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                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
 
                               ----------------
                                   FORM 10-K
 
[X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
 
                                      OR
 
[_]        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                        SECURITIES EXCHANGE ACT OF 1934
 
                        COMMISSION FILE NUMBER 0-26772
 
                               VISIO CORPORATION
            (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
             WASHINGTON                                91-1448389
   (STATE OR OTHER JURISDICTION OF                  (I.R.S. EMPLOYER
   INCORPORATION OR ORGANIZATION)                  IDENTIFICATION NO.)
 
          520 PIKE STREET, SUITE 1800, SEATTLE, WASHINGTON 98101-4001
             (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)   (ZIP CODE)
 
                                (206) 521-4500
             (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                     NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $0.01 PAR VALUE
                               (TITLE OF CLASS)
 
  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 registrant's knowledge, in definitive proxy of information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
 
  The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sales price of the Common Stock on November
30, 1998 as reported on the Nasdaq National Market, was approximately
$785,380,610. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.
 
  As of November 30, 1998, there were 30,313,816 shares outstanding of the
registrant's Common Stock.
 
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                      DOCUMENTS INCORPORATED BY REFERENCE
 
1. Portions of the registrant's definitive Proxy Statement for the 1999 Annual
   Meeting of Shareholders to be held on February 24, 1999 are incorporated by
   reference in Part III of this Form 10-K.
 
 
 
Visio, SmartShapes, IntelliCAD, Visio Solutions Library, AutoDiscovery,
Drawing Explorer and ArchT are either registered trademarks or trademarks of
Visio Corporation in the United States and/or other countries. All other
trademarks, trade names or company names referenced herein are used for
identification only and are the property of their respective owners.
 
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                               VISIO CORPORATION
 
                                   FORM 10-K
 
                 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998*
 
                               TABLE OF CONTENTS
 
                                    PART I
 
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                                                                           PAGE
                                                                           ----
<S>                                                                        <C>
Item 1.Business..........................................................    4
Item 2.Properties........................................................   12
Item 3.Legal Proceedings.................................................   12
Item 4.Submission of Matters to a Vote of Security Holders...............   12
 
                                    PART II
 
Item 5. Market for the Registrant's Common Equity and Related Shareholder
        Matters..........................................................   13
Item 6. Selected Financial Data..........................................   13
Item 7. Management's Discussion and Analysis of Financial Condition and
        Results of  Operations...........................................   14
Item 7A.Quantitative and Qualitative Disclosures about Market Risk.......   28
Item 8. Financial Statements and Supplementary Data......................   29
Item 9. Changes in and Disagreements with Accountants on Accounting and
        Financial Disclosure.............................................   50
 
                                   PART III
 
Item 10. Directors and Executive Officers of the Registrant..............   50
Item 11. Executive Compensation..........................................   50
Item 12. Security Ownership of Certain Beneficial Owners and Management..   50
Item 13. Certain Relationships and Related Transactions..................   50
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 
         8-K.............................................................   51
Signatures...............................................................   54
</TABLE>
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* Visio Corporation's fiscal year is the 52/53-week period that ends on the
  Friday nearest September 30. For convenience of presentation, all fiscal
  periods in this Form 10-K are treated as ending on a calendar month end.
 
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<PAGE>
 
                                    PART I
 
ITEM 1. BUSINESS
 
FORWARD LOOKING STATEMENTS
 
  Except for the historical information contained in this Annual Report on
Form 10K, the matters discussed herein, particularly those identified with the
words "expects," "believes," "anticipates" and similar expressions, are
forward-looking statements. These statements reflect management's best
judgment based on factors known to them at the time of such statements. Such
forward-looking statements are subject to certain risks and uncertainties,
including without limitation those set forth under "Certain Risk Factors That
May Impact Future Results of Operations" contained in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Annual Report on Form 10-K, which risks and uncertainties could cause
actual results to differ materially from those anticipated. Such factors, many
of which are beyond the Company's control, should be carefully considered when
evaluating the Company's business and prospects and the forward-looking
information provided by Visio pursuant to the safe harbor provisions
established by recent securities legislation. Readers should also carefully
review the risk factors described in other documents the Company files from
time to time with the Securities and Exchange Commission.
 
GENERAL
 
  Visio Corporation ("Visio" or the "Company") is a leading supplier of
business drawing and diagramming software. Visio(R) software, introduced in
1992, enables business and technical users to create drawings and diagrams
using a "drag and drop" approach. Customers use the Company's software for
creating drawings and diagrams ranging from simple diagrams such as
flowcharts, block diagrams and organizational charts to complex technical
drawings such as space plans, electrical schematics and network designs.
Visio's flexible product architecture and powerful graphics engine allow
organizations to standardize on a single, easy-to-use drawing technology that
meets a broad range of business drawing and diagramming needs, and thereby
realize savings on purchasing, training and support. The Company's mission is
to become the single standard for creating, storing and exchanging drawings in
business.
 
BACKGROUND
 
  Drawing and diagramming--the visual representation of concepts, processes
and relationships--can be as important to businesses as words and numbers for
communicating and exchanging ideas. Drawings and diagrams can succinctly
communicate abstract concepts and relationships such as organizational
structures and technical schematics. Business drawings and diagrams,
traditionally done by hand using rulers, templates and graph paper, or
delegated to specialists such as graphic artists or drafters, are increasingly
created using software products. Just as the advent of personal computers made
electronic word processing and spreadsheet preparation possible for the
general user, the widespread acceptance of easy-to-use graphical user
interfaces has created a similar opportunity for personal computer software to
replace traditional paper-based drawing and diagramming for general business
users.
 
  Most existing drawing and diagramming software was introduced for narrowly
defined drawing needs, for specialists or as secondary features of office
suite products. For example, single-purpose products were created for specific
tasks such as flowcharting, organizational charting or network diagramming.
Users were confronted with a variety of products, each with a different user
interface, and the drawings and diagrams they produced were often difficult to
integrate into word-processed documents, spreadsheets or presentation
materials. Illustration, page layout and computer aided design ("CAD")
software has also been created for graphics artists, designers and drafters.
These specialty products generally do not address the needs of nonspecialists
who wish to create, share or modify drawings and diagrams. These products are
also generally expensive, may require special system configurations, usually
require a substantial investment of time to master and must be used regularly
for the investment to be justified and the mastery maintained. Although the
drawing capabilities of office suite products were developed for general
business users, the Company believes that to date they have
 
                                       4
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lacked the depth and breadth of functionality necessary to enable users to
easily create a variety of business drawings and diagrams. The result has been
a market highly focused on specific users and fragmented among many
applications.
 
THE VISIO SOLUTION
 
  To address the limitations of existing drawing and diagramming software, the
Company introduced its first product, "Visio" (currently renamed "Visio
Standard"), in November 1992. Currently, four of the Company's five core
products, Visio Standard, Visio Technical, Visio Professional and Visio
Enterprise, offer users solutions based on a single, easy-to-use technology
for a wide variety of drawing and diagramming needs.
 
  These four core products are based on a common graphics "engine" that drives
parametrically defined SmartShapes(R) symbols, intelligent objects and
connectors that maintain relationships within and between shapes as they are
moved. Visio's SmartShapes objects, its stencil metaphor and its drag-and-drop
features allow users with no prior graphics or CAD training to select shapes
easily, combine them with text and manipulate them to create sophisticated
drawings and diagrams. The Company's fifth core product, IntelliCAD(R),
utilizes a distinct graphics engine and employs DWG as its native file format.
 
  The Visio graphics engine employs Microsoft Windows and ActiveX technology
to embed Visio drawings and diagrams into other documents, link documents and
incorporate information from other sources into Visio drawings and diagrams.
Visio utilizes an open architecture that is easily extensible and customizable
in order to facilitate and encourage the development of specific solutions by
both end users and third-party solution providers and to enable the Company to
expand its products to address new markets.
 
  The Company believes that its software is expanding the market for drawing
and diagramming software. Visio replaces hand-drawing and single-use products
and moves drawing and diagramming out of the specialist art and drafting
departments and onto the desktops of general users throughout business
enterprises. Due to the single architecture of all the Visio named and branded
products, users can share files created with any of the products, and users
trained in one product can easily move to another. Most importantly, Visio
software enables organizations to realize purchasing, training and support
savings by standardizing on a common technology that addresses a wide variety
of drawing and diagramming needs.
 
VISIO'S STRATEGY
 
  Visio's mission is to become the single standard for creating, storing and
exchanging drawings and diagrams in business. By becoming the standard, the
Company believes it can introduce new users to electronic drawing and
diagramming and thereby expand the market for its products. The Company's
strategy to achieve this objective includes the following elements:
 
  .   Focus on Business Users. The Company has focused on personal computer-
     based drawing and diagramming for business enterprises such as large
     corporations, consulting firms and governmental entities. The Company
     targets enterprises that create durable drawings, share those drawings
     in electronic form across organizational functions and departments and
     create custom solutions for specific drawing needs. The Company believes
     these enterprises are more likely to standardize on a single product and
     provide the best opportunity for the Company to embed its products
     broadly within an organization. The Company offers these entities a
     variety of volume licensing arrangements that encourage wide use of, and
     standardization on, its products.
 
  .   Maintain Leading Technology and Extend Product Line. The Company's
     strategy is to maintain and improve the flexibility and extensibility of
     its graphics engine and increase the ease-of-use and functionality of
     its products. The Company will continue to expand its product lines to
     address market segments where the value of drawings is high and is
     exploring complementary products. In March 1998, the Company released
     IntelliCAD, the Company's Autodesk AutoCAD-compatible software
 
                                       5
<PAGE>
 
     product. Also, in November 1998, the Company released Visio Enterprise,
     an integrated, multifunction software tool designed for IT professionals
     who develop, manage and maintain enterprise information systems. The
     Company currently expects to begin introducing the next major upgrades
     of its core products in the second half of calendar year 1999.
 
  .  Expand Use of Visio as a Development Platform. Taking advantage of the
     open architecture, powerful shape technology, and ease of customization
     of its products, the Company markets to solution providers, system
     integrators, customer in-house developers, and other third-party
     software developers who can create custom content and applications for
     specific business use. In particular, the Company seeks to develop
     business relationships with third parties who have expertise in specific
     industries and application markets and who can provide solutions and
     services that complement Visio's products. The Company also seeks to
     promote the use of its products in business-integrated solutions within
     specific customer accounts and within specific industries. To accomplish
     these goals, the Company has built a development platform infrastructure
     including a developer training program, developer support, a development
     website (whitepapers, documentation, samples, forum), a development
     seminar series, a consulting partner network and consulting services,
     all of which offer knowledge and assistance for organizations and
     individuals who wish to develop business relationships with Visio and
     more effectively utilize Visio's products.
 
  .  Focus on Microsoft Windows. The Company develops products for the
     Microsoft Windows environment and has historically worked closely with
     Microsoft to more fully utilize the capabilities of Windows technology.
     The Company intends to continue to work closely with Microsoft to gain
     access to new Windows technology and to maintain its position as a key
     developer of products for Windows.
 
  .  Expand International Markets. The Company distributes the Visio product
     line in 12 languages and in more than 45 countries around the world.
     International revenues represented approximately 35% and 41% of the
     Company's revenues in fiscal 1997 and 1998, respectively. The Company
     plans to continue to expand the number of its products distributed in
     international markets as well as its sales and marketing offices and
     distribution networks within those markets.
 
PRODUCTS AND PRODUCT GROUPS
 
  The Company currently sells five core software products, together with add-
on software products. Four of the Company's core products (Visio Standard,
Visio Technical, Visio Professional and Visio Enterprise) offer solutions to a
wide variety of drawing and diagramming needs based on a single, easy-to-use
technology. The Company designs its Visio product features to be intuitive,
enabling even occasional users to draw and diagram efficiently. The Company's
products integrate well with other desktop applications and can be easily
customized to meet individual needs.
 
  Many business drawings and diagrams are composed almost entirely of standard
symbols. Accordingly, the Company's Visio products utilize a visual "stencil"
metaphor. This metaphor is implemented through a stencil window that displays
a collection of standard shapes, including connectors, on a visually
distinctive background. The user incorporates these standard shapes into a
drawing by dragging the shapes from the stencil window and dropping them into
the drawing window. In addition, users can customize the behavior of shapes
and create their own shapes. All Visio shapes can have associated text, which
moves when the shape is moved. The Company's software allows users to
associate nongraphical data with shapes, enabling users to easily generate
nongraphical information, such as parts lists and bills of material, from
Visio drawings and diagrams.
 
 
                                       6
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  The Company's fifth core software product, IntelliCAD, utilizes a distinct
graphics engine and employs DWG as its native file format. This allows
IntelliCAD to support the vast number of legacy drawings created by CAD
operators over the years with Autodesk AutoCAD.
 
  The Company classifies its core products, together with the related add-ons,
into three product groups: the Business Diagramming product group, the
Technical Drawing product group and the IT Design and Documentation product
group.
 
BUSINESS DIAGRAMMING
 
  Visio's Business Diagramming product group focuses on developing and
commercializing tools that help business professionals manage people,
processes and projects and communicate business information more effectively
through graphics. This product group includes the Company's first core
product, Visio Standard.
 
 Visio Standard
 
  Visio Standard, which was first shipped in November 1992, enables general
business personal computer users to create a wide variety of diagrams. Many of
Visio Standard's features are designed to optimize its ease of use. Visio
Standard also includes wizards for organization charts, timelines and page
layouts that automatically generate diagrams based on the data the user
provides and the user's formatting preferences. In addition to enabling users
to easily create diagrams, Visio Standard also includes features to enhance
the information content of diagrams. Visio Standard users can link diagrams to
databases and associate nongraphical data with shapes within a diagram. Some
of the diagrams that can be created with Visio Standard include:
 
      Flowcharts                          Organization Charts
      Timelines                           Block Diagrams
      Geographic Maps                     Marketing Charts
 
  The Company released its most current major version, Visio Standard 5.0, in
August 1997 and, since that date, has released enhancements to Visio Standard
5.0 that provide additional functionality and content. Visio Standard 5.0 is
the foundation of the 5.0 product family. Visio Standard 5.0 has an estimated
street price (average purchase price paid by end users) of $149. The Company
currently expects to introduce its next major upgrade of Visio Standard by the
end of fiscal 1999.
 
TECHNICAL DRAWING
 
  The Technical Drawing product group focuses on providing tools for
engineers, engineering salespeople, architects, designers and others who
either produce or utilize technical diagrams and drawings as part of their
work. This product group includes Visio Technical and IntelliCAD.
 
 Visio Technical
 
  Visio Technical is designed for technical professionals such as engineers,
architects and others who produce or work with technical diagrams and space
plans. It offers all the features, content and capabilities of Visio Standard,
plus shapes and capabilities necessary to create professional-quality
technical drawings. Visio Technical enables users to efficiently create two-
dimensional drawings and technical schematics without the long learning curve
normally associated with CAD software. Visio Technical users can easily share
technical drawings with other Windows applications and can create intelligent
drawings by linking them to databases. Visio Technical includes more than
3,800 industry-specific SmartShapes objects. Some of the drawings that can be
created with Visio Technical include:
 
      Space Plans                         Facilities Management Drawings
      Electrical Schematics               Construction Drawings
      Mechanical Engineering Designs      Heating, Ventilation and Air
      Process Plant Designs                Conditioning Schematics
 
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<PAGE>
 
  The Company released its most current major version, Visio Technical 5.0, in
August 1997. In December 1998 the Company released Visio Technical 5.0 Plus,
which includes additional functionality and content. Visio Technical 5.0 has
an estimated street price of $349. The Company currently expects to introduce
its next major upgrade of Visio Technical by the end of fiscal 1999.
 
 IntelliCAD
 
  IntelliCAD, the Company's Autodesk AutoCAD-compatible software product, was
released in March 1998. By utilizing a distinct engine and employing DWG as
its native file format, IntelliCAD software seamlessly supports the vast
number of legacy drawings created by CAD operators over the years with
Autodesk's AutoCAD product, the dominant PC-based CAD application. IntelliCAD
allows users to exchange DWG files between IntelliCAD and AutoCAD without data
loss, including the new entities introduced in the latest version of AutoCAD,
Release 14. IntelliCAD also supports the same key customization features that
have distinguished AutoCAD in the marketplace. These features include full
support for the AutoLISP macro language, AutoCAD custom menus and dialog
boxes, and the Autodesk Development System API, used by third-party software
developers to create applications that run on AutoCAD. While maintaining
compatibility with legacy data and applications, IntelliCAD software also
includes features that enhance and extend the AutoCAD work environment. These
enhancements include a full, event-driven implementation of Drawing
Explorer(TM) for intuitively managing drawing layers, line types and blocks, a
visual menu editor for easy customization of AutoCAD-compatible menu
structures, and a drag-and-drop button bar editor that easily creates
horizontal fly-out structures on toolbars. IntelliCAD supports a multiple
document interface that permits the simultaneous editing of multiple drawings.
This feature also allows IntelliCAD users to cut, copy and paste drawing
entities between windows. IntelliCAD has an estimated street price of $349.
The Company currently expects to introduce its first major upgrade of
IntelliCAD by the end of fiscal 1999.
 
IT DESIGN AND DOCUMENTATION
 
  The IT Design and Documentation product group focuses on design,
documentation and modeling tools for the IT professional. This product group
includes Visio Professional and Visio Enterprise.
 
 Visio Professional
 
  Visio Professional is a complete diagramming tool for information systems
("IS") and information technology ("IT") professionals such as local area
network managers, database analysts, software developers and web masters as
well as business process professionals. The Company released its most current
version, Visio Professional 5.0, in August 1997. Visio Professional 5.0, a
superset of Visio Standard 5.0, incorporates all of Visio Standard 5.0's
capabilities and content as well as features specific to IS/IT and business
process management professionals. Visio Professional customers typically rely
on the product to document networks, diagram software architecture, map and
design database structures, and use it as a tool for business process
management initiatives. Visio Professional 5.0 has an estimated street price
of $349. The Company currently expects to introduce its next major upgrade of
Visio Professional in the first half of fiscal 2000.
 
 Visio Enterprise
 
  Visio Enterprise 5.0, built on the foundation of Visio Professional, was
released in November 1998. It extends the Company's reach in IT design and
documentation by offering tools in three main IT domains: network design and
documentation, software engineering, and database design. With respect to
network design and documentation, Visio Enterprise facilitates physical,
logical and wide-area network designs. The product's SNMP-based, layer 3
AutoDiscovery(TM) technology discovers and maps the logical connectivity of a
network, beginning with the address of a single seed router and building a
comprehensive database that includes network
 
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device and connectivity information. Visio Enterprise integrates this
AutoDiscovery technology with the diagramming capabilities of Visio
Professional and the 14,000-shape Visio Network Equipment library to
automatically represent discovered devices with port-level detail. Integrating
these capabilities produces time savings by automating the three basic tasks
of network management: identifying what equipment is connected to the network,
documenting it and then keeping it up to date. For software engineering, the
product's features include support for the full range of unified modeling
language ("UML") 1.2 diagram types. Visio Enterprise supports reverse
engineering of Microsoft Visual C++ and Visual Basic code into UML models and
integration with other enterprise tools via Microsoft Repository 2.0. Visio
Enterprise allows for the design of databases using standard technologies and
multiple object-oriented notations. For example, users can model in
relational, IDEF1X and other popular notations. The product supports forward
and reverse engineering of databases for maintenance and updating of existing
database management systems ("DBMSs"), and migration between DBMSs from the
leading enterprise database vendors, including IBM Corporation, Oracle
Corporation, Informix Corporation and Microsoft Corporation. The product
enables model import and export via the Microsoft Data Warehousing Framework.
Users can also read and write PLATINUM ERwin and InfoModeler(R) models, as
well as Visio Professional 5.0 database diagrams. Visio Enterprise 5.0 has an
estimated street price of $995. The Company currently expects to introduce its
first major upgrade of Visio Enterprise in the first half of fiscal 2000.
 
OTHER PRODUCTS
 
  In addition to its core products, the Company offers Visio Maps, a desktop
mapping software product that allows users to create, share and distribute
high-quality, data-rich maps quickly and easily, Visio Network Equipment, an
add-on solution to Visio Standard, Visio Technical and Visio Professional for
the design and documentation of local, wide-area and telecommunications
networks, Visio Frame Relay, which can identify the frame relay endpoints on a
network and help automate the process of diagramming and designing the
network, ArchT(TM) by Visio, an architectural add-on for AutoCAD that in early
1999 is also expected to be available for IntelliCAD, and Visio SmartShapes
Solutions for Accident Reporting and Visio SmartShapes Solutions for Crime
Scenes, two add-on stencil products. These products supplement the Company's
core products by extending the number and types of drawings available for job-
specific drawing needs.
 
SALES, MARKETING AND DISTRIBUTION
 
  Visio's marketing efforts were initially directed at creating a new product
category--drawing and diagramming software for general business users. Those
marketing efforts were directed at individual end users who purchased the
Company's products through standard retail software distribution channels. As
the need for drawing and diagramming software for general business users has
been recognized, the Company has refocused its marketing efforts on
strengthening Visio brand name recognition to facilitate the introduction of
additional Visio-branded products and on expanding its distribution channels.
In addition, the Company is increasingly focusing its sales and marketing
efforts on volume licensing arrangements with large accounts. As a result of
this effort, volume licensing revenues have been 10%, 17% and 24% of total
revenues in fiscal 1996, 1997 and 1998, respectively. The Company expects
continued investment in the volume licensing sales staff in fiscal 1999 and,
as a result, expects this percentage to increase.
 
  In North America, the Company's products are sold primarily through
distributors, including Ingram Micro, Inc. ("Ingram") and Merisel, Inc.
("Merisel"). These distributors resell the Company's products to retail
software outlets and computer superstores, corporate resellers, value added
resellers and mail order and catalog resellers. The Company has entered into
nonexclusive distribution agreements with both Ingram and Merisel. The
agreement with Ingram may be terminated without cause by either party upon 30
days notice. The agreement with Merisel is automatically renewed on an annual
basis and may be terminated without cause by either party upon 60 days'
notice.
 
  Distribution outside of North America is also primarily through distributors
and is managed by the Company's international headquarters in Dublin, Ireland,
its Asia Pacific operations center in Singapore, and its regional sales and
marketing offices in Miami, Florida, Australia, England, France, Germany,
Italy, Japan,
 
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Malaysia, the Netherlands, South Africa, South Korea, Switzerland and Taiwan.
Internationally, the Company has numerous non-exclusive distributors.
 
  In fiscal 1998, sales to Ingram and Merisel, the Company's two largest
distributors, were 34% and 10%, respectively, of the Company's revenues. See
also Note 9 of the Company's "Notes to Financial Statements" in Item 8
"Financial Statements and Supplementary Data" of this Annual Report on Form
10-K.
 
  The Company has established OEM arrangements with various hardware
manufacturers, software vendors and book publishers. The Company also sells
products directly to end users.
 
  The Company outsources most of its technical support and customer service.
To the extent it remains economically advantageous to do so, the Company
expects to continue to outsource most of these functions in the future.
 
PRODUCT DEVELOPMENT
 
  The Company believes that its future success will depend in large part on
its ability to enhance its current product line, develop new products,
maintain technological leadership and satisfy an evolving range of customer
requirements and industry standards for drawing and diagramming software. The
Company's product development group is actively engaged in identifying,
defining and developing new products and product enhancements to meet customer
needs. The Company's principal product development efforts focus on continued
enhancements to the graphics engines for its Visio products and IntelliCAD,
development of new customer solutions and applications, including increased
drawing complexity, increased number of objects, increased "smartness" of
SmartShapes objects and improved database connectivity.
 
  The Company's products have been developed primarily by its product
development group. Certain technologies, such as the spellcheck function, have
been licensed from other sources and integrated into the Company's products.
The Company intends to continue licensing technologies as it increases its
product offerings. In fiscal 1998, the Company completed mergers with MarComp,
Inc. and Kaspia Systems, Inc., and the Company purchased certain technology
from Decision Graphics UK Limited, InfoModelers, Inc. and Ketiv Technologies,
Incorporated. The Company intends to continue to make substantial investments
in product development. The Company's product development expenses totaled
$9.1 million, $16.1 million and $27.3 million, or 15%, 16% and 16% of
revenues, in fiscal 1996, 1997 and 1998, respectively.
 
COMPETITION
 
  The computer software drawing and diagramming markets are intensely
competitive and subject to rapidly changing technology and evolving standards.
The Company competes with a wide range of companies, from small niche
companies to larger software companies with strong market position and
technology. The Company's principal competitors are companies with leading
products in the special purpose drawing and diagramming, illustration, CAD and
office suite categories. Products competing with the Company's products
include, among others, those named below. Many of these competitors have
significantly greater financial, technical, sales and marketing and other
resources than the Company. As business drawing and diagramming software
markets develop, the Company believes that additional companies may enter
these markets and thereby intensify competition.
 
<TABLE>
<CAPTION>
 VISIO PRODUCT GROUP           COMPETING PRODUCT      COMPETITOR
 -------------------           -----------------      ----------
 <C>                           <C>                    <S>
 Business Diagramming          Visual Thought         Confluent, Inc.
  Visio Standard               EasyFlow               HavenTree Software
                                                      Limited
                               Milestones, Etc.       Kidasa Software, Inc.
                               Flowcharter            Micrografx, Inc.
                               Flow Charting PDQ      Patton & Patton Software
                                                      Corporation
                               Org Plus               The Learning Company,
                                                      Inc.
                               SmartDraw              SmartDraw Software, Inc.
                               allCLEAR               SPSS, Inc.
</TABLE>
 
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<TABLE>
<CAPTION>
 VISIO PRODUCT GROUP         COMPETING PRODUCT   COMPETITOR
 -------------------         -----------------   ----------
 <C>                         <C>                 <S>
 Technical Drawing           AutoCAD LT          Autodesk, Inc.
  Visio Technical            AutoCAD             Autodesk, Inc.
  IntelliCAD                 AutoSketch          Autodesk, Inc.
                             Actrix Technical    Autodesk, Inc.
                             Imagineer Technical Intergraph Corporation
                             TurboCAD            International Microcomputer
                                                 Software, Inc.
                             MicroStation        Bentley Systems, Inc.

 IT Design and Documentation netViz              NetViz Corporation
  Visio Professional         ClickNet            Pinpoint Software Corporation
  Visio Enterprise           Network Charter Pro Micrografx, Inc.
                             NetFormx            ImageNet, Inc.
                             NetSuite            NetSuite Development Corp.
                             EasyER/EasyObject   Visible Systems Corporation
                             ER/Studio           Embarcadero Technologies Inc.
                             ERwin               PLATINUM technology, inc.
                             PowerDesigner       Sybase, Inc.
                             Rational Rose       Rational Software Corporation
                             Visual Studio       Microsoft Corporation
</TABLE>
 
  In addition, the drawing capabilities included in Microsoft Office,
SmartSuite by Lotus Development Corp. and WordPerfect Suite by Corel
Corporation compete with Visio Standard. If any of these producers of office
suites aggressively pursues the business drawing and diagramming markets and
commits further resources to development in this area, the Company's results
of operations could be materially adversely affected.
 
  The principal competitive factors affecting the computer software drawing
and diagramming markets include product functionality, ease of use,
performance and reliability; customer service and support; product
availability; vendor credibility; brand awareness; ability to keep pace with
technological change; and price. Although the Company believes that its
products currently compete favorably with respect to these factors, there can
be no assurance that the Company can maintain its competitive position in the
face of increasing competition from new products and enhancements introduced
by existing competitors and new companies entering this market. The markets
for the Company's products are characterized by significant price competition,
and the Company expects it will face increasing pricing pressures. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial condition
and results of operations.
 
PROPRIETARY RIGHTS
 
  The Company regards its software as proprietary and relies primarily on a
combination of copyright, trademark and patent laws, trade secret protection,
confidentiality procedures and contractual provisions, including nondisclosure
agreements with employees and others, to protect is proprietary rights. The
Company currently has four U.S. patents, one foreign patent and various U.S.
and foreign patent applications pending. However, existing patent, copyright
and trade secret laws afford only limited protection. The Company believes
that, because of the rapid pace of technological change in the computer
software industry, copyright and trade secret protection have less effect on
the Company's business and results of operations than factors such as the
knowledge, ability and experience of the Company's employees, frequent product
enhancements and the timeliness and quality of support services.
 
  The Company provides its products to business enterprises under nonexclusive
licenses that are generally nontransferable. The Company also provides its
products to individual end users, in which case the Company relies on "shrink
wrap" licenses that are not signed by the end user and therefore may not be
enforceable in
 
                                      11
<PAGE>
 
certain jurisdictions. The Company's products do not contain copy protection.
Policing unauthorized use of software is difficult and, while the Company is
unable to determine the extent of piracy of its software, it expects software
piracy to be a persistent problem in the computer software industry.
 
  The Company licenses some software programs from independent developers and
incorporates them into the Company's products. Generally, such agreements
grant the Company nonexclusive, perpetual, worldwide licenses with respect to
the subject program and terminate only upon a material breach by the Company.
Certain of these licenses require payment of royalties based on the number of
products sold.
 
  No material claims have been made against the Company for infringement of
proprietary rights of others; however, there can be no assurance that others
will not assert infringement claims in the future. As the number of software
products in the industry increases and the functionality of these products
further overlaps, the Company believes that software programs will
increasingly become subject to infringement claims. The cost of responding to
any such assertion may be material, whether or not the assertion is valid.
 
PRODUCTION
 
  Production of the Company's software products primarily involves duplication
of various media and the printing of user manuals and packaging materials.
Media for the Company's products include CD-ROMs and 3.5-inch diskettes and
are available from multiple sources. The Company outsources the production of
its products. To date, the Company has not experienced any material
difficulties or delays in production of its software products or
documentation. To the extent it remains economically advantageous to do so,
the Company intends to continue outsourcing production in the future.
 
EMPLOYEES
 
  As of September 30, 1998, the Company employed 555 persons, including 189 in
sales and marketing, 211 in product development, and 155 in finance,
administration and operations, including customer service and technical
support. The Company believes that its future success will depend in part on
its ability to continue to attract and retain skilled product development,
technical support, marketing and management personnel. Competition for such
personnel in the computer software industry is intense. The Company believes
its relations with its employees are good.
 
ITEM 2. PROPERTIES
 
  The Company's headquarters are located in Seattle, Washington, where it
currently leases approximately 85,000 square feet in three buildings for
administrative, sales and marketing, customer service and product development
activities. The Company also leases an aggregate of approximately 30,000
square feet of office space in San Diego, Chicago and Beaverton, Oregon;
approximately 14,000 square feet of office space in Dublin, Ireland and an
aggregate of approximately 37,000 square feet of office space in its other
offices worldwide. In 1999, the Company expects to relocate its Seattle
operations to a new 184,000 square foot facility in Seattle and its Dublin
operations to a new 40,000 square foot facility in Dublin. In addition, the
Company currently expects to expand its Seattle operations to another 133,000
square foot facility beginning in mid 2000. The Company believes that such
facilities are adequate to meet its needs for the foreseeable future. The
Company believes that it can acquire additional space, if needed, on
acceptable terms.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company is not a party to any material legal proceedings.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of the Company's shareholders during the
fourth quarter of its fiscal year ended September 30, 1998.
 
                                      12
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
 
<TABLE>
<CAPTION>
                                     FISCAL QUARTER ENDED
                         --------------------------------------------- FISCAL YEAR ENDED
                         DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,   SEPTEMBER 30,
FISCAL YEAR 1998             1997       1998      1998       1998            1998
----------------         ------------ --------- -------- ------------- -----------------
<S>                      <C>          <C>       <C>      <C>           <C>
Common stock prices
  High..................    $42.63     $48.13    $50.88     $50.75          $50.88
  Low...................    $26.50     $32.38    $39.88     $19.00          $19.00
<CAPTION>
                                     FISCAL QUARTER ENDED
                         --------------------------------------------- FISCAL YEAR ENDED
                         DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,   SEPTEMBER 30,
FISCAL YEAR 1997             1996       1997      1997       1997            1997
----------------         ------------ --------- -------- ------------- -----------------
<S>                      <C>          <C>       <C>      <C>           <C>
Common stock prices
  High..................    $26.38     $26.75    $35.03     $42.50          $42.50
  Low...................    $19.75     $18.13    $19.13     $32.00          $18.13
</TABLE>
 
  Visio's common stock has been traded on the Nasdaq National Market under the
symbol VSIO since the Company's initial public offering in November 1995. The
high and low common stock prices noted above are as reported on the Nasdaq
National Market. On November 30, 1998, there were 229 holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock.
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The following table sets forth selected financial data and other operating
information of Visio. The selected financial data in the table are derived from
the financial statements of Visio. The data should be read in conjunction with
the financial statements, related notes and other financial information
included herein.
 
<TABLE>
<CAPTION>
                                        FISCAL YEAR ENDED SEPTEMBER 30,
                                   -------------------------------------------
                                    1994     1995     1996     1997     1998
                                   -------  -------  ------- -------- --------
                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                <C>      <C>      <C>     <C>      <C>
Revenues.......................... $20,616  $34,224  $59,862 $100,775 $165,995
Operating income.................. $   157  $ 2,932  $13,570 $ 14,836 $ 32,786
Net income (loss)................. $  (152) $ 2,185  $10,496 $ 13,700 $ 28,108
Basic earnings (loss) per share... $ (0.02) $  0.23  $  0.41 $   0.49 $   0.96
Diluted earnings (loss) per
 share............................ $ (0.02) $  0.10  $  0.36 $   0.44 $   0.89
Cash and short-term investments... $ 3,669  $ 7,424  $62,058 $ 81,212 $109,018
Total assets...................... $ 7,879  $19,770  $73,207 $112,701 $159,377
Debt.............................. $   587  $   453  $   158 $    387 $    --
Shareholders' equity (deficit).... $(3,476) $  (521) $55,359 $ 78,768 $127,207
</TABLE>
 
                                       13
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS
 
OVERVIEW
 
  Visio Corporation ("Visio" or "Company"), which commenced operations in
September 1990, develops drawing and diagramming software for the general
business personal computer user. All of the Company's products have been
developed for the Microsoft Windows 3.1, Windows 95, Windows 98 and Windows NT
operating systems and are marketed under the Visio brand. The Company's
primary products are Visio Standard, Visio Technical, Visio Professional,
Visio Enterprise and IntelliCAD(R). The Company's first product, Visio
Standard, which first shipped in November 1992, began creating a new market
for business diagramming. The Company shipped its second primary product,
Visio Technical, for technical drawing, in November 1994. The Company
introduced its third primary product in January 1997, Visio Professional, for
information systems and network design and documentation. In March 1998 the
Company introduced IntelliCAD for the computer aided drafting market, and in
November 1998 the Company introduced Visio Enterprise for network design and
documentation, software engineering and database design.
 
RESULTS OF OPERATIONS
 
  In July 1998 the Company acquired Kaspia Systems, Inc. ("Kaspia"). The
transaction was accounted for as a pooling of interests and accordingly, prior
year results have been restated to include the combined results of operations
for Visio and Kaspia. See "Acquired Technology and Merger Expenses."
 
  The following table sets forth statement of income data as a percentage of
revenues for the fiscal years indicated.
 
<TABLE>
<CAPTION>
                                                         FISCAL YEAR ENDED
                                                           SEPTEMBER 30,
                                                         ---------------------
                                                         1996    1997    1998
                                                         -----   -----   -----
   <S>                                                   <C>     <C>     <C>
   Revenues.............................................   100%    100%    100%
   Cost of revenues.....................................    15      11       9
                                                         -----   -----   -----
   Gross profit.........................................    85      89      91
   Operating expenses:
     Research and development...........................    15      16      16
     Sales and marketing................................    39      40      41
     General and administrative.........................     8       8       8
     Acquired technology and merger expenses............    --      10       6
                                                         -----   -----   -----
   Total operating expenses.............................    62      74      71
                                                         -----   -----   -----
   Operating income.....................................    23      15      20
   Interest and other income, net.......................     3       3       3
                                                         -----   -----   -----
   Income before income taxes...........................    26      18      23
   Provision for income taxes...........................     8       4       6
                                                         -----   -----   -----
   Net income...........................................    18%     14%     17%
                                                         =====   =====   =====
</TABLE>
 
REVENUES
 
  Revenues include fees from the license of software products, maintenance and
support contracts, net of reserves for estimated future returns and
allowances. License revenues are derived from packaged software products,
volume licenses and certain OEM arrangements. The Company periodically
upgrades its products. Revenues from upgrades are cyclical and are typically
highest in the periods of and immediately following an upgrade. The last
significant upgrade occurred in August 1997 when Visio Standard, Visio
Technical and Visio Professional were upgraded to version 5.0. Included in
upgrade revenues are revenues from "cross-grades"
 
                                      14
<PAGE>
 
whereby customers purchase upgrades to move from one Visio product to another.
The Company's average selling price per unit is typically higher on sales of
new units of packaged products than sales of upgrades, volume licenses or OEM
arrangements. Of the Company's primary products, Visio Professional, Visio
Technical, IntelliCAD and Visio Enterprise have higher average selling prices
than Visio Standard. Volume discounts are generally granted on products sold
through the Volume Licensing channel.
 
  The increase in revenues for the three fiscal years ended September 30, 1998
was due primarily to sales volume growth across product groups, distribution
channels and geographic regions as well as an aggregate increase in average
selling price due to the change in product mix toward the higher priced
products. The Company anticipates increasing the selling prices for most of
its major products in fiscal 1999. However, the Company cannot predict how
such price increases will affect total revenues due to potential changes in
sales volume and continued fluctuations in aggregate average selling prices
from shifts in product, channel and geography mix. Contributing most
significantly to the growth in revenues in fiscal 1997 and fiscal 1998 was the
release of Visio Professional in January 1997.
 
PRODUCT GROUPS
 
  The following table sets forth revenues by product group with the
corresponding percentage of total revenues and the year-to-year percentage
growth for the fiscal periods indicated.
 
<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED SEPTEMBER 30,
                                                                ---------------------------------------------------------
                                                                          %              %     %               %     %
                                                                 1996   TOTAL   1997   TOTAL GROWTH   1998   TOTAL GROWTH
(IN THOUSANDS)                                                  ------- ----- -------- ----- ------ -------- ----- ------
<S>                                                             <C>     <C>   <C>      <C>   <C>    <C>      <C>   <C>
Revenues:
 Business Diagramming.......................................... $41,952   70% $ 45,757   45%    9%  $ 47,524   29%    4%
 Technical Drawing.............................................  17,747   30    29,916   30    69     38,108   23    27
 IT Design and Documentation...................................     163   --    25,102   25   N/A     80,363   48   220
                                                                -------  ---  --------  ---   ---   --------  ---   ---
  Total revenues............................................... $59,862  100% $100,775  100%   68%  $165,995  100%   65%
--------------------------------------------------
                                                                =======  ===  ========  ===   ===   ========  ===   ===
</TABLE>
 
  The Company classifies its products into the following product groups: Visio
Standard, Visio Business Modeler and Visio Maps in the Business Diagramming
product group, Visio Technical and IntelliCAD in the Technical Drawing product
group, and Visio Professional and Visio Network Equipment in the IT Design and
Documentation product group. In early fiscal 1999, the Company introduced
Visio Enterprise that will be classified in the IT Design and Documentation
product group.
 
  The increase in Business Diagramming product revenues in fiscal 1997
compared to fiscal 1996 was attributable to an increase in the volume of new
licenses, offset by a decrease in upgrade revenues as well as a decrease in
average selling prices due to an increase in the percentage of product sold
through the Volume Licensing channel. The increase in Business Diagramming
product revenues in fiscal 1998 compared to fiscal 1997 was attributable to an
increase in upgrade revenues due to the version 5.0 upgrade released in August
1997. Revenues from new licenses were flat in fiscal 1998 compared to fiscal
1997. The Company believes that in fiscal 1997 and 1998 the percentage growth
in the Business Diagramming product group was impacted by cannibalization from
Visio Professional to the extent that customers such as IT professionals who
may otherwise have purchased Visio Standard chose Visio Professional instead
for its added features and content.
 
   The increase in Technical Drawing product revenues in fiscal 1997 compared
to fiscal 1996 was attributable to an increase in new license volume and
upgrade volume, offset by a decline in average selling prices due to the
increase in the percentage of product sold through the Volume Licensing
channel. The increase in Technical Drawing product revenues in fiscal 1998
compared to fiscal 1997 was attributable to an increase in new license volume,
upgrade volume and the release of IntelliCAD in March 1998. Average selling
prices for Technical Drawing products in fiscal 1998 were up slightly from
fiscal 1997 due to a higher percentage of revenues attributable to new
licenses rather than upgrades, offset by a higher percentage of revenues sold
through the
 
                                      15
<PAGE>
 
Volume Licensing channel. The Company believes that in fiscal 1997 and 1998
the percentage growth in the Technical Drawing product group was also impacted
by cannibalization from Visio Professional. Prior to the release of Visio
Professional, Visio Technical was marketed to IT professionals as a solution
for network diagramming.
 
  Visio Professional, the Company's first significant product in the IT Design
and Documentation product group, significantly impacted the revenue mix within
the product groups. Since Visio Professional was introduced in the second
quarter of fiscal 1997, sales of that product have grown as the product has
been accepted as a viable solution for IT professionals in the design and
documentation of their networks, databases, software applications and web
sites. Also contributing to the growth of Visio Professional has been the
growth of the IT design and documentation market as a whole. The revenue
growth of the IT Design and Documentation product group was slightly offset by
decreases in average selling prices due to the increase in the percentage of
products sold through the Volume Licensing channel.
 
SALES CHANNELS
 
  The following table sets forth revenues by sales channel with the
corresponding percentage of total revenues and the year-to-year percentage
growth for the fiscal periods indicated.
 
<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED SEPTEMBER 30,
                                                                ---------------------------------------------------------
                                                                          %              %     %               %     %
                                                                 1996   TOTAL   1997   TOTAL GROWTH   1998   TOTAL GROWTH
(IN THOUSANDS)                                                  ------- ----- -------- ----- ------ -------- ----- ------
<S>                                                             <C>     <C>   <C>      <C>   <C>    <C>      <C>   <C>
Revenues:
  Distribution................................................. $45,522   76% $ 76,022   75%   67%  $115,253   69%   52%
  Direct.......................................................   5,989   10     6,819    7    14     10,966    7    61
  Volume Licensing.............................................   6,165   10    17,046   17   176     39,343   24   131
  OEM..........................................................   2,186    4       888    1   (59)       433   --   (51)
                                                                -------  ---  --------  ---   ---   --------  ---   ---
    Total revenues............................................. $59,862  100% $100,775  100%   68%  $165,995  100%   65%
--------------------------------------------------
                                                                =======  ===  ========  ===   ===   ========  ===   ===
</TABLE>
 
  Visio classifies its revenues into four sales channels: "Distribution,"
"Direct," "Volume Licensing," and "OEM." Distribution revenues represent sales
of packaged products through national distributors and corporate, value added,
retail and mail order resellers. Direct revenues represent sales of packaged
products directly by the Company generally to end users responding to
advertising or marketing promotions. Volume Licensing revenues are derived
from volume licenses which are generally administered through corporate
resellers after the Company's sales staff has negotiated the sale. The sales
cycle for a volume license can extend up to eighteen months on significant
volume licenses as organizations can require extensive time to evaluate and
consider a large-scale implementation. Volume Licensing revenues usually do
not include any significant amount of packaged goods, but do include
maintenance and support revenues which are priced separately and recognized
over the terms of the contracts. OEM revenues include licenses of Visio
products to hardware and software manufacturers for bundling arrangements. OEM
revenues include packaged product sales, as well as royalty payments with no
associated product costs.
 
  Growth during each of fiscal 1997 and 1998 in both the Distribution and
Direct channels was primarily driven by the growth of the IT Design and
Documentation product group revenues as well as revenues from the version 5.0
upgrade in August 1997. The strong growth in Volume Licensing reflects
continued investment in the corporate sales force and the Volume Licensing
programs. The Company increased its corporate sales staff from 45 at September
30, 1997 to 70 at September 30, 1998. The Company expects to hire additional
corporate sales staff in fiscal 1999 and therefore expects revenues from
Volume Licensing to continue to increase as a percentage of total revenues.
 
                                      16
<PAGE>
 
GEOGRAPHY
 
  The following table sets forth revenues by geography with the corresponding
percentage of total revenues and the year-to-year percentage growth for the
fiscal periods indicated.
 
<TABLE>
<CAPTION>
                                                                             FISCAL YEAR ENDED SEPTEMBER 30,
                                                                ---------------------------------------------------------
                                                                          %              %     %               %     %
                                                                 1996   TOTAL   1997   TOTAL GROWTH   1998   TOTAL GROWTH
(IN THOUSANDS)                                                  ------- ----- -------- ----- ------ -------- ----- ------
<S>                                                             <C>     <C>   <C>      <C>   <C>    <C>      <C>   <C>
Revenues:
  North America................................................ $37,872   63% $ 65,238   65%   72%  $ 98,735   59%   51%
  Europe.......................................................  14,311   24    22,199   22    55     41,210   25    86
  Rest of World................................................   7,679   13    13,338   13    74     26,050   16    95
                                                                -------  ---  --------  ---   ---   --------  ---   ---
    Total revenues............................................. $59,862  100% $100,775  100%   68%  $165,995  100%   65%
--------------------------------------------------
                                                                =======  ===  ========  ===   ===   ========  ===   ===
</TABLE>
 
  The increase in Europe and Rest of World revenues in fiscal 1997 compared to
fiscal 1996 was primarily due to the release of Visio Professional and
continued growth of Visio Technical in these geographies. The decrease in
Europe revenues as a percentage of total revenues in fiscal 1997 compared to
fiscal 1996 was due primarily to the strong performance of Visio Professional
in the United States and a lower growth rate in Europe due to weaknesses in
certain European markets.
 
  The increase in Europe and Rest of World revenues in fiscal 1998 compared to
fiscal 1997 was primarily attributable to the growth of the IT Design and
Documentation product group, the upgrade to version 5.0 and the increase in
Volume Licensing. In addition, continued investment in international markets,
including localized products, sales offices and staffing, also contributed to
the growth of international revenues. The growth in Rest of World in fiscal
1998 compared to fiscal 1997 was partially offset by general weakened economic
conditions and foreign currency devaluations in Japan and Southeast Asia.
These economic and currency conditions may continue to negatively impact
revenues and operating results in the Rest of World region in upcoming
periods.
 
  The Company's operating results are affected by foreign exchange rates.
Approximately 20%, 19% and 30% of the Company's revenues were collected in
foreign currencies during fiscal 1996, 1997 and 1998, respectively. The impact
on operating income due to exchange rate fluctuation is partially mitigated as
most of the Company's international production costs and operating expenses
are incurred in foreign currencies as well. Therefore, the net impact of
exchange rate fluctuations on income from operations is less than the impact
on revenues.
 
COST OF REVENUES
 
<TABLE>
<CAPTION>
                                             FISCAL YEAR ENDED SEPTEMBER 30,
                                           ------------------------------------
                                            1996   1997   CHANGE  1998   CHANGE
(IN THOUSANDS)                             ------ ------- ------ ------- ------
<S>                                        <C>    <C>     <C>    <C>     <C>
Cost of revenues.......................... $8,708 $10,682   23%  $15,132   42%
Percentage of revenues....................    15%     11%             9%
</TABLE>
 
  Cost of revenues varies with the mix of Distribution, Direct, Volume
Licensing and OEM revenues and with relative variations in the standard
product costs associated with each product group, and fluctuations in period
costs. Standard product costs consist primarily of documentation, packaging,
media duplication, assembly and material management costs. Period costs
consist primarily of certain royalties, technical support, production
management, freight and fulfillment, amortization of capitalized technology,
standard material variances and inventory valuation adjustments.
 
  Standard costs associated with each product group are primarily determined
by the amount of packaged product delivered in that product group.
Accordingly, most of the Company's standard costs are associated with
Distribution and Direct revenues, the majority of which are derived from sales
of packaged products. Volume
 
                                      17
<PAGE>
 
Licensing revenues have the lowest standard cost because they generally do not
include any substantial amount of packaged goods.
 
  The decrease in cost of revenues as a percentage of revenues in each of
fiscal 1997 and 1998 primarily resulted from increased use of lower cost CD-
ROM media and other raw material cost reductions, an increase in the
percentage of revenues from the Technical Drawing and IT Design and
Documentation product groups which generally have lower standard product costs
as a percentage of revenues than the Business Diagramming products, and
increased Volume Licensing revenues which have little or no standard product
costs. These decreases were partially offset by increased royalty costs for
licensed technology including Visual Basic for Applications from Microsoft
Corporation and increased amortization costs of capitalized technology. The
Company believes its cost of revenues as a percentage of revenues may increase
in the future due to expected increases in support for future products of more
complexity and increased amortization of capitalized technology from recent
acquisitions. See "Acquired Technology and Merger Expenses."
 
RESEARCH AND DEVELOPMENT
 
<TABLE>
<CAPTION>
                                              FISCAL YEAR ENDED SEPTEMBER 30,
                                            ------------------------------------
                                             1996   1997   CHANGE  1998   CHANGE
(IN THOUSANDS)                              ------ ------- ------ ------- ------
<S>                                         <C>    <C>     <C>    <C>     <C>
Research and development................... $9,057 $16,073   77%  $27,257   70%
Percentage of revenues.....................    15%     16%            16%
</TABLE>
 
  Research and development expenses consist primarily of personnel, contract
services, occupancy and equipment costs required to conduct the Company's
product development efforts. Product development includes product engineering,
documentation development, localization, usability testing, quality assurance
and advanced research and development costs. Product localization costs and
lump sum payments for technology are capitalized and amortized to development
generally over the lesser of the useful life or 18 months. Research and
development expenses are charged to operations as incurred. The Company has
not capitalized certain software development costs subsequent to the
establishment of technological feasibility, as these costs have not been
material.
 
  Research and development expenses for each of fiscal 1997 and 1998 increased
primarily due to planned hiring in the Company's development organization and
staffing additions associated with the acquisition of certain technology and
assets from third parties. See "Acquired Technology and Merger Expenses." The
Company believes it will be necessary to continue to increase research and
development spending on an absolute basis during fiscal 1999 and beyond to
expand its product lines and introduce new language version product to
international markets.
 
SALES AND MARKETING
 
<TABLE>
<CAPTION>
                                             FISCAL YEAR ENDED SEPTEMBER 30,
                                          -------------------------------------
                                           1996    1997   CHANGE  1998   CHANGE
(IN THOUSANDS)                            ------- ------- ------ ------- ------
<S>                                       <C>     <C>     <C>    <C>     <C>
Sales and marketing...................... $23,496 $40,576   73%  $68,596   69%
Percentage of revenues...................     39%     40%            41%
</TABLE>
 
  Sales and marketing expenses have increased each fiscal year as the Company
continues building its worldwide sales, marketing and customer service
infrastructure. The increase in sales and marketing expenses in absolute terms
and as a percentage of revenues for each of fiscal 1997 and 1998 was primarily
due to expansion in international markets, increased product marketing costs
to introduce and support new products and product upgrades and investment in
the corporate sales force and the Volume Licensing programs.
 
  The Company believes substantial spending on marketing awareness and
corporate sales staffing is essential to achieve revenue growth and to
maintain and enhance the Company's competitive position. Accordingly, Visio
expects sales and marketing expenses will continue to increase in absolute
terms over time.
 
                                      18
<PAGE>
 
GENERAL AND ADMINISTRATIVE
 
<TABLE>
<CAPTION>
                                               FISCAL YEAR ENDED SEPTEMBER 30,
                                             -----------------------------------
                                              1996   1997  CHANGE  1998   CHANGE
(IN THOUSANDS)                               ------ ------ ------ ------- ------
<S>                                          <C>    <C>    <C>    <C>     <C>
General and administrative.................. $5,031 $8,353   66%  $12,973   55%
Percentage of revenues......................     8%     8%             8%
</TABLE>
 
  General and administrative expenses increased in each of fiscal 1997 and
1998 in absolute terms primarily due to increased staffing and new information
technology systems to support the Company's growth as well as the
establishment and growth of Visio's international operations. The Company
expects general and administrative expenses to increase in absolute terms in
future periods as the Company continues to develop a sufficient infrastructure
to support its revenue growth.
 
ACQUIRED TECHNOLOGY AND MERGER EXPENSES
 
  For all acquisitions accounted for under the purchase method, assets are
recorded at fair market value. The allocation of the purchase price to
acquired technology or capitalized technology is based on known valuation
techniques in the software industry. For some transactions, the Company
obtains an independent appraisal of the technology. Amounts allocated to
acquired technology relate to in-process research and development that were
immediately expensed in the period of acquisition because technological
feasibility was not established and no alternative commercial use was
identified. Amounts allocated to capitalized technology relate to technology
that had achieved technological feasibility at the time of acquisition.
Capitalized technology is amortized on a straight-line basis over the
estimated useful life of the technology.
 
  Boomerang Technology Acquisition. On February 21, 1997, the Company acquired
certain technology and assets of Boomerang Technology Inc. ("Boomerang"), a
privately held developer of Autodesk AutoCAD-compatible software, located in
San Diego, California. Under the terms of the agreement, the Company acquired
source code and certain other assets for a cash payment of $6.7 million. This
transaction was accounted for using the purchase method and resulted in a
charge to acquired technology and merger expenses of $6.7 million for in-
process research and development in fiscal 1997.
 
  SysDraw Software Company Acquisition. On May 1, 1997, the Company acquired
certain assets of Freedom Solutions Group, Inc., d.b.a. SysDraw Software
Company ("SysDraw"), a privately held network design and documentation
solutions provider, located in Lombard, Illinois. Under the terms of the
agreement, the acquisition price included $5.8 million in cash plus the
issuance of a $1.0 million note payable, the principal and interest of which
were paid by Visio in August 1998. Visio is required to pay $1.5 million of
additional consideration if revenues of the acquired products meet certain
performance goals within three years of the acquisition date. The transaction
was accounted for using the purchase method and resulted in capitalized
technology of $3.1 million, other assets of $100,000 and a charge to acquired
technology and merger expenses of $3.6 million for in-process research and
development in fiscal 1997. The capitalized technology is being amortized on a
straight-line basis over five years.
 
  Merger with MarComp. On January 22, 1998, the Company merged with MarComp,
Inc. ("MarComp"), a privately held provider of programming toolkits for access
to Autodesk's AutoCAD .dwg and .dxf file formats, located in Parkton,
Maryland. Under the terms of the merger agreement, Visio exchanged 50,014
shares of its unregistered common stock for all of the outstanding shares of
MarComp. The transaction was accounted for as a pooling of interests and, due
to the immateriality of the amounts involved, prior period financial
statements have not been restated. The transaction resulted in an increase in
equity of $109,000 primarily due to the acquisition of cash and accounts
receivable from MarComp and resulted in approximately $100,000 in merger
related costs in fiscal 1998.
 
  InfoModelers Technology Acquisition. On February 10, 1998, the Company
acquired certain technology and assets of InfoModelers, Inc. ("InfoModelers"),
a privately held, leading supplier of database and data
 
                                      19
<PAGE>
 
warehouse visual design, access and query tools, located in Bellevue,
Washington. Under the terms of the agreement, Visio issued 200,000 shares of
its unregistered common stock for accounts receivable, fixed assets, tax
assets and certain technology assets. The transaction was accounted for using
the purchase method and was valued at approximately $8.0 million for
InfoModeler shareholders. This transaction resulted in a total charge to
acquired technology and merger expenses of $7.0 million for in-process
research and development in fiscal 1998. In addition, the Company recorded
approximately $1.0 million in other assets.
 
  Decision Graphics Technology Acquisition. On May 5, 1998, the Company
acquired certain technology from Decision Graphics U.K. Ltd. ("Decision
Graphics"), a privately held provider of computer-aided facilities management
software, located in the U.K., for $729,000. The transaction was accounted for
using the purchase method and resulted in a total charge to acquired
technology and merger expenses of $729,000 for in-process research and
development in fiscal 1998.
 
  Ketiv Technology Acquisition. On June 2, 1998, the Company acquired certain
CAD technology, software products and other assets from Ketiv Technologies,
Incorporated ("Ketiv"), a privately held provider of architecture, engineering
and construction software located in Portland, Oregon, for approximately $2.7
million. The transaction was accounted for using the purchase method and
resulted in capitalized technology of $2.5 million and a total charge to
acquired technology and merger expenses of $247,000 for in-process research
and development in fiscal 1998. The capitalized technology is being amortized
on a straight-line basis over five years.
 
  Merger with Kaspia. On July 10, 1998, the Company merged with Kaspia, a
privately held developer of fully automated enterprise-network audit
functionality, including discovery, monitoring and reporting software, located
in Beaverton, Oregon. Under the terms of the merger agreement, Visio acquired
all of Kaspia's outstanding stock for 482,994 shares of Visio common stock,
valued at approximately $23.3 million for Kaspia shareholders. This
transaction was accounted for as a pooling of interests. Accordingly, the
financial statements include the combined results of operations for Visio and
Kaspia, and all prior financial statements have been restated. The transaction
resulted in approximately $1.2 million in merger related costs in fiscal 1998.
 
  See Note 10 of "Notes to the Financial Statements" in Item 8 for additional
information on the above business combinations.
 
INTEREST AND OTHER INCOME, NET
 
  Interest income was $1.8 million, $3.3 million and $4.4 million for fiscal
1996, 1997 and 1998, respectively. The increase in each of fiscal 1997 and
1998 was primarily due to larger cash and short-term investment balances.
Other income includes grant income from the Industrial Development Agency of
Ireland and foreign currency transaction gains and losses. The Company
conducts business in various foreign currencies and is therefore subject to
transaction exposures that arise from foreign exchange rate movements between
the dates that foreign currency transactions are recorded and the dates that
they are settled. In fiscal 1997, Visio began hedging certain foreign exchange
transaction exposures through the use of forward exchange contracts. To the
extent the Company has assets and liabilities denominated in foreign
currencies that are not hedged, the Company is subject to foreign currency
gains and losses. At September 30, 1997 and 1998, approximately $42,000 and
$7.9 million, respectively, of forward exchange contracts were outstanding
with maturities not exceeding 240 days. The net asset of forward exchange
contracts was approximately $12,000 and $222,000 at September 30, 1997 and
1998, respectively. There have been no significant foreign currency
transaction gains or losses to date with respect to these activities; however,
there can be no assurance that the Company's strategies will continue to be
effective or that transaction gains or losses can be minimized or forecasted
accurately. The Company does not hedge its translation risk.
 
INCOME TAXES
 
  The Company's effective income tax rate was 31%, 25% and 25% for fiscal
1996, 1997 and 1998, respectively. The statutory tax rate in the U.S. was 34%
for fiscal 1996 and 1997 and 35% for fiscal 1998. The
 
                                      20
<PAGE>
 
effective tax rate was lower than the statutory rates for the respective
years, and the decline in the effective tax rate in fiscal 1997 and 1998 was
primarily due to increases each year in the percentage of income taxed in
foreign jurisdictions at rates lower than in the U.S., increases in tax-exempt
interest income, increases in research and development credits and tax
benefits from the utilization of net operating loss carryforwards obtained in
the acquisition of certain technology and assets of InfoModelers and the
merger with Kaspia in fiscal 1998. Offsetting the decrease in effective tax
rate in fiscal 1998 was the tax effect of non-deductible acquired technology
and merger expenses.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company's cash and short-term investments totaled $81.2 million at
September 30, 1997 compared to $109.0 million at September 30, 1998. The
investment portfolio consisted of high-quality fixed income securities and
government issues. The increase in cash and short-term investments for fiscal
1997 and 1998 was due primarily to cash generated from operations and cash
proceeds from the issuance of shares through the employee stock option and
stock purchase programs. The increase in cash and short-term investments was
partially offset by purchases of equipment, leasehold improvements and
capitalized technology, the payoff of the note payable issued in the
acquisition of SysDraw and the payoff of the Company's lines of credit. The
increase in cash and short-term investments in fiscal 1998 was also partially
offset by the increase in accounts receivable at September 30, 1998. This was
due to a larger percentage of revenues being generated later in the fourth
quarter of fiscal 1998 as compared to the same period in fiscal 1997. In
addition, receivables have grown due to the mix of revenues from international
markets growing from 35% in 1997 to 41% in 1998. Payment cycles are generally
longer in international regions than domestically. The Company believes the
percentage of revenues from international regions will continue to grow and
thus expects that accounts receivable will grow, over time, faster than normal
revenue growth would indicate.
 
  The Company is exposed to market risk related to changes in interest rates
and foreign currency exchange rates, each of which could adversely affect the
value of the Company's investments. The Company does not use derivative
financial instruments for speculative or trading purposes.
 
  The Company maintains a short-term investment portfolio consisting of
interest bearing securities with an average maturity of less than one year.
These securities are classified as "available-for-sale" securities. The
interest bearing securities are subject to interest rate risk and will fall in
value if market interest rates increase. If market interest rates were to
increase immediately and uniformly by 10% from levels at September 30, 1998,
the fair value of the portfolio would decline by an immaterial amount. Because
the Company has the ability to hold its fixed income investments until
maturity, it does not expect its operating results or cash flows to be
affected to any significant degree by a sudden change in market interest rates
on its securities portfolio.
 
  The Company enters into foreign exchange forward contracts to hedge certain
balance sheet exposures against future movement in foreign exchange rates.
Gains and losses on the forward contracts are largely offset by gains and
losses on the underlying exposure. A hypothetical 10% appreciation or
depreciation of each of the denominated foreign currencies from September 30,
1998 market rates would impact the unrealized value of the Company's forward
contracts by plus or minus $800,000. These gains or losses on the forward
contracts are largely offset by the gains and losses on the underlying
transactions and, consequently, the Company does not expect that a sudden or
significant change in foreign exchange rates would have a material impact on
future net income or cash flows. To the extent the Company has assets and
liabilities denominated in foreign currencies that are not hedged, the Company
is subject to foreign currency transaction gains and losses. The Company does
not hedge its translation risk.
 
  At September 30, 1998, the Company's principal commitments consisted
primarily of leases on its facilities. The Company's capital expenditures of
$7.1 million in fiscal 1997 included the purchase of a year 2000 compliant
enterprisewide business software system. The Company's capital expenditures of
$7.7 million in fiscal 1998 included the purchase of furniture and fixtures,
leasehold improvements and computer equipment associated with the increase in
the Company's staffing level. In February 1999, the Company expects to
relocate its Seattle,
 
                                      21
<PAGE>
 
Washington operations to a new leased facility. At September 30, 1998, the
Company had commitments for capital expenditures of approximately $9.4 million
related to facility expansion. Subsequent to September 30, 1998, the Company
entered into a lease for a new facility in Dublin, Ireland. The Company also
exercised an option for additional space in connection with its new facility
in Seattle. The Company believes that its current cash balances, short-term
investments and cash flow from operations will be sufficient to meet its
working capital and capital expenditure requirements for at least the next 12
months.
 
  From time to time, the Company evaluates potential acquisitions of
businesses, products or technologies that complement the Company's business.
In fiscal 1997 the Company paid a combined $12.5 million related to the
acquisition of technology and other assets from Boomerang and SysDraw. In
addition, the Company issued a $1 million note payable to SysDraw, which note
was paid in fiscal 1998, and agreed to pay contingent consideration of $1.5
million based on the achievement of certain performance goals within three
years of the acquisition date. In fiscal 1998 the Company paid a combined $3.4
million related to the acquisition of certain technology from Decision
Graphics and Ketiv. At September 30, 1998, the Company had no other material
agreements or commitments with respect to any such transactions.
 
YEAR 2000 ISSUES
 
  The calendar year 2000 has the potential to cause problems in computer
systems that record years using only the last two digits of the year. For
example, such systems record 1996 as 96, and 2000 as 00. This method of dating
can introduce problems in date calculation so that systems that rely on two-
digit date identifiers may not work as expected after December 31, 1999 or
when handling dates after December 31, 1999. The year 2000 issue creates risks
for the Company from unforeseen problems in its own products or systems or in
the systems of third parties from whom the Company obtains products or
services or with whom the Company otherwise transacts business.
 
  In fiscal 1997 the Company replaced its worldwide accounting/finance,
manufacturing, sales and distribution systems with a year 2000 compliant
enterprisewide business software system, and in fiscal 1998 the Company
extended the application of such enterprisewide software to its human
resources systems. By mid 1999, the Company intends to replace its worldwide
customer management systems with a system that has been certified as year 2000
compliant. In addition, the Company has established cross-functional teams to
identify and resolve the Company's year 2000 issues. The primary functions of
these teams include (a) conducting audits of the Company's main internal
systems, including telecommunications and all material software and hardware
in the Company's desktop environments, (b) implementing any necessary plans to
correct deficiencies in such internal systems, (c) communicating with certain
key parties with whom the Company conducts business regarding the year 2000
readiness of such parties' systems and (d) coordinating the testing of the
Company's products to determine the year 2000 readiness of those products.
 
 Internal Systems
 
  The Company has completed the audit of its telecommunication systems and
expects to complete the audits of its other internal systems by March 31,
1999. The Company intends to complete any required corrective actions
identified in such audits by September 30, 1999. Although the Company does not
believe that it will incur any material costs or experience material
disruptions in its business associated with preparing its internal systems for
the year 2000, there can be no assurances that the Company will not experience
serious unanticipated negative consequences or material costs caused by
undetected errors or defects in the technology used in its internal systems,
which are composed of third party software, third party hardware that contains
embedded software and the Company's own software. The most reasonably likely
worst case scenarios would include corruption of data contained in the
Company's internal information systems, hardware failure, and the failure of
infrastructure services provided by government agencies and other third
parties (e.g., electricity, phone service, water transport, internet services,
etc.). The Company intends to prepare contingency plans for such events by
September 30, 1999. The Company expects its contingency plans to include,
among other things, manual "work-arounds" for software and hardware failures,
as well as substitution of systems, if necessary.
 
                                      22
<PAGE>
 
 Vendors and Service Providers
 
  In September 1998, the Company began distributing detailed questionnaires to
key vendors and service providers to determine the year 2000 status of their
systems. Approximately one-half of those questionnaires have been returned.
Though the Company expects to receive additional questionnaires throughout
1999, there can be no assurance that all of the contacted third parties will
respond. To date, no material year 2000 risks have been identified during the
Company's communications with its key vendors and service providers. To the
extent the Company identifies such risks, the Company will work with the
appropriate third parties to mitigate such risks. However, the disruption or
failure at or after the year 2000 of the systems of key vendors or service
providers, as well as the failure of any contingency plans, remains a
possibility and could have a material adverse effect on the Company's results
of operations or financial condition.
 
 Company Products
 
  With respect to its own products, the Company is continuing to conduct
quality and testing practices regarding the year 2000 transition. Current
information about the year 2000 status of the Company's products is available
on the Company's web site at www.visio.com/yr2000.html. The Company believes
its current products, with any applicable updates, are well prepared for year
2000 issues. However, there can be no guarantee that one or more current
Company products do not contain year 2000 deficiencies that may result in
material costs to the Company. In particular, versions of the Company's
products that are not the most currently released or that are not currently
being developed may not be year 2000 compliant.
 
  Because it is in the business of selling software products, the Company's
risk of being subjected to lawsuits relating to year 2000 issues is likely to
be greater than that of companies in other industries. Because computer
systems may include different hardware, firmware and software components from
different manufacturers, it may be difficult to determine which component in a
computer system may cause a year 2000 issue. As a result, the Company may be
subjected to year 2000-related lawsuits independent of whether its products
and services are year 2000 compliant. The outcomes of any such lawsuits and
the impact on the Company cannot be predicted at this time.
 
  The Company does not expect total costs associated with becoming year 2000
compliant to be material to its financial position or results of operations.
To date, the cost of the year 2000 project has been approximately $75,000 and
the total cost of the project is anticipated to be approximately $125,000.
These amounts do not include the cost of the enterprisewide business software
implemented in fiscal 1997 or the anticipated cost of the Company's new
customer management system.
 
EUROPEAN MONETARY UNION
 
  Within Europe, the European Economic and Monetary Union (the "EMU") will
introduce a new currency, the Euro, on January 1, 1999. The new currency is in
response to the EMU's policy of economic convergence to harmonize trade
policy, eliminate business costs associated with currency exchange and to
promote the free flow of capital, goods and services.
 
  On January 1, 1999, the participating countries are scheduled to adopt the
Euro as their local currency, initially available only for currency trading on
currency exchanges and non-cash (banking) transactions. The existing local
currencies, or legacy currencies, will remain legal tender through January 1,
2002. Beginning on January 1, 2002, Euro-denominated bills and coins will be
issued for cash transactions. For a period of six months from this date, both
legacy currencies and the Euro will be legal tender. On or before July 1,
2002, the participating countries will withdraw all legacy currency and use
exclusively the Euro.
 
  The Company has recognized the introduction of the Euro as a significant
event with potential implications for existing operations. Currently,
participating countries in the EMU where the Company operates include Ireland,
Germany, France, Italy, Spain and the Netherlands. The Company expects non
participating European Union countries, such as the United Kingdom, to
eventually join the EMU.
 
                                      23
<PAGE>
 
  The Company has committed resources to conduct risk assessments and to take
corrective actions, where required, to ensure the Company is prepared for the
introduction of the Euro. The Company has undertaken a review of the Euro
implementation and has concentrated on areas such as operations, finance,
treasury, legal information management, procurement and others, both in
participating and non participating European Union countries where the Company
operates. Also, a review of existing legacy accounting and business systems
and other business assets have been reviewed for Euro compliance, including
assessing any risks from third parties.
 
  Progress regarding Euro implementation is reported periodically to
management. Because of the staggered introduction of the Euro regarding non-
cash and cash transactions, the Company has developed its plans to address
first its accounting and business systems and then its business assets. The
Company expects to be Euro compliant within its accounting and business
systems by December 1998 and compliant within its other business assets prior
to the introduction of the Euro bills and coins. Compliance in participating
and non participating countries will be achieved primarily through upgraded
systems in cases where existing systems were already planned to be upgraded.
Remaining systems for which there is no planned upgrade will be modified to
achieve compliance. The Company does not currently expect to experience any
significant operational disruptions or to incur any significant costs,
including any currency risk, which could materially affect the Company's
liquidity or capital resources. The Company is preparing plans to address
issues within the transitional period when both legacy and Euro currencies may
be tendered. The Company does not anticipate any long-term competitive
implications or the need to materially change its mode of conducting business
as a result of increased transparency of pricing when sales in various
countries are all denominated in the Euro rather than in different currencies.
 
  To the extent the Company is unable, within the necessary timeframe, to
complete any upgrades or modifications to its systems or business assets that
are required to support Euro transactions, the Company's results of operations
and financial condition could be materially adversely affected. In addition,
the Company faces risks to the extent that key vendors and service providers
are unable to make appropriate modifications to support Euro transactions.
 
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
  In October 1997 the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
which supersedes SOP 91-1, the former literature on software revenue
recognition. This Statement will be effective for the Company beginning in
fiscal year 1999. In March 1998, AcSEC issued SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Recognition," which amends
certain provisions of SOP 97-2. The Company believes it is substantially in
compliance with the provisions of SOP 97-2 as amended by SOP 98-4 and its
adoption is not expected to have a material impact on the financial position
or results of operations of the Company.
 
  In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income." Statement No. 130
establishes standards for reporting and displaying comprehensive income and
its components in a full set of financial statements and will require the
Company to display an amount representing total comprehensive income in its
financial statements. The Company will be required to implement Statement No.
130 for its first quarter of fiscal 1999.
 
  In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Statement No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. The Company
will be required to implement Statement No. 131 for its fiscal year 1999.
Management has not yet determined what the impact, if any, will be to the
Company's future disclosures.
 
  In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
requires companies to capitalize qualifying computer software costs incurred
during the application development stage and amortize them over the software's
estimated useful
 
                                      24
<PAGE>
 
life. The Company is required to adopt this statement in fiscal year 2000 and
management has not yet determined what the effect of SOP 98-1 will be on the
earnings and financial position of the Company.
 
  In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in fiscal
year 2000. Statement No. 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
Company currently hedges certain foreign exchange transaction exposures.
Management has not yet determined what the effect of Statement No. 133 will be
on the earnings and financial position of the Company.
 
CERTAIN RISK FACTORS THAT MAY IMPACT FUTURE RESULTS OF OPERATIONS
 
  Except for the historical information contained in this Annual Report on
Form 10K, the matters discussed herein, particularly those identified with the
words "expects," believes," "anticipates" and similar expressions, are
forward-looking statements. These statements reflect management's best
judgment based on factors known to them at the time of such statements. Such
forward-looking statements are subject to certain risks and uncertainties,
including without limitation those set forth below, which risks and
uncertainties could cause actual results to differ materially from those
anticipated. The factors set forth below, many of which are beyond the
Company's control, should be carefully considered when evaluating the
Company's business and prospects and the forward-looking information provided
by Visio pursuant to the safe harbor provisions established by recent
securities legislation. Readers should also carefully review the risk factors
described in other documents the Company files from time to time with the
Securities and Exchange Commission.
 
  Fluctuations in Quarterly Performance. The Company's quarterly results of
operations can be affected substantially by demand for the Company's products,
the timing and customer acceptance of new products, product enhancements and
promotions by the Company or its competitors, product returns, fluctuations in
foreign exchange rates, the impact of acquisitions of other technologies or
companies and changes in economic conditions. The Company is increasingly
focusing its sales efforts on volume licensing to large accounts. The timing
of those licenses could significantly affect quarterly results of operations.
A significant portion of the Company's operating expenses are relatively fixed
in the short term, and planned expenditures are based on the Company's
estimates for quarterly revenues. As a result, variations in timing of
revenues can cause significant variations in quarterly results of operations.
In general, the Company has experienced the strongest demand for its software
products during the December quarter and the weakest demand in the June and
September quarters. These seasonal patterns have been overshadowed in
particular quarters by the timing of new product introductions, expansion into
international markets, the execution of volume licenses and other factors
affecting the Company's business.
 
  Dependence on Microsoft Windows; Relationship With Microsoft. Substantially
all of the Company's revenues are derived from sales of products that are
designed to work within a Microsoft Windows environment and are marketed
primarily to Windows users. As a result, sales of the Company's products would
be materially affected by market developments adverse to Windows-based
products. As a developer of products for Windows, the Company has historically
enjoyed a collaborative working relationship with Microsoft. If the
relationship were disrupted for any reason, such as a decision by Microsoft to
introduce or acquire products that compete directly with the Company's
products, the Company's development efforts and results of operations could be
materially adversely affected.
 
  Competition. The computer software drawing and diagramming markets are
intensely competitive and subject to rapidly changing technology and evolving
standards. The software industry has limited barriers to entry, and the
availability of personal computers with continuously expanding capabilities,
at progressively lower prices, contributes to the ease of market entry.
Because of this and other factors, competitive conditions in the future are
likely to intensify. The markets for the Company's products are characterized
by significant price competition, and the Company expects it will face
increasing pricing pressures. Increased competition could result in price
reductions, reduced profit margins and loss of market share, which could
materially adversely affect the Company's results of operations.
 
                                      25
<PAGE>
 
  Substantial Dependence on a Single Technology; Limited Product Line. The
Company has derived substantially all of its revenues to date from sales of
drawing and diagramming products based on its core technology. The Visio
product line and related enhancements are expected to continue to account for
a significant percentage of the Company's revenues for the foreseeable future.
A decline in demand for these products as a result of competition,
technological change or any other reason would have a material adverse effect
on the Company's results of operations.
 
  Rapid Technological Change and New Product Development. The markets for the
Company's products are characterized by rapidly changing technology, evolving
industry standards, changes in customer needs and frequent new product
introductions. The Company's future success will depend on its ability to
enhance its current products, to develop new products that meet changing
customer needs on a timely and cost-effective basis and to respond to emerging
industry standards and other technological changes. Any failure by the Company
to anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in product development or introduction,
would have a material adverse effect on the Company's results of operations.
 
  New Product Introductions.  The Company periodically introduces new products
and upgrades its current products in order to meet changing customer needs and
anticipated market demand. Due to potential difficulties in the development
process, there can be no assurance that such future products and upgrades will
be released in a timely manner or that they will receive market acceptance, if
and when released. Despite significant testing by the Company and by current
and potential customers, errors or "bugs" may still be found in new products
or upgrades after commencement of commercial shipments. Delays in the
commencement of commercial shipments of new products or upgrades, as well as
the discovery of errors or bugs after release, may result in adverse
publicity, customer dissatisfaction and delay or loss of product revenues.
Furthermore, from time to time the Company and others may announce new
products, capabilities or technologies that have the potential to replace or
shorten the life cycles of the Company's existing products. There can be no
assurance that announcements of currently planned or other new products by the
Company, by Microsoft or by the Company's competitors will not cause customers
to defer purchasing existing Company products or cause distributors to return
products to the Company. Delays or difficulties associated with new product
introductions or upgrades could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
  Management of Growth and Future Acquisitions; Risks Associated With Lease
Commitments. The Company has recently experienced rapid growth that has
placed, and will continue to place, a significant strain on its management and
operations. The Company's ability to manage its growth effectively will
require it to improve its operating, financial and management information
systems and to attract, train, motivate, manage and retain key employees.
Furthermore, the Company intends to enter into strategic relationships and
make strategic acquisitions of technologies and businesses in order to expand
its product lines and the capabilities of its current products. The risks
associated with acquisitions, including increased costs and uncertain benefits
and the ability to integrate operations of acquired companies, could adversely
affect the Company's results of operations. In addition, the Company has
committed to significant expansions of its corporate headquarters in Seattle,
Washington and the headquarters of its international operations in Dublin,
Ireland. If the Company's business does not grow at rates currently
anticipated by management, the Company may be unable to cost-effectively
utilize or sublease the new space, and the Company's results of operations
could be materially adversely affected.
 
  Risks Associated With International Operations. The Company expects that
international sales will account for an increasing portion of its revenues.
Most of the Company's international revenues are denominated in foreign
currencies. Consequently, a decrease in the value of a relevant foreign
currency in relation to the U.S. dollar occurring after establishment of
prices and before receipt of payment by the Company would have an adverse
effect on the Company's results of operations. Additionally, the Company may
be materially and adversely affected by increases in duty rates, exchange or
price controls, repatriation restrictions, or other restrictions on foreign
currencies. The Company's international operations are subject to certain
other risks common to international operations, including without limitation
government regulations, import restrictions, and, in certain jurisdictions,
reduced protection for the Company's intellectual property rights.
 
                                      26
<PAGE>
 
  Change in Licensing and Marketing Methods. The Company is increasingly
emphasizing sales to enterprises through volume, installment and enterprise
licensing arrangements. These licensing arrangements typically involve a
longer cycle (up to 18 months from first contact to execution of an initial
license) than sales through other distribution channels, require a greater
investment of resources in establishing the enterprise relationship and result
in lower operating margins. The timing of the execution of volume licenses, or
their nonrenewal or renegotiation by large customers, could cause volatility
in the Company's quarterly results of operations and could materially
adversely affect it's results of operations.
 
  Continued Reliance on Resellers and Distributors. The Company expects to
continue to rely on resellers and distributors for sales of its products in
domestic and international markets. Sales to the Company's two largest
distributors during fiscal 1996, 1997 and 1998 accounted for an aggregate of
50%, 47% and 44% of the Company's revenues, respectively. The distribution
channels through which software products are sold have been characterized by
rapid change, including consolidations and financial difficulties of certain
distributors and resellers, the emergence of new resellers such as general
mass merchandisers and the development of new channels such as electronic
networks. The Company's resellers and distributors carry competing product
lines. There can be no assurance that resellers and distributors will continue
to purchase the Company's products or be able to market them effectively or
that the Company will be able to effectively distribute its products through
new distribution channels.
 
  Reliance on Outsourcing. The Company outsources most of the production of
its products, which primarily involves duplication of various media and the
printing of user manuals and packaging materials. In addition, the Company
outsources certain aspects of order fulfillment, technical support, customer
service and localization of its products. So long as it remains economically
advantageous to do so, the Company intends to continue, and possibly to
increase, outsourcing in the future. Although the Company believes that it has
adequate alternative suppliers of such services, the loss of a supplier or its
inability to perform contracted services could materially adversely affect the
Company's results of operations.
 
  Dependence on Proprietary Technology. The Company's ability to compete
effectively depends in large part on its ability to develop and maintain
proprietary aspects of its technology. The Company relies on a combination of
copyright, trademark and patent laws, trade secret protection, confidentiality
procedures and contractual provisions, including nondisclosure agreements with
employees and others, to protect its proprietary rights. However, despite the
Company's efforts, unauthorized parties may attempt to copy aspects of the
Company's products or to obtain and use information that the Company regards
as proprietary. Policing unauthorized use of the Company's products is
difficult, and while the Company is unable to determine the extent to which
piracy of its software products exists, software piracy can be expected to be
a persistent problem. In addition, the laws of some foreign countries do not
protect the Company's proprietary rights to as great an extent as the laws of
the United States. There can be no assurance that the Company's means of
protecting its proprietary rights will be adequate, that competitors will not
independently develop similar technology or that claims of infringement of
third parties' intellectual property rights will not occur and, possibly,
prevail. Costs associated with an adverse judgment or settlement of
intellectual property litigation, as well as the cost of responding to a
claim, both in legal fees and expenses and the diversion of management
resources, whether or not the claim is valid, could have a material adverse
effect on the Company's results of operations.
 
  Dependence on Key Personnel. The Company's success depends to a significant
extent on a small number of senior management and technical personnel. The
Company's growth and future success will depend in large part on its
continuing ability to hire, motivate and retain highly qualified management,
technical, sales and marketing personnel. Competition for such personnel is
intense and there can be no assurance that the Company will be successful in
hiring, motivating or retaining such qualified personnel.
 
  Changing Accounting Standards. The principal organizations responsible for
establishing accounting standards, including the Securities and Exchange
Commission and the Financial Accounting Standards Board, continually review,
modify, provide interpretations on and create new accounting standards.
Changes to, interpretations of and the creation of new accounting standards
could materially modify the presentation of the
 
                                      27
<PAGE>
 
Company's financial results, and such a change in presentation could
materially adversely affect the Company's business, financial condition and
results of operations. If such changes to accounting standards were applied
retroactively, the Company may be required to restate its financial statements
for prior periods.
 
  Reliance on Independent Developers for Future Market Expansion. The Company
has designed its technology with an open architecture and has incorporated
certain features to encourage independent solution providers, system
integrators and other software developers to design industry or customer-
specific drawing and diagramming solutions that will extend the adoption and
use of the Company's products. There can be no assurance, however, that
developers will design solutions to extend the Company's products, and the
failure of these development efforts to materialize could adversely affect the
expansion of the markets for the Company's products. If independent developers
do design solutions for specific industries or customers, the Company could be
effectively precluded from offering add-on products that address the same
industries or customers.
 
  Year 2000. The year 2000 issue creates risks for the Company from unforeseen
problems in its own products or systems or in the systems of third parties
from whom the Company obtains products or services or with whom the Company
otherwise transacts business. For a discussion of such risks, readers should
refer to the disclosure under the heading "Year 2000" in this Item 7
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
 
  Euro Implementation. For a discussion of the risks associated with the
introduction of the Euro currency, readers should refer to the disclosure
under the heading "European Monetary Union" in this Item 7 Management's
Discussion and Analysis of Financial Condition and Results of Operations.
 
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
  The information required by this item is incorporated by reference from the
section labeled "Liquidity and Capital Resources" in Item 7 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Annual Report on Form 10-K.
 
                                      28
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
               REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
 
The Board of Directors and Shareholders
Visio Corporation
 
  We have audited the accompanying balance sheets of Visio Corporation as of
September 30, 1997 and 1998, and the related statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended September 30, 1998. Our audits also include the financial statement
schedule listed in the Index at Item 14(a). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Visio Corporation at
September 30, 1997 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles. Also, in our opinion
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
 
                                                   /s/ Ernst & Young LLP
                                          _____________________________________
 
Seattle, Washington
October 23, 1998
 
                                      29
<PAGE>
 
                               VISIO CORPORATION
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                              -----------------
                                                                1997     1998
                                                              -------- --------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
                           ASSETS
Current assets:
  Cash....................................................... $ 59,840 $ 67,088
  Short-term investments.....................................   21,372   41,930
  Accounts receivable........................................    6,587   15,934
  Inventories................................................    1,079    1,228
  Prepaid expenses and other.................................    4,231    6,662
  Deferred income taxes......................................    4,873    4,709
                                                              -------- --------
    Total current assets.....................................   97,982  137,551
Equipment and leasehold improvements.........................    8,254   10,191
Capitalized technology.......................................    2,861    4,609
Other assets.................................................       --      380
Non-current deferred income taxes............................    3,604    6,646
                                                              -------- --------
    Total assets............................................. $112,701 $159,377
                                                              ======== ========
            LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Accounts payable........................................... $  6,019 $  5,223
  Accrued compensation and benefits..........................    2,706    4,464
  Other accrued liabilities..................................   11,751   13,717
  Deferred revenue...........................................    9,082    7,830
  Income taxes payable.......................................    2,988      936
  Current portion of notes payable...........................    1,000       --
                                                              -------- --------
    Total current liabilities................................   33,546   32,170
Long-term notes payable......................................      387       --
Commitments
Shareholders' equity:
  Common stock, $.01 par value per share:
  Authorized--100,000 shares; issued and outstanding--28,633
   and 30,191................................................   56,367   75,434
  Retained earnings..........................................   22,401   51,773
                                                              -------- --------
    Total shareholders' equity...............................   78,768  127,207
                                                              -------- --------
    Total liabilities and shareholders' equity............... $112,701 $159,377
                                                              ======== ========
</TABLE>
 
                            See accompanying notes.
 
                                       30
<PAGE>
 
                               VISIO CORPORATION
 
                              STATEMENTS OF INCOME
 
<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED SEPTEMBER 30,
                                                -------------------------------
                                                  1996       1997       1998
                                                -------------------- ----------
                                                (IN THOUSANDS, EXCEPT PER SHARE
                                                           AMOUNTS)
<S>                                             <C>       <C>        <C>
Revenues......................................  $  59,862 $  100,775 $  165,995
Cost of revenues..............................      8,708     10,682     15,132
                                                --------- ---------- ----------
Gross profit..................................     51,154     90,093    150,863
Operating expenses:
  Research and development....................      9,057     16,073     27,257
  Sales and marketing.........................     23,496     40,576     68,596
  General and administrative..................      5,031      8,353     12,973
  Acquired technology and merger expenses.....         --     10,255      9,251
                                                --------- ---------- ----------
Total operating expenses......................     37,584     75,257    118,077
                                                --------- ---------- ----------
Operating income..............................     13,570     14,836     32,786
Interest and other income, net................      1,538      3,466      4,894
                                                --------- ---------- ----------
Income before income taxes....................     15,108     18,302     37,680
Provision for income taxes....................      4,612      4,602      9,572
                                                --------- ---------- ----------
Net income....................................  $  10,496 $   13,700 $   28,108
                                                ========= ========== ==========
Basic earnings per share......................  $    0.41 $     0.49 $     0.96
                                                ========= ========== ==========
Shares used in computation of basic earnings
 per share....................................     25,598     27,839     29,394
                                                ========= ========== ==========
Diluted earnings per share....................  $    0.36 $     0.44 $     0.89
                                                ========= ========== ==========
Shares used in computation of diluted earnings
 per share....................................     29,358     30,792     31,669
                                                ========= ========== ==========
</TABLE>
 
 
                            See accompanying notes.
 
                                       31
<PAGE>
 
                               VISIO CORPORATION
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                                            FISCAL YEAR ENDED SEPTEMBER 30,
                                            ----------------------------------
                                               1996        1997        1998
                                            ----------  ----------  ----------
                                                     (IN THOUSANDS)
<S>                                         <C>         <C>         <C>
CASH FLOWS FROM OPERATIONS:
  Net income............................... $   10,496  $   13,700  $   28,108
  Depreciation and amortization............      1,357       2,632       6,736
  Amortization of (premiums) discounts on
   short-term investments..................         85          92        (852)
  Deferred income taxes....................        (13)     (6,241)     (1,894)
  Issuance of common stock for acquired
   technology..............................         --          --       6,718
  Other non-cash items.....................       (183)         24        (137)
  Changes in operating assets and
   liabilities.............................      8,399      11,836      (7,823)
                                            ----------  ----------  ----------
  Net cash from operations.................     20,141      22,043      30,856
                                            ----------  ----------  ----------
CASH FLOWS USED FOR INVESTMENTS:
  Purchases of short-term investments......    (27,653)    (21,012)    (49,995)
  Proceeds from maturities of short-term
   investments.............................      9,150      18,275      30,500
  Purchases of equipment and leasehold
   improvements............................     (2,568)     (7,139)     (7,684)
  Purchases of capitalized technology......         --      (2,135)     (2,532)
  Purchases of other assets................        180          --        (385)
                                            ----------  ----------  ----------
  Net cash used for investments............    (20,891)    (12,011)    (30,096)
                                            ----------  ----------  ----------
CASH FLOWS FROM FINANCING:
  Issuance of common stock.................      1,447       6,698       7,030
  Proceeds from initial public offering....     35,680          --          --
  Proceeds from notes payable..............         --         400         647
  Payments on notes payable................       (373)       (495)     (2,034)
                                            ----------  ----------  ----------
  Net cash from financing..................     36,754       6,603       5,643
                                            ----------  ----------  ----------
Net increase in cash.......................     36,004      16,635       6,403
Effect of exchange rates on cash...........         29        (252)        845
Cash, beginning............................      7,424      43,457      59,840
                                            ----------  ----------  ----------
Cash, ending............................... $   43,457  $   59,840  $   67,088
                                            ==========  ==========  ==========
SUPPLEMENTAL DISCLOSURES:
  Income tax payments...................... $    4,010  $    6,996  $   10,196
                                            ==========  ==========  ==========
  Interest paid............................ $       --  $       --  $       70
                                            ==========  ==========  ==========
</TABLE>
 
                            See accompanying notes.
 
                                       32
<PAGE>
 
                               VISIO CORPORATION
 
                       STATEMENTS OF SHAREHOLDERS' EQUITY
 
<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED
                                                          SEPTEMBER 30,
                                                     --------------------------
                                                      1996     1997      1998
                                                     -------  -------  --------
                                                          (IN THOUSANDS)
<S>                                                  <C>      <C>      <C>
COMMON STOCK
 Balance, beginning of year......................... $ 1,223  $46,578  $ 56,367
  Conversion of preferred stock.....................   6,545       --        --
  Initial public offering, net of offering of
   $3,848...........................................  35,680       --        --
  Issuance of common stock..........................     210    3,209       944
  Issuance of common stock for acquisitions.........      --       --     7,785
  Stock options exercised...........................     153    1,732     4,297
  Stock warrants exercised..........................     750      395       376
  Stock issued under employee stock purchase plan...     341    1,427     2,329
  Repurchase of common stock........................      (7)     (64)       --
  Stock option tax benefit..........................   1,683    3,090     3,336
                                                     -------  -------  --------
 Balance, end of year...............................  46,578   56,367    75,434
                                                     -------  -------  --------
RETAINED EARNINGS
 Balance, beginning of year.........................  (1,744)   8,781    22,401
  Net income........................................  10,496   13,700    28,108
  Acquired company's retained earnings..............      --       --       109
  Translation adjustments...........................      29     (230)    1,149
  Net short-term investment unrealized gains........      --      150         6
                                                     -------  -------  --------
 Balance, end of year...............................   8,781   22,401    51,773
                                                     -------  -------  --------
Total shareholders' equity.......................... $55,359  $78,768  $127,207
                                                     =======  =======  ========
</TABLE>
 
 
                            See accompanying notes.
 
                                       33
<PAGE>
 
                               VISIO CORPORATION
 
                         NOTES TO FINANCIAL STATEMENTS
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Business
 
  Visio Corporation ("Visio" or the "Company") is a leading supplier of
business drawing and diagramming software products. The Company's primary
products are Visio(R) Standard, Visio Technical, Visio Professional and
IntelliCAD(R). Visio's software enables business and technical users to create
drawings and diagrams ranging from simple diagrams such as flowcharts, block
diagrams and organizational charts to complex technical drawings such as space
plans, electrical schematics and network designs.
 
 Basis of Presentation
 
  The Company's fiscal year is the 52/53-week period that ends on the Friday
nearest September 30. For convenience of presentation, all fiscal periods in
these financial statements are treated as ending on a calendar month end. The
accompanying financial statements are consolidated to include the accounts of
the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated. Certain reclassifications were
made to prior-year financial statements to conform to the current year
presentation. During fiscal 1998, Visio merged with MarComp, Inc. ("MarComp")
and Kaspia Systems, Inc. ("Kaspia") in transactions accounted for as pooling
of interests. All financial information has been restated to reflect the
combined operations of Visio and Kaspia. The results of operations of MarComp
were not material to Visio's financial statements, and therefore, amounts
prior to the period of the merger were not combined with Visio's financial
statements.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
 
 Foreign Currency Translation
 
  Assets and liabilities denominated in foreign currencies are translated to
U.S. dollars at the exchange rate on the balance sheet date. Revenues and
expenses are translated at the average rates of exchange prevailing during the
year. The cumulative translation adjustments resulting from this process are
included as a separate component of retained earnings. Gains and losses on
foreign currency transactions are netted and included in other income.
 
 Revenue Recognition
 
  Revenues and accounts receivable are principally from distributors and
resellers of the Company's products. The Company performs periodic credit
evaluations of its customers and maintains reserves for potential credit
losses. Revenues are generally recognized at the time of shipment, net of
deferrals for inventory at distributors which the Company estimates to be in
excess of levels appropriate for that channel and adjustments for estimated
future returns. Revenues attributable to free upgrade rights are deferred and
not recognized until the free upgrade has been shipped to the customer.
Revenues attributable to the sale of extended customer support and maintenance
programs are deferred and recognized ratably over the contract period.
 
 Financial Instruments
 
  The Company considers highly liquid financial instruments purchased with an
original maturity of three months or less to be cash equivalents and
classifies these instruments as cash on the balance sheet. Management
 
                                      34
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
currently classifies its short-term investments consisting primarily of debt
securities as available-for-sale. These securities are reported at market
value. Unrealized gains and losses are included as a separate component of
retained earnings. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in other
income. The cost of securities sold is based on the specific identification
method. At each of September 30, 1997 and 1998, all short-term investments had
contractual maturities of less than three years. The weighted average maturity
of short-term investments was 170 days at September 30, 1998.
 
 Concentration of Credit Risk
 
  The Company's product revenues are concentrated in the personal computer
software industry which is highly competitive and rapidly changing.
Significant technological changes in the industry or customer requirements, or
the emergence of competitive products with new capabilities or technologies,
could adversely affect operating results. In addition, a significant portion
of the Company's revenues and net income is derived from international sales
and distributors. Fluctuations of the U.S. dollar against foreign currencies,
changes in local tax, regulatory or economic conditions, piracy or
nonperformance by distributors could adversely affect operating results.
 
  The Company places its cash and short-term investments with financial
institutions with high credit standing. The Company's investment portfolio is
diversified and consists of investment grade securities. The Company is
exposed to credit risks in the event of default by these institutions to the
extent of the amount recorded on the balance sheet. Risk in accounts
receivable is mitigated by the Company's credit evaluation process, reasonably
short collection terms and the geographical dispersion of sales transactions.
The Company generally does not require collateral and maintains reserves for
potential credit losses and such losses have been within management's
expectations.
 
 Inventories
 
  Inventories are stated at the lower of cost or market and include
adjustments for estimated obsolescence. Cost is principally determined using
currently adjusted standard costs, which approximate actual cost on a first-
in, first-out basis.
 
 Equipment and Leasehold Improvements
 
  Equipment and leasehold improvements are recorded at cost. Equipment
depreciation is provided on the straight-line method for financial statement
purposes over its estimated useful life of two to five years. Leasehold
improvements are amortized over the lesser of the lease term or estimated
useful life.
 
 Capitalized Technology
 
  Capitalized technology represents the amount of developed technology
acquired from third parties. Amortization is provided on the straight-line
method over its remaining useful life, generally five years. Management
periodically assesses the recoverability of capitalized technology. At
September 30, 1998, management believes this capitalized technology is fully
recoverable.
 
 Research and Development
 
  Research and development costs are expensed as incurred and consist
primarily of software development costs. The effects of financial accounting
rules requiring capitalization of certain internally developed software costs
have not been material to date.
 
 
                                      35
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Acquired Technology and Merger Expenses
 
  Acquired technology represents the amount of in-process technology acquired
from third parties that had not reached technological feasibility and for
which no alternative commercial use was identified. Merger expenses include
all merger related costs such as legal and accounting fees, investment banking
fees and other related costs incurred in connection with transactions
accounted for as pooling of interests.
 
 Advertising Expenses
 
  Advertising costs are expensed as incurred. Total advertising expenses
incurred during fiscal years 1996, 1997 and 1998 were $5.5 million, $10.7
million and $18.2 million, respectively.
 
 Income Taxes
 
  Income taxes are computed using the liability method whereby the provision
for income taxes includes income taxes currently payable and deferred taxes
arising from temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes.
 
 Per Share Data
 
  In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128, Earnings Per Share, which the Company adopted in fiscal
year 1998. Pursuant to the requirements of Statement No. 128, the Company has
changed the method previously used to compute earnings per share and has
restated all prior periods whereby the calculation of primary and fully
diluted earnings per share have been replaced by basic and diluted earnings
per share. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options and stock warrants are excluded.
 
<TABLE>
<CAPTION>
                                     FISCAL YEAR ENDED SEPTEMBER 30
                             --------------------------------------------------
                                      BASIC                     DILUTED
                             -------------------------  -----------------------
                              1996     1997     1998     1996    1997    1998
                             -------  -------  -------  ------- ------- -------
                                (IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S>                          <C>      <C>      <C>      <C>     <C>     <C>
Weighed average common
 shares outstanding........   26,370   28,172   29,446   26,370  28,172  29,446
Restricted stock subject to
 repurchase................     (772)    (333)     (52)     N/A     N/A     N/A
Net effect of dilutive
 common stock
 equivalents*..............      N/A      N/A      N/A    2,988   2,620   2,223
                             -------  -------  -------  ------- ------- -------
Total......................   25,598   27,839   29,394   29,358  30,792  31,669
                             =======  =======  =======  ======= ======= =======
Net income.................  $10,496  $13,700  $28,108  $10,496 $13,700 $28,108
                             =======  =======  =======  ======= ======= =======
Earnings per share.........  $  0.41  $  0.49  $  0.96  $  0.36 $  0.44 $  0.89
                             =======  =======  =======  ======= ======= =======
</TABLE>
--------
* Common stock equivalents include stock options and stock warrants calculated
  using the treasury method. Excludes stock options which were antidilutive of
  92,000, 67,000 and 496,000 in 1996, 1997 and 1998, respectively.
 
 Recently Issued Accounting Pronouncements
 
  In October 1997 the Accounting Standards Executive Committee ("AcSEC")
issued Statement of Position ("SOP") 97-2, "Software Revenue Recognition"
which supersedes SOP 91-1, the former literature on software revenue
recognition. This Statement will be effective for the Company beginning in
fiscal year 1999. In March 1998, AcSEC issued SOP 98-4, "Deferral of the
Effective Date of a Provision of SOP 97-2, Software Recognition," which amends
certain provisions of SOP 97-2. The Company believes it is substantially in
 
                                      36
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
compliance with the provisions of SOP 97-2 as amended by SOP 98-4 and its
adoption is not expected to have a material impact on the financial position
or results of operations of the Company.
 
  In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income." Statement No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of financial statements
and will require the Company to display an amount representing total
comprehensive income in its financial statements. The Company will be required
to implement Statement No. 130 for its first quarter of fiscal 1999.
 
  In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." Statement No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. The Company
will be required to implement Statement No. 131 for its fiscal year 1999.
Management has not yet determined what the impact, if any, will be to the
Company's future disclosures.
 
  In March 1998, the AcSEC issued SOP 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement
requires companies to capitalize qualifying computer software costs incurred
during the application development stage and amortize them over the software's
estimated useful life. The Company is required to adopt this statement in
fiscal year 2000 and management has not yet determined what the effect of SOP
98-1 will be on the earnings and financial position of the Company.
 
  In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which is required to be adopted in fiscal
year 2000. Statement No. 133 provides a comprehensive and consistent standard
for the recognition and measurement of derivatives and hedging activities. The
Company currently hedges certain foreign exchange transaction exposures.
Management has not yet determined what the effect of Statement No. 133 will be
on the earnings and financial position of the Company.
 
2. BALANCE SHEET INFORMATION
 
  Detailed balance sheet data is as follows:
 
<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                            -----------------
                                                             1997      1998
                                                            -------  --------
                                                             (IN THOUSANDS)
   <S>                                                      <C>      <C>
   Accounts receivable:
     Receivables........................................... $ 7,751  $ 18,179
     Allowance for doubtful accounts.......................  (1,164)   (2,245)
                                                            -------  --------
                                                            $ 6,587  $ 15,934
                                                            =======  ========
   Inventories:
     Raw materials......................................... $   299  $    628
     Finished goods........................................     780       600
                                                            -------  --------
                                                            $ 1,079  $  1,228
                                                            =======  ========
   Equipment and leasehold improvements:
     Computer hardware..................................... $ 7,449  $ 10,967
     Office furniture, equipment, and leasehold
      improvements.........................................   6,111    10,461
                                                            -------  --------
                                                             13,560    21,428
     Accumulated depreciation and amortization.............  (5,306)  (11,237)
                                                            -------  --------
                                                            $ 8,254  $ 10,191
                                                            =======  ========
</TABLE>
 
                                      37
<PAGE>
 
                               VISIO CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                             SEPTEMBER 30,
                                                            -----------------
                                                             1997      1998
                                                            -------  --------
                                                             (IN THOUSANDS)
   <S>                                                      <C>      <C>
   Capitalized technology:
     Capitalized technology................................ $ 3,135  $  5,667
     Accumulated amortization..............................    (274)   (1,058)
                                                            -------  --------
                                                            $ 2,861  $  4,609
                                                            =======  ========
   Other accrued liabilities:
     Advertising and promotion............................. $ 4,339  $  4,169
     Other.................................................   7,412     9,548
                                                            -------  --------
                                                            $11,751  $ 13,717
                                                            =======  ========
</TABLE>
 
3. CHANGES IN OPERATING ASSETS AND LIABILITIES
 
  The changes in operating assets and liabilities, net of effects of non-cash
items, are as follows:
 
<TABLE>
<CAPTION>
                                                        FISCAL YEAR ENDED
                                                          SEPTEMBER 30,
                                                      ------------------------
                                                       1996    1997     1998
                                                      ------  -------  -------
                                                          (IN THOUSANDS)
<S>                                                   <C>     <C>      <C>
CHANGES IN OPERATING ASSETS AND LIABILITIES:
  Decrease (increase) in accounts receivable......... $2,174  $(4,401) $(8,902)
  Decrease (increase) in inventories.................    828     (460)    (133)
  (Increase) in prepaid expenses and other...........   (734)  (1,814)  (2,376)
  (Decrease) increase in accounts payable............   (593)   2,441     (783)
  Increase in accrued compensation and benefits......    976      749    1,693
  Increase in other accrued liabilities..............  3,629    4,991    2,756
  Increase (decrease) in deferred revenue............  1,505    5,787   (1,292)
  Increase in income taxes payable...................    614    4,543    1,214
                                                      ------  -------  -------
                                                      $8,399  $11,836  $(7,823)
                                                      ======  =======  =======
</TABLE>
 
4. SHORT-TERM INVESTMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
 
 Available-for Sale Investments
 
  All short-term investments have been classified as available-for-sale
securities. As of September 30, 1997 and 1998, the estimated fair value of
short-term investments consisted of the following:
 
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                              ---------------
                                                               1997    1998
                                                              ------- -------
                                                              (IN THOUSANDS)
   <S>                                                        <C>     <C>
   Estimated fair value of short-term investments by
    investment type:
     Fixed income securities................................. $    -- $20,503
     U.S. Treasury bills.....................................  21,372  21,427
                                                              ------- -------
       Total available-for-sale.............................. $21,372 $41,930
                                                              ======= =======
</TABLE>
 
 
                                       38
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                                    1998
                                                               (IN THOUSANDS)
                                                               --------------
      <S>                                                      <C>
      Estimated fair value of short-term investments by
       contractual maturity:
        Due in one year or less...............................    $31,475
        Due after one year through two years..................      9,021
        Due after two years through three years...............      1,434
                                                                  -------
          Total available-for-sale............................    $41,930
                                                                  =======
</TABLE>
 
  Unrealized gains (losses) on all available-for-sale securities are reported
as a component of retained earnings and are not material. During the period
covered by the financial statements, the Company has not used any derivative
instrument for trading purposes. Visio utilizes some natural hedging to
mitigate the Company's foreign currency exposures and the Company hedges
certain residual exposures through the use of foreign exchange forward
contracts, which the Company enters into with financial institutions to
protect against currency exchange risks associated with certain balance sheet
positions. The fair value of foreign exchange forward contracts is based on
quoted market prices. At September 30, 1997 and 1998, the Company held forward
contracts to deliver approximately $42,000 and $7.9 million, respectively, in
foreign currencies with maturities not exceeding 240 days.
 
  At September 30, 1997 and 1998, the fair value of the forward exchange
contracts approximated cost. The Company does not hedge its translation risk.
 
5. COMMITMENTS
 
  Visio rents office facilities and automobiles under operating leases.
Certain office facility leases contain renewal and escalation clauses and
space expansion provisions. In February 1999, the Company expects to relocate
its Seattle, Washington operations to its new leased facility. At September
30, 1998, the Company had commitments for capital expenditures of
approximately $9.4 million related to this new facility.
 
  At September 30, 1998, future minimum lease payments under noncancelable
operating leases are:
 
<TABLE>
<CAPTION>
                                                                OPERATING LEASES
                                                                ----------------
                                                                 (IN THOUSANDS)
      <S>                                                       <C>
      1999.....................................................     $ 5,359
      2000.....................................................       5,636
      2001.....................................................       5,045
      2002.....................................................       4,736
      2003.....................................................       4,464
      2004 and thereafter......................................      23,213
                                                                    -------
        Total minimum lease payments...........................     $48,453
                                                                    =======
</TABLE>
 
  Rental expenses under operating leases totaled $1,138,000, $1,223,000 and
$2,478,000 in fiscal 1996, 1997 and 1998, respectively.
 
  Subsequent to September 30, 1998, the Company entered into a lease for a new
facility in Dublin, Ireland. The Company also exercised an option for
additional space in connection with its new facility in Seattle. The aggregate
minimum lease payments for these noncanceable leases are as follows: $430,000
in fiscal 1999, $1.4 million in fiscal 2000, $2.5 million in fiscal 2001, $3.8
million in fiscal 2002, $4.3 million in fiscal 2003 and $31.3 million
thereafter.
 
                                      39
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
6. INCOME TAXES
 
  Income before income taxes consists of the following:
 
<TABLE>
<CAPTION>
                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                           ----------------------------------
                                              1996        1997        1998
                                           ----------  ----------  ----------
                                                    (IN THOUSANDS)
   <S>                                     <C>         <C>         <C>
   U.S.................................... $   12,244  $   14,783  $   17,387
   International..........................      2,864       3,519      20,293
                                           ----------  ----------  ----------
                                           $   15,108  $   18,302  $   37,680
                                           ==========  ==========  ==========
 
  The provision for income taxes consists of the following:
 
<CAPTION>
                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                           ----------------------------------
                                              1996        1997        1998
                                           ----------  ----------  ----------
                                                    (IN THOUSANDS)
   <S>                                     <C>         <C>         <C>
   Current tax expense:
     U.S. federal......................... $    4,445  $    9,555  $    7,535
     State................................         --         385         893
     Foreign..............................        180         882       2,363
                                           ----------  ----------  ----------
   Total current provision................      4,625      10,822      10,791
                                           ----------  ----------  ----------
   Deferred tax provision (benefit)
     U.S. federal.........................         51      (5,541)     (1,107)
     State................................        (64)       (377)       (287)
     Foreign..............................         --        (302)        175
                                           ----------  ----------  ----------
   Total deferred tax.....................        (13)     (6,220)     (1,219)
                                           ----------  ----------  ----------
   Total provision for income taxes....... $    4,612  $    4,602  $    9,572
                                           ==========  ==========  ==========
 
  Total income tax expense differs from the U.S. federal statutory rate of 34%
for fiscal years 1996 and 1997, and 35% for fiscal year 1998, as follows:
 
<CAPTION>
                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                           ----------------------------------
                                              1996        1997        1998
                                           ----------  ----------  ----------
                                                    (IN THOUSANDS)
   <S>                                     <C>         <C>         <C>
   Income tax provision at statutory
    rate.................................. $    5,137  $    6,223  $   13,188
   State taxes, net of federal benefit....        (42)         (6)        453
   Impact of international operations.....         --      (1,293)     (5,292)
   Tax-free interest......................       (429)       (454)       (711)
   Non-deductible write-off of acquired
    in-process research and development...         --          --       2,774
   Federal research and development
    credits...............................        (10)        (21)       (590)
   Other..................................        (44)        153        (250)
                                           ----------  ----------  ----------
                                           $    4,612  $    4,602  $    9,572
                                           ==========  ==========  ==========
</TABLE>
 
  The current federal and state provisions do not reflect the tax savings
resulting from deductions associated with Visio's various stock option plans.
These savings were approximately $1.7 million in fiscal 1996, $3.1 million in
fiscal 1997 and $3.3 million in fiscal 1998 and were credited to common stock.
 
 
                                      40
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  The tax effects of the temporary differences that give rise to significant
portions of the deferred tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                                 FISCAL YEAR
                                                                    ENDED
                                                                SEPTEMBER 30,
                                                                ---------------
                                                                 1997    1998
                                                                ------  -------
                                                                (IN THOUSANDS)
   <S>                                                          <C>     <C>
   Deferred tax assets:
     Reserves for sales returns and doubtful accounts.......... $  933  $ 1,154
     Deferred revenue..........................................  2,951    2,850
     Reserves and expenses not currently deductible............    862    1,535
     Acquired technology.......................................  2,825    4,042
     Net operating loss carryforwards..........................  1,080    2,481
     Tax credit carryforwards..................................     35      123
                                                                ------  -------
                                                                 8,686   12,185
   Deferred tax liabilities:
     Deductible prepaid expenses and other.....................   (209)    (830)
                                                                ------  -------
   Net deferred tax assets..................................... $8,477  $11,355
                                                                ======  =======
</TABLE>
 
  No provision has been recorded for federal income taxes on unremitted
earnings of certain of the Company's foreign subsidiaries since the Company
plans to reinvest all such earnings for the foreseeable future. At September
30, 1998, cumulative unremitted earnings from these subsidiaries were $27.6
million. The unrecognized deferred tax liability was approximately $7.5
million.
 
  The Company's deferred tax assets include net operating loss carryforwards
of approximately $7.5 million and research and development tax credit
carryforwards of $123,000 which were obtained in the acquisition of certain
technology and assets of InfoModelers, Inc. ("InfoModelers") and the merger
with Kaspia in fiscal 1998. The net operating loss carryforwards and research
and development tax credit carryforwards begin expiring in fiscal year 2009.
The Company expects to utilize these carryforwards prior to expiration.
 
7. EMPLOYEE BENEFITS
 
 Stock Option Plans
 
  The 1995 Nonemployee Director Stock Option Plan provides for the granting of
options to nonemployee directors of the Company. Options under this plan may
be granted at not less than 85% of fair market value on the date of grant,
expire after ten years and vest after one year. At September 30, 1998, a total
of 172,500 shares of common stock remained available under the plan for future
grants. There were 22,500 options granted under the plan in fiscal 1998.
 
  The 1995 Long-Term Incentive Compensation Plan provides for the granting of
incentives and awards to employees, agents and consultants of the Company and
its subsidiaries. The plan combines the features of an incentive and a
nonqualified stock option plan, a stock appreciation rights plan, a stock
award plan and a performance-based plan. Options under this plan generally
have been granted at fair market value on the date of grant, expire after ten
years and vest over a period of four years. In fiscal 1998, the Company's
shareholders approved an amendment to the plan that increased the number of
shares of common stock which may be issued under the plan by 3,000,000. At
September 30, 1998, a total of 2,695,802 shares of common stock remained
available under the plan for future grants. There were 1,393,865 options
granted under this plan in fiscal 1998.
 
 
                                      41
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 1995 Employee Stock Purchase Plan
 
  The 1995 Employee Stock Purchase Plan permits eligible employees of the
Company to purchase common stock at not less than 85% of fair market value as
defined in the plan through payroll deductions of up to 15% of their
compensation, provided that no employee may purchase common stock worth more
than $25,000 in any calendar year or more than 10,000 shares of common stock
during any offering period. The Company has reserved an aggregate of 750,000
shares of common stock for issuance under this plan, and this plan expires in
2005. There were 102,949 shares issued under this plan in fiscal 1998. At
September 30, 1998, the Company had reserved 448,000 shares of common stock
for future grants under this plan.
 
  Stock option activity and option price information were as follows:
 
<TABLE>
<CAPTION>
                                                                   WEIGHTED
                                                                    AVERAGE
                                                    SHARES        SHARE PRICE
                                                  ------------  ---------------
                                                  (IN THOUSANDS, EXCEPT PER
                                                         SHARE DATA)
   <S>                                            <C>           <C>
   Balance, October 1, 1995......................        3,127    $       0.91
     Granted.....................................          970           14.69
     Exercised...................................         (518)           0.27
     Exercised and converted to restricted
      stock......................................          (81)           0.10
     Canceled....................................         (157)           4.01
                                                  ------------    ------------
   Balance, September 30, 1996...................        3,341            4.84
     Granted.....................................        1,776           24.01
     Exercised...................................         (590)           2.91
     Exercised and converted to restricted
      stock......................................          (20)           0.37
     Canceled....................................         (280)          10.88
                                                  ------------    ------------
   Balance, September 30, 1997...................        4,227           12.63
     Granted.....................................        1,416           40.50
     Exercised...................................       (1,079)           3.99
     Canceled....................................         (325)          22.34
                                                  ------------    ------------
   Balance, September 30, 1998...................        4,239    $      23.34
                                                  ============    ============
</TABLE>
 
  The Company has reserved shares of common stock for future issuance under
its stock option plans of 7.1 million at September 30, 1998.
 
  For various price ranges, weighted average characteristics of outstanding
stock options at September 30, 1998 were as follows:
 
<TABLE>
<CAPTION>
                          OUTSTANDING OPTIONS         EXERCISABLE OPTIONS
                      ------------------------------  ------------------------
        RANGE OF               REMAINING   WEIGHTED                 WEIGHTED
        EXERCISE                 LIFE      AVERAGE                  AVERAGE
         PRICES       SHARES    (YEARS)     PRICE      SHARES        PRICE
        --------      ------   ---------   --------   ---------    ----------
                            (IN THOUSANDS, EXCEPT PER SHARE DATA)
     <S>              <C>      <C>         <C>        <C>          <C>
     $ 0.06--$10.00     943      6.22       $ 2.09          754     $     1.80
      10.01-- 20.00   1,025      7.97        17.43          472          16.98
      20.01-- 30.00     759      8.49        22.84          222          22.74
      30.01-- 40.00     934      9.12        37.68           45          35.50
      40.01-- 49.94     578      9.51        45.94           11          41.38
                      -----      ----       ------    ---------     ----------
                      4,239      8.14       $23.34        1,504     $    10.95
                      =====      ====       ======    =========     ==========
</TABLE>
 
                                      42
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company follows APB 25, "Accounting for Stock Issued to Employees," to
account for stock option and employee stock purchase plans. No compensation
cost is recognized because the option exercise price is generally equal to the
market price of the underlying stock on the date of grant. The fair value of
options granted in 1996, 1997, and 1998 reported below has been estimated at
the date of grant using a Black Scholes option pricing model with the
following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                FISCAL YEAR ENDED SEPTEMBER 30,
                                                --------------------------------
                                                   1996       1997       1998
                                                ---------- ---------- ----------
   <S>                                          <C>        <C>        <C>
   Stock option plans:
     Expected life in years....................       5.0        5.0        5.0
     Risk-free interest rate...................       6.5%       6.0%       6.0%
     Volatility................................       0.38       0.38       0.52
     Dividend yield............................       0.0%       0.0%       0.0%
   Stock purchase plan:
     Expected life in years....................       1.09       1.03       1.54
     Risk-free interest rate...................       6.5%       6.0%       6.0%
     Volatility................................       0.38       0.38       0.52
     Dividend yield............................       0.0%       0.0%       0.0%
</TABLE>
 
  The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of the fair value of its options. The weighted average
estimated fair value of stock options granted in fiscal years 1996, 1997, and
1998 was $5.20, $8.38, and $17.50 per share, respectively. The weighted
average estimated fair value of shares granted under the Employee Stock
Purchase Plan in fiscal years 1996, 1997, and 1998 was $1.72, $6.13, and
$10.32 per share, respectively. Had compensation cost for these plans been
determined based on the Black-Scholes value at the grant dates for awards as
prescribed in SFAS Statement 123, "Accounting for Stock-Based Compensation,"
pro forma net income and earnings per share would have been:
 
<TABLE>
<CAPTION>
                                           FISCAL YEAR ENDED SEPTEMBER 30,
                                       ---------------------------------------
                                           1996         1997         1998
                                       ------------ ------------ -------------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                                 <C>          <C>          <C>
   Pro forma net income............... $      9,378 $      8,710 $      17,600
   Pro forma basic earnings per
    share............................. $       0.37 $       0.31 $        0.60
   Pro forma diluted earnings per
    share............................. $       0.32 $       0.28 $        0.56
</TABLE>
 
  The pro forma disclosures above include the amortization of the fair value
of all options vesting during fiscal 1996, 1997, and 1998 net of stock option
tax benefits. Because the method prescribed by SFAS 123 has not been applied
to options granted prior to September 30, 1995, the resulting pro forma
compensation cost may not be representative of that to be expected in future
years.
 
 
                                      43
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
8. SHAREHOLDERS' EQUITY
 
 Common Shares Outstanding
 
<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED
                                                             SEPTEMBER 30,
                                                          ----------------------
                                                           1996    1997    1998
                                                          ------  ------  ------
                                                             (IN THOUSANDS)
   <S>                                                    <C>     <C>     <C>
   Balance, beginning of year............................ 11,312  27,503  28,633
   Conversion of preferred stock......................... 10,410      --      --
   Initial public offering...............................  4,941      --      --
   Issuance of common stock..............................     26     232      14
   Issuance of common stock for acquisitions.............     --      --     250
   Stock options exercised...............................    599     610   1,079
   Stock warrants exercised..............................    226     146     112
   Stock issued under employee stock purchase plan.......     43     156     103
   Repurchase of restricted common stock.................    (54)    (14)     --
                                                          ------  ------  ------
     Balance, end of year................................ 27,503  28,633  30,191
                                                          ======  ======  ======
</TABLE>
 
 Warrants
 
  In connection with a venture lease agreement entered into in fiscal 1993,
the Company granted a warrant to purchase 33,518 shares of Series B preferred
stock at $0.60 per share. In fiscal 1997, the warrant was exercised in full.
In connection with the 1994 sale of Series B preferred stock, Visio granted a
warrant to purchase 450,000 shares of common stock at approximately $3.34 per
share to an officer of the Company. In fiscal 1998, the remaining 112,500
warrants were exercised.
 
9. BUSINESS SEGMENT AND OTHER INFORMATION
 
  The Company operates in one business segment: software products and related
services for users of personal computers. Sales to unaffiliated customers
accounting for greater than 10% of sales are as follows:
 
<TABLE>
<CAPTION>
                                                                   FISCAL YEAR
                                                                      ENDED
                                                                  SEPTEMBER 30,
                                                                  ----------------
                                                                  1996  1997  1998
                                                                  ----  ----  ----
   <S>                                                            <C>   <C>   <C>
   Ingram Micro, Inc.............................................  34%   35%   34%
   Merisel, Inc..................................................  16    12    10
</TABLE>
 
  Information regarding the Company's operations in different geographic areas
is set forth below. Revenues, operating income and identifiable assets are
reported based on the location of the Company's customers.
 
<TABLE>
<CAPTION>
                                                     FISCAL YEAR ENDED
                                                       SEPTEMBER 30,
                                                 -------------------------
                                                  1996     1997     1998
                                                 ------- -------- --------
                                                      (IN THOUSANDS)
   <S>                                           <C>     <C>      <C>
   Revenues:
     North America customers.................... $37,872 $ 65,238 $ 98,735
     Europe customers...........................  14,311   22,199   41,210
     Rest of World customers....................   7,679   13,338   26,050
                                                 ------- -------- --------
                                                 $59,862 $100,775 $165,995
                                                 ======= ======== ========
</TABLE>
 
                                      44
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
<TABLE>
<CAPTION>
                                                    FISCAL YEAR ENDED
                                                      SEPTEMBER 30,
                                                --------------------------
                                                 1996     1997      1998
                                                ------- --------  --------
                                                     (IN THOUSANDS)
   <S>                                          <C>     <C>       <C>
   Operating income:
     North America customers..................  $10,326  $20,791   $27,344
     Europe customers.........................      610    1,510     8,516
     Rest of World customers..................    2,634    2,790     6,177
     Acquired technology and merger expenses..       --  (10,255)   (9,251)
                                                ------- --------  --------
                                                $13,570  $14,836   $32,786
                                                ======= ========  ========
   Identifiable assets:
     North America customers..................  $64,178 $ 96,364  $114,685
     Europe customers.........................    6,674   10,944    29,097
     Rest of World customers..................    2,355    5,393    15,595
                                                ------- --------  --------
                                                $73,207 $112,701  $159,377
                                                ======= ========  ========
</TABLE>
 
10. ACQUIRED TECHNOLOGY AND MERGER EXPENSES
 
  For all acquisitions accounted for under the purchase method, assets are
recorded at fair market value. The allocation of the purchase price to
acquired technology or capitalized technology is based on known valuation
techniques in the software industry. For some transactions, the Company
obtains an independent appraisal of the technology. Amounts allocated to
acquired technology relate to in-process research and development that were
immediately expensed in the period of acquisition because technological
feasibility was not established and no alternative commercial use was
identified. Amounts allocated to capitalized technology relate to technology
that had achieved technological feasibility at the time of acquisition.
Capitalized technology is amortized on a straight-line basis over the
estimated useful life of the technology.
 
  Boomerang Technology Acquisition. On February 21, 1997, the Company acquired
certain technology and assets of Boomerang Technology, Inc. ("Boomerang"), a
privately held developer of Autodesk AutoCAD-compatible software, located in
San Diego, California. Under the terms of the agreement, the Company acquired
source code and certain other assets for a cash payment of $6.7 million. This
transaction was accounted for using the purchase method and resulted in a
charge to acquired technology and merger expenses of $6.7 million for in-
process research and development in fiscal 1997.
 
  SysDraw Software Company Acquisition. On May 1, 1997, the Company acquired
certain assets of Freedom Solutions Group, Inc., d.b.a. SysDraw Software
Company ("SysDraw"), a privately held network design and documentation
solutions provider, located in Lombard, Illinois. Under the terms of the
agreement, the acquisition price included $5.8 million in cash plus the
issuance of a $1.0 million note payable, the principal and interest of which
were paid by Visio in August 1998. Visio is required to pay $1.5 million of
additional consideration if revenues of the acquired products meet certain
performance goals within three years of the acquisition. The transaction was
accounted for using the purchase method and resulted in capitalized technology
of $3.1 million, other assets of $100,000 and a charge to acquired technology
and merger expenses of $3.6 million for in-process research and development in
fiscal 1997. The capitalized technology is being amortized on a straight-line
basis over five years.
 
  Merger with MarComp. On January 22, 1998, the Company merged with MarComp, a
privately held provider of programming toolkits for access to Autodesk's
AutoCAD .dwg and .dxf file formats, located in Parkton, Maryland. Under the
terms of the merger agreement, Visio exchanged 50,014 shares of its
unregistered
 
                                      45
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
common stock for all of the outstanding shares of MarComp. The transaction was
accounted for as a pooling of interests and due to the immateriality of the
amounts involved, prior period financial statements have not been restated.
The transaction resulted in an increase in equity of $109,000 primarily due to
the acquisition of cash and accounts receivable from MarComp and resulted in
approximately $100,000 in merger related costs in fiscal 1998.
 
  InfoModelers Technology Acquisition. On February 10, 1998, the Company
acquired certain technology and assets of InfoModelers, Inc. ("InfoModelers"),
a privately held, leading supplier of database and data warehouse visual
design, access and query tools, located in Bellevue, Washington. Under the
terms of the agreement, Visio issued 200,000 shares of its unregistered common
stock for accounts receivable, fixed assets, tax assets and certain technology
assets. The transaction was accounted for using the purchase method and was
valued at approximately $8.0 million for InfoModeler shareholders. This
transaction resulted in a total charge to acquired technology and merger
expenses of $7.0 million for in-process research and development in fiscal
1998. In addition, the Company recorded approximately $1.0 million in other
assets.
 
  Decision Graphics Technology Acquisition. On May 5, 1998, the Company
acquired certain technology from Decision Graphics UK Ltd. ("Decision
Graphics"), a privately held provider of computer-aided facilities management
software, located in the U.K., for $729,000. The transaction was accounted for
using the purchase method and resulted in a total charge to acquired
technology and merger expenses of $729,000 for in-process research and
development in fiscal 1998.
 
  Ketiv Technology Acquisition. On June 2, 1998, the Company acquired certain
CAD technology, software products and other assets from Ketiv Technologies,
Incorporated ("Ketiv"), a privately held provider of architecture, engineering
and construction software located in Portland, Oregon, for approximately $2.7
million. The transaction was accounted for using the purchase method and
resulted in capitalized technology of $2.5 million and a total charge to
acquired technology and merger expenses of $247,000 for in-process research
and development in fiscal 1998. The capitalized technology is being amortized
on a straight-line basis over five years.
 
  Merger with Kaspia. On July 10, 1998, the Company merged with Kaspia, a
privately held developer of fully automated enterprise-network audit
functionality, including discovery, monitoring and reporting software, located
in Beaverton, Oregon. Under the terms of the merger agreement, Visio acquired
all of Kaspia's outstanding stock for 482,994 shares of Visio common stock,
valued at approximately $23.3 million for Kaspia shareholders. This
transaction was accounted for as a pooling of interests. Accordingly, the
financial statements include the combined results of operations for Visio and
Kaspia, and all prior financial statements have been restated. The transaction
resulted in approximately $1.2 million in merger related costs in fiscal 1998.
 
                                      46
<PAGE>
 
                               VISIO CORPORATION
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Statements of Income for the three years ended September 30, 1998 and
the Balance Sheets at September 30, 1997 and 1998 contain the combined results
of both Visio and Kaspia. The combined results prior to the merger with Kaspia
are stated below:
 
<TABLE>
<CAPTION>
                                                                     NINE
                                        FISCAL YEAR ENDED           MONTHS
                                          SEPTEMBER 30,             ENDED
                                    ---------------------------    JUNE 30,
                                        1996          1997           1998
                                    ------------  -------------  ------------
                                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
   <S>                              <C>           <C>            <C>
   Revenues:
     Visio......................... $     59,699  $      99,515  $    120,442
     Kaspia........................          163          1,260         1,330
                                    ------------  -------------  ------------
       Combined.................... $     59,862  $     100,775  $    121,772
                                    ============  =============  ============
   Net income:
     Visio......................... $     11,091  $      15,113  $     20,579
     Kaspia........................         (965)        (2,121)       (2,232)
     Adjustment for Kaspia tax
      benefit......................          370            708           806
                                    ------------  -------------  ------------
       Combined.................... $     10,496  $      13,700  $     19,153
                                    ============  =============  ============
   Diluted earnings (loss) per
    share:(1)
     Visio......................... $       0.38  $        0.50  $       0.66
     Kaspia........................        (3.02)         (3.72)        (3.05)
                                    ------------  -------------  ------------
       Combined.................... $       0.36  $        0.44  $       0.61
                                    ============  =============  ============
</TABLE>
  --------
  (1) Adjusted for exchange ratio of 0.0301688 shares of Visio common stock
      for each share of Kaspia common stock.
 
<TABLE>
<CAPTION>
                                                         SEPTEMBER 30, JUNE 30,
                                                             1997        1998
                                                         ------------- --------
                                                             (IN THOUSANDS)
   <S>                                                   <C>           <C>
   Total assets
     Visio..............................................   $109,215    $149,440
     Kaspia.............................................      3,079       3,163
     Adjustment for Kaspia deferred tax assets..........        407         445
                                                           --------    --------
       Combined.........................................   $112,701    $153,048
                                                           ========    ========
</TABLE>
 
  The technologies acquired in the MarComp, Boomerang, Decision Graphics and
Ketiv transactions are being integrated into the Company's products in the
Technical Drawing product group. The technologies acquired in the SysDraw,
InfoModelers and Kaspia transactions are being integrated into the Company's
products in the IT Design and Documentation product group.
 
  The operating results of MarComp, Boomerang, SysDraw, InfoModelers, Decision
Graphics, and Ketiv were not material to the financial statements of Visio,
and accordingly, pro forma financial information has not been presented for
these acquisitions.
 
                                      47
<PAGE>
 
                               VISIO CORPORATION
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
11. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
 
  Summarized quarterly financial information is as follows:
 
FISCAL YEAR 1998
 
<TABLE>
<CAPTION>
                                                                        FISCAL
                                            FISCAL QUARTER ENDED         YEAR
                                       -------------------------------  ENDED
                                       DEC 31  MAR 31  JUN 30  SEP 30   SEP 30
                                       ------- ------- ------- ------- --------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>     <C>     <C>     <C>     <C>
Revenues.............................  $37,497 $40,089 $44,186 $44,223 $165,995
Gross profit.........................  $34,105 $36,452 $40,046 $40,260 $150,863
Net income...........................  $ 7,378 $ 3,326 $ 8,449 $ 8,955 $ 28,108
Basic earnings per share.............  $  0.26 $  0.11 $  0.28 $  0.30 $   0.96
Shares used in computation of basic
 earnings per share..................   28,607  29,243  29,740  29,987   29,394
Diluted earnings per share...........  $  0.24 $  0.11 $  0.26 $  0.28 $   0.89
Shares used in computation of diluted
 earnings per share..................   31,395  31,659  32,018  31,604   31,669
Common stock prices
  High...............................  $ 42.63 $ 48.13 $ 50.88 $ 50.75 $  50.88
  Low................................  $ 26.50 $ 32.38 $ 39.88 $ 19.00 $  19.00
FISCAL YEAR 1997
 
<CAPTION>
                                                                        FISCAL
                                            FISCAL QUARTER ENDED         YEAR
                                       -------------------------------  ENDED
                                       DEC 31  MAR 31  JUN 30  SEP 30   SEP 30
                                       ------- ------- ------- ------- --------
                                        (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                    <C>     <C>     <C>     <C>     <C>
Revenues.............................  $19,207 $23,812 $26,367 $31,389 $100,775
Gross profit.........................  $17,214 $21,399 $23,616 $27,864 $ 90,093
Net income...........................  $ 4,157 $   216 $ 2,942 $ 6,385 $ 13,700
Basic earnings per share.............  $  0.15 $  0.01 $  0.10 $  0.23 $   0.49
Shares used in computation of basic
 earnings per share..................   27,263  27,685  28,063  28,344   27,839
Diluted earnings per share...........  $  0.14 $  0.01 $  0.10 $  0.20 $   0.44
Shares used in computation of diluted
 earnings per share..................   30,405  30,519  30,943  31,300   30,792
Common stock prices
  High...............................  $ 26.38 $ 26.75 $ 35.03 $ 42.50 $  42.50
  Low................................  $ 19.75 $ 18.13 $ 19.13 $ 32.00 $  18.13
</TABLE>
 
  Visio's common stock has been traded on the Nasdaq National Market under the
symbol VSIO since the Company's initial public offering in November 1995. The
high and low common stock prices noted above are as reported on the Nasdaq
National Market. On November 30, 1998, there were 229 holders of record of the
Company's common stock. The Company has not paid cash dividends on its common
stock.
 
                                       48
<PAGE>
 
                                                                     SCHEDULE II
 
                               VISIO CORPORATION
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                              BALANCE AT     ADDITIONS                 BALANCE
                             BEGINNING OF CHARGED TO COSTS REDUCTIONS  AT END
                                PERIOD      AND EXPENSES   WRITE-OFFS OF PERIOD
                             ------------ ---------------- ---------- ---------
<S>                          <C>          <C>              <C>        <C>
ALLOWANCE FOR DOUBTFUL
 ACCOUNTS:
  Year ended September 30,
   1996.....................    $  344         $  329        $ (24)    $  649
  Year ended September 30,
   1997.....................    $  649         $  539        $ (24)    $1,164
  Year ended September 30,
   1998.....................    $1,164         $1,385        $(304)    $2,245
<CAPTION>
                              BALANCE AT     ADDITIONS                 BALANCE
                             BEGINNING OF CHARGED TO COSTS REDUCTIONS  AT END
                                PERIOD      AND EXPENSES   WRITE-OFFS OF PERIOD
                             ------------ ---------------- ---------- ---------
<S>                          <C>          <C>              <C>        <C>
RESERVE FOR OBSOLETE
 INVENTORY:
  Year ended September 30,
   1996.....................    $  746         $  646        $(813)    $  579
  Year ended September 30,
   1997.....................    $  579         $  281        $(293)    $  567
  Year ended September 30,
   1998.....................    $  567         $  186        $(347)    $  406
</TABLE>
 
                                       49
<PAGE>
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
  None.
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
  The information required by this item is incorporated by reference from the
sections labeled "Election of Directors" and "Additional Information" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on February 24, 1999.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  The information required by this item is incorporated by reference from the
sections labeled "Election of Directors" and "Additional Information" in the
Company's definitive Proxy Statement for the Annual Meeting of Shareholders to
be held on February 24, 1999.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  The information required by this item is incorporated by reference from the
sections labeled "Additional Information" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on February 24,
1999.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  The information required by this item is incorporated by reference from the
sections labeled "Additional Information" in the Company's definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on February 24,
1999.
 
                                      50
<PAGE>
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
 
  (A) LIST OF DOCUMENTS FILED AS A PART OF THIS REPORT:
 
    (1)INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<S>                                                                         <C>
      Report of Ernst & Young LLP, Independent Auditors....................  29
      Balance Sheets as of September 30, 1997 and 1998.....................  30
      Statements of Income for each of the three years ended
       September 30, 1998..................................................  31
      Statements of Cash Flows for each of the three years ended
       September 30, 1998..................................................  32
      Statements of Shareholders' Equity for each of the three years ended
       September 30, 1998..................................................  33
      Notes to Financial Statements........................................  34
 
    (2)INDEX TO FINANCIAL STATEMENT SCHEDULES
 
      Schedule II--Valuation and Qualifying Accounts for each of the three
       years ended September 30, 1998......................................  49
</TABLE>
 
      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 financial statements or notes
      thereto.
 
    (3)EXHIBITS
 
      The exhibits filed in response to Item 601 of Regulation S-K are
      listed in the Exhibit Index contained herein.
 
 
  (B) REPORTS ON FORM 8-K
 
    On July 23, 1998, Visio Corporation filed with the Securities and
  Exchange Commission a Current Report on Form 8-K reporting the merger with
  Kaspia Systems, Inc.
 
                                      51
<PAGE>
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
 NUMBER                           DESCRIPTION                           LOCATION
 ------                           -----------                           --------
 <C>     <S>                                                            <C>
   2.1   Agreement and Plan of Merger by and among Visio Corporation,
          Kaspia Systems, Inc., VMS-1, Inc. and the stockholders of
          Kaspia named therein, dated July 10, 1998..................      (H)
   3.1   Fourth Restated Articles of Incorporation of Visio
          Corporation................................................      (F)
   3.2   Restated Bylaws of Visio Corporation........................      (F)
   4.1   Specimen Common Stock Certificate of Visio Corporation......      (A)
   4.2   Investor Rights Agreement between Visio Corporation and the
          investors named therein, dated July 10, 1998...............      (H)
  10.1   1990 Stock Option Plan, as amended..........................      (F)
  10.2   1995 Long-Term Incentive Stock Option Plan, as amended......      (G)
  10.3   1995 Stock Option Plan for Nonemployee Directors, as
          amended....................................................      (F)
  10.4   1995 Employee Stock Purchase Plan, as amended...............      (F)
  10.5   Office Lease between Visio Corporation and Sixth & Pike
          Associates, L.P. dated October 28, 1993....................      (A)
  10.6   Amendment to Office Lease between Visio Corporation and
          Sixth & Pike Associates, L.P. dated June 13, 1996..........      (B)
  10.7   Lease Agreement between WRC Trade Center LLC and Visio
          Corporation dated January 9, 1998..........................       +
  10.8   Office Lease between Visio International Limited and Erin
          Executor & Trustee Co. Limited dated August 20, 1996.......      (C)
  10.9   Registration Rights Agreement among Visio Corporation and
          the Investors, as defined therein, dated as of 
          April 11, 1991, as amended.................................      (A)
  10.10  Loan and Security Agreement between Silicon Valley Bank and
          Visio Corporation dated January 26, 1994, as amended.......      (A)
  10.11  Amendment to the Loan and Security Agreement between Silicon
          Valley Bank and Visio Corporation dated April 3, 1996......      (B)
  10.12  Amendment to the Loan and Security Agreement between Silicon
          Valley Bank and Visio Corporation dated February 28, 1997..      (D)
  10.13  Form of Indemnification Agreement for directors and
          officers...................................................      (A)
  10.14* Distribution Agreement dated as of December 14, 1992, as
          amended, between Visio Corporation and Merisel, Inc. ......      (A)
  10.15* Distributor Agreement dated as of November 2, 1992, as
          amended, between Visio Corporation and Ingram Micro,
          Inc. ......................................................      (A)
  10.16* License Agreement dated as of July 10, 1995.................      (A)
  10.17  Asset Purchase Agreement between Visio Corporation and
          Boomerang Technology, Inc. dated February 21, 1997.........      (D)
  10.18  Asset Purchase Agreement between Visio Corporation and
          SysDraw Software Company dated May 1, 1997.................      (E)
  21.1   Subsidiaries of the registrant..............................       +
</TABLE>
 
                                       52
<PAGE>
 
<TABLE>
<CAPTION>
 NUMBER                           DESCRIPTION                           LOCATION
 ------                           -----------                           --------
 <C>    <S>                                                             <C>
  23.1  Consent of Ernst & Young LLP, Independent Auditors............      +
  24.1  Power of Attorney (contained on signature page)...............      +
  27.1  Financial Data Schedule, which is submitted electronically to
         the Securities and Exchange Commission for information
         purposes only and not filed..................................      +
  27.2  Financial Data Schedule, which is submitted electronically to
         the Securities and Exchange Commission for information
         purposes only and not filed..................................      +
  27.3  Financial Data Schedule, which is submitted electronically to
         the Securities and Exchange Commission for information
         purposes only and not filed..................................      +
  27.4  Financial Data Schedule, which is submitted electronically to
         the Securities and Exchange Commission for information
         purposes only and not filed..................................      +
</TABLE>
--------
 +  Filed herewith.
(A)Filed as an exhibit to the Company's Registration Statement on Form S-1
      (Registration No. 33-96986) effective November 9, 1995 and incorporated
      herein by reference.
(B)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarterly period ended June 30, 1996 and incorporated herein by
      reference.
(C)Filed as an exhibit to the Company's Annual Report on Form 10-K for the
      fiscal year ended September 30, 1996 and incorporated herein by
      reference.
(D)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarterly period ended March 31, 1997 and incorporated herein by
      reference.
(E)Filed as an exhibit to the Company's Quarterly Report on Form 10-Q for the
      quarterly period ended June 30, 1997 and incorporated herein by
      reference.
(F)Filed as an exhibit to the Company's Annual Report on Form 10-K for the
      fiscal year ended September 30, 1997 and incorporated herein by
      reference.
(G)Filed as an exhibit to the Company's Post-Effective Amendment No. 1 to the
      Registration Statement on Form S-8 (Registration No. 333-50619)
      effective June 18, 1998 and incorporated herein by reference.
(H)Filed as an exhibit to the Company's Current Report on Form 8-K filed with
      the Securities and Exchange Commission on July 23, 1998.
 *Confidential treatment has been granted for portions of the exhibit.
 
                                      53
<PAGE>
 
                                  SIGNATURES
 
  PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES ACT OF
1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF OF THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
 
                                          Visio Corporation
 
                                                  /s/ Jeremy A. Jaech
                                          By: _________________________________
                                                      JEREMY A. JAECH
                                               PRESIDENT AND CHIEF EXECUTIVE
                                                          OFFICER
 
                                          Date: December 23, 1998
 
                               POWER OF ATTORNEY
 
  Each person whose signature appears below hereby authorizes and appoints
Jeremy A. Jaech and Theodore C. Johnson, and each of them, with full power of
substitution and full power to act without the other, as his true and lawful
attorney-in-fact and agent to act in his name, place and stead and to execute
in the name and on behalf of each person, individually and in each capacity
stated below, and to file, any and all amendments to this Annual Report on
Form 10-K.
 
  PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1934, AS AMENDED, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS, ON BEHALF OF THE REGISTRANT,
IN THE CAPACITIES AND ON THE DAYS INDICATED.
 
<TABLE>
<CAPTION>
              SIGNATURE                          TITLE                   DATE
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
       /s/ Jeremy A. Jaech             President, Chief Executive  December 23, 1998
______________________________________  Officer and Director
           JEREMY A. JAECH              (Principal Executive
                                        Officer)
 
       /s/ Steve M. Gordon             Chief Financial Officer     December 23, 1998
______________________________________  and Senior Vice
           STEVE M. GORDON              President, Finance and
                                        Administration (Principal
                                        Financial and Accounting
                                        Officer)
 
     /s/ Theodore C. Johnson           Chief Technology Officer,   December 23, 1998
______________________________________  Executive Vice President,
         THEODORE C. JOHNSON            and Director
 
        /s/ Tom A. Alberg              Director                    December 23, 1998
______________________________________
            TOM A. ALBERG
 
       /s/ Thomas H. Byers             Director                    December 23, 1998
______________________________________
           THOMAS H. BYERS
 
 
</TABLE>
 
                                      54
<PAGE>
 
<TABLE>
<CAPTION>
              SIGNATURE                          TITLE                   DATE
              ---------                          -----                   ----
 
<S>                                    <C>                        <C>
       /s/ John R. Johnston            Director                    December 23, 1998
______________________________________
           JOHN R. JOHNSTON
 
     /s/ Douglas J. Mackenzie          Director                    December 23, 1998
______________________________________
         DOUGLAS J. MACKENZIE
 
          /s/ Scott Oki                Director                    December 23, 1998
______________________________________
              SCOTT OKI
 
</TABLE>
 
                                       55
<PAGE>
 
 
 
 
 
 
 
    (C) 1998 Visio Corporation. All rights reserved.
    Part No. 19356-0199