layout,
graphics and rich media content for Internet users. Macromedia
sells its products through a network of distributors,
value-added resellers (VARs), 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. 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.

When the Company owns greater than 20% but less than 50% voting
interest in an investee and has the ability to exert significant
influence over the investees management, the Company
accounts for its investment using the equity method of
accounting. At March 31, 2000, the Company owned a
controlling interest in the outstanding voting stock of
shockwave.com, and accounted for shockwave.com as a consolidated
subsidiary. As of March 31, 2001, the Company accounted for
its investment in AtomShockwave under the equity method, as its
ownership interest declined to approximately 38% of the
outstanding voting stock. Prior to the Companys
deconsolidation of shockwave.com, gains or losses from the sale
of subsidiary capital stock were recorded in additional
paid-in-capital, net of tax. Historically, the Company
considered shockwave.com a start up and the ultimate realization
of the adjustments relating to these transactions were not
assured. As such, no gains or losses were recognized by the
Company.

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.

Software Revenue Recognition The Company
recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 97-2,
Software Revenue Recognition(SOP 97-2),
as modified by SOP 98-9. 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. If in a multiple element arrangement,
fair value does not exist for one or more of the delivered
elements in the arrangement, but fair value does exist for all
undelivered elements, then the residual method of accounting is
applied. Under the residual method, the fair value of the
undelivered elements is deferred, and the remaining portion of
the arrangement fee is recognized as revenue.

Revenues from shrink-wrap software are recognized upon shipment
based on the fair value of the element provided that persuasive
evidence of an arrangement exists, collection of the resulting
receivable is deemed probable and the payment terms are fixed
and determinable. The Company also maintains a reserve for
anticipated returns on products sold to distributors and direct
customers. Revenue from consulting, training, and other services
is generally recognized as the services are performed.

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


The Company licenses products to Original Equipment
Manufacturers (OEMs) or provides customers the right
to multiple copies. These arrangements generally provide for
nonrefundable fixed fees that are recognized at delivery of the
product master or the first copy. 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 PCS. If objective
evidence of the fair value of the PCS is not available, the
revenues from the entire arrangement are recognized ratably over
the PCS term.

Fees from volume 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 consulting services.
Revenues from PCS are recognized on a straight-line basis over
the term of the contract.

The Company licenses software to end users that provide for an
initial fee to use the products in perpetuity up to a maximum
number of users. 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 contract
accounting. 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.

Advertising Revenues 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, 2001,
advertising contracts have been typically 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 Web
site. 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
maturities 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.
Cash equivalents and all of the Companys short-term
investments are classified as available-for-sale.
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.

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 other income.
Available-for-sale securities are recorded at fair value.
Unrealized gains and losses are reported as a separate component
of accumulated other comprehensive income in stockholders
equity. Realized gains and losses, and declines in value
determined 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 on securities classified as available-for-sale is
included in interest and investment income.

Investments The Company holds investments in
the common and preferred stock of several non-marketable
companies. These strategic investments do not represent a
greater than 20% voting interest in the

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


investee and the Company does not have the ability to
significantly influence the investees management.
Accordingly the investments are accounted for on the cost basis.
Impairment losses are recognized on these strategic investments
when the Company determines that there has been in a decline in
the fair value of the investment that is other than temporary.
During fiscal year 2001, the Company recorded impairment losses
on strategic investments of $13.8 million. The losses
represented write-offs or write-downs of the Companys
carrying amount of these investments and were determined by
using, among other factors, an investees significant
decline in stock value, the inability for an investee to obtain
additional private financing, the suspension of an
investees current operations and uncertain financial
conditions of the investees. The Company has evaluated its
remaining investments and currently believes the carrying values
of $8.0 million are recoverable.

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, net of allowance for excess and obsolete inventory.

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, 2001, 2000, and 1999, sales to one
distributor accounted for 28% of each respective years
consolidated revenues. Accounts receivable relating to this
customer were $15.7 million and $16.0 million as of
March 31, 2001 and 2000, respectively. These sales to the
distributor are included in the Companys Software segment.

Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash
equivalents, short-term investments, accounts receivables,
accounts payable, accrued liabilities, employee loans,
investments and forward contracts used in foreign exchange
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,
accrued liabilities and employee loans approximated their
carrying values due to their short maturity or rate structure.

Land and Building and Other Fixed Assets Land
and building and other fixed assets are recorded at cost.
Buildings are depreciated over thirty years, using the
straight-line method. Depreciation of equipment and furniture 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
primarily of a trademark license, trade name, assembled
workforce, developed technology and goodwill related to
acquisitions accounted for under the purchase method of
accounting. Amortization of the trademark license is provided on
a straight-line basis over an estimated useful life of seven
years. The trade name, assembled workforce, developed technology
and goodwill are amortized on a straight-line basis over an
estimated useful life of approximately three years. The Company
identifies and records impairment losses on intangible and other
long-lived 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 discounted cash flows from the respective asset.
Impairment losses are measured as the amount by which the
carrying amount of the asset exceeds its fair value (see
Note 4).

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


Software Development 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 charged to cost of revenues. The
Companys capitalized localization costs totaled
$2.6 million and $2.1 million at March 31, 2001 and
2000, respectively. In addition, approximately
$3.1 million, $2.6 million and $1.5 million was
charged to cost of revenues during the years ended
March 31, 2001, 2000 and 1999, respectively.

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 income.

Foreign Exchange Forward Contracts The
Company uses foreign exchange forward contracts to hedge its
economic exposure associated with sales and asset balances
denominated in various 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 the current period 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.

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 and EITF 96-18.
Compensation costs are amortized on a straight-line basis over
the vesting period of the securities.

Comprehensive Income The sole component of
other comprehensive income for the years ended March 31,
2001, 2000 and 1999 was unrealized gains or losses from the
Companys available-for-sale securities.

Advertising Costs Advertising expenditures
are charged to operations as incurred. Advertising expense for
the year ended March 31, 2001, 2000, and 1999 was
$10.4 million, $8.3 million, and $8.2 million,
respectively.

Income Taxes The Company uses 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 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.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


Recent 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, will be
effective for the Company during fiscal year 2002. SFAS 133
requires the recognition of all derivatives on the balance sheet
at fair value. The Companys adoption of SFAS 133 will
not have a material impact on the Companys financial
position or results of operations. The Company has no designated
hedges for accounting purposes.

In December 1999, the Securities and Exchange Commission (the
SEC) issued Staff Accounting Bulletin No. 101
(SAB 101), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the
SECs views in applying accounting principles generally
accepted in the United States of America relating to revenue
recognition in financial statements. In March 2000, the SEC
issued SAB 101A, which delayed the implementation date of
SAB 101. In June 2000, the SEC issued SAB 101B, which
further delayed the implementation date of SAB 101. The
Company adopted SAB 101 during its fourth quarter of fiscal
year 2001. The adoption of SAB 101 did not have a material
impact on the Companys financial position or income.

Reclassification Certain amounts in the
accompanying fiscal year 2000 and fiscal year 1999 consolidated
financial statements have been reclassified in order to conform
with the presentation of the 2001 consolidated financial
statements.

3. Supplemental Statements of Cash Flows
Information

Supplemental cash flow information and non-cash investing and
financing activities for the years ended March 31, 2001,
2000 and 1999 are as follows (in thousands):

|                                                  |                                                                                         |      |   |         |      |  |   |      |  |  |   |       |  
|------------------------------------------------- | --------------------------------------------------------------------------------------- | ---- | - | ------- | ---- |  | - | ---- |  |  | - | ----- | -
|                                                  |                                                                                         | 2001 |   |         | 2000 |  |   | 1999 | 
|                                                  |                                                                                         |      |   |         |      |  |   |      | 
|Supplemental disclosure of cash flow information: |                                                                                         |      |   |         |      |  |   |      |  |  |   |      
|                                                  | Interest paid                                                                           |      | $ |        |      |  | $ | 76   |  |  | $ | 43    |  
|                                                  | Income taxes paid                                                                       |      |   | 934     |      |  |   | 126  |  |  |   |      |  
|Non-cash investing and financing activities:      |                                                                                         |      |   |         |      |  |   |      |  |  |   |      
|                                                  | Common stock issued and warrants and options
	assumed in purchase business combinations |      | $ | 337,606 |      |  | $ |     |  |  | $ | 2,608 |  
|                                                  | Unrealized gain (loss) on available-for-sale
	securities                                |      |   | (85     | )    |  |   | 355  |  |  |   | (9    | )

In connection with the acquisition of AtomFilms by
shockwave.com, the Company began accounting for its investment
under the equity method of accounting. The following information
illustrates the effect of the deconsolidation of AtomShockwave
on the Companys consolidated cash flow position (in
thousands).

|                              |                                       |   |        |        |  
|----------------------------- | ------------------------------------- | - | ------ | ------ | -
|Carrying value of assets      |                                       | $ | 7,875  |       
|Carrying value of liabilities |                                       |   | 14,866 |       
|                              |                                       |   |       
|                              | Effect on cash due to deconsolidation |   | $      | (6,991 | )

4. Business Combinations

Fiscal 2001 Acquisitions

Allaire Corporation On March 20, 2001,
the Company acquired Allaire Corporation (Allaire),
a publicly held company that provides software products for
companies building their business on the Web. The acquisition
was accounted for as a purchase business combination and
accordingly the purchase price was allocated to the tangible and
intangible assets acquired and the liabilities assumed on the
basis of their respective fair values as of the acquisition
date. Included in the consolidated statements of income for
fiscal year 2001 are the results of Allaires operations
from the date of the acquisition through March 31, 2001. In

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


connection with the acquisition, the Company issued
0.2 shares of Macromedia common stock and paid $3.00 in
cash for each outstanding Allaire share, issuing an aggregate of
approximately 5.6 million shares of Macromedia common stock
and paying a total of approximately $83.3 million. In
addition, the Company assumed Allaires outstanding vested
and unvested stock options and warrants. The Company also
incurred transaction costs related to the acquisition. The
following table illustrates the components of the purchase price.

|                                                      |                   |                      |         |         |         | 
|----------------------------------------------------- | ----------------- | -------------------- | ------- | ------- | ------- | 
|                                                      |                   | (in thousands)       |        
|Purchase Price                                        |                   |                      |        
|                                                      |                   |                     
|Common stock issued                                   |                   | $                    | 214,579 |        
|Cash                                                  |                   |                      | 83,331  |        
|                                                      |                   |                      |        
|                                                      | Acquisition value |                      |         | 297,910 |        
|Fair value of Allaires options and warrants
	assumed |                   |                      | 123,028 |        
|Transaction costs                                     |                   |                      | 7,074   |        
|                                                      |                   |                      |        
|                                                      |                   | Total purchase price |         | $       | 428,012 | 
|                                                      |                   |                      |        

The excess of the purchase price over the net assets acquired
totaled $364.9 million, of which $18.0 million was
expensed in the fourth quarter of fiscal year 2001 as acquired
in-process research and development. The remaining
$346.9 million of the purchase price was recorded as
goodwill and other intangible assets, and are being amortized on
a straight-line basis over a period of three years. The
following table illustrates the allocation of the purchase price.

|                                    |                      |                |         |         | 
|----------------------------------- | -------------------- | -------------- | ------- | ------- | 
|                                    |                      | (in thousands) |        
|                                    |                      |                |        
|Allaires net tangible assets       |                      | $              | 63,068  |        
|Developed technology                |                      |                | 34,000  |        
|Assembled workforce                 |                      |                | 24,000  |        
|In-process research and development |                      |                | 18,000  |        
|Trade name                          |                      |                | 5,000   |        
|Goodwill                            |                      |                | 283,944 |        
|                                    |                      |                |        
|                                    | Total purchase price |                | $       | 428,012 | 
|                                    |                      |                |        

The $18.0 million allocated to in-process research and
development was expensed upon acquisition, because technological
feasibility had not been established and no future alternative
uses existed. The charge is the result of Allaires ongoing
projects at the time of the purchase, including the development
of the ColdFusion Server 5.0 and JRun 4.0 technologies
which were primarily aimed at building various application
services on the Java 2 Enterprise Edition platform. The
values assigned to the in-process research and development were
based upon established valuation techniques. At the date of
acquisition, it was estimated that approximately 75% of the
development effort was complete and that the remaining 25% would
be completed sometime in mid to late calendar year 2001 at an
approximate cost of $2.1 million. The remaining efforts
included finalizing coding and completion testing of the
products and were determined by analyzing efforts incurred on
development up to the point of acquisition. The value of the
acquired in-process research and development was calculated as
the estimated future net cash flows factoring in estimated
future net revenues that may be generated from the products. The
cash flows were calculated for an estimated five-year life cycle
with costs estimated to improve over time, assuming that the
products were successfully developed and that the Company was
able to effectively manage the products contributions to
operating results. These cash flows were discounted to their net
present value using a discount factor of approximately 28%,
considering the uncertainty surrounding the successful
development of the projects.

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


The following pro forma results of operations reflect the
combined results of Macromedia for the years ended as of
March 31, 2001 and 2000 and the results of Allaire for the
years ended December 31, 2000 and 1999 as if the
acquisition occurred at the beginning of the periods presented.
The pro forma results do not reflect any nonrecurring charges
that resulted directly from the acquisition (in thousands except
per share data).

|                                                      |                   |                       |         |        |      |   |          |        |  
|----------------------------------------------------- | ----------------- | --------------------- | ------- | ------ | ---- | - | -------- | ------ | -
|                                                      |                   |                      
|                                                      |                   | Years Ended March 31, |        
|                                                      |                   |                       |        
|                                                      |                   | 2001                  |         |        | 2000 |  
|                                                      |                   |                       |         |        |      |  
|Revenues                                              |                   | $                     | 504,328 |        |      | $ | 318,552  |       
|Net loss applicable to common stockholders            |                   | $                     | (84,640 | )      |      | $ | (114,877 | )     
|Net loss applicable to common stockholders per
	share |                   |                       |         |        |      |   |          |       
|                                                      | Basic and Diluted |                       | $       | (1.51  | )    |   | $        | (2.29  | )
|Weighted average common shares outstanding            |                   |                       |         |        |      |   |          |       
|                                                      | Basic and Diluted |                       |         | 56,187 |      |   |          | 50,097 |  

Atom Corporation In January 2001, the
Companys consolidated subsidiary, shockwave.com,
consummated its acquisition of Atom Corporation
(AtomFilms) in a stock-for-stock transaction
accounted for under the purchase method of accounting. Under the
terms of the transaction, AtomFilms stockholders received
common stock, preferred stock, options and warrants in the
surviving company, AtomShockwave, Corp., equal to approximately
30% of the fully diluted equity outstanding. Further, in
connection with the acquisition, the Company invested
approximately $15.0 million in convertible promissory
notes. The notes converted to Series D Preferred Stock upon
the closing of AtomShockwaves preferred Series D
financing round on March 15, 2001. Immediately subsequent
to the acquisition, the Company began accounting for its
investment in AtomShockwave under the equity method of
accounting (see Note 11).

Middlesoft, Inc On July 10, 2000, the
Company acquired Middlesoft, Inc. (Middlesoft), a
privately held software development company, for approximately
$9.0 million in cash consideration. The acquisition was
accounted for under the purchase method. Included in the
consolidated statements of income for fiscal year 2001 are the
results of Middlesofts operations from the date of
consummation through March 31, 2001. The purchase price of
the transaction was allocated to the acquired assets and
liabilities based on their fair values as of the date of the
acquisition. $3.1 million of the purchase price was
expensed in the second quarter of fiscal year 2001 as acquired
in-process research and development and $5.3 million was
recorded as goodwill and other intangible assets.

The projects associated with the acquired in-process research
and development of Middlesoft are related to Embedded Flash
technologies. The Company purchased these technologies to
increase the functionality of existing Flash technologies in
order to allow them to run on multiple hardware devices. At the
date of acquisition, it was estimated that approximately 50% of
the development effort on the technologies was completed with
the remaining 50% due in October 2000 for an estimated cost of
$500,000. The completion percentage was determined by comparing
the time and manpower incurred up to the point of acquisition
with the estimated resources and efforts needed to complete the
development. The valuation of the purchased in-process research
and development was based upon the present value of the
operating cash flows to be generated by the current technology
after considering the cost to realize the revenue and the
relative risk of the technology. These cash flows were
discounted to their net present value using a discount factor of
approximately 22%.

In fiscal year 2001, the Company wrote off the remaining
unamortized balance of goodwill and other intangible assets
associated with the Middlesoft acquisition. This resulted in a
charge of $4.3 million in the fourth quarter. The Company
acquired the technologies associated with Middlesoft in the
second quarter of fiscal year 2001. During the third quarter of
fiscal year 2001, the Company had indications that the markets

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


the Company expected would develop were not receptive to its
planned strategy. By the end of the fourth quarter of fiscal
year 2001, the actual results of the operations surrounding the
technology were considerably below the Companys
expectations and as a result, management performed an impairment
analysis, which considered several factors including revenue and
cash flow projections and the realignment of the business
strategy into different product agendas. The Company also
evaluated possible strategies surrounding the operating
contributions of the technology, and after doing so, determined
that they would be prohibitive. As a result, the Company
abandoned the technology, terminated key employees associated
with the original product plan and recorded the impairment
charge.

The pro forma results of operations from the Middlesoft
acquisition as if it had occurred at the beginning of fiscal
years 2001 and 2000 was not materially different from the
Companys consolidated results of operations for the
respective periods.

Fiscal 2000 Acquisitions

Time4.com On 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.

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 were
combined with Macromedias financial statements for the
year ended March 31, 2000. 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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


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 was
accounted for as a pooling-of-interests and was 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 combined
balance sheet as of March 31, 2000 combines the assets,
liabilities and stockholders equity of Macromedia with
ESI. 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.

Starbase Corporation In 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.

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 a period of three years as a
result of the terms of the agreements.

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


6. Cash, Cash Equivalents and Short-Term
Investments

The following is a summary of cash, cash-equivalents and
short-term investments at March 31, 2001 and 2000 (in
thousands):

|                           |                                 |                                                           |   |        |         |  |   |        |         | 
|-------------------------- | ------------------------------- | --------------------------------------------------------- | - | ------ | ------- |  | - | ------ | ------- | 
|                           |                                 | 2001                                                      |   |        | 2000    | 
|                           |                                 |                                                           |   |        |         | 
|Cash and cash equivalents: |                                 |                                                           |   |        |         |  |   |       
|                           | Cash                            |                                                           | $ | 56,131 |         |  | $ | 27,732 |        
|                           | Money market funds              |                                                           |   | 9,249  |         |  |   | 8,729  |        
|                           | Commercial paper                |                                                           |   | 51,127 |         |  |   | 64,674 |        
|                           | Certificates of deposit         |                                                           |   |       |         |  |   | 1,999  |        
|                           | Government securities           |                                                           |   |       |         |  |   | 11,950 |        
|                           |                                 |                                                           |   |        |         | 
|                           |                                 | Total cash and cash equivalents                           |   |        | 116,507 |  |   |        | 115,084 | 
|                           |                                 |                                                           |   |        |         | 
|Short-term investments:    |                                 |                                                           |   |        |         |  |   |       
|                           | Corporate equity securities     |                                                           | $ | 560    |         |  | $ | 982    |        
|                           | Corporate bonds                 |                                                           |   | 6,025  |         |  |   | 27,378 |        
|                           | Commercial paper                |                                                           |   | 20,771 |         |  |   | 3,976  |        
|                           | U.S. government debt securities |                                                           |   | 26,961 |         |  |   | 33,128 |        
|                           | Foreign debt securities         |                                                           |   | 5,146  |         |  |   |       |        
|                           | Certificate of deposit          |                                                           |   | 2,000  |         |  |   | 6,488  |        
|                           |                                 |                                                           |   |        |         | 
|                           |                                 | Total short-term investments                              |   |        | 61,463  |  |   |        | 71,952  | 
|                           |                                 |                                                           |   |        |         | 
|                           |                                 | Total cash, cash equivalents, and short-term
	investments |   | $      | 177,970 |  |   | $      | 187,036 | 
|                           |                                 |                                                           |   |        |         | 

Short-term investments consisted of the following, by original
contractual maturity as of March 31, 2001 and 2000 (in
thousands):

|                          |  |      |        |  |      |   |        | 
|------------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                          |  | 2001 |        |  | 2000 |  
|                          |  |      |        |  |      |  
|Due in one year or less   |  | $    | 35,893 |  |      | $ | 28,449 | 
|Due in one to three years |  |      | 25,570 |  |      |   | 43,503 | 
|                          |  |      |        |  |      |  
|                          |  | $    | 61,463 |  |      | $ | 71,952 | 
|                          |  |      |        |  |      |  

The Companys available-for-sale securities are carried at
fair value. The Company recorded, net of tax, an unrealized loss
of $85,000 and an unrealized gain of $355,000 during fiscal
years 2001 and 2000, respectively.

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


7. Land and Building and Other Fixed Assets

Land and building and other fixed assets as of March 31,
2001 and 2000, consisted of the following (in thousands):

|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2001 |         |   | 2000 |  
|                                               |  |      |         |   |      |  
|Land and building                              |  | $    | 26,605  |   |      | $ | 21,280  |  
|Computer equipment                             |  |      | 50,556  |   |      |   | 40,259  |  
|Computer software                              |  |      | 17,110  |   |      |   | 20,535  |  
|Office equipment and furniture                 |  |      | 39,106  |   |      |   | 15,463  |  
|Leasehold improvements                         |  |      | 37,027  |   |      |   | 7,847   |  
|                                               |  |      |         |   |      |  
|                                               |  |      | 170,404 |   |      |   | 105,384 |  
|Less accumulated depreciation and amortization |  |      | (55,800 | ) |      |   | (44,531 | )
|                                               |  |      |         |   |      |  
|                                               |  | $    | 114,604 |   |      | $ | 60,853  |  
|                                               |  |      |         |   |      |  

Depreciation and amortization expense for the years ended
March 31, 2001, 2000 and 1999 was $23.9 million,
$14.8 million and $8.4 million, respectively.

8. Intangible Assets

Intangible assets as of March 31, 2001 and 2000, consisted
of the following (in thousands):

|                              |  |      |         |   |      |   |        |  
|----------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                              |  | 2001 |         |   | 2000 |  
|                              |  |      |         |   |      |  
|Goodwill                      |  | $    | 285,413 |   |      | $ | 1,461  |  
|Developed technology          |  |      | 34,000  |   |      |   |       |  
|Assembled workforce           |  |      | 24,975  |   |      |   | 975    |  
|Other intangibles             |  |      | 6,911   |   |      |   | 1,911  |  
|                              |  |      |         |   |      |  
|                              |  |      | 351,299 |   |      |   | 4,347  |  
|Less accumulated amortization |  |      | (6,065  | ) |      |   | (1,702 | )
|                              |  |      |         |   |      |  
|                              |  | $    | 345,234 |   |      | $ | 2,645  |  
|                              |  |      |         |   |      |  

9. Accrued Liabilities

Accrued liabilities as of March 31, 2001 and 2000,
consisted of the following (in thousands):

|                                  |                           |      |        |        |      |   |        |        | 
|--------------------------------- | ------------------------- | ---- | ------ | ------ | ---- | - | ------ | ------ | 
|                                  |                           | 2001 |        |        | 2000 |  
|                                  |                           |      |        |        |      |  
|Accrued compensation              |                           | $    | 6,561  |        |      | $ | 5,172  |       
|Accrued marketing development     |                           |      | 5,259  |        |      |   | 2,789  |       
|Accrued fringe benefits           |                           |      | 12,362 |        |      |   | 4,822  |       
|Accrued payroll taxes             |                           |      | 1,615  |        |      |   | 9,113  |       
|Accrued income taxes              |                           |      | 12,947 |        |      |   | 8,782  |       
|Accrued acquisition related costs |                           |      | 9,399  |        |      |   | 1,632  |       
|Accrued rebates                   |                           |      | 8,519  |        |      |   | 1,709  |       
|Other accrued expenses            |                           |      | 34,371 |        |      |   | 19,823 |       
|                                  |                           |      |        |        |      |  
|                                  | Total accrued liabilities |      | $      | 91,033 |      |   | $      | 53,842 | 
|                                  |                           |      |        |        |      |  

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


10. Income Taxes

The components of the provision for income taxes for the years
ended March 31, 2001, 2000 and 1999, are as follows (in
thousands):

|                                                              |         |                |       |        |        |   |       |       |        |  |       |       |       | 
|------------------------------------------------------------- | ------- | -------------- | ----- | ------ | ------ | - | ----- | ----- | ------ |  | ----- | ----- | ----- | 
|                                                              |         | 2001           |       |        | 2000   |   |       | 1999  |       
|                                                              |         |                |       |        |        |   |       |       |       
|Current                                                       |         |                |       |        |        |   |       |       |        |  |       |      
|                                                              | Federal |                | $     |       |        |   | $     |      |        |  | $     |      |      
|                                                              | State   |                |       |       |        |   |       |      |        |  |       |      |      
|                                                              | Foreign |                |       | 5,768  |        |   |       | 2,651 |        |  |       | 2,331 |      
|                                                              |         |                |       |        |        |   |       |       |       
|                                                              |         | Total Current  |       |        | 5,768  |   |       |       | 2,651  |  |       |       | 2,331 | 
|Deferred:                                                     |         |                |       |        |        |   |       |       |        |  |       |      
|                                                              | Federal |                |       | (3,771 | )      |   |       | 416   |        |  |       | 949   |      
|                                                              | State   |                |       | (1,080 | )      |   |       | 194   |        |  |       | (107  | )    
|                                                              |         |                |       |        |        |   |       |       |       
|                                                              |         | Total Deferred |       |        | (4,851 | ) |       |       | 610    |  |       |       | 842   | 
|Charge in lieu of taxes attributable to employee
	stock plans |         |                | 7,820 |        |        |   | 8,714 |       |        |  | 4,439 |      
|                                                              |         |                |       |        |        |   |       |       |       
|                                                              |         | Total          |       | $      | 8,737  |   |       | $     | 11,975 |  |       | $     | 7,612 | 
|                                                              |         |                |       |        |        |   |       |       |       

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, 2001, 2000 and 1999, as a result of the
following (in thousands):

|                                                                        |       |      |         |       |      |   |        |        |  |   |        |       | 
|----------------------------------------------------------------------- | ----- | ---- | ------- | ----- | ---- | - | ------ | ------ |  | - | ------ | ----- | 
|                                                                        |       | 2001 |         |       | 2000 |   |        | 1999   | 
|                                                                        |       |      |         |       |      |   |        |        | 
|Computed tax at statutory rate                                          |       | $    | 7,739   |       |      | $ | 7,213  |        |  | $ | 9,590  |      
|State taxes (net)                                                       |       |      | 1,160   |       |      |   | 602    |        |  |   | 387    |      
|Nondeductible pooling and acquisition costs and
	goodwill               |       |      | 17,794  |       |      |   | 10,442 |        |  |   | 32     |      
|Net operating loss carryforward utilization                             |       |      | (4,982  | )     |      |   |       |        |  |   |       |      
|Foreign benefits provided for at rates other than
	U.S. statutory rates |       |      | (13,366 | )     |      |   | (4,286 | )      |  |   | (725   | )    
|Research and other tax credits                                          |       |      | (3,455  | )     |      |   | (2,413 | )      |  |   | (1,543 | )    
|Change in valuation allowance                                           |       |      | 3,218   |       |      |   |       |        |  |   |       |      
|Other, net                                                              |       |      | 629     |       |      |   | 417    |        |  |   | (129   | )    
|                                                                        |       |      |         |       |      |   |        |        | 
|                                                                        | Total |      | $       | 8,737 |      |   | $      | 11,975 |  |   | $      | 7,612 | 
|                                                                        |       |      |         |       |      |   |        |        | 

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


The tax effect of temporary differences that give rise to
deferred tax assets (liabilities) as of March 31, 2001
and 2000, is as follows (in thousands):

|                          |                                            |                                |        |          |         |   |       |          |         | 
|------------------------- | ------------------------------------------ | ------------------------------ | ------ | -------- | ------- | - | ----- | -------- | ------- | 
|                          |                                            | 2001                           |        |          | 2000    |  
|                          |                                            |                                |        |          |         |  
|Deferred tax assets:      |                                            |                                |        |          |         |   |       |         
|                          | Reserves, accruals and other               |                                | $      | 28,512   |         |   | $     | 9,333    |        
|                          | Net operating loss carryforwards (federal) |                                |        | 169,388  |         |   |       | 79,857   |        
|                          | Net operating loss carryforwards (state)   |                                |        | 31,345   |         |   |       | 21,797   |        
|                          | Credit for research activities             |                                |        | 29,800   |         |   |       | 16,330   |        
|                          | Other credits                              |                                |        | 5,112    |         |   |       | 3,339    |        
|                          |                                            |                                |        |          |         |  
|                          |                                            | Total deferred tax assets      |        |          | 264,157 |   |       |          | 130,656 | 
|                          | Less valuation allowance                   |                                |        | (224,777 | )       |   |       | (122,844 | )      
|                          |                                            |                                |        |          |         |  
|                          | Net deferred tax assets                    |                                |        | 39,380   |         |   |       | 7,812    |        
|Deferred tax liabilities: |                                            |                                |        |          |         |   |       |         
|                          | Intangible Assets                          |                                |        | (26,717  | )       |   |       |         |        
|                          |                                            |                                |        |          |         |  
|                          |                                            | Total deferred tax liabilities |        |          | (26,717 | ) |       |          |        | 
|                          |                                            |                                |        |          |         |  
|Net deferred tax asset    |                                            | $                              | 12,663 |          |         | $ | 7,812 |         
|                          |                                            |                                |        |          |         |  

As of March 31, 2001, the Company had available federal and
state net operating loss carryforwards of approximately
$484.0 million and $257.0 million, respectively. The
Company also had unused research credit carryforwards of
approximately $19.5 million and $10.3 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 2021. The
California research credits may be carried forward indefinitely.

Approximately $190.0 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 income when subsequently recognized.
Approximately $29.8 million of the valuation allowance for
deferred tax assets relates to research and experimentation
credits, of which approximately $18.2 million will be
allocated to paid-in capital rather than current income when
subsequently recognized.

Cumulative undistributed income of international subsidiaries
amounted to $72.0 million as of March 31, 2001, which
are intended to be permanently reinvested. The amount of income
tax liability that would result had such income been repatriated
is estimated to be approximately $26.0 million.

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. Investment in Equity Affiliate

The Companys investment in equity affiliate relates to its
minority ownership of AtomShockwave, formerly named
shockwave.com. The Companys investment in AtomShockwave
resulted from the acquisition by the Companys subsidiary,
shockwave.com, of AtomFilms, Inc. in January 2001. Prior to
January 2001, the Company maintained a controlling interest in
shockwave.com, and accounted for its investment in shockwave.com
as a consolidated subsidiary. shockwave.com consummated its
merger with AtomFilms in a stock-for-stock transaction accounted
for as a purchase business combination (see Note 4).

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


At March 31, 2001 the Company owned 38% of the voting
common and preferred stock outstanding of AtomShockwave and no
longer had a controlling interest in AtomShockwave. On a
fully-diluted basis, the Company owned 32%. Therefore,
AtomShockwave has been accounted for as an equity method
investment from the date of its acquisition of AtomFilms.
Management of AtomShockwave has taken several measures to
restructure its organization and to refine its business model.
These measures have taken a priority and have prevented
AtomShockwave from producing timely, accurate operating results.
Additionally, AtomShockwave management has informed the Company
that it will not be able to produce timely financial statements
for the foreseeable future. Therefore, as allowed under
generally accepted accounting principles, the Company made a
decision to report the results of operations from AtomShockwave
on a 90-day lag. Accordingly, the accompanying consolidated
statement of income for the year ended March 31, 2001, does
not include the Companys proportionate share of net loss
attributable to AtomShockwave from the date of the acquisition
to March 31, 2001. Such results of operations will be
reported in the Companys financial statements for the
first quarter of fiscal year 2002.

During fiscal year 2001, prior to its acquisition of AtomFilms,
shockwave.com sold additional shares of Series B preferred
stock to parties other than Macromedia for consideration of
$2.50 per share. The proportionate value offered to the third
parties in the sales of Preferred Series B shares was in
excess of the Companys average carrying amount. As a
result of these sales, the Company recorded adjustments 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. These adjustments
amounted to $1.6 million in fiscal year 2001.

During fiscal year 2000, 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 a
$21.1 million adjustment 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.

12. Mandatorily Redeemable Convertible Preferred Stock

At the consummation of the merger between the Company and
Andromedia, which occurred in fiscal year 2000 and was accounted
for as a pooling of interests, 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 |  
|                                              |  |             |        |   |        |  
|Balance as of March 31, 1999                  |  |             | 1,216  |   |        | $ | 13,591  |  
|Issuance of Series D Preferred Stock          |  |             | 1,055  |   |        |   | 14,914  |  
|Issuance of Series D Preferred Stock Warrants |  |             |       |   |        |   | 360     |  
|Preferred Stock accretion                     |  |             |       |   |        |   | 2,538   |  
|Conversion into Macromedia Common Stock       |  |             | (2,271 | ) |        |   | (31,403 | )
|                                              |  |             |        |   |        |  
|Balance as of March 31, 2000                  |  |             |       |   |        | $ |        |  
|                                              |  |             |        |   |        |  

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


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.

13. Stockholders Equity

As a result of the Companys poolings-of-interest
acquisitions during fiscal year 2000, various issuances of stock
of the acquired entities were issued and outstanding during
fiscal year 2000 and 1999. 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.

Treasury 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 fiscal
year 2000, the Company rescinded the repurchase program.

Stock Based Compensation Plans

Macromedia, Inc. Stock Option Plans.As of March 31,
2001, there are stock options outstanding in connection with the
following stock option and purchase plans (the Macromedia
Plans):

|       |  |                                                            
|------ |  | -----------------------------------------------------------
|(i)    |  | 1992 Equity Incentive Plan (EIP)                         
|(ii)   |  | 1993 Directors Stock Option Plan                           
|(iii)  |  | 1993 Employee Stock Purchase Plan
	(ESPP)                
|(iv)   |  | Allaire 1997 Stock Incentive Plan                          
|(v)    |  | Allaire 1998 Stock Incentive Plan                          
|(vi)   |  | Allaire 1998 Employee Stock Purchase Plan
	(Allaire ESPP)
|(vii)  |  | Andromedia 1999 Stock Option Plan                          
|(viii) |  | Macromedia 1999 Stock Option Plan                          
|(ix)   |  | Allaire 2000 Stock Incentive Plan                          

The options outstanding under the plans indicated at (iv), (v),
(vi), (vii) and (ix) (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.

The EIP and Andromedia 1999 Stock Plans 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, 2001, was
18.1 million. Any option or purchase rights under these
plans that become unexercisable, without having been exercised
in full, shall become available for future grant or sale.

Under the 1993 Directors Stock Option Plan and Macromedia 1999
Stock Option Plan, 700,000 and 3.9 million shares of common
stock, respectively, are reserved for grant as non-qualified
stock options.

Under the ESPP, 1.2 million 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 15% 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, 2001,
2000 and 1999, the Company issued 157,157, 84,358 and
145,826 shares under the plan at average prices of $39.17,
$28.98 and $11.10 per share, respectively.

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


Under the Allaire 1997, 1998 and 2000 Stock Incentive Plans, the
Company had reserved a total of 4.7 million shares of
common stock for issuance as of March 31, 2001. The Plans
provide for the granting of incentive and non-qualified stock
options and stock bonus awards to officers, directors, employees
and consultants of the Company, which typically vest over a
period of four years. Incentive stock options may not be granted
at less than the fair market value of the Companys common
stock at the date of grant and for a term not to exceed ten
years.

Under the Allaire ESPP, 178,000 shares of common stock are
reserved for issuance. Under the plan, and subject to certain
limitations, employees may purchase, through payroll deductions
of 1% 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.

In fiscal year 2001, 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.

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, 2001, 2000 and 1999 (in thousands, except
per share amounts):

|                                         |                        |        |        |          |       |   |       |       | 
|---------------------------------------- | ---------------------- | ------ | ------ | -------- | ----- | - | ----- | ----- | 
|                                         |                        |        |        | Weighted |      
|                                         |                        |        |        | Average  |      
|                                         |                        |        |        | Exercise |      
|                                         |                        | Shares |        |          | Price |  
|                                         |                        |        |        |          |       |  
|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 |      
|                                         | Assumed in acquisition |        |        | 4,189    |       |   |       | 17.98 | 
|                                         | Granted                |        |        | 7,165    |       |   |       | 56.16 | 
|                                         | Exercised              |        |        | (2,790   | )     |   |       | 15.13 | 
|                                         | Cancelled              |        |        | (2,427   | )     |   |       | 57.19 | 
|                                         |                        |        |        |          |       |  
|Options outstanding as of March 31, 2001 |                        |        | 17,685 |          |       | $ | 37.64 |      
|                                         |                        |        |        |          |       |  

14. Stock Compensation

The Company has recorded deferred compensation or compensation
expense for options issued under the Prior Plans and
shockwave.com stock option plan 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
National Market. The deferred compensation portions brought over
from the poolings of Andromedia and ESI were determined

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


based on an underlying common stock value of the respective
companies, based upon their then fair market value. The Company
recorded compensation expense related to stock options of
approximately $6.0 million, $5.1 million and $300,000
in fiscal year 2001, 2000 and 1999, respectively.

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, 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, 2001,
2000 and 1999, would have been changed as indicated below (in
thousands, except per share amounts):

|                                                                |          |             |  |   |         |   |  |      |       |   |  |   |        |  
|--------------------------------------------------------------- | -------- | ----------- |  | - | ------- | - |  | ---- | ----- | - |  | - | ------ | -
|                                                                |          | 2001        |  |   | 2000    |   |  | 1999 |      
|                                                                |          |             |  |   |         |   |  |      |      
|Net income (loss) applicable to common
	stockholders:           |          |             |  |   |         |   |  |      |       |   |  |  
|                                                                |          | As reported |  | $ | 13,374  |   |  | $    | 6,229 |   |  | $ | 2,506  |  
|                                                                |          | Pro-forma   |  | $ | (34,273 | ) |  | $    | (702  | ) |  | $ | (1,877 | )
|Net income (loss) applicable to common
	stockholders per share: |          |             |  |   |         |   |  |      |       |   |  |  
|                                                                | Basic:   |             |  |   |         |   |  |      |       |   |  |   |       
|                                                                |          | As reported |  | $ | 0.26    |   |  | $    | 0.14  |   |  | $ | 0.06   |  
|                                                                |          | Pro-forma   |  | $ | (0.67   | ) |  | $    | (0.02 | ) |  | $ | (0.05  | )
|                                                                | Diluted: |             |  |   |         |   |  |      |       |   |  |   |       
|                                                                |          | As reported |  | $ | 0.24    |   |  | $    | 0.12  |   |  | $ | 0.05   |  
|                                                                |          | Pro-forma   |  | $ | (0.67   | ) |  | $    | (0.02 | ) |  | $ | (0.05  | )

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, 2001, 2000, and 1999 were
$35.90, $26.79, and $10.11, respectively. The weighted average
fair value of purchase rights granted under the ESPP during the
years ended March 31, 2001, 2000, and 1999, were $17.82,
$17.92, and $7.53 per right, respectively.

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 2001, 2000, and 1999:

|                                |  |                   |      |   |                              |  |      |      |  |  |      |   |  |      |      |   |      |  |      |   |  |  |      |  
|------------------------------- |  | ----------------- | ---- | - | ---------------------------- |  | ---- | ---- |  |  | ---- | - |  | ---- | ---- | - | ---- |  | ---- | - |  |  | ---- | -
|                                |  |                   |      |  
|                                |  | Stock Option Plan |      |   | Employee Stock Purchase Plan | 
|                                |  |                   |      |   |                              | 
|                                |  | 2001              |      |   | 2000                         |  |      | 1999 |  |  | 2001 |   |  | 2000 |      |   | 1999 | 
|                                |  |                   |      |   |                              |  |      |      |  |  |      |   |  |      |      |   |      | 
|Weighted average risk free rate |  |                   | 5.83 | % |                              |  | 6.07 | %    |  |  | 5.11 | % |  |      | 4.93 | % |      |  | 5.49 | % |  |  | 5.08 | %
|Expected life (years)           |  |                   | 3.50 |   |                              |  | 3.50 |      |  |  | 3.50 |   |  |      | 0.50 |   |      |  | 0.50 |   |  |  | 0.50 |  
|Expected volatility             |  |                   | 90   | % |                              |  | 70   | %    |  |  | 73   | % |  |      | 90   | % |      |  | 70   | % |  |  | 73   | %
|Expected dividend yield         |  |                   | 0    | % |                              |  | 0    | %    |  |  | 0    | % |  |      | 0    | % |      |  | 0    | % |  |  | 0    | %

F-38



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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


The following table summarizes information about the
Macromedias stock options outstanding as of March 31,
2001 (in thousands, except per share amounts):

|                         |       |                     |       |           |             |  |          |                |                     |   |           |          |  |                |       |       |  |   |        |       | 
|------------------------ | ----- | ------------------- | ----- | --------- | ----------- |  | -------- | -------------- | ------------------- | - | --------- | -------- |  | -------------- | ----- | ----- |  | - | ------ | ----- | 
|                         |       |                     |       |           |             | 
|                         |       | Options Outstanding |       |           |             |  |         
|                         |       |                     |       |           |            
|                         |       |                     |       | Weighted  |             |  |          |                | Options Exercisable |  
|                         |       |                     |       | Average   |             |  |          |                |                     |  
|                         |       |                     |       | Remaining |             |  | Weighted |                |                     |   |           | Weighted | 
|                         |       | Number of           |       |           | Contractual |  |          | Average        |                     |   | Number of |          |  | Average        |      
|Range of Exercise Prices |       | Options             |       |           | Life        |  |          | Exercise Price |                     |   | Options   |          |  | Exercise Price |      
|                         |       |                     |       |           |             |  |          |                |                     |   |           |          |  |                |      
|$  0.20  $  0.96        |       |                     | 350   |           |             |  | 5.58     |                |                     | $ | 0.72      |          |  |                | 343   |       |  | $ | 0.72   |      
|$  1.44  $  3.00        |       |                     | 156   |           |             |  | 8.35     |                |                     |   | 1.38      |          |  |                | 122   |       |  |   | 1.31   |      
|$  3.50  $  5.25        |       |                     | 83    |           |             |  | 5.25     |                |                     |   | 4.48      |          |  |                | 69    |       |  |   | 4.61   |      
|$  6.00  $  9.00        |       |                     | 1,166 |           |             |  | 5.79     |                |                     |   | 7.88      |          |  |                | 1,007 |       |  |   | 7.85   |      
|$  9.31  $ 13.00        |       |                     | 933   |           |             |  | 7.06     |                |                     |   | 11.59     |          |  |                | 549   |       |  |   | 11.25  |      
|$ 14.69  $ 22.00        |       |                     | 5,148 |           |             |  | 9.02     |                |                     |   | 18.30     |          |  |                | 1,185 |       |  |   | 18.17  |      
|$ 22.38  $ 32.75        |       |                     | 2,290 |           |             |  | 8.76     |                |                     |   | 28.95     |          |  |                | 841   |       |  |   | 27.99  |      
|$ 34.00  $ 44.50        |       |                     | 667   |           |             |  | 8.30     |                |                     |   | 38.46     |          |  |                | 221   |       |  |   | 38.95  |      
|$ 45.31  $ 63.72        |       |                     | 4,001 |           |             |  | 9.09     |                |                     |   | 56.49     |          |  |                | 173   |       |  |   | 59.13  |      
|$ 72.88  $ 78.94        |       |                     | 1,472 |           |             |  | 9.14     |                |                     |   | 75.68     |          |  |                | 278   |       |  |   | 76.10  |      
|$ 81.13  $ 88.61        |       |                     | 1,107 |           |             |  | 9.05     |                |                     |   | 82.33     |          |  |                | 218   |       |  |   | 83.20  |      
|$ 91.87  $ 99.98        |       |                     | 143   |           |             |  | 9.27     |                |                     |   | 91.89     |          |  |                | 1     |       |  |   | 91.88  |      
|$100.50  $215.50        |       |                     | 169   |           |             |  | 9.21     |                |                     |   | 100.42    |          |  |                | 2     |       |  |   | 113.85 |      
|                         |       |                     |       |           |             |  |          |                |                     |   |           |          |  |                |      
|                         | Total |                     |       | 17,685    |             |  |          | 5.04           |                     |   | $         | 37.64    |  |                |       | 5,009 |  |   | $      | 13.67 | 
|                         |       |                     |       |           |             |  |          |                |                     |   |           |          |  |                |      

15. Earnings Per Share

Basic net income per share is computed by dividing the net
income applicable to common stockholders for the period by the
weighted average number of common shares outstanding during the
period. Diluted net income per share is computed by dividing the
net income 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.

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

|                                       |                                                                                    |                                              |                                                               |        |        |      |   |        |       |      |   |        |       |      | 
|-------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------- | ------------------------------------------------------------- | ------ | ------ | ---- | - | ------ | ----- | ---- | - | ------ | ----- | ---- | 
|                                       |                                                                                    |                                             
|                                       |                                                                                    | Year Ended March 31,                         |                                                              
|                                       |                                                                                    |                                              |                                                              
|                                       |                                                                                    | 2001                                         |                                                               |        | 2000   |      |   | 1999   |      
|                                       |                                                                                    |                                              |                                                               |        |        |      |   |        |      
|Basic Net Income Per Share Computation |                                                                                    |                                              |                                                               |        |        |      |   |        |       |      |   |       
|Numerator:                             |                                                                                    |                                              |                                                               |        |        |      |   |        |       |      |   |       
|                                       | Net income                                                                         |                                              | $                                                             | 13,374 |        |      | $ | 8,767  |       |      | $ | 2,610  |      
|                                       | Accretion of Series C, D and E mandatorily
	redeemable convertible preferred stock |                                              |                                                               |       |        |      |   | (2,538 | )     |      |   | (104   | )    
|                                       |                                                                                    |                                              |                                                               |        |        |      |   |        |      
|                                       |                                                                                    | Net income applicable to common stockholders |                                                               | $      | 13,374 |      |   | $      | 6,229 |      |   | $      | 2,506 |     
|                                       |                                                                                    |                                              |                                                               |        |        |      |   |        |      
|Denominator:                           |                                                                                    |                                              |                                                               |        |        |      |   |        |       |      |   |       
|                                       | Weighted average number of common shares
	outstanding during the period            |                                              |                                                               | 50,842 |        |      |   | 44,601 |       |      |   | 40,045 |      
|                                       |                                                                                    |                                              | Basic net income applicable to common
	stockholders per share |        | $      | 0.26 |   |        | $     | 0.14 |   |        | $     | 0.06 | 
|                                       |                                                                                    |                                              |                                                               |        |        |      |   |        |      

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


|                                                                |                                                                                    |                                                |        |        |        |   |        |        |       |   |        |        |       | 
|--------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ---------------------------------------------- | ------ | ------ | ------ | - | ------ | ------ | ----- | - | ------ | ------ | ----- | 
|                                                                |                                                                                    |                                               
|                                                                |                                                                                    | Year Ended March 31,                           |       
|                                                                |                                                                                    |                                                |       
|                                                                |                                                                                    | 2001                                           |        |        | 2000   |   |        | 1999   |      
|                                                                |                                                                                    |                                                |        |        |        |   |        |        |      
|Diluted Net Income Per Share Computation                        |                                                                                    |                                                |        |        |        |   |        |        |       |   |        |       
|Numerator:                                                      |                                                                                    |                                                |        |        |        |   |        |        |       |   |        |       
|                                                                | Net income                                                                         |                                                | $      | 13,374 |        |   | $      | 8,767  |       |   | $      | 2,610  |      
|                                                                | Accretion of Series C, D and E mandatorily
	redeemable convertible preferred stock |                                                |        |       |        |   |        | (2,538 | )     |   |        | (104   | )    
|                                                                |                                                                                    |                                                |        |        |        |   |        |        |      
|                                                                |                                                                                    | Net income applicable to common stockholders   |        | $      | 13,374 |   |        | $      | 6,229 |   |        | $      | 2,506 | 
|                                                                |                                                                                    |                                                |        |        |        |   |        |        |      
|Denominator:                                                    |                                                                                    |                                                |        |        |        |   |        |        |       |   |        |       
|                                                                | Weighted average number of common shares
	outstanding during the period            |                                                |        | 50,842 |        |   |        | 44,601 |       |   |        | 40,045 |      
|                                                                | Effect of dilutive securities:                                                     |                                                |        |        |        |   |        |        |       |   |        |        |      
|                                                                |                                                                                    | Convertible preferred stock and stock warrants |        |        | 8      |   |        |        | 532   |   |        |        | 823   | 
|                                                                |                                                                                    | Stock options and restricted stock             |        |        | 5,914  |   |        |        | 7,137 |   |        |        | 6,374 | 
|                                                                |                                                                                    |                                                |        |        |        |   |        |        |      
|Total                                                           |                                                                                    |                                                | 56,764 |        |        |   | 52,270 |        |       |   | 47,242 |       
|                                                                |                                                                                    |                                                |        |        |        |   |        |        |      
|Diluted net income applicable to common
	stockholders per share |                                                                                    | $                                              | 0.24   |        |        | $ | 0.12   |        |       | $ | 0.05   |       
|                                                                |                                                                                    |                                                |        |        |        |   |        |        |      

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

|                |       |                      |     |     |      |  |       |       |  |  |       |       | 
|--------------- | ----- | -------------------- | --- | --- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                |       |                     
|                |       | Year Ended March 31, |    
|                |       |                      |    
|                |       | 2001                 |     |     | 2000 |  |       | 1999  | 
|                |       |                      |     |     |      |  |       |       | 
|Preferred stock |       |                      |    |     |      |  | 1,593 |       |  |  | 1,046 |      
|Stock options   |       |                      | 606 |     |      |  | 118   |       |  |  | 94    |      
|                |       |                      |     |     |      |  |       |       | 
|                | Total |                      |     | 606 |      |  |       | 1,711 |  |  |       | 1,140 | 
|                |       |                      |     |     |      |  |       |       | 

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 discretion of the
Companys Board of Directors. Employer contributions made
to the plan during the years ended March 31, 2001, 2000,
and 1999, were $1.9 million, $812,000 and $465,000,
respectively.

In addition, the Company maintains a 401(k) defined
contribution plan assumed under the Allaire acquisition. All
former Allaire employees over 21 are eligible under the
plan and allows employees to defer up to 15% of their pretax
salary. For the period from the date of consummation of the
acquisition of Allaire through March 31, 2001, no
contributions were made to the plan.

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 in less than one
year. The Company does not enter into derivative financial
instruments for trading purposes.

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


As of March 31, 2001, the Company had forward contracts in
Euro and Japanese Yen outstanding. The forward contracts are
accounted for on a marked-to-market basis, with gains or losses
recognized in the consolidated statements of income. As of
March 31, 2001 and 2000, the contract amount of the forward
contracts amounted to $10.8 million and $21.6 million,
respectively. The future value of these contracts is subject to
exchange rate 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, 2001. 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, 2001):

|             |       |          |       |        |            |   |        |        |  
|------------ | ----- | -------- | ----- | ------ | ---------- | - | ------ | ------ | -
|             |       | Notional |       |        |           
|             |       | Amount   |       |        | Fair Value |  
|             |       |          |       |        |            |  
|Euro         |       | $        | 3,640 |        |            | $ | (106   | )     
|Japanese Yen |       |          | 7,134 |        |            |   | (1,407 | )     
|             |       |          |       |        |            |  
|             | Total |          | $     | 10,774 |            |   | $      | (1,513 | )
|             |       |          |       |        |            |  

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

18. Related Party Transactions

During fiscal year 2001, 2000 and 1999 the Company made loans
totaling $15.2 million to certain officers and other key
employees in conjunction with their hiring and relocation. The
notes bear interest ranging from 4.86% to 6.65% per annum and
mature between 2001 and 2006.

The total loan amount outstanding as of March 31, 2001
approximated $14.5 million, which reflects payments from
certain officers and key employees. As of March 31, 2001,
the stated loan amounts approximated fair value.

The long-term outstanding loans are shown as related party loans
on the face of the balance sheet. The remaining balance of
$290,000 is included in prepaids and other current assets as the
loans are short-term in nature. Of the total amount of loans
outstanding as of March 31, 2001, $13.6 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. As of
March 31, 2001, the Company had accrued interest of
$474,000 relating to the loans.

The remaining balance is comprised of approximately $420,000 in
unsecured loans to certain key employees. These agreements are
entered into as part of the Companys recruiting efforts.

In addition, the Company has accounts receivable due from
AtomShockwave in the amount of $2.6 million. These
receivables represent trade payables that the Company has paid
on behalf of AtomShockwave, fees for professional services
provided to AtomShockwave by the Companys employees, and
royalty receivables due based on existing agreements between
AtomShockwave and the Company. As of March 31, 2001, the
Company has deferred $1.5 million of revenue related to
royalties due based on existing agreements between AtomShockwave
and the Company and will recognize this revenue on a 90-day lag,
consistent with the equity method of accounting for
AtomShockwave.

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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


19. Segment Reporting and Geographic Information

At March 31, 2001, the Company operated in one business
segment, the Software segment. The Companys Software
segment develops software that creates Web site layout, graphics
and rich media content for Internet users. Prior to fourth
quarter of fiscal year 2001, the Companys operations
consisted of a second business segment, shockwave.com, which
designs, develops and markets aggregated content to provide
online entertainment on the Web (see Note 11). The
Companys chief executive officer is the chief operating
decision maker (the CODM). The CODM 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 had intersegment transactions of $2.2 million
for the year ended March 31, 2001 and none in the years
ended March 31, 2000 and 1999. These intersegment
transactions represent royalty revenues paid by shockwave.com.
Segment data for the years ended March 31, 2001, 2000 and
1999 are shown in the following (in thousands):

|                                                           |              |                               |         |         |                  |   |        |        |         |   |         |         |       | 
|---------------------------------------------------------- | ------------ | ----------------------------- | ------- | ------- | ---------------- | - | ------ | ------ | ------- | - | ------- | ------- | ----- | 
|Year Ended March 31,                                       |              | Software                      |         |         | shockwave.com(1) |   |        | Total  |        
|                                                           |              |                               |         |         |                  |   |        |        |        
|2001                                                       |              |                               |         |         |                  |   |        |        |         |   |         |        
|Revenues                                                   |              | $                             | 376,434 |         |                  | $ | 13,166 |        |         | $ | 389,600 |        
|Cost of revenues                                           |              |                               | 40,680  |         |                  |   | 1,718  |        |         |   | 42,398  |        
|                                                           |              |                               |         |         |                  |   |        |        |        
|                                                           | Gross margin |                               | $       | 335,754 |                  |   | $      | 11,448 |         |   | $       | 347,202 |      
|                                                           |              |                               |         |         |                  |   |        |        |        
|Direct operating expenses                                  |              |                               | 265,982 |         |                  |   | 36,141 |        |         |   | 302,123 |        
|Acquisition related expenses and certain non-cash
	charges |              |                               | 33,066  |         |                  |   | 5,580  |        |         |   | 38,646  |        
|                                                           |              |                               |         |         |                  |   |        |        |        
|                                                           |              | Total operating income (loss) |         | $       | 36,706           |   |        | $      | (30,273 | ) |         | $       | 6,433 | 
|                                                           |              |                               |         |         |                  |   |        |        |        
|Total assets                                               |              | $                             | 785,673 |         |                  | $ |       |        |         | $ | 785,673 |        
|                                                           |              |                               |         |         |                  |   |        |        |        
|2000                                                       |              |                               |         |         |                  |   |        |        |         |   |         |        
|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 (loss) |         | $       | 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 |        
|                                                           |              |                               |         |         |                  |   |        |        |        




|    |                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------
|(1) | Due to the deconsolidation of shockwave.com, only nine months
	operating results have been included during fiscal year 2001.

F-42



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##### Table of Contents



MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


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

|                       |  |                      |        |  |      |   |        |      |  |   |        | 
|---------------------- |  | -------------------- | ------ |  | ---- | - | ------ | ---- |  | - | ------ | 
|                       |  |                     
|                       |  | Year Ended March 31, |       
|                       |  |                      |       
|                       |  | 2001                 |        |  | 2000 |   |        | 1999 | 
|                       |  |                      |        |  |      |   |        |      | 
|Total operating income |  | $                    | 6,433  |  |      | $ | 8,376  |      |  | $ | 5,185  | 
|Other income           |  |                      | 342    |  |      |   | 6,187  |      |  |   | 5,037  | 
|Minority interest      |  |                      | 15,336 |  |      |   | 6,179  |      |  |   |       | 
|                       |  |                      |        |  |      |   |        |      | 
|Income before taxes    |  | $                    | 22,111 |  |      | $ | 20,742 |      |  | $ | 10,222 | 
|                       |  |                      |        |  |      |   |        |      | 

As of March 31, 2001, the Company was in the initial stages
of integration activities with the Allaire acquisition and was
evaluating the effect on its organizational and financial
reporting structures.

The Companys operations outside the United States consist
of sales offices in Japan, the United Kingdom, the Netherlands,
France, Germany, Sweden, Belgium, Republic of Korea, and Canada
that are wholly owned subsidiaries and a branch in Australia,
and representative offices in Hong Kong and Singapore. 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 their 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.
Outside of the United States, no other individual country
contributed more than 10% of total revenues for the years ended
March 31, 2001, 2000, and 1999. Additionally, other than
the United States, no individual countrys assets comprised
more than 10% of total assets as of March 31, 2001, 2000,
and 1999.

The distribution of net revenues and identifiable assets by
geographic areas for the years ended March 31, 2001, 2000
and 1999 are as follows (in thousands):

|                     |               |      |         |         |      |   |         |         |   |   |         |         |  
|-------------------- | ------------- | ---- | ------- | ------- | ---- | - | ------- | ------- | - | - | ------- | ------- | -
|                     |               | 2001 |         |         | 2000 |   |         | 1999    |  
|                     |               |      |         |         |      |   |         |         |  
|Net Revenues:        |               |      |         |         |      |   |         |         |   |   |         |        
|                     | North America |      | $       | 221,547 |      |   | $       | 156,494 |   |   | $       | 89,500  |  
|                     | Europe        |      |         | 102,178 |      |   |         | 71,324  |   |   |         | 43,243  |  
|                     | Japan         |      |         | 30,974  |      |   |         | 19,540  |   |   |         | 11,824  |  
|                     | All Other     |      |         | 34,901  |      |   |         | 16,801  |   |   |         | 8,676   |  
|                     |               |      |         |         |      |   |         |         |  
|Total Revenues       |               | $    | 389,600 |         |      | $ | 264,159 |         |   | $ | 153,243 |        
|                     |               |      |         |         |      |   |         |         |  
|Identifiable Assets: |               |      |         |         |      |   |         |         |   |   |         |        
|                     | North America |      | $       | 713,981 |      |   | $       | 315,484 |   |   | $       | 188,668 |  
|                     | Europe        |      |         | 129,546 |      |   |         | 80,100  |   |   |         | 31,350  |  
|                     | All Other     |      |         | 4,314   |      |   |         | 3,123   |   |   |         | 1,622   |  
|                     | Eliminations  |      |         | (62,168 | )    |   |         | (59,348 | ) |   |         | (19,145 | )
|                     |               |      |         |         |      |   |         |         |  
|Total                |               | $    | 785,673 |         |      | $ | 339,359 |         |   | $ | 202,495 |        
|                     |               |      |         |         |      |   |         |         |  
|Long-lived assets:   |               |      |         |         |      |   |         |         |   |   |         |        
|                     | United States |      | $       | 510,831 |      |   | $       | 77,302  |   |   | $       | 45,065  |  
|                     | International |      |         | 4,882   |      |   |         | 1,089   |   |   |         | 775     |  
|                     |               |      |         |         |      |   |         |         |  
|Total                |               | $    | 515,713 |         |      | $ | 78,391  |         |   | $ | 45,840  |        
|                     |               |      |         |         |      |   |         |         |  

20. Commitments and Contingencies

Restricted Cash.The Company has non-current cash of
approximately $9.2 million, the use of which is restricted.
The restrictions on these funds involve security deposits on a
lease of real property located in San

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


Francisco that is currently under construction. These funds
cannot be withdrawn without the written consent of the landlord
or until the security deposit is reduced pursuant to the terms
of the contract. The Company has entered into a 20-year lease
agreement for this property. Under the provisions of the lease,
the Company is not obligated to the landlord until the landlord
has obtained all necessary permits and substantially completed
construction of the building. The Company is committed to a
portion of the construction costs surrounding this project
should the necessary permits and financing occur.

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, 2002, 2003, 2004 and 2005 are $2.6 million,
$1.9 million, $1.1 million and $143,000, respectively.
The Company has rights to future upgrades on certain licenses.

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.

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):

|                     |                              |          |        |         |        |   |         |         |  
|-------------------- | ---------------------------- | -------- | ------ | ------- | ------ | - | ------- | ------- | -
|Year Ended March 31, |                              | Payments |        |         | Income |  
|                     |                              |          |        |         |        |  
|2002                 |                              | $        | 25,000 |         |        | $ | (10,985 | )      
|2003                 |                              |          | 25,790 |         |        |   | (7,467  | )      
|2004                 |                              |          | 25,500 |         |        |   | (3,598  | )      
|2005                 |                              |          | 24,727 |         |        |   | (1,267  | )      
|2006                 |                              |          | 22,151 |         |        |   |        |        
|Thereafter           |                              |          | 75,874 |         |        |   |        |        
|                     |                              |          |        |         |        |  
|                     | Total minimum lease payments |          | $      | 199,042 |        |   | $       | (23,317 | )
|                     |                              |          |        |         |        |  

Rent expense was $15.3 million, $7.4 million, and
$4.5 million for the years ended March 31, 2001, 2000,
and 1999, respectively. For the years ended March 31, 2001,
2000 and 1999, sublease income was $3.2 million,
$3.0 million and $2.9 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 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 have been 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 Court sustained the demurrers as to claims
against Susan Bird and overruled the demurrers as to Macromedia,
John Colligan, James Von Ehr, II, and Kevin Crowder. In May
1999, the Court granted plaintiffs motion for
certification of a class of all persons who purchased
Macromedias common stock from April 18, 1996 through
January 9, 1997. Discovery proceedings are in process but a
substantial portion has been completed and a jury trial has been
set for November 2001. The consolidated complaint seeks damages
in unspecified amounts, as well as other forms of relief.
Although the Company is not able to predict the outcome of the
litigation, Macromedia intends to vigorously defend the action.

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


On August 10, 2000, Adobe Systems, Inc. (Adobe)
filed suit against us in the United States District Court for
the District of Delaware (Case No. 00-743-JJF). On
September 18, 2000, Adobe filed a first amended complaint
in the same action. In the first amended complaint, Adobe
alleges that certain Macromedia products infringe U.S. Patents
Nos. 5,546,528 and 6,084,597. On September 27, 2000,
Macromedia answered the first amended complaint by denying the
allegations and filing counterclaims against Adobe seeking a
declaration that Adobes patents are invalid and
unenforceable, and alleging infringement of three Macromedia
patents. In particular, Macromedia alleges infringement of U.S.
Patent No. 5,467,443 by at least the Adobe Illustrator
product and U.S. Patents Nos. 5,151,998 and 5,204,969 by
the Adobe Premiere product. On October 17, 2000, Adobe
filed its answer denying the allegations in Macromedias
counterclaims. Each party is requesting monetary damages for
infringement of its patents and an injunction against future
infringement. Further, each party is seeking a court declaration
that it is not infringing the other partys patents, that
the other parties patents are invalid and an award of
attorneys fees. Discovery has begun in this matter, and
trial is currently set for April 2002. Although the Company is
not able to predict the outcome, Macromedia intends to
vigorously defend the matter.

On or after September 25, 2000, Allaire Corporation
(Allaire), prior to its acquisition by Macromedia,
and individuals who were serving as officers or directors of
Allaire during the periods covered by the complaints, were named
as defendants in eleven virtually identical lawsuits filed in
the United States District Court for the District of
Massachusetts: (i) Krakauer v. Allaire Corporation,
Joseph J. Allaire, Jeremy Allaire, David A. Gerth and
David J. Orfao, Civil Action No. 00-11972-WGY;
(ii) Dargenzio v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11973-WGY;
(iii) Gordon v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11974-WGY;
(iv) Large v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11986 -WGY;
(v) DiMaggio v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-11996-WGY;
(vi) Knorr v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12014-WGY;
(vii) Jarvis v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12016-WGY;
(viii) Cordeiro v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12158-WGY;
(ix) Fisher v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12182-WGY;
(x) Crippin v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12333-WGY; and
(xi) Reagor v. Allaire Corporation, Joseph J.
Allaire, Jeremy Allaire, David A. Gerth and David J.
Orfao, Civil Action No. 00-12377-WGY (collectively, the
initial complaints). Each of the plaintiffs in each
of the actions purport to bring their complaint on behalf of all
purchasers of Allaire Corporation stock during an alleged class
period (July 20, 2000 and September 18, 2000). The
plaintiffs claim that the defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, and SEC Rule 10b-5, by virtue of statements that the
plaintiffs claim were materially false or misleading. Plaintiffs
seek damages, interest, costs, and attorneys fees. On
December 5, 2000, Chief Judge Young of the District of
Massachusetts entered an order consolidating these initial cases
as In re: Allaire Corporation Securities Litigation, Case
No. 00-CV-11972(WGY). The order appointed lead plaintiffs
for the class and permitted them to file a consolidated
complaint, to be treated as if it were the original complaint in
the consolidated actions. The consolidated complaint was filed
on February 20, 2001.

On April 11, 2001, after Allaire was merged into
Macromedia, a twelfth complaint was filed, Kassin v.
Allaire Corporation, Joseph J. Allaire, Jeremy D.
Allaire, David A. Gerth, and David J. Orfao, Civil
Action No. 01-10600 -WGY (the subsequent
complaint). This complaint, filed on behalf of the
plaintiff (and not a class), contains substantially the same
allegations as the initial complaints, but in addition asserts
claims for common law fraud and negligent misrepresentation.

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


The defendants intend to file a motion to dismiss the
consolidated initial complaints and the subsequent complaint.
The litigation is in its early stages, and the Company is not
able to predict the outcome of the litigation at this time, but
the Company intends to defend all of these claims vigorously.

The Company intends to defend all of the above noted claims
vigorously. It is reasonably possible the Company may incur a
loss upon conclusion of these claims, an estimate of any loss or
range of loss cannot be made, and the Company believes, based on
information it presently possesses, that the conclusion of these
claims will not have a material adverse effect on the
Companys consolidated financial position. However, there
can be no assurance that an adverse judgment, if granted on any
claim would not have a material adverse effect on the
Companys business, consolidated financial position or
consolidated results of operations.

21. Subsequent Events

Restructuring.In April 2001, the Company began executing
a restructuring and cost containment plan delivering cost
synergies associated with the Allaire acquisition and aligning
its cost structure with the weaker business environment. In
connection with the restructuring, the Company terminated
approximately 200 employees, primarily in the sales and
marketing and general and administrative functions, and as a
result, incurred employee termination costs such as severance
benefits. In addition, the Company will incur additional charges
associated with vacating certain facilities and potential asset
write-offs. The Company expects to record these charges
beginning in the first quarter of fiscal year 2002.

Option Exchange.On May 4, 2001, the Company
announced an offer for existing stock option holders to exchange
outstanding stock options for new options to be granted in
excess of six months and one day from the date the offer
expires, which is June 4, 2001 (the Option
Exchange). Under the terms of the Option Exchange, option
holders will receive an equal number of options for those they
elected to exchange sometime between December 5, 2001 and
January 21, 2002 with exercise prices at the then fair
market value. Options that were granted and are outstanding
under the Macromedia, Inc. 1992 Equity Incentive Plan, the
Macromedia, Inc. 1999 Stock Option Plan and the Andromedia, Inc.
1999 Stock Plan, along with some non-plan option grants that
were originally granted by Macromedia, will be eligible under
the Option Exchange. In addition, the vesting period of options
exchanged in connection with the Option Exchange will remain the
same as the original grant, with time between the cancel date
and the replacement grant date under the Option Exchange
included in the vesting term. The Company will not incur any
financial statement impact as a result of the initial
cancellation upon acceptance of the Option Exchange, but may
incur potential dilution of income per share upon the subsequent
issuance of options in the December 2001 and January 2002 time
frame.

AtomShockwave Restructuring.On June 1, 2001, the
Companys equity investee, AtomShockwave, announced that it
would be laying off the majority of its workforce and closing
several offices in conjunction with a planned restructuring.

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MACROMEDIA, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

March 31, 2001


22. Quarterly Results and Stock Market Data (unaudited)

Summarized quarterly financial information for fiscal years 2001
and 2000 is as follows (in thousands, except per share data):

|            |                                                      |                                                                          |   |        |              |  |   |             |       |   |          |         |        |  |   |         |        |  
|----------- | ---------------------------------------------------- | ------------------------------------------------------------------------ | - | ------ | ------------ |  | - | ----------- | ----- | - | -------- | ------- | ------ |  | - | ------- | ------ | -
|            |                                                      |                                                                         
|            |                                                      | Quarter Ended                                                            |  
|            |                                                      |                                                                          |  
|Fiscal Year |                                                      | June 30                                                                  |   |        | September 30 |  |   | December 31 |       |   | March 31 |        
|            |                                                      |                                                                          |   |        |              |  |   |             |       |   |          |        
|2001        |                                                      |                                                                          |   |        |              |  |   |             |       |   |          |         |        |  |   |        
|            | Total revenues                                       |                                                                          | $ | 94,764 |              |  | $ | 102,421     |       |   | $        | 103,338 |        |  | $ | 89,077  |       
|            | Gross profit                                         |                                                                          |   | 84,653 |              |  |   | 90,032      |       |   |          | 93,601  |        |  |   | 78,916  |       
|            | Operating income (loss)                              |                                                                          |   | 8,038  |              |  |   | 5,792       |       |   |          | 10,832  |        |  |   | (18,229 | )     
|            | Net income (loss)                                    |                                                                          |   | 12,007 |              |  |   | 10,312      |       |   |          | 12,829  |        |  |   | (21,774 | )     
|            | Net income (loss) applicable to common
	stockholders |                                                                          |   | 12,007 |              |  |   | 10,312      |       |   |          | 12,829  |        |  |   | (21,774 | )     
|            |                                                      | Net income (loss) applicable to common
	stockholders per share  basic   |   |        | 0.24         |  |   |             | 0.20  |   |          |         | 0.25   |  |   |         | (0.42  | )
|            |                                                      | Net income (loss) applicable to common
	stockholders per share  diluted |   |        | 0.21         |  |   |             | 0.18  |   |          |         | 0.23   |  |   |         | (0.42  | )
|            | Common Stock Price Range:                            |                                                                          |   |        |              |  |   |             |       |   |          |         |        |  |   |         |       
|            |                                                      | High                                                                     |   | $      | 60.98        |  |   | $           | 84.56 |   |          | $       | 118.48 |  |   | $       | 114.56 |  
|            |                                                      | Low                                                                      |   | $      | 14.38        |  |   | $           | 58.19 |   |          | $       | 56.94  |  |   | $       | 44.81  |  
|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  |  

The Company has not paid cash dividends and has no present plans
to do so. There were 453 stockholders of record as of
May 8, 2001, excluding stockholders whose stock is held in
nominee or street name by brokers.

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MACROMEDIA, INC. AND SUBSIDIARIES






SCHEDULE II  VALUATION AND QUALIFYING
ACCOUNTS


(in thousands)


|                                |                           |              |   |           |          |  |   |           |  |            |        |        |  |  |   |        | 
|------------------------------- | ------------------------- | ------------ | - | --------- | -------- |  | - | --------- |  | ---------- | ------ | ------ |  |  | - | ------ | 
|                                |                           |              |   | Charge to |          |  |   |           | 
|                                |                           | Balance at   |   |           | Costs    |  |   |           |  | Balance at |       
|                                |                           | Beginning of |   |           | and      |  |   |           |  | End of     |       
|Description                     |                           | Period       |   |           | Expenses |  |   | Deduction |  |            | Period |       
|                                |                           |              |   |           |          |  |   |           |  |            |        |       
|Allowance for Doubtful Accounts |                           |              |   |           |          |  |   |           |  |            |        |        |  |  |   |       
|                                | Year ended March 31, 2001 |              | $ | 1,659     |          |  | $ | 812       |  |            | $      | 940    |  |  | $ | 1,531  | 
|                                | Year ended March 31, 2000 |              |   | 1,122     |          |  |   | 801       |  |            |        | 264    |  |  |   | 1,659  | 
|                                | Year ended March 31, 1999 |              |   | 1,075     |          |  |   | 125       |  |            |        | 78     |  |  |   | 1,122  | 
|                               
|Allowance for Returns           |                           |              |   |           |          |  |   |           |  |            |        |        |  |  |   |       
|                                | Year ended March 31, 2001 |              | $ | 9,221     |          |  | $ | 20,645    |  |            | $      | 17,967 |  |  | $ | 11,899 | 
|                                | Year ended March 31, 2000 |              |   | 8,477     |          |  |   | 13,641    |  |            |        | 12,897 |  |  |   | 9,221  | 
|                                | Year ended March 31, 1999 |              |   | 6,531     |          |  |   | 11,958    |  |            |        | 10,012 |  |  |   | 8,477  | 

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EXHIBIT 21.01

LIST OF REGISTRANTS SUBSIDIARIES

|                                   |  |                        
|---------------------------------- |  | -----------------------
|Percentage Owned By                |  |                        
|Macromedia, Inc.                   |  | Country of Organization
|                                   |  |                        
|Macromedia Ireland (PTY) Ltd. 100% |  | Ireland                
|Allaire Corporation 100%           |  | United States          
|Macromedia Canada Ltd. 100%        |  | Canada                 
|AtomShockwave Corp. 38%            |  | United States          

|                                 |  |               
|-------------------------------- |  | --------------
|Percentage Owned By              |  |               
|Macromedia Ireland Ltd.          |  |               
|                                 |  |               
|Macromedia Netherlands B.V. 100% |  | Netherlands   
|Macromedia Europe Limited 100%   |  | United Kingdom
|Macromedia KK 100%               |  | Japan         

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##### Table of Contents



EXHIBIT 23.01

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors



We consent to incorporation by reference in the registration
statements (Nos. 333-92233, 333-89247, 333-64141,
333-57708, 333-44016, 333-39285, 333-24713 and 333-08435) on
Form S-8 of Macromedia, Inc. of our reports dated
April 27, 2001, except for note 21, which is as of
June 1, 2001, relating to the consolidated balance sheets
of Macromedia and subsidiaries as of March 31, 2001, and
2000, and the related consolidated statements of income,
stockholders equity, and cash flows for each of the years
in the three-year period ended March 31, 2001, and the
related financial statement schedule, which reports appear in
the March 31, 2001, annual report on Form 10-K of
Macromedia, Inc.



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

Mountain View, California



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EXHIBIT INDEX

|        |       |  |               |                                                                                                                                                                                                                                                                                                                                                                              
|------- | ----- |  | ------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |              
|Number  |       |  | Exhibit Title
|        |       |  |              
|        | 2.01  |  |               | Agreement and Plan of Merger dated
	January 16, 2001, as amended and restated January 29,
	2001, by and among Macromedia, Inc., Alaska Acquisition
	Corporation, and Allaire Corporation.(a)                                                                                                                                                                                 
|        | 2.02  |  |               | Agreement and Plan of Reorganization dated
	December 14, 2000, by and among shockwave.com, Inc., a
	Delaware Corporation and Atom Corporation, a Washington
	Corporation.(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  |  |               | Certificate of Amendment of Registrants
	Amended and Restated Certificate of Incorporation.(q)                                                                                                                                                                                                                                                                              
|        | 3.04  |  |               | Registrants amended and restated Bylaws
	effective May 3, 2001.(*)                                                                                                                                                                                                                                                                                                          
|        | 10.01 |  |               | 1992 Equity Incentive Plan and related documents,
	as amended to date.(n)(***)                                                                                                                                                                                                                                                                                               
|        | 10.02 |  |               | 1993 Directors Stock Option Plan and related
	documents, as amended to date.(o)(***)                                                                                                                                                                                                                                                                                         
|        | 10.03 |  |               | Non-Plan Form Agreements.(i)(***)                                                                                                                                                                                                                                                                                                                                            
|        | 10.04 |  |               | Registrants Form of Non-Plan Stock Option
	Grant.(n)(***)                                                                                                                                                                                                                                                                                                                   
|        | 10.05 |  |               | Registrants 1999 Stock Option Plan.(n)(***)                                                                                                                                                                                                                                                                                                                                 
|        | 10.06 |  |               | Andromedia, Inc. 1999 Stock Option Plan.(k)(***)                                                                                                                                                                                                                                                                                                                             
|        | 10.07 |  |               | Allaire Corporation 1997 Stock Incentive
	Plan.(p)(***)                                                                                                                                                                                                                                                                                                                      
|        | 10.08 |  |               | Allaire Corporation 1998 Stock Incentive
	Plan.(p)(***)                                                                                                                                                                                                                                                                                                                      
|        | 10.09 |  |               | Allaire Corporation 2000 Stock Incentive
	Plan.(p)(***)                                                                                                                                                                                                                                                                                                                      
|        | 10.10 |  |               | Allaire Corporation 1998 Employee Stock Purchase
	Plan.(p)(***)                                                                                                                                                                                                                                                                                                              
|        | 10.11 |  |               | Allaire Corporation Non-Plan Stock Option
	Grants.(p)(***)                                                                                                                                                                                                                                                                                                                   
|        | 10.12 |  |               | Form of Indemnification Agreement entered into by
	Registrant with its directors and executive officers.(e)                                                                                                                                                                                                                                                                  
|        | 10.13 |  |               | 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.(f)
|        | 10.14 |  |               | Employment Agreement between the Registrant and
	Robert K. Burgess dated August 25, 1996. (g)(***)                                                                                                                                                                                                                                                                           
|        | 10.15 |  |               | Loan Agreement between Registrant and Brian and
	Sharon Allum, dated July 15, 1997.(h)(***)                                                                                                                                                                                                                                                                                  
|        | 10.16 |  |               | Loan Agreement between Registrant and Steven A.
	and Nancy M. Elop, dated April 24, 1998.(j)(***)                                                                                                                                                                                                                                                                            
|        | 10.17 |  |               | Lease Agreement by and between Registrant and
	Zoro LLC, dated April 15, 1999.(l)                                                                                                                                                                                                                                                                                            
|        | 10.18 |  |               | First Amendment to Lease agreement by and between
	Registrant and Zoro LLC, dated July 1, 1999.(l)                                                                                                                                                                                                                                                                           
|        | 10.19 |  |               | Lease Agreement by and between Registrant and
	Oelsner Commercial Properties, dated February 28, 2000.(l)                                                                                                                                                                                                                                                                    
|        | 10.20 |  |               | Employment Agreement between the Registrant and
	Brian Allum dated July 22, 1997.(l)(***)                                                                                                                                                                                                                                                                                    
|        | 10.21 |  |               | Built to suit lease, dated April 20, 2000
	between the Registrant, Kaufman Family Partnership,
	Ronald H. Kaufman and Barbara Kaufman.(m)                                                                                                                                                                                                                                    
|        | 10.22 |  |               | Distribution Agreement by and between the
	Registrant and Ingram Micro, Inc. dated March 28,
	1996.(r)(**)                                                                                                                                                                                                                                                                   



---



##### Table of Contents



|        |       |  |               |                                                                              
|------- | ----- |  | ------------- | -----------------------------------------------------------------------------
|Exhibit |       |  |              
|Number  |       |  | Exhibit Title
|        |       |  |              
|        | 21.01 |  |               | List of Registrants subsidiaries (see
	page F-49 of this Form 10-K).        
|        | 23.01 |  |               | Consent of KPMG LLP, Independent Auditors (see
	page F-50 of this Form 10-K).
|        | 24.01 |  |               | Power of Attorney (see page 16 of this
	Form 10-K).                          




|    |                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-4 filed on February 2, 2001
	(Registration Statement No. 333-54930).  
|   
|(b) | Incorporated by reference to the Registrants Current
	Report on Form 8-K filed January 27, 2001.                                                      
|   
|(c) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on (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 Annual Report
	on Form 10-K for the fiscal year ended March 31, 1997.                                    
|   
|(g) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 1996.                         
|   
|(h) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 1997.                         
|   
|(i) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on October 31, 1997
	(Registration Statement No. 333-39285).  
|   
|(j) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 1998.                         
|   
|(k) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on December 07, 1999
	(Registration Statement No. 333-92233). 
|   
|(l) | Incorporated by reference to the Registrants Annual Report
	on Form 10-K for the fiscal year ended March 31, 2000.                                    
|   
|(m) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	June 30, 2000.                              
|   
|(n) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on August 17, 2000
	(Registration Statement No. 333-44016).   
|   
|(o) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on September 24, 1998
	(Registration Statement No. 333-64141).
|   
|(p) | Incorporated by reference to the Registrants Registration
	Statement on Form  S-8 filed on March 27, 2001
	(Registration Statement No. 333-57708).    
|   
|(q) | Incorporated by reference to the Registrants Quarterly
	Report on Form 10-Q for the fiscal quarter ended
	September 30, 2000.                         
|   
|(r) | Incorporated by reference to the Registrants Annual Report
	on Form 10-K for the fiscal year ended March 31, 1996.                                    



|      |                                                                                                                                                                                                                                                                                                                         
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(*)   | Filed herewith.                                                                                                                                                                                                                                                                                                         
|     
|(**)  | Confidential treatment has been granted with respect to certain
	portions of this agreement. Such portions have been redacted and
	marked with a double asterisk. The non-redacted version of this
	agreement was sent to the Securities and Exchange Commission
	pursuant to an application for confidential treatment.
|     
|(***) | Represents a management contract or compensatory plan or
	arrangement.