10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended March 31, 2002

OR

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

Commission File No. 000-22688

MACROMEDIA, INC.

(A Delaware Corporation)

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

600 Townsend Street

San Francisco, California 94103

Telephone: (415) 252-2000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $0.001 Per Share

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

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

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of May 8, 2002: $1.3 billion. 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 2002 Annual Meeting of Stockholders: Part III (Items 10, 11, 12 and 13)

MACROMEDIA, INC. AND SUBSIDIARIES

FORM 10-K

ANNUAL REPORT

For the Year Ended March 31, 2002

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	3
Item 2.	Properties	10
Item 3.	Legal Proceedings	10
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	12
Item 6.	Selected Financial Data	12
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 8.	Financial Statements and Supplementary Data	12
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosures	12
	PART III
Item 10.	Directors and Executive Officers of the Registrant	13
Item 11.	Executive Compensation	13
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	13
Item 13.	Certain Relationships and Related Transactions	13
	PART IV
Item 14.	Exhibits, Financial Statement Schedules, and Reports on Form 8-K	14
	Signatures	17
	Index to Consolidated Financial Statements and Other Information	F-1

PART I

Except for historical financial information contained herein, the matters discussed in this Form 10-K may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and subject to the safe harbor created by the Securities Litigation Reform Act of 1995. Such statements include declarations regarding our intent, belief or current expectations and those of our management. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve a number of risks, uncertainties, and other factors, some of which are beyond our control; actual results could differ materially from those indicated by such forward-looking statements. Important factors that could cause actual results to differ materially from those indicated by such forward-looking statements include, but are not limited to: (i) that the information is of a preliminary nature and may be subject to further adjustment, (ii) those risks and uncertainties identified under “Risk Factors that May Affect Future Results of Operations”, and (iii) the other risks detailed from time-to-time in our reports and registration statements filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.

Item 1.     Business

Business Overview

We provide software that empowers millions of developers and designers to create effective user experiences on the Internet. Our integrated family of software technologies enables the development of a wide range of Internet solutions including Websites, rich media content, and Internet applications across multiple platforms and devices.

With an installed base of more than three million developers and designers, and with Macromedia Flash Player available to 98 percent of Web users, we are a strategic information technology (“IT”) supplier to customers in the business, government, and educational markets. Our products are sold worldwide in more than 50 countries, primarily through a network of distributors, dealers and value-added resellers (“VARs”).

Our market strategy is to ensure that our products support, enhance, and extend the capabilities of major computing platforms. To implement this strategy we design our products to work on multiple operating systems including Microsoft Windows, Sun Microsystems’ Solaris, Apple OS X, and Linux as well as application server technology based on the Sun Microsystems, Inc. Java technology platform and the Microsoft .NET Framework. In addition, we actively participate in the creation and adoption of important industry standards that we believe will make our customers more successful by enabling open integration and interoperability between different software systems.

Customers as varied as Cisco Systems, Inc., Walt Disney Company’s Disney Online, Hewlett-Packard, the U.S. Air Force, Bose Corporation, E*Trade Financial, and Ford Motor Company have all used Macromedia products to deliver effective user experiences for solutions that include Website marketing, online advertising, online commerce, automation of key business processes, and employee training.

Throughout fiscal year 2002, we operated in one business segment, the Software segment. Prior to the fourth quarter of fiscal year 2001, our operations also included a business segment consisting of our then consolidated subsidiary, AtomShockwave Corp. (“AtomShockwave”), formerly shockwave.com, a provider of online entertainment on the Web. On January 14, 2001, shockwave.com consummated its merger with Atom Corporation (“AtomFilms”), with the surviving company named AtomShockwave. As a result of the transaction, we no longer consolidate the results of AtomShockwave and currently operate in one business segment, the Software segment. We evaluate operating segment performance based on net revenues and total operating expenses of the Software segment. At March 31, 2002, we held approximately 40% of the outstanding voting shares of AtomShockwave.

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

Market Opportunity

Several broad industry trends in the development of software systems for corporations, government, and educational institutions shape the market opportunity for our products. First, organizations are adopting Internet technologies as the primary mechanism for deploying content and applications to end-users. This trend began in the mid 1990s and is continuing today, as more and more organizations recognize the benefits of using Internet technologies to communicate and interact with employees, customers, and partners. Second, large organizations are migrating existing business systems from mainframe computers to a new generation of application server technologies such as Java application servers and the Microsoft .NET Framework. At the same time, organizations are building new business systems using application server technologies to automate business processes including expense management, customer service, supply chain interactions, employee training and support for remote workers, and human resources administration. Third, the market for Internet-connected devices including cellular phones, personal digital assistants, game consoles, and home entertainment systems is rapidly expanding.

In the context of these broad industry trends, we believe there is a significant opportunity for software that makes it easier and more cost effective to create content and applications that offer a positive interactive experience for end-users. Creating high-quality, responsive, and effective interfaces for end-users requires a combination of client software for enabling the display of information and user interactions, server software that can extend application server technologies to handle the unique needs of generating a high-quality end-user experience, and development tools that can be used to design content, develop interactions, and integrate content and application functionality. Moreover, as the market for Internet-connected devices grows, we believe there will be increasing demand for products that enable the creation of content and application user interfaces which can be deployed to personal computers and other Internet-connected devices.

Given these market trends and the opportunities they create, we believe our products provide IT organizations in business and government institutions the client, server, and development tool technologies to create effective end-user interfaces for Internet technologies and Internet-connected devices.

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

Products

Macromedia provides client software, servers, and development tools for cost-effectively building Websites and Internet applications that offer highly effective end-user experiences. A substantial portion of our revenues are derived from licensing our software products, which are now included in the Macromedia MX product family. The products in the Macromedia MX product family are specifically designed to work together through functional integration and a shared user interface standard. Macromedia MX provides a complete, integrated solution for building Internet applications that combine the interactivity of multimedia and desktop applications, the multi-way communication capabilities of collaborative computing systems, and the flexible deployment characteristics of Web applications.

Client Software.    Our client software is enabling technology to be distributed to end-users on the Internet. We distribute our client software for the personal computing platform as downloads from our Websites at no charge.

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We also distribute our client software through original equipment manufacturers (“OEMs”) such as Microsoft and Apple as well as device manufactures including Casio, Nokia, and Sony. Our two client software products are Macromedia Flash Player for the Macromedia MX product family and Macromedia Shockwave Player.

Macromedia Flash Player—Macromedia Flash Player is the most widely distributed rich client software on the Internet. The player provides a runtime environment for text, graphics, animations, sound, video, application forms, and two-way communications. According to a survey by The NPD Group, a provider of global information for measuring product movement and consumer behavior in a variety of industries, 98 percent of Web users can view content created for Macromedia Flash Player. Macromedia Flash Player is also available on a wide range of Internet-connected devices such as wireless and handheld devices, interactive TV, and game consoles.

Macromedia Shockwave Player—Macromedia Shockwave Player is a rich media player used for deploying multimedia content for use in Internet solutions including education, training, games, and commerce. According to The NPD Group, Macromedia Shockwave Player is available to 70 percent of Web users.

Server Software.    Our Server Software is used by thousands of companies worldwide to develop and deploy Web applications. The Macromedia MX product family primarily includes Macromedia ColdFusion MX server. In addition, our Server Software includes the Macromedia JRun Server product which supports the Java 2 Platform, Enterprise Edition (“J2EE”).

Macromedia ColdFusion MX—Macromedia ColdFusion MX is the server technology in the Macromedia MX product family. Macromedia ColdFusion MX provides a server-scripting environment and a set of features for building database-driven applications that are accessible through both Web browsers and Macromedia Flash Player. ColdFusion is used by organizations that need a way to quickly build scalable business applications. Macromedia ColdFusion MX is built on an open Java technology architecture. As a result, it can be deployed on third-party Java application servers that support the J2EE specification, including Macromedia JRun Server, IBM WebSphere, and Sun Microsystems SunONE application servers.

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

Development Tools.    Our development tools provide a broad range of capabilities for building the full scope of Internet solutions including Websites, Web applications, and Rich Internet Applications. The tools in the Macromedia MX family include Macromedia Dreamweaver MX, Macromedia Flash MX, and Macromedia Fireworks MX. These products are licensed individually and together in a suite, Macromedia Studio MX, that also includes Macromedia FreeHand 10 and a license of ColdFusion MX Server Professional Edition, which is restricted to use on a single computer for development purposes. In addition to the Macromedia MX products, we license several tools that are market leaders in their respective categories, including Macromedia Director Shockwave Studio for multimedia development and Macromedia Authorware for creating computer based training solutions.

Macromedia Dreamweaver MX—Macromedia Dreamweaver MX is a leading professional development environment for creating Websites and applications. It includes capabilities for visually designing HTML (“Hyper Text Markup Language”) pages, coding HTML and application logic, and working with application server technologies. Macromedia Dreamweaver MX is used by designers and developers to create a broad range of Web solutions for publishing online commerce, customer service, and online education. Macromedia Dreamweaver MX, which is included in the Macromedia MX product suite, is licensed per development seat and is available for both the Microsoft Windows and Apple OS X operating systems.

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Macromedia Flash MX—Macromedia Flash MX provides a development environment for creating Internet user experiences that integrate animations, motion graphics, sound, text, video, and application functionality. Solutions built with Macromedia Flash MX are deployed on the Web to browsers and Internet-connected devices that run Macromedia Flash Player. Since Macromedia Flash MX is part of the Macromedia MX product family, it is designed to work with and complement the other Macromedia MX products, including integration on the server with Macromedia ColdFusion MX. Macromedia Flash MX is licensed per development seat, and available for both the Microsoft Windows and Apple OS X operating systems.

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

Macromedia FreeHand—Macromedia FreeHand is a professional vector graphics tool that is used by designers and illustrators to create images that can be scaled. Macromedia FreeHand, which is included in the Macromedia Studio MX product suite, supports developing images for print, the Web, and Macromedia Flash Player.

Director Shockwave Studio—Director Shockwave Studio is a tool for creating multimedia content that combines images, text, audio, and video into presentations and interactive experiences. For Websites, Director Shockwave Studio provides a powerful solution for delivering multimedia content that supports three dimensional images and animations including education, games, and commerce. In addition, Director Shockwave Studio enables the creation of fixed-media content for CD titles and DVD titles in the entertainment, education, and corporate training markets.

Macromedia Authorware—Macromedia Authorware is a rich media authoring tool used for e-learning. Uses of Macromedia Authorware range from creating Web-based tutorials to simulations incorporating audio and video. Applications developed with Macromedia Authorware can be delivered on the Web, over corporate networks, or on CD-ROM.

Product Development

The majority of our research and product development has been performed in the United States. Development teams or contractors in various local markets perform translation and localization of foreign-language versions of certain products. For fiscal years 2002, 2001, and 2000, consolidated research and development expenses were $110.1 million, $107.7 million, and $65.7 million, respectively.

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 constantly evolving network infrastructure, Internet technology, and competitive offerings. We continue to adapt our products to new hardware and software platforms in order to embrace industry standards, and therefore we will continue to incur significant operating expenses in the future for product research and development. As part of this effort, we may, as appropriate, acquire additional software and system technologies that we consider critical to meeting the needs of Internet developers and consumers.

Independent firms and contractors perform some of our product development activities, while other technologies used in our products are licensed from third-parties. We generally either own or license the software developed by third-parties. Because qualified development personnel are in high demand, independent

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developers, including those who currently develop products for us, may not be able to provide development support to us in the future. Similarly, we may not be able to obtain and renew existing license agreements on favorable terms, if at all, and any failure to do so could harm our business.

Marketing and Sales

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

A substantial portion of our revenues are derived from the sale of our software products through a variety of distribution channels, including traditional software distributors, VARs, electronic commerce through our Websites, mail order, OEMs, hardware and software superstores, and retail dealers.

Our ability to effectively distribute our products, particularly in the international markets we serve, depends in part upon the financial and business condition of our distributor network. From time to time, computer software distributors experience difficulties, particularly during times of economic contraction, and may do so in the future. Moreover, the changing distribution models resulting from the Internet, and in particular the increased focus on direct sales to major accounts, may impact our distributor network in the future. One distributor, Ingram Micro, accounted for 28% of our consolidated net revenues in fiscal years 2002 and 2001. The loss of this distributor or a significant reduction in business with this or any major international distributor could harm our business.

We also sell our products directly to large corporate and educational institutions, typically under volume licensing programs where customers have the right to reproduce and use our software products.

Internationally, our products are sold both directly to end-users and through distributors. International sales accounted for 40% and 43% of our consolidated net revenues in fiscal years 2002 and 2001, respectively. In certain cases, distributors have exclusive distribution rights to certain products in their respective countries.

We typically ship finished products shortly after receipt of order, which is common in the computer software industry. Accordingly, we do not typically maintain significant backlog and backlog as of any particular date is not indicative of actual sales of any succeeding period.

Customer Support and Training

We believe that providing a high level of customer service and technical support is necessary to achieve rapid product implementation that, in turn, is essential to customer satisfaction and continued license sales and revenue growth. Our customers have a broad choice of support options depending on the level of service desired. We provide access to a wide range of technical information on our Website, as well as online forums for each of our products. For our development tool software products, we offer complimentary 90-day technical support for end-users who have registered their products with us by email or over the phone. In addition, we offer a number of paid support options, including incident-based support, annual support contracts, and access to “24 by 7” support.

We have also developed relationships with third-party support providers to complement the support services provided by Macromedia.

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

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We offer both online and classroom-based training as well as formal certification for our development tool and server products through a worldwide network of authorized third-party training centers and certified Macromedia instructors. In addition, training and instruction on the use of Macromedia products is provided by thousands of high schools, colleges, and technical schools throughout the world. We support the expanded use of Macromedia products for classroom training by providing approved curriculum and through reduced pricing on products licensed to schools and students.

Production and Suppliers

Production of our finished products involves duplication of the software, the printing of user manuals, and product assembly. The purchase of media, the transfer of the software programs onto media, and the assembly and distribution of finished goods is performed by a third-party manufacturer. Manufacturing is currently performed by one vendor at three separate facilities located in Preston, Washington, Apeldoorn, The Netherlands, and in Singapore. Our current vendor operates multiple facilities around the world that are capable of serving any additional needs we may have and such sites could serve as viable back-ups in the event manufacturing difficulties arise at the existing sites used to support our business. In addition, we believe there are other third-party vendors capable of fulfilling our production and distribution requirements. To date, we have not experienced any material difficulties or delays in the production of our software and documentation or in the distribution of finished products.

In addition, we license and distribute our software products directly to end-users over the Internet through our Websites. With an increasing proportion of revenues being derived from online sales, customer access to our Websites affects the volume of software products we sell and thus affects our consolidated net revenues. A third-party hosts the primary computer equipment and communications systems used to run our Websites. We experience occasional system interruptions that make our Websites unavailable or prevent us from efficiently fulfilling orders, which may reduce our revenues. To prevent system interruptions, we, as well as our third-party service provider, upgrade software, hardware, and network infrastructures used in the operation of our Websites to accommodate increased traffic and sales volume on our Websites, and to ensure integration to our other business systems.

Our computer and communications systems as well as those of our third-party service provider could be damaged or interrupted by fire, flood, earthquake, power loss, telecommunications failure, vandalism, and similar events. Computer viruses, physical or electronic vandalism and similar disruptions could also cause system interruptions, delays, and loss of critical data and could prevent us from fulfilling customer orders. If this were to occur, it could impact our sales and damage our reputation and the reputation of our products. In addition, we may have inadequate insurance coverage or insurance limits to compensate us for losses from a major interruption. While we currently do not have backup systems and our formal disaster recovery plan and related testing are under development, we are actively evaluating other third-party services providers to distribute our infrastructure in order to mitigate against such risks.

Competition

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

Our development tools compete directly and indirectly with products from major vendors including Microsoft Corporation (“Microsoft”), International Business Machines (“IBM”), Corel Corp. (“Corel”), and Adobe Systems Incorporated (“Adobe”). The Web application development tools market is a very competitive market. While we believe that we are a leader in the market for professional Web development tools with Macromedia Dreamweaver, we face competition from Adobe GoLive, and pressure from the mid-range solution provided by Microsoft FrontPage. We believe our ability to compete favorably in this market in the future will

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require continued product development and innovation resulting in new functionality that can integrate with our existing products so that we can offer our customers a greater suite of products and solutions.

Our server products compete in a highly competitive and rapidly changing market for application server technologies. We face competition from major vendors including Microsoft, IBM, BEA Systems, Inc. (“BEA”), Sun Microsystems, Inc. (“Sun”), and Oracle Corporation (“Oracle”). In addition, Macromedia ColdFusion MX competes indirectly with several technologies available today at no cost including the PHP and PERL programming environments that are available for the Apache Web server. Macromedia JRun Server competes with large Java application server vendors as well as products available at no cost including the Tomcat Java Servlet Engine provided by the Apache Foundation. We believe our future results largely depend on our ability to innovate by developing new products and providing enhancements and upgrades of current product offerings that compete favorably with respect to reliability, performance, ease of use, and pricing. We believe that we will be able to continue to successfully compete with our server products through a combination of functionality, ease of use, and price performance.

Today our client technologies, Macromedia Flash Player and Shockwave Player, command leadership positions in their respective categories. For animation and application user interfaces, Macromedia Flash Player is the most widely distributed Web browser plug-in. However, Macromedia Flash Player faces competition from several vendors and the on-going success of Macromedia Flash Player could be threatened by new capabilities added to Web browsers or by alternatives provided by major operating system vendors. We believe that our existing market penetration and user acceptance provides our client technologies with a competitive advantage over other competing technologies.

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 that customers accept when they open physical copies of our products or activate electronic versions of our products. Nonetheless, certain of our intellectual property rights may not be successfully asserted in the future or may be invalidated or challenged. In addition, the laws of certain countries in which our products are or may be distributed do not protect our products and intellectual rights to the same extent as the laws of the United States. Our inability to protect our proprietary rights could harm our business.

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

Employees

As of March 31, 2002, we had 1,216 full-time employees and 189 contractors worldwide. None of our employees are subject to a collective bargaining agreement, and we believe that our relations with our employees are good. Our future success is highly dependent on our ability to attract, retain, and motivate highly skilled employees.

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Item 2.     Properties

A significant portion of our United States operations are located in various buildings in San Francisco, California. We lease 306,000 square feet of space in San Francisco, 109,000 of which is not currently occupied by us and is sub-leased or being marketed for sub-lease. Most of the leases expire between July 2004 and June 2010, and we have renewal options at favorable rates to market conditions and for successive terms. We currently lease 348,000 square feet of space in Newton, Massachusetts, which expires in June 2010, of which 250,000 square feet is sub-leased or being marketed for sub-lease. We lease 53,000 square feet of space in Redwood City, California with a lease that expires in December 2011. We also lease 55,000 square feet at a facility in Richardson, Texas, of which 27,000 square feet is being marketed for sub-lease. We have additional facilities 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 believe our facilities are adequate for current and near-term needs.

Item 3.     Legal Proceedings

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 alleged that certain of our products infringe U.S. Patents Nos. 5,546,528 and 6,084,597. On September 27, 2000, we 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 of its patents. In particular, we alleged infringement of U.S. Patent No. 5,467,443 (“the ‘443 patent”) by at least the Adobe Illustrator product and U.S. Patents Nos. 5,151,998 and 5,204,969 (“the ‘998 and ‘969 patents”) by the Adobe Premiere product. On October 17, 2000, Adobe filed its answer denying the allegations of our counterclaims. On March 28, 2002, Adobe’s claims relating to U.S. Patent No. 6,084,597 were dismissed by stipulation.

Trial on Adobe’s remaining claims relating to U.S. Patent No. 5,546,528 (“the ‘528 patent”) was held on April 29, 2002 through May 2, 2002. On May 2, 2002, the jury in that trial found that we willfully infringed Adobe’s ‘528 patent, that the ‘528 patent was valid, and awarded damages of $2.8 million to Adobe. Adobe has also claimed that Macromedia Flash MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products infringe the ‘528 patent. The court has ordered a separate trial of Adobe’s claims relating to these software products but has not yet set a date for the trial. We intend to vigorously defend against Adobe’s claims relating to our Macromedia Flash MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products. Our March 31, 2002 consolidated financial statements reflect the charge of $2.8 million in damages awarded to Adobe in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 5, Accounting for Contingencies. The awarded damages are included as a component of other income (expense) in our consolidated statements of operations and in accrued liabilities in our consolidated balance sheets. Trial on our counterclaims for infringement of the ‘443, ‘998, and ‘969 patents proceeded before a separate jury on May 6, 2002 through May 10, 2002. On May 10, 2002, the jury found that Adobe willfully infringed our patents and that all but the ‘998 patent were valid. The jury awarded damages of $4.9 million to us. We intend to seek to set aside the invalidity determination as to the ‘998 patent. In addition, issues relating to each party’s equitable defenses and claims for enhanced damages and attorneys’ fees remain to be resolved by the court, as do the parties’ respective post-trial motions. We will record the gain from the judgment in our consolidated financial statements during the period that the amount becomes known and is realizable in accordance with SFAS No. 5.

On October 19, 2001, we filed suit in the United States District Court for the Northern District of California in San Francisco against Adobe (Case No. C01-3940-SI). In that suit, we allege that certain of Adobe products, including Adobe’s GoLive and Photoshop software, infringe U.S. Patent No. 5,845,299, entitled “Draw-based Editor for Web Pages,” and that certain of Adobe’s products, including GoLive, infringe U.S. Patent No. 5,911,145, entitled “Hierarchical Structure Editor for Websites”. The complaint further alleges that Adobe has been on notice of these patents since 1999, and that its infringement has been willful. Our complaint seeks monetary damages for Adobe’s infringement and an injunction against future infringement. We also seek an award of attorneys’ fees. Discovery has begun, and the case is set for trial in June 2003.

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On and after September 25, 2000, Allaire Corporation (“Allaire”), prior to its merger with Macromedia, and certain of Allaire’s officers and directors were named as defendants in several putative class action lawsuits filed in the United States District Court for the District of Massachusetts, each alleging violations of the federal securities laws. On December 5, 2000, the court consolidated the lawsuits under the caption In re: Allaire Corporation Securities Litig., No. 00-CV-11972 (WGY) (“Class Action”), and appointed lead plaintiffs and counsel for the putative class. On February 23, 2001, the lead plaintiffs, on behalf of a putative class defined as those who purchased Allaire stock between January 26, 2000, and September 18, 2000, filed a Corrected Consolidated Class Action Complaint alleging that Allaire, Joseph J. Allaire, Jeremy Allaire, David A. Gerth, and David J. Orfao, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and are seeking damages, interest, and attorneys’ fees and costs. The defendants filed a motion to dismiss the Class Action. On September 25, 2001, the court ruled that the complaint in the Class Action did not comply with the pleading standards imposed by the Private Securities Litigation Reform Act of 1995, and permitted plaintiffs to file an amended complaint in accordance with specific requirements imposed by the court. Plaintiffs filed an amended complaint on November 30, 2001. The defendants have filed a motion to dismiss the amended complaint, which the plaintiffs have opposed and are awaiting action by the court.

On April 11, 2001, Allaire, after it was merged into Macromedia, Joseph J. Allaire, Jeremy Allaire, David A. Gerth, and David J. Orfao were named as defendants in an additional lawsuit alleging violations of the federal securities laws that also was filed in the United States District Court for the District of Massachusetts, Kassin v. Allaire Corporation, et al., No. 01-10600-WGY (“Kassin”). The complaint in Kassin, filed on behalf of an individual, alleges substantially the same violations of the Securities Exchange Act of 1934 as have been asserted in the Class Action, and additional claims for common law fraud and negligent misrepresentation. On May 11, 2001, the court consolidated the Class Action and Kassin for purposes of briefing and oral argument on the defendants’ motions to dismiss. The defendants filed a motion to dismiss Kassin. On September 25, 2001, the court consolidated Kassin with the Class Action, and the plaintiff’s claims in Kassin have been included in the amended complaint for the Class Action, and also are subject to defendants’ pending motion to dismiss. Although the Class Action and Kassin are in their early stages and we are not able to predict the outcome of the litigation at this time, we intend to defend these claims vigorously.

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

On February 13, 2002, we held a special meeting of stockholders where stockholders approved a proposal to increase the number of shares reserved for issuance under our 1993 Employee Stock Purchase Plan by 400,000 shares, from 1,150,000 shares to 1,550,000 shares. A total of 52,903,422 shares of Macromedia were present or represented by proxy at the meeting. The proposal was approved, with 48,562,778 shares voting for, 4,270,123 shares voting against, and 70,521 abstaining. There were no broker non-votes.

At this meeting, the stockholders also approved the adoption of Macromedia’s 2001 Employee Stock Purchase Plan authorizing 2,000,000 shares to be reserved for issuance. A total of 52,903,422 shares of Macromedia were present or represented by proxy at the meeting. The proposal was approved, with 48,786,643 shares voting for, 4,045,463 shares voting against, and 71,316 abstaining. There were no broker non-votes.

11

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-60 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 Operations,” “Consolidated Statements of Stockholders’ Equity,” “Consolidated Statements of Cash Flows,” and “Notes to Consolidated Financial Statements,” on pages F-25 to F-60 of this report.

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

Not applicable.

12

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”.

Item 11.       Executive Compensation

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

Item 12.       Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information concerning 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”.

Certain information concerning related stockholder matters required by this Item can be found on page F-49. Additional information required by this item is incorporated by reference to the section in our Proxy Statement entitled “Equity Compensation Plan Information”.

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”.

13

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

Consolidated Balance Sheets—March 31, 2002 and 2001

Consolidated Statements of Operations—Years Ended March 31, 2002, 2001, and 2000

Consolidated Statements of Stockholders’ Equity—Years Ended March 31, 2002, 2001, and 2000

Consolidated Statements of Cash Flows—Years Ended March 31, 2002, 2001, and 2000

Notes to Consolidated Financial Statements

2.  Financial Statement Schedule.    The following financial statement schedule of Macromedia, Inc. and Subsidiaries for the fiscal years ended March 31, 2002, 2001, and 2000 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.

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Date Filed	Filed Herewith
3.01	Amended and Restated Certificate of Incorporation.	S-8	August 20, 2001
3.02	Certificate of Amendment of Restated Certificate of Incorporation.	S-8	August 20, 2001
3.03	Certificate of Amendment of Amended and Restated Certificate of Incorporation.	S-8	August 20, 2001
3.04	Certificate of Designations specifying the terms of the Series A Junior Participating Preferred Stock of Registrant, as filed with the Secretary of State of the State of Delaware on October 26, 2001.	8-A	October 26, 2001
3.05	Registrant’s amended and restated Bylaws effective May 3, 2001.	10-K	June 11, 2001
4.01	Rights Agreement dated October 25, 2001 between Registrant and Mellon Investor Services LLC as Rights Agent, which includes as Exhibit A the form of Certificate of Designations of Series A Junior Participating Preferred Stock, as Exhibit B the Summary of Rights to Purchase Preferred Shares, and as Exhibit C the Form of Rights Certificate.	8-A	October 26, 2001
10.01	Macromedia, Inc. 1993 Employee Stock Purchase Plan, as amended to date. *	S-8	January 18, 2002

14

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Date Filed	Filed Herewith
10.02	Macromedia, Inc. 2001 Employee Stock Purchase Plan. *	S-8	January 18, 2002
10.03	1992 Equity Incentive Plan, as amended to date. *	10-Q	August 3, 2001
10.04	1993 Directors Stock Option Plan, as amended to date. *	10-Q	August 3, 2001
10.05	Agreement for Purchase and Sale of Real Property by and between Registrant and Menlo Equities Associates LLC dated November 6, 2001.			X
10.06	First Amendment to Agreement for Purchase and Sale of Real Property by and between Registrant and Menlo Equities Associates LLC dated November 21, 2001.			X
10.07	Second Amendment to Agreement for Purchase and Sale of Real Property by and between Registrant and Menlo Equities Associates LLC dated November 21, 2001.			X
10.08	Third Amendment to Agreement for Purchase and Sale of Real Property by and between Registrant and Menlo Equities Associates LLC dated November 30, 2001.			X
10.09	Lease Agreement by and between Registrant and Menlo Equities Associates LLC dated November 29, 2001.			X
10.10	First Amendment to Lease Agreement by and between Registrant and Menlo Equities Associates LLC dated December 3, 2001.			X
10.11	Second Amendment to Lease Agreement by and between Registrant and Menlo Equities Associates LLC dated December 17, 2001.			X
10.12	Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated November 23, 1999.	10-K1	March 30, 2000
10.13	First Amendment to Lease Agreement by and between Allaire Corporation and EOP Riverside Project LLC dated May 31, 2000.	10-Q2	August 14, 2000
10.14	Registrant’s Form of Non-Plan Stock Option Grant. *	S-8	August 17, 2000
10.15	Non-Stock Option Grant between the Registrant and Robert K. Burgess dated July 11, 1996. *			X
10.16	Written Confirmation of Consent to Amendment of Option and Cancellation of Option between the Registrant and Robert K. Burgess dated July 15, 1997. *			X
10.17	Non-Plan Stock Option Grant between the Registrant and Dominic J. Gallello dated October 18, 2001. *			X

15

		Incorporated by Reference
Exhibit Number	Exhibit Description	Form	Date Filed	Filed Herewith
10.18	Employment agreement between the Registrant and Robert K. Burgess dated August 25, 1996. *	10-Q	November 14, 1996
10.19	Consulting agreement between the Registrant and Alan S. Ramadan dated October 1, 2001. *			X
10.20	Distribution Agreement by and between the Registrant and Ingram Micro, Inc. dated March 28, 1996. **	10-K	June 27, 1996
10.21	Consulting agreement between the Registrant and John (Ian) Giffen dated February 1, 1998. *			X
10.22	First Amendment to consulting agreement between the Registrant and John (Ian) Giffen dated March 31, 2000. *			X
21.01	List of Registrant’s subsidiaries.			X
23.01	Consent of Independent Auditors.			X
24.01	Power of Attorney (see page 17 of this Form 10-K).			X

* Represents a management contract or compensatory plan or arrangement.

** 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.

(1) Filed with the Allaire Corporation Annual Report on Form 10-K (Commission File Number  0-25265).

(2) Filed with the Allaire Corporation Quarterly Report on Form 10-Q (Commission File Number  0-25265).

(B)  Reports on Form 8-K:

No reports on Form 8-K were filed during the quarter ended March 31, 2002.

16

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.

MACROMEDIA, INC.
By:	/s/    ROBERT K. BURGESS
	Robert K. Burgess Chairman and Chief Executive Officer

Dated: June 10, 2002

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 or her attorneys-in-fact, each with the power of substitution, for him or her 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 or her substitutes, may do or cause to be done by virtue hereof.

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

Signature	Title	Date
/s/    ROBERT K. BURGESS       Robert K. Burgess	Chairman and Chief Executive Officer (Principal Executive Officer)	June 10, 2002
/S/    ELIZABETH A. NELSON         Elizabeth A. Nelson	Executive Vice President, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)	June 10, 2002
/S/    JOHN (IAN) GIFFEN         John (Ian) Giffen	Director	June 10, 2002
/S/    WILLIAM H. HARRIS, JR.         William H. Harris, Jr.	Director	June 10, 2002
/S/    ROBERT A. KOTICK         Robert A. Kotick	Director	June 10, 2002
/S/    MARK KVAMME         Mark Kvamme	Director	June 10, 2002
/S/    DONALD L. LUCAS         Donald L. Lucas	Director	June 10, 2002
/S/    ALAN RAMADAN         Alan Ramadan	Director	June 10, 2002
/S/    WILLIAM B. WELTY         William B. Welty	Director	June 10, 2002

17

MACROMEDIA, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

AND OTHER INFORMATION

March 31, 2002

	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-25
Consolidated Balance Sheets as of March 31, 2002 and 2001	F-26
Consolidated Statements of Operations for the Years Ended March 31, 2002, 2001, and 2000	F-27
Consolidated Statements of Stockholders’ Equity for the Years Ended March 31, 2002, 2001, and 2000	F-28
Consolidated Statements of Cash Flows for the Years Ended March 31, 2002, 2001, and 2000	F-29
Notes to Consolidated Financial Statements	F-30
Schedule II: Valuation and Qualifying Accounts	F-61

F-1

MACROMEDIA, INC. AND SUBSIDIARIES

SELECTED CONSOLIDATED FINANCIAL DATA

The selected financial data presented below for the five years ended March 31, 2002, is derived from our Consolidated Financial Statements and related notes thereto. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related Notes thereto included in Item 8 of this Form 10-K.

	Years ended March 31,
	2002			2001			2000			1999			1998
	(In thousands, except per share data)
OPERATING RESULTS:
Net revenues	$	324,794		$	389,600		$	264,159		$	153,243		$	113,803
Cost of revenues		42,546			42,398			28,829			15,625			15,107
Gross profit		282,248			347,202			235,330			137,618			98,696
Operating expenses:
Sales and marketing		170,651			155,453			113,005			73,153			60,379
Research and development		110,118			107,670			65,739			41,551			36,829
General and administrative		43,693			39,000			24,610			16,740			13,231
Acquisition related expenses and in-process research and development		—			22,774			11,516			454			7,658
Non-cash stock compensation		—			6,000			11,071			287			49
Restructuring expenses		81,820			—			—			—			—
Impairment and amortization of intangible assets		114,532			9,872			1,013			248			—
Total operating expenses		520,814			340,769			226,954			132,433			118,146
Operating income (loss)		(238,566	)		6,433			8,376			5,185			(19,450	)
Interest income and other, net		6,400			14,178			6,187			5,037			4,637
Loss on investments, net		(6,980	)		(13,836	)		—			—			—
Loss on equity affiliate		(36,016	)		—			—			—			—
Litigation settlements		(31,402	)		—			—			—			—
Minority interest		—			15,336			6,179			—			—
Income (loss) before income taxes		(306,564	)		22,111			20,742			10,222			(14,813	)
Provision for income taxes		2,266			8,737			11,975			7,612			828
Net income (loss)		(308,830	)		13,374			8,767			2,610			(15,641	)
Accretion on mandatorily redeemable convertible preferred stock		—			—			(2,538	)		(104	)		—
Net income (loss) applicable to common stockholders	$	(308,830	)	$	13,374		$	6,229		$	2,506		$	(15,641	)
Net income (loss) applicable to common stockholders per common share:
Basic	$	(5.31	)	$	0.26		$	0.14		$	0.06		$	(0.40	)
Diluted	$	(5.31	)	$	0.24		$	0.12		$	0.05		$	(0.40	)

	As of March 31,
	2002		2001		2000		1999		1998
	(In thousands)
BALANCE SHEET DATA:
Cash, cash equivalents, and short-term investments	$	161,971	$	177,970	$	187,036	$	111,157	$	88,940
Working capital		116,881		139,497		182,150		105,367		83,525
Total assets		517,838		785,673		339,359		202,495		158,126
Long-term liabilities		37,301		1,172		321		687		653
Mandatorily redeemable convertible preferred stock		—		—		—		13,591		3,548
Total stockholders’ equity		380,721		668,213		254,276		147,031		127,240

F-2

MACROMEDIA, INC. AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Macromedia, Inc. provides software that empowers developers and designers to create effective user experiences on the Internet. Our integrated family of technologies enables the development of a wide range of Internet solutions including Websites, rich media content, and Internet applications across multiple platforms and devices.

In fiscal year 2002, we experienced a decline in revenues and operating results from our business that was primarily due to adverse worldwide economic conditions as well as reduced information technology (“IT”) and Web developer spending worldwide. In addition, other factors specific to our company impacted our revenues and operating results during fiscal year 2002. In particular, we extended the product development cycle for some of our core products, including Macromedia Dreamweaver, Macromedia Flash, and Macromedia Fireworks. During fiscal year 2002, there were no new version releases of these and certain other products, and as a result, revenues for these products decreased in fiscal year 2002 when compared to the prior fiscal year. These decreases were partially offset by a full year of revenues from products resulting from the March 2001 merger with Allaire Corporation (“Allaire”).

Our total spending in fiscal year 2002 increased primarily due to higher compensation and benefits expenses for additional employees resulting from the merger with Allaire. In order to realize cost synergies from the Allaire merger as well as respond to the current economic environment, we restructured the organization during the first and fourth quarters of fiscal year 2002. Our restructuring expenses for fiscal year 2002 totaled $81.8 million, primarily consisting of charges for canceling or vacating facility operating leases, the write off of abandoned fixed assets, and severance-related costs.

In March 2002, we launched the first product release of our new Macromedia MX family of products, Macromedia Flash MX. Our MX strategy provides an integrated family of client, tool, and server technologies. We will continue to commit significant resources to our research and development activities in order to enhance existing products and develop new products and technologies to meet customer needs. In addition, we are investing additional resources in our international offices to strengthen our infrastructure and increase sales and marketing programs, which includes the addition of management and staff personnel. We anticipate that our international revenues will continue to represent a significant portion of our revenues and increase as a percentage of our consolidated net revenues.

As a result of the merger with Allaire, we realigned our products into two main product lines during fiscal year 2002: Software Tools and Server Software. The following table represents the core products in each main product line:

Software Tools	Server Software
Macromedia Dreamweaver MX	Macromedia ColdFusion MX
Macromedia Flash MX	Macromedia JRun Server
Macromedia Fireworks MX
Macromedia FreeHand
Director Shockwave Studio

Prior to the fourth quarter of fiscal year 2001, our operations included a business segment consisting of our then consolidated subsidiary, AtomShockwave Corp. (“AtomShockwave”) formerly shockwave.com, a provider of online entertainment on the Web. On January 14, 2001, shockwave.com consummated its merger with Atom Corporation (“AtomFilms”), with the surviving company named AtomShockwave. As a result of the transaction,

F-3

we no longer consolidate the results of AtomShockwave and currently operate in one business segment, the Software segment. We evaluate operating segment performance based on net revenues and total operating expenses of the Software segment. At March 31, 2002, we held approximately 40% of the outstanding voting shares of AtomShockwave.

Critical Accounting Policies

We make certain estimates, assumptions, and judgments when preparing our consolidated financial statements. These estimates, assumptions, and judgments can have a significant impact on our consolidated financial statements including: the value of certain assets and liabilities on our consolidated balance sheets as well as the amounts of net revenues; operating income (loss); and net income (loss) on our consolidated statements of operations. We have identified the following to be critical accounting policies to Macromedia: allowance for sales returns; restructuring expenses and related accruals; and impairment assessments on certain intangible assets.

Allowance for sales returns.    We sell our products through a network of distributors, value-added resellers (“VARs”), our own sales force and Websites, and to original equipment manufacturers (“OEMs”) throughout the world. In addition, we derive revenues from software maintenance, technology licensing agreements, and training.

The primary sales channels into which we sell our products throughout the world are a network of distributors and VARs. Agreements with our distributors and VARs contain specific product return privileges for stock rotation and obsolete products that are generally limited to contractual amounts. As part of our revenue recognition practices, we have established an allowance for sales returns based upon future estimated returns. Product returns are recorded as a reduction of revenues and as a reduction of our accounts receivable on our consolidated balance sheets.

We evaluate our allowance for sales returns on an ongoing basis. In estimating our allowance for sales returns, we evaluate the following factors:

• Historical product returns and inventory levels on a product-by-product basis, for each of our primary sales regions;

• Current inventory levels and sell through data on a product-by-product basis as reported to us by our distributors worldwide on a weekly or monthly basis;

• Our demand forecast by product in each of our principle geographic markets, which is impacted by our product release schedule, seasonal trends, analyses developed by our internal sales and marketing organizations, and analysis of third-party market data;

• General economic conditions in the markets we serve; and

• Trends in our accounts receivable.

In general, we would expect product returns to increase following the announcement of new or upgraded versions of our products or in anticipation of such product announcements, as our distributors and VARs seek to reduce their inventory levels of the prior version of a product in advance of receiving the new version. Similarly, we would expect that product inventory held by our distributors and VARs would increase following the successful introduction of new or upgraded products, as these resellers stock the new version in anticipation of end-user demand. In assessing the appropriateness of product inventory levels held by our resellers and the impact on potential product returns, we may limit sales to our distributors and VARs in order to maintain inventory levels deemed by management to be appropriate. We generally estimate our allowance for sales returns to maintain channel inventory levels between four to eight weeks of expected sales by our distributors and VARs, based on the criteria noted above. Accordingly, actual product returns may differ from our estimates and may

F-4

have a material adverse effect on our net revenues and consolidated results of operations in future periods due to factors including, but not limited to, market conditions and product release cycles.

We have recently released a number of new and upgraded products and intend to continue introducing new and upgraded products throughout fiscal year 2003. Delays in the introduction of planned future product releases, or failure to achieve significant customer acceptance for these new products, may have a material adverse effect on our net revenues and consolidated results of operations in future periods.

Restructuring expenses and related accruals.    In April 2001, we began executing a restructuring plan to deliver cost synergies associated with the March 2001 Allaire merger and to better align our cost structure with the weaker business environment. In January 2002, we announced a supplemental restructuring plan to better align our cost structure with the continuing weaker business environment. In connection with these plans, we restructured over 450,000 square feet of facility space under our operating leases and recorded restructuring expenses and accruals that consisted primarily of the following: expenses for canceling or vacating facility operating leases as a result of staff reductions and changes in our business; demise and tenant improvement costs to sub-lease these facilities; writing off the unamortized cost of abandoned fixed assets; employee termination and severance costs; and certain other related charges. Our restructuring expenses involved significant estimates made by management using the best information available at the time that the estimates were made, some of which was provided by third-parties. These estimates include: facility exit costs such as demise and lease termination costs; timing and market conditions of rental payments and sub-lease income which extend through fiscal year 2011; and any fees associated with our restructuring expenses; such as brokerage fees.

On a regular basis we evaluate a number of factors to determine the appropriateness and reasonableness of our restructuring accruals. Such factors include, but are not limited to, market data in order to estimate the likelihood, timing, term, and lease rates to be realized from potential sub-leases of canceled or vacated facility operating leases. We also estimate costs associated with terminating certain leases on excess facilities. These estimates involve a number of risks and uncertainties, some of which may be beyond our control, and include: future rental conditions and our ability to successfully work with commercial real estate brokers to market and sub-lease excess facilities on terms acceptable to us, particularly in Newton, Massachusetts; San Francisco, California; Richardson, Texas; and Minneapolis, Minnesota; the financial condition of potential sub-lessees and their ability to meet the financial obligations throughout the term of any sub-lease agreement; and estimated costs associated with canceling or vacating such facility leases. Actual results may differ significantly from our estimates, and as such, may require adjustments to our restructuring accrual and operating results in future periods.

Impairment assessments on certain intangible assets.    At March 31, 2002, the carrying value of our intangible assets totaled $226.6 million and consisted primarily of goodwill, developed technology, assembled workforce, and other intangible assets associated with mergers and acquisitions. Through March 31, 2002, we periodically assessed whether any events, including significant changes in demand for our products or changes in market conditions in the principal markets in which we sell our products, would adversely impact the carrying value of these assets. Possible examples of these events include, but are not limited to: a significant decline in our market value; a decrease in the market value of a particular asset; and continued operating or cash flow losses combined with forecasted future losses. If such an event were to have occurred, we would have estimated future discounted cash flows generated by each of these assets in order to assess the amount by which the asset was impaired as required by Statement of Financial Accounting Standards (“SFAS”) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and Accounting Principles Board Opinion No. 17, Intangible Assets. We did not record an impairment to any of our intangible assets during fiscal year 2002.

At the beginning of fiscal year 2003, we adopted SFAS No. 142, Goodwill and Other Intangible Assets, which supersedes SFAS No. 121, for determining impairment of intangible assets. As a result of adopting this standard, we will no longer amortize certain intangible assets, most notably goodwill and assembled workforce,

F-5

which had net book values at March 31, 2002 of $183.1 million and $15.8 million, respectively. During fiscal year 2002, goodwill and assembled workforce were amortized on a straight-line basis over a three-year period, resulting in recurring quarterly amortization charges of $23.2 million and $2.0 million, respectively.

Under SFAS No. 142, we will also be required to assess the fair value and recoverability of our intangible assets upon adoption, as well as at least once a year prospectively. Accordingly, we will continue to evaluate whether any event has occurred which might indicate that the carrying value of an intangible asset is not recoverable. Changes in market conditions and other business indicators could give rise to factors that would require us to assess whether any of our intangible assets are impaired. We currently operate in one business segment, the Software segment. Because a significant amount of our intangible assets represent goodwill and other intangible assets recorded in connection with our March 2001 Allaire merger, any conditions causing a material adverse affect on our sales could result in significant non-cash operating charges reflecting the write down of such intangible assets to their estimated fair values. SFAS No. 142 became effective for us at the beginning of fiscal year 2003. We have not yet completed our evaluation of the effects that SFAS No. 142 will have on our consolidated financial statements. Currently, we do not expect to record an impairment charge upon completion of our evaluation, however, there can be no assurance that a significant impairment charge will not be recorded upon completion.

Results of Operations

Net revenues.

	Years Ended March 31,
	2002			2001			2000
	(In millions, except percentages)
Software segment	$	324.8		$	376.4		$	256.0
AtomShockwave		—			13.2			8.2
	$	324.8		$	389.6		$	264.2
Sequential change		(17	%)		47	%

Net revenues for the Software segment were $324.8 million in fiscal year 2002, a decrease of $51.6 million from fiscal year 2001 net revenues of $376.4 million. The overall slowdown in IT and Web developer spending experienced worldwide during fiscal year 2002, combined with fewer new product releases as compared to prior fiscal years, were the primary factors contributing to the decline in revenues during fiscal year 2002. Our Software Tools, which include products such as Macromedia Dreamweaver, Macromedia Flash, and Macromedia Fireworks, had total fiscal year 2002 net revenues of $242.5 million, down 28% from $338.3 million in net revenues recorded in the prior fiscal year.

The decline in revenues during fiscal year 2002 was partially offset by a full year of revenues from our Server Software products (primarily Macromedia ColdFusion and Macromedia JRun Server) obtained from our merger with Allaire in March 2001. Server Software product revenues increased from $2.4 million in fiscal year 2001 to $60.1 million in fiscal year 2002, primarily resulting from the timing of the Allaire merger which contributed only 10 days of revenues in fiscal year 2001, as compared to a full year in fiscal year 2002.

Net revenues for the Software segment were $376.4 million in fiscal year 2001, an increase of 47% from fiscal year 2000 net revenues of $256.0 million. This increase was primarily due to increased sales of new and upgrade licenses of Macromedia Flash and Macromedia Dreamweaver following the introduction of new versions of these products in the second and third quarters of fiscal year 2001, respectively. These increases were partially offset by a decrease in Director revenues as that version neared the end of its product life cycle in advance of the launch of Director Shockwave Studio in fiscal year 2002.

F-6

As a result of our deconsolidation of AtomShockwave during the fourth quarter of fiscal year 2001, our consolidated net revenues during fiscal 2002 no longer reflected revenues from AtomShockwave. Net revenues for the AtomShockwave segment were $13.2 million in fiscal year 2001 during the period that AtomShockwave was consolidated and $8.2 million during fiscal year 2000.

We have recently released a number of new and upgraded products and intend to continue introducing new and upgraded products throughout fiscal year 2003. Delays in the introduction of planned future product releases, or failure to achieve significant customer acceptance for these new products, may have a material adverse effect on our net revenues and consolidated results of operations in future periods.

Software Segment Net Revenues by Geography

	Years ended March 31,
	2002			2001			% change
	(In millions, except percentages)
North America	$	195.1		$	207.6		(6%)
% of total net revenues		60	%		55	%
Europe		77.9			103.0
Japan		23.3			31.1
All Other		28.5			34.7
International	$	129.7		$	168.8		(23%)
% of total net revenues		40	%		45	%
Net revenues, Software segment	$	324.8		$	376.4		(14%)

Due to adverse worldwide economic conditions as well as the extended product development cycle for some of our core products, including Macromedia Dreamweaver, Macromedia Flash, and Macromedia Fireworks, we experienced a decline in revenues across all geographic areas during fiscal year 2002 as compared to fiscal year 2001.

North American net revenues for the Software segment have decreased by $12.5 million to $195.1 million in fiscal year 2002 from $207.6 million in fiscal year 2001. The decrease primarily resulted from the overall market decline and relatively mature product cycles for our core Software Tools products, partially offset by the contribution of our Server Software products during the current fiscal year.

International net revenues for the Software segment decreased by $39.1 million to $129.7 million in fiscal year 2002 from $168.8 million in the prior fiscal year. The decrease primarily resulted from lower demand for our products in Europe, partially offset by the contribution of our Server Software in Europe and Japan during the current fiscal year (See “Risk Factors That May Affect Future Results of Operations – Risks Associated With Our International Operations” for additional information).

Cost of revenues.

	Years Ended March 31,
	2002			2001			2000
	(In millions, except percentages)
Software segment	$	42.5		$	40.7		$	27.7
AtomShockwave		—			1.7			1.1
	$	42.5		$	42.4		$	28.8
Sequential change		—	%		47	%

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Cost of revenues for the Software segment includes cost of materials, assembly and distribution, costs incurred in providing training and technical support to customers and business partners, royalties paid to third-parties for the licensing of developed technology, and costs to translate our software into various languages. Cost of revenues for the Software segment were $42.5 million or 13% of software net revenues in fiscal year 2002, as compared to $40.7 million or 11% of software net revenues in fiscal year 2001. Cost of revenues for our Software segment increased in absolute dollars during fiscal year 2002 due to higher customer training costs primarily for our Server Software products and partner training programs. In addition, during fiscal year 2002, we incurred higher royalties for third-party technologies, particularly those embedded in product lines acquired in the Allaire merger. The year over year increase as a percentage of software net revenues was due to a lower revenue base over which to spread our fixed costs.

These increases were partially offset by decreased consulting costs due to a re-allocation of personnel from providing consulting services during fiscal year 2001 to focusing on our sales and marketing efforts during fiscal year 2002. In addition, these increases were partially offset by decreased product costs, driven mostly by lower volume of shipments.

Cost of revenues for the Software segment were $40.7 million in fiscal year 2001 as compared to $27.7 million in fiscal year 2000, however, remained consistent as a percentage of net revenues at 11%. The increase in absolute dollars was primarily due to increased product shipments, increased product and labor costs associated with greater sales of bundled products, and increased costs for product manuals.

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

In the near future, cost of revenues as a percentage of net revenues may be impacted by the mix of product sales, royalty rates for licensed technology, and the geographic distribution of sales.

Sales and marketing.

	Years Ended March 31,
	2002			2001			2000
	(In millions, except percentages)
Software segment	$	170.7		$	143.7		$	101.0
AtomShockwave		—			11.8			12.0
	$	170.7		$	155.5		$	113.0
Sequential change		10	%		38	%

Sales and marketing expenses for the Software segment consist primarily of the following: compensation and benefits; advertising costs including co-marketing development costs, mail order advertising, tradeshow and seminar expenses, and other marketing costs; and allocated costs for our facilities and information technology infrastructure. Sales and marketing expenses for the Software segment were $170.7 million in fiscal year 2002, an increase of $27.0 million from fiscal year 2001 sales and marketing expenses of $143.7 million. The increase resulted primarily from higher salary-related costs due to incremental headcount, and related occupancy costs resulting from the March 2001 merger with Allaire. These increases were partially offset by declines in our advertising and other variable sales and marketing expenses resulting from decreased sales and our cost reduction efforts during fiscal year 2002.

Sales and marketing expenses for the Software segment during fiscal year 2001 were $143.7 million, as compared to $101.0 million in fiscal year 2000. The increase in sales and marketing expenses was primarily due

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to the hiring of additional sales and marketing personnel at the beginning of fiscal year 2001 to support the growth of the business.

Sales and marketing expenses for the AtomShockwave segment were $11.8 million in fiscal year 2001 during the period it was consolidated and $12.0 million in fiscal year 2000. Sales and marketing expenses for AtomShockwave consisted primarily of compensation and benefits and infrastructure costs.

In the near future, we expect to continue investing in sales and marketing of our products as we continue our launch of the Macromedia MX family of products, develop market opportunities, and promote our competitive position. Accordingly, we expect sales and marketing expenses to continue to be significant.

Research and development.

	Years Ended March 31,
	2002			2001			2000
	(In millions, except percentages)
Software segment	$	110.1		$	88.6		$	53.5
AtomShockwave		—			19.1			12.2
	$	110.1		$	107.7		$	65.7
Sequential change		2	%		64	%

Research and development expenses for the Software segment consist primarily of compensation and benefits as well as allocated costs for our facilities and information technology infrastructure to support product development. Research and development expenses for the Software segment were $110.1 million in fiscal year 2002, an increase of $21.5 million from fiscal year 2001 research and development expenses of $88.6 million. The increase was primarily due to higher employee and occupancy costs as a result of our March 2001 merger with Allaire.

Research and development expenses for the Software segment were $88.6 million in fiscal year 2001, as compared to $53.5 million in fiscal year 2000. The increase in research and development was primarily attributable to costs of additional personnel to support the development and enhancement of our software products. Also contributing to the increase was the allocation of increased facility and information technology infrastructure costs to support the growth of the business.

Research and development expenses for the AtomShockwave segment were $19.1 million in fiscal year 2001 during the period it was consolidated and $12.2 million in fiscal year 2000. The increase in fiscal year 2001 as compared to the prior fiscal year was primarily due to higher compensation and benefits expense resulting from increased headcount.

We have recently released a number of new and upgraded products and intend to continue introducing new and upgraded products throughout fiscal year 2003. We anticipate continuing to invest significant resources in research and development activities in order to develop new products, advance the technology in our existing products, and to develop new business opportunities.

General and administrative.

	Years Ended March 31,
	2002			2001			2000
	(In millions, except percentages)
Software segment	$	43.7		$	33.6		$	22.9
AtomShockwave		—			5.4			1.7
	$	43.7		$	39.0		$	24.6
Sequential change		12	%		59	%

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General and administrative expenses for the Software segment consist mainly of compensation and benefits, fees for professional services, and allocated costs for our facilities and information technology infrastructure. General and administrative expenses for the Software segment were $43.7 million in fiscal year 2002, an increase of $10.1 million from fiscal year 2001 general and administrative expenses of $33.6 million. The increase was primarily due to increased professional fees, including legal costs.

General and administrative expenses for the Software segment were $33.6 million in fiscal year 2001, as compared to $22.9 million in fiscal year 2000. The increase was primarily due to increased staffing and associated infrastructure expenses necessary to manage and support our increased scale of operations.

General and administrative expenses for the AtomShockwave segment were $5.4 million in fiscal year 2001 during the period it was consolidated and $1.7 million in fiscal year 2000. The increase in fiscal year 2001 as compared to the prior fiscal year was primarily due to increased legal and accounting costs and other administrative functions that AtomShockwave did not perform in fiscal year 2000.

We expect that our general and administrative expenses may increase in the near-term due to legal fees associated with our pending litigations.

Acquisition related expenses and in-process research and development.    Although we did not incur any acquisition related expenses in fiscal year 2002, we incurred $1.7 million in fiscal year 2001. These charges related to certain technology rights and related software products obtained from our acquisition of Bitcraft, Inc. In fiscal year 2001, we also recorded $21.1 million of in-process research and development, of which $18.0 million was attributable to certain technology being developed by Allaire, while $3.1 million resulted from the merger with Middlesoft, Inc. in the second quarter of fiscal year 2001. These technologies were recognized as in-process research and development as they had not reached technological feasibility at the time of the transactions and had no alternative future uses. The in-process technology resulting from the Allaire merger related to projects for ColdFusion Server 5.0 and JRun 4.0, which were aimed at building various application services on the Java 2 Platform, Enterprise Edition. At the date of merger, it was estimated that 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 completing testing of the products and were determined by analyzing efforts incurred on development up to the point of the merger. 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 technologies.

In developing the cash flow projections, net 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 net revenues for the technologies in development were assumed to increase from product release through calendar year 2003, decline slightly in calendar year 2004, and decline significantly in calendar years 2005 and 2006, which is estimated to be the end of the in-process technology’s economic life. Gross profit was assumed to grow slightly from calendar year 2001 to 2003, and then stabilize through the remainder of the forecasted revenue period. The projected cost of revenues include costs of materials, assembly and distribution, salaries and other costs incurred during consulting, and royalties paid to third-parties. Gross profit projections were based on comparable company indications. Estimated operating expenses, income taxes, and capital charges to provide a return on other acquired assets were deducted from gross profit to arrive at an after tax cash flow for the in-process development project. Operating expenses were estimated as a percentage of net revenues and included sales, marketing and administrative expenses, and development costs to maintain the technologies once they had achieved technological feasibility. We discounted the net cash flows of the in-process research and development projects to their present values using a discount rate of 28%, which reflects the uncertainty surrounding the successful development of the projects. By March 31, 2002, we had successfully developed the technologies without incurring any significant changes from either the timeline or completion costs originally estimated at the date of the merger.

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The total purchase price for the Middlesoft merger 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 Macromedia Flash technologies to allow them to run on multiple hardware devices. At the date of merger, it was estimated that 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 merger 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 net revenues, and the relative risk of the technology.

The cash flow projections considered the characteristics of the potential market for the technology and the anticipated life of the technology. Projected annual net revenues for the in-process technology was expected to be 90% of the forecasted net revenues of the business as a whole within six months of introduction of the project to market. The projected net revenues 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 net revenues to arrive at an after tax cash flow for the in-process development project. Operating expenses were estimated as a percentage of net revenues and included sales, marketing and administrative expenses, depreciation on fixed assets, and development costs to maintain the technology once it had 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 rate of 22%, which reflected the uncertainty surrounding the successful development of the project.

In fiscal year 2000, we incurred $11.5 million in acquisition related expenses primarily as a result of our Andromedia, Inc. and ESI Software, Inc. acquisitions. The charges related primarily to investment banking fees, legal and other professional fees, and severance and personnel relocation costs.

Non-cash stock compensation.    Our non-cash stock compensation primarily represents the difference between the exercise price of stock option grants to employees and the deemed fair value of our common stock at the time of grant. In fiscal years 2001 and 2000, substantially all of our deferred stock compensation was attributable to AtomShockwave, which we deconsolidated from our consolidated results in January 2001. In fiscal year 2002, we incurred non-cash stock compensation expense of $689,000 related to our mergers with Allaire and Middlesoft. The amortization of non-cash stock compensation was allocated to the following expense functions in our fiscal year 2002 consolidated statements of operations: cost of revenues, $62,000; sales and marketing, $294,000; research and development, $265,000; and general and administrative, $68,000. We anticipate completely amortizing our existing deferred compensation balance in fiscal year 2003.

Restructuring expenses.    In April 2001, we began executing a restructuring plan to deliver cost synergies associated with the March 2001 Allaire merger and to better align our cost structure with the weaker business environment. In connection with the restructuring, we recorded expenses totaling $39.5 million in the first quarter of fiscal year 2002, of which $13.1 million related to non-cash charges for the write off of abandoned fixed assets due to staff reductions.

In January 2002, we announced a supplemental restructuring plan to further align our cost structure with the continuing weaker business environment. As a result of this supplemental restructuring plan, we recorded an additional restructuring expense of $42.3 million, of which, $11.2 million related to non-cash charges for the write off of abandoned fixed assets.

The restructuring expenses recorded in fiscal year 2002 consisted primarily of expenses for canceling or vacating facility operating leases as a result of staff reductions and changes in our business; demise and tenant improvement costs to sub-lease these facilities, net of deferred rent recorded for these facilities; writing off the

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unamortized cost of abandoned fixed assets; employee termination and severance costs; and certain other charges. Our restructuring expenses involved significant estimates made by management using the best information available at the time that the estimates were made, some of which was provided by third-parties. These estimates include: facility exit costs such as demise and lease termination costs; timing and market conditions of rental payments and sub-lease income which extend through fiscal year 2011; and any fees associated with our restructuring expenses; such as brokerage fees.

At March 31, 2002, we had a restructuring liability balance of $43.0 million, primarily relating to future rent payments, net of estimated sub-lease income, and demise and tenant improvement costs to sub-lease these facilities. We expect to make future facility rent payments, net of sub-lease income, on our contractual lease obligations through fiscal year 2011, which will be recorded as a reduction to our restructuring accrual. We will continue to assess the accuracy of our accrual on a regular basis and may make adjustments to the accrual based on new information and estimates we obtain. Should facts and circumstances warrant adjustments to our restructuring accrual, our operating results would also be directly affected.

Detail of the fiscal year 2002 restructuring expenses, payment activity, and ending accrual balances related to the restructurings is presented in the following table:

Restructuring Expenses	Total Expense		Cash Payments			Non-cash Charges			Accrual Balance as of March 31, 2002
	(In thousands)
Facilities	$	48,996	$	(8,192	)	$	1,184		$	41,988
Impairment of fixed assets		24,303		—			(24,303	)		—
Severance and related charges		5,976		(4,959	)		—			1,017
Other charges		2,545		(2,323	)		(194	)		28
	$	81,820	$	(15,474	)	$	(23,313	)	$	43,033

Impairment and amortization of intangible assets.    Our consolidated impairment and amortization of intangible assets increased by $104.7 million to $114.5 million for fiscal year 2002 as compared to $9.9 million in fiscal year 2001. The increase in these charges is primarily the result of amortization expense of $113.8 million related to amortization of intangible assets resulting from the Allaire merger during the fourth quarter of fiscal year 2001. Fiscal year 2001 included the impairment and write off of goodwill acquired in our merger of Middlesoft during the second quarter of fiscal year 2001. The write off resulted in a charge of $4.3 million during fiscal year 2001, and was triggered primarily by weaker market conditions and reduced forecasted net revenues and cash flow projections surrounding certain technology acquired in the Middlesoft merger. The following table summarizes our intangible asset balances:

	March 31,
	2002			2001			2000
	(In thousands)
Goodwill	$	278,747		$	285,413		$	1,461
Developed technology		34,000			34,000			—
Assembled workforce		24,000			24,975			975
Other intangibles		7,762			6,911			1,911
		344,509			351,299			4,347
Less accumulated amortization		(117,930	)		(6,065	)		(1,702	)
	$	226,579		$	345,234		$	2,645

During fiscal year 2002, the majority of our intangible assets were amortized on a straight-line basis over a period of three years. This resulted in recurring amortization charges of $28.5 million per quarter in fiscal year

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2002. At the beginning of fiscal year 2003, we adopted SFAS No. 142 which requires that we no longer amortize certain intangible assets, most notably goodwill and assembled workforce, which had net book values at March 31, 2002 of $183.1 million and $15.8 million, respectively. During fiscal year 2002, goodwill and assembled workforce were amortized on a straight-line basis over a three-year period, resulting in recurring quarterly amortization charges of $23.2 million and $2.0 million, respectively. In addition, under SFAS No. 142, we will also be required to assess the fair value and recoverability of our intangible assets upon adoption, as well as at least once a year prospectively. Accordingly, we will continue to evaluate whether any event has occurred which might indicate that the carrying value of an intangible asset is not recoverable. SFAS No. 142 became effective for us at the beginning of fiscal year 2003. We have not yet completed our evaluation of the effects that SFAS No. 142 will have on our consolidated financial statements. Currently, we do not expect to record an impairment charge upon completion of our evaluation, however, there can be no assurance that a significant impairment charge will not be recorded upon completion.

Impairment and amortization of intangible assets totaled $9.9 million in fiscal year 2001 and $1.0 million in fiscal year 2000. A significant portion of the increase was due to the fiscal year 2001 impairment and write off of goodwill recorded in connection with the Middlesoft merger. In addition, intangible asset balances were significantly higher in fiscal year 2001 compared to fiscal year 2000, primarily as a result of our Allaire merger.

Interest income and other, net.    Our consolidated interest income and other, net, decreased by $7.8 million to $6.4 million for fiscal year 2002. Returns from interest-bearing cash, cash equivalents, and short-term investments represent the majority of the activity for both fiscal years 2002 and 2001. The decline in our interest income and other, net is primarily due to lower yields and lower average balances of cash, cash equivalents, and short-term investments in fiscal year 2002 as compared to the prior fiscal year. In fiscal year 2001, we realized an increase in interest income and other, net of $8.0 million from $6.2 million in fiscal year 2000. The increase was primarily due to larger interest-bearing asset balances throughout fiscal year 2001.

Loss on investments, net.    We have historically held non-marketable investments in the common and preferred stock of certain companies. These strategic investments are accounted for on the cost basis as they do not represent a greater than 20% voting interest in the investee and we do not have the ability to significantly influence the investee’s day-to-day operations. Impairment losses are recognized on these strategic investments when we determine that there has been a decline in the fair value of the investment that is other than temporary.

During fiscal year 2002, we recorded impairment losses on strategic investments of $7.6 million. These losses represented write offs or write downs of the carrying amount of these investments and were determined considering, among other factors, the investees’ current and projected operating results, including estimated liquidation value, and the inability of the investee to obtain additional financing. During fiscal year 2002, we received funds totaling $600,000, representing our portion of the liquidated assets of two investees whose investment balances were previously written off during fiscal year 2001 in accordance with our investments policy.

During fiscal year 2001, we recognized $13.8 million in impairment losses on various strategic investments held at cost. These losses were recorded in accordance with our investments policy.

At March 31, 2002, we had one remaining cost basis investment with a carrying value of $400,000. We will continue to assess the carrying amount of this investment in accordance with our policy using factors such as, but not limited to, cash flow projections, revenue trends, market values for comparable public companies, and changes in capital structure that would impact liquidation preferences.

Loss on equity affiliate.    During fiscal year 2002, we recorded losses totaling $36.0 million relating to our ownership in AtomShockwave. These losses represent our relative portion of AtomShockwave’s net losses as well as impairments of our remaining investment balance. Of the $36.0 million, $14.2 million represented our 40% ownership interest in AtomShockwave’s net losses recorded under the equity method of accounting. In

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addition, during the first and second quarters of fiscal year 2002 we reviewed our investment in AtomShockwave due to the decline in AtomShockwave’s general business environment as well as AtomShockwave’s restructuring, which resulted in additional losses of $21.8 million and the write off of certain receivables totaling $344,000.

Although there is no remaining investment balance in our March 31, 2002 consolidated balance sheet relating to our equity affiliate, we continue to hold approximately 40% of the outstanding voting shares of AtomShockwave. Consistent with our policy on accounting for equity affiliates, we will no longer recognize our share of AtomShockwave’s losses since our investment balance has been reduced to zero. However, since we still hold voting rights, should AtomShockwave become profitable at a future point in time, we will begin recording our equity in earnings of the company only after our share of AtomShockwave’s net income exceeds the share of our net losses in AtomShockwave not recognized during the period in which the equity method of accounting was discontinued.

Litigation settlements.    On August 30, 2001, we signed a stipulation of settlement with lead plaintiffs that resolved securities litigation pending against us and certain of our former officers and directors since 1997. The settlement amount was $48.0 million, of which $19.5 million was recovered from insurance, net of reimbursable legal fees and subject to a reservation of rights by one insurer to seek reimbursement of its $5.0 million settlement contribution. As a result, we recorded a $28.5 million charge as a component of other income (expense) in our consolidated statements of operations during fiscal year 2002. Subsequently, on March 7, 2002 one of our insurers, RLI Corp., filed a complaint against us for reimbursement of its $5.0 million settlement contribution. We feel this claim is without merit and intend to defend it vigorously.

On May 2, 2002, a jury in our Adobe litigation determined that we willfully infringed Adobe’s ‘528 patent and that the ‘528 patent was valid. The jury awarded a judgment for damages of $2.8 million to Adobe. Adobe has also claimed that our Macromedia Flash MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products infringe the ‘528 patent. The court has ordered a separate trial of Adobe’s claims relating to these software products but has not yet set a date for the trial. We intend to vigorously defend against Adobe’s claims relating to our Macromedia Flash MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products. Our March 31, 2002 consolidated financial statements reflect the charge of $2.8 million in damages awarded to Adobe, as well as a $100,000 settlement which occurred in May 2002 related to a separate legal matter. The awarded damages are included as a component of other income (expense) in our consolidated statements of operations and in accrued liabilities in our consolidated balance sheets.

Minority interest.    Minority interest represents the non-controlling ownership of AtomShockwave’s results during the period it was consolidated with Macromedia. As a result of our deconsolidation with AtomShockwave during the fourth quarter of fiscal year 2001, we did not record any minority interest during fiscal year 2002. During fiscal years 2001 and 2000, we recorded $15.3 million and $6.2 million in minority interest, respectively.

Provision for income taxes.    We recorded income tax provisions of $2.3 million and $8.7 million in fiscal years 2002 and 2001, respectively. Although we realized losses before income taxes in fiscal year 2002, we recognized a provision due to taxable income in certain foreign jurisdictions where we operate. In fiscal year 2001, our effective tax rate was 40%, lower than our rate in fiscal year 2000 of 58%. The decrease in the effective tax rate reflects foreign operating results that were taxed at rates lower than U.S. statutory rate, the utilization of research and experimentation tax credits, and net operating loss carryforwards.

At March 31, 2002, we had available federal and state net operating loss carryforwards of $511.0 million and $418.9 million, respectively. We also had unused research credit carryforwards of $28.4 million and $22.7 million for federal and California tax purposes, respectively. If not utilized, net operating loss and federal research credit carryforwards will expire in fiscal years 2003 through 2022. The California research credits may be carried forward indefinitely.

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Liquidity and Capital Resources

The following table summarizes our cash flow activities for the periods indicated:

	Years ended March 31,
	2002			2001			2000
	(In thousands)
Cash flows provided by (used in):
Operating activities	$	(42,059	)	$	66,448		$	38,294
Investing activities		(28,683	)		(117,965	)		(38,820	)
Financing activities		21,109			59,931			89,977
	$	(49,633	)	$	8,414		$	89,451

At March 31, 2002, we had cash, cash equivalents, and short-term investments of $162.0 million, a 9% decrease from the March 31, 2001 balance of $178.0 million. Working capital decreased to $116.9 million at March 31, 2002, a 16% decrease from the March 31, 2001 balance of $139.5 million.

Cash used in operating activities for fiscal year 2002 was $42.1 million, as compared to cash provided by operating activities of $66.4 million during the prior fiscal year. Cash used in operating activities for fiscal year 2002 was primarily due to the net loss of $308.8 million, offset by non-cash depreciation and amortization of $152.1 million, $36.0 million loss on equity affiliate, and $24.7 million in write off of fixed assets relating primarily to our restructurings. Cash provided by operating activities for fiscal year 2001 was primarily due to net income of $13.4 million, adjusted for depreciation and amortization of $35.9 million, in-process research and development of $21.1 million, impairment of investments of $13.8 million, and other non-cash charges.

Cash used in investing activities for fiscal year 2002 was $28.7 million, as compared to $118.0 million during the prior fiscal year. Cash used in investing activities for fiscal year 2002 was primarily used for purchases of short-term investments and property and equipment. These payments were partially offset by maturities of available-for-sale short-term investments, proceeds from the December 2001 sale-leaseback of our Redwood Shores, California property, and collections on related party loans receivable. At March 31, 2002, the majority of our related party loans consisted of loans to employees that are secured by their personal property. Cash used in investing activities for fiscal year 2001 was primarily used for purchases of short-term investments and property and equipment. These purchases were partially offset by maturities of available-for-sale short-term investments.

Cash provided by financing activities for fiscal year 2002 was $21.1 million, as compared to $59.9 million during the prior fiscal year. Cash provided by financing activities for fiscal years 2002 and 2001 was primarily due to proceeds received from the exercise of common stock options.

During fiscal year 2002, we made capital expenditures of $17.4 million, net of certain contractual reimbursements for tenant improvements, which primarily consisted of leasehold improvements. In fiscal year 2003, we anticipate spending $10.0 million to $20.0 million on capital expenditures, primarily relating to the purchase of new software applications and computer equipment.

We enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in Euros, Japanese Yen, and Singapore Dollars. At March 31, 2002, the notional amount of forward contracts outstanding amounted to $12.4 million.

We expect that for the foreseeable future our operating expenses will constitute a significant use of our cash balances, but that our cash from operations and existing cash, cash equivalents, and available-for-sale short-term investments will be sufficient to meet our operating requirements through at least March 31, 2003. Cash from operations could be affected by various risks and uncertainties, including, without limitation, those related to:

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customer acceptance of new products and services and new versions of existing products; the risk of integrating newly acquired technologies and products; the impact of competition; the risk of delay in product development and release dates; the economic conditions in the domestic and significant international markets where we market and sell our products; quarterly fluctuations of operating results; risks of product returns; risks associated with investment in international sales operations; our ability to successfully contain our costs; and the other risks detailed in the section “Risk Factors That May Affect Future Results of Operations”.

At times, we may require additional liquid resources and may seek to raise these additional funds through public or private debt or equity financings. There can be no assurance that this additional financing will be available, or if available, will be on reasonable terms and not dilutive to our stockholders. If additional funds are required at a future date and are not available on acceptable terms, our business and operating results could be adversely affected.

Our liquidity and capital resources in any period could be impacted by the exercise of outstanding common stock options and cash proceeds upon exercise of these securities and securities reserved for future issuance under our stock option plans.

Commitments.    Our principal commitments as of March 31, 2002 consist of obligations under operating leases for facilities, license agreements, and letter of credit arrangements. We anticipate fulfilling our obligations under these commitments through our working capital.

Leases—We lease office space and certain equipment under operating leases, some of which contain renewal and purchase options. In addition, we sub-lease certain office space that is not currently occupied by us. In December 2001, we sold an office building in Redwood City, California, with a consecutive 10-year lease for the space that we currently occupy. The sale resulted in proceeds of $22.1 million, excluding related tenant deposits and fees. The transaction was accounted for as a sale-leaseback arrangement and resulted in a deferred gain of $4.5 million, which is classified in other long-term liabilities in our consolidated balance sheet and will be amortized to operating expense over the lease term. The lease will be accounted for as an operating lease, resulting in base rental expense of $1.8 million per year.

Royalties—We have entered into license agreements with third-parties whose products or technologies are embedded in our software products. These license agreements generally provide for either fixed annual payments or royalties on a per-unit basis.

The following table aggregates our contractual commitments consisting of future minimum payments under operating leases, net of sub-lease income, and fixed minimum royalty payments as of March 31, 2002:

(In thousands)	Net Lease Obligations
Years ending March 31,	Lease Obligations		Sublease Income			Total Net Lease Obligations		Minimum Royalties		Total Payments
2003	$	30,028	$	(8,472	)	$	21,556	$	2,478	$	24,034
2004		29,326		(7,528	)		21,798		1,661		23,459
2005		26,904		(5,076	)		21,828		663		22,491
2006		25,265		(3,950	)		21,315		218		21,533
2007		20,437		(3,809	)		16,628		—		16,628
Thereafter		68,185		(9,277	)		58,908		—		58,908
	$	200,145	$	(38,112	)	$	162,033	$	5,020	$	167,053

Included in the total minimum net lease obligations of $162.0 million are estimated future net minimum rent payments for facilities included in the Company’s restructurings during fiscal year 2002. At March 31, 2002, our restructuring accrual included $29.4 million of estimated future net rent payments related to idle facilities (see Note 11).

F-16

Letters of credit and restricted cash.    We obtained letters of credit from financial institutions totaling $12.7 million as of March 31, 2002 in lieu of security deposits for leased office space. No amounts have been drawn against the letters of credit. We pledged $11.4 million as of March 31, 2002 as security in trust for certain of the letters of credit. These funds were invested in a certificate of deposit and are classified as non-current restricted cash in our consolidated balance sheets.

Pro Forma Results

Included in our Quarterly Reports on Form 10-Q and our Annual Reports on Form 10-K filed with the Securities and Exchange Commission are consolidated financial statements prepared in conformity with accounting principles generally accepted in the United States (“GAAP”). However, we also report our quarterly and annual financial results on a pro forma basis in our financial press releases, on our Website, and with financial analysts. We believe our pro forma results have value in assessing our financial performance. Our pro forma results exclude certain non-cash and unusual items, allowing us to isolate financial results of certain core functions of our operations.

Although meaningful, pro forma results do not necessarily provide a comprehensive reflection of our operating results or financial position in accordance with GAAP. In addition, our pro forma results may include different adjustments than those employed by other companies, and therefore, comparisons of other companies’ pro forma results may not be meaningful. As a result, we strongly encourage all of our current and prospective investors to carefully read and review our consolidated balance sheets and related consolidated statements of operations, stockholders’ equity, cash flows, and the accompanying notes (GAAP financial statements) included in our Annual Reports on Form 10-K and our unaudited Quarterly Reports on Form 10-Q filed with the Securities and Exchange Commission.

F-17

The following tables reconcile our GAAP operating results to results on a pro forma basis for fiscal years 2002 and 2001:

	Year Ended March 31, 2002
	GAAP			Adjustments*			Pro forma*
	(In thousands)
Net revenues	$	324,794		$	—		$	324,794
Cost of revenues		42,546			(62	)		42,484
Gross profit		282,248			62			282,310
Operating expenses:
Sales and marketing		170,651			(294	)		170,357
Research and development		110,118			(265	)		109,853
General and administrative		43,693			(68	)		43,625
Restructuring expenses		81,820			(81,820	)		—
Impairment and amortization of intangible assets		114,532			(114,532	)		—
Total operating expenses		520,814			(196,979	)		323,835
Operating income (loss)		(238,566	)		197,041			(41,525	)
Other income (expense):
Interest income and other, net		6,400			—			6,400
Loss on investments, net		(6,980	)		6,980			—
Loss on equity affiliate		(36,016	)		36,016			—
Litigation settlements**		(31,402	)		31,402			—
Total other income (expense)		(67,998	)		74,398			6,400
Income (loss) before income taxes		(306,564	)		271,439			(35,125	)
Provision (benefit) for income taxes		2,266			(9,291	)		(7,025	)
Net income (loss)	$	(308,830	)	$	280,730		$	(28,100	)

* Pro forma results differ from GAAP and exclude the following: non-cash stock compensation (as shown in the reductions to cost of revenues, sales and marketing, research and development, and general and administrative functions); restructuring expenses; impairment and amortization of intangible assets; net loss on investments; loss on equity affiliate; and litigation settlements. Pro forma results reflect an effective tax benefit of 20%. Recognition of this tax benefit results from the expected utilization of tax loss carryforwards generated in fiscal year 2002 to offset taxable income in future periods.

** Included in litigation settlements is $2.8 million in damages awarded to Adobe and a $100,000 settlement in May 2002 related to a separate legal matter. In accordance with SFAS No. 5, Accounting for Contingencies, these awards have been reflected in our consolidated financial statements at March 31, 2002. Accordingly, our consolidated financial statements differ from those previously announced in our press release on April 24, 2002. (See Note 21)

F-18

	Year Ended March 31, 2001
	GAAP			Adjustments*			Pro forma*
	(In thousands)
Net revenues	$	389,600		$	(13,166	)	$	376,434
Cost of revenues		42,398			(1,718	)		40,680
Gross profit		347,202			(11,448	)		335,754
Operating expenses:
Sales and marketing		155,453			(11,744	)		143,709
Research and development		107,670			(19,036	)		88,634
General and administrative		39,000			(5,361	)		33,639
Acquisition related expenses and in-process research and development		22,774			(22,774	)		—
Non-cash stock compensation		6,000			(6,000	)		—
Impairment and amortization of intangible assets		9,872			(9,872	)		—
Total operating expenses		340,769			(74,787	)		265,982
Operating income		6,433			63,339			69,772
Other income (expense):
Interest income and other, net		14,178			(927	)		13,251
Loss on investments		(13,836	)		13,836			—
Total other income		342			12,909			13,251
Minority interest		15,336			(15,336	)		—
Income before income taxes		22,111			60,912			83,023
Provision for income taxes		8,737			7,411			16,148
Net income	$	13,374		$	53,501		$	66,875

* Pro forma results differ from GAAP and exclude the following: results of a previously owned subsidiary, AtomShockwave; acquisition related expenses and in-process research and development; non-cash stock compensation; impairment and amortization of intangible assets; and loss on investments. Pro forma results reflect an effective tax provision of 19%.

Recent Accounting Standards

In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted. The adoption of this standard did not have an impact on our consolidated financial statements during fiscal year 2002 as we did not enter into any business combinations during that period.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and other intangible assets no longer be amortized to operations, but instead be reviewed for impairment at least once a year. SFAS No. 142 became effective for us in the beginning of fiscal year 2003. We have not yet completed our evaluation of the effects that SFAS No. 142 will have on our consolidated financial statements. Currently, we do not expect to record an impairment charge upon completion of our evaluation, however, there can be no assurance that a significant impairment charge will not be recorded upon completion.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 applies to all long-lived assets. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing

F-19

operations of the entity in a disposal transaction. SFAS No. 144 will be effective for us in fiscal year 2003. We have not yet evaluated the effects of this pronouncement on our consolidated financial statements.

Risk Factors That May Affect Future Results of Operations

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

General Economic Conditions—In recent quarters, our operating results have been adversely affected by the general economic slowdown as well as reduced IT and Web developer spending worldwide. The cost-cutting initiatives implemented by some of the users of our products and services may reduce or stagnate the demand for our products, including our new product or version releases, until the economic conditions significantly improve.

In addition, a substantial portion of our business and revenues depend on the continued growth of the Internet and on the utilization of our products by customers that depend on the growth of the Internet. Our business has been adversely impacted as a result of the continued economic slowdown and the reduction in IT spending, and declines in spending on Web-based and server-based software products. To the extent the economic slowdown and reduction in capital spending continue to adversely affect spending, we could continue to experience material adverse effects on our business, operating results, and financial condition.

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

Risks Associated with Our International Operations—During fiscal years 2002 and 2001, we derived 40% and 43% of our consolidated net revenues from international sales, respectively. We expect that international sales will continue to represent a significant percentage of our revenues. We rely primarily on third-parties, including distributors, for sales and support of our software products in foreign countries and, accordingly, are dependent on their ability to promote and support our software products, and in some cases, to translate them into foreign languages. Furthermore, international business is subject to a number of special risks, including:

• Foreign government regulation

• Reduced intellectual property protections

F-20

• 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

• Difficulties in staffing and managing foreign operations

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, liquidity problems, and political and military hostilities in these regions.

Furthermore, we enter into foreign exchange forward contracts to reduce economic exposure associated with sales and asset balances denominated in Euros, Japanese Yen, and Singapore Dollars. At March 31, 2002, the notional amount of forward contracts outstanding amounted to $12.4 million. There can be no assurance that such contracts will adequately manage our exposure to currency fluctuations.

We Are Dependent on Our Distributors—A substantial majority of our revenues are 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, and retail dealers. Domestically, our products are sold primarily through distributors, VARs, and OEMs. One distributor, Ingram Micro, accounted for 28% of consolidated net revenues in fiscal years 2002 and 2001. The loss of a relationship with, or a significant reduction in sales volume to, a significant distributor or reseller, could have a material adverse effect on our results of operations.

System Failure Related to Our Websites Could Harm Our Business—We rely, in part, on our Websites as a portal for marketing, selling, and supporting our products. Substantially all of the system hardware for deploying and maintaining our Websites are hosted by a third-party. These systems are subject to damage from earthquakes, floods, fires, power loss, telecommunication failures and similar events. They are also subject to acts of vandalism and to potential disruption if our third-party service provider experiences financial difficulties. Any event that causes interruption in the deployment of our Websites may result in disruption in the services we provide, loss of revenues, or damage to our reputation.

We Are Subject to Intellectual Property Litigation—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, unpredictable, and can be disruptive to our business operations by diverting the attention and energies of our management and key technical personnel. In addition, any adverse decisions, including injunctions or damage awards entered against us, could subject us to significant liabilities, require us to seek licenses from others, prevent us from manufacturing or licensing certain of our products, require us to alter 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.

F-21

Our Future Operating Results Are Difficult to Predict and Our Future Operating Results and Our Stock Price Are Subject to Volatility—As a result of a variety of factors discussed herein, operating results for a particular period are extremely difficult to predict. Our revenues may grow at a slower rate than experienced in previous periods and, in particular periods, may decline. As a result of our growth in past periods and the merger with Allaire in March 2001, our fixed costs have increased and, despite our cost-cutting efforts, we may not be able to achieve the operating results expected by securities analysts, our stockholders, or us. Furthermore, our efforts to reduce our expenses may hinder our ability to achieve business and revenue growth. Any shortfall in revenues or results of operations from levels expected by securities analysts, general decline in economic conditions, or significant reductions in spending by our customers, could have an immediate and materially adverse effect on the trading price of our common stock in any given period. In addition to factors specific to us, changes in analysts’ earnings estimates for us or our industry and factors affecting the corporate environment, our industry, or the securities markets in general will often result in significant volatility of our common stock price.

Cost Controls Could Adversely Impact Our Business—In April 2001, we implemented a restructuring plan to deliver cost synergies associated with our March 2001 merger with Allaire and to better align our cost structure with the weakening business environment. In January 2002, we announced a supplemental restructuring plan to further align our operations and cost structure with the continuing weakening business environment. The failure to achieve these cost savings could have a material adverse effect on our financial condition. Moreover, even if we are successful with these efforts and generate the anticipated cost savings, there can be no assurance that these actions will not adversely impact our employee morale and productivity and our business and results of operations.

We Face Intense Competition—The markets for all of our product lines are highly competitive. A number of companies currently offer products and services that compete directly or indirectly with one or more of our products. Our development tools compete directly and indirectly with products from major vendors including Microsoft Corporation, International Business Machines Corp., Corel Corp., and Adobe Systems Incorporated. Our server products compete in a highly competitive and rapidly changing market for application server technologies. We compete directly with Microsoft Corporation, International Business Machines Corp., BEA Systems, Inc., Sun Microsystems, Inc., and Oracle Corporation. Introduction of new products or functionalities in current products by our company or by another company may intensify our current competitive pressures. In addition, several of our current and potential competitors have greater financial, marketing, technical, and intellectual property resources than we do.

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

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

F-22

We May Not Be Able to Defend or Enforce Our Intellectual Property Rights Adequately—Because we are a software company, our business is dependent on our ability to protect our intellectual property rights. We rely on a combination of patent, copyright, trade secret, and trademark laws, as well as employee and third-party nondisclosure agreements, 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.

Dependence on Third-Party Manufacturer and Service Providers—We rely primarily on a single independent third-party to assemble and distribute our products. If there is a temporary or permanent disruption of our supply from such manufacturer, we may not be able to replace the supply in sufficient time to meet the demand for our products. Any such failure to meet the demand for our products would adversely affect our revenues and might cause some users to purchase licenses to our competitors’ products to meet their requirements.

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

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

Changes in Generally Accepted Accounting Principles May Affect Our Reported Results—We prepare our financial statements in conformity with GAAP. GAAP is subject to interpretation by the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting principles. A change in these principles can have a significant effect on our reported results, and may affect the reporting of transactions completed prior to the announcement of a change. In order to prepare our GAAP financial statements, a number of estimates are used by our management, particularly with regard to our restructuring plans, amortization of intangible assets, and the impact of product returns from our distributors and VARs when determining license revenues to be recognized. Our management uses the best available information at the time to create estimates, however, actual future results may vary from these estimates. It is our policy to prospectively adjust estimates in accordance with GAAP when actual results or better information differ from our original estimates.

Interest Rate Risk

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

The table below represents cost, carrying amounts, and the related weighted average effective interest rates by year of maturity for our cash equivalents and short-term investments as of March 31, 2002. The table does not include cash and marketable equity securities of $47.3 million and $392,000 as of March 31, 2002, respectively.

F-23

	For the Fiscal Years Ending
	2003			2004			2005 and thereafter		Total Cost			Carrying Amount
	(In thousands, except percentages)
Cash equivalents	$	19,579		$	—		$	—	$	19,579		$	19,579
Average interest rate		1.72	%		—			—		1.72	%
Short-term investments		66,606			28,044			—		94,650			94,705
Average interest rate		2.81	%		3.32	%		—		2.96	%
Total cash equivalents and short-term investments	$	86,185		$	28,044		$	—	$	114,229		$	114,284

We also have loans outstanding to related parties, including accrued interest, totaling $8.3 million as of March 31, 2002. The stated loan amounts approximate fair value.

Foreign Currency Risk

We sell our products internationally in U.S. Dollars and certain foreign currencies, predominantly Euros and Japanese Yen. We enter into foreign exchange forward contracts up to one year in duration to reduce our exposure to foreign currency fluctuations involving probable anticipated and current foreign currency exposures. Our forward contracts relate primarily to foreign currency denominated revenue transactions. We do not enter into derivative financial instruments for trading purposes.

As a result of this activity, we had open forward contracts in Euros, Singapore Dollars, and Japanese Yen as of March 31, 2002. The forward contracts are accounted for on a marked-to-market basis, with realized and unrealized gains or losses recognized in our consolidated statements of operations. As of March 31, 2002 and 2001, the notional amount of the forward contracts totaled $12.4 million and $10.8 million, respectively. 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 open forward contracts as of March 31, 2002. The information is provided in U.S. Dollar equivalents and presents the notional and fair value amounts of the respective contracts and their weighted average forward rates in effect as of March 31, 2002:

	Notional Amount		Fair Value			Weighted average forward rates
	(In thousands, except weighted average forward rates)
Euros	$	3,525	$	51		0.88
Singapore Dollars		651		(1	)	1.84
Japanese Yen		8,174		830		118.00
	$	12,350	$	880

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

Market Price Risk

We are exposed to market risk from changes in the price of our available-for-sale short-term investments. These short-term investments were recorded at a fair market value of $95.1 million at March 31, 2002. We have a policy of evaluating the viability of our investments on a regular basis, primarily by reviewing the respective security’s price performance over the prior six-month period, liquidity and management/ownership, as well as other financial measurements.

F-24

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Stockholders

Macromedia, Inc.

We have audited the accompanying consolidated balance sheets of Macromedia, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2002. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedule as listed in the accompanying index in Item 14(A)2 herein. These consolidated financial statements and the 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, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2002, 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

April 19, 2002, except as to Note 21 which is as of May 10, 2002

F-25

MACROMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	March 31,
	2002			2001
ASSETS
Current assets:
Cash, cash equivalents, and short-term investments	$	161,971		$	177,970
Accounts receivable, less allowance for sales returns and doubtful accounts of $13,714 and $13,430 as of March 31, 2002 and 2001, respectively		24,181			37,861
Receivable from equity affiliate		—			2,621
Inventory		3,032			2,114
Prepaid expenses and other current assets		17,659			22,556
Deferred income taxes		9,854			12,663
Total current assets		216,697			255,785
Property and equipment, net		49,189			114,604
Related party loans		8,305			14,175
Investment in equity affiliate		—			31,290
Intangibles assets, net		226,579			345,234
Restricted cash		11,409			9,202
Other long-term assets		5,659			15,383
Total assets	$	517,838		$	785,673
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	6,719		$	8,273
Accrued liabilities		56,082			91,033
Accrued restructuring		12,224			—
Unearned revenues		24,791			16,982
Total current liabilities		99,816			116,288
Other liabilities:
Accrued restructuring, non-current		30,809			—
Other long-term liabilities		6,492			1,172
Total liabilities		137,117			117,460
Stockholders’ equity:
Preferred stock, par value $0.001 per preferred share: 5,000 shares authorized, no shares issued as of March 31, 2002 and 2001, respectively		—			—
Common stock, par value $0.001 per common share: 200,000 shares authorized, 60,987 and 59,221 shares issued as of March 31, 2002 and 2001, respectively		61			59
Treasury stock, at cost; 1,818 shares as of March 31, 2002 and 2001		(33,649	)		(33,649	)
Additional paid-in capital		734,755			713,579
Deferred stock compensation		(281	)		(907	)
Accumulated other comprehensive income (loss)		(158	)		308
Accumulated deficit		(320,007	)		(11,177	)
Total stockholders’ equity		380,721			668,213
Total liabilities and stockholders’ equity	$	517,838		$	785,673

See accompanying notes to consolidated financial statements.

F-26

MACROMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

	Years Ended March 31,
	2002			2001			2000
Net revenues	$	324,794		$	389,600		$	264,159
Cost of revenues		42,546			42,398			28,829
Gross profit		282,248			347,202			235,330
Operating expenses:
Sales and marketing		170,651			155,453			113,005
Research and development		110,118			107,670			65,739
General and administrative		43,693			39,000			24,610
Acquisition related expenses and in-process research and development		—			22,774			11,516
Non-cash stock compensation		—			6,000			11,071
Restructuring expenses		81,820			—			—
Impairment and amortization of intangible assets		114,532			9,872			1,013
Total operating expenses		520,814			340,769			226,954
Operating income (loss)		(238,566	)		6,433			8,376
Other income (expense):
Interest income and other, net		6,400			14,178			6,187
Loss on investments, net		(6,980	)		(13,836	)		—
Loss on equity affiliate		(36,016	)		—			—
Litigation settlements		(31,402	)		—			—
Total other income (expense)		(67,998	)		342			6,187
Minority interest		—			15,336			6,179
Income (loss) before taxes		(306,564	)		22,111			20,742
Provision for income taxes		2,266			8,737			11,975
Net income (loss)		(308,830	)		13,374			8,767
Accretion on mandatorily redeemable convertible preferred stock		—			—			(2,538	)
Net income (loss) applicable to common stockholders	$	(308,830	)	$	13,374		$	6,229
Net income (loss) applicable to common stockholders per common share
Basic	$	(5.31	)	$	0.26		$	0.14
Diluted	$	(5.31	)	$	0.24		$	0.12
Weighted average common shares outstanding used for basic and diluted income (loss) per common share
Basic		58,190			50,842			44,601
Diluted		58,190			56,764			52,270

See accompanying notes to consolidated financial statements.

F-27

MACROMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

	Common Stock			Treasury Stock					Additional Paid-In Capital			Deferred Stock Compensation			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)			Accumulated Deficit			Total Stockholders’ Equity
	Shares	Amount		Shares		Amount
Balances as of March 31, 1999	43,590	$	43	(1,620	)	$	(25,445	)	$	203,431		$	(1,544	)	$	38					$	(29,492	)	$	147,031
Comprehensive income: Net income																		$	8,767			8,767			8,767
Unrealized gain on available-for-sale short-term investments, net of tax																365			365						365
Total comprehensive income																		$	9,132
Preferred shares issued by acquired companies.										520															520
Exercise of stock options	3,725		4							36,842															36,846
Common stock issued under ESPP	84		—							2,445															2,445
Common stock exchanged for preferred stock of pooled entities	3,231		4							31,403															31,407
Purchase of treasury stock				(198	)		(8,204	)																	(8,204	)
Preferred stock accretion										(2,538	)														(2,538	)
Tax benefit from stock plans										8,714															8,714
Non-cash stock compensation										33,251			(21,747	)											11,504
Gain on sale of subsidiary stock										21,109															21,109
Adjustment to conform acquired company’s year end	44		—							320			(174	)		(10	)					(3,826	)		(3,690	)
Balances as of March 31, 2000	50,674		51	(1,818	)		(33,649	)		335,497			(23,465	)		393						(24,551	)		254,276
Comprehensive income:
Net income																		$	13,374			13,374			13,374
Unrealized loss on available-for-sale short-term investments, net of tax																(85	)		(85	)					(85	)
Total comprehensive income																		$	13,289
Exercise of stock options and warrants	2,835		3							42,242															42,245
Common stock issued under ESPP	157		—							5,407															5,407
Common stock issued and warrants and options assumed in business combinations	5,555		5							337,601															337,606
Tax benefit from stock plans										7,820															7,820
Non-cash stock compensation										10,498			(4,509	)											5,989
Deconsolidation of AtomShockwave										(27,067	)		27,067												—
Gain on sale of subsidiary stock										1,581															1,581
Balances as of March 31, 2001	59,221		59	(1,818	)		(33,649	)		713,579			(907	)		308						(11,177	)		668,213
Comprehensive loss:
Net loss																		$	(308,830	)		(308,830	)		(308,830	)
Unrealized loss on available-for-sale short-term investments, net of tax																(466	)		(466	)					(466	)
Total comprehensive loss																		$	(309,296	)
Exercise of stock options	1,295		1							15,194															15,195
Common stock issued under ESPP	471		1							5,919															5,920
Non-cash stock compensation										63			626												689
Balances as of March 31, 2002	60,987	$	61	(1,818	)	$	(33,649	)	$	734,755		$	(281	)	$	(158	)				$	(320,007	)	$	380,721

See accompanying notes to consolidated financial statements.

F-28

MACROMEDIA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	Years Ended March 31,
	2002			2001			2000
Cash flows from operating activities:
Net income (loss)	$	(308,830	)	$	13,374		$	8,767
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		152,131			35,910			18,434
Write off of long-lived assets		24,678			—			191
Write off of acquired in-process research and development		—			21,100			—
Loss on investments		7,610			13,836			—
Loss on equity affiliate		36,016			—			—
Impairment of intangible assets		—			4,293			—
Deferred income taxes		2,809			(4,851	)		(1,583	)
Tax benefit from employee stock plans		—			7,820			8,714
Minority interest		—			(15,336	)		(6,179	)
Non-cash stock compensation		—			—			9,719
Changes in operating assets and liabilities, net of business combinations:
Accounts receivable, net		16,476			2,469			(27,912	)
Prepaid expenses and other current assets		3,118			(8,613	)		233
Accrued liabilities and payables		(26,909	)		(4,717	)		25,356
Accrued restructuring		43,033			—			—
Unearned revenues		7,809			1,163			2,554
Net cash provided by (used in) operating activities		(42,059	)		66,448			38,294
Cash flows from investing activities:
Purchases of available-for-sale short-term investments		(130,690	)		(50,611	)		(117,457	)
Proceeds from sales and maturities of available-for-sale short-term investments		96,592			57,924			127,558
Cash paid for acquisitions, net of cash acquired		—			(16,686	)		—
Purchases of property and equipment		(17,392	)		(65,251	)		(33,934	)
Purchases of investments		(2,995	)		(28,399	)		(13,300	)
Proceeds from sale-leaseback		22,125			—			—
Deposits of restricted cash		(2,207	)		(9,202	)		—
Other, net		5,884			(5,740	)		(1,687	)
Net cash used in investing activities		(28,683	)		(117,965	)		(38,820	)
Cash flows from financing activities:
Proceeds from issuance of preferred stock		—			9,384			59,029
Proceeds from issuance of common stock		21,109			50,547			39,434
Borrowings on capital lease		—			—			999
Repayments of capital lease obligations		—			—			(1,281	)
Acquisition of treasury stock		—			—			(8,204	)
Net cash provided by financing activities		21,109			59,931			89,977
Net increase (decrease) in cash and cash equivalents		(49,633	)		8,414			89,451
Deconsolidation of AtomShockwave		—			(6,991	)		—
Adjustment to conform acquired companies’ year ends		—			—			(3,826	)
Total adjusted increase (decrease) in cash and cash equivalents		(49,633	)		1,423			85,625
Cash and cash equivalents, beginning of year		116,507			115,084			29,459
Cash and cash equivalents, end of year	$	66,874		$	116,507		$	115,084

See accompanying notes to consolidated financial statements.

F-29

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    Nature of Operations

Macromedia, Inc. (the “Company” or “Macromedia”) provides software that empowers developers and designers to create effective user experiences on the Internet. The Company’s integrated family of technologies enables the development of a wide range of Internet solutions including Websites, rich media content, and Internet applications across multiple platforms and devices.

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

2.    Summary of Significant Accounting Policies

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

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

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

Revenues recognized from 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 an allowance for anticipated product returns and rebates to distributors. Revenues from consulting, training, and other services are generally recognized as the services are performed.

Revenues recognized 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 revenues.

The Company licenses products to OEMs or provides end-user customers the right to multiple copies. These arrangements generally provide for nonrefundable fixed fees and revenues are recognized upon delivery of the product master or the first copy, provided all significant obligations have been met, persuasive evidence of an arrangement exists, fees are fixed and determinable, and collection is probable. Per-copy royalties in excess of

F-30

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

the fixed minimum amounts and refundable license fees are recognized as revenues when 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 revenues 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 under agreements 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 as revenues 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, revenues are recognized using the completed contract method.

Cash Equivalents and Short-term Investments—Cash equivalents consist of highly liquid investments with maturities of generally three months or less at the time of purchase. Short-term investments consist of readily marketable securities with a maturity of generally 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 original 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. At March 31, 2002, these marketable securities consisted principally of U.S. government agency securities, commercial paper, and taxable municipal securities. The objective of the Company’s investments policy is preservation of the value of its fixed-income investment portfolio while maintaining adequate financial liquidity. The Company invests in high-quality fixed-income investment securities with maturities of 24 months or less.

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 interest 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 (loss) in stockholders’ equity. Realized gains and losses are included in interest income.

The Company reviews its investments in marketable securities on a regular basis to determine whether or not each security has experienced an other-than-temporary decline in fair value. If the Company concludes that an other-than-temporary decline exists in its marketable securities, the Company writes down the investment to the fair value and records the related write down as an investment loss in its consolidated statement of operations. To date, the Company has not recorded any such investment losses.

Investments—The Company has historically held non-marketable investments in the common and preferred stock of certain companies. These strategic investments are accounted for on the cost basis as they do not represent a greater than 20% voting interest in the investee and the Company does not have the ability to significantly influence the investee’s day-to-day operations. Impairment losses are recognized on these strategic investments when the Company determines that there has been a decline in the fair value of the investment that is other than temporary.

F-31

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

During fiscal year 2002, the Company recorded impairment losses on strategic investments of $7.6 million. These losses represented write offs or write downs of the carrying amount of these investments and were determined considering, among other factors, the investees’ current and projected operating results, estimated liquidation value, and the inability of the investee to obtain additional financing. During fiscal year 2002, the Company received funds totaling approximately $600,000, representing its portion of the liquidated assets of two investees whose investment balances were written off during fiscal year 2001 in accordance with the Company’s investments policy. At March 31, 2002, the Company had one remaining cost basis investment with a carrying value of $400,000.

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

Concentrations of Credit Risk—Distributors comprise a significant portion of the Company’s revenues and trade receivables. The Company controls credit risk through credit approvals, credit limits, and monitoring procedures. The Company performs in-depth credit evaluations of all new customers and ongoing assessments of existing customers. If deemed necessary, the Company may require letters of credit or bank guarantees, but generally requires no collateral. During fiscal years 2002, 2001, and 2000, sales to one distributor accounted for 28% of each respective years’ consolidated net revenues. Accounts receivable relating to this customer were $11.1 million and $15.7 million as of March 31, 2002 and 2001, respectively.

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities, related party loans, other long-term cost basis 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 monitors the financial health of these institutions and limits its concentration in individual securities and type of investments that exist within its portfolio. In addition, all of the Company’s investments must carry high credit-quality ratings. As such, the Company does not believe there is significant financial risk to its portfolio or risk of non-performance by the institutions. The fair value of the Company’s cash equivalents, short-term investments, accounts receivable, accounts payable, accrued liabilities, and related party loans approximate their carrying values due to their short maturity or rate structure.

Property and equipment, net—Equipment, computer software, and furniture are recorded at cost and are depreciated over the estimated useful lives of the assets 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. Land and building and other fixed assets are recorded at cost. Buildings are depreciated over thirty years, using the straight-line method. At March 31, 2002, the Company did not own any land or buildings (see Note 14).

Intangible Assets—Intangible assets primarily consist of goodwill, developed technology, and assembled workforce relating to mergers and acquisitions accounted for under the purchase method of accounting. During the three years ended March 31, 2002, these intangibles were amortized on a straight-line basis over an estimated useful life of three years. Through March 31, 2002, the Company periodically assessed whether any events, including significant changes in demand for its products or changes in market conditions in the principle markets in which the Company sells its products, would adversely impact the carrying value of these assets. Possible examples of these events include, but are not limited to: a significant decline in the Company’s market value; a decrease in the market value of a particular asset; and continued operating or cash flow losses combined with forecasted future losses. If such an event were to have occurred, the Company would have estimated future discounted cash flows generated by each of these assets in order to assess the amount by which the asset was impaired as required by Statement of Financial Accounting Standards (“SFAS”) No. 121, Accounting for the

F-32

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and Accounting Principles Bulletin (“APB”) No. 17, Intangible Assets. The Company did not record an impairment to any of its intangible assets during fiscal year 2002.

At the beginning of fiscal year 2003, the Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which supersedes SFAS No. 121, for determining impairment of intangible assets. As a result of adopting this standard, the Company will no longer amortize certain intangible assets, most notably goodwill and assembled workforce, which had net book values at March 31, 2002 of $183.1 million and $15.8 million, respectively. During fiscal year 2002, goodwill and assembled workforce were amortized on a straight-line basis over a three-year period, resulting in recurring quarterly amortization charges of $23.2 million and $2.0 million, respectively.

Under SFAS No. 142, the Company will be required to assess the fair value and recoverability of its intangible assets upon adoption as well as at least once a year prospectively. Accordingly, the Company will continue to evaluate whether any event has occurred that might indicate that the carrying value of an intangible asset is not recoverable. SFAS No. 142 became effective for the Company in the beginning of fiscal year 2003. The Company has not yet completed its evaluation of the effects that SFAS No. 142 will have on its consolidated financial statements. Currently, the Company does not expect to record an impairment charge upon completion of its evaluation, however, there can be no assurance that a significant impairment charge will not be recorded upon completion.

Capitalized Software—The Company follows the guidance of SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, in accounting for its capitalized software. Under the Company’s policy, costs incurred in the initial design phase of software development are expensed as incurred. Once the point of technological feasibility is reached, production costs related to the development of foreign-language versions of the Company’s products are capitalized. Capitalized software costs are amortized on a per-unit basis as revenues are recognized, but not less than on a straight-line basis over the estimated life of the technology. Amortization of the capitalized software is included as a component of cost of revenues and was $4.0 million, $3.1 million, and $2.6 million in fiscal years 2002, 2001, and 2000, respectively. The actual lives of Macromedia’s capitalized software could differ from management’s estimates, and such differences could cause carrying amounts of the assets to be materially reduced.

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 in U.S. Dollars using the exchange rates at the balance sheet date. Net revenues and expenses are translated using average exchange rates during the period. Translation adjustments are recorded in the Company’s consolidated statements of operations as a component of interest income and other, net.

Foreign Exchange Forward Contracts—The Company uses foreign exchange forward contracts to manage its economic exposure associated with probable anticipated revenues and certain asset balances denominated in various foreign currencies. The Company’s forward contracts are not designated as accounting hedges as prescribed by SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and therefore, the Company marks-to-market the forward contracts and includes realized and unrealized gains and

F-33

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

losses in the current period as a component of interest income and other, net. 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 the consolidated statements of operations 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 APB No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for stock-based awards to employees (see Note 15). 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 No. 123 and Emerging Issues Task Force (“EITF”) No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services. Compensation costs are amortized on a straight-line basis over the vesting period of the securities.

Other Comprehensive Income (Loss)—SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and displaying comprehensive income (loss) and its components in the consolidated financial statements. The sole component of other comprehensive income (loss) during fiscal years 2002, 2001, and 2000 was unrealized gains or losses from the Company’s available-for-sale short-term investments.

Advertising Costs—Advertising expenditures are charged to operations as incurred and include certain cash consideration paid to distributors for advertising the Company’s products. Advertising expenses incurred during fiscal years 2002, 2001, and 2000 were $6.0 million, $10.4 million, and $8.3 million, respectively.

Deferred Taxes—The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets arise primarily from net operating losses, reserves, and timing differences for purchased technologies and intangible assets. Deferred tax assets 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.

Recent Accounting Standards—In July 2001, the FASB issued SFAS No. 141, Business Combinations. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method. Use of the pooling-of-interests method is no longer permitted. The adoption of this standard did not have an impact on the Company’s consolidated financial statements during fiscal year 2002 as the Company did not enter into any business combinations during that period.

In July 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and certain other intangible assets no longer be amortized to operations, but instead be reviewed for impairment at least once a year. SFAS No. 142 became effective for the Company in the beginning of fiscal year 2003. Macromedia has not yet completed its evaluation of the effects that SFAS No. 142 will have on its consolidated financial statements. Currently, the Company does not expect to record an impairment charge upon completion of its evaluation, however, there can be no assurance that a significant impairment charge will not be recorded upon completion.

In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 applies to all long-lived assets. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 will be effective for the Company in fiscal year

F-34

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

2003. The Company has not yet evaluated the effects of this pronouncement on its consolidated financial statements.

Reclassification—Certain amounts in the accompanying fiscal year 2001 and fiscal year 2000 consolidated financial statements have been reclassified in order to conform to the presentation of the fiscal year 2002 consolidated financial statements.

3.    Supplemental Cash Flows Information

Supplemental cash flows information is as follows:

	Years Ended March 31,
	2002			2001			2000
	(In thousands)
Cash paid for:
Interest	$	—		$	—		$	76
Income taxes	$	3,014		$	934		$	126
Non-cash investing and financing activities:
Common stock issued and warrants and options assumed in purchase business combinations	$	—		$	337,606		$	—
Unrealized gain (loss) on available-for-sale securities	$	(466	)	$	(85	)	$	355

In connection with the acquisition of Atom Corporation by the Company’s then-consolidated subsidiary, shockwave.com, with the surviving company being AtomShockwave Corp., (“AtomShockwave”), the Company began accounting for its investment under the equity method of accounting during the fourth quarter of fiscal year 2001. The following information illustrates the effect of the deconsolidation of AtomShockwave on the Company’s consolidated cash flow position:

	2001
	(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 Year 2001 Acquisitions

Allaire Corporation—On January 29, 2001, Macromedia, Alaska Acquisition Corp. (“Alaska”), a wholly-owned subsidiary of Macromedia, and Allaire Corporation (“Allaire”), a publicly held company that provided software products for companies building their business on the Web, entered into an amended and restated agreement and plan of merger. Under the terms of the merger, Allaire merged with and into Alaska with Alaska continuing as the surviving company. The merger closed on March 20, 2001 and was accounted for as a purchase business combination. 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 merger date. The results of Allaire’s operations are included in the Company’s consolidated statements of operations from the date of the merger. In connection with the merger, 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 cash. In addition, the Company assumed all of Allaire’s outstanding stock options and warrants. The Company also incurred transaction costs related to the merger.

F-35

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The allocation of the purchase price, based on valuation performed by a third-party, is as follows:

Purchase Price
	(In thousands)
Common stock issued	$	214,579
Cash paid		83,331
Acquisition value		297,910
Fair value of Allaire’s options and warrants assumed		123,028
Transaction costs		7,074
	$	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 certain other intangible assets, which are being amortized on a straight-line basis over a period of three years, through March 31, 2002. The following table summarizes the allocation of the purchase price:

Purchase Price Allocation
	(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
	$	428,012

The $18.0 million allocated to in-process research and development was expensed upon closing of the merger, 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 Platform, Enterprise Edition. The values assigned to the in-process research and development were based upon established valuation techniques. At the date of the merger, 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 completing testing of the products and were determined by analyzing efforts incurred on development up to the point of the merger. The value of the acquired in-process research and development was calculated using 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 products’ contributions to operating results. These cash flows were discounted to their net present value using a discount rate of approximately 28%, considering the uncertainty surrounding the successful development of the projects. However, by March 31, 2002, the Company had successfully developed the technologies without incurring significant changes from either the estimated timeline or completion costs originally estimated at the date of the merger.

The following pro forma results of operations reflect the combined results of Macromedia for fiscal years 2001 and 2000 and the results of Allaire for the calendar years ended December 31, 2000 and 1999 as if the

F-36

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

merger occurred at the beginning of the earliest period presented. The pro forma results do not reflect any unusual charges that resulted directly from the merger.

	Years Ended March 31,
	2001			2000
	(In thousands, except per share data)
Net revenues	$	504,328		$	318,552
Net loss applicable to common stockholders	$	(84,640	)	$	(114,877	)
Net loss applicable to common stockholders per share	$	(1.51	)	$	(2.29	)
Weighted average common shares outstanding		56,187			50,097

Atom Corporation—On December 14, 2000, the Company’s majority-owned subsidiary, shockwave.com, entered into an Agreement and Plan of Reorganization with Atom Corporation (“AtomFilms”), whereby AtomFilms merged with and into shockwave.com with shockwave.com continuing as the surviving corporation. The merger closed in January 2001, and was 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, renamed AtomShockwave, Corp. (“AtomShockwave”), equal to approximately 30% of the fully diluted equity outstanding. Further, in connection with the merger, 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 Series D preferred financing round on March 15, 2001. Immediately subsequent to the merger, the Company began accounting for its investment in AtomShockwave under the equity method of accounting (see Note 8).

Middlesoft, Inc—On July 6, 2000, Macromedia, Core Acquisition Corp. (“Core”) and Middlesoft, Inc. (“Middlesoft”) entered into an agreement and plan of merger, whereby Core merged into and with Middlesoft with Middlesoft remaining as the surviving corporation. The merger was completed on July 10, 2000, and was accounted for under the purchase method for approximately $9.0 million in cash consideration. The merger was accounted for under the purchase method in fiscal year 2001. The results of Middlesoft’s operations are included in the Company’s consolidated statements of operations from the date of merger. The purchase price of the transaction was allocated to the acquired assets and assumed liabilities based on their fair values as of the date of the merger. $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 Macromedia Flash technologies in order to allow them to run on multiple hardware devices. At the date of merger, it was estimated that approximately 50% of the development effort on the technologies was completed with the remaining 50% to be completed 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 merger 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 rate 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 merger, resulting in a charge during the fourth quarter of $4.3 million. 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 the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 net 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 write off.

The pro forma results of operations from the Middlesoft merger as if it had occurred at the beginning of fiscal year 2000 were not significantly different from the Company’s actual consolidated results of operations.

Fiscal Year 2000 Acquisitions

Time4.com—On December 22, 1999, the Company acquired certain technology rights of Time4.com, Inc. (“Time4”), a software development company, 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.

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 remained 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.

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 year 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. There were no conforming accounting adjustments for Andromedia upon acquisition.

ESI Software, Inc.—On July 8, 1999, Macromedia, Inc., ESI Software, Inc., (“ESI”), and Dynamo Acquisition Corp., a wholly-owned subsidiary of Macromedia (“Dynamo”), entered into an Agreement and Plan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 remained 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.

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 the fiscal year ended March 31, 2000. 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 in cash. At the time of the acquisition, the Company intended to utilize these assets in the research and development of a single future research and development project. As a result, 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: (1) sell certain tangible and intangible assets relating to the Company’s Pathware product line to Lotus; (2) result in Lotus acting as a distributor of the Company’s products; and (3) 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 from the original agreement date as a result of the terms of the agreements.

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6.    Cash, Cash Equivalents, and Short-Term Investments

The following is a summary of cash, cash-equivalents, and short-term investments:

	March 31,
	2002		2001
	(In thousands)
Cash and cash equivalents:
Cash	$	47,295	$	56,131
Money market funds		5,124		9,249
Commercial paper		12,455		51,127
Certificates of deposit		2,000		—
Total cash and cash equivalents		66,874		116,507
Short-term investments:
Corporate equity securities	$	392	$	560
Corporate debt securities		—		11,192
Commercial paper		23,659		20,773
Certificates of deposit		6,400		2,000
U.S. treasury securities		2,043		2,558
U.S. government agency securities		50,986		16,727
Taxable municipal securities		11,617		7,653
Total short-term investments		95,097		61,463
	$	161,971	$	177,970

Short-term investments consisted of the following, by original contractual maturity:

	March 31,
	2002		2001
	(In thousands)
Due in one year or less	$	47,672	$	35,893
Due greater than one year		47,425		25,570
	$	95,097	$	61,463

The Company’s available-for-sale securities are carried at fair value. The Company recorded, net of tax, unrealized losses of $466,000 and $85,000 during fiscal years 2002 and 2001, respectively.

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.    Property and Equipment, net

Property and equipment, net consisted of the following:

	March 31,
	2002			2001
	(In thousands)
Land and building	$	—		$	26,605
Computer equipment		32,654			50,556
Computer software		6,607			17,110
Office equipment and furniture		18,836			39,106
Leasehold improvements		24,063			37,027
		82,160			170,404
Less accumulated depreciation and amortization		(32,971	)		(55,800	)
	$	49,189		$	114,604

Depreciation and amortization expense for fiscal years 2002, 2001, and 2000 was $36.4 million, $23.9 million, and $14.8 million, respectively. In December 2001, Macromedia sold land and an office building in Redwood City, California, with a consecutive 10-year lease for the space that the Company currently occupies (see Note 14). In addition, during fiscal year 2002 the Company wrote off certain assets in conjunction with its restructurings as these assets were abandoned due to the closure of office facilities and employee terminations (see Note 11).

8.    Investment in Equity Affiliate

Prior to January 2001, Macromedia owned a controlling interest in AtomShockwave, formerly shockwave.com, and as such accounted for AtomShockwave as a consolidated subsidiary. In January 2001, shockwave.com acquired AtomFilms, and as a result, the Company’s ownership of the voting common and preferred stock outstanding of AtomShockwave was reduced to 38%. Accordingly, the Company accounted for its ownership during the fourth quarter of fiscal year 2001 and prospectively under the equity method of accounting. This resulted in an investment in equity affiliate balance of $31.3 million on the Company’s consolidated balance sheet at March 31, 2001.

During the first quarter of fiscal year 2002, the Company made additional investments in AtomShockwave in return for secured promissory notes of $2.2 million. Additionally, during fiscal year 2002, the Company purchased $2.4 million in AtomShockwave common stock from certain Macromedia executives. These investments were made in arm’s-length transactions and increased the Company’s ownership in AtomShockwave to approximately 40%.

During fiscal year 2002, the Company recognized its share of AtomShockwave’s losses, recording $14.2 million in losses from its equity affiliate. These losses were recorded as a reduction in the carrying amount of the Company’s investment in equity affiliate in its consolidated balance sheet and as a loss from equity affiliate in its consolidated statements of operations.

As a result of the continued weaker business environment during fiscal year 2002 and a restructuring by AtomShockwave that included significant staff reductions and the closure of several facilities, Macromedia periodically reviewed its remaining investment in AtomShockwave for impairment. These reviews resulted in the write off of the Company’s remaining investment balance of $21.8 million and certain receivables totaling

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$344,000 during the first and second quarters of fiscal year 2002. At March 31, 2002, Macromedia’s investment balance in AtomShockwave was zero, however, the Company still owned approximately 40% of the outstanding voting shares of AtomShockwave.

9.    Intangible Assets

In March 2001, the Company entered into a merger with Allaire for a total purchase price of $428.0 million. The excess of the purchase price over the net tangible 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 because technological feasibility had not been established and no future alternative uses existed. The remaining $346.9 million of the purchase price was recorded as goodwill and other intangible assets, which are being amortized on a straight-line basis over a period of three years, through March 31, 2002. During fiscal year 2002, the Company recorded net purchase price adjustments to reduce goodwill by $5.2 million relating to the merger. These adjustments primarily relate to a decrease in reserves for anticipated product returns, partially offset by the write off of certain assets assumed upon the merger with Allaire. The Company also recorded a balance sheet reclassification between short and long-term liabilities of $1.4 million relating to deferred rent assumed in the merger.

During fiscal year 2002, the Company wrote off fully amortized intangible assets consisting of goodwill, assembled workforce, and other intangibles totaling $1.5 million, $975,000, and $231,000, respectively. Intangible assets, consisted of the following:

	March 31,
	2002			2001
	(In thousands)
Goodwill	$	278,747		$	285,413
Developed technology		34,000			34,000
Assembled workforce		24,000			24,975
Other intangibles		7,762			6,911
		344,509			351,299
Less accumulated amortization		(117,930	)		(6,065	)
	$	226,579		$	345,234

10.    Accrued Liabilities

Accrued liabilities, consisted of the following:

	March 31,
	2002		2001
	(In thousands)
Accrued payroll and related	$	14,373	$	20,538
Accrued marketing development		3,014		5,259
Accrued income taxes		9,587		12,947
Accrued acquisition related costs		—		9,399
Accrued rebates		2,568		8,519
Other accrued expenses		26,540		34,371
	$	56,082	$	91,033

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.    Accrued Restructuring

In April 2001, the Company began executing a restructuring plan to deliver cost synergies associated with the March 2001 merger with Allaire and to better align its cost structure with the weaker business environment. The Company recorded restructuring expenses totaling approximately $39.5 million. In January 2002, the Company announced a supplemental restructuring plan to better align its cost structure with the continuing weaker business environment. As a result of this supplemental restructuring plan, the Company recorded additional restructuring expense of $42.3 million.

Expenses associated with these fiscal year 2002 restructuring plans were recorded in accordance with EITF No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring), Staff Accounting Bulletin (“SAB”) No. 100, Restructuring and Impairment Charges, and SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Detail of the fiscal year 2002 restructuring expenses, payment activity, and ending accrual balance related to restructuring is presented in the following table:

Restructuring Expenses	Total Expense		Cash Payments			Non-cash Charges			Accrual Balance as of March 31, 2002
	(In thousands)
Facilities	$	48,996	$	(8,192	)	$	1,184		$	41,988
Write off of fixed assets		24,303		—			(24,303	)		—
Severance and related charges		5,976		(4,959	)		—			1,017
Other charges		2,545		(2,323	)		(194	)		28
	$	81,820	$	(15,474	)	$	(23,313	)	$	43,033

Restructuring expenses associated with facilities for the two plans primarily represent estimated future costs related to approximately 22 facilities to either cancel or vacate these facility operating leases as a result of staff reductions and changes in the Company’s business and demise and tenant improvement costs to sub-lease these facilities, net of deferred rent recorded for these facilities. The Company expects to make future facility rent payments, net of sub-lease income, on its contractual lease obligations for these facilities, the longest of which extends through fiscal year 2011, which will be recorded as a reduction to the Company’s restructuring accrual.

In connection with the fiscal year 2002 restructurings, the Company also incurred expenses related to the impairment of fixed assets that were abandoned which resulted in the write off of leasehold improvements and furniture and fixtures due to the closure of office facilities and employee terminations.

Under the fiscal year 2002 restructurings, the Company had workforce reductions whereby it terminated approximately 330 employees, primarily in North America and the United Kingdom, impacting all of Macromedia’s business functions. The worldwide workforce reductions began during April 2001 for the initial plan and January 2002 for the supplemental plan. Both plans included workforce-related costs including severance, fringe benefits, and job placement costs. The accrual balance at March 31, 2002 includes unpaid severance benefits and ongoing scheduled fringe benefit payments for these former employees, primarily related to the supplemental plan. The Company expects to be substantially complete with these payments in fiscal year 2003.

Included in restructuring expenses are other charges of approximately $2.5 million, of which $1.7 million relates to non-severance obligations under an amendment to contractual agreements with certain former

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

personnel. The remaining $800,000 relates to contract cancellation fees for marketing contracts, including advertising. Payments on these obligations were substantially completed by March 31, 2002.

12.    Income Taxes

The components of the provision for income taxes were as follows:

	Years Ended March 31,
	2002			2001			2000
	(In thousands)
Current:
Federal	$	(2,760	)	$	—		$	—
State		(473	)		—			—
Foreign		2,823			5,768			2,651
Total Current		(410	)		5,768			2,651
Deferred:
Federal		1,245			(3,771	)		416
State		1,431			(1,080	)		194
Total Deferred		2,676			(4,851	)		610
Charge in lieu of taxes attributable to employee stock plans		—			7,820			8,714
	$	2,266		$	8,737		$	11,975

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, as a result of the following:

	Years Ended March 31,
	2002			2001			2000
	(In thousands)
Computed tax (benefit) at statutory rate	$	(107,297	)	$	7,739		$	7,213
State taxes, net		458			1,160			602
Nondeductible pooling and acquisition costs and goodwill		32,489			17,794			10,442
Net operating loss carryforward utilization		—			(4,982	)		—
Foreign tax (benefits) provided for at rates other than U.S. statutory rates		12,258			(13,366	)		(4,286	)
Research and other tax credits		—			(3,455	)		(2,413	)
Change in valuation allowance		64,108			3,218			—
Other, net		250			629			417
	$	2,266		$	8,737		$	11,975

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The tax effect of temporary differences that give rise to deferred tax assets (liabilities) is as follows:

	March 31,
	2002			2001
	(In thousands)
Deferred tax assets:
Reserves, accruals and other	$	66,865		$	28,512
Net operating loss carryforwards (federal)		178,846			169,388
Net operating loss carryforwards (state)		21,845			31,345
Credit for research activities		43,227			29,800
Other credits		9,846			5,112
Total deferred tax assets		320,629			264,157
Less valuation allowance		(294,300	)		(224,777	)
Net deferred tax assets		26,329			39,380
Deferred tax liabilities:
Intangible assets		(16,475	)		(26,717	)
Net deferred tax asset	$	9,854		$	12,663

The Company has established a valuation allowance to reduce the deferred tax assets to levels which the Company believes is more likely than not to be realized through future taxable income. Approximately $195.0 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. Also, approximately $7.2 million of the valuation allowance for deferred tax assets relates to the Allaire merger, the benefit from which will be allocated to goodwill and other identifiable intangible assets generated in the merger rather than current income when subsequently recognized.

During fiscal year 2002, Macromedia repatriated $50.0 million of non-U.S. earnings from international subsidiaries which was included in fiscal year 2002 taxable income and, as such, reduced the Company’s current year net operating loss. Cumulative undistributed income of international subsidiaries amounted to $2.7 million as of March 31, 2002, 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 $1.1 million.

As of March 31, 2002, the Company had available federal and state net operating loss carryforwards of approximately $511.0 million and $418.9 million, respectively. If not utilized, net operating loss carryforwards will expire in fiscal years 2003 through 2022.

The Company also had research and experimentation credit carryforwards of approximately $28.4 million and $22.7 million for federal and California income tax purposes, respectively. In addition, the Company had foreign tax credit carryforwards of approximately $6.2 million for federal income tax purposes and Enterprise Zone and Manufacturer Investment credits of $5.4 million for California income tax purposes. If not utilized, the federal research credit carryforwards will expire in fiscal years 2003 through 2022 while the California research credits may be carried forward indefinitely; the foreign tax credit carryforwards will expire in fiscal years 2003 through 2007, while the California Enterprise Zone credit may be carried forward indefinitely and the Manufacturer Investment credit will expire in fiscal years 2007 through 2011.

The utilization of net operating loss carryforwards, as well as research and experimentation credits carryforwards, is limited by current tax regulations. These net operating loss carryforwards, as well as research

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and experimentation credits carryforwards, 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.

13.    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 activity consisted of the following:

	Shares Outstanding		Amount
	(In thousands)
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	—		$	—

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.

14.    Commitments, Contingencies, and Legal Proceedings

Leases.    The Company leases office space and certain equipment under operating leases, some of which contain renewal and purchase options. In addition, the Company sub-leases 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 sub-lease income are summarized as follows:

	Lease Obligations		Sublease Income			Net Lease Obligations
	(In thousands)
Years ended March 31,
2003	$	30,028	$	(8,472	)	$	21,556
2004		29,326		(7,528	)		21,798
2005		26,904		(5,076	)		21,828
2006		25,265		(3,950	)		21,315
2007		20,437		(3,809	)		16,628
Thereafter		68,185		(9,277	)		58,908
	$	200,145	$	(38,112	)	$	162,033

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Included in the total minimum net lease obligations of $162.0 million are estimated future net minimum rent payments for facilities included in the Company’s restructurings during fiscal year 2002. At March 31, 2002, the Company’s restructuring accrual included $29.4 million of estimated future net rent payments related to idle facilities (see Note 11).

The Company recorded rent expense excluding sub-lease income of $22.4 million, $15.3 million, and $7.4 million for fiscal years 2002, 2001, and 2000, respectively. For fiscal years 2002, 2001, and 2000, the Company recorded sub-lease income as an offset to rent expense of $7.7 million, $3.2 million, and $3.0 million, respectively.

Letters of Credit and Restricted Cash.    The Company obtained letters of credit from financial institutions totaling approximately $12.7 million as of March 31, 2002 in lieu of security deposits for leased office space. No amounts have been drawn against the letters of credit. The Company pledged approximately $11.4 million as of March 31, 2002 as security in trust for certain of the letters of credit. These funds were invested in a certificate of deposit and are classified as non-current restricted cash.

At March 31, 2001, the Company had non-current restricted cash amounting to approximately $9.2 million. The restrictions on these funds involved security deposits on a lease of real property. At March 31, 2002, the Company was no longer involved in this lease and had no remaining restricted cash under this arrangement.

Sale-Leaseback.    In December 2001, Macromedia sold land and an office building in Redwood City, California, with a consecutive 10-year lease for the space that the Company currently occupies. The sale resulted in proceeds of $22.1 million, excluding related tenant deposits and fees. The transaction was accounted for as a sale-leaseback arrangement in accordance with SFAS No. 98, Accounting for Leases, SFAS No. 28, Accounting for Sales with Leasebacks, and SFAS No. 66, Accounting for Sales of Real Estate. The transaction resulted in a deferred gain of approximately $4.5 million, which is classified in other long-term liabilities on the Company’s consolidated balance sheet, and will be amortized to operating expense over the lease term. The lease will be accounted for as an operating lease, resulting in base rental expense of approximately $1.8 million per year.

Royalties.    Macromedia has entered into license agreements with third-parties whose products or technologies are embedded in the Company’s software products. These license agreements generally provide for either fixed annual payments or royalties on a per-unit basis. Future minimum royalty payments for the years ending March 31, 2003, 2004, 2005 and 2006 are $2.5 million, $1.7 million, $663,000, and $218,000, respectively. The Company has rights to future upgrades on certain licenses at no additional charge.

Legal.    On August 10, 2000, Adobe Systems, Inc. (“Adobe”) filed suit against the Company 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 alleged that certain of the Company’s products infringe U.S. Patents Nos. 5,546,528 (“the ‘528 patent”) and 6,084,597. On September 27, 2000, the Company 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, the Company alleged infringement of U.S. Patent No. 5,467,443 (“the ‘443 patent”) by at least the Adobe Illustrator product and U.S. Patents Nos. 5,151,998 and 5,204,969 (“the ‘998 and ‘969 patents”) by the Adobe Premiere product. On October 17, 2000, Adobe filed its answer denying the allegations of the Company’s counterclaims. On March 28, 2002, Adobe’s claims relating to U.S. Patent No. 6,084,597 were dismissed by stipulation.

Judgments were reached on claims relating to the ‘528 patent on May 2, 2002 for Adobe’s claims and on May 10, 2002 for Macromedia’s counterclaims (see Note 21). Adobe has also claimed that Macromedia Flash

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products infringe the ‘528 patent. The court has ordered a separate trial of Adobe’s claims relating to these software products but has not yet set a date for the trial. The Company intends to vigorously defend against Adobe’s claims relating to its Macromedia Flash MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products.

On October 19, 2001, the Company filed suit in the United States District Court for the Northern District of California in San Francisco against Adobe (Case No. C01-3940-SI). In that suit, the Company alleges that certain of Adobe products, including Adobe’s GoLive and Photoshop software, infringe U.S. Patent No. 5,845,299, entitled “Draw-based Editor for Web Pages,” and that certain of Adobe’s products, including GoLive, infringe U.S. Patent No. 5,911,145, entitled “Hierarchical Structure Editor for Websites”. The complaint further alleges that Adobe has been on notice of these patents since 1999, and that its infringement has been willful. The Company’s complaint seeks monetary damages for Adobe’s infringement and an injunction against future infringement. The Company also seeks an award of attorneys’ fees. Discovery has begun, and the case is set for trial in June 2003.

On and after September 25, 2000, Allaire Corporation (“Allaire”), prior to its merger with the Company, and certain of Allaire’s officers and directors were named as defendants in several putative class action lawsuits filed in the United States District Court for the District of Massachusetts, each alleging violations of the federal securities laws. On December 5, 2000, the court consolidated the lawsuits under the caption In re: Allaire Corporation Securities Litig., No. 00-CV-11972 (WGY) (“Class Action”), and appointed lead plaintiffs and counsel for the putative class. On February 23, 2001, the lead plaintiffs, on behalf of a putative class defined as those who purchased Allaire stock between January 26, 2000, and September 18, 2000, filed a Corrected Consolidated Class Action Complaint alleging that Allaire, Joseph J. Allaire, Jeremy Allaire, David A. Gerth, and David J. Orfao, violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and are seeking damages, interest, and attorneys’ fees and costs. The defendants filed a motion to dismiss the Class Action. On September 25, 2001, the court ruled that the complaint in the Class Action did not comply with the pleading standards imposed by the Private Securities Litigation Reform Act of 1995, and permitted plaintiffs to file an amended complaint in accordance with specific requirements imposed by the court. Plaintiffs filed an amended complaint on November 30, 2001. The defendants have filed a motion to dismiss the amended complaint, which the plaintiffs have opposed and are awaiting action by the court.

On April 11, 2001, Allaire, after it was merged into Macromedia, Joseph J. Allaire, Jeremy Allaire, David A. Gerth, and David J. Orfao were named as defendants in an additional lawsuit alleging violations of the federal securities laws that also was filed in the United States District Court for the District of Massachusetts, Kassin v. Allaire Corporation, et al., No. 01-10600-WGY (“Kassin”). The complaint in Kassin, filed on behalf of an individual, alleges substantially the same violations of the Securities Exchange Act of 1934 as have been asserted in the Class Action, and additional claims for common law fraud and negligent misrepresentation. On May 11, 2001, the court consolidated the Class Action and Kassin for purposes of briefing and oral argument on the defendants’ motions to dismiss. The defendants filed a motion to dismiss Kassin. On September 25, 2001, the court consolidated Kassin with the Class Action, and the plaintiff’s claims in Kassin have been included in the amended complaint for the Class Action, and also are subject to defendants’ pending motion to dismiss. Although the Class Action and Kassin are in their early stages and Macromedia is not able to predict the outcome of the litigation at this time, the Company intends to defend it vigorously.

On January 9, 2002, the Superior Court for San Francisco, California entered a final judgment dismissing a complaint entitled Rosen et al. v. Macromedia, Inc. et al., (Case No. 988526) (“Rosen”) filed in the Court. The January 9, 2002 judgment implements a settlement under which the claims against us and all other defendants in the Rosen case and related state and federal cases were resolved without presumption or admission of any

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

liability or wrongdoing. The Rosen complaint alleged that the Company 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 the Company’s 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 its financial results and prospects. The settlement amount was $48.0 million, of which approximately $19.5 million was paid by insurance, net of reimbursable legal fees and subject to a reservation by one insurer to seek reimbursement of its $5.0 million settlement contribution. As a result, the Company recorded a $28.5 million charge as a component of other income (expense) in its consolidated statements of operations during fiscal year 2002. Subsequently, on March 7, 2002 one of the insurers, RLI Corp., filed a complaint against the Company for reimbursement of its $5.0 million settlement contribution. The Company feels this claim is without merit and intends to defend it vigorously.

15.     Stockholders’ Equity

As a result of the Company’s pooling-of-interests acquisitions during fiscal year 2000, various issuances of stock of the acquired entities were issued and outstanding during fiscal year 2000. 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 consolidated statements of stockholders’ equity.

Treasury Stock.    During fiscal year 2000, the Company purchased 198,000 shares of its common stock on the open market at an average price of $41.43 per share under a previously announced repurchase plan. 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.    As of March 31, 2002, there were stock options outstanding in connection with the following stock option and stock purchase plans (the “Macromedia Plans”):

(i)       1992 Equity Incentive Plan (“EIP”)

(ii)      1993 Directors Stock Option Plan

(iii)     Allaire 1997 Stock Incentive Plan

(iv)     Allaire 1998 Stock Incentive Plan

(v)      Allaire 1998 Employee Stock Purchase Plan (“Allaire ESPP”)

(vi)     Andromedia 1999 Stock Option Plan

(vii)    Macromedia 1999 Stock Option Plan

(viii)  Allaire 2000 Stock Incentive Plan

(ix)     2001 Employee Stock Purchase Plan (“ESPP”)

The options outstanding under the plans indicated at (iii), (iv), (v), (vi), and (viii) (the “Prior Plans”) above were assumed by the Company as a result of merger activities. The Company assumed certain options granted to former employees of the acquired companies (the “Acquired Options”) under these plans. All of the Acquired Options have been adjusted to give effect to the respective conversion terms between the Company and companies acquired.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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, 2002, was 20.3 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, 890,000 and 3.9 million shares of common stock, respectively, are reserved for grant as non-qualified stock options.

In December 2001, the Company adopted the 2001 Employee Stock Purchase Plan (the “2001 ESPP”). On February 16, 2002, all remaining available shares under the 1993 Employee Stock Purchase Plan were transferred to the 2001 ESPP. As such, under the 2001 ESPP, 2.3 million shares of common stock are reserved for issuance. Pursuant to the 2001 ESPP, and subject to certain limitations, employees may purchase, through payroll deductions of 2% to 15% of eligible 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 fiscal years 2002, 2001 and 2000, the Company issued 424,140, 157,157, and 84,358 shares under its employee stock purchase plans at average prices of $12.69, $39.17, and $28.98 per share, respectively.

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, 2002. 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 were reserved for issuance. Under the plan, and subject to certain limitations, employees were able to 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. At March 31, 2002, the Allaire ESPP had been superseded by the 2001 ESPP, and as such, is no longer an active plan.

In fiscal year 2002, the Company granted non-plan stock options to purchase shares of the Company’s common stock to new executive hires. The stock options were granted with an exercise price equal to fair market value on the grant date and have terms similar to options granted under the Company’s stock option plans.

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

In March 2000 the FASB issued Interpretation No. (“FIN”) 44, Accounting for Certain Transactions Involving Stock Compensation—An Interpretation of APB Opinion No. 25. Among other things, FIN 44 clarifies the accounting treatment for stock repurchases and exchanges and the criteria for such a transaction to qualify as a noncompensatory arrangement. 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 from the date the offer expired, June 4, 2001 (the “Option Exchange”). In connection with the Option Exchange, the Company cancelled 7.4 million common stock options and on December 21, 2001, regranted 6.6 million common stock options at an exercise price of $15.99 per share, which represented fair market value. The Company did not incur any financial statement impact during fiscal year 2002 due to the Option Exchange.

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following summarizes the stock option activity for fiscal years 2002, 2001, and 2000:

	Number of Options		Weighted Average Exercise Price
	(In thousands, except per share data)
As of March 31, 1999	10,180		$	10.81
Granted	7,231			49.46
Exercised	(3,725	)		9.85
Cancelled	(2,138	)		29.25
As of March 31, 2000	11,548			31.92
Assumed in merger	4,189			17.98
Granted	7,165			56.16
Exercised	(2,790	)		15.13
Cancelled	(2,427	)		57.19
As of March 31, 2001	17,685			37.64
Granted	11,443			15.42
Exercised	(1,314	)		11.61
Cancelled	(9,790	)		53.74
As of March 31, 2002	18,024			16.69

The following table summarizes information about Macromedia’s stock options outstanding as of March 31, 2002:

	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Number of Options	Weighted Average Exercise Price
	(In thousands, except per share data)
$   0.08  –  $     1.22	160	6.17	$	0.92	158	$	0.92
$   1.23  –  $     6.50	62	3.70		4.58	61		4.59
$   6.51  –  $     9.25	1,250	5.01		8.24	1,250		8.24
$   9.26  –  $   13.39	3,570	9.36		13.29	471		12.71
$ 13.40  –  $   14.94	1,590	8.65		14.46	468		14.75
$ 14.95  –  $   16.03	6,683	8.07		15.98	2,579		15.97
$ 16.04  –  $   20.65	2,977	8.49		19.27	1,474		19.55
$ 20.66  –  $   29.19	1,322	7.56		27.37	921		27.85
$ 29.20  –  $   45.31	261	7.94		33.83	125		34.79
$ 45.32  –  $   73.63	98	7.93		63.07	62		63.21
$ 73.64  –  $ 100.50	51	8.29		85.29	28		84.77
	18,024	7.98		16.69	7,597		17.10

The Company has recorded deferred stock compensation or non-cash stock compensation expense for stock options issued under the Prior Plans and the AtomShockwave 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

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

stock of AtomShockwave was 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 the Nasdaq National Market. The deferred stock compensation resulting from business combinations accounted for as pooling-of-interests with Andromedia and ESI were determined 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 $689,000, $6.0 million, and $5.1 million in fiscal years 2002, 2001, and 2000, respectively.

In connection with certain content development agreements entered into in fiscal year 2000, warrants for approximately 2.8 million shares of AtomShockwave common stock were issued to non-employees. Each warrant entitled the holder to purchase one share of AtomShockwave common stock at $0.50 per share. The warrants were immediately exercisable and expire ten 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. In fiscal year 2000, the Company recorded compensation expense of approximately $6.0 million in connection with the issuance of the AtomShockwave 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 ten 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 would have been changed as indicated below:

	Years Ended March 31,
	2002			2001			2000
	(In thousands, except per share data)
Net income (loss) applicable to common stockholders:
As reported	$	(308,830	)	$	13,374		$	6,229
Pro forma	$	(400,220	)	$	(34,273	)	$	(702	)
Net income (loss) applicable to common stockholders per common share:
Basic:
As reported	$	(5.31	)	$	0.26		$	0.14
Pro forma	$	(6.88	)	$	(0.67	)	$	(0.02	)
Diluted:
As reported	$	(5.31	)	$	0.24		$	0.12
Pro forma	$	(6.88	)	$	(0.67	)	$	(0.02	)

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

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The fair value of Macromedia stock options and ESPP purchase rights granted under its employee stock-based compensation plans were estimated on the date of grant using the Black-Scholes option pricing model and the following weighted average assumptions for grants during fiscal years 2002, 2001, and 2000:

	Stock Option Plans						Employee Stock Purchase Plans
	2002		2001		2000		2002		2001		2000
Weighted average risk free rate	3.99	%	5.83	%	6.07	%	2.30	%	4.93	%	5.49	%
Expected life (years)	3.50		3.50		3.50		0.50-2.00		0.50		0.50
Expected volatility	97.00	%	90.00	%	70.00	%	97.00	%	90.00	%	70.00	%
Expected dividend yield	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%	0.00	%

Accordingly, using the Black-Scholes option pricing model and the above assumptions, the weighted average fair value of Macromedia stock options granted during fiscal years 2002, 2001, and 2000 were $10.20, $35.90, and $26.79, respectively. In addition, the weighted average fair value of purchase rights granted under the ESPP during fiscal years 2002, 2001, and 2000, were $7.31, $17.82, and $17.92 per right, respectively.

16.    Net Income (Loss) Per Share

Basic net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is computed by dividing the net income (loss) applicable to common stockholders for the period by the weighted average number of common and potentially dilutive securities outstanding during the period using the treasury stock method. Potentially dilutive securities are composed of incremental common shares issuable upon the exercise of stock options and warrants, unvested restricted stock, and upon conversion of preferred stock.

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

	Years Ended March 31,
	2002			2001		2000
	(In thousands, except per share data)
Basic Net Income (Loss) Per Common Share Computation
Numerator:
Net income (loss)	$	(308,830	)	$	13,374	$	8,767
Accretion of Series C, D, and E mandatorily redeemable convertible preferred stock		—			—		(2,538	)
Net income (loss) applicable to common stockholders	$	(308,830	)	$	13,374	$	6,229
Denominator:
Weighted average number of common shares outstanding during the period		58,190			50,842		44,601
Basic net income (loss) applicable to common stockholders per common share	$	(5.31	)	$	0.26	$	0.14

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Years Ended March 31,
	2002			2001		2000
	(In thousands, except per share data)
Diluted Net Income (Loss) Per Common Share Computation
Numerator:
Net income (loss)	$	(308,830	)	$	13,374	$	8,767
Accretion of Series C, D and E mandatorily redeemable convertible preferred stock		—			—		(2,538	)
Net income (loss) applicable to common stockholders	$	(308,830	)	$	13,374	$	6,229
Denominator:
Weighted average number of common shares outstanding during the period		58,190			50,842		44,601
Effect of dilutive securities:
Convertible preferred stock and stock warrants		—			8		532
Stock options and restricted stock		—			5,914		7,137
Total	$	58,190		$	56,764	$	52,270
Diluted net income (loss) applicable to common stockholders per common share	$	(5.31	)	$	0.24	$	0.12

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

	Years Ended March 31,
	2002		2001		2000
	(In thousands)
Preferred stock	$	—	$	—	$	1,593
Stock options and warrants		18,040		606		118
	$	18,040	$	606	$	1,711

Potentially dilutive securities for fiscal year 2002 consist of all stock options and warrants outstanding and are considered antidilutive due to the Company’s loss position.

17.    Pre-Tax Savings Plan

The Company maintains a 401(k) defined contribution benefit plan that covers all eligible domestic 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 20% of their pretax salary in certain investments at the discretion of the employee. The Company matches a portion of employee contributions. Employer contributions, which may be terminated at the Company’s discretion, were $2.5 million, $1.9 million, and $812,000, during fiscal years 2002, 2001, and 2000, respectively.

18.    Foreign Currency Forward Contracts

The Company sells its products internationally in U.S. Dollars and certain foreign currencies. The Company enters into foreign exchange forward contracts up to one year in duration to reduce its exposure to foreign currency fluctuations involving probable anticipated and current foreign currency exposures. The forward

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

contracts relate primarily to foreign currency denominated revenue transactions. The Company does not enter into derivative financial instruments for trading purposes.

As of March 31, 2002, the Company had open forward contracts in Euros, Singapore Dollars, and Japanese Yen. The forward contracts are accounted for on a marked-to-market basis, with realized and unrealized gains or losses recognized in the Company’s consolidated statements of operations. As of March 31, 2002 and 2001, the notional amount of the forward contracts totaled $12.4 million and $10.8 million, respectively. Market rates as of March 31, 2002 were used to determine the fair value of foreign currency forward contracts.

The table below provides information about the Company’s open forward contracts as of March 31, 2002. The information is provided in U.S. Dollar equivalents and presents the notional amount of the respective forward contracts, their fair value, and the weighted average forward rates in effect as of March 31, 2002:

	Notional Amount		Fair Value			Weighted average forward rates
	(In thousands, except weighted average forward rates)
Euros	$	3,525	$	51		0.88
Singapore Dollars		651		(1	)	1.84
Japanese Yen		8,174		830		118.00
	$	12,350	$	880

19.    Related Party Transactions

During fiscal years 2002, 2001, and 2000 the Company made loans totaling $14.4 million in aggregate to certain officers and other key employees in conjunction with their hiring and relocation. The aggregate outstanding balance of these loans was $8.3 million as of March 31, 2002 and is recorded as related party loans on the Company’s consolidated balance sheets. The loans bear interest at rates ranging from 2.73% to 6.60% per annum and mature as to both principal and interest between fiscal years 2003 and 2006. At March 31, 2002 and 2001, the stated loan amounts approximated fair value.

Of the total amount of loans outstanding as of March 31, 2002, $8.0 million are full recourse and secured by personal property of the related parties. The principal and accrued interest are due upon maturity of the loan or upon separation from the Company. As of March 31, 2002, the Company had accrued interest receivables of $251,000 relating to the loans.

20.    Segment Reporting and Geographic Information

At March 31, 2002, the Company operated in one business segment, the Software segment. The Company’s Software segment provides software that empowers developers and designers to create effective user experiences on the Internet.

Since the merger with Allaire during the fourth quarter of fiscal year 2001, the Company has realigned its products into two main product lines: Software Tools and Server Software. Training and other miscellaneous revenues are included in other net revenues. The Company’s chief executive officer is the chief operating decision maker and evaluates operating segment performance based on net revenues and total operating expenses of the Software segment.

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Enterprise-wide net revenues by product line for fiscal years 2002 and 2001 are disclosed in the following table. Information for the year ended March 31, 2000 is not disclosed, as it is impracticable to do so.

Net revenues	Software Tools		Server Software		Atom- Shockwave		Other		Total
	(In thousands)
Year Ended March 31, 2002	$	242,528	$	60,098	$	—	$	22,168	$	324,794
Year Ended March 31, 2001	$	338,257	$	2,422	$	13,166	$	35,755	$	389,600

Prior to the fourth quarter of fiscal year 2001, the Company’s operations consisted of a second business segment, AtomShockwave, which designs, develops and markets aggregated content to provide online entertainment on the Web (see Note 8). The Company had intersegment transactions of $0, $2.2 million, and $0 for fiscal years 2002, 2001, and 2000, respectively. These intersegment transactions represent royalty revenues paid by AtomShockwave.

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Segment data for fiscal years 2002, 2001, and 2000 are shown in the following:

	Software			Atom- Shockwave(1)			Total
	(In thousands)
Years Ended March 31,
2002
Net revenues	$	324,794		$	—		$	324,794
Cost of revenues(2)		42,484			—			42,484
Gross margin		282,310			—			282,310
Direct operating expenses(2)		323,835			—			323,835
Restructuring and certain non-cash charges(2)		197,041			—			197,041
Total operating loss	$	(238,566	)	$	—		$	(238,566	)
Total assets	$	517,838		$	—		$	517,838
2001
Net 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
Net 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

(1) Due to the deconsolidation of AtomShockwave during the quarter ended March 31, 2001, only nine months of operating results have been included during fiscal year 2001.

(2) The Company allocated non-cash compensation during fiscal year 2002 to cost of revenues, sales and marketing, research and development, and general and administrative expenses. Accordingly, $689,000 of non-cash compensation from these administrative functions is included in restructuring and certain non-cash charges.

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MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

	Years ended March 31,
	2002			2001		2000
	(In thousands)
Total operating income (loss)	$	(238,566	)	$	6,433	$	8,376
Other income (expense)		(67,998	)		342		6,187
Minority interest		—			15,336		6,179
Income (loss) before taxes	$	(306,564	)	$	22,111	$	20,742

The Company’s operations outside the United States consist of wholly owned subsidiaries in Japan, United Kingdom, The Netherlands, France, Germany, Sweden, Belgium, Italy, Brazil, Australia, Hong Kong, Singapore, Republic of Korea, Canada, and a representative office in India. Domestic operations are responsible for the design and development of all products, as well as product distribution in North and South America, while the international operations are responsible for product distribution everywhere else. Net revenues are attributed to each region based on the location of the customer. Outside of the United States, no other individual country contributed more than 10% of total net revenues during fiscal years 2002, 2001, and 2000. Additionally, other than the United States, no individual country’s net revenues or assets comprised more than 10% of the Company’s total net revenues or assets, respectively, as of March 31, 2002, 2001, and 2000. The following is a summary of net revenues and identifiable assets by geographic areas:

	Years Ended March 31,
	2002			2001			2000
	(In thousands)
Net Revenues:
North America	$	195,143		$	221,547		$	156,494
Europe		77,874			102,178			71,324
Japan		23,282			30,974			19,540
All Other		28,495			34,901			16,801
	$	324,794		$	389,600		$	264,159
Identifiable Assets:
North America	$	453,924		$	713,981		$	315,484
Europe		57,954			129,546			80,100
All Other		6,202			4,314			3,123
Eliminations		(242	)		(62,168	)		(59,348	)
	$	517,838		$	785,673		$	339,359
Long-lived assets:
United States	$	289,080		$	510,831		$	77,302
International		3,756			4,882			1,089
	$	292,836		$	515,713		$	78,391

21.    Subsequent Events

On May 2, 2002, a jury in the Company’s Adobe litigation determined that the Company willfully infringed Adobe’s ‘528 patent and that the ‘528 patent was valid. The jury awarded a judgment for damages of $2.8 million to Adobe. Adobe has also claimed that Macromedia Flash MX, Macromedia Dreamweaver MX, and

F-58

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Macromedia Fireworks MX software products infringe the ‘528 patent. The court has ordered a separate trial of Adobe’s claims relating to these software products but has not yet set a date for the trial. The Company intends to

vigorously defend against Adobe’s claims relating to its Macromedia Flash MX, Macromedia Dreamweaver MX, and Macromedia Fireworks MX software products. The Company’s March 31, 2002 consolidated financial statements reflect the charge of $2.8 million in damages awarded to Adobe in accordance with SFAS No. 5, Accounting for Contingencies. In addition, the Company recorded $100,000 related to the settlement of an unrelated litigation, which also existed at March 31, 2002. The awarded damages are included as a component of other income (expense) on the Company’s consolidated statements of operations and in accrued liabilities in its consolidated balance sheets. Accordingly, the Company’s statements of operations and consolidated balance sheets for the fiscal year ended March 31, 2002 differs from those previously announced in its press release issued on April 24, 2002.

On May 10, 2002, a jury in the Company’s counterclaims for infringement of the ‘443, ‘998, and ‘969 patents found that Adobe willfully infringed those patents and that all but the ‘998 patent were valid. The jury awarded damages of $4.9 million to the Company. The Company intends to seek to set aside the invalidity determination as to the ‘998 patent. In addition, issues relating to each party’s equitable defenses and claims for enhanced damages and attorneys’ fees remain to be resolved by the court, as do the parties’ respective post-trial motions. The Company will record the gain from the judgment in its consolidated financial statements during the period that the amount becomes known and is realizable in accordance with SFAS No. 5.

F-59

MACROMEDIA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

22.    Quarterly Results and Stock Market Data (unaudited)

Summarized quarterly financial information for fiscal years 2002 and 2001 is as follows:

	Quarter Ended
	June 30			September 30			December 31			March 31**
Fiscal years
2002
Net revenues	$	88,743		$	87,086		$	73,316		$	75,649
Gross profit		77,606			77,199			61,844			65,599
Operating loss		(82,301	)		(34,482	)		(42,122	)		(79,661	)
Net loss**		(111,774	)		(70,704	)		(42,937	)		(83,415	)
Net loss applicable to common stockholders		(111,774	)		(70,704	)		(42,937	)		(83,415	)
Net loss applicable to common stockholders per common share—basic **		(1.94	)		(1.22	)		(0.74	)		(1.42	)
Net loss applicable to common stockholders per common share—diluted **		(1.94	)		(1.22	)		(0.74	)		(1.42	)
Closing common stock price range:
High	$	26.58		$	18.07		$	27.17		$	22.00
Low	$	13.50		$	11.48		$	11.62		$	13.39
2001
Net 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 common share—basic		0.24			0.20			0.25			(0.42	)
Net income (loss) applicable to common stockholders per common share—diluted		0.21			0.18			0.23			(0.42	)
Closing common stock price range:
High	$	114.56		$	118.48		$	84.56		$	60.98
Low	$	44.81		$	56.94		$	58.19		$	14.38

** Included in litigation settlements is $2.8 million in damages awarded to Adobe and $100,000 settlement in May 2002 related to a separate legal matter. In accordance with SFAS No. 5, Accounting for Contingencies, these awards have been reflected in the Company’s consolidated financial statements at March 31, 2002. Accordingly, the Company’s consolidated financial statements differ from those previously announced in its press release on April 24, 2002. (See Note 21)

Macromedia’s stock is traded on the Nasdaq stock exchange under the symbol “MACR”. The Company has not paid any cash dividends and does not currently have plans to do so in the foreseeable future. The Company’s closing stock price was $21.66 on May 8, 2002 and there were 458 stockholders of record as of that date, excluding stockholders whose shares were held in nominee or street name by brokers.

F-60

MACROMEDIA, INC. AND SUBSIDIARIES

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Description	Balance at beginning of period		Additions—   Provision		Deductions, Returns, and Write Offs		Balance at end of period
	(In thousands)
Allowance for Doubtful Accounts
Year ended March 31, 2002	$	1,531	$	3,919	$	1,944	$	3,506
Year ended March 31, 2001		1,659		812		940		1,531
Year ended March 31, 2000		1,122		801		264		1,659
Allowance for Sales Returns
Year ended March 31, 2002	$	11,899	$	26,069	$	27,760	$	10,208
Year ended March 31, 2001		9,221		23,323		20,645		11,899
Year ended March 31, 2000		8,477		14,385		13,641		9,221

F-61

EX-10.05

                                                                   Exhibit 10.05

                         AGREEMENT FOR PURCHASE AND SALE

                                       OF

                                  REAL PROPERTY

                                 by and between

                                MACROMEDIA, INC.
                             a Delaware corporation

                                    as Seller

                                       and

                         MENLO EQUITIES ASSOCIATES LLC,
                     a California limited liability company,

                                    as Buyer

                                November __, 2001

                              Property located at:

                           101 Redwood Shores Parkway
                            Redwood City, California



                                TABLE OF CONTENTS



                                                                                              Page
                                                                                             
1.    Definitions ........................................................................      1

2.    Purchase and Sale ..................................................................      3

3.    Purchase Price .....................................................................      4

      3.1      Deposit ...................................................................      4

      3.2      Cash Payment ..............................................................      4

4.    Review and Inspection; "As-Is" Purchase; Conditions To Agreement ...................      4

               (a)      Review And Inspection ............................................      4

               (b)      Buyer's Conditions Precedent .....................................      4

               (c)      Seller's Condition Precedent .....................................      6

5.    Representations, Warranties, Covenants And Agreements ..............................      6

      5.1      Representations And Warranties Of Seller ..................................      6

      5.2      Representations And Warranties Of Buyer ...................................      7

      5.3      Agreements ................................................................      7

6.    Indemnification ....................................................................      8

      6.1      Seller's Indemnity ........................................................      8

      6.2      Buyer's Indemnity .........................................................      9

7.    Title, Escrow And Closing ..........................................................      9

      7.1      Conditions Of Title .......................................................      9

      7.2      Title Insurance ...........................................................      9

      7.3      Closing Date ..............................................................      9

      7.4      Deposits And Deliveries By Seller .........................................      9

      7.5      Deposits And Deliveries By Buyer ..........................................     10

      7.6      Closing ...................................................................     11

      7.7      Prorations ................................................................     11

      7.8      Closing Costs .............................................................     12

      7.9      Possession ................................................................     12

      7.10     Filing Of Reports .........................................................     12

      7.11     Cooperation ...............................................................     13

8.    Liquidated Damages .................................................................     13

9.    Damage And Destruction; Condemnation ...............................................     13

10.   Commissions ........................................................................     13


                                       i.



                                                                                         
11.  General Provisions ..................................................................  14

     11.1   Notices ......................................................................  14

     11.2   Entire Agreement; No Modifications ...........................................  14

     11.3   Time .........................................................................  15

     11.4   Attorneys' Fees ..............................................................  15

     11.5   Specific Performance .........................................................  15

     11.6   Successors And Assigns .......................................................  15

     11.7   Counterparts .................................................................  15

     11.8   Construction .................................................................  15

     11.9   Confidentiality ..............................................................  16



                                       ii.



                                List Of Exhibits

Exhibit A     - List of Contracts
Exhibit B     - Legal Description
Exhibit C     - List of Personal Property
Exhibit D     - List of Leases
Exhibit E     - Form of Estoppel Certificate
Exhibit F     - Form of Deed
Exhibit G     - Form of Bill of Sale
Exhibit H     - Form of Assignment of Contracts
Exhibit I     - Form of Assignment of Leases
Exhibit J     - Form of Notice to Tenants
Exhibit K     - Form of Non-Foreign Affidavit

                                      iii.



                         Agreement For Purchase And Sale
                                       of
                                  Real Property

         This Agreement For Purchase And Sale Of Real Property (the "Agreement")
is made and entered into as of the _____ day of November, 2001 (the "Contract
Date") by and between Macromedia, Inc., a Delaware corporation ("Seller"), and
Menlo Equities Associates LLC, a California limited liability company ("Buyer").

         For good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, Seller and Buyer hereby agree as follows:

         1. Definitions. Unless the context otherwise specifies or requires, for
the purposes of this Agreement all words and phrases having their initial
letters capitalized herein shall have the meanings set forth below:

         "Close of Escrow" shall mean the time of recordation of the Deed in
accordance with this Agreement on the Closing Date.

         "Closing Date" shall mean the earlier of the date of recordation of the
Deed or December 27, 2001.

         "Contingency Period" shall mean the period commencing on the Contract
Date and terminating at 5:00 p.m. Pacific Time on December 7, 2001.

         "Contract Obligations" shall mean those contracts, agreements,
commitments, employment agreements, service contracts, utility contracts,
construction contracts, maintenance agreements, leasing and brokerage agreements
and all other contracts, agreements and obligations, whether or not in writing,
which relate to the ownership, operation, management, maintenance, use or
occupancy of the Property which will or may continue in effect on or after the
Closing Date as listed on Exhibit A to this Agreement ("Contract Obligations").

         "Environmental Laws" shall mean any and all presently existing federal,
state and local laws (whether under common law, statute, rule, regulation or
otherwise), requirements under permits issued with respect thereto, and other
requirements of any federal, state or local governmental agency, court, board,
bureau or other authority having jurisdiction with respect to or relating to the
environment, to any Hazardous Substance or to any activity involving Hazardous
Substances, and shall include, without limitation, the Comprehensive
Environmental Response, Compensation, and Liability Act (42 U.S.C. Section 9601,
et seq., the Federal Resource Conservation and Recovery Act (42 U.S.C. Section
6901, et seq.) and all amendments thereto in effect as of the Closing Date.

         "Hazardous Substances" shall mean and include any chemical, compound,
material, mixture, waste or substance that is now or hereafter defined or listed
in, or otherwise classified pursuant to, any Environmental Laws as a "hazardous
substance," "hazardous material," "hazardous waste," "extremely hazardous
waste," "infectious waste," "toxic substance," "toxic pollutant" or any other
formulation intended to define, list, or classify substances by reason of

                                       1.



deleterious properties such as ignitability, corrosivity, reactivity,
carcinogenicity, or toxicity including any petroleum, natural gas, natural gas
liquids, liquified natural gas, or synthetic gas usable for fuel (or mixture of
natural gas and such synthetic gas). "Hazardous Substances" shall include,
without limitation, any hazardous or toxic substance, material or waste or any
chemical, compound or mixture which is (i) asbestos, (ii) designated as a
"hazardous substance" pursuant to Section 1317 of the Federal Water Pollution
Control Act (33 U.S.C. Section 1251 et seq.), (iii) defined as a "hazardous
waste" pursuant to Section 6903 of the Federal Resource Conservation and
Recovery Act, (42 U.S.C. Section 6901 et seq., (iv) defined as "hazardous
substances" pursuant to Section 9601 of the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. Section 9601 et seq.), or
(v) listed in the United States Department of Transportation Table (49 CFR
172.101) or by the Environmental Protection Agency as hazardous substances (40
CFR part 302); or in any and all amendments thereto in effect as of the Closing
Date; or such chemicals, compounds, mixtures, substances, materials or wastes
otherwise regulated under any applicable local, state or federal Environmental
Laws.

         "Improvements" shall mean all improvements and fixtures now or
hereafter located on the Land including, without limitation, the four (4) story
building (the "Building") constructed on the Land, and surface level paved and
striped parking areas, together with all appurtenances thereto and all
apparatus, equipment and appliances located on the Land and owned by Seller and
used in connection with the operation and occupancy thereof such as systems or
facilities for heating, ventilation, air conditioning, climate control, utility
services, parking services, garbage disposal, irrigation and/or recreation, and
all landscaping and residual interests in leasehold improvements under the
Tenant Occupancy Leases.

         "Intangible Property" shall mean Seller's rights and interests in: (a)
any and all transferable or assignable permits, building plans and
specifications, certificates of occupancy, operating permits, sign permits,
development rights and approvals, certificates, licenses, warranties and
guarantees, trade names, service marks, engineering, soils, pest control and
other reports relating to the Property, tenant lists, advertising materials, and
telephone exchange numbers identified with the Property; and (b) all other
transferable intangible property, miscellaneous rights, benefits or privileges
of any kind or character with respect to the Property.

         "Land" shall mean the real property commonly known as 101 Redwood
Shores Parkway, Redwood City, California, and more particularly described in
Exhibit B to this Agreement, including all easements, riparian or other water
rights, rights of way and other interests appurtenant thereto, and all right,
title and interest of Seller in and to any land lying in the bed of any street,
road, highway or avenue, open or proposed, in front of, adjacent to or adjoining
such real property and in all strips and gores.

         "Laws and Restrictions" shall mean all applicable federal, state, local
and other laws, statutes, regulations, codes, orders, ordinances and rules
including, without limitation, those relating to fire, safety, land use,
subdivision, health, labor, environmental protection, seismic design,
conservation, parking, handicapped access, zoning and building, and all
restrictive covenants (if any), other title encumbrances and other obligations
affecting the Property, all Environmental Laws, all applicable provisions of the
Fair Housing Act of 1968 and the Americans With Disabilities Act of 1990, and
all amendments thereto, and all requirements under Tenant Occupancy Leases.

                                       2.



         "Macromedia Lease" shall mean the commercially reasonable lease to be
negotiated, executed, and delivered by Buyer and Seller, pursuant to which
Seller will, from and after the Close of Escrow, lease from Buyer a portion of
the Building. The Macromedia Lease shall contain, among other things, the
following terms: (a) the term shall be ten (10) years from the Close of Escrow;
(b) the leased premises shall be the two (2) full floors of the Building
currently occupied by Seller (and a small amount of space on the second floor of
the Building which space has already been demised), and shall be measured prior
to Lease execution from inside surface of exterior wall to inside surface of
exterior wall, with a pro rata allocation of the first floor lobby space; (c)
the base monthly rent for the first sixty (60) months of the lease term shall be
$2.45 per square foot as measured, triple net; (d) the base monthly rent for the
second sixty (60) months of the lease term shall be $2.82 per square foot as
measured, triple net; (e) there shall be no tenant improvement allowance; and
(f) the security deposit shall be equal to six (6) months rent, and shall be in
cash or, at Seller's option, a letter of credit in form and from a financial
institution acceptable to Buyer and Seller.

         "Personal Property" shall mean all personal property now or hereafter
located on the Land or within the Improvements (except for any personal property
located within the Leased Premises as defined in the Macromedia Lease), owned or
held by Seller and used in connection with the Land, the Improvements and/or the
Intangible Property or the ownership, operation or occupancy thereof including,
without limitation, all furniture, fixtures, machinery, appliances and equipment
located on the Property, other than personal property owned by tenants of the
Property. A current list of the Personal Property is attached hereto as Exhibit
C.

         "Property" shall mean collectively the Land, the Improvements, the
Personal Property, the Intangible Property and all of Seller's interest, as
landlord, in and to the Tenant Occupancy Leases.

         "Tenant Occupancy Leases" shall mean all leases, work letter
agreements, improvement agreements, and other rental agreements listed in
Exhibit D to this Agreement with respect to occupancy or use of the Property by
tenants, and such other leases, work letter agreements, improvement agreements,
and other rental agreements as may be approved by Buyer in accordance with the
terms of this Agreement.

         "Title Company" shall mean First American Title Guaranty Company whose
address for this transaction is as follows:

         First American Title Guaranty
         1737 North First Street
         San Jose, California  95112
         Attn:  Pete Phillips
         Fax No. (408) 451-7836

         "Title Report" shall mean the commitment for title insurance with
respect to the Land and Improvements to be issued to Buyer by the Title Company.

         2. Purchase And Sale. Seller agrees to sell the Property to Buyer, and
Buyer agrees to purchase the Property from Seller, on all of the terms,
covenants and conditions set forth in this Agreement.

                                       3.



     3.  Purchase Price. The total purchase price for the Property (the
"Purchase Price") shall be $22,125,000, and, subject to all prorations and
adjustments provided in this Agreement, shall be paid by Buyer to Seller through
escrow on the Closing Date as follows:

         3.1  Deposit. Buyer has deposited or shall deposit with the Title
Company within two (2) business days after full execution of this Agreement, the
amount of $500,000, which sum the Title Company shall deposit in a federally
insured interest-bearing "money market" account at a financial institution
approved by Buyer with the interest from such account to be credited to Buyer.
Upon expiration of the Contingency Period, provided Buyer does not elect to
terminate this Agreement in accordance with Section 4 below, Buyer shall deposit
an additional $500,000 with the Title Company. Each and all such amounts
deposited with the Title Company pursuant to this Section 3.1 together with
interest earned thereon, are referred to herein as the "Deposit." Except as
expressly provided to the contrary herein, the Deposit shall be non-refundable
after the expiration of the Contingency Period. The Deposit shall be returned to
Buyer following Buyer's demand therefor made in writing following the earlier of
the scheduled Closing Date or Buyer's termination of this Agreement for failure
of any condition to the performance of Buyer's obligation(s) under this
Agreement, or for default by Seller.

         3.2  Cash Payment. The balance of Purchase Price shall be paid in cash
on the Closing Date.

     4.  Review And Inspection; "As-Is" Purchase; Conditions To Agreement.

              (a) Review And Inspection. During the Contingency Period, Buyer
shall have the right, subject to the rights of tenants under the Tenant
Occupancy Leases, to conduct, at its sole cost and expense, such investigations,
studies, surveys, analyses and tests on and of the Property as it shall, in its
sole discretion, determine are necessary or desirable, including, without
limitation, soil tests, environmental audits and studies, and make such
evaluations as Buyer may, in its sole and absolute discretion, determine are
necessary or desirable under the circumstances, all subject to Section 5.3(a)
below. Without limiting the foregoing, Buyer shall have the right to cause the
square footage of the Building and of the premises under the Macromedia Lease to
be measured by a licensed architect. In order to perform the foregoing
investigations, Buyer, its agents, contractors, employees and potential lenders,
shall have reasonable access to the Property, all for the purposes of inspecting
the same and conducting tests, inspections, and analyses thereon and making
evaluations thereof, all at Buyer's expense, and Seller shall provide to Buyer
(or make available for Buyer's inspection) all contracts (including the Contract
Obligations), leases, plans, studies, reports, budgets and all other current and
historical information about the Property, in Seller's possession or available
to Seller. Buyer is purchasing the Property based on Buyer's own investigation
thereof, in its "As-Is" condition and "With All Faults" and, except for the
express representation and warranties of Seller set forth in this Agreement,
Seller makes no representations or warranties as to the condition of the
Property. No representation or warranty (or alleged representation or warranty)
shall be binding on Seller unless expressly set forth in this Agreement, and
Buyer has not relied, and will not rely, upon any representation or warranty
which is not expressly set forth in this Agreement. Buyer may, at any time
during the Contingency Period, terminate this Agreement upon written notice to
Seller, in which case the Deposit shall be promptly returned to Buyer and,

                                       4.



except for the indemnity provided in Section 5.3(a) below, this Agreement shall
be null and void and of no further force and effect.

                (b)   Buyer's Conditions Precedent. Buyer's obligation to
purchase the Property or otherwise to perform any obligation provided in this
Agreement shall be conditioned expressly upon the fulfillment to Buyer's
satisfaction in its sole and absolute discretion of each of the following
conditions precedent within the time periods specified:

                      (i)   Prior to the expiration of the Contingency Period,
Buyer's review and approval of the physical, legal and environmental condition
of the Property in its sole and absolute discretion.

                      (ii)  On or prior to November 21, 2001, Buyer and Seller
shall have negotiated, executed, and delivered the Macromedia Lease.

                      (iii) Buyer's review and approval of the Title Report
including, without limitation, the exceptions to title and legal description of
the Land contained therein, within the Contingency Period. In the event Buyer
fails to object to any matter contained or referred to in the Title Report or
the survey prior to the expiration of the Contingency Period, Buyer shall be
deemed to have approved such matters. In the event Buyer objects to any matter
contained or referred to in the Title Report or the survey, Buyer shall deliver
written notice of such objection to Seller prior to the expiration of the
Contingency Period. Seller shall then have five (5) business days after receipt
of Buyer's objections within which to notify Buyer in writing as to which of
such matters objected to by Buyer Seller will or will not cure. Failure of
Seller to notify Buyer within such period of its election shall be deemed
Seller's election not to cure all of such matters. If Seller elects not to cure
any or all of such matters, Buyer shall have the right to elect either (i) to
terminate this Agreement and receive back the Deposit, or (ii) to waive such
matters and proceed to close. If Seller elects to cure any of such matters, such
election shall be a covenant of Seller, but Seller shall have until the Closing
Date to effect such cure. Seller shall cure all monetary liens not caused by
Buyer, but Seller shall not be required to pay off any assessments. If Buyer
receives an update of the Title Report containing exceptions which were not
expressly set forth as exceptions to title insurance coverage in the initial
Title Report, Buyer shall have an additional period of five (5) days within
which to object to such exceptions, and the Deposit shall be refundable pending
resolution of such objections to the satisfaction of Buyer.

                      (iv)  The issuance by the Title Company on the Closing
Date, upon payment of its regularly-scheduled premium, of the title insurance
policy described in subsection (vii) below.

                      (v)   As of the Closing Date, subject to the terms of
Section 9 below, there shall have been no material adverse change in the
condition of the Property, or any portion thereof, or in any document, Laws and
Restrictions, contractual relations, or other circumstances affecting the
Property previously approved by Buyer.

                      (vi)  Buyer's receipt and approval of an estoppel
certificate in substantially the form of Exhibit E attached hereto (each an
"Estoppel Certificate, and collectively, the "Estoppel Certificates") from each
tenant under each Tenant Occupancy Lease, dated not earlier than thirty (30)
days prior to the Closing Date.

                                       5.



                        (vii)    During the Contingency Period, Buyer
determining, to Buyer's satisfaction, that Buyer can obtain an ALTA Extended
Coverage Owner's Policy of Title Insurance (Form B, Rev. 10/17/70), together
with such endorsements as Buyer may reasonably require (including, without
limitation, CLTA endorsements numbered 100 (modified), 100.6, 103.4, 103.7, 116,
116.1, 116.4, 116.7 and 123.2, a "Fairway" endorsement, and a "separate tax
parcel" endorsement) (the "Owner's Policy"), all as set forth in a pro forma
policy of title insurance to be delivered to and approved by Buyer prior to the
expiration of the Contingency Period.

                        (viii)   During the Contingency Period, Buyer's review
and approval of the Contract Obligations. Any Contract Obligations disapproved
by Buyer during the Contingency Period shall be terminated by Seller on or prior
to the Closing Date.

                        (ix)     Seller's execution and delivery of the Closing
Certificate (as defined in Section 7.4 below).

At any time or times on or before the date for the satisfaction or waiver of
each condition, at Buyer's election, Buyer may waive any of the foregoing
conditions by written notice to Seller. Other than Buyer's Close of Escrow
pursuant to this Agreement which shall waive all such unfulfilled conditions, no
waiver shall be effective unless made in writing specific as to the conditions
or matters so waived. No such waiver shall be inferred or implied by any act or
conduct of Buyer or reduce the rights or remedies of Buyer arising from any
breach of any undertaking, agreement, covenant, warranty, or representation of
Seller under this Agreement.

In the event any of the foregoing conditions or other conditions to this
Agreement which are for the benefit of Buyer are neither fulfilled, nor waived
as provided above, Buyer, at its election by written notice to Seller, may
terminate this Agreement and be released from all obligations under this
Agreement, except for the indemnity provided in Section 5.3(a) below. In the
event Buyer fails to approve, by written notice to Seller (which notice may be
given by facsimile), all matters set forth in Sections 4(i), (ii), (vi) and
(vii) above no later than 5 p.m. Pacific time on expiration of the Contingency
Period, this Agreement shall terminate and the Deposit shall be promptly
returned to Buyer and, except for the indemnity provided in Section 5.3(a)
below, this Agreement shall be null and void and of no further force and effect.
In the event of any automatic termination or other termination by Buyer for
failure of condition or for default of Seller, the Deposit and all other funds
deposited in escrow by Buyer or paid by Buyer to Seller outside of escrow and
all interest accrued on such funds (less Buyer's share of any escrow or title
cancellation fees) shall be returned immediately to Buyer, and all documents
deposited in escrow by Buyer or Seller shall be returned to the depositing
party.

                 (c)    Seller's Condition Precedent. Seller's obligation to
sell the Property shall be conditioned expressly upon Buyer and Seller
negotiating, executing, and delivering the Macromedia Lease on or prior to
November 21, 2001.

        5.  Representations, Warranties, Covenants And Agreements.

            5.1  Representations And Warranties Of Seller. Seller hereby makes
the following representations and warranties to and for the benefit of Buyer,
each of which representations and warranties (i) is material and being relied
upon by Buyer, (ii) is made as an

                                       6.



inducement to Buyer to enter into this Agreement and consummate the transaction
contemplated hereby, (iii) is true in all respects as of the date of this
Agreement, (iv) shall be true in all respects on the Closing Date, and (v) shall
survive the Close of Escrow:

                        (a)   Seller is a Delaware corporation and has the full
power, authority and legal right to enter into and perform this Agreement. The
execution, delivery and performance of this Agreement have been duly authorized
by all necessary action on the part of the Seller.

                        (b)   Seller has no actual knowledge of any pending or
threatened actions or proceedings before any court or administrative agency
which will materially adversely affect the ability of Seller to perform Seller's
obligations under this Agreement.

                        (c)   Seller is not a "foreign person" as defined in
Internal Revenue Code Section 1445 and any related regulations. At the Closing,
Buyer will have no duty to collect withholding Taxes for Seller pursuant to the
Foreign Investment in U.S. Real Property Tax Act of 1980, as amended.

                        (d)   Seller has not (i) made a general assignment for
the benefit of creditors; (ii) filed any voluntary petition in bankruptcy or
suffered the filing of any voluntary petition by its creditors; (iii) suffered
the appointment of a receiver to take possession of all or substantially all of
its assets; or (iv) suffered the attachment or other judicial seizure of all or
substantially all of its assets.

                        (e)   Seller is not, and as of the Closing Date will not
be, in default under any Tenant Occupancy Leases.

                 5.2    Representations And Warranties Of Buyer. Buyer hereby
makes the following representations and warranties to and for the benefit of
Seller, each of which representations and warranties (i) is material and being
relied upon by Seller, (ii) is made as an inducement to Seller to enter into
this Agreement and consummate the transaction contemplated hereby, (iii) is true
in all respects as of the date of this Agreement, (iv) shall be true in all
respects on the Closing Date, and (v) shall survive the Close of Escrow:

                        (a)   Buyer is a California limited liability company
and it has the full power, authority and legal right to enter into and perform
this Agreement. The execution, delivery and performance of this have been duly
authorized by all necessary action on the part of Buyer.

                        (b)   Buyer has no knowledge of any pending or
threatened actions or proceedings before any court or administrative agency
which will materially adversely affect the ability of Buyer to perform Buyer's
obligations under this Agreement.

                 5.3    Agreements.  Seller hereby specifically agrees as
follows:

                        (a)   Buyer shall have the right to enter onto and
inspect and test the Property, with the prior approval of Seller as to time and
place to interview tenants and personnel, and to inspect all documents relating
thereto from the date of this Agreement to the

                                       7.



Closing Date, provided that (i) Buyer shall only have the right to conduct soils
and groundwater tests and borings regarding the environmental condition of the
Property with Seller's prior written consent, which shall not be unreasonably
withheld or delayed, (ii) Buyer has named Seller as an additional insured on a
One Million Dollar ($1,000,000) combined, single limit, comprehensive general
public liability insurance policy issued by a licensed insurance company, and
(iii) Buyer shall defend, indemnify, protect and hold Seller, the Property, and
Seller's affiliates, subsidiaries, officers, directors and agents harmless from
and against any loss, cost, damage (including without limitation repair of the
Property to its condition existing prior to Buyer's or Buyer's agents' damage
thereto), or expense (including without limitation, reasonable attorneys' fees)
incurred by Seller as a result of property damage, personal injury, or
mechanics' liens, to the extent relating to or arising out of Buyer's inspection
of the Property and Improvements. Notwithstanding the foregoing, Buyer shall
have no liability for the discovery of any matters in, on, at, or relating to
the Property or the Improvements; provided, however, Buyer shall be responsible
for its or its agents' negligent exacerbation of existing problems.

                 (b)    From the date of this Agreement to the Closing Date,
Seller shall (i) manage, maintain, operate, and service the Property, with
regard to those matters for which Seller is responsible under the Tenant
Occupancy Leases, to the same standard as existed at the Contract Date, (ii)
keep the Property and every portion thereof in good working order and repair,
(iii) not remove or permit the removal of any Personal Property or any fixtures
from the Property unless such items are replaced immediately with Personal
Property or fixtures of equal or greater value, (iv) timely perform all its
obligations under all Contract Obligations, Tenant Occupancy Leases and Laws and
Restrictions including, without limitation, the payment of all bills, charges,
invoices, salaries, benefits, and other expenses arising in connection with the
Property, (v) not modify, terminate, cancel, extend, or amend any existing
Contract Obligations, nor enter into any new contracts or arrangements which
will affect the Property on or after the Closing Date, (vi) notify Buyer in
writing within one business day after applying any security deposit to rent due
from any tenant of the Property, and (vii) not modify, terminate, cancel, extend
or amend any existing Tenant Occupancy Lease, nor accept any payment of rent or
other charges from any tenant of the Property applicable to a period exceeding
one month in advance, nor grant any material consent relating to any existing
Tenant Occupancy Lease, nor enter into any new lease, work letter agreement,
improvement agreement, or other rental agreement affecting the Property without
Buyer's prior written approval (which Buyer shall not unreasonably withhold if
the landlord under the Tenant Occupancy Leases is required to be reasonable in
granting such consents), except that Seller may enter into new Tenant Occupancy
Leases consistent with interim leasing guidelines, if any, approved in writing
by Buyer, and (vii) maintain in full force and effect all of the insurance
policies and coverages currently in effect with respect to the Property.

                 (c)    Buyer and Seller shall negotiate in good faith to
finalize, execute, and deliver the Macromedia Lease.

                 (d)    Seller shall promptly notify Buyer in writing of any
event or circumstance which adversely affects Seller's ability to perform its
obligations under this Agreement in a timely manner, or the likelihood of timely
satisfaction of the conditions precedent set forth above.

                                       8.



                        (e)   Seller shall promptly notify Buyer in writing if
Seller becomes aware of any fact or occurrence that would render any
representation by Seller under Section 5.1 above untrue.

                        (f)   Seller acknowledges that Buyer has no obligation
whatsoever with respect to hiring or any other matter relating to Seller's
employees at the Property, and Seller agrees to take reasonable steps (as
determined by Seller in its reasonable discretion) prior to the Closing Date to
communicate to its employees at the Property that Buyer will not offer
employment, hire, or have any other obligation to such employees.

         6.      Indemnification.

                 6.1    Seller's Indemnity. Seller agrees to indemnify, protect
and defend Buyer against and hold Buyer harmless from any and all claims,
demands, liabilities, losses, damages, costs and expenses including, without
limitation, all reasonable attorneys' fees, asserted against, incurred or
suffered by Buyer resulting from (i) any breach by Seller of this Agreement,
(ii) any liability or obligation of Seller which Buyer is not required to assume
under this Agreement or accruing prior to such assumption, (iii) any personal
injury or property damage occurring in, on or about the Property or relating
thereto on or before the Close of Escrow, from any cause whatsoever except
Buyer's inspection or other activities on or about the Property, or (iv) the
untruth, inaccuracy or breach of any of the representations, warranties,
covenants and agreements made by Seller pursuant to this Agreement. Seller's
obligations under this Section 6.1 shall survive Close of Escrow or termination
of this Agreement for a period of one year. Neither the foregoing nor any other
provision of this Agreement shall limit the rights and remedies available to
Buyer at law or in equity, whether by statute or otherwise, and all such rights
and remedies shall be cumulative and non-exclusive.

                 6.2    Buyer's Indemnity. Buyer agrees to indemnify, protect
and defend Seller against and hold Seller harmless from any claims, losses,
damages, costs or expenses including, without limitation, any reasonable
attorneys' fees, asserted against, incurred or suffered by Seller resulting from
any breach by Buyer following the Closing Date of express obligations of Buyer
arising under this Agreement. Buyer's obligations under this Section 6.2 shall
survive Close of Escrow or termination of this Agreement for a period of one
year. In the event of a material breach by Buyer of this Agreement prior to the
Closing Date, Seller shall have as its sole and exclusive remedy the right to
retain the Deposit as liquidated damages to the extent and as provided below.

         7.      Title, Escrow And Closing.

                 7.1    Conditions Of Title. Seller shall deliver to Escrow
Holder a deed in the form attached hereto as Exhibit F (the "Deed"). Buyer's
obligation to acquire the Property shall be subject to Title Insurer insuring
title to the Property subject to no exceptions other than the following (the
"Conditions of Title"):

                        (a)   The lien for local real estate taxes and
assessments not yet due or payable;

                                       9.



                        (b)   Such items set forth in Schedule B of the Title
Report as Buyer shall have approved (or shall be deemed to have approved
pursuant to Section 4(b)(iii) above) during the Contingency Period;

                        (c)   The interest of Seller as the tenant under the
Macromedia Lease, and the interests of other tenants pursuant to Tenant
Occupancy Leases approved by Buyer; and

                        (d)   The lien of any deed of trust executed by Buyer.

                 7.2    Title Insurance. Buyer's obligation to purchase the
Property shall be subject to and conditioned upon the issuance of the Owner's
Policy by the Title Company upon payment of its normal premium on the Close of
Escrow of the transaction contemplated by this Agreement.

                 7.3    Closing Date. Through an escrow established with the
Title Company, Buyer and Seller shall consummate this transaction on the Closing
Date or such earlier date upon which Buyer and Seller may mutually agree. If the
Close of Escrow has not occurred by December 27, 2001, either party who is not
in default may terminate this Agreement by providing written notice to the other
party.

                 7.4    Deposits And Deliveries By Seller. Seller shall deposit
or cause to be deposited into escrow with the Title Company, or deliver directly
to Buyer outside of escrow, on or before the Closing Date, the following
documents duly executed and acknowledged as required:

                        (a)   The Deed.

                        (b)   A Bill of Sale and Assignment of Intangible
Property in the form attached hereto as Exhibit G transferring the Personal
Property and Intangible Property to Buyer (the "Bill of Sale").

                        (c)   An Assignment of Contracts assigning to Buyer the
approved Contract Obligations in the form attached as Exhibit H (the "Assignment
of Contracts").

                        (d)   An Assignment of Leases in the form attached
hereto as Exhibit I transferring to Buyer all of Seller's interest as landlord
under the Tenant Occupancy Leases (the "Assignment of Leases").

                        (e)   A letter to each of the tenants under the Tenant
Occupancy Leases in form attached hereto as Exhibit J (the "Notice To Tenants").

                        (f)   An Affidavit of Non-Foreign Status in form
attached hereto as Exhibit K (the "Non-Foreign Affidavit) and a California Form
590-RE (the "California Affidavit").

                        (g)   A Closing Certificate confirming the accuracy and
completeness as of the Closing Date of each representation and warranty made
herein (the "Closing Certificate").

                                       10.



                        (h)  The original Estoppel Certificates executed by all
tenants under the Tenant Occupancy Leases, except to the extent Buyer shall have
expressly waived such requirement in writing.

                        (i)  Seller's written escrow instructions to close
escrow in accordance with the terms of this Agreement.

                        (j)  A counterpart of the Macromedia Lease executed by
Seller.

                        (k)  Evidence reasonably acceptable to Buyer's counsel
that the documents delivered to Buyer by Seller at closing have been duly
authorized by Seller, duly executed on behalf of Seller and when delivered
constitute valid and binding obligations of Seller.

                        (l)  Such other documents, resolutions, consents and
affidavits necessary or advisable to effect the valid consummation of the
transaction evidenced by this Agreement.

                7.5     Deposits And Deliveries By Buyer. Buyer shall deposit or
cause to be deposited into escrow with the Title Company, or deliver directly to
Seller outside of escrow, on or before the Closing Date, each of the following
documents duly executed and acknowledged as required and funds:

                        (a)  Cash, wire transfer, cashier's check, or other
immediately available funds, which, together with the Deposit, shall equal the
Purchase Price (the "Purchase Funds").

                        (b)  Buyer's written escrow instructions to close escrow
in accordance with the terms of this Agreement.

                        (c)  A counterpart of the Macromedia Lease executed by
Buyer.

                        (d)  Evidence reasonably acceptable to Seller's counsel
that the documents delivered to Seller by Buyer at closing have been duly
authorized by Buyer, duly executed on behalf of Buyer and when delivered
constitute valid and binding obligations of Buyer.

                7.6     Closing. The Title Company shall close escrow on the
Closing Date when and if it is irrevocably committed to issue the title
insurance described in Section 7.2 above and has received all of the documents
and funds listed in Sections 7.4 and 7.5 above. The Title Company shall close
escrow by:

                        (a)  Recording the Deed.

                        (b)  Issuing to Buyer the Owner's Policy described in
Section 4(b)(v) above.

                        (c)  Delivering to Buyer the original of the Bill of
Sale, the counterpart original of the Assignment of Leases executed by Seller,
the counterpart original of the

                                       11.



Macromedia Lease executed by Seller, the Notice To Tenants, the Non-Foreign
Affidavit, the California Affidavit and the Closing Certificate, each duly
executed by Seller, and the Estoppel Certificates.

                        (d)  Delivering to Seller the Purchase Funds after
deducting Seller's share of closing costs and prorations, the counterpart
original of the Assignment of Leases executed by Buyer, and the counterpart
original of the Macromedia Lease executed by Buyer.

                        (e)  Delivering to Buyer and Seller of copies of all
other documents and things deposited and/or delivered through escrow, the
originals of which are not being delivered by the Title Company to such parties,
together with Title Company's final closing statement for the subject
transaction.

                7.7     Prorations.

                        (a)  Rents and other income and maintenance expenses
(and, to the extent not paid directly by tenants, taxes, insurance, utilities,
management, service and operating expenses) shall be prorated between Seller and
Buyer as of the Closing Date. Rent shall be prorated on the basis of a 30-day
month. Income and expenses shall be prorated on the basis of the actual number
of days in a month. All rents and other sums received by Buyer on or after the
Closing Date shall be applied first to rent and other obligations accrued or due
on or after the Closing Date, then to Buyer's costs of collection, if any,
including attorneys' fees, and any excess paid by tenants for rent or other
obligations owed prior to the Closing Date shall be paid to Seller, provided
that Buyer shall have no obligation to collect delinquent rents for Seller's
account. At closing, Buyer shall be allowed a credit against the Purchase Price
for all rent and other credits and concessions (except credits and concessions
granted by Buyer, if any) due to tenants of the Property allocable to the period
on and after the Closing Date.

                        (b)  All deposits made by tenants of the Property as
security for rent, cleaning or any other purpose (whether identified as
refundable or non-refundable) and prepaid rents and all interest accrued or due
on such sums (whether under applicable law or by agreement) shall, at the sole
option of Buyer, be paid to Buyer in cash on the Closing Date or credited
against the Purchase Price to be paid by Buyer.

                        (c)  All items subject to proration pertaining to the
period prior to the Closing Date shall be credited to Seller, and all such
prorations pertaining to the period on or following the Closing Date shall be
credited to Buyer. Seller, Buyer and Title Company shall cooperate to produce
prior to the Closing Date a schedule of prorations to be made as of the Closing
Date as complete and accurate as reasonably possible. All prorations which can
be liquidated accurately or reasonably estimated as of the Closing Date shall be
made in escrow on the Closing Date. All other prorations, and adjustments to
initial estimated prorations, shall be made by Buyer and Seller with due
diligence and cooperation within 30 days following the Closing Date, or such
later time as may be required to obtain necessary information for proration, by
cash payment to the party yielding a net credit from such prorations from the
other party. Such cash payment shall be made within ten (10) business days of
demand for payment by the party entitled to receive such payment.

                                       12.



                7.8     Closing Costs. Buyer shall pay the title insurance
premiums for the title insurance described in Section 7.2 above, escrow fees,
and Buyer's legal fees and costs incurred in connection with the contemplated
transaction, and one-half of any transfer taxes payable to the City of Redwood
City. Seller shall pay the cost of any county transfer tax, Seller's legal fees
and costs incurred in connection with the contemplated transaction, and one-half
of any transfer taxes payable to the City of Redwood City. In addition, Seller
shall be solely responsible for the cost (including payment of prepayment fees
or other charges) to pay off in full and have cancelled and discharged of
record, all liens, encumbrances and other instruments of record to which Buyer
has objected, and which Seller has agreed to remove in accordance with Section
4(b)(i) above. All other closing costs shall be borne by Seller and/or Buyer in
the manner which is customary in the county where the Land is located.

                7.9     Possession. Right to possession of the Property shall
transfer to Buyer on the Closing Date, subject to the rights of Seller as tenant
under the Macromedia Lease and subject to the rights of the other tenants under
the approved Tenant Occupancy Leases. Seller shall transfer and deliver to Buyer
on the Closing Date the originals of all approved Tenant Occupancy Leases, all
approved written Contract Obligations, all instruments and documents evidencing
or relating to the Intangible Property and all other documents transferred to
Buyer by this Agreement which have not yet been delivered to Buyer.

                7.10    Filing Of Reports. Title Company shall be solely
responsible for the timely filing of any reports or returns required pursuant to
the provisions of Section 6045(e) of the Internal Revenue Code of 1986 (and any
similar reports or returns required under any state or local laws) in connection
with the closing of the transaction contemplated in this Agreement.

                7.11    Cooperation. Without further consideration but at no
out-of-pocket cost to Seller, Seller shall execute, acknowledge and deliver to
Buyer on or after the Closing Date any and all other instruments or documents,
and do and perform any other acts which may be required or which Buyer may
reasonably request in order to fully assign, transfer and/or convey to Buyer,
and vest in Buyer, the Property, and each and every part and component thereof.

        8.      Liquidated Damages. In the event that (i) all of the conditions
to Buyer's duty to perform its obligations under this Agreement shall have been
satisfied, or waived in writing by Buyer, (ii) Seller shall have performed or
tendered performance of all of its obligations under this Agreement, and (iii)
Buyer shall default in its obligations to purchase the Property, then the
Deposit shall be paid by Title Company to Seller as liquidated damages. Buyer
And Seller Hereby Acknowledge And Agree That Seller's Damages Would Be Difficult
Or Impossible To Determine And The Amount Of The Deposit Is The Parties' Best
And Most Accurate Estimate Of The Damages Seller Would Suffer In The Event The
Transaction Provided For In This Agreement Fails To Close Under The Foregoing
Conditions, And Is Reasonable Under The Circumstances Existing As Of The Date Of
This Agreement. Buyer And Seller Agree That The Seller's Right To Retain The
Deposit Shall Be The Sole And Exclusive Remedy Of Seller In The Event Of Such A
Breach Of This Agreement By Buyer.

                                       13.



     _____________________________      ____________________________
     Buyer                              Seller

     9.   Damage And Destruction; Condemnation. Seller shall notify Buyer
immediately of the occurrence of any damage to or destruction of the Property,
or the institution or maintenance of any condemnation or similar proceedings
with respect to the Property. In the event of any damage to or destruction of
the Property for which the cost to repair exceeds $500,000, or is not fully
covered by insurance (except for deductible amounts), or in the event any such
condemnation or other proceedings are instituted or maintained, Buyer at its
option either (i) may terminate this Agreement as provided in Section 4 above,
or (ii) may consummate the purchase evidenced by this Agreement. In all other
events or in the event that Buyer elects to consummate the purchase pursuant to
(ii) above, all insurance or condemnation proceeds (except for any business
interruption and rental loss proceeds which shall be prorated as of Close of
Escrow), collected by Seller prior to the Closing Date, together with an amount
equal to all deductible amounts under the insurance policies covering such
damage or destruction (in the event the cost to repair does not exceed
$500,000), shall be credited against the Purchase Price on Buyer's account, and
all entitlement to all other insurance or condemnation proceeds arising out of
such damage or destruction or proceedings and not collected prior to the Closing
Date shall be assigned by Seller to Buyer on the Closing Date, and all such
deductible amounts not credited against the Purchase Price shall be immediately
paid by Seller to Buyer. Notwithstanding the foregoing, in the event of damage
covered by an earthquake policy, if the deductible amount otherwise payable by
Seller would exceed $10,000, Seller shall have the right to terminate this
Agreement by written notice to Buyer; provided, however, that if Buyer notifies
Seller in writing within five (5) days of receipt of such termination notice
that Buyer waives its claim to the deductible amount in excess of $10,000, such
termination notice shall be void and of no further force or effect.

     10.  Commissions. Each party to this Agreement warrants to the other that
no person or entity can properly claim a right to a real estate commission, real
estate finder's fee, real estate acquisition fee or other real estate
brokerage-type compensation (collectively, "Real Estate Compensation") based
upon the acts of that party with respect to the transaction contemplated by this
Agreement, and each party hereby agrees to indemnify, defend and protect the
other against and to hold the other harmless from any loss, cost or expense
(including but not limited to attorneys' fees and returned commissions)
resulting from any claim for Real Estate Compensation by any person or entity
based upon such acts.

     11.  General Provisions.

          11.1   Notices. Any notice required or permitted to be given under
this Agreement shall be in writing and (i) personally delivered, (ii) sent by
United States mail, registered or certified mail, postage prepaid, return
receipt requested, (iii) sent by Federal Express or similar nationally
recognized overnight courier service, or (iv) transmitted by facsimile with a
hard copy sent within one (1) business day by any of the foregoing means, and in
all cases addressed as follows, and such notice shall be deemed to have been
given upon the date of actual receipt or delivery (or refusal to accept
delivery) at the address specified below (or such other addresses as may be
specified by notice in the foregoing manner) as indicated on the return receipt
or air bill:

                                       14.



                  To Seller:             Macromedia, Inc.
                                         600 Townsend Street
                                         San Francisco, California  94103
                                         Attention: James L. Morgensen
                                         Fax No. (415) 832-2959
                                         Phone No. (415) 832-4294

                  with copies to:        W. Russell Davis
                                         1145 Merrill Street, 2nd Floor
                                         Menlo Park, California 94025
                                         Fax No. (650) 323-2526
                                         Phone No. (650) 323-2529

                  To Buyer:              Menlo Equities Associates LLC
                                         490 California Avenue
                                         4/th/ Floor
                                         Palo Alto, California  94306
                                         Attn: Henry D. Bullock
                                         Fax No. (650) 326-9333
                                         Phone No. (650) 326-9300

                  with copies to:        Cooley Godward LLP
                                         One Maritime Plaza
                                         20th Floor
                                         San Francisco, California  94111
                                         Attn: Paul Churchill
                                         Fax No. (415) 951-3699
                                         Phone No. (415) 693-2000

                  11.2  Entire Agreement; No Modifications. This Agreement,
together with the schedules and exhibits attached hereto, incorporates all
agreements, warranties, representations and understandings between the parties
to the Agreement with respect to the subject matter hereof and constitutes the
entire agreement of Seller and Buyer with respect to the purchase and sale of
the Property. Any prior or contemporaneous correspondence, memoranda,
understandings, offers, negotiations and agreements, oral or written, are merged
herein and replaced in total by this Agreement and the exhibits hereto and shall
be of no further force or effect. This Agreement may not be modified or amended
except in a writing signed by Seller and Buyer.

                  11.3  Time. Time is of the essence in the performance of the
parties' respective obligations set forth in this Agreement.

                  11.4  Attorneys' Fees. In the event any action or proceeding
at law or in equity between Buyer and Seller (including an action or proceeding
between Buyer and the trustee or debtor in possession while Seller is a debtor
in a proceeding under the Bankruptcy Code (Title 11 of the United States Code)
or any successor statute to such Code) to enforce or interpret any provision of
this Agreement or to protect or establish any right or remedy of either Buyer or

                                       15.



Seller hereunder, the unsuccessful party to such action or proceeding shall
pay to the prevailing party all costs and expenses including, without
limitation, reasonable attorneys' and paralegals' fees and expenses, incurred by
such prevailing party, in such action or proceeding and in any appeal in
connection therewith, whether or not such action, proceeding or appeal is
prosecuted to judgment or other final determination, together with all costs of
enforcement and/or collection of any judgment or other relief.

     11.5 Specific Performance. The parties understand and agree that the
Property is unique and for that reason, among others, Buyer will be irreparably
damaged in the event that this Agreement is not specifically enforced.
Accordingly, in the event of any breach or default in or of this Agreement or
any of the warranties, terms or provisions hereof by Seller, Buyer shall have,
in addition to a claim for damages for such breach or default, and in addition
and without prejudice to any right or remedy available at law or in equity, the
right to demand and have specific performance of this Agreement.

     11.6 Successors And Assigns. Except as permitted by this Section 11.6, this
Agreement may not be assigned by Seller or Buyer without the prior written
consent of the other party which may be granted or withheld by the other party
in its sole discretion. Subject to the foregoing provision, this Agreement shall
inure to the benefit of and be binding upon the parties to this Agreement and
their respective successors and assigns. Buyer shall have the right to assign
its rights under this Agreement to an affiliate or related entity of Buyer, and
upon Buyer's assignment of this Agreement and the assignee's assumption of
Buyer's obligations hereunder, the assigning Buyer shall be released (effective
as of and contingent upon the Close of Escrow) from any obligation under, or
liability accruing pursuant to, this Agreement.

     11.7 Counterparts. This Agreement may be executed in one or more
counterparts and each such counterpart shall be deemed to be an original; all
counterparts so executed shall constitute one instrument and shall be binding on
all of the parties to this Agreement notwithstanding that all of the parties are
not signatory to the same counterpart.

     11.8 Construction. This Agreement shall be governed by and construed under
the laws of the State of California. The parties acknowledge that each party and
its counsel have reviewed and revised this Agreement and that no rule of
construction to the effect that any ambiguities are to be resolved against the
drafting party shall be employed in the interpretation of this Agreement or any
schedules or exhibits to it or any document executed and delivered by either
party in connection with this Agreement. All captions in this Agreement are for
reference only and shall not be used in the interpretation of this Agreement or
any related document. If any provision of this Agreement shall be determined to
be illegal or unenforceable, such determination shall not affect any other
provision of this Agreement and all such other provisions shall remain in full
force and effect.

     11.9 Confidentiality. Seller shall keep all information obtained from or
about Buyer or the transaction contemplated by this Agreement strictly
confidential and will not disclose any such information to any other person or
entity without first obtaining the prior written consent of Buyer, except that
Seller may, without Buyer's consent, make such disclosures to Seller's attorneys
and accountants as are reasonable necessary as well as any legally required
disclosures. Buyer shall keep all information obtained from or about Seller or
the transaction

                                       16.



contemplated by this Agreement strictly confidential and will not disclose any
such information to any other person or entity without first obtaining the prior
written consent of Seller, except that Buyer may, without Seller's consent, make
such disclosures to Buyer's consultants assisting Buyer in Buyer's due diligence
investigation of the Property, and Buyer's attorneys and potential equity
investors and lenders.

                                       17.



     In Witness Whereof, Buyer and Seller have executed this Agreement as of the
date and year first written above:

Seller:                              Buyer:

Macromedia, Inc.,                    Menlo Equities Associates LLC,
a Delaware corporation               a California limited liability company

                                     By: Menlo Equities Inc., Managing Member


By: _____________________________        By: ___________________________________
Name:  James Morgensen,                      Henry D. Bullock, President
Title: Vice President, Real Estate,
        Facilities and Services


By: _______________________________
Name: _____________________________
Title: Chief Financial Officer

                                       18.



                                    Exhibit A

                              Contract Obligations

Firm                             Service
ADT Security Services            Security monitoring
Big Bear Fire                    Fire extinguisher
BFI                              Trash removal
Clark Pest Control               Pest control
Diversified Fire Products        Fire Panel service
Otis Elevator                    Elevator Maintenance
Rentokil                         Plant rental and
                                 maintenance
San Mateo Security Services      Security personnel
Therma Corporation               HVAC service and
                                 maintenance
Trinity Building Maintenance     Janitorial Service
TruGreen Landcare                Landscape maintenance
United Properties, Inc.          Facility Management

Utilities                        Service
PG&E                             Electricity and gas
Municipal (Redwood City)         Water, irrigation water,
                                 sewer



                                    Exhibit B

                                LEGAL DESCRIPTION

     THE LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF SAN MATEO, CITY OF
REDWOOD CITY, DESCRIBED AS FOLLOWS:

     Lot 4, as shown on that certain map entitled "SHORES CENTER UNIT NO. 2.
CITY OF REDWOOD CITY, SAN MATEO COUNTY, CALIFORNIA", filed in the office of the
County Recorder of San Mateo County, State of California, on October 15, 1984 in
Book 112 of Maps at page(s) 20-22.



                                    Exhibit C

                            LIST OF PERSONAL PROPERTY

Common Area Furniture
4 ea.   Upholstered wood lounge chairs
2 ea.   Upholstered seating benches

Note:   Security Equipment (access control and video monitoring) is leased from
        ADT
        Plants and containers are rented from Rentokil

Outdoor Furniture
6 ea.   Benches, painted steel
2 ea.   Large theft-roof trash containers, painted steel
2 ea.   Glass top rectangular tables, painted aluminum legs
10 ea.  Resin topped square tables, painted aluminum base
30 ea.  Resin molded chairs



                                    Exhibit D

                         LIST OF TENANT OCCUPANCY LEASES

1. Lease Agreement dated September __, 1997, between Seller and Command Audio
Corporation, as amended by that First Amendment to Lease dated October 24, 2000.

2. Lease Agreement dated August __, 2000, between Seller and VM Sub, Inc.,
including that Consent of Landlord dated January 10, 2001 which granted Seller's
consent to a Sublease between VM Sub, Inc. and Bain & Co.



                                    Exhibit E

                       FORM OF TENANT ESTOPPEL CERTIFICATE

                              Estoppel Certificate

                  RE:   Lease dated ___________________, _________
                        between __________________________________
                        and ______________________________________

     The undersigned hereby certifies to _______________________ ("Buyer") and
________________ ("Lender") as follows:

     1. The undersigned is the "Tenant" under the above-referenced lease
("Lease"), a copy of which is attached hereto as Exhibit A, covering the
above-referenced Premises ("Premises") located in that certain building commonly
known as ___________ Street, _________________, California ("Property").

     2. The Lease is in full force and effect and constitutes the entire
agreement between the landlord under the Lease ("Landlord") and Tenant with
respect to the Premises, and the Lease has not been modified, changed, altered
or amended in any respect except as set forth above.

     3. The term of the Lease commenced on __________, 19_____, will expire on
__________________, 20_____. Tenant has accepted possession of the Premises and
is the actual occupant in possession and has not sublet, assigned or
hypothecated Tenant's leasehold interest. All improvements to be constructed in
the Premises by Landlord have been completed and accepted by Tenant and any
tenant construction allowances have been paid in full.

     4. As of the date of this Estoppel Certificate, to Tenant's knowledge there
exists no breach or default, nor any state of facts which, with notice, the
passage of time, or both, would result in a breach or default on the part of
either Tenant or Landlord.

     5. Tenant is currently obligated to pay annual rental of $_____________ in
monthly installments of $______________ per month and monthly installments of
annual rental have been paid through ___________, 20__. Tenant's pro rata share
of real estate taxes and operating expenses for the Property is ______ percent
(___%) and the "base year", if any, for calculation of taxes and operating
expenses is _____. Tenant's pro rata share of real estate taxes and operating
expenses for the Property have been paid through ______, 20___. In addition to
its pro rata share of real estate taxes and operating expenses, Tenant is also
directly obligated to pay the following: _________________________________. No
other rent has been paid in advance and Tenant has no claim or defense against
Landlord under the Lease and is asserting no offsets or credits against either
the rent or Landlord. Tenant has no claim against Landlord for any security or
other deposits except $_______ which was paid pursuant to the Lease.

                                       1.



     6. Tenant has no option or preferential right to purchase all or any part
of the Premises (or the real property of which the Premises are a part) nor any
right or interest with respect to the Property other than as Tenant under the
Lease.

     7. Tenant has no option, right of first offer or right of first refusal to
lease or occupy any other space within the Property, and Tenant has no right to
renew or extend the terms of the Lease except as follows: _____________________.

     8. Tenant has made no agreement with Landlord or any agent, representative
or employee of Landlord concerning free rent, partial rent, rebate or rental
payments or any other type of rental or other concession except as expressly set
forth in the Lease.

     9. There has not been filed by or against Tenant a petition in bankruptcy,
voluntary or otherwise, any assignment for the benefit of creditors, any
petition seeking reorganization or arrangement under the bankruptcy laws of the
United States, or any state thereof, or any other action brought under said
bankruptcy laws with respect to Tenant.

     This Estoppel Certificate is made to Buyer in connection with the
prospective purchase by Buyer, or Buyer's assignee, of the Property. This
Estoppel Certificate may be relied on by Buyer or Buyer's assignee and any other
party who acquires an interest in the Premises in connection with such purchase
or any person or entity which may finance such purchase. The statements made
herein shall be binding upon us, our successors and assigns. The officers or
persons executing this letter have been duly empowered to do so on behalf of
Tenant.

     Dated this _________________ day of __________, 20__

                                      "Tenant"

                                      __________________________________________
                                      a ________________________________________


                                      By: ______________________________________
                                      Name: ____________________________________
                                      Its:  ____________________________________

                                       2.



                                    Exhibit F

                                  FORM OF DEED

Recorded at Request of:

First American Title Guaranty Company

When Recorded Mail to:

Paul Churchill, Esq.
Cooley Godward LLP
One Maritime Plaza, 20th Floor
San Francisco, California  94111-3580

Mail Tax Statements to:

c/o Menlo Equities Associates LLC
490 California Avenue, 4/th/ Floor
Palo Alto, California  94306

                                   Grant Deed

     For valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, __________________, a __________________________, hereby grants to
______________________, a _______________________, that certain real property
located in the City of Redwood City, County of San Mateo, State of California,
described in Exhibit A attached hereto and made a part hereof.

     Dated: _________________, 20___

                                      __________________________________________
                                      a ________________________________________



                                      By: ______________________________________
                                      Name: ____________________________________
                                      Its:  ____________________________________



                                    Exhibit G

           FORM OF BILL OF SALE AND ASSIGNMENT OF INTANGIBLE PROPERTY

     For valuable consideration, receipt of which is hereby acknowledged, the
undersigned, _________________ ("Seller"), hereby sells, transfers, assigns and
conveys to Menlo Equities Associates LLC, a California limited liability company
("Buyer"), all of Seller's right, title and interest in the "Personal Property"
and in the "Intangible Property" (as such terms are defined in the "Purchase
Agreement" hereinafter described).

     This Bill of Sale and Assignment of Intangible Property is given pursuant
to that certain Agreement for Purchase and Sale of Real Property (the "Purchase
Agreement") dated as of ___________, 20___, between the Seller and Buyer,
providing for, among other things, the assignment of all of Seller's right,
title and interest in the Personal Property and in the Intangible Property. The
covenants, agreements, and limitations provided in the Purchase Agreement with
respect to the property conveyed hereunder are hereby incorporated herein by
this reference as if herein set out in full. Prior to the date hereof Buyer has
no obligations with respect to the Intangible Property.

     This Bill of Sale and Assignment of Intangible Property shall inure to the
benefit of and shall be binding upon Seller and Buyer, and their respective
successors and assigns. Said property is conveyed "as is" without warranty or
representation, except as expressly provided in (and subject to the limitations
of) the Purchase Agreement. Notwithstanding the foregoing, Seller hereby
represents and warrants that the assets transferred hereunder are owned by
Seller free and clear of all mortgages, liens, encumbrances and claims of any
nature whatsoever.

All references to "Seller" and "Buyer" herein shall be deemed to include their
respective heirs, representatives, nominees, successors and/or assigns, where
the context permit.

Dated: ____________________, 20___

                                      __________________________________________
                                      a ________________________________________


                                      By: ______________________________________
                                      Name: ____________________________________
                                      Its: _____________________________________



                                    Exhibit H

                         FORM OF ASSIGNMENT OF CONTRACTS

     This Assignment dated as of _______________, 20___ (the "Assignment"), is
made by _____________________________ corporation ("Assignor") in favor of Menlo
Equities Associates LLC, a California limited liability company ("Assignee"),
pursuant to that certain Agreement for Purchase and Sale of Real Property dated
_______________, 20___ (the "Purchase Agreement").

     1. Effective as of the Effective Date (as defined below):

               (a) Assignor hereby assigns to Assignee all of its right, title
and interest in and to the Contract Obligations (as defined in the Purchase
Agreement).

               (b) Assignee hereby accepts such assignment and assumes the
Contract Obligations.

     2. Assignor warrants and represents that as of the date hereof Schedule 1
includes all of the Contract Obligations affecting the Property.

     3. In the event of any litigation arising out of this Assignment, the
losing party shall pay the prevailing party's costs and expenses of such
litigation, including, without limitation, attorneys' fees.

     4. This Assignment shall be binding on and inure to the benefit of the
parties hereto, their heirs, executors, administrators, successors in interest
and assigns.

     5. This Assignment shall be governed by and construed in accordance with
the laws of the State of California.

     6. For purposes of this Assignment, the "Effective Date" shall be the date
of recordation of the Deed, as defined in the Purchase Agreement.

     In Witness Whereof, Assignor has executed this Assignment the day and year
first above written.

                                      ______________________________,
                                      a _______________ corporation


                                      By: ______________________________________
                                      Name: ____________________________________
                                      Its: _____________________________________

                                       1.



                                   Schedule 1

                          List of Contract Obligations

                                       2.



                                    Exhibit I

                          FORM OF ASSIGNMENT OF LEASES

     This Assignment dated as of _______________, 20___ (the "Assignment"), is
entered into by and between __________________, a __________________________
("Assignor") and Menlo Equities Associates LLC, a California limited liability
company ("Assignee").

                                    Recitals:

     A. Assignor is the landlord under certain leases executed with respect to
that certain real property commonly known as _____________________ Street,
_______________, California (the "Property") as more fully described in Exhibit
A attached hereto, which leases are described in Schedule 1 attached hereto (the
"Leases"); and

     B. Assignor desires to assign its interest as landlord in the Leases to
Assignee, and Assignee desires to accept the assignment thereof.

                                   Agreement:

     Now, Therefore, in consideration of the promises and conditions contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are hereby acknowledged, the parties hereby agree as follows:

     1. Effective as of the Effective Date (as defined below):

        (a) Assignor hereby assigns to Assignee all of its right, title and
interest in and to the Leases.

        (b) Assignee hereby accepts such assignment and assumes the Leases.

     2. Assignor warrants and represents that as of the date hereof Schedule 1
includes all of the leases and occupancy agreements affecting the Property. As
of the date hereof, there are no assignments of or agreements to assign the
Leases to any other party.

     3. Assignor hereby agrees to indemnify Assignee against and hold Assignee
harmless from any and all cost, liability, loss, damage or expense, including,
without limitation, attorneys' fees, arising out of or relating to: (a) events
occurring prior to the Effective Date (as defined below) and arising out of the
landlord's obligations under the Leases, such as tenant claims made after the
Effective Date based on Landlord defaults before the Effective Date, and
including any obligation with respect to security deposits not delivered to
Assignee or credited against the purchase price paid by Assignee pursuant to the
Purchase Agreement (as defined in Paragraph 8 below), and (b) to the extent not
covered by clause (a) above, any third party claims for personal injury or
property damage occurring prior to the Close of Escrow (as defined in the
Purchase Agreement).

                                       1.



     4. Assignee hereby agrees to indemnify Assignor against and hold Assignor
harmless from any and all cost, liability, loss, damage or expense, including,
without limitation, attorneys' fees, arising out of or relating to: (a) events
occurring after the Effective Date and arising out of Buyer's obligations as
landlord under the Leases, and (b) to the extent not covered by clause (a)
above, any third party claims for personal injury or property damage occurring
after the Close of Escrow (as defined in the Purchase Agreement).

     5. In the event of any litigation arising out of this Assignment, the
losing party shall pay the prevailing party's costs and expenses of such
litigation, including, without limitation, attorneys' fees.

     6. This Assignment shall be binding on and inure to the benefit of the
parties hereto, their heirs, executors, administrators, successors in interest
and assigns.

     7. This Assignment shall be governed by and construed in accordance with
the laws of the State of California.

     8. For purposes of this Assignment, the "Effective Date" shall be the date
of recordation of the Deed, as defined in the Purchase Agreement between
Assignor, as Seller, and Menlo Equities Associates LLC, as Buyer ("Purchase
Agreement").

     In Witness Whereof, Assignor and Assignee have executed this Assignment the
day and year first above written.

Assignor:                                   Assignee:

_____________________________________       _______________________________,
a ___________________________________       a ______________________________

                                            By: __________________, a ______

By: _________________________________           By: ________________________
Name: _______________________________
Its:  _______________________________

                                       2.



                                    Exhibit J

                            FORM OF NOTICE TO TENANT

To: ________________________________________
____________________________________________
____________________________________________
____________________________________________


Re:  Lease dated _______________ For Space Located at 101 Redwood Shores
     Parkway, Suite ___, Redwood City, California

This is to notify you that as of ____________________, 20____, the Landlord's
interest in the Lease has been assigned to ________________________.

You are further notified that all rental payments under your Lease shall be paid
to _________________________ at __________________________, in accordance with
the terms of your Lease unless you are otherwise notified in writing by
________________________.

Very truly yours,

___________________,
a ______________________________


By: ________________________________________
Name: ______________________________________
Its: _______________________________________



                                    Exhibit K

                          FORM OF NON-FOREIGN AFFIDAVIT

     Section 1445 of the Internal Revenue Code provides that a transferee of a
U.S. real property interest must withhold tax if the transferor is a foreign
person. To inform the transferee that withholding of tax is not required upon
the disposition of a U.S. real property interest by _____________________, a
_____________________ ("Seller"), the undersigned hereby certifies the following
on behalf of Seller:

     1. Seller is not a foreign corporation, foreign partnership, foreign trust
or foreign estate (as those terms are defined in the Internal Revenue Code and
Income Tax Regulations);

     2. Seller's U.S. employer identification number is ___________; and

     3. Seller's office address is ________________________ Street, __________,
California _________.

     Seller understands that this certification may be disclosed to the Internal
Revenue Service by the transferee and that any false statement contained herein
could be punished by fine, imprisonment, or both.

     Under penalties of perjury I declare that I have examined this certificate
and to the best of my knowledge and belief it is true, correct and complete, and
I further declare that I have authority to sign this document on behalf of
Seller.

     Dated: ___________, 20___

                                        ______________________________________
                                        a ____________________________________


                                        By: __________________________________
                                        Name: ________________________________
                                        Its: _________________________________

EX-10.06

                                                                   Exhibit 10.06

                                 AMENDMENT NO. 1

                                       TO

                         AGREEMENT FOR PURCHASE AND SALE
                                       OF
                                  REAL PROPERTY

         This Amendment No. 1 to Agreement For Purchase And Sale Of Real
Property (the "Agreement") is made and entered into as of the 21st day of
November, 2001 (the "Contract Date") by and between Macromedia, Inc., a Delaware
corporation ("Seller"), and Menlo Equities Associates LLC, a California limited
liability company ("Buyer").

                                    Recitals

         A. Buyer and Seller are parties to that certain Agreement for Purchase
and Sale of Real Property dated as of November 6, 2001 (the "Purchase
Agreement").

         B. Buyer and Seller now desire to amend the Purchase Agreement as set
forth in this Amendment. Capitalized terms used in this Amendment and not
otherwise defined shall have the meanings assigned to them in the Purchase
Agreement.

                                    Agreement

         Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree as
follows:

         1. Macromedia Lease. Section 4(b)(ii) of the Purchase Agreement is
hereby amended in its entirety to read as follows:

               "On or prior to November 28, 2001, Buyer and Seller shall have
               negotiated and finalized executed, and delivered the Macromedia
               Lease."

         2. Ratification. The Purchase Agreement, as amended by this Amendment,
shall continue in full force and effect.

         3. Miscellaneous.

               (i)   Attorney's Fees. If either party commences an action
against the other party arising out of or in connection with this Amendment, the
prevailing party shall be entitled to recover from the losing party reasonable
attorney's fees and costs of suit.


               (ii)  Successors. This Amendment shall be binding on and inure to
the benefit of the parties and their successors.

               (iii) Counterparts. This Amendment may be signed in two or more
counterparts. When at least one such counterpart has been signed by each party,
this



Amendment shall be deemed to have been fully executed, each counterpart
shall be deemed to be an original, and all counterparts shall be deemed to be
one and the same agreement.

         In Witness Whereof, Seller and Buyer have executed this Amendment as of
the day and year first written above.

Seller:                                 Buyer:

Macromedia, Inc.,                       Menlo Equities Associates LLC,
a Delaware corporation                  a California limited liability company

                                        By: Menlo Equities Inc., Managing Member

By: _________________________________       By:_____________________________
Name:   James Morgensen,                    Henry D. Bullock, President
Title:  Vice President, Real Estate,
          Facilities and Services



By: _________________________________
Name:________________________________
Title:  Chief Financial Officer

                                       2

EX-10.07

                                                                   Exhibit 10.07

                                 AMENDMENT NO. 2

                                       TO

                         AGREEMENT FOR PURCHASE AND SALE
                                       OF
                                  REAL PROPERTY

     This Amendment No. 2 to Agreement For Purchase And Sale Of Real Property
(the "Agreement") is made and entered into as of the 21st day of November, 2001
(the "Contract Date") by and between Macromedia, Inc., a Delaware corporation
("Seller"), and Menlo Equities Associates LLC, a California limited liability
company ("Buyer").

                                    Recitals

     A. Buyer and Seller are parties to that certain Agreement for Purchase and
Sale of Real Property dated as of November 6, 2001, as amended by Amendment No.
1 to Agreement for Purchase and Sale of Real Property dated as of November 21,
2001 (collectively, the "Purchase Agreement").

     B. Buyer and Seller now desire to amend the Purchase Agreement as set forth
in this Amendment. Capitalized terms used in this Amendment and not otherwise
defined shall have the meanings assigned to them in the Purchase Agreement.

                                    Agreement

     Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree as
follows:

     1. Macromedia Lease. Section 4(b)(ii) of the Purchase Agreement is hereby
amended in its entirety to read as follows:

          "On or prior to November 29, 2001, Buyer and Seller shall have
          negotiated and finalized executed, and delivered the Macromedia
          Lease."

     2. Ratification. The Purchase Agreement, as amended by this Amendment,
shall continue in full force and effect.

     3. Miscellaneous.

          (i)  Attorney's Fees. If either party commences an action against the
other party arising out of or in connection with this Amendment, the prevailing
party shall be entitled to recover from the losing party reasonable attorney's
fees and costs of suit.

          (ii) Successors. This Amendment shall be binding on and inure to the
benefit of the parties and their successors.



          (iii) Counterparts. This Amendment may be signed in two or more
counterparts. When at least one such counterpart has been signed by each party,
this Amendment shall be deemed to have been fully executed, each counterpart
shall be deemed to be an original, and all counterparts shall be deemed to be
one and the same agreement.

     In Witness Whereof, Seller and Buyer have executed this Amendment as of the
day and year first written above.

Seller:                                 Buyer:

Macromedia, Inc.,                       Menlo Equities Associates LLC,
a Delaware corporation                  a California limited liability company

                                        By: Menlo Equities Inc., Managing Member

By: __________________________________      By: ________________________________
Name:  James Morgensen,                         Henry D. Bullock, President
Title: Vice President, Real Estate,
        Facilities and Services


By: __________________________________
Name: ________________________________
Title: Chief Financial Officer

                                        2

EX-10.08

                                                                   Exhibit 10.08

                                 AMENDMENT NO. 3

                                       TO

                         AGREEMENT FOR PURCHASE AND SALE
                                       OF
                                  REAL PROPERTY

     This Amendment No. 3 to Agreement For Purchase And Sale Of Real Property
(the "Agreement") is made and entered into as of the 30th day of November, 2001
by and between Macromedia, Inc., a Delaware corporation ("Seller"), and Menlo
Equities Associates LLC, a California limited liability company ("Buyer").

                                    Recitals

     A. Buyer and Seller are parties to that certain Agreement for Purchase and
Sale of Real Property dated as of November 6, 2001, as amended by Amendment No.
1 to Agreement for Purchase and Sale of Real Property dated as of November 21,
2001, and as further amended by Amendment No. 2 to Agreement for Purchase and
Sale of Real Property dated as of November 28, 2001 (collectively, the "Purchase
Agreement").

     B. Buyer and Seller now desire to amend the Purchase Agreement as set forth
in this Amendment. Capitalized terms used in this Amendment and not otherwise
defined shall have the meanings assigned to them in the Purchase Agreement.

                                    Agreement

     Now, Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree as
follows:

     1. Deposit. The second sentence of Section 3.1 of the Purchase Agreement is
hereby amended in its entirety to read as follows:

          "Upon expiration of the Contingency Period, provided Buyer does not
          elect to terminate this Agreement in accordance with Section 4 below,
          Buyer shall deposit an additional $1,500,000 with the Title Company."

     2. Conditions Precedent. The condition set forth in Section 4(b)(ii) of the
Purchase Agreement has been satisfied. Buyer hereby agrees that:

          (a) The conditions set forth in Sections 4(b)(i), 4(b)(vii), and
4(b)(viii) of the Purchase Agreement are hereby waived.

          (b) The condition set forth in Sections 4(b)(iii) of the Purchase
Agreement is hereby waived except with respect to exception nos. 5 and 8 set
forth in the Title Report. Buyer



has until 5:00 p.m. on December 7, 2001, within which to waive objections to
such exceptions, or to terminate the Purchase Agreement pursuant to Section 4(b)
thereof.

          3. Ratification. The Purchase Agreement, as amended by this Amendment,
shall continue in full force and effect.

          4. Miscellaneous.

               (i)   Attorney's Fees. If either party commences an action
against the other party arising out of or in connection with this Amendment, the
prevailing party shall be entitled to recover from the losing party reasonable
attorney's fees and costs of suit.

               (ii)  Successors. This Amendment shall be binding on and inure to
the benefit of the parties and their successors.

               (iii) Counterparts. This Amendment may be signed in two or more
counterparts. When at least one such counterpart has been signed by each party,
this Amendment shall be deemed to have been fully executed, each counterpart
shall be deemed to be an original, and all counterparts shall be deemed to be
one and the same agreement.

         In Witness Whereof, Seller and Buyer have executed this Amendment as of
the day and year first written above.

Seller:                                 Buyer:

Macromedia, Inc.,                       Menlo Equities Associates LLC,
a Delaware corporation                  a California limited liability company

                                        By: Menlo Equities Inc., Managing Member

By:_________________________________        By:_________________________________
Name:  James Morgensen,                        Henry D. Bullock, President
Title: Vice President, Real Estate,
        Facilities and Services



By:__________________________________
Name:________________________________
Title: Chief Financial Officer

                                        2

EX-10.09

                                                                   Exhibit 10.09

                                      LEASE


                                 BY AND BETWEEN

                         Menlo Equities Associates LLC,
                     a California limited liability company

                                   as Landlord

                                       and

                                Macromedia, Inc.,
                             a Delaware corporation

                                    as Tenant

                                November 29, 2001



                                Table Of Contents



                                                                                                        Page
                                                                                                     
ARTICLE 1      REFERENCE ...............................................................................   1

     1.1   References ..................................................................................   1

ARTICLE 2      LEASED PREMISES, TERM AND POSSESSION ....................................................   2

     2.1   Demise Of Leased Premises ...................................................................   2

     2.2   Right To Use Outside Areas ..................................................................   3

     2.3   Lease Commencement Date And Lease Term ......................................................   3

     2.4   Delivery Of Possession ......................................................................   3

     2.5   No Improvement Work; Acceptance Of Possession ...............................................   3

     2.6   Surrender Of Possession .....................................................................   3

ARTICLE 3      RENT, LATE CHARGES AND SECURITY DEPOSITS ................................................   4

     3.1   Base Monthly Rent ...........................................................................   4

     3.2   Additional Rent .............................................................................   4

     3.3   Year-End Adjustments ........................................................................   4

     3.4   Late Charge, And Interest On Rent In Default. ...............................................   4

     3.5   Payment Of Rent .............................................................................   5

     3.6   Prepaid Rent ................................................................................   5

     3.7   Security Deposit ............................................................................   5

ARTICLE 4      USE OF LEASED PREMISES AND OUTSIDE AREA .................................................   6

     4.1   Permitted Use ...............................................................................   6

     4.2   General Limitations On Use ..................................................................   6

     4.3   Noise And Emissions .........................................................................   6

     4.4   Trash Disposal ..............................................................................   6

     4.5   Parking .....................................................................................   6

     4.6   Signs .......................................................................................   6

     4.7   Compliance With Laws And Private Restrictions ...............................................   7

     4.8   Compliance With Insurance Requirements ......................................................   7

     4.9   Landlord's Right To Enter ...................................................................   7

     4.10  Use Of Outside Areas ........................................................................   7

     4.11  Environmental Protection ....................................................................   7

     4.12  Rules And Regulations .......................................................................   8

     4.13  Reservations ................................................................................   8

     4.14  Roof ........................................................................................   9

ARTICLE 5      REPAIRS, MAINTENANCE, SERVICES AND UTILITIES ............................................   9

     5.1   Repair And Maintenance ......................................................................   9

           (a)    Tenant's Obligations .................................................................   9

           (b)    Landlord's Obligation ................................................................   9

     5.2   Utilities ...................................................................................   9

     5.3   Security ....................................................................................   9

     5.4   Energy And Resource Consumption .............................................................  10

     5.5   Limitation Of Landlord's Liability ..........................................................  10

ARTICLE 6      ALTERATIONS AND IMPROVEMENTS ............................................................  10


                                       i.



                                Table Of Contents
                                   (continued)



                                                                                                         Page
                                                                                                      
     6.1    By Tenant ...................................................................................  10

     6.2    Ownership Of Improvements ...................................................................  10

     6.3    Alterations Required By Law .................................................................  10

     6.4    Liens .......................................................................................  11

ARTICLE 7       ASSIGNMENT AND SUBLETTING BY TENANT .....................................................  11

     7.1    By Tenant ...................................................................................  11

     7.2    Merger, Reorganization, or Sale of Assets ...................................................  11

     7.3    Landlord's Election .........................................................................  12

     7.4    Conditions To Landlord's Consent ............................................................  12

     7.5    Assignment Consideration And Excess Rentals Defined .........................................  13

     7.6    Payments ....................................................................................  13

     7.7    Good Faith ..................................................................................  13

     7.8    Effect Of Landlord's Consent ................................................................  13

ARTICLE 8       LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY ........................................  13

     8.1    Limitation On Landlord's Liability And Release ..............................................  13

     8.2    Tenant's Indemnification Of Landlord ........................................................  14

ARTICLE 9       INSURANCE ...............................................................................  14

     9.1    Tenant's Insurance ..........................................................................  14

     9.2    Landlord's Insurance ........................................................................  15

     9.3    Mutual Waiver Of Subrogation ................................................................  15

ARTICLE 10      DAMAGE TO LEASED PREMISES ...............................................................  15

     10.1   Landlord's Duty To Restore ..................................................................  15

     10.2   Insurance Proceeds ..........................................................................  15

     10.3   Landlord's Right To Terminate ...............................................................  16

     10.4   Tenant's Right To Terminate .................................................................  16

     10.5   Tenant's Waiver .............................................................................  16

     10.6   Abatement Of Rent ...........................................................................  16

ARTICLE 11      CONDEMNATION ............................................................................  16

     11.1   Tenant's Right To Terminate .................................................................  16

     11.2   Landlord's Right To Terminate ...............................................................  16

     11.3   Restoration .................................................................................  16

     11.4   Temporary Taking ............................................................................  17

     11.5   Division Of Condemnation Award ..............................................................  17

     11.6   Abatement Of Rent ...........................................................................  17

     11.7   Taking Defined ..............................................................................  17

ARTICLE 12      DEFAULT AND REMEDIES ....................................................................  17

     12.1   Events Of Tenant's Default ..................................................................  17

     12.2   Landlord's Remedies .........................................................................  18

     12.3   Landlord's Default And Tenant's Remedies ....................................................  19

     12.4   Limitation Of Tenant's Recourse .............................................................  19

     12.5   Tenant's Waiver .............................................................................  19


                                       ii.



                                Table Of Contents
                                   (continued)



                                                                                                         Page
                                                                                                      
ARTICLE 13      GENERAL PROVISIONS .....................................................................   19

     13.1   Taxes On Tenant's Property .................................................................   19

     13.2   Holding Over ...............................................................................   19

     13.3   Subordination To Mortgages .................................................................   20

     13.4   Tenant's Attornment Upon Foreclosure .......................................................   20

     13.5   Mortgagee Protection .......................................................................   20

     13.6   Estoppel Certificate .......................................................................   20

     13.7   Tenant's Financial Information .............................................................   20

     13.8   Transfer By Landlord .......................................................................   21

     13.9   Force Majeure ..............................................................................   21

     13.10  Notices ....................................................................................   21

     13.11  Attorneys' Fees ............................................................................   21

     13.12  Definitions ................................................................................   21

            (a)    Real Property Taxes .................................................................   21

            (b)    Landlord's Insurance Costs ..........................................................   22

            (c)    Property Maintenance Costs ..........................................................   22

            (d)    Property Operating Expenses .........................................................   22

            (e)    Law .................................................................................   22

            (f)    Lender ..............................................................................   22

            (g)    Private Restrictions ................................................................   22

            (h)    Rent ................................................................................   22

     13.13  General Waivers ............................................................................   22

     13.14  Miscellaneous ..............................................................................   22

ARTICLE 14      CORPORATE AUTHORITY BROKERS AND ENTIRE AGREEMENT .......................................   23

     14.1   Corporate Authority ........................................................................   23

     14.2   Brokerage Commissions ......................................................................   23

     14.3   Entire Agreement ...........................................................................   23

     14.4   Landlord's Representations .................................................................   23

ARTICLE 15      TELEPHONE SERVICE ......................................................................   23


                                      iii.



                                      LEASE

         This Lease, dated November 29, 2001 for reference purposes only, is
made by and between Menlo Equities Associates LLC, a California limited
liability company ("Landlord") and Macromedia, Inc.,, a Delaware corporation
("Tenant"), to be effective and binding upon the parties as of the date the last
of the designated signatories to this Lease shall have executed and delivered
this Lease (the "Effective Date of this Lease").

                                    Recitals

         A. Landlord, as buyer, and Tenant, as seller, are parties to that
certain Agreement for Purchase and Sale of Real Property dated November 6, 2001
(the "Purchase Agreement"), pursuant to which Landlord expects to acquire the
fee interest in the Property from Tenant. The date on which such fee title is so
acquired by Landlord shall be referred to hereinafter as the "Closing Date;"

         B. The parties intend that this Lease shall be effective and binding on
the parties as of the Effective Date of the Lease; provided, however, because
Landlord does not currently own fee title to the Property, each of Landlord's
and Tenant's rights and obligations hereunder shall be conditioned upon the
close of escrow occurring no later than the expiration of the delivery grace
period (as defined in paragraph 2.4 below).

                                   ARTICLE 1

                                   REFERENCE

1.1 References. All references in this Lease (subject to any further
clarifications contained in this Lease) to the following terms shall have the
following meaning or refer to the respective address, person, date, time period,
amount, percentage, calendar year or fiscal year as below set forth:

         Tenant's Address for Notice:            600 Townsend Street
                                                 San Francisco, California 94103
                                                 Attention: James L. Morgensen
                                                 Fax No. (415) 832-2959
                                                 Phone No. (415) 832-4294

         Tenant's Representative:                James L. Morgensen


         Landlord's Address for Notices:         490 California Avenue
                                                 4/th/ Floor
                                                 Palo Alto, California 94306

         Landlord's Representative:              Henry Bullock/Richard Holmstrom
         Phone Number:                           (650) 326-9300

         Intended Commencement Date:             December 27, 2001

         Intended Term:                          Ten (10) years

         Lease Expiration Date:                  Ten (10) years from the Actual
                                                 Lease Commencement Date, unless
                                                 earlier terminated by Landlord
                                                 in accordance with the terms of
                                                 this Lease.

         First Month's Prepaid Rent:             $129,617.25

         Tenant's Security Deposit:              $777,703.50

         Late Charge Amount:                     Four Percent (4%) of the
                                                 Delinquent Amount

         Tenant's Required Liability
         Coverage:                               $2,000,000 per occurrence,
                                                 $5,000,000 Aggregate

         Tenant's Broker(s):                     None

         Property:                               That certain real property
                                                 situated in the City of Redwood
                                                 City, County of San Mateo,
                                                 State of California, as
                                                 presently improved with one (1)
                                                 building, which real property
                                                 is shown on the Site Plan
                                                 attached hereto as Exhibit "A"
                                                 and is commonly known as or
                                                 otherwise described as follows:
                                                 101 Redwood Shores Parkway,
                                                 Redwood City, California. The
                                                 legal description of the
                                                 Property is: Lot 4, as shown on
                                                 that certain map entitled
                                                 "SHORES CENTER UNIT NO. 2. CITY

                                       1.



                                       OF REDWOOD CITY, SAN MATEO COUNTY,
                                       CALIFORNIA", filed in the office of the
                                       County Recorder of San Mateo County,
                                       State of California, on October 15, 1984
                                       in Book 112 of Maps at page(s) 20-22.


        Building:                      That certain building on the Property in
                                       which the Leased Premises are located
                                       commonly known as 101 Redwood Shores
                                       Parkway, Redwood City, California (the
                                       "Building") which Building is shown
                                       outlined on Exhibit "A" hereto.

        Outside Areas:                 The "Outside Areas" shall mean all areas
                                       within the Property which are located
                                       outside the Building, such as pedestrian
                                       walkways, parking areas, landscaped
                                       areas, open areas and enclosed trash
                                       disposal areas.

        Leased Premises:               All the interior space within the third
                                       and fourth floors of the Building,
                                       including stairwells, connecting
                                       walkways, and atriums, plus the space on
                                       the second floor of the Building which
                                       space has already been demised as shown
                                       on Exhibit "B". The Leased Premises
                                       consists of approximately 52,905 rentable
                                       square feet and, for purposes of this
                                       Lease, is agreed to contain said number
                                       of rentable square feet.

        Parking Spaces:                A number of spaces equal to 3.2
                                       multiplied by the rentable square footage
                                       of the Leased Premise from time to time,
                                       and divided by 1,000, to be available on
                                       an undesignated and unreserved basis.

        Tenant's Expense Share:        The term "Tenant's Expense Share" shall
                                       mean the percentage obtained by dividing
                                       the rentable square footage of the Leased
                                       Premises at the time of calculation by
                                       the rentable square footage of all
                                       buildings located on the Property at the
                                       time of calculation. Such percentage is
                                       currently 56.44%. In the event that the
                                       rentable square footage of the Leased
                                       Premises or the Property is changed,
                                       Tenant's Expense Share shall be
                                       recalculated to equal the percentage
                                       described in the first sentence of this
                                       paragraph, so that the aggregate Tenant's
                                       Expense Share of all tenants of the
                                       Property shall equal 100%. Tenant's
                                       Expense Share is subject to adjustment as
                                       set forth in Paragraphs 13.12(b) and
                                       13.12 (c).

        Base Monthly Rent:             The term "Base Monthly Rent" shall mean
                                       the following:

                                       Period                  Base Monthly Rent
                                       ------                  -----------------
                                       12/27/01 - 12/26/04     $129,617.25

                                       12/27/04 - 12/26/09     $142,843.50

                                       12/27/09 - 12/26/11     $149,192.10


        Permitted Use:                 General office and software engineering,
                                       research and development (non-industrial)
                                       for software products, training and
                                       marketing

        Exhibits:                      The term "Exhibits" shall mean the
                                       Exhibits of this Lease which are
                                       described as follows:

                                       Exhibit "A" - Site Plan showing the
                                       Property and delineating the Building in
                                       which the Leased Premises are located.

                                       Exhibit "B"- Floor Plan outlining the
                                       Leased Premises

                                       Exhibit "C" - Form of Lease Commencement
                                       date Certificate

                                       Exhibit "D" - Form of Letter of Credit

                                       Exhibit "E" - Rules and Regulations

                                       Exhibit "F"- Form of Tenant Estoppel
                                       Certificate

                                       2.



                                   ARTICLE 2

                      LEASED PREMISES, TERM AND POSSESSION

2.1  Demise Of Leased Premises. Landlord hereby leases to Tenant and Tenant
hereby leases from Landlord for Tenant's own use in the conduct of Tenant's
business and not for purposes of speculating in real estate, for the Lease Term
and upon the terms and subject to the conditions of this Lease, that certain
interior space described in Article 1 as the Leased Premises, reserving and
excepting to Landlord (a) such access as may be required (including but not
limited to elevator access) by Landlord to the Building roof and heating,
ventilating, air conditioning, ducting, and cabling systems, (b) the right to
place additional vertical penetrations behind the walls of the Leased Premises
as needed for heating, ventilating, air conditioning, ducting, and cabling, and
(c) the right to fifty percent (50%) of all assignment consideration and excess
rentals as provided in Article 7 below. Tenant's lease of the Leased Premises,
together with the appurtenant non-exclusive right to use the Outside Areas as
described in Paragraph 2.2 below, shall be conditioned upon and be subject to
the continuing compliance by Tenant with (i) all the terms and conditions of
this Lease, (ii) all Laws and Private Restrictions governing the use or
occupancy of the Leased Premises and the Property, (iii) all easements and other
matters now of public record respecting the use of the Leased Premises and
Property, and (iv) all reasonable rules and regulations from time to time
established by Landlord. Notwithstanding any provision of this Lease to the
contrary, Landlord hereby reserves to itself and its designees all rights of
access, use and occupancy of the Building roof, and Tenant shall have no right
of access, use or occupancy of the Building roof except (if at all) to the
extent required in order to maintain and repair any of Tenant's equipment
located upon the roof as of the Effective Date of this Lease, or such equipment
as may thereafter be approved by Landlord in its reasonable discretion pursuant
to Section 4.14 below for placement in a Landlord-designated area upon the roof,
or to enable Tenant to perform Tenant's maintenance and repair obligations
pursuant to this Lease. Tenant shall not be required to pay rent or other
amounts to Landlord for the right to maintain its existing equipment on the roof
as of the Effective Date of this Lease.

2.2  Right To Use Outside Areas. As an appurtenant right to Tenant's right to
the use and occupancy of the Leased Premises, Tenant shall have the
non-exclusive right to use the Outside Areas in conjunction with its use of the
Leased Premises solely for the purposes for which they were designated and
intended and for no other purposes whatsoever. Tenant's right to so use the
Outside Areas shall be subject to the limitations on such use as set forth in
Article 1 and any rules and regulations established by Landlord pursuant to
Section 4.12 below, and shall terminate concurrently with any termination of
this Lease. Tenant shall at all times be entitled to use at least that number of
parking spaces determined by multiplying Tenant's Expense Share by the total
number of parking spaces then available upon the Property.

2.3  Lease Commencement Date And Lease Term. The term of this Lease shall begin,
and the Lease Commencement Date shall be deemed to have occurred, on the Closing
Date (the "Lease Commencement Date"). If the Lease Commencement Date is other
than the Intended Commencement Date, appropriate adjustments shall be made so
that all obligations under this Lease which are based on the Intended
Commencement Date, shall instead be based on the Lease Commencement Date. Within
five (5) days after the Lease Commencement Date has been determined, Landlord
and Tenant shall execute a Lease Commencement Date Certificate in the form of
Exhibit "C" attached hereto. The term of this Lease shall in all events end on
the Lease Expiration Date (as set forth in Article 1). The Lease Term shall be
that period of time commencing on the Lease Commencement Date and ending on the
Lease Expiration Date (the "Lease Term"). The parties intend that this Lease
shall be effective and binding on the parties as of the Effective Date of the
Lease; provided, however, because Landlord does not currently own fee title to
the Property, each of Landlord's and Tenant's rights and obligations hereunder
shall be conditioned upon the close of escrow whereupon Landlord acquires fee
title to the Property. A termination of the Purchase Agreement pursuant to its
terms shall automatically terminate this Lease.

2.4  Delivery Of Possession. Landlord shall deliver to Tenant possession of the
Leased Premises in its then "AS-IS" condition, "WITH ALL FAULTS," on the
Intended Commencement Date. If Landlord is unable to so deliver possession of
the Leased Premises to Tenant on or before the Intended Commencement Date,
Landlord shall not be in default under this Lease, nor shall this Lease be void,
voidable or cancelable by Tenant until the lapse of ninety (90) days after the
Intended Commencement Date (the "delivery grace period"). Additionally, the
delivery grace period above set forth shall be extended for such number of days
as Landlord may be delayed in delivering possession of the Leased Premises to
Tenant by reason of Force Majeure or the action or inaction of Tenant. If
Landlord is unable to deliver possession of the Leased Premises to Tenant within
the described delivery grace period (including any extension thereof by reason
of Force Majeure or the actions or inactions of Tenant), then Tenant's sole
remedy shall be to terminate this Lease by written notice delivered to Landlord
within ten days after the expiration of the delivery grace period (as extended,
if applicable), and in no event shall Landlord be liable in damages to Tenant
for such delay. Tenant may not terminate this Lease at any time after the date
Landlord notifies Tenant that the Leased Premises have been put into the agreed
condition and are available for delivery to Tenant, unless Landlord's notice is
not given in good faith.

2.5  No Improvement Work; Acceptance Of Possession. Landlord shall have no
obligation whatsoever to perform and construction or other improvements to
Leased Premises, nor to provide any allowances of any kind to Tenant on account
thereof. It is agreed that, by virtue of the Closing Date occurring, on the
Lease Commencement Date, Tenant formally accepts the Leased Premises and
acknowledges that the Leased Premises in their then "AS-IS" condition, "WITH ALL
FAULTS."

2.6  Surrender Of Possession. Immediately prior to the expiration or upon the
sooner termination of this Lease, Tenant shall remove all of Tenant's signs from
the exterior of the Building (the foregoing shall not imply any right to place
signs on the exterior of the Building, it being agreed that any such rights
shall be pursuant to Paragraph 4.6 below only), and shall remove all of Tenant's
equipment (excluding telecommunications wiring and cabling), trade fixtures,
furniture, supplies, wall decorations and other personal property from within
the Leased Premises, the

                                       3.



Building and the Outside Areas, and shall vacate and surrender the Leased
Premises, the Building, the Outside Areas and the Property to Landlord in the
same condition, broom clean, as existed at the Lease Commencement Date,
reasonable wear and tear excepted. Tenant shall repair all damage to the Leased
Premises, the exterior of the Building and the Outside Areas caused by Tenant's
removal of Tenant's property. Tenant shall, with respect to telecommunications
wiring and cabling, leave the same in good condition and repair and labeled
and/or coded (to the extent labeled and coded as of the Effective Date of this
Lease) sufficiently so that Landlord can readily determine the origin,
destination and function of the wires and cables. Tenant shall patch and
refinish, to Landlord's reasonable satisfaction, all penetrations made by Tenant
or its employees to the floor, walls or ceiling of the Leased Premises (except
for nail holes used to hang pictures and artwork on the walls of the Leased
Premises), whether such penetrations were made with Landlord's approval or not.
Tenant shall repair all damage caused by Tenant to the exterior surface of the
Building and the paved surfaces of the Outside Areas and, where necessary,
replace or resurface same. Additionally, to the extent that Landlord shall have
notified or is deemed to have notified Tenant in writing at the time the
improvements were completed that it desired to have certain improvements made by
Tenant or at the request of Tenant removed at the expiration or sooner
termination of the Lease, Tenant shall, upon the expiration or sooner
termination of the Lease, remove any such improvements constructed or installed
by Landlord or Tenant and repair all damage caused by such removal. In no event
shall Tenant be required to remove any portions of the Leased Premises existing
as of the Effective Date of this Lease. If the Leased Premises, the Building,
the Outside Areas and the Property are not surrendered to Landlord in the
condition required by this paragraph at the expiration or sooner termination of
this Lease, Landlord may, at Tenant's expense, so remove Tenant's signs,
property and/or improvements not so removed and make such repairs and
replacements not so made or hire, at Tenant's expense, independent contractors
to perform such work. Tenant shall be liable to Landlord for all costs incurred
by Landlord in returning the Leased Premises, the Building and the Outside Areas
to the required condition, together with interest on all costs so incurred from
the date paid by Landlord at the then maximum rate of interest not prohibited or
made usurious by law until paid. Tenant shall pay to Landlord the amount of all
costs so incurred plus such interest thereon, within ten (10) business days of
Landlord's billing Tenant for same. Tenant shall indemnify Landlord against loss
or liability resulting from delay by Tenant in surrendering the Leased Premises,
including, without limitation, any claims made by any succeeding Tenant or any
losses to Landlord with respect to lost opportunities to lease to succeeding
tenants.

                                   ARTICLE 3

                    RENT, LATE CHARGES AND SECURITY DEPOSITS

3.1  Base Monthly Rent. Commencing on the Lease Commencement Date and continuing
throughout the Lease Term, Tenant shall pay to Landlord, without prior demand
therefor, in advance on the first day of each calendar month, the amount set
forth as "Base Monthly Rent" in Article 1 (the "Base Monthly Rent").

3.2  Additional Rent. Commencing on the Lease Commencement Date and continuing
throughout the Lease Term, in addition to the Base Monthly Rent and to the
extent not required by Landlord to be contracted for and paid directly by
Tenant, Tenant shall pay to Landlord as additional rent (the "Additional Rent")
the following amounts:

(a)  An amount equal to all Property Operating Expenses (as defined in Article
13) incurred by Landlord. Payment shall be made by whichever of the following
methods (or combination of methods) is (are) from time to time designated by
Landlord:

          (i)   Landlord may forward invoices or bills for such expenses to
Tenant, and Tenant shall, no later than the later of (A) ten (10) days prior to
the due date, and (B) fifteen (15) business days after delivery to Tenant, pay
such invoices or bills and deliver satisfactory evidence of such payment to
Landlord, and/or

          (ii)  Landlord may bill to Tenant, on a periodic basis not more
frequently than monthly, the amount of such expenses (or group of expenses) as
paid or incurred by Landlord, and Tenant shall pay to Landlord the amount of
such expenses within fifteen (15) business days after receipt of a written bill
therefor from Landlord, and/or

          (iii) Landlord may deliver to Tenant Landlord's reasonable estimate of
any given expense (such as Landlord's Insurance Costs or Real Property Taxes),
or group of expenses, which it anticipates will be paid or incurred for the
ensuing calendar or fiscal year, as Landlord may determine, and Tenant shall pay
to Landlord an amount equal to the estimated amount of such expenses for such
year in equal monthly installments during such year with the installments of
Base Monthly Rent. Landlord reserves the right to revise such estimate from time
to time.

Landlord reserves the right to change from time to time the methods of billing
Tenant for any given expense or group of expenses or the periodic basis on which
such expenses are billed.

     (b)  Landlord's share of the consideration received by Tenant upon certain
assignments and sublettings as required by Article 7.

     (c)  Any legal fees and costs that Tenant is obligated to pay or reimburse
to Landlord pursuant to Article 13; and

     (d)  Any other charges or reimbursements due Landlord from Tenant pursuant
to the terms of this Lease.

Notwithstanding the foregoing, Landlord may elect by written notice to Tenant to
have Tenant pay Real Property Taxes or any portion thereof directly to the
applicable taxing authority, in which case Tenant shall make such

                                       4.



payments and deliver satisfactory evidence of payment to Landlord no later than
ten (10) days before such Real Property Taxes become delinquent.

After Tenant's receipt of the year-end statement described in Paragraph 3.3
above setting forth the annual reconciliation of the Property Operating
Expenses, if Tenant has a basis for suspecting that Landlord may have
overcharged Tenant for Property Operating Expenses, Tenant shall so notify
Landlord and provide Landlord with such basis. Landlord and Tenant shall
thereafter promptly meet and confer and attempt in good faith to resolve any
differences regarding such possible overcharges. If they are unable to resolve
such differences, Tenant may cause an audit of Landlord's books and records to
determine the accuracy of Landlord's billings for Property Operating Expenses
under this Lease, provided (a) such audit is performed by a "Big Five"
accounting firm with no present or prior relationship with Tenant, (b) there is
no contingency compensation, and (c) such audit is commenced within sixty (60)
days after Tenant's receipt of the year-end statement described above. If such
audit reveals that the actual Property Operating Expenses for any given year
were less than the amount that Tenant paid for Property Operating Expenses for
any such year, then Landlord shall credit the excess to Tenant's next payment of
Additional Rent. If such audit reveals that the actual Property Operating
Expenses for any given year were more than the amount that Tenant paid for
Property Operating Expenses for any such year, Tenant shall pay such amount to
Landlord within thirty (30) days after completion of the audit. If such audit
establishes that Property Operating Expenses have been overstated by more than
seven percent (7%), Landlord shall reimburse Tenant for the reasonable costs and
expenses of the audit, in no event to exceed $5,000.

3.3  Year-End Adjustments. If Landlord shall have elected to bill Tenant for the
Property Operating Expenses (or any group of such expenses) on an estimated
basis in accordance with the provisions of Paragraph 3.2(a)(iii) above, Landlord
shall furnish to Tenant within three months following the end of the applicable
calendar or fiscal year, as the case may be, a statement setting forth (i) the
amount of such expenses paid or incurred during the just ended calendar or
fiscal year, as appropriate, and (ii) the amount that Tenant has paid to
Landlord for credit against such expenses for such period. If Tenant shall have
paid more than its obligation for such expenses for the stated period, Landlord
shall, at its election, either (i) credit the amount of such overpayment toward
the next ensuing payment or payments of Additional Rent that would otherwise be
due or (ii) refund in cash to Tenant the amount of such overpayment within
thirty (30) days after its determination. If such year-end statement shall show
that Tenant did not pay its obligation for such expenses in full, then Tenant
shall pay to Landlord the amount of such underpayment within thirty (30) days
from Landlord's billing of same to Tenant. The provisions of this Paragraph
shall survive the expiration or sooner termination of this Lease.

3.4  Late Charge, And Interest On Rent In Default. Tenant acknowledges that the
late payment by Tenant of any monthly installment of Base Monthly Rent or any
Additional Rent will cause Landlord to incur certain costs and expenses not
contemplated under this Lease, the exact amounts of which are extremely
difficult or impractical to fix. Such costs and expenses will include without
limitation, administration and collection costs and processing and accounting
expenses. Therefore, if any installment of Base Monthly Rent is not received by
Landlord from Tenant within five (5) calendar days after the same becomes due,
Tenant shall immediately pay to Landlord a late charge in an amount equal to the
amount set forth in Article 1 as the "Late Charge Amount," and if any Additional
Rent is not received by Landlord when the same becomes due, Tenant shall
immediately pay to Landlord a late charge in an amount equal to 4% of the
Additional Rent not so paid; provided, however, that once but only once in any
twelve (12) month period during the Lease Term, Tenant shall be entitled to
written notice of non-receipt of Base Monthly Rent or Additional Rent from
Landlord, and Tenant shall not be liable for any Late Charge Amount or other
late charge hereunder if such installment of Base Monthly Rent or Additional
Rent is received by Landlord within three (3) days after Tenant's receipt of
such notice from Landlord. Landlord and Tenant agree that this late charge
represents a reasonable estimate of such costs and expenses and is fair
compensation to Landlord for the anticipated loss Landlord would suffer by
reason of Tenant's failure to make timely payment. In no event shall this
provision for a late charge be deemed to grant to Tenant a grace period or
extension of time within which to pay any rental installment or prevent Landlord
from exercising any right or remedy available to Landlord upon Tenant's failure
to pay each rental installment due under this Lease when due, including the
right to terminate this Lease. If any rent remains delinquent for a period in
excess of five (5) calendar days, then, in addition to such late charge, Tenant
shall pay to Landlord interest on any rent that is not so paid from said tenth
day at the then maximum rate of interest not prohibited or made usurious by Law
until paid.

3.5  Payment Of Rent. Except as specifically provided otherwise in this Lease,
all rent shall be paid in lawful money of the United States, without any
abatement, reduction or offset for any reason whatsoever, to Landlord at such
address as Landlord may designate from time to time. Tenant's obligation to pay
Base Monthly Rent and all Additional Rent shall be appropriately prorated at the
commencement and expiration of the Lease Term. The failure by Tenant to pay any
Additional Rent as required pursuant to this Lease when due shall be treated the
same as a failure by Tenant to pay Base Monthly Rent when due, and Landlord
shall have the same rights and remedies against Tenant as Landlord would have
had Tenant failed to pay the Base Monthly Rent when due.

3.6  Prepaid Rent. Tenant shall, upon execution of this Lease, pay to Landlord
the amount set forth in Article 1 as "First Month's Prepaid Rent" as prepayment
of rent for credit against the first payment of Base Monthly Rent due hereunder.

3.7  Security Deposit.

          (a)   Tenant shall deposit, prior to the close of escrow pursuant to
the Purchase Agreement, with Landlord the amount set forth in Article 1 as the
"Security Deposit" as security for the performance by Tenant of the terms of
this Lease to be performed by Tenant, and not as prepayment of rent. Tenant
hereby grants to Landlord a security interest in the Security Deposit, including
but not limited to replenishments thereof. Landlord may apply such portion or
portions of the Security Deposit as are reasonably necessary for the following
purposes: (i) to remedy any default by Tenant in the payment of Base Monthly
Rent or Additional Rent or a late charge or interest on defaulted

                                       5.



rent, or any other monetary payment obligation of Tenant under this Lease; (ii)
to repair damage to the Leased Premises, the Building or the Outside Areas
caused or permitted to occur by Tenant; (iii) to clean and restore and repair
the Leased Premises, the Building or the Outside Areas following their surrender
to Landlord if not surrendered in the condition required pursuant to the
provisions of Article 2, and (iv) to remedy any other default of Tenant to the
extent permitted by Law including, without limitation, paying in full on
Tenant's behalf any sums claimed by materialmen or contractors of Tenant to be
owing to them by Tenant for work done or improvements made at Tenant's request
to the Leased Premises. In this regard, Tenant hereby waives any restriction on
the uses to which the Security Deposit may be applied as contained in Section
1950.7(c) of the California Civil Code and/or any successor statute. In the
event the Security Deposit or any portion thereof is so used, Tenant shall pay
to Landlord, promptly upon demand, an amount in cash sufficient to restore the
Security Deposit to the full original sum. If Tenant fails to promptly restore
the Security Deposit and if Tenant shall have paid to Landlord any sums as "Last
Month's Prepaid Rent," Landlord may, in addition to any other remedy Landlord
may have under this Lease, reduce the amount of Tenant's Last Month's Prepaid
Rent by transferring all or portions of such Last Month's Prepaid Rent to
Tenant's Security Deposit until such Security Deposit is restored to the amount
set forth in Article 1. Landlord shall not be deemed a trustee of the Security
Deposit. Landlord may use the Security Deposit in Landlord's ordinary business
and shall not be required to segregate it from Landlord's general accounts.
Tenant shall not be entitled to any interest on the Security Deposit. If
Landlord transfers the Building or the Property during the Lease Term, Landlord
may pay the Security Deposit to any subsequent owner in conformity with the
provisions of Section 1950.7 of the California Civil Code and/or any successor
statute, in which event the transferring landlord shall be released from all
liability for the return of the Security Deposit. Tenant specifically grants to
Landlord (and Tenant hereby waives the provisions of California Civil Code
Section 1950.7 to the contrary) a period of sixty (60) days following a
surrender of the Leased Premises by Tenant to Landlord within which to inspect
the Leased Premises, make required restorations and repairs, receive and verify
workmen's billings therefor, and prepare a final accounting with respect to the
Security Deposit. In no event shall the Security Deposit or any portion thereof,
be considered prepaid rent.

        (b) Notwithstanding the foregoing, at Tenant's option, Tenant may
deliver to Landlord a clean, unconditional, irrevocable, transferable letter of
credit in lieu of cash for the Security Deposit (the "Letter of Credit") in form
and issued by a financial institution ("Issuer") satisfactory to Landlord in its
sole discretion, substantially in the form attached as Exhibit "D." The Letter
of Credit shall permit partial draws, and provide that draws thereunder will be
honored upon presentation by Landlord. The Letter of Credit shall have an
expiration period of one (1) year but shall automatically renew by its terms
unless affirmatively cancelled by either Issuer or Tenant, in which case Issuer
must provide Landlord 30 days' prior written notice of such expiration or
cancellation. The Letter of Credit shall remain in effect until seventy-five
(75) days after the Lease Expiration Date. Any amount drawn under the Letter of
Credit and not utilized by Landlord for the purposes permitted by this Lease
shall be held in accordance with subparagraph (a) of this Paragraph 3.7. If the
Tenant fails to renew or replace the Letter of Credit as required under this
Lease at least thirty (30) days before its stated expiration date, Landlord may
draw upon the entire amount of the Letter of Credit. No fees applicable to the
Letter of Credit shall be charged to Landlord.

        (c) At the beginning of the seventy-third (73rd) month of the Lease
Term, provided Tenant is then rated as an "investment grade" credit by a
reputable, New York-based rating agency, Tenant shall have the right to have the
amount of the Security Deposit or Letter of Credit reduced by Two Hundred Fifty
Thousand Dollars ($250,000) (but not to an amount below $250,000) and at the
beginning of the ninety-seventh (97th) month of the Lease Term, to have the
amount of the Security Deposit or Letter of Credit further reduced by Two
Hundred Fifty Thousand Dollars ($250,000) (but not to an amount below $250,000).
Notwithstanding the foregoing, there shall be no reduction under this paragraph
of the required amount of the Security Deposit or Letter of Credit if an uncured
default has occurred and is continuing on such date(s).

                                    ARTICLE 4

                     USE OF LEASED PREMISES AND OUTSIDE AREA

4.1 Permitted Use. Tenant shall be entitled to use the Leased Premises solely
for the "Permitted Use" as set forth in Article 1 and for no other purpose
whatsoever. Tenant shall be entitled to use the Leased Premises solely for the
"Permitted Use" as set forth in Article 1 and for no other purpose whatsoever.
Tenant shall have the right to vacate the Leased Premises at any time during the
Term of this Lease, provided Tenant maintains the Leased Premises in the same
condition as if fully occupied and as otherwise required by the terms of this
Lease. Tenant shall have the right to use the Outside Areas in conjunction with
its Permitted Use of the Leased Premises solely for the purposes for which they
were designed and intended and for no other purposes whatsoever. Notwithstanding
the foregoing, Tenant shall cause the Leased Premises to be occupied by no fewer
than one hundred twenty-five of its or its sublessees' personnel (and no fewer
than fifty such personnel on each of the third and fourth floors of the
Building) for at least the first thirty-six months of the Lease Term. Tenant
shall have the non-exclusive right to use the Outside Areas in conjunction with
its Permitted Use of the Leased Premises solely for the purposes for which they
were designed and intended and for no other purposes whatsoever.

4.2 General Limitations On Use. Tenant shall not do or permit anything to be
done in or about the Leased Premises, the Building, the Outside Areas or the
Property which does or could (i) jeopardize the structural integrity of the
Building or (ii) cause damage to any part of the Leased Premises, the Building,
the Outside Areas or the Property. Tenant shall not operate any equipment within
the Leased Premises which does or could (i) injure, vibrate or shake the Leased
Premises or the Building, (ii) damage, overload or impair the efficient
operation of any electrical, plumbing, heating, ventilating or air conditioning
systems within or servicing the Leased Premises or the Building, or (iii) damage
or impair the efficient operation of the sprinkler system (if any) within or
servicing the Leased Premises or the Building. Tenant shall not install any
equipment or antennas on or make any penetrations of the exterior walls or roof
of the Building except as permitted under Section 4.14 below. Tenant shall not
affix any

                                       6.



equipment to or make any penetrations or cuts in the floor, ceiling, walls or
roof of the Leased Premises. Tenant shall not place any loads upon the floors,
walls, ceiling or roof systems which could endanger the structural integrity of
the Building or damage its floors, foundations or supporting structural
components. Tenant shall not place any explosive, flammable or harmful fluids or
other waste materials in the drainage systems of the Leased Premises, the
Building, the Outside Areas or the Property. Tenant shall not drain or discharge
any fluids in the landscaped areas or across the paved areas of the Property.
Tenant shall not use any of the Outside Areas for the storage of its materials,
supplies, inventory or equipment and all such materials, supplies, inventory or
equipment shall at all times be stored within the Leased Premises. Tenant shall
not commit nor permit to be committed any waste in or about the Leased Premises,
the Building, the Outside Areas or the Property.

4.3 Noise And Emissions. All noise generated by Tenant in its use of the Leased
Premises shall be confined or muffled so that it does not interfere with the
businesses of or annoy the occupants and/or users of adjacent properties. All
dust, fumes, odors and other emissions generated by Tenant's use of the Leased
Premises shall be sufficiently dissipated in accordance with sound environmental
practice and exhausted from the Leased Premises in such a manner so as not to
interfere with the businesses of or annoy the occupants and/or users of adjacent
properties, or cause any damage to the Leased Premises, the Building, the
Outside Areas or the Property or any component part thereof or the property of
adjacent property owners.

4.4 Trash Disposal. Tenant shall provide trash bins or other adequate garbage
disposal facilities within the trash enclosure areas provided or permitted by
Landlord outside the Leased Premises sufficient for the interim disposal of all
of its trash, garbage and waste. All such trash, garbage and waste temporarily
stored in such areas shall be stored in such a manner so that it is not visible
from outside of such areas, and Tenant shall cause such trash, garbage and waste
to be regularly removed from the Property. Tenant shall keep the Leased Premises
and the Outside Areas in a clean, safe and neat condition free and clear of all
of Tenant's trash, garbage, waste and/or boxes, pallets and containers
containing same at all times.

4.5 Parking. Tenant shall not, at any time, park or permit to be parked any
recreational vehicles, inoperative vehicles or equipment in the Outside Areas or
on any portion of the Property. Tenant agrees to assume responsibility for
compliance by its employees and invitees with the parking provisions contained
herein. If Tenant or its employees park any vehicle within the Property in
violation of these provisions, then Landlord may, upon prior written notice to
Tenant giving Tenant one (1) day (or any applicable statutory notice period, if
longer than one (1) day) to remove such vehicle(s), in addition to any other
remedies Landlord may have under this Lease, charge Tenant, as Additional Rent,
and Tenant agrees to pay, as Additional Rent, One Hundred Dollars ($100) per day
for each day or partial day that each such vehicle is so parked within the
Property. Landlord reserves the right to grant easements and access rights to
others for use of the parking areas on the Property, provided that such grants
do not materially interfere with Tenant's use of the parking areas or reduce the
number of parking spaces available to the Building below such parking/square
footage requirements as are required by Law.

4.6 Signs. Tenant shall not place or install on or within any portion of the
Leased Premises, the exterior of the Building, the Outside Areas or the Property
any sign, advertisement, banner, placard, or picture which is visible from the
exterior of the Leased Premises. Tenant shall not place or install on or within
any portion of the Leased Premises, the exterior of the Building, the Outside
Areas or the Property any business identification sign which is visible from the
exterior of the Leased Premises until Landlord shall have approved in writing
and in its sole discretion the location, size, content, design, method of
attachment and material to be used in the making of such sign; provided,
however, that so long as such signs are normal and customary business
directional or identification signs within the Building, Tenant shall not be
required to obtain Landlord's approval. Any sign, once approved by Landlord,
shall be installed at Tenant's sole cost and expense and only in strict
compliance with Landlord's approval, using a person approved by Landlord to
install same. Landlord may remove any signs (which have not been approved in
writing by Landlord), advertisements, banners, placards or pictures so placed by
Tenant on or within the Leased Premises, the exterior of the Building, the
Outside Areas or the Property and charge to Tenant the cost of such removal,
together with any costs incurred by Landlord to repair any damage caused
thereby, including any cost incurred to restore the surface (upon which such
sign was so affixed) to its original condition. Tenant shall remove all of
Tenant's signs, repair any damage caused thereby, and restore the surface upon
which the sign was affixed to its original condition less reasonable wear and
tear, all to Landlord's reasonable satisfaction, upon the termination of this
Lease. Tenant shall be entitled to maintain throughout the Lease Term monument,
building facade and lobby signage commensurate with the portion of the Building
being occupied by Tenant from time to time. So long as Tenant is occupying at
least half of the Building, Tenant shall be permitted to retain its existing
building facade sign; provided that Landlord shall nonetheless have the right to
seek (or to permit other tenants to seek) City approval for other Building
facade signs, and if obtained, to place such other signs on the Building facade.
At Landlord's option, monument signage shall be allocated to all tenants pro
rata, and Tenant agrees to cooperate reasonably with Landlord in connection
therewith.

4.7 Compliance With Laws And Private Restrictions. Tenant shall abide by and
shall promptly observe and comply with, at its sole cost and expense, all Laws
and Private Restrictions respecting the use and occupancy of the Leased
Premises, the Building, the Outside Areas or the Property including, without
limitation, all Laws governing the use and/or disposal of hazardous materials,
and shall defend with competent counsel, indemnify and hold Landlord harmless
from any claims, damages or liability resulting from Tenant's failure to so
abide, observe, or comply. Tenant's obligations hereunder shall survive the
expiration or sooner termination of this Lease.

4.8 Compliance With Insurance Requirements. With respect to any insurance
policies required or permitted to be carried by Landlord in accordance with the
provisions of this Lease, Tenant shall not conduct nor permit any other person
to conduct any activities nor keep, store or use (or allow any other person to
keep, store or use) any item or thing within the Leased Premises, the Building,
the Outside Areas or the Property which (i) is prohibited under the terms of any
such policies, (ii) could result in the termination of the coverage afforded
under any of such policies, (iii) could give to the insurance carrier the right
to cancel any of such policies, or (iv) could cause an

                                       7.



increase in the rates (over standard rates) charged for the coverage afforded
under any of such policies. Tenant shall comply with all requirements of any
insurance company, insurance underwriter, or Board of Fire Underwriters which
are necessary to maintain, at standard rates, the insurance coverages carried by
either Landlord or Tenant pursuant to this Lease.

4.9  Landlord's Right To Enter. Landlord and its agents shall have the right to
enter the Leased Premises during normal business hours after giving Tenant
reasonable written notice (which shall include e-mail notice for this purpose)
and subject to Tenant's reasonable security measures for the purpose of (i)
inspecting the same; (ii) showing the Leased Premises to tenants (provided that
so long as there is no compelling business reason to show the Leased Premises
earlier than one (1) year prior to the expiration of the Lease Term, and Tenant
is not in default under this Lease, and upon Landlord's request Tenant confirms
that it then has no present intention of subleasing the Leased Premises or any
portion thereof or of assigning this Lease, then Landlord agrees that it will
not exercise its right to enter the Leased Premises to show the same to a
prospective tenant until the last twelve (12) months of the Lease Term; (iii)
showing the Leased Premises to prospective purchasers or mortgagees; (iv) making
necessary alterations, additions or repairs; and (v) performing any of Tenant's
obligations when Tenant has failed to do so. Landlord shall have the right to
enter the Leased Premises during normal business hours (or as otherwise agreed),
subject to Tenant's reasonable security measures, for purposes of supplying any
maintenance or services agreed to be supplied by Landlord. Landlord shall have
the right to enter the Outside Areas during normal business hours for purposes
of (i) inspecting the exterior of the Building and the Outside Areas; (ii)
posting notices of nonresponsibility (and for such purposes Tenant shall provide
Landlord at least thirty days' prior written notice of any work to be performed
on the Leased Premises); and (iii) supplying any services to be provided by
Landlord. Any entry into the Leased Premises or the Outside Areas obtained by
Landlord in accordance with this paragraph shall not under any circumstances be
construed or deemed to be a forcible or unlawful entry into, or a detainer of,
the Leased Premises, or an eviction, actual or constructive of Tenant from the
Leased Premises or any portion thereof. Prior to exercising its rights under
this paragraph relating to a prospective lease or sale (which exercise may
reasonably be expected to impact Tenant's use or occupancy of the Leased
Premises), and provided that Tenant is not then in material default under this
Lease, Landlord shall give Tenant reasonable notice of the specific actions to
be taken shall exercise reasonable efforts to avoid materially impactingTenant's
use and occupancy of or access to the Leased Premises.

4.10 Use Of Outside Areas. Tenant, in its use of the Outside Areas, shall at all
times keep the Outside Areas in a safe condition free and clear of all
materials, equipment, debris, trash (except within existing enclosed trash
areas), inoperable vehicles, and other items which are not specifically
permitted by Landlord to be stored or located thereon by Tenant. If, in the
opinion of Landlord, unauthorized persons are using any of the Outside Areas by
reason of, or under claim of, the express or implied authority or consent of
Tenant, then Tenant, upon demand of Landlord, shall restrain, to the fullest
extent then allowed by Law, such unauthorized use, and shall initiate such
appropriate proceedings as may be required to so restrain such use. Landlord
reserves the right to grant easements and access rights to others for use of the
Outside Areas, provided that (unless required by Law) such easements and access
rights do not materially impair Tenant's use of the Outside Areas or its access
to and from the Leased Premises and Landlord, and shall not be liable to Tenant
for any diminution in Tenant's right to use the Outside Areas as a result.

4.11 Environmental Protection. Tenant's obligations under this Paragraph 4.11
shall survive the expiration or termination of this Lease.

        (a) As used herein, the term "Hazardous Materials" shall mean any toxic
or hazardous substance, material or waste or any pollutant or infectious or
radioactive material, including but not limited to those substances, materials
or wastes regulated now or in the future under any of the following statutes or
regulations and any and all of those substances included within the definitions
of "hazardous substances," "hazardous materials," "hazardous waste," "hazardous
chemical substance or mixture," "imminently hazardous chemical substance or
mixture," "toxic substances," "hazardous air pollutant," "toxic pollutant," or
"solid waste" in the (a) Comprehensive Environmental Response, Compensation and
Liability Act of 1990 ("CERCLA" or "Superfund"), as amended by the Superfund
Amendments and Reauthorization Act of 1986 ("SARA"), 42 U.S.C.(S) 9601 et seq.,
(b) Resource Conservation and Recovery Act of 1976 ("RCRA"), 42 U.S.C.(S) 6901
et seq., (c) Federal Water Pollution Control Act ("FSPCA"), 33 U.S.C.(S) 1251 et
seq., (d) Clean Air Act ("CAA"), 42 U.S.C.(S) 7401 et seq., (e) Toxic Substances
Control Act ("TSCA"), 14 U.S.C.(S) 2601 et seq., (f) Hazardous Materials
Transportation Act, 49 U.S.C.(S) 1801, et seq., (g) Carpenter-Presley-Tanner
Hazardous Substance Account Act ("California Superfund"), Cal. Health & Safety
Code (S) 25300 et seq., (h) California Hazardous Waste Control Act, Cal. Health
& Safety code (S) 25100 et seq., (i) Porter-Cologne Water Quality Control Act
("Porter-Cologne Act"), Cal. Water Code (S) 13000 et seq., (j) Hazardous Waste
Disposal Land Use Law, Cal. Health & Safety codes (S) 25220 et seq., (k) Safe
Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65"), Cal. Health
& Safety code (S) 25249.5 et seq., (l) Hazardous Substances Underground Storage
Tank Law, Cal. Health & Safety code ss. 25280 et seq., (m) Air Resources Law,
Cal. Health & Safety Code (S) 39000 et seq., and (n) regulations promulgated
pursuant to said laws or any replacement thereof, or as similar terms are
defined in the federal, state and local laws, statutes, regulations, orders or
rules. Hazardous Materials shall also mean any and all other biohazardous wastes
and substances, materials and wastes which are, or in the future become,
regulated under applicable Laws for the protection of health or the environment,
or which are classified as hazardous or toxic substances, materials or wastes,
pollutants or contaminants, as defined, listed or regulated by any federal,
state or local law, regulation or order or by common law decision, including,
without limitation, (i) trichloroethylene, tetrachloroethylene,
perchloroethylene and other chlorinated solvents, (ii) any petroleum products or
fractions thereof, (iii) asbestos, (iv) polychlorinted biphenyls, (v) flammable
explosives, (vi) urea formaldehyde, (vii) radioactive materials and waste, and
(viii) materials and wastes that are harmful to or may threaten human health,
ecology or the environment.

        (b) Notwithstanding anything to the contrary in this Lease, Tenant, at
its sole cost, shall comply with all Laws relating to the storage, use and
disposal of Hazardous Materials. Tenant shall not store, use or dispose of any
Hazardous Materials except for (i) normal types and quantities of office
products and cleaning materials used and disposed of in compliance with all Laws
and Private Restriction, and (ii) those Hazardous Materials listed in a

                                       8.



Hazardous Materials management plan ("HMMP") which Tenant shall deliver to
Landlord upon execution of this Lease and update at least annually with Landlord
(collectively, "Permitted Materials") which may be used, stored and disposed of
provided (i) such Permitted Materials are used, stored, transported, and
disposed of in strict compliance with applicable laws, (ii) such Permitted
Materials shall be limited to the materials listed on and may be used only in
the quantities specified in the HMMP, and (iii) Tenant shall provide Landlord
with copies of all material safety data sheets and other documentation required
under applicable Laws in connection with Tenant's use of Permitted Materials as
and when such documentation is provided to any regulatory authority having
jurisdiction, in no event shall Tenant cause or permit to be discharged into the
plumbing or sewage system of the Building or onto the land underlying or
adjacent to the Building any Hazardous Materials. Tenant shall be solely
responsible for and shall defend, indemnify, and hold Landlord and its agents
harmless from and against all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with Tenant's
storage, use and/or disposal of Hazardous Materials. If the presence of
Hazardous Materials on the Leased Premises caused or permitted by Tenant results
in contamination or deterioration of water or soil, then Tenant shall promptly
take any and all action necessary to clean up such contamination, but the
foregoing shall in no event be deemed to constitute permission by Landlord to
allow the presence of such Hazardous Materials. At any time prior to the
expiration of the Lease Term if Tenant has a reasonable basis to suspect that
there has been any release or the presence of Hazardous Materials in the ground
or ground water on the Leased Premises which did not exist upon commencement of
the Lease Term, Tenant shall have the right to conduct appropriate tests of
water and soil and to deliver to Landlord the results of such tests to
demonstrate that no contamination in excess of permitted levels has occurred as
a result of Tenant's use of the Leased Premises. Tenant shall further be solely
responsible for, and shall defend, indemnify, and hold Landlord and its agents
harmless from and against all claims, costs and liabilities, including
attorneys' fees and costs, arising out of or in connection with any removal,
cleanup and restoration work and materials required hereunder to return the
Leased Premises and any other property of whatever nature to their condition
existing prior to the appearance of the Hazardous Materials.

        (c) Upon termination or expiration of the Lease, Tenant at its sole
expense shall cause all Hazardous Materials placed in or about the Leased
Premises, the Building and/or the Property by Tenant, its agents, contractors,
or invitees, and all installations (whether interior or exterior) made by or on
behalf of Tenant relating to the storage, use, disposal or transportation of
Hazardous Materials to be removed from the property and transported for use,
storage or disposal in accordance and compliance with all Laws and other
requirements respecting Hazardous Materials used or permitted to be used by
Tenant. Tenant shall apply for and shall obtain from all appropriate regulatory
authorities (including any applicable fire department or regional water quality
control board) all permits, approvals and clearances necessary for the closure
of the Property and shall take all other actions as may be required to complete
the closure of the Building and the Property.

        (d) At any time prior to expiration of the Lease term, subject to
reasonable prior written (including e-mail) notice (not less than forty-eight
(48) hours) and Tenant's reasonable security requirements and provided such
activities do not unreasonably interfere with the conduct of Tenant's business
at the Leased Premises, Landlord shall have the right to enter in and upon the
Property, Building and Leased Premises in order to conduct appropriate tests of
water and soil to determine whether levels of any Hazardous Materials in excess
of legally permissible levels has occurred as a result of Tenant's use thereof.
Landlord shall furnish copies of all such test results and reports to Tenant
and, at Tenant's option and cost, shall permit split sampling for testing and
analysis by Tenant. Such testing shall be at Tenant's expense if Landlord has a
reasonable basis for suspecting and confirms the presence of Hazardous Materials
in the soil or surface or ground water in, on, under, or about the Property, the
Building or the Leased Premises, which has been caused by or resulted from the
activities of Tenant, its agents, contractors, or invitees.

        (e) Landlord may voluntarily cooperate in a reasonable manner with the
efforts of all governmental agencies in reducing actual or potential
environmental damage. Tenant shall not be entitled to terminate this Lease or to
any reduction in or abatement of rent by reason of such compliance or
cooperation. Tenant agrees at all times to cooperate fully with the requirements
and recommendations of governmental agencies regulating, or otherwise involved
in, the protection of the environment.

4.12 Rules And Regulations. Landlord shall have the right from time to time to
establish reasonable rules and regulations and/or amendments or additions
thereto respecting the use of the Leased Premises and the Outside Areas for the
care and orderly management of the Property. Upon delivery to Tenant of a copy
of such rules and regulations or any amendments or additions thereto, Tenant
shall comply with such rules and regulations, provided that such Rules and
Regulations shall be enforced in a non-discriminatory manner on all tenants of
the Building. A violation by Tenant of any of such rules and regulations shall
constitute a default by Tenant under this Lease. If there is a conflict between
the rules and regulations and any of the provisions of this Lease, the
provisions of this Lease shall prevail. Landlord shall not be responsible or
liable to Tenant for the violation of such rules and regulations by any other
tenant of the Property. A copy of the initial Rules and Regulations is attached
to this Lease as Exhibit "E."

4.13 Reservations. Landlord reserves the right from time to time to grant,
without the consent or joinder of Tenant, such easements, rights of way and
dedications that Landlord deems necessary, and to cause the recordation of
parcel maps and restrictions, so long as such easements, rights of way and
dedications do not materially interfere with the use of or access to the Leased
Premises by Tenant. Tenant agrees to execute any documents reasonably requested
by Landlord to effectuate any such easement rights, dedications, maps or
restrictions.

4.14 Roof. Notwithstanding any provision of this Lease to the contrary, Landlord
hereby reserves to itself and its designees all rights of access, use and
occupancy of the Building roof, and Tenant shall have no right of access, use or
occupancy of the Building roof except (if at all) to the extent required in
order to enable Tenant to perform Tenant's maintenance and repair obligations
pursuant to this Lease. Subject to Tenant's restoration and repair obligations
under Paragraph 2.6, Tenant at its sole cost and expense shall have the right to
install on the roof of the

                                       9.



Building, satellite dishes, television antennas, microwave equipment and
apparatus, and related receiving equipment, related cable connections, as well
as heating, ventilating and air conditioning equipment and any equipment, to the
extent reasonably necessary for the conduct of Tenant's business in the Leased
Premises (collectively, "Roof Equipment"), in an area or areas to be determined
as hereinafter set forth (provided however that Landlord shall have the right to
reasonably relocate the same at no out-of-pocket cost to Tenant), and provided
such installation does not impact the structural integrity of the Building.
Tenant may, subject to Landlord's written approval which shall not be
unreasonably withheld, conditioned or delayed, place the Roof Equipment in one
or two (but not more than two) locations on the roof which in the aggregate do
not contain more than 1,250 square feet, which do not interfere with other
tenants' or Landlord's roof equipment, and which do not result in any additional
roof penetrations beyond those existing as of the Effective Date of this Lease.
Tenant shall remove all such Roof Equipment and complete all repairs prior to
the expiration or earlier termination of the Lease Term. Tenant shall supply
Landlord with detailed plans and specifications of the Roof Equipment prior to
the installation thereof. Furthermore, Tenant shall have secured the approval of
all governmental authorities and all permits required by governmental
authorities having jurisdiction over such approvals and permits for the Roof
Equipment , and shall provide copies of such approvals and permits to Landlord
prior to commencing any work with respect to such Roof Equipment. Tenant shall
pay for any and all costs and expenses in connection with, and shall repair all
damage to the roof resulting from, the installation, maintenance, use and
removal of the Roof Equipment. Tenant shall not be required to pay any extra
rent for the space on the Building roof occupied by the Roof Equipment, but
shall have no right to sublease any of such space.

                                    ARTICLE 5

                  REPAIRS, MAINTENANCE, SERVICES AND UTILITIES

5.1 Repair And Maintenance. Except in the case of damage to or destruction of
the Leased Premises, the Building, the Outside Areas or the Property caused by
an act of God or other peril, in which case the provisions of Article 10 shall
control, the parties shall have the following obligations and responsibilities
with respect to the repair and maintenance of the Leased Premises, the Building,
the Outside Areas, and the Property.

        (a) Tenant's Obligations. Tenant shall, at all times during the Lease
Term and at its sole cost and expense, regularly clean and continuously keep and
maintain in good order, condition and repair the Leased Premises and every part
thereof including, without limiting the generality of the foregoing, (i) the
interior side of all exterior windows, all interior windows, walls, floors and
ceilings, (ii) all windows, doors and skylights, (iii) all electrical wiring,
conduits, connectors and fixtures, (iv) all plumbing, pipes, sinks, toilets,
faucets and drains, (v) all lighting fixtures, bulbs and lamps and all heating,
ventilating and air conditioning equipment serving the Leased Premises
exclusively, and (vi) the secured access system serving the Leased Premises.
Tenant shall, at its sole cost and expense, repair all damage to the Leased
Premises, the Building, the Outside Areas or the Property caused by the
activities of Tenant, its employees, invitees or contractors promptly following
written notice from Landlord to so repair such damages. If Tenant shall fail to
perform the required maintenance or fail to make repairs required of it pursuant
to this paragraph within a reasonable period of time following notice from
Landlord to do so, then Landlord may, at its election and without waiving any
other remedy it may otherwise have under this Lease or at law, perform such
maintenance or make such repairs and charge to Tenant, as Additional Rent, the
costs so incurred by Landlord for same. All glass within or a part of the Leased
Premises, both interior and exterior, is at the sole risk of Tenant and any
broken glass shall promptly be replaced by Tenant at Tenant's expense with glass
of the same kind, size and quality.

        (b) Landlord's Obligation. Landlord shall, at all times during the Lease
Term, maintain in good condition and repair the foundation, roof structure and
membrane, load-bearing and exterior walls of the Building, and those Building
elevators, electrical, plumbing, and life safety (and Building central heating,
ventilating, and air conditioning) systems or components thereof which serve the
Building but which do not serve, or are not identifiable with, the Leased
Premises or the premises leased to other building tenants. The provisions of
this subparagraph (b) shall in no way limit the right of Landlord to charge to
Tenant, as Additional Rent pursuant to Article 3 (to the extent permitted
pursuant to Article 3), the costs incurred by Landlord in performing such
maintenance and/or making such repairs. Landlord shall hire a licensed roofing
contractor to regularly and periodically inspect and perform required
maintenance on the roof of the Building, and a licensed heating, ventilating and
air conditioning contractor to regularly and periodically inspect and perform
required maintenance on the heating, ventilating and air conditioning equipment
and systems serving the Leased Premises, and charge to Tenant, as Additional
Rent, Tenant's Expense Share of the cost thereof.

5.2 Utilities.

        (a) Landlord will furnish to the Leased Premises during the period from
7:00 a.m. to 6:00 p.m., Monday through Friday, except for New Year's Day,
Washington's Birthday, Memorial Day, Independence Day, Labor Day, Thanksgiving,
Christmas and such other holidays as are generally recognized in San Francisco,
California (hereafter, "Building Standard Hours"), and subject to rules and
regulations from time to time established by Landlord: heating, air conditioning
and ventilation in amounts required, in Landlord's reasonable judgment, for the
normal use and occupancy of the Leased Premises. Tenant acknowledges that the
heating, air conditioning and ventilating system of the Building is designed to
operate efficiently while electrical equipment such as customary lamps,
typewriters and other small fractional horsepower office machines are being used
in the Leased Premises and while the Leased Premises are occupied in any
Building System zone by not more than one person per one hundred square feet of
rentable area of the Leased Premises. If the temperature otherwise maintained in
any portion of the Leased Premises by the heating, air conditioning and
ventilating system of the Building is affected by (i) Tenant's use of any
lights, machines or equipment (including, without limitation, computers,
electronic data processing machines and copying machines), or (ii) the occupancy
of the Leased Premises by more than one person per one hundred square feet of
rentable area of the Leased Premises, or (iii) an electrical load that generates
heat in excess of normal office usage,

                                       10.



Landlord shall have the right, unless Tenant ceases and desists from such usage
or excess occupancy within five (5) days after written notice from Landlord, to
install any machinery and equipment that Landlord reasonably deems necessary to
restore temperature balance, including, without limitation, supplemental and
independent heating, air conditioning and ventilation systems and/or
modifications to the standard air conditioning equipment, and the cost thereof,
including the cost of installation and any additional cost of operation and
maintenance incurred thereby, shall be paid by Tenant to Landlord within five
(5) days after demand therefor by Landlord. Tenant shall notify Landlord in
advance, prior to installing or operating any machines or equipment, of the
specifications of such machines or equipment which could so affect the
temperature otherwise maintained in any portion of the Leased Premises by the
heating, air conditioning and ventilating system of the Building. In addition,
Tenant shall pay Landlord the amount of $30 per hour for Building standard HVAC
usage during any times other than Building Standard Hours. Tenant must notify
Landlord by Thursday at 5:00 p.m. as to what weekend usage Tenant will require.

        (b) Unless and until Landlord has caused the Leased Premises to be
separately metered, this subparagraph (b) shall apply and subparagraph (c) below
shall be inapplicable.

               (i)   Landlord will furnish to the Leased Premises during
Building Standard Hours, and subject to rules and regulations from time to time
established by Landlord: (a) elevator service, (b) electric current in amounts
required for normal lighting by building standard overhead fluorescent fixtures,
and (c) water for lavatory and drinking purposes. Landlord will charge Tenant as
Additional Rent for such utilities based on a reasonable allocation to the
Leased Premises of the utility costs incurred by Landlord. It is understood that
subject to subparagraphs (ii) and (iii) below, such elevator service, electric
current and water will be available twenty-four (24) hours a day.

               (ii)  In the event any governmental entity promulgates or revises
any statute, ordinance or building, fire or other code or imposes mandatory or
voluntary controls or guidelines on Landlord or the Building or any part
thereof, or Landlord's engineers propose guidelines or otherwise make
recommendations, relating to the use or conservation of energy, water, gas,
light or electricity or the reduction of automobile or other emissions or the
provision of any other utility or service provided with respect to this Lease,
or in the event Landlord is required or elects to make alterations or to perform
maintenance with respect to, any part of the Property in order to comply with
such mandatory or voluntary controls, guidelines or recommendations, such
compliance, the making of such alterations and/or the performance of such
maintenance shall in no event entitle Tenant to any damages, relieve Tenant of
the obligation to pay the full Base Monthly Rent and Additional Rent reserved
hereunder or to perform each of its other covenants hereunder or constitute or
be construed as a constructive or other eviction of Tenant.

               (iii) Without the prior written consent of Landlord, which
Landlord may refuse in its sole discretion, the electrical current available to
the Leased Premises for both lighting and power (excluding the central heating,
air conditioning and ventilating system) shall at no time exceed a connected
load of 4 watts per square foot of usable area of the Leased Premises. Without
the prior written consent of Landlord, which Landlord may refuse in its sole
discretion, Tenant shall not: (a) connect or use any electrical equipment that
exceeds the capacity of the Building electrical system; (b) connect any
apparatus, machine or device through electrical outlets except in the manner for
which such outlets are designed and without the use of any device intended to
increase the plug capacity of any electrical outlet; or (c) maintain at any time
an electrical demand load in excess of 4 watts per square foot of rentable area
of the Leased Premises. At any time that Tenant's use of electricity exceeds the
foregoing limits, Landlord shall have the right to impose a reasonable charge,
as determined by Landlord, for such excess use. Landlord shall have the right at
any time to install an electric current meter in the Leased Premises or
otherwise to measure the amount of electric current consumed on the Leased
Premises, and the cost of such meter or other corrective measures and the
installation and maintenance thereof shall be paid for by Tenant.

        (c) At such time as Landlord has caused the Leased Premises to be
separately metered, (which it is authorized to do at the sole expense of
Tenant), this subparagraph (c) shall apply and subparagraph (b) above shall be
inapplicable.

               (i)   Landlord shall arrange for gas and electricity connections
to the Building.

               (ii)  Tenant shall arrange at its sole cost and expense and in
its own name, for the supply of gas and electricity to the Leased Premises.

        (d) Landlord shall maintain the water meter(s) in its own name;
provided, however, that if at any time during the Lease Term Landlord shall
require Tenant to put the water service in Tenant's name, Tenant shall do so at
Tenant's sole cost. Tenant shall be responsible for determining if the local
supplier of water, gas and electricity can supply the needs of Tenant and
whether or not the existing water, gas and electrical distribution systems
within the Building and the Leased Premises are adequate for Tenant's needs.
Tenant shall be responsible for determining if the existing sanitary and storm
sewer systems now servicing the Leased Premises and the Property are adequate
for Tenant's needs. Tenant shall pay all charges for water, gas, electricity and
storm and sanitary sewer services as so supplied to the Leased Premises,
irrespective of whether or not the services are maintained in Landlord's or
Tenant's name.

5.3 Security. Tenant acknowledges that Landlord has not undertaken any duty
whatsoever to provide security for the Leased Premises, the Building, the
Outside Areas or the Property and, accordingly, Landlord is not responsible for
the security of same or the protection of Tenant's property or Tenant's
employees, invitees or contractors. To the extent Tenant determines that such
security or protection services are advisable or necessary, Tenant shall arrange
for and pay the costs of providing same. In the event Landlord agrees to provide
any security services, whether it be guard service or secure access systems or
otherwise, Landlord shall do so strictly as an accommodation

                                       11.



to Tenant and Landlord shall have no liability whatsoever in connection
therewith, whether it be for failure to maintain the secure access system, or
for failure of the guard service to provide adequate security, or otherwise.
Without limitation, Paragraph 8.1 below is intended by Tenant and Landlord to
apply to this Paragraph 5.3.

5.4 Energy And Resource Consumption. Landlord may voluntarily cooperate in a
reasonable manner with the efforts of governmental agencies and/or utility
suppliers in reducing energy or other resource consumption within the Property.
Tenant shall not be entitled to terminate this Lease or to any reduction in or
abatement of rent by reason of such compliance or cooperation. Tenant agrees at
all times to cooperate fully with Landlord and to abide by all reasonable rules
established by Landlord (i) in order to maximize the efficient operation of the
electrical, heating, ventilating and air conditioning systems and all other
energy or other resource consumption systems with the Property and/or (ii) in
order to comply with the requirements and recommendations of utility suppliers
and governmental agencies regulating the consumption of energy and/or other
resources.

5.5 Limitation Of Landlord's Liability. Landlord shall not be liable to Tenant
for injury to Tenant, its employees, agents, invitees or contractors, damage to
Tenant's property or loss of Tenant's business or profits, nor shall Tenant be
entitled to terminate this Lease or to any reduction in or abatement of rent by
reason of (i) Landlord's failure to provide security services or systems within
the Property for the protection of the Leased Premises, the Building or the
Outside Areas, or the protection of Tenant's property or Tenant's employees,
invitees, agents or contractors, or (ii) Landlord's failure to perform any
maintenance or repairs to the Leased Premises, the Building, the Outside Areas
or the Property (other than by reason of Landlord's gross negligence or willful
misconduct) until Tenant shall have first notified Landlord, in writing, of the
need for such maintenance or repairs, and then only after Landlord shall have
had a reasonable period of time following its receipt of such notice within
which to perform such maintenance or repairs, or (iii) any failure,
interruption, rationing or other curtailment in the supply of water, electric
current, gas or other utility service to the Leased Premises, the Building, the
Outside Areas or the Property from whatever cause (other than Landlord's sole
active negligence or willful misconduct), or (iv) the unauthorized intrusion or
entry into the Leased Premises by third parties (other than Landlord).
Notwithstanding the foregoing, if (i) utility services are unavailable to the
Leased Premises for a period of ten (10) or more consecutive days and (ii) the
unavailability of such utilities substantially interferes with Tenant's ability
to operate within the Leased Premises, and (iii) Landlord carries rental
interruption insurance and is able to and does collect rental interruption
insurance proceeds covering the Rent under this Lease, then Rent hereunder shall
abate to the extent of the rental interruption insurance proceeds collected by
Landlord.

                                    ARTICLE 6

                          ALTERATIONS AND IMPROVEMENTS

6.1 By Tenant. Tenant shall not make any alterations to or modifications of the
Leased Premises or construct any improvements within the Leased Premises until
Landlord shall have first approved, in writing, the plans and specifications
therefor, which approval may be withheld in Landlord's sole discretion, except
that if Tenant's alterations, modifications, or improvements are generic (and
not specialized) in nature and are generally reusable by other likely tenants of
the Leased Premises in Landlord's reasonable opinion, then such approval shall
not be unreasonably withheld, delayed or conditioned. Tenant's written request
shall also contain a request for Landlord to elect whether or not it will
require Tenant to remove the subject alterations, modifications or improvements
at the expiration or earlier termination of this Lease. If such additional
request is not included, Landlord may make such election at the expiration or
earlier termination of this Lease (and for purposes of Tenant's removal
obligations set forth in Paragraph 2.6 above, Landlord shall be deemed to have
made the election at the time the alterations, modifications or improvements
were completed). All such modifications, alterations or improvements, once so
approved, shall be made, constructed or installed by Tenant at Tenant's expense
(including all permit fees and governmental charges related thereto), using a
licensed contractor first approved by Landlord, in substantial compliance with
the Landlord-approved plans and specifications therefor. All work undertaken by
Tenant shall be done in accordance with all Laws and in a good and workmanlike
manner using new materials of good quality. Tenant shall not commence the making
of any such modifications or alterations or the construction of any such
improvements until (i) all required governmental approvals and permits shall
have been obtained, (ii) all requirements regarding insurance imposed by this
Lease have been satisfied, (iii) Tenant shall have given Landlord at least five
(5) business days prior written notice of its intention to commence such work so
that Landlord may post and file notices of non-responsibility, and (iv) if
requested by Landlord, for any alteration or modification exceeding One Hundred
Thousand Dollars ($100,000) in cost, Tenant shall have obtained contingent
liability and broad form builder's risk insurance in an amount satisfactory to
Landlord in its reasonable discretion to cover any perils relating to the
proposed work not covered by insurance carried by Tenant pursuant to Article 9.
In no event shall Tenant make any modification, alterations or improvements
whatsoever to the Outside Areas or the exterior or structural components of the
Building including, without limitation, any cuts or penetrations in the floor,
roof or exterior walls of the Leased Premises. As used in this Article, the term
"modifications, alterations and/or improvements" shall include, without
limitation, the installation of additional electrical outlets, overhead lighting
fixtures, drains, sinks, partitions, doorways, or the like. Subject to Tenant's
repair and restoration obligations, Tenant shall be entitled to make interior,
non-structural alterations to the Leased Premises which do not exceed either
Seventy Thousand Dollars ($70,000) in cost per project or Two Hundred Fifty
Thousand Dollars ($250,000) in cost in the aggregate, without obtaining
Landlord's prior written consent.

6.2 Ownership Of Improvements. All modifications, alterations and improvements
made or added to the Leased Premises by Tenant (other than Tenant's inventory,
equipment, movable furniture, wall decorations and trade fixtures) shall be
deemed real property and a part of the Leased Premises, but shall remain the
property of Tenant during the Lease, and Tenant hereby covenants and agrees not
to grant a security interest in any such items to any party other than Landlord.
Any such modifications, alterations or improvements, once completed, shall not
be altered or removed from the Leased Premises during the Lease Term without
Landlord's written approval first obtained in accordance with the provisions of
Paragraph 6.1 above. At the expiration or sooner termination of this

                                       12.



Lease, all such modifications, alterations and improvements other than Tenant's
inventory, equipment, movable furniture, wall decorations and trade fixtures,
shall automatically become the property of Landlord and shall be surrendered to
Landlord as part of the Leased Premises as required pursuant to Article 2,
unless Landlord shall require Tenant to remove any of such modifications,
alterations or improvements in accordance with the provisions of Article 2, in
which case Tenant shall so remove same. Landlord shall have no obligations to
reimburse Tenant for all or any portion of the cost or value of any such
modifications, alterations or improvements so surrendered to Landlord. All
modifications, alterations or improvements which are installed or constructed on
or attached to the Leased Premises by Landlord and/or at Landlord's expense
shall be deemed real property and a part of the Leased Premises and shall be
property of Landlord. All lighting, plumbing, electrical, heating, ventilating
and air conditioning fixtures, partitioning, window coverings, wall coverings
and floor coverings installed by Tenant shall be deemed improvements to the
Leased Premises and not trade fixtures of Tenant.

6.3 Alterations Required By Law. Tenant shall make all modifications,
alterations and improvements to the Leased Premises, at its sole cost, that are
required by any Law because of (i) Tenant's use or occupancy of the Leased
Premises, the Building, the Outside Areas or the Property, (ii) Tenant's
application for any permit or governmental approval, or (iii) Tenant's making of
any modifications, alterations or improvements to or within the Leased Premises.
If Landlord shall, at any time during the Lease Term, be required by any
governmental authority to make any modifications, alterations or improvements to
the Building or the Property, the cost incurred by Landlord in making such
modifications, alterations or improvements, including interest at a rate equal
to the greater of (a) 12%, or (b) the sum of that rate quoted by Wells Fargo
Bank, N.T. & S.A. from time to time as its prime rate, plus two percent (2%)
("Wells Prime Plus Two") (but in no event more than the maximum rate of interest
not prohibited or made usurious), shall be amortized by Landlord over the useful
life of such modifications, alterations or improvements, as determined in
accordance with generally accepted accounting principles, and the monthly
amortized cost of such modifications, alterations and improvements as so
amortized shall be considered a Property Maintenance Cost.

6.4 Liens. Tenant shall keep the Property and every part thereof free from any
lien, and shall pay when due all bills arising out of any work performed,
materials furnished, or obligations incurred by Tenant, its agents, employees or
contractors relating to the Property. If any such claim of lien is recorded
against Tenant's interest in this Lease, the Property or any part thereof,
Tenant shall bond against, discharge or otherwise cause such lien to be entirely
released within ten business days after the same has been recorded. Tenant's
failure to do so shall be conclusively deemed a material default under the terms
of this Lease.

                                    ARTICLE 7

                       ASSIGNMENT AND SUBLETTING BY TENANT

7.1 By Tenant. Tenant shall not sublet the Leased Premises or any portion
thereof or assign its interest in this Lease, whether voluntarily or by
operation of Law, without Landlord's prior written consent which shall not be
unreasonably withheld, conditioned or delayed. Any attempted subletting or
assignment without Landlord's prior written consent, at Landlord's election,
shall constitute a default by Tenant under the terms of this Lease. The
acceptance of rent by Landlord from any person or entity other than Tenant, or
the acceptance of rent by Landlord from Tenant with knowledge of a violation of
the provisions of this paragraph, shall not be deemed to be a waiver by Landlord
of any provision of this Article or this Lease or to be a consent to any
subletting by Tenant or any assignment of Tenant's interest in this Lease.
Without limiting the circumstances in which it may be reasonable for Landlord to
withhold its consent to an assignment or subletting, Landlord and Tenant
acknowledge that it shall be reasonable for Landlord to withhold its consent in
the following instances:

        (a) the proposed assignee or sublessee is a governmental agency;

        (b) in Landlord's reasonable judgment, the use of the Leased Premises by
the proposed assignee or sublessee would involve occupancy by other than for a
Permitted Use, would entail any alterations which would lessen the value of the
leasehold improvements in the Leased Premises, or would require increased
services by Landlord;

        (c) in Landlord's reasonable judgment, the credit-worthiness of the
proposed assignee is less than that of Tenant or does not meet the credit
standards applied by Landlord;

        (d) the proposed assignee or sublessee (or any of its affiliates) has
been in material default under a lease, has been in litigation with a previous
landlord, or in the ten years prior to the assignment or sublease has filed for
bankruptcy protection, has been the subject of an involuntary bankruptcy, or has
been adjudged insolvent;

        (e) Landlord has experienced a previous default by or is in litigation
with the proposed assignee or sublessee;

        (f) in Landlord's reasonable judgment, the Leased Premises, or the
relevant part thereof, will be used in a manner that will violate any negative
covenant as to use contained in this Lease;

        (g) the use of the Leased Premises by the proposed assignee or sublessee
will violate any applicable law, ordinance or regulation;

        (h) the proposed assignee or sublessee is, as of the date of this Lease,
a tenant in the Building;

                                       13.



        (i) the proposed assignment or sublease fails to include all of the
terms and provisions required to be included therein pursuant to this Article 7;

        (j) in the case of a subletting of less than the entire Leased Premises,
if the subletting would result in the division of the Leased Premises into more
than two subparcels per floor or would require improvements to be made outside
of the Leased Premises; or

        (k) in the case of a subletting of less than an entire floor of the
Leased Premises, such subletting or the marketing activity relating thereto
commenced prior to January 1, 2003.

7.2 Merger, Reorganization, or Sale of Assets.

        (a) Subject to subparagraph (b) below: Any dissolution, merger,
consolidation or other reorganization of Tenant, or the sale or other transfer
in the aggregate over the Lease Term of a controlling percentage of the capital
stock of Tenant, or the sale or transfer of all or a substantial portion of the
assets of Tenant, shall be deemed a voluntary assignment of Tenant's interest in
this Lease. The phrase "controlling percentage" means the ownership of and the
right to vote stock possessing more than fifty percent of the total combined
voting power of all classes of Tenant's capital stock issued, outstanding and
entitled to vote for the election of directors. If Tenant is a partnership, a
withdrawal or change, voluntary, involuntary or by operation of Law, of any
general partner, or the dissolution of the partnership, shall be deemed a
voluntary assignment of Tenant's interest in this Lease. Upon Landlord's request
from time to time, Tenant shall promptly provide Landlord with a statement
certified by the Tenant's chief operating officer, which shall provide the
following information: (a) the names of all of Tenant's shareholders and their
ownership interests at the time thereof, provided Tenant's shares are not
publicly traded; (b) the state in which Tenant is incorporated; (c) the location
of Tenant's principal place of business; (d) information regarding a material
change in the corporate structure of Tenant, including, without limitation, a
merger or consolidation; and (e) any other information regarding Tenant's
ownership that Landlord reasonably requests. In the event of an acquisition by
one entity of the controlling percentage of the capital stock of Tenant where
this Lease is not assigned to such entity, it shall be a condition to Landlord's
consent to such change in control that such entity acquiring the controlling
percentage assume, as a primary obligor, all rights and obligations of Tenant
under this Lease (and such entity shall execute all documents reasonably
required to effectuate such assumption).

        (b) Notwithstanding subparagraph (a) above, over-the-counter stock
market transactions shall not be deemed to be assignments under this Lease. In
addition, provided that the conditions described below in this sentence have
been satisfied prior to or upon such assignment or subleasing, Tenant may,
without Landlord's prior written consent, sublet the Leased Premises or assign
this Lease to (i) a subsidiary, affiliate, division, corporation or joint
venture controlling, controlled by or under common control with Tenant, (ii) a
successor entity resulting from a merger, consolidation, or nonbankruptcy
reorganization by Tenant, or (iii) a purchaser of substantially all of Tenant's
assets located in the Leased Premises, provided that (A) the successor entity,
assignee, purchaser or subtenant has a net worth and a liquid net worth equal to
or greater than those of Tenant prior to the Effective Date of this Lease and
assumes in writing for the benefit of Landlord, this Lease and all of Tenant's
obligations under this Lease, and (B) the entity with the greatest net worth
involved directly or indirectly in the ownership and/or control of the
acquiring, merged, reorganized, or consolidated entity (hereafter, the "Assignee
Affiliate") shall have unconditionally assumed in writing for the benefit of
Landlord, this Lease and all of Tenant's obligations under this Lease. If any
assignment or subleasing occurs without such an assumption and without
Landlord's consent as provided in Paragraph 7.1 above, then the Assignee
Affiliate (and the successor entity, assignee, purchaser or subtenant) shall for
all purposes be deemed to have unconditionally assumed in writing for the
benefit of Landlord, this Lease and all of Tenant's obligations under this
Lease. In all events, Tenant shall remain fully liable under this Lease.

7.3 Landlord's Election. If Tenant shall desire to assign its interest under the
Lease or to sublet the Leased Premises, Tenant must first notify Landlord, in
writing, of its intent to so assign or sublet, at least thirty (30) days in
advance of taking any action with respect thereto. Once Tenant (or Landlord or
both pursuant to the joint marketing election described below) has identified a
potential assignee or sublessee, Tenant shall notify Landlord, in writing, of
its intent to so assign or sublet, at least thirty (30) days in advance of the
date it intends to so assign its interest in this Lease or sublet the Leased
Premises but not sooner than one hundred eighty days in advance of such date,
specifying in detail the terms of such proposed assignment or subletting,
including the name of the proposed assignee or sublessee, the proposed
assignee's or sublessee's intended use of the Leased Premises, current financial
statements (including a balance sheet, income statement and statement of cash
flow, all prepared in accordance with generally accepted accounting principles)
of such proposed assignee or sublessee, the form of documents to be used in
effectuating such assignment or subletting and such other information as
Landlord may reasonably request. Landlord shall have a period of ten (10)
business days following receipt of such notice and the required information
within which to do one of the following: (i) consent to such requested
assignment or subletting subject to Tenant's compliance with the conditions set
forth in Paragraph 7.4 below, or (ii) refuse to so consent to such requested
assignment or subletting, provided that such consent shall not be unreasonably
refused, or (iii) terminate this Lease as to the entire portion (approximately
half) of the floor on the side of the Building elevator bank on which the
subject portion of the Leased Premises is located, or, at Landlord's sole
option, as to only such portion of the Leased Premises as is the subject of the
proposed assignment or subletting. Notwithstanding the foregoing, Landlord shall
not have the right to elect option (iii) above with respect to subleases which
both (A) are for terms (including extension options) of not more than three (3)
years and (B) expire on or prior to five (5) years after the Lease Commencement
Date. During such ten (10) business day period, Tenant covenants and agrees to
supply to Landlord, upon request, all necessary or relevant information which
Landlord may reasonably request respecting such proposed assignment or
subletting and/or the proposed assignee or sublessee. In the event of an
election by Landlord under clause (iii) above, Tenant shall have the right to
withdraw such notice of intent to assign or sublet provided Tenant notifies
Landlord in writing of such withdrawal within five (5) business days after
receipt of Landlord's termination notice. In the event of an election by
Landlord under clause (iii) above, and absent Tenant's timely

                                       14.



written withdrawal of such notice, Landlord shall have the right to enter into a
direct lease with the proposed assignee or sublessee without payment of any
consideration to Tenant. In addition, in the event Tenant desires to sublease
all or a portion of the Leased Premises, Landlord shall have the right to elect
to jointly market with Tenant the applicable portion (including all) of the
Leased Premises for subleasing and/or direct leasing, such joint marketing
election to be made, if at all, in writing and delivered to Tenant during the
thirty (30) day period described in the first sentence of this Paragraph 7.3.

7.4 Conditions To Landlord's Consent. If Landlord elects to consent, or shall
have been ordered to so consent by a court of competent jurisdiction, to such
requested assignment or subletting, such consent shall be expressly conditioned
upon the occurrence of each of the conditions below set forth, and any purported
assignment or subletting made or ordered prior to the full and complete
satisfaction of each of the following conditions shall be void and, at the
election of Landlord, which election may be exercised at any time following such
a purported assignment or subletting but prior to the satisfaction of each of
the stated conditions, shall constitute a material default by Tenant under this
Lease until cured by satisfying in full each such condition by the assignee or
sublessee. The conditions are as follows:

        (a) Landlord having approved in form and substance the assignment or
sublease agreement and any ancillary documents, which approval shall not be
unreasonably withheld by Landlord if the requirements of this Article 7 are
otherwise complied with.

        (b) Each such sublessee or assignee having agreed, in writing
satisfactory to Landlord and its counsel and for the benefit of Landlord, to
assume, to be bound by, and to perform the obligations of this Lease to be
performed by Tenant which relate to space being subleased.

        (c) Tenant having fully and completely performed all of its obligations
under the terms of this Lease through and including the date of such assignment
or subletting.

        (d) Tenant having reimbursed to Landlord all reasonable costs and
reasonable attorneys' fees incurred by Landlord in conjunction with the
processing and documentation of any such requested subletting or assignment.

        (e) Tenant having delivered to Landlord a complete and fully-executed
duplicate original of such sublease agreement or assignment agreement (as
applicable) and all related agreements.

        (f) Tenant having paid, or having agreed in writing to pay as to future
payments, to Landlord fifty percent (50%) of all assignment consideration or
excess rentals to be paid to Tenant or to any other on Tenant's behalf or for
Tenant's benefit for such assignment or subletting as follows:

               (i)   If Tenant assigns its interest under this Lease and if all
or a portion of the consideration for such assignment is to be paid by the
assignee at the time of the assignment, that Tenant shall have paid to Landlord
and Landlord shall have received an amount equal to fifty percent (50%) of the
assignment consideration so paid or to be paid (whichever is the greater) at the
time of the assignment by the assignee; or

               (ii)  If Tenant assigns its interest under this Lease and if
Tenant is to receive all or a portion of the consideration for such assignment
in future installments, that Tenant and Tenant's assignee shall have entered
into a written agreement with and for the benefit of Landlord satisfactory to
Landlord and its counsel whereby Tenant and Tenant's assignee jointly agree to
pay to Landlord an amount equal to fifty percent (50%) of all such future
assignment consideration installments to be paid by such assignee as and when
such assignment consideration is so paid.

               (iii) If Tenant subleases the Leased Premises, that Tenant and
Tenant's sublessee shall have entered into a written agreement with and for the
benefit of Landlord satisfactory to Landlord and its counsel whereby Tenant and
Tenant's sublessee jointly agree to pay to Landlord fifty percent (50%) of all
excess rentals to be paid by such sublessee as and when such excess rentals are
so paid.

7.5 Assignment Consideration And Excess Rentals Defined. For purposes of this
Article, including any amendment to this Article by way of addendum or other
writing, the term "assignment consideration" shall mean all consideration to be
paid by the assignee to Tenant or to any other party on Tenant's behalf or for
Tenant's benefit as consideration for such assignment, without deduction for any
commissions paid by Tenant or any other costs or expenses (including, without
limitation, tenant improvements, capital improvements, building upgrades, permit
fees, attorneys' fees, and other consultants' fees) incurred by Tenant in
connection with such assignment (provided that the cost of third party, market
rate brokerage commissions and improvements which are generic (and not
specialized) in nature and are generally reusable by other likely tenants of the
Leased Premises in Landlord's reasonable opinion, may be deducted if the
assignment is to an unaffiliated third party), and the term "excess rentals"
shall mean all consideration to be paid by the sublessee to Tenant or to any
other party on Tenant's behalf or for Tenant's benefit for the sublease of all
or any portion of the Leased Premises in excess of the rent due to Landlord
under the terms of this Lease for the portion so subleased for the same period,
without deduction for any commissions paid by Tenant or any other costs or
expenses (including, without limitation, tenant improvements, capital
improvements, building upgrades, permit fees, attorneys' fees, and other
consultants' fees) incurred by Tenant in connection with such sublease (provided
that the cost of third party, market rate brokerage commissions and improvements
which are generic (and not specialized) in nature and are generally reusable by
other likely tenants of the Leased Premises in Landlord's reasonable opinion,
may be deducted if the sublease is to an unaffiliated third party),. Tenant
agrees that the portion of any assignment consideration and/or excess rentals
arising from any assignment or subletting by Tenant which is to be paid to
Landlord pursuant to this Article now is and shall then be the property of
Landlord and not the property of Tenant.

                                       15.



7.6 Payments. All payments required by this Article to be made to Landlord shall
be made in cash in full as and when they become due. At the time Tenant,
Tenant's assignee or sublessee makes each such payment to Landlord, Tenant or
Tenant's assignee or sublessee, as the case may be, shall deliver to Landlord an
itemized statement in reasonable detail showing the method by which the amount
due Landlord was calculated and certified by the party making such payment as
true and correct.

7.7 Good Faith. The rights granted to Tenant by this Article are granted in
consideration of Tenant's express covenant that all pertinent allocations which
are made by Tenant between the rental value of the Leased Premises and the value
of any of Tenant's personal property which may be conveyed or leased (or
services provided) generally concurrently with and which may reasonably be
considered a part of the same transaction as the permitted assignment or
subletting shall be made fairly, honestly and in good faith. If Tenant shall
breach this covenant, Landlord may immediately declare Tenant to be in default
under the terms of this Lease and terminate this Lease and/or exercise any other
rights and remedies Landlord would have under the terms of this Lease in the
case of a material default by Tenant under this Lease.

7.8 Effect Of Landlord's Consent. No subletting or assignment, even with the
consent of Landlord, shall relieve Tenant of its personal and primary obligation
to pay rent and to perform all of the other obligations to be performed by
Tenant hereunder. Consent by Landlord to one or more assignments of Tenant's
interest in this Lease or to one or more sublettings of the Leased Premises
shall not be deemed to be a consent to any subsequent assignment or subletting.
No subtenant shall have any right to assign its sublease or to further sublet
any portion of the sublet premises or to permit any portion of the sublet
premises to be used or occupied by any other party. If Landlord shall have been
ordered by a court of competent jurisdiction to consent to a requested
assignment or subletting, or such an assignment or subletting shall have been
ordered by a court of competent jurisdiction over the objection of Landlord,
such assignment or subletting shall not be binding between the assignee (or
sublessee) and Landlord until such time as all conditions set forth in Paragraph
7.4 above have been fully satisfied (to the extent not then satisfied) by the
assignee or sublessee, including, without limitation, the payment to Landlord of
all agreed assignment considerations and/or excess rentals then due Landlord.

                                    ARTICLE 8

                LIMITATION ON LANDLORD'S LIABILITY AND INDEMNITY

8.1 Limitation On Landlord's Liability And Release. Landlord shall not be liable
to Tenant for, and Tenant hereby releases and waives all claims and rights of
recovery against Landlord and its partners, principals, members, officers,
agents, employees, lenders, attorneys, and consultants from, any and all
liability, whether in contract, tort or on any other basis, for any injury to or
any damage sustained by Tenant, Tenant's agents, employees, contractors or
invitees, any damage to Tenant's property, or any loss to Tenant's business,
loss of Tenant's profits or other financial loss of Tenant resulting from or
attributable to the condition of, the management of, the repair or maintenance
of, the protection of, the supply of services or utilities to, the damage in or
destruction of the Leased Premises, the Building, the Property or the Outside
Areas, including without limitation (i) the failure, interruption, rationing or
other curtailment or cessation in the supply of electricity, water, gas or other
utility service to the Property, the Building or the Leased Premises; (ii) the
vandalism or forcible entry into the Building or the Leased Premises; (iii) the
penetration of water into or onto any portion of the Leased Premises; (iv) the
failure to provide security and/or adequate lighting in or about the Property,
the Building or the Leased Premises, (v) the existence of any design or
construction defects within the Property, the Building or the Leased Premises;
(vi) the failure of any mechanical systems to function properly (such as the
HVAC systems); (vii) the blockage of access to any portion of the Property, the
Building or the Leased Premises, except that Tenant does not so release Landlord
from such liability to the extent such damage was proximately caused by
Landlord's active negligence, willful misconduct, or Landlord's failure to
perform an obligation expressly undertaken pursuant to this Lease after a
reasonable period of time shall have lapsed following receipt of written notice
from Tenant to so perform such obligation.

8.2 Tenant's Indemnification Of Landlord. Tenant shall defend with competent
counsel satisfactory to Landlord any claims made or legal actions filed or
threatened against Landlord with respect to the violation of any Law, or the
death, bodily injury, personal injury, property damage, or any other damages
suffered by any third party or Landlord occurring within the Leased Premises or
resulting from Tenant's use or occupancy of the Leased Premises, the Building or
the Outside Areas, or resulting from Tenant's activities in or about the Leased
Premises, the Building, the Outside Areas or the Property, and Tenant shall
indemnify and hold Landlord, Landlord's partners, principals, members,
employees, agents and contractors harmless from any loss liability, penalties,
or expense whatsoever (including any loss attributable to vacant space which
otherwise would have been leased, but for such activities) resulting therefrom,
except to the extent proximately caused by the active negligence or willful
misconduct of Landlord. This indemnity agreement shall survive the expiration or
sooner termination of this Lease.

                                    ARTICLE 9

                                    INSURANCE

9.1 Tenant's Insurance. Tenant shall maintain insurance complying with all of
the following:

        (a) Tenant shall procure, pay for and keep in full force and effect, at
all times during the Lease Term, the following:

               (i) Commercial general liability insurance insuring Tenant
against liability for personal injury, bodily injury, death and damage to
property occurring within the Leased Premises, or resulting from Tenant's use or
occupancy of the Leased Premises, the Building, the Outside Areas or the
Property, or resulting from

                                       16.



Tenant's activities in or about the Leased Premises or the Property, with
coverage in an amount equal to Tenant's Required Liability Coverage (as set
forth in Article 1), which insurance shall contain "blanket contractual
liability" and "broad form property damage" endorsements insuring Tenant's
performance of Tenant's obligations to indemnify Landlord as contained in this
Lease.

               (ii)  Fire and property damage insurance in "special form"
coverage insuring Tenant against loss from physical damage to Tenant's personal
property, inventory, trade fixtures and improvements within the Leased Premises
with coverage for the full actual replacement cost thereof;

               (iii) Business income/extra expense insurance sufficient to pay
Base Monthly Rent and Additional Rent for a period of not less than twelve (12)
months;

               (iv)  DELETED;

               (v)   Product liability insurance (including, without limitation,
if food and/or beverages are distributed, sold and/or consumed within the Leased
Premises, to the extent obtainable, coverage for liability arising out of the
distribution, sale, use or consumption of food and/or beverages (including
alcoholic beverages, if applicable) at the Leased Premises for not less than
Tenant's Required Liability Coverage (as set forth in Article 1);

               (vi)  Workers' compensation insurance (statutory coverage) with
employer's liability in amounts not less than $1,000,000 insurance sufficient to
comply with all laws; and

               (vii) With respect to making of any alterations or modifications
or the construction of improvements (the cost of which exceeds $100,000) or the
like undertaken by Tenant, course of construction, commercial general liability,
automobile liability and workers' compensation (to be carried by Tenant's
contractor), in an amount and with coverage reasonably satisfactory to Landlord.

        (b) Each policy of liability insurance required to be carried by Tenant
pursuant to this paragraph or actually carried by Tenant with respect to the
Leased Premises or the Property: (i) shall, except with respect to insurance
required by subparagraph (a)(vii) above, name Landlord, and such others as are
designated by Landlord, as additional insureds; (ii) shall be primary insurance
providing that the insurer shall be liable for the full amount of the loss, up
to and including the total amount of liability set forth in the declaration of
coverage, without the right of contribution from or prior payment by any other
insurance coverage of Landlord; (iii) shall be in a form satisfactory to
Landlord; (iv) shall be carried with companies reasonably acceptable to Landlord
with Best's ratings of at least A and VIII; (v) shall provide that such policy
shall not be subject to cancellation, lapse or change except after at least
thirty (30) days prior written notice to Landlord, and (vi) shall contain a
so-called "severability" or "cross liability" endorsement. Each policy of
property insurance maintained by Tenant with respect to the Leased Premises or
the Property or any property therein (i) shall provide that such policy shall
not be subject to cancellation, lapse or change except after at least thirty
(30) days prior written notice to Landlord and (ii) shall contain a waiver
and/or a permission to waive by the insurer of any right of subrogation against
Landlord, its partners, principals, members, officers, employees, agents and
contractors, which might arise by reason of any payment under such policy or by
reason of any act or omission of Landlord, its partners, principals, members,
officers, employees, agents and contractors.

        (c) Prior to the time Tenant or any of its contractors enters the Leased
Premises, Tenant shall deliver to Landlord, with respect to each policy of
insurance required to be carried by Tenant pursuant to this Article, a copy of
such policy (appropriately authenticated by the insurer as having been issued,
premium paid) or a certificate of the insurer certifying in form satisfactory to
Landlord that a policy has been issued, premium paid, providing the coverage
required by this Paragraph and containing the provisions specified herein. With
respect to each renewal or replacement of any such insurance, the requirements
of this Paragraph must be complied with not less than thirty days prior to the
expiration or cancellation of the policies being renewed or replaced. Landlord
may, at any time and from time to time, inspect and/or copy any and all
insurance policies required to be carried by Tenant pursuant to this Article. If
Landlord's Lender, insurance broker, advisor or counsel reasonably determines at
any time that the amount of coverage set forth in Paragraph 9.1(a) for any
policy of insurance Tenant is required to carry pursuant to this Article is not
adequate, then Tenant shall increase the amount of coverage for such insurance
to such greater amount as Landlord's Lender, insurance broker, advisor or
counsel reasonably deems adequate.

9.2 Landlord's Insurance. With respect to insurance maintained by Landlord:

        (a) Landlord shall maintain, as the minimum coverage required of it by
this Lease, fire and property damage insurance in so-called special form
coverage insuring Landlord (and such others as Landlord may designate) against
loss from physical damage to the Building with coverage of not less than one
hundred percent (100%) of the full actual replacement cost thereof and against
loss of rents for a period of not less than six months. Such fire and property
damage insurance, at Landlord's election but without any requirements on
Landlord's behalf to do so, (i) may be written in so-called "all risk" form,
excluding only those perils commonly excluded from such coverage by Landlord's
then property damage insurer; (ii) may provide coverage for physical damage to
the improvements so insured for up to the entire full actual replacement cost
thereof; (iii) may be endorsed to cover loss or damage caused by any additional
perils against which Landlord may elect to insure, including earthquake and/or
flood; and/or (iv) may provide coverage for loss of rents for a period of up to
twelve months. Landlord shall not be required to cause such insurance to cover
any of Tenant's personal property, inventory, and trade fixtures, or any
modifications, alterations or improvements made or constructed by Tenant to or
within the Leased Premises. Landlord shall use commercially reasonable efforts
to obtain such insurance at competitive rates.

                                       17.



        (b) Landlord shall maintain commercial general liability insurance
insuring Landlord (and such others as are designated by Landlord) against
liability for personal injury, bodily injury, death, and damage to property
occurring in, on or about, or resulting from the use or occupancy of the
Property, or any portion thereof, with combined single limit coverage of at
least Ten Million Dollars ($10,000,000). Landlord may carry such greater
coverage as Landlord or Landlord's Lender, insurance broker, advisor or counsel
may from time to time determine is reasonably necessary for the adequate
protection of Landlord and the Property.

        (c) Landlord may maintain any other insurance which in the opinion of
its insurance broker, advisor or legal counsel is prudent in carry under the
given circumstances, provided such insurance is commonly carried by owners of
property similarly situated and operating under similar circumstances.

9.3  Mutual Waiver Of Subrogation. Landlord hereby releases Tenant, and Tenant
hereby releases Landlord and its respective partners, principals, members,
officers, agents, employees and servants, from any and all liability for loss,
damage or injury to the property of the other in or about the Leased Premises or
the Property which is caused by or results from a peril or event or happening
which is covered by insurance actually carried and in force at the time of the
loss by the party sustaining such loss; provided, however, that such waiver
shall be effective only to the extent permitted by the insurance covering such
loss and to the extent such insurance is not prejudiced thereby.

                                   ARTICLE 10

                            DAMAGE TO LEASED PREMISES

10.1 Landlord's Duty To Restore. If the Leased Premises, the Building or the
Outside Area are damaged by any peril after the Effective Date of this Lease,
Landlord shall restore the same, as and when required by this paragraph, unless
this Lease is terminated by Landlord pursuant to Paragraph 10.3 or by Tenant
pursuant to Paragraph 10.4. If this Lease is not so terminated, then upon the
issuance of all necessary governmental permits, Landlord shall commence and
diligently prosecute to completion the restoration of the Leased Premises, the
Building or the Outside Area, as the case may be, to the extent then allowed by
law, to substantially the same condition in which it existed as of the Lease
Commencement Date. Landlord's obligation to restore shall be limited to the
improvements constructed by Landlord. Landlord shall have no obligation to
restore any alterations, modifications or improvements made by Tenant to the
Leased Premises or any of Tenant's personal property, inventory or trade
fixtures. Upon completion of the restoration by Landlord, Tenant shall forthwith
replace or fully repair all of Tenant's personal property, inventory, trade
fixtures and other improvements constructed by Tenant to like or similar
conditions as existed at the time immediately prior to such damage or
destruction.

10.2 Insurance Proceeds. All insurance proceeds available from the fire and
property damage insurance carried by Landlord shall be paid to and become the
property of Landlord. If this Lease is terminated pursuant to either Paragraph
10.3 or 10.4, all insurance proceeds available from insurance carried by Tenant
which cover loss of property that is Landlord's property or would become
Landlord's property on termination of this Lease shall be paid to and become the
property of Landlord, and the remainder of such proceeds shall be paid to and
become the property of Tenant. If this Lease is not terminated pursuant to
either Paragraph 10.3 or 10.4, all insurance proceeds available from insurance
carried by Tenant which cover loss to property that is Landlord's property shall
be paid to and become the property of Landlord, and all proceeds available from
such insurance which cover loss to property which would only become the property
of Landlord upon the termination of this Lease shall be paid to and remain the
property of Tenant. The determination of Landlord's property and Tenant's
property shall be made pursuant to Paragraph 6.2.

10.3 Landlord's Right To Terminate. Landlord shall have the option to terminate
this Lease in the event any of the following occurs, which option may be
exercised only by delivery to Tenant of a written notice of election to
terminate within thirty days after the date of such damage or destruction:

        (a) The Building is damaged by any peril covered by valid and
collectible insurance actually carried by Landlord and in force at the time of
such damage or destruction (an "insured peril") to such an extent that the
estimated cost to restore the Building exceeds the lesser of (i) the insurance
proceeds available from insurance actually carried by Landlord, or (ii) fifty
percent of the then actual replacement cost thereof;

        (b) The Building is damaged by an uninsured peril, which peril Landlord
was not required to insure against pursuant to the provisions of Article 9 of
this Lease.

        (c) The Building is damaged by any peril and, because of the laws then
in force, the Building (i) cannot be restored at reasonable cost or (ii) if
restored, cannot be used for the same use being made thereof before such damage.

10.4 Tenant's Right To Terminate. If the Leased Premises, the Building or the
Outside Area are damaged by any peril and Landlord does not elect to terminate
this Lease or is not entitled to terminate this Lease pursuant to this Article,
then as soon as reasonably practicable, Landlord shall furnish Tenant with the
written opinion of Landlord's architect or construction consultant as to when
the restoration work required of Landlord may be complete. Tenant shall have the
option to terminate this Lease in the event any of the following occurs, which
option may be exercised only by delivery to Landlord of a written notice of
election to terminate within ten business days after Tenant receives from
Landlord the estimate of the time needed to complete such restoration:

        (a) If the time estimated to substantially complete the restoration
exceeds nine months from and after the date the architect's or construction
consultant's written opinion is delivered; or

                                       18.



        (b) If the damage occurred within twelve months of the last day of the
Lease Term and the time estimated to substantially complete the restoration
exceeds ninety days from and after the date such restoration is commenced.

10.5 Tenant's Waiver. Landlord and Tenant agree that the provisions of Paragraph
10.4 above, captioned "Tenant's Right To Terminate", are intended to supersede
and replace the provisions contained in California Civil Code, Section 1932,
Subdivision 2, and California Civil Code, Section 1934, and accordingly, Tenant
hereby waives the provisions of such Civil Code Sections and the provisions of
any successor Civil Code Sections or similar laws hereinafter enacted.

10.6 Abatement Of Rent. In the event of damage to the Leased Premises which does
not result in the termination of this Lease, the Base Monthly Rent (and any
Additional Rent) shall be temporarily abated during the period of restoration in
proportion in the degree to which Tenant's use of the Leased Premises is
impaired by such damage.

                                   ARTICLE 11

                                  CONDEMNATION

11.1 Tenant's Right To Terminate. Except as otherwise provided in Paragraph 11.4
below regarding temporary takings, Tenant shall have the option to terminate
this Lease if, as a result of any taking, (i) all of the Leased Premises is
taken, or (ii) twenty-five percent (25%) or more of the Leased Premises is taken
and the part of the Leased Premises that remains cannot, within a reasonable
period of time, be made reasonably suitable for the continued operation of
Tenant's business. Tenant must exercise such option within a reasonable period
of time, to be effective on the later to occur of (i) the date that possession
of that portion of the Leased Premises that is condemned is taken by the
condemnor or (ii) the date Tenant vacated the Leased Premises.

11.2 Landlord's Right To Terminate. Except as otherwise provided in Paragraph
11.4 below regarding temporary takings, Landlord shall have the option to
terminate this Lease if, as a result of any taking, (i) all of the Leased
Premises is taken, (ii) twenty-five percent (25%) or more of the Leased Premises
is taken and the part of the Leased Premises that remains cannot, within a
reasonable period of time, be made reasonably suitable for the continued
operation of Tenant's business, or (iii) because of the laws then in force, the
Leased Premises may not be used for the same use being made before such taking,
whether or not restored as required by Paragraph 11.3 below. Any such option to
terminate by Landlord must be exercised within a reasonable period of time, to
be effective as of the date possession is taken by the condemnor.

11.3 Restoration. If any part of the Leased Premises or the Building is taken
and this Lease is not terminated, then Landlord shall, to the extent not
prohibited by laws then in force, repair any damage occasioned thereby to the
remainder thereof to a condition reasonably suitable for Tenant's continued
operations and otherwise, to the extent practicable, in the manner and to the
extent provided in Paragraph 10.1.

11.4 Temporary Taking. If a portion of the Leased Premises is temporarily taken
for a period of one year or less and such period does not extend beyond the
Lease Expiration Date, this Lease shall remain in effect. If any portion of the
Leased Premises is temporarily taken for a period which exceeds one year or
which extends beyond the Lease Expiration Date, then the rights of Landlord and
Tenant shall be determined in accordance with Paragraphs 11.1 and 11.2 above.

11.5 Division Of Condemnation Award. Any award made for any taking of the
Property, the Building, or the Leased Premises, or any portion thereof, shall
belong to and be paid to Landlord, and Tenant hereby assigns to Landlord all of
its right, title and interest in any such award; provided, however, that Tenant
shall be entitled to receive any portion of the award that is made specifically
(i) for the taking of personal property, inventory or trade fixtures belonging
to Tenant, (ii) for the interruption of Tenant's business or its moving costs,
or (iii) for the value of any leasehold improvements installed and paid for by
Tenant. In the event of a temporary taking where this Lease is not terminated,
because there will be no abatement of rent, Tenant shall be entitled to all of
the award for said taking. The rights of Landlord and Tenant regarding any
condemnation shall be determined as provided in this Article, and each party
hereby waives the provisions of Section 1265.130 of the California Code of Civil
Procedure, and the provisions of any similar law hereinafter enacted, allowing
either party to petition the Supreme Court to terminate this Lease and/or
otherwise allocate condemnation awards between Landlord and Tenant in the event
of a taking of the Leased Premises.

11.6 Abatement Of Rent. In the event of a taking of the Leased Premises which
does not result in a termination of this Lease (other than a temporary taking),
then, as of the date possession is taken by the condemning authority, the Base
Monthly Rent shall be reduced in the same proportion that the area of that part
of the Leased Premises so taken (less any addition to the area of the Leased
Premises by reason of any reconstruction) bears to the area of the Leased
Premises immediately prior to such taking.

11.7 Taking Defined. The term "taking" or "taken" as used in this Article 11
shall mean any transfer or conveyance of all or any portion of the Property to a
public or quasi-public agency or other entity having the power of eminent domain
pursuant to or as a result of the exercise of such power by such an agency,
including any inverse condemnation and/or any sale or transfer by Landlord of
all or any portion of the Property to such an agency under threat of
condemnation or the exercise of such power.

                                       19.



                                   ARTICLE 12

                              DEFAULT AND REMEDIES

12.1 Events Of Tenant's Default. Tenant shall be in default of its obligations
under this Lease if any of the following events occur:

        (a) Tenant shall have failed to pay Base Monthly Rent or any Additional
Rent when due; provided that Tenant shall be entitled to receive written notice
of late payment one time during each year of the Lease Term, and with respect to
that one late payment, Tenant shall not be in default under this Paragraph
12.1(a) unless Tenant has failed to make the required payment within three (3)
days after such notice from Landlord. After the notice has been given, Landlord
shall not be required to provide any further notices to Tenant. Each such notice
shall be concurrent with, and not in addition to, any notice required by
applicable Laws; or

        (b) Tenant shall have done or permitted to be done any act, use or thing
in its use, occupancy or possession of the Leased Premises or the Building or
the Outside Areas which is prohibited by the terms of this Lease; or

        (c) Tenant shall have failed to perform any term, covenant or condition
of this Lease (except those requiring the payment of Base Monthly Rent or
Additional Rent, which failures shall be governed by subparagraph (a) above)
within the shorter of (i) any specific time period expressly provided under this
Lease for the performance of such term, covenant or condition, or (ii) thirty
(30) days after written notice from Landlord to Tenant specifying the nature of
such failure and requesting Tenant to perform same; provided that, if such
default is curable but longer than thirty (30) days is reasonably required in
order to perform such obligations and Tenant has substantially commenced said
performance within said thirty (30) day period, Tenant shall have such longer
period as may be reasonably required to complete said performance; or

        (d) Tenant shall have sublet the Leased Premises or assigned or
encumbered its interest in this Lease in violation of the provisions contained
in Article 7, whether voluntarily or by operation of law; or

        (e) Tenant shall have abandoned the Leased Premises; or

        (f) Tenant or any Guarantor of this Lease shall have permitted or
suffered the sequestration or attachment of, or execution on, or the appointment
of a custodian or receiver with respect to, all or any substantial part of the
property or assets of Tenant (or such Guarantor) or any property or asset
essential to the conduct of Tenant's (or such Guarantor's) business, and Tenant
(or such Guarantor) shall have failed to obtain a return or release of the same
within thirty days thereafter, or prior to sale pursuant to such sequestration,
attachment or levy, whichever is earlier; or

        (g) Tenant or any Guarantor of this Lease shall have made a general
assignment of all or a substantial part of its assets for the benefit of its
creditors; or

        (h) Tenant or any Guarantor of this Lease shall have allowed (or sought)
to have entered against it a decree or order which: (i) grants or constitutes an
order for relief, appointment of a trustee, or condemnation or a reorganization
plan under the bankruptcy laws of the United States; (ii) approves as properly
filed a petition seeking liquidation or reorganization under said bankruptcy
laws or any other debtor's relief law or similar statute of the United States or
any state thereof; or (iii) otherwise directs the winding up or liquidation of
Tenant; provided, however, if any decree or order was entered without Tenant's
consent or over Tenant's objection, Landlord may not terminate this Lease
pursuant to this Subparagraph if such decree or order is rescinded or reversed
within thirty days after its original entry; or

        (i) Tenant or any Guarantor of this Lease shall have availed itself of
the protection of any debtor's relief law, moratorium law or other similar law
which does not require the prior entry of a decree or order.

        (j) Tenant shall be in default of its obligations under any lease
between Landlord and Tenant.

12.2 Landlord's Remedies. In the event of any default by Tenant, and without
limiting Landlord's right to indemnification as provided in Article 8.2,
Landlord shall have the following remedies, in addition to all other rights and
remedies provided by law or otherwise provided in this Lease, to which Landlord
may resort cumulatively, or in the alternative:

        (a) Landlord may, at Landlord's election, keep this Lease in effect and
enforce, by an action at law or in equity, all of its rights and remedies under
this Lease including, without limitation, (i) the right to recover the rent and
other sums as they become due by appropriate legal action, (ii) the right to
make payments required by Tenant, or perform Tenant's obligations and be
reimbursed by Tenant for the cost thereof with interest at the then maximum rate
of interest not prohibited by law from the date the sum is paid by Landlord
until Landlord is reimbursed by Tenant, and (iii) the remedies of injunctive
relief and specific performance to prevent Tenant from violating the terms of
this Lease and/or to compel Tenant to perform its obligations under this Lease,
as the case may be.

        (b) Landlord may, at Landlord's election, terminate this Lease by giving
Tenant written notice of termination, in which event this Lease shall terminate
on the date set forth for termination in such notice, in which event Tenant
shall immediately surrender the Leased Premises to Landlord, and if Tenant fails
to do so, Landlord may, without prejudice to any other remedy which it may have
for possession or arrearages in rent, enter upon and take possession of the
Leased Premises and expel or remove Tenant and any other person who may be
occupying the Leased Premises or any part thereof, without being liable for
prosecution or any claim or damages therefor. Any

                                       20.



termination under this subparagraph shall not relieve Tenant from its
obligation to pay to Landlord all Base Monthly Rent and Additional Rent then or
thereafter due, or any other sums due or thereafter accruing to Landlord, or
from any claim against Tenant for damages previously accrued or then or
thereafter accruing. In no event shall any one or more of the following actions
by Landlord, in the absence of a written election by Landlord to terminate this
Lease constitute a termination of this Lease:

               (i)   Appointment of a receiver or keeper in order to protect
Landlord's interest hereunder;

               (ii)  Consent to any subletting of the Leased Premises or
assignment of this Lease by Tenant, whether pursuant to the provisions hereof or
otherwise; or

               (iii) Any action taken by Landlord or its partners, principals,
members, officers, agents, employees, or servants, which is intended to mitigate
the adverse effects of any breach of this Lease by Tenant, including, without
limitation, any action taken to maintain and preserve the Leased Premises on any
action taken to relet the Leased Premises or any portion thereof for the account
at Tenant and in the name of Tenant.

     (c)   In the event Tenant breaches this Lease and abandons the Leased
Premises, Landlord may terminate this Lease, but this Lease shall not terminate
unless Landlord gives Tenant written notice of termination. If Landlord does not
terminate this Lease by giving written notice of termination, Landlord may
enforce all its rights and remedies under this Lease, including the right and
remedies provided by California Civil Code Section 1951.4 ("lessor may continue
lease in effect after lessee's breach and abandonment and recover rent as it
becomes due, if lessee has right to sublet or assign, subject only to reasonable
limitations"), as in effect on the Effective Date of this Lease.

     (d)   In the event Landlord terminates this Lease, Landlord shall be
entitled, at Landlord's election, to the rights and remedies provided in
California Civil Code Section 1951.2, as in effect on the Effective Date of this
Lease. For purposes of computing damages pursuant to Section 1951.2, an interest
rate equal to the maximum rate of interest then not prohibited by law shall be
used where permitted. Such damages shall include, without limitation:

               (i)   The worth at the time of the award of the unpaid rent
which had been earned at the time of termination;

               (ii)  The worth at the time of award of the amount by which the
unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided,
computed by discounting such amount at the discount rate of the Federal Reserve
Bank of San Francisco, at the time of award plus one percent; and

               (iii) Any other amount necessary to compensate Landlord for all
detriment proximately caused by Tenant's failure to perform Tenant's obligations
under this Lease, or which in the ordinary course of things would be likely to
result therefrom, including without limitation, the following: (i) expenses for
cleaning, repairing or restoring the Leased Premises, (ii) expenses for
altering, remodeling or otherwise improving the Leased Premises for the purpose
of reletting, including removal of existing leasehold improvements and/or
installation of additional leasehold improvements (regardless of how the same is
funded, including reduction of rent, a direct payment or allowance to a new
tenant, or otherwise), (iii) broker's fees allocable to the remainder of the
term of this Lease, advertising costs and other expenses of reletting the Leased
Premises; (iv) costs of carrying and maintaining the Leased Premises, such as
taxes, insurance premiums, utility charges and security precautions, (v)
expenses incurred in removing, disposing of and/or storing any of Tenant's
personal property, inventory or trade fixtures remaining therein; (vi)
reasonable attorney's fees, expert witness fees, court costs and other
reasonable expenses incurred by Landlord (but not limited to taxable costs) in
retaking possession of the Leased Premises, establishing damages hereunder, and
releasing the Leased Premises; and (vii) any other expenses, costs or damages
otherwise incurred or suffered as a result of Tenant's default.

12.3 Landlord's Default And Tenant's Remedies. In the event Landlord fails to
perform its obligations under this Lease, Landlord shall nevertheless not be in
default under the terms of this Lease until such time as Tenant shall have first
given Landlord written notice specifying the nature of such failure to perform
its obligations, and then only after Landlord shall have had thirty (30) days
following its receipt of such notice within which to perform such obligations;
provided that, if longer than thirty (30) days is reasonably required in order
to perform such obligations and Landlord has reasonably commenced said
performance within said thirty (30) day period, Landlord shall have such longer
period. Notwithstanding the foregoing, Landlord agrees to act with reasonable
diligence in making repairs it is required to make to the Building or otherwise
in performing its obligations hereunder. In the event of Landlord's default as
above set forth, then, and only then, Tenant may then proceed in equity or at
law to compel Landlord to perform its obligations and/or to recover damages
proximately caused by such failure to perform (except as and to the extent
Tenant has waived its right to damages as provided in this Lease).

12.4 Limitation Of Tenant's Recourse. Tenant's sole recourse against Landlord
shall be to Landlord's interest in the Building and the Outside Areas. If
Landlord is a corporation, trust, partnership, joint venture, limited liability
company, unincorporated association, or other form of business entity, Tenant
agrees that (i) the obligations of Landlord under this Lease shall not
constitute personal obligations of the officers, directors, trustees, partners,
joint venturers, members, owners, stockholders, or other principals of such
business entity, and (ii) Tenant shall have recourse only to the interest of
such corporation, trust, partnership, joint venture, limited liability company,
unincorporated association, or other form of business entity in the Building and
the Outside Areas for the satisfaction of such obligations and not against the
assets of such officers, directors, trustees, partners, joint

                                       21.



venturers, members, owners, stockholders or principals. Additionally, if
Landlord is a partnership or limited liability company, then Tenant covenants
and agrees:

     (a) No partner or member of Landlord shall be sued or named as a party in
any suit or action brought by Tenant with respect to any alleged breach of this
Lease (except to the extent necessary to secure jurisdiction over the
partnership and then only for that sole purpose);

     (b) No service of process shall be made against any partner or member of
Landlord except for the sole purpose of securing jurisdiction over the
partnership; and

     (c) No writ of execution will ever be levied against the assets of any
partner or member of Landlord other than to the extent of his or her interest in
the assets of the partnership or limited liability company constituting
Landlord.

Tenant further agrees that each of the foregoing covenants and agreements shall
be enforceable by Landlord and by any partner or member of Landlord and shall be
applicable to any actual or alleged misrepresentation or nondisclosure made
regarding this Lease or the Leased Premises or any actual or alleged failure,
default or breach of any covenant or agreement either expressly or implicitly
contained in this Lease or imposed by statute or at common law.

12.5 Tenant's Waiver. Landlord and Tenant agree that the provisions of Paragraph
12.3 above are intended to supersede and replace the provisions of California
Civil Code Sections 1932(1), 1941 and 1942, and accordingly, Tenant hereby
waives the provisions of California Civil Code Sections 1932(1), 1941 and 1942
and/or any similar or successor law regarding Tenant's right to terminate this
Lease or to make repairs and deduct the expenses of such repairs from the rent
due under this Lease.

                                   ARTICLE 13

                               GENERAL PROVISIONS

13.1 Taxes On Tenant's Property. Tenant shall pay before delinquency any and all
taxes, assessments, license fees, use fees, permit fees and public charges of
whatever nature or description levied, assessed or imposed against Tenant or
Landlord by a governmental agency arising out of, caused by reason of or based
upon Tenant's estate in this Lease, Tenant's ownership of property, improvements
made by Tenant to the Leased Premises or the Outside Areas, improvements made by
Landlord for Tenant's use within the Leased Premises or the Outside Areas,
Tenant's use (or estimated use) of public facilities or services or Tenant's
consumption (or estimated consumption) of public utilities, energy, water or
other resources (collectively, "Tenant's Interest"). Upon demand by Landlord,
Tenant shall furnish Landlord with satisfactory evidence of these payments. If
any such taxes, assessments, fees or public charges are levied against Landlord,
Landlord's property, the Building or the Property, or if the assessed value of
the Building or the Property is increased by the inclusion therein of a value
placed upon Tenant's Interest, regardless of the validity thereof, Landlord
shall have the right to require Tenant to pay such taxes, and if not paid and
satisfactory evidence of payment delivered to Landlord at least ten days prior
to delinquency, then Landlord shall have the right to pay such taxes on Tenant's
behalf and to invoice Tenant for the same, in either case whether before or
after the expiration or earlier termination of the Lease Term. Tenant shall, no
later than the later of (a) ten (10) days prior to the due date, and (b) fifteen
(15) days after delivery to Tenant, pay to Landlord, as Additional Rent, the
amount set forth in such invoice. Failure by Tenant to pay the amount so
invoiced within such time period shall be conclusively deemed a default by
Tenant under this Lease. Tenant shall have the right to bring suit in any court
of competent jurisdiction to recover from the taxing authority the amount of any
such taxes, assessments, fees or public charges so paid.

13.2 Holding Over. This Lease shall terminate without further notice on the
Lease Expiration Date (as set forth in Article 1). Any holding over by Tenant
after expiration of the Lease Term shall neither constitute a renewal nor
extension of this Lease nor give Tenant any rights in or to the Leased Premises
except as expressly provided in this Paragraph. Any such holding over to which
Landlord has consented shall be construed to be a tenancy from month to month,
on the same terms and conditions herein specified insofar as applicable, except
that the Base Monthly Rent shall be increased to an amount equal to one hundred
fifty percent (150%) of the Base Monthly Rent payable during the last full month
immediately preceding such holding over. Tenant acknowledges that if Tenant
holds over without Landlord's consent, such holding over may compromise or
otherwise affect Landlord's ability to enter into new leases with prospective
tenants regarding the Leased Premises. Therefore, if Tenant fails to surrender
the Leased Premises upon the expiration or termination of this Lease, in
addition to any other liabilities to Landlord accruing therefrom, Tenant shall
protect, defend, indemnify and hold Landlord harmless from and against all
claims resulting from such failure, including, without limiting the foregoing,
any claims made by any succeeding tenant founded upon such failure to surrender,
and any losses suffered by Landlord, including lost profits, resulting from such
failure to surrender.

13.3 Subordination To Mortgages. This Lease is subject to and subordinate to all
ground leases, mortgages and deeds of trust which affect the Building or the
Property and which are of public record as of the Effective Date of this Lease,
and to all renewals, modifications, consolidations, replacements and extensions
thereof. However, if the lessor under any such ground lease or any lender
holding any such mortgage or deed of trust shall advise Landlord that it desires
or requires this Lease to be made prior and superior thereto, then, upon written
request of Landlord to Tenant, Tenant shall promptly execute, acknowledge and
deliver any and all customary or reasonable documents or instruments which
Landlord and such lessor or lender deems necessary or desirable to make this
Lease prior thereto. Tenant hereby consents to Landlord's ground leasing the
land underlying the Building or the Property and/or encumbering the Building or
the Property as security for future loans on such terms as Landlord shall
desire, all of

                                       22.



which future ground leases, mortgages or deeds of trust shall be subject to
and subordinate to this Lease. However, if any lessor under any such future
ground lease or any lender holding such future mortgage or deed of trust shall
desire or require that this Lease be made subject to and subordinate to such
future ground lease, mortgage or deed of trust, then Tenant agrees, within ten
days after Landlord's written request therefor, to execute, acknowledge and
deliver to Landlord any and all documents or instruments requested by Landlord
or by such lessor or lender as may be necessary or proper to assure the
subordination of this Lease to such future ground lease, mortgage or deed of
trust, but only if such lessor or lender agrees not to disturb Tenant's quiet
possession of the Leased Premises so long as Tenant is not in default under this
Lease (as evidenced by a then customary and reasonable subordination and
non-disturbance agreement). If Landlord assigns the Lease as security for a
loan, Tenant agrees to execute such documents as are reasonably requested by the
lender and to provide reasonable provisions in the Lease protecting such
lender's security interest which are customarily required by institutional
lenders making loans secured by a deed of trust.

13.4  Tenant's Attornment Upon Foreclosure. Tenant shall, upon request, attorn
(i) to any purchaser of the Building or the Property at any foreclosure sale or
private sale conducted pursuant to any security instruments encumbering the
Building or the Property, (ii) to any grantee or transferee designated in any
deed given in lieu of foreclosure of any security interest encumbering the
Building or the Property, or (iii) to the lessor under an underlying ground
lease of the land underlying the Building or the Property, should such ground
lease be terminated; provided that such purchaser, grantee or lessor recognizes
Tenant's rights under this Lease.

13.5  Mortgagee Protection. In the event of any default on the part of Landlord,
Tenant will give notice by registered mail to any Lender or lessor under any
underlying ground lease who shall have requested, in writing, to Tenant that it
be provided with such notice, and Tenant shall offer such Lender or lessor a
reasonable opportunity to cure the default, including time to obtain possession
of the Leased Premises by power of sale or judicial foreclosure or other
appropriate legal proceedings if reasonably necessary to effect a cure.

13.6  Estoppel Certificate. Tenant will, following any request by Landlord,
promptly execute and deliver to Landlord an estoppel certificate in a form
reasonably requested by Landlord (including but not limited to the form attached
as Exhibit "F"), (i) certifying that this Lease is unmodified and in full force
and effect, or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect, (ii)
stating the date to which the rent and other charges are paid in advance, if
any, (iii) acknowledging that there are not, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, or specifying such defaults if any
are claimed, and (iv) certifying such other information about this Lease as may
be reasonably requested by Landlord, its Lender or prospective lenders,
investors or purchasers of the Building or the Property. Tenant's failure to
execute and deliver such estoppel certificate within ten days after Landlord's
request therefor shall be a material default by Tenant under this Lease, and
Landlord shall have all of the rights and remedies available to Landlord as
Landlord would otherwise have in the case of any other material default by
Tenant, including the right to terminate this Lease and sue for damages
proximately caused thereby, it being agreed and understood by Tenant that
Tenant's failure to so deliver such estoppel certificate in a timely manner
could result in Landlord being unable to perform committed obligations to other
third parties which were made by Landlord in reliance upon this covenant of
Tenant. Landlord and Tenant intend that any statement delivered pursuant to this
paragraph may be relied upon by any Lender or purchaser or prospective Lender or
purchaser of the Building, the Property, or any interest in them.

13.7  Tenant's Financial Information. Tenant shall, within ten business days
after Landlord's request therefor, deliver to Landlord a copy of Tenant's (and
any guarantor's) current financial statements (including a balance sheet, income
statement and statement of cash flow, all prepared in accordance with generally
accepted accounting principles), a list of all of Tenant's creditors with
current contact information, and any such other information reasonably requested
by Landlord regarding Tenant's financial condition. Landlord shall be entitled
to disclose such financial statements or other information to its Lender, to any
present or prospective principal of or investor in Landlord, or to any
prospective Lender or purchaser of the Building, the Property, or any portion
thereof or interest therein. Any such financial statement or other information
which is marked "confidential" or "company secrets" (or is otherwise similarly
marked by Tenant) shall be confidential and shall not be disclosed by Landlord
to any third party except as specifically provided in this paragraph, unless the
same becomes a part of the public domain without the fault of Landlord.

13.8  Transfer By Landlord. Landlord and its successors in interest shall have
the right to transfer their interest in the Building, the Property, or any
portion thereof at any time and to any person or entity. In the event of any
such transfer, the Landlord originally named herein (and in the case of any
subsequent transfer, the transferor), from the date of such transfer, (i) shall
be automatically relieved, without any further act by any person or entity, of
all liability for the performance of the obligations of the Landlord hereunder
which may accrue after the date of such transfer and (ii) shall be relieved of
all liability for the performance of the obligations of the Landlord hereunder
which have accrued before the date of transfer if its transferee agrees to
assume and perform all such prior obligations of the Landlord hereunder. Tenant
shall attorn to any such transferee. After the date of any such transfer, the
term "Landlord" as used herein shall mean the transferee of such interest in the
Building or the Property.

13.9  Force Majeure. The obligations of each of the parties under this Lease
(other than the obligations to pay money) shall be temporarily excused if such
party is prevented or delayed in performing such obligations by reason of any
strikes, lockouts or labor disputes; government restrictions, regulations,
controls, action or inaction; civil commotion; or extraordinary weather, fire or
other acts of God.

13.10 Notices. Any notice required or permitted to be given under this Lease
shall be in writing and (i) personally delivered, (ii) sent by United States
mail, registered or certified mail, postage prepaid, return receipt requested,
(iii) sent by Federal Express or similar nationally recognized overnight courier
service, or (iv) transmitted by facsimile with a hard copy sent within one (1)
business day by any of the foregoing means, and in all cases

                                       23.



addressed as follows, and such notice shall be deemed to have been given
upon the date of actual receipt or delivery (or refusal to accept delivery) at
the address specified below (or such other addresses as may be specified by
notice in the foregoing manner) as indicated on the return receipt or air bill:

         If to Landlord:            Menlo Equities Associates LLC
                                    490 California Avenue
                                    4/th/ Floor
                                    Palo Alto, California  94306
                                    Attention: Henry Bullock/Richard Holmstrom
                                    Facsimile:  (650) 326-9333

         with a copy to:            Cooley Godward LLP
                                    One Maritime Plaza
                                    20th Floor
                                    San Francisco, California  94111
                                    Attention: Paul Churchill
                                    Facsimile:  (415) 951-3699

         If to Tenant:              600 Townsend Street
                                    San Francisco, California  94103
                                    Attention: James L. Morgensen
                                    Fax No. (415) 832-2959


                  with a copy to:   W. Russell Davis
                                    1145 Merrill Street, 2nd Floor
                                    Menlo Park, California  94025
                                    Fax No. (650) 323-2526
                                    Phone No. (650) 323-2529


Any notice given in accordance with the foregoing shall be deemed received upon
actual receipt or refusal to accept delivery.

13.11 Attorneys' Fees. In the event any party shall bring any action,
arbitration proceeding or legal proceeding alleging a breach of any provision of
this Lease, to recover rent, to terminate this Lease, or to enforce, protect,
determine or establish any term or covenant of this Lease or rights or duties
hereunder of either party, the prevailing party shall be entitled to recover
from the non-prevailing party as a part of such action or proceeding, or in a
separate action for that purpose brought within one year from the determination
of such proceeding, reasonable attorneys' fees, expert witness fees, court costs
and other reasonable expenses incurred by the prevailing party.

13.12 Definitions. Any term that is given a special meaning by any provision in
this Lease shall, unless otherwise specifically stated, have such meaning
wherever used in this Lease or in any Addenda or amendment hereto. In addition
to the terms defined in Article 1, the following terms shall have the following
meanings:

      (a) Real Property Taxes. The term "Real Property Tax" or "Real Property
Taxes" shall each mean Tenant's Expense Share of the following (to the extent
applicable to any portion of the Lease Term, regardless of when the same are
imposed, assessed, levied, or otherwise charged): (i) all taxes, assessments,
levies and other charges of any kind or nature whatsoever, general and special,
foreseen and unforeseen (including all instruments of principal and interest
required to pay any general or special assessments for public improvements and
any increases resulting from reassessments caused by any change in ownership or
new construction), now or hereafter imposed by any governmental or
quasi-governmental authority or special district having the direct or indirect
power to tax or levy assessments, which are levied or assessed for whatever
reason against the Property or any portion thereof, or Landlord's interest
herein, or the fixtures, equipment and other property of Landlord that is an
integral part of the Property and located thereon, or Landlord's business of
owning, leasing or managing the Property or the gross receipts, income or
rentals from the Property, (ii) all charges, levies or fees imposed by any
governmental authority against Landlord by reason of or based upon the use of or
number of parking spaces within the Property, the amount of public services or
public utilities used or consumed (e.g. water, gas, electricity, sewage or waste
water disposal) at the Property, the number of persons employed by tenants of
the Property, the size (whether measured in area, volume, number of tenants or
whatever) or the value of the Property, or the type of use or uses conducted
within the Property, and all costs and fees (including attorneys' fees)
reasonably incurred by Landlord in contesting any Real Property Tax and in
negotiating with public authorities as to any Real Property Tax. If, at any time
during the Lease Term, the taxation or assessment of the Property prevailing as
of the Effective Date of this Lease shall be altered so that in lieu of or in
addition to any the Real Property Tax described above there shall be levied,
awarded or imposed (whether by reason of a change in the method of taxation or
assessment, creation of a new tax or charge, or any other cause) an alternate,
substitute, or additional use or charge (i) on the value, size, use or occupancy
of the Property or Landlord's interest therein or (ii) on or measured by the
gross receipts, income or rentals from the Property, or on Landlord's business
of owning, leasing or managing the Property or (iii) computed in any manner with
respect to the operation of the Property, then any such tax or charge, however
designated, shall be included within the meaning of the terms "Real Property
Tax" or "Real Property Taxes" for purposes of this Lease. If any Real Property
Tax is partly based upon property or rents unrelated to the Property, then only
that part of such Real Property Tax that is fairly allocable to the Property
shall be included within the meaning of the terms "Real Property Tax" or "Real
Property Taxes." Notwithstanding the foregoing, the terms "Real Property Tax" or
"Real Property

                                       24.



Taxes" shall not include estate, inheritance, transfer, gift or franchise taxes
of Landlord or the federal or state income tax imposed on Landlord's income from
all sources.

     (b) Landlord's Insurance Costs.

         (i)  The term "Landlord's Insurance Costs" shall mean Tenant's Expense
Share of the following (to the extent applicable to any portion of the Lease
Term, regardless of when the same are incurred): the costs to Landlord to carry
and maintain the policies of fire and property damage insurance for the Building
and the Property and general liability and any other insurance required or
permitted to be carried by Landlord pursuant to Article 9, together with any
deductible amounts paid by Landlord upon the occurrence of any insured casualty
or loss. In the event in any year the Building is less than 95% occupied, the
Landlord's Insurance Costs shall be adjusted to reflect a 95% occupancy level.

         (ii) Notwithstanding the foregoing, and with respect to earthquake
insurance policies only, Tenant's Expense Share of the deductible amount under
such policy(ies) shall be limited on each occurrence to Tenant's Expense Share
of the deductible amount that would result if: (A) Landlord had insured the
Building and other insurable improvements for 100% of their replacement value
(subject to the deductible stated in the policy(ies)), (B) the deductible stated
in the policy(ies) does not exceed 15% of such replacement value, and (C) such
resulting amount were amortized using an interest rate equal to Wells Prime Plus
Two, over the useful life of the modifications, alterations or improvements
constructed with the deductible amount, and the monthly amortized amount of such
deductible amount as so amortized were considered a Property Maintenance Cost.

     (c) Property Maintenance Costs. The term "Property Maintenance Costs" shall
mean Tenant's Expense Share of all costs and expenses (except Landlord's
Insurance Costs and Real Property Taxes) paid or incurred by Landlord in
protecting, operating, maintaining, repairing and preserving the Property and
all parts thereof, including without limitation, (i) market rate professional
management fees (not to exceed 3% of gross rent), (ii) the amortizing portion of
any costs incurred by Landlord in the making of any modifications, alterations
or improvements required by any governmental authority as set forth in Article
6, which are so amortized during the Lease Term, and (iii) such other costs as
may be paid or incurred with respect to operating, maintaining, and preserving
the Property, such as repairing and resurfacing the exterior surfaces of the
Building (including roofs), repairing and resurfacing paved areas, repairing and
replacing structural parts of the Building, and repairing and replacing, when
necessary, electrical, plumbing, heating, ventilating and air conditioning
systems serving the Building, and common elements such as elevators, stair
wells, and lobbies. In the event in any year the Building is less than 95%
occupied, the Property Maintenance Costs shall be adjusted to reflect a 95%
occupancy level. To the extent any of the foregoing items described constitute
capital repairs or replacements under generally accepted accounting principles,
consistently applied, then only the amortizing portion of such capital repairs
or replacements shall constitute Property Maintenance Costs; such amortization
shall be over the useful life of the applicable repair or replacement, and shall
employ a per annum interest rate equal to Wells Prime Plus Two, and only the
amortizing portion of such cost shall be included in Additional Rent on a
monthly basis.

Notwithstanding the foregoing provisions of this Paragraph 13.12(c), the
following are specifically excluded from the definition of Property Maintenance
Costs and Tenant shall have no obligation to pay directly or reimburse Landlord
for all or any portion of the following except to the extent any of the
following are caused by the actions or inactions of Tenant, or result from the
failure of Tenant to comply with the terms of this Lease: (i) legal and auditing
fees (other than those fees reasonably incurred in connection with the
maintenance and operation of all or any portion the Building), leasing
commissions, advertising expenses, and other costs incurred in connection with
the original leasing of the Property or future re-leasing of any portion of the
Building; (ii) depreciation of the Building or any other improvements situated
within the Project; (iii) any items for which Landlord is actually reimbursed by
insurance or by direct reimbursement by Tenant or any other party; (iv) costs of
repairs or other work necessitated by fire, windstorm or other casualty
(excluding any deductibles) and/or costs of repair or other work necessitated by
the exercise of the right of eminent domain to the extent insurance proceeds or
a condemnation award, as applicable, is actually received by Landlord for such
purposes; (v) other than any interest charges for capital improvements referred
to in Paragraph 6.3 of this Lease, any interest or payments on any financing for
the Building, interest and penalties incurred as a result of Landlord's late
payment of any invoice (provided that Tenant pays Tenant's Expense Share of
Property Operating Expenses and Real Property Taxes to Landlord when due as set
forth herein), and any bad debt loss, rent loss or reserves for same; (vi)
overhead and profit increment paid to Landlord or to subsidiaries or affiliates
of Landlord for goods and/or services in the Project to the extent the same
exceeds the costs of such by unaffiliated third parties on a competitive basis;
or any costs included in Property Operating Expenses representing an amount paid
to a person, firm, corporation or other entity related to Landlord which is in
excess of the amount which would have been paid in the absence of such
relationship; (vii) any payments under a ground lease or master lease; (viii)
costs incurred in the investigation and/or remediation of Hazardous Materials
which were brought onto the Property by Landlord, its agents, employees or
contractors; (ix) the cost of providing tenant improvements for any other
tenants in other space in the Building, (ii) maintenance, repairs or
replacements necessitated by the gross negligence or willful misconduct of
Landlord, its agents, servants or employees, (iii) the cost of any repair to
remedy damage caused by or resulting from the negligence of any other tenants in
the Building to the extent chargeable to such tenants by the terms of their
leases, and (iv) reserves for anticipated future maintenance, repair or
replacement expenses.

     (d) Property Operating Expenses. The term "Property Operating Expenses"
shall mean and include all Real Property Taxes, plus all Landlord's Insurance
Costs, plus all Property Maintenance Costs.

     (e) Law. The term "Law" shall mean any judicial decisions and any statute,
constitution, ordinance, resolution, regulation, rule, administrative order, or
other requirements of any municipal, county, state, federal, or other
governmental agency or authority having jurisdiction over the parties to this
Lease, the Leased Premises, the Building or the Property, or any of them, in
effect either at the Effective Date of this Lease or at any time during the

                                       25.



Lease Term, including, without limitation, any regulation, order, or policy of
any quasi-official entity or body (e.g. a board of fire examiners or a public
utility or special district).

      (f) Lender. The term "Lender" shall mean the holder of any promissory note
or other evidence of indebtedness secured by the Property or any portion
thereof.

      (g) Private Restrictions. The term "Private Restrictions" shall mean (as
they may exist from time to time) any and all covenants, conditions and
restrictions, private agreements, easements, and any other recorded documents or
instruments affecting the use of the Property, the Building, the Leased
Premises, or the Outside Areas.

      (h) Rent. The term "Rent" shall mean collectively Base Monthly Rent and
all Additional Rent.

13.13 General Waivers. One party's consent to or approval of any act by the
other party requiring the first party's consent or approval shall not be deemed
to waive or render unnecessary the first party's consent to or approval of any
subsequent similar act by the other party. No waiver of any provision hereof, or
any waiver of any breach of any provision hereof, shall be effective unless in
writing and signed by the waiving party. The receipt by Landlord of any rent or
payment with or without knowledge of the breach of any other provision hereof
shall not be deemed a waiver of any such breach. No waiver of any provision of
this Lease shall be deemed a continuing waiver unless such waiver specifically
states so in writing and is signed by both Landlord and Tenant. No delay or
omission in the exercise of any right or remedy accruing to either party upon
any breach by the other party under this Lease shall impair such right or remedy
or be construed as a waiver of any such breach theretofore or thereafter
occurring. The waiver by either party of any breach of any provision of this
Lease shall not be deemed to be a waiver of any subsequent breach of the same or
any other provisions herein contained.

13.14 Miscellaneous. Should any provisions of this Lease prove to be invalid or
illegal, such invalidity or illegality shall in no way affect, impair or
invalidate any other provisions hereof, and such remaining provisions shall
remain in full force and effect. Time is of the essence with respect to the
performance of every provision of this Lease in which time of performance is a
factor. Any copy of this Lease which is executed by the parties shall be deemed
an original for all purposes. This Lease shall, subject to the provisions
regarding assignment, apply to and bind the respective heirs, successors,
executors, administrators and assigns of Landlord and Tenant. The term "party"
shall mean Landlord or Tenant as the context implies. If Tenant consists of more
than one person or entity, then all members of Tenant shall be jointly and
severally liable hereunder. Submission of this Lease for review, examination or
signature by Tenant does not constitute an offer to lease, a reservation of or
an option for lease, and notwithstanding any inconsistent language contained in
any other document, this Lease is not effective as a lease or otherwise until
execution and delivery by both Landlord and Tenant. This Lease shall be
construed and enforced in accordance with the Laws of the State in which the
Leased Premises are located. The captions in this Lease are for convenience only
and shall not be construed in the construction or interpretation of any
provision hereof. When the context of this Lease requires, the neuter gender
includes the masculine, the feminine, a partnership, corporation, limited
liability company, joint venture, or other form of business entity, and the
singular includes the plural. The terms "must," "shall," "will," and "agree" are
mandatory. The term "may" is permissive. The term "governmental agency" or
"governmental authority" or similar terms shall include, without limitation, all
federal, state, city, local and other governmental and quasi-governmental
agencies, authorities, bodies, boards, etc., and any party or parties having
enforcement rights under any Private Restrictions. When a party is required to
do something by this Lease, it shall do so at its sole cost and expense without
right of reimbursement from the other party unless specific provision is made
therefor. Where Landlord's consent is required hereunder, the consent of any
Lender shall also be required. Landlord and Tenant shall both be deemed to have
drafted this Lease, and the rule of construction that a document is to be
construed against the drafting party shall not be employed in the construction
or interpretation of this Lease. Where Tenant is obligated not to perform any
act or is not permitted to perform any act, Tenant is also obligated to restrain
any others reasonably within its control, including agents, invitees,
contractors, subcontractors and employees, from performing such act. Landlord
shall not become or be deemed a partner or a joint venturer with Tenant by
reason of any of the provisions of this Lease.

                                   ARTICLE 14

                               CORPORATE AUTHORITY
                          BROKERS AND ENTIRE AGREEMENT

14.1 Corporate Authority. If Tenant is a corporation, each individual executing
this Lease on behalf of such corporation represents and warrants that Tenant is
validly formed and duly authorized and existing, that Tenant is qualified to do
business in the State in which the Leased Premises are located, that Tenant has
the full right and legal authority to enter into this Lease, and that he or she
is duly authorized to execute and deliver this Lease on behalf of Tenant in
accordance with its terms. Tenant shall, within thirty days after execution of
this Lease, deliver to Landlord a certified copy of the resolution of its board
of directors authorizing or ratifying the execution of this Lease and if Tenant
fails to do so, Landlord at its sole election may elect to terminate this Lease.

14.2 Brokerage Commissions. Tenant and Landlord each represents, warrants and
agrees that it has not had any dealings with any real estate broker(s), leasing
agent(s), finder(s) or salesmen, other than the Brokers (as named in Article 1)
with respect to the lease by it of the Leased Premises pursuant to this Lease,
and that it will indemnify, defend with competent counsel, and hold the other
party harmless from any liability for the payment of any real estate brokerage
commissions, leasing commissions or finder's fees claimed by any other real
estate broker(s), leasing agent(s), finder(s), or salesmen to be earned or due
and payable by reason of such party's agreement or promise (implied or
otherwise) to pay (or to have the other party pay) such a commission or finder's
fee by reason of its leasing the Leased Premises pursuant to this Lease.

                                       26.



14.3 Entire Agreement. This Lease and the Exhibits (as described in Article 1),
which Exhibits are by this reference incorporated herein, constitute the entire
agreement between the parties, and there are no other agreements, understandings
or representations between the parties relating to the lease by Landlord of the
Leased Premises to Tenant, except as expressed herein. No subsequent changes,
modifications or additions to this Lease shall be binding upon the parties
unless in writing and signed by both Landlord and Tenant.

14.4 Landlord's Representations. Tenant acknowledges that neither Landlord nor
any of its agents made any representations or warranties respecting the
Property, the Building or the Leased Premises, upon which Tenant relied in
entering into the Lease, which are not expressly set forth in this Lease. Tenant
further acknowledges that neither Landlord nor any of its agents made any
representations as to (i) whether the Leased Premises may be used for Tenant's
intended use under existing Law, or (ii) the suitability of the Leased Premises
for the conduct of Tenant's business, or (iii) the exact square footage of the
Leased Premises, and that Tenant relies solely upon its own investigations with
respect to such matters. Tenant expressly waives any and all claims for damage
by reason of any statement, representation, warranty, promise or other agreement
of Landlord or Landlord's agent(s), if any, not contained in this Lease or in
any Exhibit attached hereto.

                                   ARTICLE 15

                                TELEPHONE SERVICE

     Notwithstanding any other provision of this Lease to the contrary:

     (a) Landlord shall provide Tenant access to such quantity of existing pairs
in the Building intra-building network cable ("INC") as is determined to be
available by Landlord in its reasonable discretion, provided that Tenant shall
be able to maintain all such INC and connections thereto as are existing as of
the Effective Date of this Lease. Tenant's access to the INC shall be solely by
arrangements made by Tenant, as Tenant may elect, directly with Pacific Bell or
Landlord (or such vendor as Landlord may designate, provided that Tenant may
utilize other vendors for the Leased Premises so long as neither such other
vendors nor their installations interfere with other tenants' service within the
Building and do not increase the costs to those tenants), and Tenant shall pay
all reasonable charges as may be imposed in connection therewith. Pacific Bell's
charges shall be deemed to be reasonable. Other than the foregoing, Landlord
shall have no responsibility for providing to Tenant any telephone equipment,
including wiring, within the Leased Premises or for providing telephone service
or connections from the utility to the Leased Premises, except as required by
law.

     (b) Tenant shall not alter, modify, add to or disturb any telephone wiring
in the Leased Premises or elsewhere in the Building without the Landlord's prior
written consent. Tenant shall be liable to Landlord for any damage to the
telephone wiring in the Building due to the act, negligent or otherwise, of
Tenant or any employee, contractor or other agent of Tenant. Tenant shall have
no access to the telephone closets within the Building, except in the manner and
under procedures established by Landlord. Tenant shall promptly notify Landlord
of any actual or suspected failure of telephone service to the Leased Premises.

     (c) All costs incurred by Landlord for the installation, maintenance,
repair and replacement of telephone wiring in the Building shall be a Property
Maintenance Cost.

     (d) Landlord makes no warranty as to the quality, continuity or
availability of the telecommunications services in the Building, and Tenant
hereby waives any claim against Landlord for any actual or consequential damages
(including damages for loss of business) in the event Tenant's
telecommunications services in any way are interrupted, damaged or rendered less
effective, except to the extent caused by the grossly negligent or willful act
or omission by Landlord, its agents or employees. Tenant acknowledges that
Landlord meets its duty of care to Tenant with respect to the Building INC by
contracting with a reliable third party vendor to assume responsibility for the
maintenance and repair thereof (which contract shall contain provisions
requiring such vendor to inspect the INC periodically (the frequency of such
inspections to be determined by such vendor based on its experience and
professional judgment), and requiring such vendor to meet local and federal
requirements for telecommunications material and workmanship). Subject to the
foregoing, Landlord shall not be liable to Tenant and Tenant waives all claims
against Landlord whatsoever, whether for personal injury, property damage, loss
of use of the Leased Premises, or otherwise, due to the interruption or failure
of telephone services to the Leased Premises.

         In Witness Whereof, Landlord and Tenant have executed this Lease as of
the respective dates below set forth with the intent to be legally bound thereby
as of the Effective Date of this Lease first above set forth.

                                      Landlord:

                                      Menlo Equities Associates LLC,
                                      a california limited liability company


                                      By:  Menlo Equities Inc., Managing Member

Dated:_________________________            By:__________________________________
                                                  Henry D. Bullock, President

                                      Tenant:

                                       27.



                                      Macromedia, Inc., a Delaware corporation

Dated:____________________________    By:_______________________________________

                                      Title:____________________________________


Dated:____________________________    By:_______________________________________

                                      Title:____________________________________

                                      28.



                                    Exhibit A

                                    SITE PLAN
                             [Graphic appears here]

                                       1.



                                    Exhibit B
                             [Graphic appears here]
                                   FLOOR PLAN

                                       1.



                                    Exhibit C

                   FORM OF LEASE COMMENCEMENT DATE CERTIFICATE

         This Lease Commencement Date Certificate ("Certificate") is made this
____________ day of ____________________, 200__, between
__________________________________, a ____________________________ ("Landlord"),
and _____________________, a ______________________ ("Tenant"), and is attached
to and made a part of that certain [insert name of lease] dated ______________,
200__, by and between Landlord, as lessor thereunder, and Tenant, as lessee
thereunder, [if applicable - as amended by that certain ____________________
dated as of __________, 200__, (as amended, the "Lease").

         Landlord and Tenant hereby acknowledge and agree for all purposes of
the Lease that the [Lease Term Commencement Date] as defined in Section ___ of
the Lease is __________, 200__. Tenant further acknowledges that Tenant accepts
the Leased Premises in their current "AS-IS" condition, "WITH ALL FAULTS."

         In Witness Whereof, Landlord and Tenant have executed this Certificate
on the date first above written.

TENANT:

_____________________, a ___________________


By:_________________________________________
Its:________________________________________


LANDLORD:

_____________________, a ___________________


By:_________________________________________
Its:________________________________________


                                       1.



                                    Exhibit D

                            FORM OF LETTER OF CREDIT

Date:   ____________________, 2001
Irrevocable Standby Letter of Credit Number:  ____________


Beneficiary:                         Applicant:

_____________________ LLC            Macromedia, Inc.
490 California Avenue, 4/th/ Floor   __________________________________
Palo Alto, California  94306         __________________________________
                                     __________________________________
                                     __________________________________

                                     Amount:

                                     USD $ ________________

                                     (______ MILLION _________ HUNDRED _________
                                     THOUSAND _______ HUNDRED ______ AND 00/100
                                     U.S. DOLLARS)

                                     Expiration:  _____________________


We hereby establish our Irrevocable Standby Letter of Credit No. ___________ in
your favor for the account of ________________________________________________,
____________________________, on behalf of ____________________________________
______________________________________________________, available for drawings
for up to an aggregate amount of U.S. $ ___________.00 (______ MILLION _______
HUNDRED ______________ THOUSAND ________ HUNDRED _________ AND 00/100 U.S.
DOLLARS). This Letter of Credit is available by payment upon your draft drawn at
sight on us and accompanied by your written statement that Landlord is entitled
to draw such amount under the terms and conditions of the Lease dated November
__, 2001, between Beneficiary and Applicant, submitted at the office of
____________________________________________________________________, Attention:
Letter of Credit Services, and expires at our close of business on the
expiration date or any automatically extended expiration date as hereinafter set
forth.

This Letter of Credit shall expire on ________________________, but such
expiration date shall be automatically extended for a period of one (1) year on
______________________ and on each successive expiration date, unless at least
sixty (60) days before the current expiration date we notify you by overnight
courier that this Letter of Credit is not extended beyond the current expiration
date. In the event you are so notified, any unused portion of the Letter of
Credit shall be available upon presentation of a sight draft by________________
LLC, within the current expiration date.

We give our undertaking to the Beneficiary that sums drawn under and in
compliance with the terms of this Letter of Credit will be duly honored by our
bank on presentation of drawings in accordance with the terms of this credit.

                                       2.



Date:________________________, 1999
Irrevocable Standby Letter of Credit Number:_______________________


This Letter of Credit is transferable by the Beneficiary. Transfer of this
Letter of Credit is subject to our consent and receipt of Beneficiary's
instructions in the form attached hereto as Exhibit A accompanied by the
original Letter of Credit and amendment(s) if any.

This Letter of Credit is subject to the Uniform Customs and Practices for
Documentary Credits (1993 Revision) International Chamber of Commerce
Publication No. 500 and engages us to the terms herein.

                                             Yours very truly,



                                             Authorized Signature
                                             Letter of Credit Services

                                             (_____) ________________

                                       3.



Date: ____________________________, 1999
Irrevocable Standby Letter of Credit Number: _________________



                                    EXHIBIT A

__________________________________
__________________________________
__________________________________
__________________________________
Attention:  Letter of Credit Services

               Re: Irrevocable Letter of Credit No. ______________

Dear Sirs:

         The undersigned acknowledges receipt of your advice No._______________
of a credit issued in our favor, the terms of which are satisfactory. We now
return the original advice of the said credit with all amendments and
extensions, if any, and hereby irrevocably transfer the said credit and all
amendments and extensions thereof, if any, to:

                   __________________________________________
                              [Name of Transferee]

                   __________________________________________
                                    [Address]

         You are to inform the transferee of this transfer and such transferee
shall have sole rights as beneficiary under the credit, including any
amendments, extension or increases thereof, without notice to or further assent
from us.

                                        Yours very truly,


                                        By: ____________________________________
                                        (The above signature with title as
                                        stated with that on file with us and is
                                        authorized for execution of this
                                        instrument.)


                                        ________________________________________
                                        (Bank)


                                       1.



Date: _______________________, 1999
Irrevocably Standby Letter of Credit Number: ________________


                                    Exhibit E

                              RULES AND REGULATIONS

1.       No sign, placard, picture, advertisement, name or notice shall be
         installed or displayed on any part of the outside or inside of the
         Building without the prior written consent of Landlord, except that
         photographs and art work may be displayed within the Leased Premises.
         Landlord shall have the right to remove, at Tenant's expense and
         without notice, any sign installed or displayed in violation of this
         rule. All approved signs or lettering on doors and walls shall be
         printed, painted, affixed or inscribed at the expense of Tenant by a
         person chosen by Landlord.

2.       If Landlord objects in writing to any curtains, blinds, shades, screens
         or hanging plants or other similar objects attached to or used in
         connection with any window or door of the Premises, Tenant shall
         immediately discontinue such use. No awning shall be permitted on any
         part of the Premises. Tenant shall not place anything against or near
         glass partitions or doors or windows which may appear unsightly from
         outside the Premises.

3.       Tenant shall not obstruct any sidewalks, halls, passages, exits,
         entrances, elevators, escalators, or stairways of the Building. The
         halls, passages, exits, entrances, shopping malls, elevators,
         escalators and stairways are not open to the general public. Landlord
         shall in all cases retain the right to control and prevent access
         thereto of all persons whose presence in the judgment of Landlord
         would be prejudicial to the safety, character, reputation and interest
         of the Building and its tenants; provided that nothing herein
         contained shall be construed to prevent such access to persons with
         whom any tenant normally deals in the ordinary course of its business,
         unless such persons are engaged in illegal activities. No tenant and
         no employee or invitee of any tenant shall go upon the roof of the
         Building except as expressly provided in the Lease.

4.       The directory of the Building will be provided exclusively for the
         display of the name and location of Tenant only, and Landlord reserves
         the right to exclude any other names therefrom.

5.       All cleaning and janitorial services for the Premises shall be provided
         exclusively through Landlord, and except with the written consent of
         Landlord, no person or persons other than those approved by Landlord
         shall be employed by Tenant or permitted to enter the Building for the
         purpose of cleaning the same. Tenant shall not cause any unnecessary
         labor by carelessness or indifference to the good order and cleanliness
         of the Premises. Landlord shall not in any way be responsible to any
         tenant for any loss of property on the Premises, however occurring, or
         for any damage to any Tenant's property by the janitor or any other
         employee or any other person.

6.       Landlord will furnish Tenant, free of charge, with two keys to each
         door lock in the Premises. Landlord may make a reasonable charge for
         any additional keys. Tenant shall not make or have made additional
         keys, and Tenant shall not alter any lock or install a new additional
         lock or bolt on any door of its Premises. Tenant, upon the termination
         of its tenancy, shall deliver to Landlord the keys of all doors which
         have been furnished to Tenant, and in the event of loss of any keys so
         furnished, shall pay Landlord therefor.

7.       If Tenant requires telegraphic, telephonic, burglar alarm or similar
         services, Tenant shall first obtain, and comply with, Landlord's
         instructions in their installation.

8.       Any freight elevator shall be available for use by all tenants in the
         Building, subject to such reasonable scheduling as Landlord in its
         discretion shall deem appropriate. No equipment, materials, furniture,
         packages, supplies, merchandise or other property will be received in
         the Building or carried in the elevators except between such hours and
         in such elevators as may be designated by Landlord.

9.       Tenant shall not place a load upon any floor of the Premises which
         exceeds the load per square foot which such floor was designed to carry
         and which is allowed by law. Landlord shall have the right to prescribe
         the weight, size and position of all equipment, materials, furniture or
         other property brought into the Building. Heavy objects shall, if
         considered necessary by Landlord, stand on such platforms as determined
         by Landlord to be necessary to properly distribute the weight. Business
         machines and mechanical equipment belonging to Tenant, which cause
         noise or vibration that may be transmitted to the structure of the
         Building or to any space therein to such a degree as to be
         objectionable to Landlord or to any tenants in the Building, shall be
         placed and maintained by Tenant, at Tenant's expense, on vibration
         eliminators or other devices sufficient to eliminate noise or
         vibration. The persons employed to move such equipment in or out of the
         Building must be acceptable to Landlord. Landlord will not be
         responsible for loss of, or damage to, any such equipment or other
         property from any cause, and all damage done to the Building by
         maintaining or moving such equipment or other property shall be
         repaired at the expense of Tenant.

10.      Tenant shall not use or keep in the Premises any kerosene, gasoline or
         other inflammable or combustible fluid or material other than those
         limited quantities necessary for the operation or maintenance of office
         equipment. Tenant shall not use or permit to be used in the Premises
         any foul or noxious gas or substance, or permit or allow the Premises
         to be occupied or used in a manner offensive or objectionable to
         Landlord


                                       1.



Date: _______________________, 1999
Irrevocably Standby Letter of Credit Number: ________________

     or other occupants of the Building by reason of noise, odors or vibrations,
     nor shall Tenant bring into or keep in or about the Premises any birds or
     animals.

11.  Tenant shall not use any method of heating or air conditioning other than
     that supplied by Landlord.

12.  Tenant shall not waste electricity, water or air-conditioning and agrees to
     cooperate fully with Landlord to assure the most effective operation of the
     Building's heating and air-conditioning and to comply with any governmental
     energy-saving rules, laws or regulations of which Tenant has actual notice,
     and shall refrain from adjusting controls. Tenant shall keep corridor doors
     closed, and shall close window coverings at the end of each business day.

13.  Landlord reserves the right, exercisable without notice and without
     liability to Tenant, to change the name and street address of the Building.

14.  Landlord reserves the right to exclude from the Building between the hours
     of 6 p.m. and 7 a.m. the following day, or such other hours as may be
     established from time to time by Landlord, and on Sundays and legal
     holidays, any person unless that person is known to the person or employee
     in charge of the Building and has a pass or is properly identified. Tenant
     shall be responsible for all persons for whom it requests passes and shall
     be liable to Landlord for all acts of such persons. Landlord shall not be
     liable for damages for any error with regard to the admission to or
     exclusion from the Building of any person. Landlord reserves the right to
     prevent access to the Building in case of invasion, mob, riot, public
     excitement or other commotion by closing the doors or by other appropriate
     action.

15.  Tenant shall close and lock the doors of its Premises and entirely shut off
     all water faucets or other water apparatus, and electricity, gas or air
     outlets before tenant and its employees leave the Premises. Tenant shall be
     responsible for any damage or injuries sustained by other tenants or
     occupants of the Building or by Landlord for noncompliance with this rule.

16.  Tenant shall not accept barbering or bootblacking service upon the
     Premises, except at such hours and under such regulations as may be fixed
     by Landlord.

17.  The toilet rooms, toilets, urinals, wash bowls and other apparatus shall
     not be used for any purpose other than that for which they were constructed
     and no foreign substance of any kind whatsoever shall be thrown therein.
     The expense of any breakage, stoppage or damage resulting from the
     violation of this rule shall be borne by the tenant who, or whose employees
     or invitees, shall have caused it.

18.  Tenant shall not sell, or permit the sale at retail, of newspapers,
     magazines, periodicals, theater tickets or any other goods or merchandise
     to the general public in or on the Premises. Tenant shall not make any
     room-to-room solicitation of business from other tenants in the Building.
     Tenant shall not use the Premises for any business or activity other than
     that specifically provided for in Tenant's Lease.

19.  Tenant shall not install any radio or television antenna, loudspeaker or
     other devise on the roof or exterior walls of the Building. Tenant shall
     not interfere with radio or television broadcasting or reception from or in
     the Building or elsewhere.

20.  Landlord reserves the right to direct electricians as to where and how
     telephone and telegraph wires are to be introduced to the Premises. Tenant
     shall not cut or bore holes for wires. Tenant shall not affix any floor
     covering to the floor of the Premises in any manner except as approved by
     Landlord. Tenant shall repair any damage resulting from noncompliance with
     this rule.

21.  Tenant shall not install, maintain or operate upon the Premises any vending
     machine without the written consent of Landlord except for vending machines
     for its employees' and invitees' use.

22.  Canvassing, soliciting and distribution of handbills or any other written
     material, and peddling in the Building are prohibited, and each tenant
     shall cooperate to prevent same.

23.  Landlord reserves the right to exclude or expel from the Building any
     person who, in Landlord's judgment, is intoxicated or under the influence
     of liquor or drugs or who is in violation of any of the Rules and
     Regulations of this Building.

24.  Tenant shall store all its trash and garbage within its Premises. Tenant
     shall not place in any trash box or receptacle any material which cannot be
     disposed of in the ordinary and customary manner of trash and garbage
     disposal. All garbage and refuse disposal shall be made in accordance with
     directions issued from time to time by Landlord.

25.  The Premises shall not be used for the storage of merchandise held for sale
     to the general public, or for lodging or for manufacturing of any kind, nor
     shall the Premises be used for any improper, immoral or objectionable
     purpose. No cooking shall be done or permitted by any tenant on the
     Premises, except that

                                       2.



Date: _______________________, 1999
Irrevocably Standby Letter of Credit Number: ________________

     use by Tenant of Underwriters' Laboratory-approved equipment for brewing
     coffee, tea, hot chocolate and similar beverages and microwave ovens for
     cooking food shall be permitted, provided that such equipment and use is in
     accordance with all applicable federal, state, county and city laws, codes,
     ordinances, rules and regulations.

26.  Tenant shall not use in any space or in the public halls of the Building
     any hand trucks except those equipped with rubber tires and side guards or
     such other material-handling equipment as Landlord may approve. Tenant
     shall not bring any other vehicles of any kind into the Building.

27.  Without the written consent of Landlord, Tenant shall not use the name of
     the Building in connection with or in promoting or advertising the business
     of Tenant except as Tenant's address.

28.  Tenant shall comply with all safety, fire protection and evacuation
     procedures and regulations established by Landlord or any governmental
     agency.

29.  Tenant assumes any and all responsibility for protecting its Premises from
     theft, robbery and pilferage, which includes keeping doors locked and other
     means of entry to the Premises closed.

30.  The requirements of Tenant will be attended to only upon appropriate
     application to the office of the Building by an authorized individual.
     Employees of Landlord shall not perform any work or do anything outside of
     their regular duties unless under special instructions from Landlord, and
     no employee of Landlord will admit any person (Tenant or otherwise) to any
     office without specific instructions from Landlord.

31.  Tenant shall not park its vehicles in any parking areas designated by
     Landlord as areas for parking by visitors to the Building. Tenant shall not
     leave vehicles in the Building parking areas overnight nor park any
     vehicles in the Building parking areas other than automobiles, motorcycles,
     motor driven or non-motor driven bicycles or four-wheeled trucks.

32.  Landlord may waive any one or more of these Rules and Regulations for the
     benefit of Tenant or any other tenant, but no such waiver by Landlord shall
     be construed as a continuous waiver of such Rules and Regulations against
     any or all of the tenants of the Building.

33.  These Rules and Regulations are in addition to, and shall not be construed
     to in any way modify or amend in whole or in part, the terms, covenants,
     agreements and conditions of any lease of premises in the Building.

34.  Landlord reserves the right to make such other reasonable Rules and
     Regulations as, in its judgment, may from time to time be needed for safety
     and security, for care and cleanliness of the Building and for the
     preservation of good order therein. Tenant agrees to abide by all such
     Rules and Regulations hereinabove stated and any additional rules and
     regulations which are adopted.

35.  Tenant shall be responsible for the observance of all of the foregoing
     rules by Tenant's employees, agents, clients, customers, invitees and
     guests.

                                       3.



Date: _______________________, 1999
Irrevocably Standby Letter of Credit Number: ________________

                                    Exhibit F

                          FORM OF ESTOPPEL CERTIFICATE

__________________, 200_

_____________________________
_____________________________
_____________________________
_____________________________

Re     ______________________
       ______________, California

Ladies and Gentlemen:

Reference is made to that certain Lease, dated as of _______________, 200__,
between _____________ LLC, a California limited liability company ("Landlord"),
and the undersigned (herein referred to as the "Lease"). A copy of the Lease
[and all amendment thereto] is[are] attached hereto as Exhibit A. At the request
of Landlord in connection with [ State reasons for request for estoppel
certificate ], the undersigned hereby certifies to Landlord and to [ State names
of other parties requiring certification ] and each of your respective
successors and assigns as follows:

     1. The undersigned is the tenant under the Lease.

     2. The Lease is in full force and effect and has not been amended,
modified, supplemented or superseded except as indicated in Exhibit A.

     3. There is no defense, offset, claim or counterclaim by or in favor of the
undersigned against Landlord under the Lease or against the obligations of the
undersigned under the Lease. The undersigned has no renewal, extension or
expansion option, no right of first offer or right of first refusal and no other
similar right to renew or extend the term of the Lease or expand the property
demised thereunder except as may be expressly set forth in the Lease.

     4. The undersigned is not aware of any default now existing of the
undersigned or of Landlord under the Lease, nor of any event which with notice
or the passage of time or both would constitute a default of the undersigned or
of Landlord under the Lease.

     5. The undersigned has not received notice of a prior transfer, assignment,
hypothecation or pledge by Landlord of any of Landlord's interest in the Lease.

     6. The monthly rent due under the Lease is $____________ and has been paid
through __________________, and all additional rent due and payable under the
Lease has been paid through _________________.

     7. The term of the Lease commenced on __________________, and expires on
___________________, unless sooner terminated pursuant to the provisions of the
Lease. Landlord has performed all work required by the Lease for the
undersigned's initial occupancy of the demised property.

     8. The undersigned has deposited the sum of $____________ with Landlord as
security for the performance of its obligations as tenant under the Lease, and
no portion of such deposit has been applied by Landlord to any obligation under
the Lease.

     9. There is no free rent period pending, nor is Tenant entitled to any
Landlord's contribution.

The above certifications are made to Landlord and Lender knowing that Landlord
and Lender will rely thereon in accepting an assignment of the Lease.

Very truly yours,

__________________________

By: ________________________________________
Name: ______________________________________

                                       1.



Date: _______________________, 1999
Irrevocably Standby Letter of Credit Number: ________________

Title: _________________________________________

                                       2.



Date: _______________________, 1999
Irrevocably Standby Letter of Credit Number: ________________

                                       1.

EX-10.10

                                                                   Exhibit 10.10

                            AMENDMENT NO. 1 TO LEASE

     This Amendment No. 1 To Lease (this "Amendment") is dated as of this 3rd
day of December, 2001, by and between Menlo Equities Associates LLC, a
California limited liability company ("Landlord") and Macromedia, Inc.,, a
Delaware corporation ("Tenant").

                                    Recitals

     A. Landlord and Tenant entered into that certain Lease Agreement dated
November 29, 2001 (the "Lease") for premises located in the City of Redwood
City, County of San Mateo, State of California, commonly known as 101 Redwood
Shores Parkway, comprised of 52,905 rentable square feet of floor area
("Premises"); and

     B. Landlord and Tenant now desire to amend the Lease according to the terms
and conditions set forth herein. Capitalized terms used in this Amendment and
not otherwise defined shall have the meanings assigned to them in the Lease.

                                    Agreement

     Now Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:

     1. Base Monthly Rent. The term "Base Monthly Rent" as defined in Article 1
of the Lease is hereby deleted and replaced with the following:

     Base Monthly Rent:   The term "Base Monthly Rent" shall mean the following:

                          Period                             Base Monthly Rent
                          ------                             -----------------
                          12/27/01 - 12/26/04                $140,727.30

                          12/27/04 - 12/26/09                $153,953.55

                          12/27/09 - 12/26/11                $160,302.15

                          Notwithstanding the foregoing, from and after the end
                          of the 24/th/ month of the Lease Term, Base Monthly
                          Rent is subject to reduction by the Reduction Factor,
                          as hereinafter defined in this paragraph. The term
                          "Reduction Factor" shall mean a number, between $0 and
                          $10,416.67, inclusive, calculated (as of the last day
                          of the 24/th/ month of the Lease Term) by dividing the
                          Commission and T.I. Balance (as hereinafter defined in
                          this paragraph) by 96 (the remaining number of months
                          in the Lease Term). The term "Commission and T.I.
                          Balance" shall mean (A) $1,000,000 multiplied by the
                          percentage of the rentable square feet located on the
                          first and second floors of the Building (exclusive of
                          the Building lobby and any portion of the 52,905
                          square feet of the Leased Premises) which are subject
                          to leases or other form of occupancy agreement in
                          effect as of the last day of the 24/th/ month of the
                          Lease Term, minus (B) the total costs incurred or
                          irrevocably committed (subject to reasonable,
                          customary, good faith conditions) by Landlord in
                          connection with multi-tenant corridors required by
                          such leased premises, tenant improvements, and/or
                          leasing commissions for space located on the first and
                          second floors of the Building. For example, if 75% of
                          the first and second floors of the Building were
                          subject to leases or other form of occupancy agreement
                          as of the end of the 24 month period, the $1,000,000
                          base would be reduced to $750,000, and if the total
                          costs incurred or irrevocably committed (subject to
                          reasonable, customary, good faith conditions) by
                          Landlord in connection with multi-tenant corridors
                          required by such leased premises, tenant improvements,
                          and/or leasing commissions for space located on the
                          first and second floors of the Building were $400,000,
                          then Base Monthly Rent for the remaining 96 months of
                          the Lease Term would be reduced by $3,645.83 (i.e.,
                          $350,000 divided by 96). In this example, the
                          Reduction Factor would be $3,645.83.



     2.  Ratification. The Lease, as amended by this Amendment, is hereby
ratified by Landlord and Tenant and Landlord and Tenant hereby agree that the
Lease, as so amended, shall continue in full force and effect.

     3.  Miscellaneous.

         (a)  Attorney's Fees. If either party commences an action against the
other party arising out of or in connection with this Amendment, the prevailing
party shall be entitled to recover from the losing party reasonable attorney's
fees and costs of suit.

         (b)  Counterparts. This Amendment may be signed in two or more
counterparts. When at least one such counterpart has been signed by each party,
this Amendment shall be deemed to have been fully executed, each counterpart
shall be deemed to be an original, and all counterparts shall be deemed to be
one and the same agreement.

     In Witness Whereof, Landlord and Tenant have executed this Amendment as
of the date first written above.

Tenant:                                 Landlord:

Macromedia, Inc.,                       Menlo Equities Associates LLC,
a Delaware corporation                  a California limited liability company

                                        By: Menlo Equities Inc., Managing Member


By: _________________________________       By: ________________________________
Name:  James Morgensen,                           Henry D. Bullock, President
Title: Vice President, Real Estate,
        Facilities and Services


By: _________________________________
Name: Elizabeth Nelson
Title: Chief Financial Officer

EX-10.11

                                                                   Exhibit 10.11

                            AMENDMENT NO. 2 TO LEASE

     This Amendment No. 2 To Lease (this "Amendment") is dated as of this 17th
day of December, 2001, by and between Menlo Equities Associates LLC, a
California limited liability company ("Landlord") and Macromedia, Inc., a
Delaware corporation ("Tenant").

                                    Recitals

     A. Landlord and Tenant entered into that certain Lease Agreement dated
November 29, 2001, as amended by that certain Amendment No. 1 to Lease (the
"First Amendment") dated December 3, 2001 (collectively, the "Lease") for
premises located in the City of Redwood City, County of San Mateo, State of
California, commonly known as 101 Redwood Shores Parkway, comprised of 52,905
rentable square feet of floor area ("Premises"); and

     B. Landlord and Tenant now desire to amend the Lease according to the terms
and conditions set forth herein. Capitalized terms used in this Amendment and
not otherwise defined shall have the meanings assigned to them in the Lease.

                                    Agreement

     Now Therefore, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Landlord and Tenant hereby agree
as follows:

     1. Base Monthly Rent. The paragraph in Section 1 of the First Amendment
which commences with the words "Notwithstanding the foregoing," is hereby
deleted in its entirety and the term "Base Monthly Rent" as defined in Article 1
of the Lease is hereby restated in its entirety as the following:

     Base Monthly Rent:   The term "Base Monthly Rent" shall mean the following:

                          Period                       Base Monthly Rent
                          ------                       -----------------
                          12/27/01 - 12/26/04          $140,727.30

                          12/27/04 - 12/26/09          $153,953.55

                          12/27/09 - 12/26/11          $160,302.15

     2. Ratification. The Lease, as amended by this Amendment, is hereby
ratified by Landlord and Tenant and Landlord and Tenant hereby agree that the
Lease, as so amended, shall continue in full force and effect.

     3. Miscellaneous.

        (a) Attorney's Fees. If either party commences an action against the
other party arising out of or in connection with this Amendment, the prevailing
party shall be entitled to recover from the losing party reasonable attorney's
fees and costs of suit.



          (b) Counterparts. This Amendment may be signed in two or more
counterparts. When at least one such counterpart has been signed by each party,
this Amendment shall be deemed to have been fully executed, each counterpart
shall be deemed to be an original, and all counterparts shall be deemed to be
one and the same agreement.

     In Witness Whereof, Landlord and Tenant have executed this Amendment as of
the date first written above.

Tenant:                                 Landlord:

Macromedia, Inc.,                       Menlo Equities Associates LLC,
a Delaware corporation                  a California limited liability company

                                        By: Menlo Equities Inc., Managing Member


By: __________________________________      By: ________________________________
Name:  James Morgensen,                            Henry D. Bullock, President
Title: Vice President, Real Estate,
        Facilities and Services


By: __________________________________
Name: Elizabeth Nelson
Title: Chief Financial Officer

EX-10.15

                                                                   EXHIBIT 10.15

                                MACROMEDIA, INC.
                       NONQUALIFIED STOCK OPTION AGREEMENT

          This Stock Option Agreement ("Agreement") is made and entered into as
of the date of grant set forth below (the "Date of Grant") by and between
Macromedia, Inc., a Delaware corporation (the "Company"), and the participant
named below ("Participant"). Capitalized terms not defined herein shall have the
meaning ascribed to them in the Company's 1992 Equity Incentive Plan (the
"Plan").

Participant:                              Robert K. Burgess

Social Security Number:                   ____________________________

Address:                                  12 Cowell

                                          Atherton, California  94027

Total Option Shares:                      1,000,000

Exercise Price Per Share:                 $15.00

Date of Grant:                            July 11, 1996

Vesting Start Date:                       July 11, 1996

Expiration Date:                          July 11, 2006

          1.      Grant of Option. The Company hereby grants to Participant an
option (the "Option") to purchase the total number of shares of Common Stock
$0.001 par value, of the Company set forth above (the "Shares") at the Exercise
Price Per Share set forth above (the "Exercise Price"), subject to all of the
terms and conditions of this Agreement. The Option is intended to be a
"nonqualified stock option."

          2.      Vesting and Exercise Periods
                  ----------------------------

                  2.1 Vesting and Exercise Periods of Option. The Option will
vest as to 25% of the Shares at the end of twelve (12) full months of continuous
service with the Company. Thereafter the option will vest in a series of
thirty-six (36) successive equal monthly installments over Participant's period
of service with the Company with each monthly installment equal to 2.08% of the
total number of shares in the option (20,833.33 shares) on the last day of each
month over the thirty-six (36) month period. For purposes of such Option,
Participant will be deemed to continue in service with the Company for so long
as he renders services as an employee, director or independent consultant to the
Company or any Subsidiary, Parent or Affiliate of the Company; provided,
however, that in the event that Participant is terminated as President of the
Company whether actually or pursuant to a Constructive Termination (as defined
in Participant's Employment Agreement with the Company attached hereto as
Exhibit A) (the



"Employment Agreement") or a Change of Control (as defined in the Employment
Agreement) occurs, the terms of Sections 7 and 8 of such Employment Agreement
shall be applicable to and shall govern the vesting and exercise periods of such
Option and shall supersede all provisions to the contrary in this Agreement.

          2.2  Expiration. The Option shall expire on the Expiration Date set
forth above and must be exercised, if at all, on or before the Expiration Date.

     3.   Termination. Subject to any provisions to the contrary in the
Employment Agreement, which shall supersede the provisions of this Section 3,
the following provisions shall govern the exercise of this Option in the event
the Participant is Terminated.

          3.1  Termination for Any Reason Except Death or Disability. If
Participant is Terminated for any reason, except death or Disability,
notwithstanding any other provision in this Agreement or in the Plan to the
contrary, the Option, to the extent that it would have been exercisable by
Participant on the date of Termination pursuant to this Agreement or under the
terms of the Employment Agreement, may be exercised by Participant no later than
one hundred eighty (180) days after the date of Termination or, if longer, the
dates set forth in the Employment Agreement, but in any event no later than the
Expiration Date; provided however, that if Participant voluntarily terminates
his service with Macromedia other then for Good Reason or is terminated for
Cause (in each case as defined in the Employment Agreement), a ninety (90) day
period shall be substituted for such one hundred eighty (180) day period.

          3.2  Termination Because of Death or Disability. If Participant is
Terminated because of death or Disability of Participant, the Option, to the
extent that it is exercisable by Participant on the date of Termination, may be
exercised by Participant (or Participant's legal representative) no later than
twelve (12) months after the date of Termination, but in any event no later than
the Expiration Date.

          3.3  No Obligation to Employ. Nothing in the Plan or this Agreement
shall confer on Participant any right to continue in the employ of, or other
relationship with, the Company or any Parent, Subsidiary or Affiliate of the
Company, or limit in any way the right of the Company or any Parent, Subsidiary
or Affiliate of the Company to terminate Participant's employment or other
relationship at any time, with or without cause.

          3.4  For purposes of this Section 3, the Participant shall not be
deemed Terminated nor shall a date of Termination be deemed to have occurred for
so long as Participant continues to render services as an employee, director or
independent consultant.

     4.   Manner of Exercise
          ------------------

          4.1  Stock Option Exercise Agreement. To exercise this Option,
Participant (or in the case of exercise after Participant's death, Participant's
executor, administrator, heir or legatee, as the case may be) must deliver to
the Company an executed stock option exercise agreement in the form attached
hereto as Exhibit B, or in such other form as may be approved by the Company
from time to time (the "Exercise Agreement"), which shall set forth, inter alia.
Participant's election to exercise the Option and the number of Shares being
purchased. If

                                        2



someone other than Participant exercises the Option, then such person must
submit documentation reasonably acceptable to the Company that such person has
the right to exercise the Option.

          4.2  Limitations on Exercise. The Option may not be exercised unless
such exercise is in compliance with all applicable federal and state securities
laws, as they are in effect on the date of exercise. The Option may not be
exercised as to fewer than 100 Shares unless it is exercised as to all Shares as
to which the Option is then exercisable.

          4.3  Payment. The Exercise Agreement shall be accompanied by full
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:

     (a)  by cancellation of indebtedness of the Company to the Participant;

     (b)  by surrender of shares of the Company's Common Stock that either: (1)
          have been owned by Participant for more than six (6) months and have
          been paid for within the meaning of SEC Rule 144 and, if such shares
          were purchased from the Company by use of a promissory note, such note
          has been fully paid with respect to such shares); or (2) were obtained
          by Participant in the open public market; and (3) are clear of all
          liens, claims, encumbrances or security interests;

     (c)  by waiver of compensation due or accrued to Participant for services
          rendered;

     (d)  provided that a public market for the Company's stock exists, (1)
          through a "same day sale" commitment from Participant and a
          broker-dealer that is a member of the National Association of
          Securities Dealers (a "NASD Dealer") whereby Participant irrevocably
          elects to exercise the Option and to sell a portion of the Shares so
          purchased to pay for the Exercise Price and whereby the NASD Dealer
          irrevocably commits upon receipt of such Shares to forward the
          exercise price directly to the Company, or (2) through a "margin"
          commitment from Participant and a NASD Dealer whereby Participant
          irrevocably elects to exercise the Option and to pledge the Shares so
          purchased to the NASD Dealer in a margin account as security for a
          loan from the NASD Dealer in the amount of the Exercise Price, and
          whereby the NASD Dealer irrevocably commits upon receipt of such
          Shares to forward the Exercise Price directly to the Company; or

     (e)  by any combination of the foregoing.

          4.4  Tax Withholding. In connection with the issuance of the Shares
upon exercise of the Option, Participant must pay or provide for any applicable
federal or state withholding obligations of the Company. If the Committee
permits, Participant may provide for payment of withholding taxes upon exercise
of the Option by requesting that the Company retain Shares with a Fair Market
Value equal to the minimum amount of taxes required to be withheld. In such
case, the Company shall issue the net number of Shares to the Participant by
deducting the Shares retained from the Shares issuable upon exercise.

                                        3



         4.5 Issuance of Shares. Upon the exercise of the Option in accordance
with this Section 4, the Company shall issue the purchased Shares registered in
the name of Participant, Participant's authorized assignee, or Participant's
legal representative, and shall deliver certificates representing the Shares
with the appropriate legends affixed thereto.

     6.  Compliance with Laws and Regulations. The exercise of the Option and
the issuance and transfer of Shares shall be subject to compliance by the
Company and Participants with all applicable requirements of federal and state
securities laws and with ail applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such issuance or
transfer.

     7.  Nontransferability of Option. The Option may not be transferred in any
manner other than by will or by the laws of decent and distribution and may be
exercised during the lifetime of Participant only by Participant. The terms of
the Option shall be binding upon the executors, administrators, successor and
assigns of Participant.

     8.  Tax Consequences. Set forth below is a brief summary as of the Date of
Grant of some of the federal and California tax consequences of exercise of the
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. PARTICIPANT SHOULD
CONSULT A TAX ADVISOR BEFORE EXERCISING THE OPTION OR DISPOSING OF THE SHARES.

         8.1 Exercise of Nonqualified Stock Option. Participant will be treated
as having received compensation income (taxable at ordinary income tax rates)
equal to the excess, if any, of the fair market value of the Shares on the date
of exercise over the Exercise Price. The Company will be required to withhold
from Participant's compensation or collect from Participant and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.

         8.3 Disposition of Shares. If the Shares are hold for more than twelve
(12) months after the date of the transfer of the Shares pursuant to the
exercise of the Option, any gain realized on disposition of the Shares will be
treated as long term capital gain for federal and California income tax
purposes.

     9.  Privileges of Stock Ownership. Participant shall not have any of the
rights of a shareholder with respect to any Shares until Participant exercises
the Option and pays the Exercise Price.

     10. S-8 Registration. The Company shall register the Shares issuable under
this Option on a Form S-8 Registration Statement prior to the initial vesting
date hereunder and shall keep such Registration Statement in effect for the
entire period that this Option thereafter remains outstanding.

     11. Entire Agreement. This Agreement and the Employment Agreement
constitutes the entire agreement of the parties and supersede all prior
undertakings and agreements with respect to the subject matter hereof. In the
event of any conflict between the terms of this

                                        4



Agreement and the terms of the Employment Agreement, the terms of the Employment
Agreement shall be controlling.

     12. Notices. Any notices required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to the
Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Participant shall be in writing and
addressed to Participant at the address indicated above or to such other address
as such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon; personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by rapifax or telecopier.

     13. Successor and Assigns. The Company any assign any of its rights under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
the successors and assigns the Company. Subject to the restrictions on transfer
set forth herein, this Agreement shall be binding upon Participant and
Participant's heirs, executors, administrators, legal representatives,
successors and assigns.

     14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.

     15. Acceptance. Participant hereby acknowledges receipt of this Agreement.
Participant has read and understands the terms and provisions thereof, and
accepts the Option subject to all the terms and conditions of this Agreement.
Participant acknowledges that there may be adverse tax consequences upon
exercise of the Option or disposition of the Shares and that Participant should
consult a tax adviser prior to such exercise or disposition.

     16. Replacement Agreement. Participant shall have the right in his
discretion to require the Company to reissue a new Agreement in replacement of
this Agreement which more specifically incorporates the terms and provisions of
the Employment Agreement applicable to this Option.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Participant has executed
this Agreement in duplicate as of the Effective Date.

MACROMEDIA, INC.                                        PARTICIPANT

By /s/ Bud Colligan                                     /s/ R. Burgess
   ------------------------------                       ------------------------
                                                        (Signature)

/s/ BUD COLLIGAN                                        /s/ R. BURGESS
- ---------------------------------                       ------------------------
(Please print name)                                     Please print name)

CHAIRMAN
- ---------------------------------
(Please print title)

                                       5

EX-10.16

                                                                   EXHIBIT 10.16

                       WRITTEN CONFIRMATION OF CONSENT TO
                 AMENDMENT OF OPTION AND CANCELLATION OF OPTION

I, Robert K. Burgess, hereby confirm in writing my earlier consent on July 15,
1997 to the amendment of the stock option granted to me in July 1996 to purchase
l,000,000 shares of Common Stock of Macromedia at $15.00 per share to reduce the
per share exercise price to $7.781, the fair market value of Macromedia's Common
Stock on July 15, 1997.

I understand and confirm my agreement that the repriced option will remain
subject to all of its original terms as set forth in the Nonqualified Stock
Option Agreement, except that the repriced option will not be exercisable until
May 5, 1998 unless my employment as President of Macromedia is terminated prior
to that date (i) because of my death or disability or (ii) at or following a
"Change in Control" (as defined in my Employment Agreement) which termination
triggers the acceleration of the exercisability and vesting of my option
pursuant to my Employment Agreement.

I further understand and confirm my agreement to the cancellation, as of July
15, 1997, of the option granted to me on May 6, 1997 to purchase 250,000 shares
of Macromedia's Common Stock.


                                          /s/ Robert K. Burgess
                                          --------------------------------------
                                          Signature of Robert K. Burgess

                                                          ______________________
                                                                   (Date)

EX-10.17

                                                                   Exhibit 10.17

New Employee                                                          No. 009612


                                Macromedia, Inc.
                      Non-Qualified Stock Option Agreement

     This Stock Option Agreement ("Agreement") is made and entered into as of
the Date of Grant set forth below (the "Date of Grant") by and between
Macromedia, Inc., a Delaware corporation (the "Company"), and the Optionee named
below ("Optionee"). Capitalized terms not defined herein shall have the meanings
ascribed to them in the Company's 1992 Equity Incentive Plan (the "Plan"), as
amended through May 3, 2001.

Optionee:                     Dominic Gallello
Social Security Number:       ###-##-####
Total Option Shares:          400,000
Exercise Price Per Share:     $14.02
Date of Grant:                October 18, 2001
Vesting Start Date:           October 18, 2001
Expiration Date:              October 18, 2011
                              (unless terminated earlier pursuant to Section 3
                               below)

     1. Grant of Option. The Company hereby grants to Optionee an option (the
"Option") to purchase the total number of shares of Common Stock at $0.001 par
value, of the Company set forth above as Total Option Shares (the "Shares") at
the Exercise Price Per Share set forth above (the "Exercise Price"), subject to
all of the terms and conditions of this Agreement. This Option does not meet the
incentive Stock Option requirements of Section 422(b) of the Internal Revenue
Code and is intended to be a "nonqualified stock option".

     2. Vesting and Exercise Period.

        2.1 Vesting and Exercise Periods of Option. Provided Optionee
continues to provide services to the Company or any Subsidiary, Parent or
Affiliate of the Company throughout the specified period, the Option shall
become exercisable as to 25% of the Total Option Shares on the date twelve
months after the Vesting Start Date specified above and shall be exercisable as
to an additional 2.0833% of the Total Option Shares at the end of each full
succeeding month thereafter until this Option is exercisable with respect to
100% of the Shares.

        2.2 Expiration. The Option shall expire on the earlier of Expiration
Date set forth above or the last day of the applicable post-termination exercise
period set forth in Section 3.1 and 3.2 below and must be exercised, if at all,
on or before such date.



                                                                Macromedia, Inc.
                                            Non-Qualified Stock Option Agreement
                                                                          Page 2

     3.  Termination. The following provisions shall govern the exercise of the
Option in the event Optionee is Terminated.

         3.1 Termination for Any Reason Except Death or Disability. If Optionee
is Terminated for any reason, except death or Disability, notwithstanding any
other provision in this Agreement to the contrary, the Option, to the extent
that it would have been exercisable on Optionee's Termination Date pursuant to
Section 2.1 of this Agreement, may be exercised by the Holder no later than
ninety (90) days after the Termination Date, but in any event no later than the
Expiration Date.

         3.2 Termination Because of Death or Disability. If Optionee is
Terminated because of his of her death or Disability of Optionee , the Option,
to the extent that it is exercisable on Optionee's Termination Date, may be
exercised by the Holder no later than twelve (12) months after the Termination
Date, but in any event no later than the Expiration Date.

         3.3 No Obligation to Employ. Nothing in this Agreement shall confer on
Optionee any right to continue in the employ of, or other relationship with, the
Company or any Parent, Subsidiary or Affiliate of the Company, or limit in any
way the right of the Company or any Parent, Subsidiary or Affiliate of the
Company to terminate Optionee's employment or other relationship at any time,
with or without cause.

     4.  Manner of Exercise.

         4.1 Stock Option Exercise Agreement. To exercise this Option, the
Holder must deliver to the Company an executed stock option exercise agreement
in the form attached hereto as Exhibit A, or in such other form as may be
approved by the Company from time to time (the "Exercise Agreement"), which
shall set forth, inter alia, Holder's election to exercise the Option, the
number of Shares being purchased, any restrictions imposed on the Shares and any
representations, warranties and agreements regarding Holder's investment intent
and access to information as may be required by the Company to comply with
applicable securities laws. If someone other than Optionee exercises the Option,
then such person must submit documentation reasonably acceptable to the Company
that such person has the right to exercise the Option.

         4.2 Limitations on Exercise. The Option may not be exercised unless
such exercise is in compliance with all applicable federal and state securities
laws, as they are in effect on the date of exercise. The Option may not be
exercised as to fewer than 100 Shares unless it is exercised as to all Shares as
to which the Option is then exercisable.

         4.3 Payment. The Exercise Agreement shall be accompanied by full
payment of the Exercise Price for the Shares being purchased in cash (by check),
or where permitted by law:



                                                                Macromedia, Inc.
                                            Non-Qualified Stock Option Agreement
                                                                          Page 3

     (a)  in case of exercise by the Optionee, by cancellation of indebtedness
          of the Company to the Optionee;

     (b)  by surrender of shares of the Company's Common Stock that either: (1)
          have been owned by the Holder for more than six (6) months and have
          been paid for within the meaning of SEC Rule 144 and, if such shares
          were purchased from the Company by use of a promissory note, such note
          has been fully paid with respect to such shares or (2) were obtained
          by the Holder in the open public market; and (3) are clear of all
          liens, claims, encumbrances or security interests;

     (c)  in case of exercise by the Optionee, by waiver of compensation due or
          accrued to Optionee for services rendered;

     (d)  provided that a public market for the Company's stock exists, (1)
          through a "same day sale" commitment from the Holder and a
          broker-dealer that is a member of the National Association of
          Securities Dealers (a "NASD Dealer") whereby the Holder irrevocably
          elects to exercise the Option and to sell a portion of the Shares so
          purchased to pay for the Exercise Price and whereby the NASD Dealer
          irrevocably commits upon receipt of such Shares to forward the
          Exercise Price directly to the Company, or (2) through a "margin"
          commitment from Optionee and a NASD Dealer whereby Optionee
          irrevocably elects to exercise the Option and to pledge the Shares so
          purchased to the NASD Dealer in a margin account as security for a
          loan from the NASD Dealer in the amount of the Exercise Price, and
          whereby the NASD Dealer irrevocably commits upon receipt of such
          Shares to forward the Exercise Price directly to the Company; or

     (e)  by any combination of the foregoing.

               4.4  Tax Withholding. Prior to the issuance of the Shares upon
exercise of the Option, Optionee must pay or provide for any applicable federal
or state withholding obligations of the Company. If the Committee permits,
Optionee may provide for payment of withholding taxes upon exercise of the
Option by requesting that the Company retain Shares with a Fair Market Value
equal to the minimum amount of taxes required to be withheld. In such case, the
Company shall issue the net number of Shares to the Holder by deducting the
Shares retained from the Shares issuable upon exercise.

               4.5  Issuance of Shares. Upon the exercise of the Option in
accordance with this Section 4, the Company shall issue the Shares registered in
the name of the Holder and shall deliver certificates representing the Shares
with the appropriate legends affixed thereto.

          6.   Compliance with Laws and Regulations. The exercise of the Option
and the issuance and transfer of Shares shall be subject to compliance by the
Company and the Holder with all applicable requirements of federal and state
securities laws and with all applicable requirements of any stock exchange on
which the Company's Common Stock may be listed at the time of such



                                                                Macromedia, Inc.
                                            Non-Qualified Stock Option Agreement
                                                                          Page 4

issuance or transfer. Optionee understands that the Company is under no
obligation to register or qualify the Shares with the Securities and Exchange
Commission, any state securities commission or any stock exchange to effect such
compliance.

          7.   Transferability of Option. The Option shall be exercisable: (a)
during the Optionee's lifetime only by (i) Optionee, (ii) the Optionee's
guardian or legal representative, (iii) a Family Member of the Optionee who has
acquired the Option by Permitted Transfer; and (b) after Optionee's death, by
the legal representative of the Optionee's heirs or legatees. For purposes of
this Agreement "Holder" means one of the above persons to the extent such person
has or controls an interest in the Option at the time in question.

          8.   Tax Consequences. Set forth below is a brief summary as of the
Date of Grant of some of the federal and California tax consequences of exercise
of the Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY
INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. OPTIONEE
SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THE OPTION OR DISPOSING OF THE
SHARES.

               8.1  Exercise of Non-qualified Stock Option. Optionee will be
treated as having received compensation income (taxable at ordinary income tax
rates) equal to the excess, if any, of the fair market value of the Shares on
the date of exercise over the Exercise Price. The Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.

               8.2  Disposition of Shares. If the Shares are held for more than
twelve (12) months after the date of the transfer of the Shares pursuant to the
exercise of the Option, any gain realized on disposition of the Shares will be
treated as long term capital gain for federal and California income tax
purposes.

          9.   Privileges of Stock Ownership. The Holder shall not have any of
the rights of a stockholder with respect to any Shares until the Holder
exercises the Option and pays the Exercise Price and is issued the Shares
following such exercise.

          10.  Interpretation. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or the Company to the Committee for
review. The resolution of such a dispute by the Committee shall be final and
binding on the Company, the Optionee and the Holder an anyone else with an
interest in the Option.

          11.  Entire Agreement. This Agreement constitutes the entire agreement
of the parties and supersede all prior undertakings and agreements with respect
to the subject matter hereof.


                                                                Macromedia, Inc.
                                            Non-Qualified Stock Option Agreement
                                                                          Page 5

     12. Notices. Any notice required to be given or delivered to the Company
under the terms of this Agreement shall be in writing and addressed to the
Corporate Secretary of the Company at its principal corporate offices. Any
notice required to be given or delivered to Optionee shall be in writing and
addressed to Optionee at the address indicated above or to such other address as
such party may designate in writing from time to time to the Company. All
notices shall be deemed to have been given or delivered upon: personal delivery;
three (3) days after deposit in the United States mail by certified or
registered mail (return receipt requested); one (1) business day after deposit
with any return receipt express courier (prepaid); or one (1) business day after
transmission by facsimile.

     13. Successors and Assigns. The Company may assign any of its rights under
this Agreement. This Agreement shall be binding upon and inure to the benefit of
the successors and assigns of the Company. Subject to the restrictions on
transfer set forth herein, this Agreement shall be binding upon Optionee and
Optionee's heirs, executors, administrators, legal representatives, successors
and assigns and the Holder and the Holder's heirs, executors, administrators,
legal representatives, successors and assigns.

     14. Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of California, excluding that
body of law pertaining to conflict of laws.

     15. Acceptance. Optionee hereby acknowledges receipt of a copy this
Agreement. Optionee has read and understands the terms and provisions thereof,
and accepts the Option subject to all the terms and conditions of this
Agreement. Optionee acknowledges that there may be adverse tax consequences upon
exercise of the Option or disposition of the Shares and that Optionee should
consult a tax adviser prior to such exercise or disposition.

     IN WITNESS WHEREOF, the Company has caused this Agreement to be executed in
duplicate by its duly authorized representative and Optionee has executed this
Agreement in duplicate as of the Date of Grant.

MACROMEDIA, INC.                              OPTIONEE


By: ____________________________________      __________________________________
      Betsey Nelson                           (Signature)
      Executive Vice President and
      Chief Financial Officer

EX-10.19

                                                                   Exhibit 10.19

MACROMEDIA

Independent Contractor Agreement
For Services

This Agreement, when accepted by Macromedia, is made as of the 1/st/ day of
October, 2001 by and between Macromedia, Inc., a Delaware corporation of 600
Townsend St., San Francisco, CA 94103 "Macromedia"), and Al Ramadan of
Pogmohane Partners, LP ("Contractor").

1. Provision of Services. Contractor agrees to provide Services, in accordance
with the terms and conditions of this Agreement, and as described on Exhibits A
and B hereto. Contractor shall furnish all labor, materials, equipment,
supervision and insurance needed to provide the Services. It is understood that
Contractor is an independent contractor in the performance of this Agreement and
not an employee of Macromedia. Nothing contained herein shall be construed to
imply an employment, joint venture or principal and agent relationship between
the parties, and neither party shall have any right, power or authority to
create any obligations, express or implied, on behalf of the other. Contractor
shall not be entitled to participate in any plans, benefits or distributions,
intended for Macromedia employees. Contractor agrees that Macromedia will make
no deductions from any compensation paid to Contractor for, and Contractor shall
have full and exclusive liability for, the payment of any taxes and/or
contributions for unemployment insurance, workers' compensation or any other
employment-related costs or obligations, related to the provision of the
Services.

2. Additional Services. Exhibits A and B may be modified, from time-to-time,
upon agreement of the parties. If Macromedia requests modified or additional
Services, Contractor shall provide Macromedia with an estimate of changes to the
compensation payable and impact upon milestone or completion dates, if any.
Contractor shall proceed with such modified or additional Services only upon
Macromedia's written approval.

3. Macromedia Representative. Macromedia Representative means Rob Burgess, or
such other person as Macromedia may subsequently designate. All instructions,
approvals submissions, notices, and any other communications or transactions
which must be made to or by Macromedia pursuant to this agreement must be made
through the Macromedia representative.

4. Term. Time is of the essence in the provision of Services under this
Agreement. Contractor shall commence provision of Services on October 1, 2001.
This Agreement shall terminate upon Contractor's completion of the Services in
accordance with Exhibit B.

5. Compensation Payable To Contractor And Invoices Therefor. In consideration
for the Services provided and rights assigned hereunder, Macromedia shall pay
Contractor as specified in Exhibits A and B. Contractor shall invoice Macromedia
in accordance with the schedule on Exhibit B. No compensation shall be paid for
Services, unless provided in accordance with Exhibits A and B, or otherwise
approved in advance in writing by Macromedia, and fully accepted by Macromedia.

6. Indemnity and Warranty. Contractor shall at all times comply with all
applicable laws, statutes, ordinances, rules, regulations and other governmental
requirements. Contractor shall indemnify and hold Macromedia harmless from any
and all claims, causes of action, losses, damage, liabilities, costs and
expenses, including attorney's fees, arising from the death of or injury to any
person, from damage to or destruction of property, or from breach of the
warranties in this paragraph, arising from the provision of Services by
Contractor, its agents or employees. Contractor warrants that the Services
provided by Contractor and/or work delivered to Macromedia, not provided by
Macromedia to Contractor, does not infringe upon or violate the rights or any
third party, and use of same by Macromedia will not violate or infringe the
rights of any person or party. Contractor warrants that all deliverables shall
be "Year 2000" and "Leap Year" compliant. For purposes of this Agreement, "Year
2000 compliant" means that all deliverables will record, maintain and process
accurate dates for all dates including and following January 1, 2000. "Leap Year
compliant" means that the deliverables will record, maintain, and process
accurate dates for all dates in a year during which an extra day is added in
February.

Independent Contractor Agreement
(1/27/00)



7.  Ownership Of Intellectual Property. Contractor agrees that all copyrightable
material, including writings, software, drawings, and designs, and all ideas,
inventions, improvements, developments and discoveries made, conceived or
reduced to practice by Contractor, whether individually or in collaboration with
others, during the course of performance under this Agreement, which relate in
any manner to Macromedia's business or to the Services, are the sole property of
Macromedia and Contractor agrees to assign (or cause to be assigned) to
Macromedia all right, title and interest in and to all such intellectual
property, including without limitation any worldwide copyright(s), moral rights,
patent(s) and any and all other such rights of whatever kind, and the right to
obtain registrations, renewals, reissues and extensions of the same. Contractor
agrees to execute such further documents and to do such further acts as may be
necessary to perfect the foregoing assignments and to protect Macromedia's
rights. In the event Contractor fails or refuses to execute such documents,
Contractor hereby appoints Macromedia as Contractor's attorney-in-fact (this
appointment to be irrevocable and a power coupled with an interest) to act on
Contractor's behalf and to execute such documents. Contractor further agrees
that Macromedia shall have the right to use, copy, publish, reproduce, alter, or
destroy the Intellectual Property and to take any other action consistent with
Macromedia's sole and exclusive ownership thereof, and Contractor waives any
right to interfere with or to prevent the exercise of the forgoing rights by
Macromedia in its sole and absolute discretion.

8.  Confidentiality. Contractor acknowledges and agrees (a) that all
Intellectual Property, and any other plans, specifications, designs and other
documents and materials created pursuant to this Agreement, or related to the
Services and any information, work in progress, trade secrets or other secret or
confidential matter related to the business or projects of Macromedia constitute
confidential information ("Confidential Information"), and (b) that Contractor
shall not use, copy or disclose to any person, firm or corporation any such
Confidential Information, unless such use, copying or disclosure is necessary to
accomplish Contractor's duties hereunder and has been authorized in writing by
Macromedia pursuant to the Independent Contractor Confidentiality Agreement
between Macromedia and Contractor (attached hereto as Exhibit C), and (c)
Contractor shall execute Macromedia's standard Independent Contractor
Confidentiality Agreement, a copy of which is attached hereto as Exhibit C, and
return same with an executed copy of this Agreement.

9.  Termination. (a) Macromedia reserves the right to terminate this Agreement
at any time and will endeavor to give Contractor up to ten (10) days notice of
termination, if practicable. Macromedia may terminate this Agreement
immediately, however, should Contractor fail to perform any of its obligations
hereunder. Contractor shall be compensated for all Services provided, prior to
termination. (b) Contractor's obligations pursuant to Paragraphs 6, 7, 8, 13
and 15 shall survive the termination or expiration of the Agreement, and said
paragraphs shall remain in full force and effect notwithstanding such
termination or expiration.

10. Assignment. Neither this Agreement nor any rights or duties hereunder may
be assigned or delegated to any other person or entity by Contractor without the
express written consent of Macromedia. Any such purported assignment or
subcontract shall be void.

11. Notices. Any and all notices or other communications required or permitted
by this Agreement or by law to be served on or given to either party by the
other party to this Agreement shall be in writing and shall be deemed duly
served, given, or delivered when personally delivered to the party to whom it is
addressed, or in lieu of such personal service, upon deposit in United States
mail, first-class postage prepaid, addressed to such party at the appropriate
address set forth below the signature block of this Agreement. Either party may
change its address for the purpose of this paragraph by giving written notice of
such change to the other party in the manner provided in this paragraph.

12. Entire Agreement. This agreement represents the entire agreement of the
parties hereto relating to the subject matter hereof, and any prior agreements,
promises, negotiations, or representations, whether oral or written, not
expressly set forth in this Agreement are of no force and effect. This agreement
may be modified only by a writing, signed by both parties.

Independent Contractor Agreement
(1/27/00)                              2



13. Advertising. Contractor shall acquire no right to use, and shall not use,
the names, characters, artwork, designs, tradenames, copyrighted materials,
trademarks or service marks of Macromedia, its related or subsidiary companies,
employees, directors, shareholders, assigns, successors or licensees: (a) in any
advertising, publicity or promotion; (b) to express or to imply any endorsement
of Contractor's services; or (c) in any manner other than in accordance with
this Agreement.

14. Waiver. All waivers hereunder must be made in writing, and failure at any
time to require the other party's performance of any obligation under this
Agreement shall not affect the right subsequently to require performance of the
obligation.

15. Governing Law. This Agreement shall take effect under and be governed by
the laws of the State of California.

16. Authority. The undersigned warrants and represents that the undersigned has
full power and authority to enter into this Agreement, to bind Contractor
hereto, and to grant the rights set forth herein.

17. Equal Opportunity. Macromedia is a federal government contractor subject to
Executive Order 11246 and its implementing regulations. Macromedia requires a
certification from Contractor, as a prospective subcontractor also subject to
the Order, that Contractor does not and will not maintain any facilities in a
segregated manner, or permit its employees to perform services at any location
under its control where segregated facilities are maintained. See 41 C.F.R.
section 60.1.8(b). Macromedia is an Equal Opportunity Employer and affords equal
employment opportunities to all qualified persons, regardless of race, religion,
creed, color, national origin, ancestry, physical or mental disability, medical
condition, marital status, sex, sexual orientation, family care status,
citizenship, age or veteran status. We hereby incorporate by reference the
provisions of 41 C.F.R. sections 60-1.4(a)(7), 60-250.4; and 60-741.4, binding,
where applicable, upon Macromedia subcontractors and vendors.

Macromedia, Inc.

By:   /s/ [ILLEGIBLE]
    ---------------------------------------

Title: SUP Human Resources
      -------------------------------------

Date:          10/1/01
      -------------------------------------


Contractor

By:   /s/ Alan Ramadan
   -----------------------------------------

Printed:  Alan Ramadan
        ------------------------------------

Title:______________________________________


Address: 151 Lark Lane
        ------------------------------------
        Mill Valley CA 94941

____________________________________________


Tel/fax:____________________________________

e-mail:_____________________________________


SS/Tax ID #: _______________________________

Independent Contractor Agreement
(1/27/00)                              3



                                   EXHIBIT A


                               SERVICES, DEFINED

Provide consulting services to Executives regarding Rich Media business.

Independent Contractor Agreement
(1/27/00)                              4



EXHIBIT B
- ---------

                     PROJECT MILESTONES AND PAYMENT SCHEDULE

$30,000 monthly rate based on a 5 day work week.

Independent Contractor Agreement
(1/27/00                              5



EXHIBIT C

                      UNILATERAL CONFIDENTIALITY AGREEMENT

This unilateral confidentiality agreement (the "Agreement") is made as of the
1/st/ day of October 2001 by and between Al Ramadan of Pogmohane Partners, LP
having a principal place of business or residing at ________________________
("Recipient"), and Macromedia having a principal place of business at 600
Townsend, San Francisco, CA 94103.

RECITALS

A.  Recipient and Macromedia are engaged in discussions in contemplation of a
business relationship or in furtherance of a business relationship.

B.  In the course of dealings between the Recipient and Macromedia, Recipient
will have access to or have disclosed to it information relating to Macromedia
which is of a confidential nature as that term is later defined in this
Agreement.

C.  Macromedia desires to establish and set forth Recipient's obligations with
respect to Macromedia's Confidential Information.

AGREEMENT

In consideration of the foregoing, Recipient and Macromedia mutually agree as
follows:

1.  "Confidential Information" as used in this Agreement shall mean all
technical and non-technical information including patent, copyright, trade
secret, and proprietary information, techniques, sketches, drawings, designs,
models, inventions, know-how, processes, apparatus, equipment, algorithms,
software programs, software source documents, and formulae related to current,
future and proposed products, and services of Macromedia, and includes, without
limitation its respective information concerning research, experimental work,
development, design details and specifications, engineering, financial
information, procurement requirements, purchasing, manufacturing, customer
lists, business forecasts, sales and merchandising, and marketing plans and
information.

2.  Recipient agrees that it shall not make use of, disseminate, or in any way
circulate within its own organization any Confidential Information of Macromedia
which is supplied to or obtained by it in writing, orally or by observation,
except to the extent necessary for negotiations, discussions, and consultations
with personnel or authorized representatives of Macromedia; and any purpose
Macromedia may hereafter authorize in writing.

3.  Recipient agrees that it shall disclose Confidential Information of
Macromedia only to those of its employees who need to know such information and
who have first agreed to be bound by the terms and conditions of this Agreement.

4.  Recipient agrees that it shall treat all Confidential Information of
Macromedia with the same degree of care as it accords to its own Confidential
Information of the same or similar nature, and Recipient represents that it
exercises reasonable care to protect its own Confidential Information.

5.  Recipient further agrees that it shall not publish, copy, or disclose any
Confidential Information of Macromedia to any third party and that it shall use
its best efforts to prevent inadvertent disclosure of such Confidential
Information to any third party.

6.  Recipients obligations under paragraph 3, 4, and 5 with respect to any
portion of Macromedia's Confidential Information shall terminate when Recipient
can document that:

         (a) it was in the public domain at the time it was communicated to
Recipient by Macromedia;

         (b) it entered the public domain subsequent to the time it was
communicated to Recipient by Macromedia through no fault of Recipient;

         (c) it was in the Recipient's possession free of any obligation of
confidence at the time it was communicated to Recipient by Macromedia;

Independent Contractor Agreement
(1/27/00)                             6



          (d)   it was rightfully communicated to Recipient free of any
obligation of confidence subsequent to the time it was communicated to
Recipient by Macromedia;

          (e)   it was developed by employees or agents of Recipient
independently of and without reference to any information communicated to
Recipient by Macromedia;

          (f)   it was communicated by Macromedia to an unaffiliated third party
free of any obligation of confidence; or

          (g)   the communication was in response to a valid order by a court or
other governmental body, was required otherwise required by law, or was
necessary to establish the rights of either party under this Agreement.

7.  All materials (including, without limitation, documents, drawings, models,
apparatus, sketches, designs and lists) furnished to Recipient by Macromedia,
and which are designated in writing to be the property of Macromedia, shall
remain the property of Macromedia and shall be returned to it promptly at its
request, together with any copies thereof.

8.  Recipient shall not communicate any information to Macromedia in violation
of the proprietary rights of any third party.

9.  Recipient will not export, directly or indirectly, any technical data
acquired from Macromedia pursuant to this Agreement or any product utilizing any
such data to any country for which the U .S. government or any agency thereof at
the time of export requires an export license or other government approval
without first obtaining such license or approval.

10. Since the unauthorized disclosure of Confidential Information will diminish
the value to Macromedia of the proprietary interests that are the subject of
this Agreement, if Recipient breaches any of its obligations hereunder,
Macromedia shall be entitled to seek equitable relief to protect its interests
therein, including but not limited to injunctive relief, as well as money
damages.

11. This Agreement shall govern all communication between the parties that are
made during the period from the effective date of this Agreement to the date on
which either party receives from the other written notice that subsequent
communications shall not be so governed, provided, however, that Recipients
obligations under Paragraphs 2, 3, 4 and 5 with respect to Confidential
Information of Macromedia which it has previously received shall continue in
perpetuity unless terminated pursuant to Paragraph 6.

12. This Agreement shall be construed in accordance with the Laws of the State
of California, without giving effect to principles of conflict of laws.

13. This Agreement is the complete and exclusive statement of the agreement
between the parties, supersedes all prior written and oral communications and
agreements relating to the subject matter hereof.

]4. Any notice required to be given under this Agreement shall be deemed
received upon personal delivery or three (3) days after mailing if sent by
registered or certified mail to the addresses of the parties set forth below, or
to such other address as either of the parties shall have furnished to the other
in writing.

15. In the event of invalidity of any provision of this Agreement, the parties
agree that such invalidity shall not affect the validity of the remaining
portions of this Agreement, and further agree to substitute for the invalid
provision which most closely approximates the intent and economic effect of the
invalid provisions.

Independent Contractor Agreement
(1/27/00)                              7



IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.

MACROMEDIA, INC.                       RECIPIENT:

By: /s/ [ILLEGIBLE]                         By: /s/ Alan Ramadan
   ------------------------------              ------------------------------

Title: SUP Human Resources                  Title:___________________________

600 Townsend                                151 Lark Lane
- ---------------------------------           ---------------------------------
(Address)                                   (Address)

                                            Mill Valley CA 94941
_________________________________           ---------------------------------

Independent Contractor Agreement
(1/27/00)                              8

EX-10.21

                                                                   EXHIBIT 10.21

                              CONSULTING AGREEMENT

This Agreement is made as of February 1, 1998, (the "Effective Date") by and
between Macromedia, a corporation ("the Company"), and J. (Ian) Giffen
("Consultant").

                                     RECITAL

Consultant desires to perform, and the Company desires to have Consultant
perform, consulting services as an independent Consultant to the Company.

NOW, THEREFORE, the parties agree as follows:

1.   Services.

     (a) Request. From time to time during the Consultancy Period (as defined
     below), as required by the Company, Consultant will provide the following
     services to the Company: advise the Company's Chief Financial Officer,
     Senior Finance staff, and Investment Relations staff; provide assistance in
     specific areas, such as review of internal operations, tax planning
     strategy, class action coordination, accounting and financial policy
     development, tactical annual plan and budget process, and acquisition
     analysis; actively implement audit committee terms of reference as Chair of
     the Audit Committee; and provide advice to the Company in other areas and
     perform other special projects (hereafter collectively referred to as the
     "Services"). As part of the performance of the Services, Consultant agrees,
     during the Consultancy Period, to spend approximately three days per month
     on site at the Company in San Francisco, attend (in person or by telephone)
     all Company board and audit committee meetings, participate in weekly
     conference calls with the Company's Chief Financial Officer and finance
     staff, and participate in other conference calls on other areas as
     required by the Company.

     (b) Performance. Consultant agrees to use his best efforts to perform the
     Services during the Consultancy Period. Consultant and the Company
     anticipate that performance of the Services will occupy approximately 30%
     of Consultant's available working hours during the Consultancy Period.

     (c) Consultancy Period. The initial "Consultancy Period" will commence on
     the Effective Date for a period of 3 years and will subsequently be subject
     to annual renewal based on agreed upon terms by Consultant and Company,
     unless terminated earlier pursuant to paragraph 6 below.

                                       1



     (d) Payment. The Company will pay Consultant a monthly consulting fee of
     Eight Thousand Three Hundred Thirty Four U.S. dollars ($8,334.00 U.S.~ on
     the first day of each month during the Consultancy Period. This is the only
     compensation the Company will pay for the Services, other than the stock
     option and benefits as set forth in Paragraphs 2(c) and 2(d), below. The
     Company will reimburse Consultant for travel costs to and from San
     Francisco incurred by Consultant in his performance of the Services. The
     Company will also reimburse Consultant for the reasonable costs involved in
     setting up and maintaining his remote office, including office lease costs,
     computer, fax, and telephone service. Any equipment purchased by the
     Company for this purpose will remain Company property and must be returned
     upon termination of the Consultancy Period. Any other expenses Consultant
     incurs in performing the Services are Consultant's responsibility. The
     Company will not pay Consultant a royalty or other remuneration on the
     production or distribution of any products either it or Consultant develops
     in connection with or based upon the Services ("Products").

2.   Relationship of Parties.

     (a) Independent Contractor. Consultant is an independent contractor and is
     not an agent or employee of, and has no authority to bind the Company, by
     contract or otherwise. Consultant will perform the Services under the
     Company's general direction, but will determine, in his sole discretion,
     the manner and means by which he will accomplish the Services, subject to
     the requirement that Consultant shall at all times comply with applicable
     law. The Company has no right or authority to control the manner or means
     by which the Services are accomplished.

     (b) Employment Taxes and Benefits. Consultant will report as income all
     compensation he receives pursuant to this Agreement. Consultant agrees that
     Macromedia will make no deductions from any compensation paid to Consultant
     for, and Consultant shall have full and exclusive liability for, the
     payment of any taxes and/or contributions for unemployment insurance,
     workers' compensation or any other employment-related costs or obligations,
     related to the provision of the Services.

                                       2



     (c) Benefits. Consultant understands he is only entitled to participate in
     the Company's Canadian health benefits plan (to the extent of medical,
     dental, vision, life, and long-term disability insurance) and the stock
     option benefits as set forth in paragraph 2(d), below, and in his Stock
     Option Agreement dated February 5, 1998. Consultant understands he is not
     entitled to and will not participate in any other Company plans,
     arrangements, or distributions pertaining to bonus, profit sharing,
     insurance or similar company employee benefits. Consultant hereby knowingly
     and voluntarily waives his right to participate in these other benefits,
     should a federal or state government agency later re-classify him a Company
     employee.

     (d) Stock Option. Upon a Change of Control (as defined below) of the
     Company that occurs while you are providing services as a Consultant of the
     Company, the option for 75,000 shares described in your Stock Option
     Agreement dated February 5, 1998, shall immediately become exercisable and
     vest with respect to all 75,000 shares (whether or not you provide services
     to the Company after the Change of Control) .The option as so accelerated
     shall remain exercisable in accordance with the terms of your February 5,
     1998 Stock Option Agreement with the Company.

     A "Change of Control" shall be deemed to occur upon:

     (I)  the sale, lease, conveyance or other disposition of all or
          substantially all of the Company's assets as an entirety or
          substantially as an entirety to any person, entity or group of persons
          acting in concert,

     (II) any transaction or series of transactions (as a result of a tender
          offer, merger, consolidation or otherwise) that results in, or that is
          in connection with, any person, entity or group acting in concert,
          becoming the "beneficial owner" (as defined in Rule 13d-3 under the
          Securities Exchange Act of 1934), directly or indirectly, of more than
          50% percent of the aggregate voting power of all classes of common
          equity stock of the Company, or

     (III) a liquidation and winding up of the business of the Company.

                                       3



3.   Company Property.

     (a) Definition. For the purposes of this Agreement, "Designs and Materials"
     means all designs, discoveries, inventions, products, computer programs,
     procedures, improvements, developments, drawings, notes, documents,
     information and materials made, conceived or developed by Consultant alone
     or with others which result from or relate to the Services.

     (b) Assignment of Ownership. Consultant hereby irrevocably transfers and
     assigns any and all of his right, title, and interest in and to Designs and
     Materials, including but not limited to all copyrights, patent rights,
     trade secrets and trademarks, to the Company. Designs and Materials will be
     the sole property of the Company and the Company will have the sole right
     to determine the treatment of any Designs and Materials, including the
     right to keep them as trade secrets, to file and execute patent
     applications on them, to use and disclose them without prior patent
     application, to file registrations for copyright or trademark on them in
     his own name, or to follow any other procedure that the Company deems
     appropriate. Consultant agrees: (a) to disclose promptly in writing to the
     Company all Designs and Materials; (b) to cooperate with and assist the
     Company to apply for, and to execute any applications and/or assignments
     reasonably necessary to obtain any patent, copyright, trademark or other
     statutory protection for Designs and Materials in the Company's name as the
     Company deems appropriate; and (c) to otherwise treat all Designs and
     Materials as "Confidential Information," as defined below. These
     obligations to disclose, assist, execute and keep confidential will survive
     any expiration or termination of this Agreement.

     (c) Moral Rights Waiver. "Moral Rights" means any right to claim authorship
     of a work, any right to object to any distortion or other modification of a
     work, and any similar right, existing under the law of any country in the
     world, or under any treaty. Consultant hereby irrevocably transfers and
     assigns to the Company any and all Moral Rights that Consultant may have in
     any Services, Designs and Materials or Products. Consultant also hereby
     forever waives and agrees never to assert against the Company, its
     successors or licensees any and all Moral Rights Consultant may have in any
     Services, Designs and Materials or Products, even after expiration or
     termination of the Consultancy Period.

                                       4



4.   Confidential Information.

     Consultant acknowledges that he will acquire information and materials from
     the Company and knowledge about the business, products, programming
     techniques, experimental work, customers, clients and suppliers of the
     Company and that all such knowledge, information and materials acquired,
     the existence, terms and conditions of this Agreement, and the Designs and
     Materials, are and will be the trade secrets and confidential and
     proprietary information of the Company ( collectively "Confidential
     Information"). Confidential Information will not include, however, any
     information which is or becomes part of the public domain through no fault
     of Consultant or that the Company regularly gives to third parties without
     restriction on use or disclosure. Consultant agrees to hold all such
     Confidential Information in strict confidence and not to disclose it to
     others or use it in any way, commercially or otherwise, except in
     performing the Services, and not to allow any unauthorized person access to
     it, either before or after expiration or termination of this Agreement.
     Consultant further agrees to take all action reasonably necessary and
     satisfactory to protect the confidentiality of the Confidential Information
     including, without limitation, implementing and enforcing operating
     procedures to minimize the possibility of unauthorized use or copying of
     the Confidential Information.

5.   Indemnity and Warranty

     (a) Consultant shall at all times comply with all applicable laws,
     statutes, ordinances, rules, regulations and other governmental
     requirements. Consultant shall indemnify and hold Macromedia harmless from
     any and all claims, causes of action, losses, damage, liabilities, costs
     and expenses, including attorney's fees, arising from the death of or
     injury to any person, from damage to or destruction of property, or from
     breach of the warranties in this paragraph, arising from the provision of
     Services by Consultant, its agents or employees. Consultant warrants that
     the Services provided by Consultant and/or work delivered to Macromedia,
     not provided by Macromedia to Consultant, does not infringe upon or violate
     the rights or any third party I and use of same by Macromedia will not
     violate or infringe the rights of any person or party.

                                       5



     (b) In addition, the Company is an equal opportunity employer and does not
     unlawfully discriminate on the basis of race, color, religion, sex,
     national origin, age, physical or mental disability, family care status,
     veteran status, or any other basis proscribed by federal, state, or local
     law. It also prohibits the harassment of any individual on any of the bases
     listed above. It requires, and Consultant acknowledges and agrees, that
     Consultant also comply with all federal, state, and local laws that
     prohibit unlawful discrimination or harassment. Consultant will indemnify
     and hold the Company harmless from any losses or expenses, including
     attorneys' fees, that result from or relate to claims that Consultant
     failed to comply in any respect with non-discrimination or harassment laws.

     (c) Consultant acknowledges and agrees that he shall bear the sole
     obligation to report as income all compensation received by him under this
     Agreement. Consultant will indemnify the Company and hold it harmless to
     the extent of any obligations, including penalties imposed by law, for
     overtime compensation, withholding taxes, social security, unemployment or
     disability insurance or similar items in connection with any payments made
     to Consultant for the services provided hereunder.

6.   Termination and Expiration.

     (a) Termination. The Company may not terminate this agreement prior to the
     end of the first 2 years of the initial Consultancy Period except for just
     cause. The Consultant may terminate this agreement during the first 2 years
     of the initial Consultancy Period with 6 months prior written notice.
     Either party may terminate this agreement within the 3rd year of the
     Consultancy Period upon 90 days prior written notice.

     (b) Automatic. This Agreement terminates automatically, with no further
     action of either party, if Consultant is adjudicated bankrupt, files a
     voluntary petition of bankruptcy, makes a general assignment for the
     benefit of creditors, or is unable to meet his obligations in the normal
     course of business.

     (c) Expiration. Unless terminated earlier, this Agreement will expire at
     the end of the Consultancy Period.

                                       6



     (d) Election of Remedies. The Company's election to terminate this
     Agreement in accordance with its terms will not be deemed an election of
     remedies, and all other remedies provided by this Agreement or available at
     law or in equity shall survive any termination.

7.   Effect of Expiration or Termination.

     Upon the expiration or termination of this Agreement for any reason:

     (a) each party will be released from all obligations to the other arising
     after the date of expiration or termination, except that expiration or
     termination of this Agreement will not relieve Consultant of his
     obligations under Sections 2(b), 3,4, 5, 8, 9(b) and 10, nor will
     expiration or termination relieve Consultant or the Company from any
     liability arising from any breach of this Agreement; and

     (b) Consultant will promptly notify the Company of all Company property and
     Confidential Information, including but not limited to the Designs and
     Materials, in Consultants possession and, at the expense of and in
     accordance with the Company's instructions, will promptly deliver to the
     Company all such Company property and Confidential Information.

8.   Limitation of Liability.

     IN NO EVENT SHALL COMPANY BE LIABLE FOR ANY SPECIAL, INCIDENTAL, INDIRECT
     OR CONSEQUENTIAL DAMAGES OF ANY KIND IN CONNECTION WITH THIS AGREEMENT,
     EVEN IF COMPANY HAS BEEN INFORMED IN ADVANCE OF THE POSSIBILITY OF SUCH
     DAMAGES.

9.   Covenants.

     (a) Pre-existing Obligations. Consultant represents and warrants that
     Consultant is not under any pre-existing obligation inconsistent with the
     provisions of this Agreement.

                                       7



     (b) Solicitation of Employment. Because of the trade secret subject matter
     of the Company's business, Consultant agrees that he will not (i) induce
     any employee of the Company to leave the employ of the Company or (ii)
     solicit the business of any client or customer of the Company (other than
     on behalf of the Company) for the Consultancy Period and for twelve ( 12)
     months thereafter.

10.  General.

     (a) Assignment. Consultant may not assign his rights or delegate
     Consultant's duties under this Agreement either in whole or in part without
     the prior written consent of the Company. Any attempted assignment or
     delegation without such consent will be void.

     (b) Equitable Remedies. Because the Services are personal and unique and
     because Consultant will have access to the Company's Confidential
     Information, the Company may enforce this Agreement and any of its
     provisions by injunction, specific performance or other equitable relief
     without prejudice to any other rights and remedies that the Company may
     have for a breach of this Agreement.

     (c) Attorneys' Fees. If any action is necessary to enforce the terms of
     this Agreement, the substantially prevailing party will be entitled to
     reasonable attorneys' fees, costs and expenses in addition to any other
     relief to which such prevailing party may be entitled.

     (d) Governing Law; Severability. This Agreement will be governed by and
     construed in accordance with the laws of the State of California excluding
     that body of law pertaining to conflict of laws. If any provision of this
     Agreement is for any reason found to be unenforceable, the remainder of
     this Agreement will continue in full force and effect.

     (e) Notices. Any notices under this Agreement will be sent by certified or
     registered mail, return receipt requested, to the address specified below
     or such other address as the party specifies in writing. Such notice will
     be effective upon its mailing as specified.

                                       8



     (f) Complete Understanding: Modification. This Agreement, along with
     Consultant's Stock Option Agreement dated February __, 1998, constitutes
     the complete and exclusive understanding and agreement of the parties and
     supersedes all prior understandings and agreements, whether written or
     oral, with respect to the subject matter hereof. Any waiver, modification
     or amendment of any provision of this Agreement will be effective only if
     in writing and signed by the parties hereto.

IN WITNESS WHEREOF, the parties have signed this Agreement as of the Effective
Date.

Macromedia:                                   J. (Ian) Giffen:

By:                                           By:
   ------------------------------                -------------------------------

Address: 600 Townsend                         Address:
         San Francisco, CA 94103



                                       9

EX-10.22

                                                                   EXHIBIT 10.22


                               AMENDMENT NO. 1 TO
                              CONSULTING AGREEMENT

     This Amendment No. 1 to Consulting Agreement (this "Amendment") by and
between John (Ian) Giffen ("Consultant") and Macromedia, Inc., a Delaware
corporation ("Macromedia"), with regard to that certain Consulting Agreement,
dated as of February 1, 1998, between Consultant and Macromedia (the
"Agreement"), shall be effective as of March 31, 2000 (the "Effective Date").

                                    RECITALS

     WHEREAS, Macromedia and Consultant entered into the Agreement pursuant to
which Consultant has provided certain consulting services to Macromedia; and

     WHEREAS, Macromedia and Consultant desire to amend the Agreement as set
forth herein;

     NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements, provisions and covenants contained in the Agreement, the parties
hereby agree, pursuant to Section 10(f) of the Agreement, as follows:

     Section 1. Amendment to the Agreement. As of the Effective Date, the
Agreement is amended as set forth in this Section 1.

          1.1. Section 1(a): Section 1(a) of the Agreement is amended by
     deleting in its entirety the phrase "spend approximately three days per
     month on site at the Company in San Francisco, attend (in person or by
     telephone) all Company board and audit committee meetings," in the second
     sentence thereof.

          1.2 Section 1(b): Section 1(b) of the Agreement is amended by deleting
     in its entirety the phrase "occupy approximately 30% of Consultant's
     available working hours during the Consultancy Period" in the second
     sentence thereof and replacing it with the phrase "require Consultant to
     spend approximately three days per month".

          1.3 Section 1(c): Section 1(c) of the Agreement is amended by deleting
     in its entirety the phrase "3 years" in the first sentence thereof and
     replacing it with the phrase "6 years".

          1.4 Section 1(d): Section 1(d) of the Agreement is amended by deleting
     in its entirety the phrase "during the Consultancy Period" in the first
     sentence thereof and replacing it with the phrase "from the Effective Date
     until March 31, 2000, and Four Thousand One Hundred Sixty Seven U.S.
     dollars ($4,167.00 U.S.) on the first day of each month from April 1, 2000
     until the end of the Consultancy Period"




     Section 2. No Effect on Remaining  Provisions.  Except as amended by this
Amendment,  the provisions of the Agreement  remain in full force and effect.

     Section 3. Miscellaneous Provisions.

          3.1 This Amendment may be executed in one or more counterparts each of
which shall be deemed an original instrument, but all of which together shall
constitute but one and the same Amendment.

          3.2 This Amendment shall be governed by, and construed in accordance
with, the laws of the State of California without reference to its choice of law
rules.




     IN WITNESS WHEREOF, the parties hereto have duly executed and delivered
this Amendment as of the Effective Date.

                                JOHN (IAN) GIFFEN



                                (signature)
                                --------------------------------------------

                                Name
                                --------------------------------------------

                                Title
                                --------------------------------------------




                                MACROMEDIA, INC.



                                By (signature)
                                --------------------------------------------

                                Name
                                --------------------------------------------

                                Title
                                --------------------------------------------


           [Signature page to Amendment No. 1 to Consulting Agreement]

EX-21.01

EXHIBIT 21.01

LIST OF REGISTRANT’S SUBSIDIARIES

Legal Entity (Percentage Owned By Macromedia, Inc.)	Country of Organization
Macromedia Ireland (PTY) Ltd.	Ireland
(100%)
Allaire Corporation	United States
(100%)
Macromedia Canada Ltd.	Canada
(100%)
AtomShockwave Corp.	United States
(40%)

Legal Entity (Percentage Owned By Macromedia Ireland Ltd.)
Macromedia Netherlands B.V.	Netherlands
(100%)
Macromedia Europe Limited	United Kingdom
(100%)
Macromedia KK	Japan
(100%)

EX-23.01

EXHIBIT 23.01

CONSENT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Macromedia, Inc.

We consent to incorporation by reference in the registration statements (Nos. 333-67960, 333-77040, 333-57708, 333-44016, 333-92233, 333-89247, 333-64141, 333-39285, 333-24713, and 333-08435) on Form S-8 of Macromedia, Inc. and subsidiaries of our report dated April 19, 2002, except as to Note 21 which is as of May 10, 2002, relating to the consolidated balance sheets of Macromedia, Inc. and subsidiaries as of March 31, 2002 and 2001, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2002, and the related financial statement schedule, which report appears in the March 31, 2002, annual report on Form 10-K of Macromedia, Inc.

/s/    KPMG LLP

Mountain View

June 6, 2002