MICROGRAFX INC, 10-K, 1996-09-30

MICROGRAFX INC
10-K, 1996-09-30
PREPACKAGED SOFTWARE

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

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FORM 10K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 30, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM ________ TO ________.

COMMISSION FILE NUMBER 0-18708

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MICROGRAFX, INC.
(Exact name of registrant as specified in its charter)

TEXAS 75-1952080
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1303 ARAPAHO ROAD, RICHARDSON, TEXAS 75081
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (972) 234-1769

Securities Registered Pursuant to Section 12(b) of the Act: NONE

Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
(Title of Class)

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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 or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ X ]

The aggregate market value of voting stock held by nonaffiliates of the
registrant at September 16, 1996 was approximately $96,388,142.

On September 16, 1996, there were 10,206,823 shares outstanding of the
registrant's Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to stockholders in
connection with the Annual Meeting of Stockholders to be held November 7, 1996
are incorporated by reference into Part III.

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MICROGRAFX, INC.

FORM 10-K

FOR THE FISCAL YEAR ENDED JUNE 30, 1996

TABLE OF CONTENTS

<TABLE>
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PAGE
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PART I.

Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 8

PART II.

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . 10

Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 11

Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . 25

Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . 43

PART III.

Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . 43

Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Item 12. Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . 43

PART IV.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . 43

Item 14 (a) Index to Financial Statements and Financial Statement Schedules . . . . . 46

Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

Financial Statement Schedule . . . . . . . . . . . . . . . . . . . . . . 49

</TABLE>

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PART I

ITEM 1. BUSINESS

FORWARD-LOOKING STATEMENTS

The following discussion contains forward-looking statements that are subject
to risks and uncertainties. There are several important factors that could
cause actual results to differ materially from those anticipated by the
forward- looking statements contained in the following discussion. Readers
should pay particular attention to the risk factors set forth in this section
and in the section of this report entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Trends and Risk
Factors."

GENERAL

Micrografx, Inc. develops and markets graphics software which enhances visual
communication and empowers creative expression. As used herein, the "Company"
refers to Micrografx, Inc. and its wholly owned subsidiaries. The Company's
graphics applications software products range from entry-level drawing products
to powerful, professional illustration products. The Company's strategy to
date has emphasized the Microsoft(R) Windows(R) operating environments, which
include Windows(R) 3.1, Windows(R) 95TM and Windows(R) NTTM. The Company's
U.S. operations are based in Richardson, Texas, with development offices
located in San Francisco and Los Angeles. International subsidiaries are
located in Canada, the United Kingdom, France, Germany, Italy, the Netherlands,
Australia, and Japan.

The Company was initially organized as a partnership in June 1982 and was
subsequently incorporated in the State of Texas in March 1984. The principal
executive offices of the Company are located at 1303 Arapaho Road, Richardson,
Texas 75081, and its telephone number is (972) 234-1769.

PRODUCTS

The Company's applications software products are designed for personal
computers utilizing the Microsoft Windows operating environments, which include
Windows 3.1, Windows 95 and Windows NT. A typical system configuration for the
Company's applications software products consists of a 486 or higher
microprocessor based IBM personal computer or compatible, with eight megabytes
of memory, EGA or VGA-level graphics, and a hard disk.

The Company has segmented its applications software products into three product
categories: Business Products (ABC Graphics SuiteTM, Micrografx DesignerTM,
Picture Publisher(R), Designer Power Pack, ABC FlowCharter(R), ABC ToolKitTM,
ABC SnapGraphicsTM, Simply 3DTM, Instant 3DTM and Visual Reality(R)), Consumer
Products (CrayolaTM Art StudioTM 2, CrayolaTM Art, Hallmark ConnectionsTM Card
StudioTM, Windows Draw(R) and PhotoMagic(R)) and Legacy Products (CharismaTM,
Windows OrgChart(R), Graphics Works(R) and revenues from clipart libraries and
support services). In August 1996, the Company announced the availability of
ABC FlowCharter(R) 6. In September 1996, the Company announced the
availability of American Greetings CreataCard(R) PlusTM and Windows DrawTM 5.

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Business Products

ABC GRAPHICS SUITE. This graphics application suite seamlessly integrates
powerful diagramming, painting, image editing, illustration, 3D and clip-art
management capabilities within a Windows 95/NT and Microsoft(R) Office(R) 95
environment. ABC Graphics Suite offers a comprehensive graphics solution to
business professionals. ABC Graphics Suite includes ABC FlowCharter,
Micrografx Designer, Picture Publisher, ABC Media ManagerTM, Instant 3D and
thousands of clip-art images.

ABC FLOWCHARTER. ABC FlowCharter provides tools for the creation of business
diagrams. A fully integrated ABC FlowCharter, ABC DataAnalyzerTM, ABC
SnapGraphics and ABC ViewerTM modules provide a complete selection of business
charts for every occasion. This powerful application suite provides tools for
analyzing, updating and understanding Total Quality Management, Business
Process Engineering and Business Process Modeling.

VISUAL REALITY. Visual Reality brings powerful 3D imaging and modeling
capabilities to the desktop, enabling artists, designers and business
communicators to work easily and affordably in 3D. Visual Reality is
fully Windows 95/NT compatible and permits incorporation of sophisticated 3D
images in business documents. This innovative and easy-to-use graphics tool
became part of the Micrografx product line in connection with the April 1996
acquisition of Visual.

SIMPLY 3D. Simply 3D is an entry level 3D software package for Windows that
makes the creation of exciting 3D graphics easy and accessible to hobbyists,
illustrators, graphic artists and business users. A complete set of 3D
graphics tools and tutorials lets even the novice artist transform drawings,
typography and charts into 3D objects using seventy seamless textures like
wood, stone or even dinosaur skin. Simply 3D links with popular 2D draw and
paint applications and over 130 pre-build 3D objects are included to make the
creation of 3D imagery even easier.

INSTANT 3D. This office compatible 3D application brings dramatic 3D text and
object creation within reach of anyone with a PC. Instant 3D features a
Microsoft Office compatible interface for easy integration of 3D graphics into
other applications. The program supports TGA, TIF and DFX files and includes
over 200 3D objects that users can drag and drop into layouts. Instant
3D provides an intuitive and cost-effective way to enter the exciting new world
of 3D graphics.

ABC QUICKSILVER PACK. This software plug-in for Netscape Navigator 2.0 and
Microsoft Internet Explorer 3.0 extends the capabilities of ABC Graphics Suite
by allowing users to place, view and interact with dynamic object graphics
inside World Wide Web pages. Using ABC QuickSilver Pack, it is easy to create
exciting object graphics without complex HTML coding. Object graphics created
using ABC QuickSilver Pack may be associated with a wide range of properties
that enable actions, including linking directly to URLs. These graphics may
also be reused, enabling the creation of versatile graphics libraries of
Internet images.

DESIGNER 4.1 TE. Micrografx Designer 4.1 TE is a professional illustration and
graphics package that contains free-hand drawing capabilities, computer-aided
design features, and import and export capabilities for popular graphics
formats. Designer provides robust color support, enhanced font and text
handling capabilities, and advanced editing features.

PICTURE PUBLISHER 5.0. Picture Publisher 5.0 is a photographic image editing
product that features a powerful set of gray scale and color editing tools to
edit and enhance photographic images. Picture Publisher allows the user to
design and assemble complex image montages, to paint and retouch images, and to
add special effects. Picture Publisher contains tools to crop, size, rotate,
mirror, and calibrate the image for dependable, high quality output.

DESIGNER POWER PACK. Designer Power Pack incorporates Micrografx Designer,
Picture Publisher, and Kai's Power Tools(R), a third-party software
application, for a combination of illustrating and image-editing tools.

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Consumer Products

WINDOWS DRAW. Windows Draw is a comprehensive and affordable graphics package
available for home and small office users today. In a single easy-to-use
package it includes all the features of Windows Draw, PhotoMagic and ABC Media
Manager. Over 150 custom templates are included that allow people to instantly
create their own banners, certificates, announcements, family trees and
organization charts. Photos can easily be scanned into layouts and over 250
customizable TrueType fonts are available to fit any artistic need. This
application brings a full range of sophisticated, user-friendly graphics tools
within reach of any PC user.

CRAYOLA ART STUDIO 2. This versatile application combines two imaginative
age-appropriate programs in one convenient package. Both programs were created
in conjunction with Binney & Smith, the makers of Crayola(R) brand products.
Crayola Art Studio 2 features authentic on-screen Crayola colors in crayons,
markers and paints. The Crayola Art Adventure module for ages 3-6 features a
wide variety of computerized learning games and coloring books. The Crayola
Art Studio module, for ages 6-12, offers more challenging fun for older
children with word puzzles, a slide show maker, creative games and crafts
projects. The program comes with animated sound effects, step-by-step audio
instructions, built-in coloring templates and much more. The Company's license
to sell this product expires on December 31, 1996. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Licensing Agreements" in Item 7.

HALLMARK CONNECTIONS CARD STUDIO. Hallmark Connections Card Studio brings the
resources of the Hallmark Card's creative staff within reach of anyone with a
PC. This application lets the consumer choose from original artwork and
messages to create their own distinctive greeting cards. Or they can select
and personalize over 1000 predesigned cards from Hallmark artists. Hallmark
Connections Card Studio can also be used to create original signs,
certificates, invitations and announcements. See "Trends and Risk Factors -
Licensing Agreements" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7.

Legacy and Other Products

In late fiscal 1994, the Company discontinued certain of its products which no
longer fit within the Company's long-term business strategy. These legacy
products consisted of Charisma, Windows OrgChart, and Graphics Works. Other
products revenues also includes revenues from clipart libraries and support
services.

New Products

During the first quarter of fiscal 1997, the Company announced the following
products, which shipped in the first quarter of fiscal 1997 or are expected to
begin shipping in the first half of fiscal 1997.

ABC FLOWCHARTER 6. ABC FlowCharter 6 is a graphics program that was previously
available only as part of ABC Graphics Suite. ABC FlowCharter embraces all
Windows platforms, including Windows NT Workstation 3.51 - 4.0, Windows 95 and
Windows 3.1 and higher with both 16- and 32-bit versions in one package.

AMERICAN GREETINGS CREATACARD PLUS. American Greetings Corporation is the
largest publicly owned greeting card company in the world. This company is now
applying its 90 years of experience to developing new ways to create and share
sentiments electronically. Working together, American Greetings and Micrografx
are making American Greetings social expression products available for today's
computer user. In early fall of fiscal 1997, customers will be able to shop
on-line for cards or use CreataCard Plus software to combine a selection of
professional American Greetings graphics with their own personalized message
and print the results using their own inkjet or laserprinter. Orders can also
be sent via modem to American Greetings where the cards will be individually
printed and mailed.

WINDOWS DRAW 5 GRAPHICS AND PRINT STUDIO. This upgrade of Windows Draw
enhances an already powerful product. Now included in Windows Draw are the
Company's 3D graphics program, Instant 3D; 5,000 pieces of new high-quality,
editable clipart; improved usability through wizards; increased flexibility in
shape creation; and the ability to place, view and edit vector graphics created
in Windows Draw inside of Internet web pages through the inclusion of ABC
QuickSilver as part of the Windows Draw product.

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LICENSING AGREEMENTS

Crayola Licensing and Development Agreement. The Company's product offerings
in fiscal 1996 included Crayola Amazing Art Adventure, Crayola Art Studio,
Crayola Art Studio 2 and Crayola Art, which embody copyrights, trademarks,
trade names and other proprietary designs and characters that are the property
(the "Licensed Intellectual Property") of Binney & Smith Properties, Inc. (a
subsidiary of Hallmark Cards, Inc.) pursuant to license agreements between the
Company and Binney & Smith. The Company pays Binney & Smith a quarterly fee
for the right to use the Crayola trademark based upon sales of the Crayola
products. The license agreement for Crayola Amazing Art Adventure and Crayola
Art Studio 2 expired on December 31, 1995, and the Company ceased using the
Licensed Intellectual Property in connection with these products by March
31,1996, in accordance with the license agreements. Revenue from the sale of
these products were not material during fiscal 1996. In August 1995, the
Company released Crayola Art, a new product specifically designed for original
equipment manufacturers, and in October 1995, the Company released another
product, Crayola Art Studio 2. The Company has a license agreement with
Binney & Smith that extends to Micrografx the right to sell and market Crayola
Art and Crayola Art Studio 2 through December 31, 1996, with the right to sell
off inventory on hand at the expiration of the license through March 31, 1997.
See "Licensing Agreements" under "Trends and Risk Factors" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in
Item 7 for further discussion of the Crayola brand name products.

Hallmark Licensing and Development Agreement. In May 1994, the Company entered
into an agreement with Hallmark Cards, Incorporated ("Hallmark") for the joint
development of personal computer software programs utilizing various trademarks
licensed from Hallmark. Pursuant to this agreement, the Company developed a
software product, Hallmark Connections Card Studio, utilizing the Hallmark
trademark, which was released in the first quarter of fiscal 1996. The Company
pays Hallmark a quarterly fee for the right to use the trademark based upon
sales of the Hallmark product. The agreement has an initial term of two years
and automatically renews for successive terms of two years each, unless
terminated by either party prior to the expiration of the initial term.
Hallmark has recently announced the introduction of a new product for the
consumer greeting card market in conjunction with Microsoft Corporation which
will compete directly with the Company's greeting card products, and Hallmark
has advised the Company that it does not intend to renew the Company's license
agreement for the Hallmark Connections Card Studio product. The license
expires in September 1997 unless earlier terminated. The Company expects the
new competing Hallmark/Microsoft product to be shipped in the first quarter of
fiscal 1997. See "Licensing Agreements" under "Trends and Risk Factors" in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 for further discussion of Hallmark Connections Card Studio
brand name products.

American Greetings Licensing and Development Agreement. The Company entered
into a licensing agreement with American Greetings Corporation for a new
product for the consumer greeting card market, American Greetings CreataCard
Plus, to be shipped in the first quarter of fiscal 1997. The Company believes
that it will ultimately be required to phase out sales of its Hallmark
Connections Card Studio product, and its strategy is to replace it in its
consumer product line with American Greetings CreataCard Plus. The Company
pays American Greetings a quarterly fee for the right to use the trademark
based upon sales of the American Greetings product. The agreement expires on
August 31, 1999, and automatically renews for successive terms of one year
each, unless terminated by either party prior to the expiration of the initial
term.

LOCALIZATION

The Company localizes its business products for distribution in countries other
than the United States, generally by translating user interfaces, dialog
descriptions, and product documentation. Most of the Company's business
products have been localized into various product languages, including German,
French, Japanese, Italian and Spanish. The consumer products are distributed
only in English language versions.

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MARKETING AND DISTRIBUTION

The Company maintains sales organizations in most of the major markets in the
world, including the United States, Germany, France, the United Kingdom, Italy,
the Netherlands, Australia and Japan. In addition, the Company has appointed
agents in Belgium, Denmark, Switzerland, Spain and Poland. Approximately 53%
of the Company's revenues were generated outside the United States in fiscal
1996, with 34% from Europe, and 17% from the Pacific Rim. See Segment
Information in Notes to Consolidated Financial Statements included under Item 8
for geographical segmentation of operating results and identifiable assets.

The Company typically operates with very little backlog of unshipped orders,
due to its capability to ship product within a few days of receipt of a
purchase order. The Company distributes its products through the following
channels: distributors and resellers, corporate sales force, direct to end
users, and through OEMs (original equipment manufacturers).

Distributors and resellers. The Company markets its products primarily through
independent, non-exclusive distributors and resellers located in 18 countries
around the world. Distributors include Computer 2000, Ingram Micro, Merisel,
Inc. and Tech Data Corporation. Resellers include Corporate Software, Inc.,
Softmart, Inc., Softbank, Egghead Software, Seiko Epson, Macrotron, and
Software Spectrum, Inc. In fiscal 1996, sales to Ingram Micro accounted for
17% of the Company's net revenues and no other customer accounted for more than
10% of the Company's net revenues. In fiscal 1995, sales to Ingram Micro and
Merisel, Inc. accounted for 15% and 11%, respectively, of the Company's net
revenues, representing an aggregate of 26% of the Company's net revenues. The
Company offers sales incentives, training, technical support, and promotional
aids to some resellers. The Company has distributorship agreements with all
distributors and resellers. These agreements are cancelable by either party
with specified prior written notice, and none of these agreements contain
minimum or required purchase commitments by the distributor or dealer.

Corporate sales force. The Company has corporate sales representatives located
at the Company's corporate headquarter in the United States and in Germany,
France, the United Kingdom, Italy, the Netherlands, Australia, Japan, Belgium,
Denmark, Switzerland, Spain and Poland. The Company's corporate sales
representatives provide sales support and assistance to the Company's resellers
and distributors. As such, sales made by the corporate sales force are
generally distributed through the distributor and reseller channels.

Direct sales to end users. The Company promotes its products through direct
marketing techniques designed to reach existing and potential customers, and
one-on-many seminars and trade show events. Fulfillment of product to the end
user is accomplished primarily through the services of third party fulfillment
companies located in the United States, Europe and Japan.

Original Equipment Manufacturers. The Company licenses certain of its products
to OEMs under agreements that grant the OEMs the right to distribute copies of
the Company's products with the OEM's equipment, typically personal computers,
printers and scanners. During fiscal 1996, the Company had OEM agreements with
Canon Computer Systems, Inc., Compaq Computer Corporation, Epson, Inc., Mustek,
Inc., Escom, Inc., NEC Corporation, Olivetti A.T.C. Inc. and Vobis.

PROMOTION AND ADVERTISING

The Company's global marketing organization is responsible for worldwide
product marketing, planning, positioning, market strategy, and communicating
marketing plans to the Company's worldwide sales offices. Local personnel in
each sales territory develop the marketing mix by coordinating media placement,
direct mail, public relations, and channel sales management. The Company
utilizes outside agencies in the development of marketing literature,
advertisements, brochures, demonstration diskettes, and packaging, as well as
an outside public relations agency.

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The Company routinely conducts promotions with dealers, distributors, OEMs, and
major customers in an effort to increase sales of its products. The Company
advertises in the personal computer industry trade press and certain other
business publications. To build awareness, the Company offers trial and
preview versions with certain of its software products and participates in
industry trade events.

PRODUCT SUPPORT

The Company offers technical support to its customers through telephone
support, fax response, online services such as CompuServe, American Online, the
Microsoft Network, and the Internet. Telephone support for the Company's
business products is provided free of charge for 30 days to registered users,
beginning with a customer's first phone call. Technical support after 30 days
is provided via a priority access toll call, or through a contract service
plan. Technical support for the Company's consumer products is provided free
of charge. Telephone support is provided from 7:00 a.m. to 5:00 p.m. Central
Standard Time in the United States. Online support is provided 24 hours a day,
7 days a week. The Company generally outsources product support activities to
independent, third-party service providers in the United States, Europe, Japan
and Australia.

PRODUCT DEVELOPMENT

The Company has a continuing program of product development directed toward the
enhancement of existing products based upon current and anticipated customer
needs. The Company's research and product development effort also emphasizes
introduction of new products to broaden the Company's product line and to reach
larger segments of the market.

In order to foster an entrepreneurial spirit among its developers and to assure
better quality control and encourage innovation, the Company adopted a program
to provide certain incentives to developers principally responsible for the
design and development of versions of key products. Under the program,
developers principally responsible for the design and development of products
are eligible to receive stock options under the Company's Incentive and
Nonstatutory Stock Option Plan. Options are granted in each quarter in which
the Company records a profit based upon a formula involving quarterly gross
margins and the closing market price of the Company's common stock on the last
day of each such quarter.

See the Consolidated Statements of Operations and Intangible Assets in the
Notes to Consolidated Financial Statements included under Item 8 for a
discussion of research and development expenditures.

COMPETITION

The personal computer graphics software market is highly competitive. The
Company's competitors include many independent applications software vendors,
such as Adobe Systems Incorporated, Broderbund Software, Inc., Corel Systems
Corporation, Macromedia, Inc., Microsoft Corporation, and Visio Corporation.
The primary competitors for ABC FlowCharter are Visio and Corel; and the
primary competitors for ABC Graphics Suite and the Designer Power Pack are
Adobe, Corel, and Macromedia. Competitors of the Company's consumer products
include Broderbund and Microsoft.

Most of the Company's existing competitors, as well as a number of potential
competitors, have larger technical staffs, more established and larger
marketing and sales organizations, and significantly greater financial
resources than does the Company. There can be no assurance that competitors
will not develop products that are superior to the Company's applications
software products or that will achieve greater market acceptance at the
Company's expense, possibly resulting in reduced sales of the Company's
applications software products.

The Company believes that the principal competitive factors in the applications
products market include customer demand, product capabilities, ease of
understanding and operating the software, product reliability,

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price/performance characteristics, name recognition, and availability and
quality of support services. The Company believes that its products currently
compete favorably with respect to these factors.

See "Trends and Risk Factors" in Management's Discussion and Analysis of
Financial Condition and Results of Operations in Item 7.

PRODUCT PROTECTION

The Company attempts to protect its ownership rights in its software products
with patents, trademarks, copyrights, trade secret laws, and nondisclosure
safeguards, as well as contractual restrictions on copying, disclosure, and
transferability that are incorporated into its software license agreements.
Despite these restrictions, it may be possible for competitors or users to copy
aspects of the Company's products to obtain information that the Company
regards as proprietary. Existing laws protecting intellectual property are
helpful but imperfect aids in preventing unauthorized copying and use of the
Company's products. Monitoring and identifying unauthorized copying and use of
software can be difficult, and software piracy is a persistent problem for the
software industry.

The Company believes that because of the rapid technological change in the
computer software industry, trade secret and copyright protection are less
significant than factors such as the knowledge, ability, and experience of the
Company's personnel, name recognition, and ongoing product innovation.

TRADEMARKS

Micrografx, Picture Publisher, ABC FlowCharter, Windows Draw, PhotoMagic and
Visual Reality are registered trademarks of Micrografx, Inc. The Micrografx
logo, ABC Graphics Suite, ABC Media Manager, Micrografx Designer, ABC
SnapGraphics, ABC ToolKit, Simply 3D and Instant 3D are trademarks of
Micrografx, Inc. Crayola Amazing Art Adventure, Crayola Art Studio and Crayola
Art Studio 2 are trademarks of Binney & Smith. Crayola is a registered
trademark of Binney & Smith, used with permission. Hallmark Connections and
Card Studio are trademarks of Hallmark Licensing, Inc. American Greetings
CreataCard Plus is a trademark of American Greetings Corporation. Microsoft and
Windows are either registered trademarks or trademarks of Microsoft Corporation
in the United States and/or other countries. All other products are trademarks
or registered trademarks of their respective holders.

MANUFACTURING

The Company assembles products in the United States and the Netherlands. The
principal materials and components used in the Company's products include
disks, books, other printed material and packaging. The Company outsources a
portion of its manufacturing activity to third parties, including disk
duplication and product assembly. The Company has multiple sources of raw
materials, supplies, and components, and the Company does not currently
anticipate difficulty in securing the raw materials required in connection with
its operations.

EMPLOYEES

As of June 30, 1996, the Company employed 262 associates, of which 115 were in
product development, 71 in sales, marketing and customer support, and 76 in
finance, operations, and administration. The Company's continued success is
dependent in part upon its ability to attract and retain qualified employees.
Competition for employees in the software industry is intense. To date, the
Company believes that it has been successful in its efforts to recruit and
retain highly qualified employees. None of the Company's employees is subject
to a collective bargaining agreement. The Company believes that its relations
with its employees are good.

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The executive officers of the Company are as follows:

<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
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<S> <C> <C>
J. Paul Grayson 46 Chairman of the Board and Chief Executive Officer

Herman DeLatte 42 Chief Operating Officer

Larry G. Morris 58 Chief Financial Officer and Treasurer

John E. Dearborn 40 Vice President and General Manager, United States
Subsidiary
</TABLE>

J. Paul Grayson is co-founder of the Company and has served as the Chairman of
the Board of Directors since the Company's predecessor partnership was
incorporated in March 1984. Prior to founding the Company, he was a software
consultant with Peat, Marwick, Mitchell & Co. from 1980 to 1983.

Herman DeLatte was appointed Chief Operating Officer in October 1994. Prior to
his promotion to Chief Operating Officer, Mr. DeLatte was Senior Vice President
and General Manager of the Company's international subsidiaries, and was
responsible for the Company's international markets. Prior to joining
Micrografx in 1991, Mr. DeLatte served as managing director in major areas of
Europe for Ashton-Tate Corporation from 1988 to 1991.

Larry G. Morris was appointed Chief Financial Officer in September 1996 after
serving as the Company's Interim Chief Financial Officer since July 1996.
Prior to joining the Company, Mr. Morris held several key management positions
in his seven years at ADVO, Inc., including Senior Executive Vice President,
Chief Administrative and Process Development Officer, and Chief Financial
Officer.

John E. Dearborn was appointed Vice President and General Manager, United
States in May 1994. Mr. Dearborn joined the Company as Director of OEM Sales
in February 1991 and has held various positions with the Company, including
Vice President of Sales, Vice President, Business Development and Director of
Sales. Prior to joining the Company, Mr. Dearborn was a co-founder and Vice
President, Sales and Marketing from 1988 to February 1991 for Astral Development
Company, which was acquired by the Company in February 1991.

ITEM 2. PROPERTIES

The Company's headquarters are located in Richardson, Texas, and includes
approximately 67,000 square feet of leased space under an agreement that
expires on August 31, 1999. The leased space is used for research and
development, sales and marketing, manufacturing, operations, and
administration. The Company currently leases space for development and sales
offices in Los Angeles and San Francisco, California; and international sales
offices in Woking, United Kingdom; Paris, France; Munich, Germany; Chatswood,
Australia and Tokyo, Japan; and a production control office in Venlo, the
Netherlands.

ITEM 3. LEGAL PROCEEDINGS

The Company is subject to certain legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the resolution
of these legal proceedings and claims will not have a material effect on the
Company's consolidated financial position and results of operations.

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

There were no matters submitted to the Company's security holders during the
fourth quarter ended June 30, 1996.

8
<PAGE> 11

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

The Company's common stock is traded on NASDAQ/NMS under the symbol MGXI. As
of June 30, 1996, there were approximately 246 holders of record of the
Company's common stock.

The Company has not paid any cash dividends on its common stock in the three
most recent fiscal years and has no intention of paying cash dividends in the
foreseeable future.

The following are the high and low closing sale prices of the Company's stock
per the NASDAQ National Market System:

<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ---- ---
<S> <C> <C>
September 30, 1994 $ 6.750 $ 4.625
December 31, 1994 $ 7.125 $ 5.000
March 31, 1995 $ 8.000 $ 5.750
June 30, 1995 $ 9.250 $ 5.750
September 30, 1995 $ 13.875 $ 7.625
December 31, 1995 $ 14.000 $ 9.188
March 31, 1996 $ 15.125 $11.500
June 30, 1996 $ 18.625 $12.000
</TABLE>

9
<PAGE> 12

ITEM 6. SELECTED FINANCIAL DATA

RESULTS OF OPERATIONS (in thousands, except per share data) (1)

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
================================================================================================================
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues $72,919 $64,345 $ 61,505 $ 56,477 $56,878

Income (loss) from operations $ 1,078 $ 529 $ (6,355) $ (4,327) $ 4,989

Net income (loss) $ 1,112 $ 695 $ (5,768) $ (3,472) $ 3,395

Earnings (loss) per share $ 0.11 $ 0.07 $ (0.64) $ (0.40) $ 0.39

Shares used in computing earnings (loss) per 10,136 9,480 8,986 8,754 8,672
share

</TABLE>

BALANCE SHEET DATA (in thousands, except per share data and percentages)(1)

<TABLE>
<CAPTION>
AS OF JUNE 30,
================================================================================================================
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash and short-term investments $ 18,634 $ 16,641 $ 18,098 $ 13,656 $ 14,687

Working capital $ 21,232 $ 16,726 $ 13,861 $ 16,701 $ 20,467

Total assets $ 40,098 $ 39,290 $ 38,577 $ 40,739 $ 44,044

Total long-term liabilities $ 684 $ 903 $ 1,152 $ 4,138 $ 2,079

Debt to banks - $ 700 $ 1,687 $ 2,951 $ 3,800

Shareholders' equity $ 29,105 $ 25,976 $ 23,711 $ 27,315 $ 29,197

Cash and investments per share outstanding $ 1.82 $ 1.73 $ 1.97 $ 1.58 $ 1.77

Debt to equity - 3% 7% 11% 13%
</TABLE>
- ---------------------------------

(1) On April 2, 1996, Micrografx, Inc. acquired Visual Software, Inc. in a
stock-for-stock acquisition accounted for as a pooling of interest.
The above financial data has been retroactively adjusted to include
the results of Visual for all periods presented. See Notes to
Consolidated Financial Statements.

10
<PAGE> 13

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

OVERVIEW

Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software which enhances visual communication and empowers creative
expression.

On April 2, 1996, the Company acquired all of the issued and outstanding
capital stock and options of Visual Software, Inc. ("Visual") for approximately
882,536 shares of Micrografx common stock. Visual and its subsidiaries are
engaged in the development and marketing of 3-D graphics software and
Micrografx intends to continue the business of Visual. The merger has been
accounted for as a pooling of interests. Accordingly, the financial
information of Micrografx has been restated to retroactively include the
accounts and operations of Visual for all periods presented. As a result of
this merger, the Company incurred several charges for professional services,
the write-offs of costs related to certain software products which will not be
actively marketed, exit costs, and costs to eliminate excess personnel and
duplicate leases of approximately $3,379,000, of which $1,359,000 was non-cash.
For further information on the Visual merger, see Notes to Consolidated
Financial Statements.

For the fiscal year ended June 30, 1996 (after retroactively restating the
results prior to April 2, 1996, for the Visual merger accounted for as a
pooling of interests, see above), the Company reported net revenues of $72.9
million which represents an increase of 13% from the $64.3 million for the year
ended June 30, 1995. Including the acquisition related charges of $3.4
million, net income for the year ended June 30, 1996 was $1.1 million, or $0.11
per share. This compares to net income of $0.7 million, or $0.07 per share,
for fiscal 1995. Excluding the acquisition related charges and including
Visual operations only for the period subsequent to the acquisition, net income
for the year ended June 30, 1996 would have been $5.5 million, or $0.54 per
share, on revenues of $69.5 million.

11
<PAGE> 14

RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage
relationship to net revenues of certain items in the Company's Consolidated
Statements of Operations. Historical results and percentage relationships are
not necessarily indicative of operating results for any future period.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
ADJUSTED(1) ----------------------------
1996 1996 1995 1994
---------- ------ ------ ------
<S> <C> <C> <C> <C>
Net revenues 100% 100% 100% 100%
Cost of revenues 24% 24% 25% 24%
Gross profit 76% 76% 75% 76%

Operating expenses:
Sales and marketing 46% 48% 54% 54%
General and administrative 10% 11% 12% 15%
Research and development 9% 10% 8% 11%
Acquisition charges - 5% - -
Restructuring charges - - - 6%
Total operating expenses 66% 75% 74% 86%

Income (loss) from operations 10% 1% 1% (10%)

Non operating (income) expense (1%) (1%) (1%) 1%

Income (loss) before income taxes 11% 2% 2% (11%)

Income taxes 3% 1% 1% (2%)

Net income (loss) 8% 2% 1% (9%)
</TABLE>

(1) Results of operations for fiscal 1996 including Visual only subsequent to
April 2, 1996, and excluding the acquisition charges.

The Company's business model transformation that began in fiscal 1994 included:

o A continued focus on core applications;
o "Value" price points on all business products;
o Bundling product offerings into "suites"; and
o The development of a consumer product line.

As depicted above, the Company showed strong improvement (on an adjusted basis)
in its business model during fiscal 1996. Gross margins improved from 75% of
revenues to 76% of revenues even with the overall reduction in price points and
a shift in the Company's product mix to increased revenues from its consumer
products. The consumer product line represented 27% of revenues in fiscal
1996, an increase from 10% of revenues in fiscal 1995. In addition, total
operating expense decreased to 66% of revenues (on an adjusted basis), from the
74% of revenues reflected in fiscal 1995. This is primarily the result of the
leveraging of the Company's fixed cost structure during fiscal 1996 as revenues
grew year over year. These improvements resulted in net income as a percentage
of revenue increasing to 8% (on an adjusted basis) in fiscal 1996, compared to
1% in fiscal 1995.

12
<PAGE> 15

FISCAL 1996 COMPARED TO FISCAL 1995

The following comparisons are made after giving effect to the retroactive
restatement of financial information to include the accounts and operations of
Visual for all periods presented.

NET REVENUES
Net revenues for fiscal 1996 were $72.9 million, compared to net revenues for
fiscal 1995 of $64.3 million.

The following table sets forth, by customer category, net revenues by product
category and the percentage relationship to total net revenues. The Business
category includes ABC Graphics SuiteTM, Micrografx DesignerTM, Picture
Publisher(R), Designer Power Pack, ABC FlowCharter(R), ABC ToolKitTM, ABC
SnapGraphicsTM, Simply 3DTM, Instant 3DTM and Visual Reality(R). The Consumer
category includes CrayolaTM Amazing Art AdventureTM , CrayolaTM Art StudioTM,
CrayolaTM Art StudioTM 2, CrayolaTM Art, Hallmark ConnectionsTM Card StudioTM,
Windows Draw(R) and PhotoMagic(R). Legacy products include Micrografx
CharismaTM, Windows OrgChart(R), Graphics Works(R) and revenues from clipart
libraries and support services.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 % 1995 %
----------------------------------------
<S> <C> <C> <C> <C>
Business $ 51,602 71% $ 56,411 88%
Consumer 20,030 27% 6,516 10%
Legacy 1,287 2% 1,418 2%
----------------------------------------

Total revenues $ 72,919 100% $ 64,345 100%

</TABLE>

BUSINESS
The Company markets and sells business products for the Windows(R) 3.1,
Windows(R) 95TM and Windows(R) NTTM operating systems. Revenues from the
Company's business products designed for the Windows 3.1 operating system, the
predecessor to Windows 95, declined and were partially offset by revenue from
ABC Graphics Suite. The ABC Graphics Suite is designed specifically for the
Windows 95 and Windows NT operating systems and includes new versions of the
Company's traditional business products: ABC FlowCharter, Designer and Picture
Publisher. During the year ended June 30, 1996, revenue from the ABC Graphics
Suite represented 26% of the Company's business products revenues. The
Company's future business products revenues are expected to become
substantially dependent upon sales of ABC Graphics Suite as companies migrate
to Windows 95 and Windows NT software applications. The decline in overall
business revenue from the prior year reflects the delay in corporations
adopting Windows 95 and Windows NT, as the Company's principal business product
is designed for these operating environments.

CONSUMER
The revenue growth in the Company's consumer products was primarily
attributable to the release of the initial version of the Hallmark
ConnectionsTM Card StudioTM in August 1995. During the year ended June 30,
1996, revenue from the Hallmark ConnectionsTM Card StudioTM represented 48% of
the Company's consumer products revenues. In addition, revenue from Windows
Draw and the products licensed under the Crayola(R) brand name grew 49% and 26%
year over year, respectively. See "Licensing Agreements" under "Trends and
Risk Factors" for further discussion of Hallmark ConnectionsTM Card StudioTM
and the Crayola(R) brand name products.

13
<PAGE> 16

Net revenues by geographic region and as a percentage of total revenues are as
follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 % 1995 %
-----------------------------------------
<S> <C> <C> <C> <C>
Americas $ 35,671 49% $ 28,617 45%
Europe 25,196 34% 26,496 41%
Pacific Rim 12,052 17% 9,232 14%
-----------------------------------------

Total net revenues $ 72,919 100% $ 64,345 100%
</TABLE>

The growth of net revenues during the year was greatest in Japan and the United
States, which grew 46% and 24%, respectively, over fiscal 1995. Revenues in the
U.S. was positively impacted by the release of ABC Graphics Suite and the
Company's consumer product offerings. Revenue declined slightly in Europe due
to general economic conditions, slower transition to Windows 95 and Windows NT,
and that the Company's consumer products are not distributed in Europe.

COST OF REVENUES AND GROSS PROFIT
Cost of revenues includes the cost of documentation, diskettes, packaging and
production overhead for the Company's application software products;
amortization of capitalized software development costs and acquired product
rights; and external product royalties. Cost of revenues in fiscal 1996 were
$17.5 million, or 24% of net revenues, compared to $16.1 million or 25% of net
revenues in fiscal 1995. The improvement in cost of revenues as a percentage of
net revenues for fiscal 1996 is attributable to a product mix that includes
more OEM (products bundled by original equipment manufacturers) and license
revenues, which have lower cost of revenues than full product versions. This
improvement was offset in part by increased external royalties associated with
certain of the Company's consumer products.

SALES AND MARKETING EXPENSE
Sales and marketing expenses include the cost of advertising, promotions, coop,
rebate and incentive programs with distributors, trade shows, marketing,
technical support, and the Company's sales force. Sales and marketing expenses
in fiscal 1996 were $35.1 million, or 48% of net revenues, compared to $34.7
million, or 54% of net revenues, in fiscal 1995. The decrease in sales and
marketing expense as a percentage of revenue reflects the efficiencies gained
by marketing fewer products as a result of their combination into suite
offerings.

GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses include the costs of the Company's
information systems, human resources, finance and administrative functions.
General and administrative expenses in fiscal 1996 were $8.2 million, or 11% of
net revenues, compared to $7.6 million, or 12% of net revenues, in fiscal 1995.
The decrease in general and administrative expenses as a percentage of net
revenues reflects efficiencies realized by leveraging the Company's
organization over a larger revenue base.

RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses include compensation, benefits, and
incentives paid to developers. In accordance with Financial Accounting
Standards No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased or Otherwise Marketed," the Company capitalizes certain software
development costs incurred after technological feasibility is achieved, and
amortizes these costs over a period ranging from 12 to 24 months, depending on
the product. Amortization of capitalized software development costs is
included in cost of revenues.

Research and development expenses (net of amounts capitalized) in fiscal 1996
were $7.6 million, or 10% of net revenues, compared to $5.4 million, or 8% of
net revenues, in fiscal 1995, an increase of $2.2 million. Gross research and
development expenses, before capitalization, for fiscal 1996 were $10.9
million, or 15% of net

14
<PAGE> 17

revenues, compared to $8.9 million, or 14% of revenues for fiscal 1995. The
increase in gross spending is due to increased investment across all product
lines.

During fiscal 1996, the Company capitalized approximately $3.3 million in
software development costs and amortized $3.3 million in software development
costs. This compares to capitalization of $3.5 million and amortization of
$3.3 million for fiscal 1995.

ACQUISITION CHARGES
On April 2, 1996, Micrografx acquired all of the issued and outstanding capital
stock and options of Visual, which has been accounted for as a pooling of
interests. As a result of this acquisition, the Company incurred charges for
professional services, the write-offs of costs related to certain software
products which will not be actively marketed, exit costs, and costs to
eliminate excess personnel and duplicate leases of approximately $3,379,000, of
which $1,359,000 was non-cash. Components of the acquisition related charges
consisted of the following (in thousands):

<TABLE>
<S> <C>
Acquisition transaction costs $ 1,115
Asset write-downs:
Inventory and accounts receivable 840
Acquired product rights 158
Fixed assets 241
Severance and other 1,025
-------
Total acquisition charges $ 3,379
</TABLE>

The severance charges resulted from the closing of Visual's general and
administrative support office and the related termination of 21 Visual
employees which was substantially completed during the 4th quarter. As a
result of the acquisition charges, future operating results are expected to
benefit from the reduction in workforce and elimination of duplicate
facilities. Estimated annual cost reductions of approximately $0.9 million in
salaries and benefits from the reduction in workforce and estimated total
future cost reductions of approximately $0.4 million in depreciation,
amortization and occupancy costs are anticipated from the write-offs of
software products which will not be actively marketed by the Company and the
elimination of duplicate facilities and equipment.

EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1996 had an unfavorable impact on net revenues
reported by the Company. If exchange rates had not changed from their 1995
rates, the Company would have reported approximately $0.5 million more in net
revenues in fiscal 1996. Exchange rates during fiscal 1996 had no material net
effect on operating expenses reported by the Company as compared to the 1995
rates.

NON OPERATING (INCOME) EXPENSE
Non operating (income) expense includes interest income, interest expense and
other (income) expense. Other (income) expense, net includes the gain or loss
resulting from revaluation of receivables and payables denominated in foreign
currency, and gains or losses when receivables and payables denominated in
foreign currency are settled. Interest income increased from $0.7 million in
fiscal 1995 to $0.9 million in fiscal 1996, primarily as a result of
improvements in short-term interest rates and an increase in the cash
equivalents and short-term investments balances. Unfavorable exchange rate
variations charged $0.4 million to other expense in fiscal 1996, compared to
contributing other income of $0.3 million in fiscal 1995.

INCOME TAXES
The Company recognized a tax provision of $0.5 million in fiscal 1996, compared
to $0.8 million in fiscal 1995. For further information on income taxes, see
Notes to Consolidated Financial Statements. As the Company continues to
generate income from operations, it is expected that the Company's effective
tax rate will increase in the future as net operating loss carryforwards and
research and development credits become utilized, and as $1.1 million of the
valuation allowance will be credited to equity if the valuation allowance is
reduced in future years.

15
<PAGE> 18

FISCAL 1995 COMPARED TO FISCAL 1994

The following comparisons are made after giving effect to the retroactive
restatement of financial information to include the accounts and operations of
Visual for all periods presented.

NET REVENUES
Net revenues for fiscal 1995 were $64.3 million, compared to net revenues for
fiscal 1994 of $61.5 million. In fiscal 1994, the Company discontinued certain
of its products which no longer fit within the Company's long-term business
strategy. As a result, revenue from such legacy products declined
significantly in fiscal 1995, when compared to the prior year. This decline
was offset by revenue growth from the Company's core products.

The following table sets forth, by customer category, net revenues by product
category and the percentage relationship to total net revenues. The Business
category includes ABC Graphics Suite, Micrografx Designer, Picture Publisher,
Designer Power Pack, ABC FlowCharter, ABC ToolKit, ABC SnapGraphics, Simply 3D,
Instant 3D and Visual Reality. The Consumer category includes CrayolaTM
Amazing Art AdventureTM , CrayolaTM Art StudioTM, CrayolaTM Art StudioTM 2,
CrayolaTM Art, Hallmark ConnectionsTM Card StudioTM, Windows Draw and
PhotoMagic. Legacy products include Micrografx Charisma, Windows OrgChart,
Graphics Works and revenues from clipart libraries and support services.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 % 1994 %
---------------------------------------
<S> <C> <C> <C> <C>
Business $ 56,411 88% $ 51,920 84%
Consumer 6,516 10% 4,705 8%
Legacy 1,418 2% 4,880 8%
---------------------------------------

Total net revenues $ 64,345 100% $ 61,505 100%
</TABLE>

BUSINESS
Revenues from the Business category in fiscal 1995 were $56.4 million, compared
to $51.9 million in fiscal 1994, a increase of $4.5 million, or 9%. ABC
FlowCharter, including ABC FlowCharter, ABC ToolKit and ABC SnapGraphics, was
the Company's best-selling product, with revenues totaling $26.5 million in
fiscal 1995, compared to $21.9 million in fiscal 1994, an increase of $4.6
million, or 21%. During fiscal 1995, the Company released Designer Power Pack,
a suite containing Designer, Picture Publisher, and Kai's Power Tools, a
third-party application. The introduction of the suite product in the third
fiscal quarter resulted in a migration from Designer and Picture Publisher to
the more value-oriented offering. Revenues from Designer were $14.8 million in
fiscal 1995, compared to $23.4 million in fiscal 1994, a decrease of $8.6
million, or 37%. Revenues from Picture Publisher grew from $5.8 million in
fiscal 1994 to $6.7 million in fiscal 1995, an increase of $0.9 million, or
16%. Revenues from Designer Power Pack were $4.5 million for the two quarters
it was available in fiscal 1995.

Revenues from Visual products increased a total of $3.1 million, from $0.8 in
fiscal 1994 to $3.9 million in fiscal 1995. The Visual products include Simply
3D and Visual Reality. Simply 3D revenues were $1.6 million during fiscal
1995. Visual Reality, which was released during fiscal 1995, generated
revenues of $2.0 million.

CONSUMER
Revenues from the Consumer Products category were $6.5 million in fiscal 1995,
compared to $4.7 million in fiscal 1994, an increase of $1.8 million, or 38%.
The Company released diskette versions of CrayolaTM Amazing Art AdventureTM and
CrayolaTM Art StudioTM in late fiscal 1994, and CD ROM versions of the products
in fiscal 1995.

16
<PAGE> 19

LEGACY
Legacy and other revenues were $1.4 million in fiscal 1995, compared to $4.9
million in fiscal 1994, a decrease of $3.5 million or 71%. The decline is
primarily the result of revenues from Charisma decreasing by $2.1 million, from
$2.8 million in fiscal 1994 to $0.7 million in fiscal 1995.

Net revenues by geographical region and as a percentage of total revenues are
as follows:

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1995 % 1994 %
---------------------------------------
<S> <C> <C> <C> <C>
Americas $ 28,617 45% $ 27,498 44%
Europe 26,496 41% 28,716 47%
Pacific Rim 9,232 14% 5,291 9%
---------------------------------------

Total net revenues $ 64,345 100% $ 61,505 100%
</TABLE>

Revenue declines in Europe, as a result of declines in the Company's legacy
products as discussed previously, were offset by growth in the Pacific Rim and
the Americas. Revenue growth was greatest in the Pacific Rim, where revenues
grew from $5.3 million in fiscal 1994 to $9.2 million in fiscal 1995,
increasing $3.9 million, or 74%. Revenue growth was greatest in Japan, which
increased 113% from $3.2 million in fiscal 1994, to $6.8 million in fiscal
1995.

COST OF REVENUES AND GROSS PROFIT
Cost of revenues in fiscal 1995 were $16.1 million, or 25% of net revenue,
compared to $15.0 million or 24% of net revenue in fiscal 1994. In general, the
Company's efforts during fiscal year 1995 to reduce the average selling prices
of its products, introduce new product suite offerings, and enter the consumer
software marketplace had a negative effect on gross margins as a percentage of
net revenues when compared to the prior year. In some cases, the Company was
able to limit the impact on gross margins through reductions in the cost of
revenues in some of the products.

SALES AND MARKETING EXPENSE
Sales and marketing expenses in fiscal 1995 were $34.7 million, or 54% of net
revenues, compared to $33.1 million, or 54% of net revenues, in fiscal 1994.
Sales and marketing expense increased in fiscal 1995 primarily due to increased
sales and marketing efforts relating to Visual products which were offset by
reduced staffing levels worldwide and more efficient use of advertising and
cooperative and incentive programs. Fiscal 1994 sales and marketing expenses
also included certain costs associated with the formation and initial launch of
the consumer products.

GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expenses in fiscal 1995 were $7.6 million, or 12% of
net revenues, compared to $9.1 million, or 15% of net revenues, in fiscal 1994,
a decrease of $1.5 million. The expense reduction was primarily due to the
departure of a former executive in fiscal 1994, reduced costs associated with
legal matters and reduced costs associated with information systems, when
compared to the prior year.

RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenses (net of amounts capitalized) in fiscal 1995
were $5.4 million, or 8% of net revenues, compared to $6.8 million, or 11% of
net revenues, in fiscal 1994, a decrease of $1.4 million. In fiscal 1995 and
1994, gross research and development spending was $8.9 million and $9.5
million, respectively, a decrease of $0.6 million. The decrease in gross
spending was due primarily to the transition from a cash-based developer
incentive program to a stock option-based developer incentive program offset by
an increase in development costs associated with Visual products.

17
<PAGE> 20

EFFECT OF EXCHANGE RATES
Exchange rates during fiscal 1995 had a favorable impact on revenues reported
by the Company. If exchange rates had not changed from their 1994 rates, the
Company would have reported approximately $2.7 million less in revenues in
fiscal 1995. Exchange rates during fiscal 1995 had an adverse effect on
operating expenses reported by the Company. If exchange rates had not changed
from their 1994 rates, the Company would have reported approximately $1.4
million less in sales and marketing expenses in fiscal 1995.

NON OPERATING (INCOME) EXPENSE
Interest income increased from $0.6 million in fiscal 1994 to $0.7 million in
fiscal 1995, primarily as a result of improvements in short-term interest
rates. Favorable exchange rate variations contributed $0.3 million to other
income in fiscal 1995, compared to other expense of $1.0 million in fiscal
1994.

INCOME TAXES
The Company recognized a provision of $0.8 million in fiscal 1995, with an
effective tax rate of 52% due to not benefiting from Visual net operating
losses. In fiscal 1994, the Company recorded a tax benefit of $1.1 million on
a loss from operations of $6.4 million. For further information on income
taxes, see Notes to Consolidated Financial Statements.

18
<PAGE> 21

QUARTERLY RESULTS OF OPERATIONS

The following table presents selected financial results for each of the last
eight quarters through June 30, 1996 (in thousands). These financial results
are unaudited and have been restated from the financial results previously
reported to include the operations of Visual in accordance with
pooling-of-interests accounting. In the opinion of management, however, they
have been prepared on the same basis as the audited financial information and
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the periods presented
when read in conjunction with the accompanying Consolidated Financial
Statements and notes thereto.

<TABLE>
<CAPTION>
QUARTERS ENDED (RESTATED)
=====================================================================================
9/30/94 12/31/94 3/31/95 6/30/95
-------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $14,765 $17,858 $15,896 $ 15,826

Gross profit $10,960 $13,486 $11,870 $ 11,881

Income (loss) from operations $ (142) $ 932 $ 227 $ (488)

Net income (loss) $ (16) $ 795 $ 356 $ (440)

Income (loss) per share $ 0.00 $ 0.09 $ 0.04 $ (0.05)

Shares used in computing income
(loss) per share 9,275 9,281 9,728 9,623
</TABLE>

<TABLE>
<CAPTION>
QUARTERS ENDED (RESTATED)
=====================================================================================
9/30/95 12/31/95 3/31/96 6/30/96
-------------------------------------------------
<S> <C> <C> <C>
Net revenues $15,678 $22,143 $18,355 $16,743

Gross profit $11,930 $17,058 $13,718 $12,716

Income (loss) from operations $ 70 $ 2,439 $ 545 *$(1,976)

Net income (loss) $ (119) $ 1,695 $ 487 *$ (951)

Income (loss) per share $ (0.01) $ 0.17 $ 0.05 *$ (0.09)

Shares used in computing income
(loss) per share 9,666 9,997 10,177 10,091
</TABLE>

* The financial results for the quarter ended June 30, 1996, include the Visual
related acquisition charge of $3.4 million. See Notes to Consolidated
Financial Statements.

19
<PAGE> 22

The following table presents selected financial results for each of the last
eight quarters through June 30, 1996 (in thousands) as previously reported
prior to the restatement for the Visual merger. The quarter ended June 30,
1996, includes the operations of Visual subsequent to the April 2, 1996,
acquisition. These financial results are unaudited and are presented for
comparative purposes.

<TABLE>
<CAPTION>
QUARTERS ENDED (PREVIOUSLY REPORTED)
=====================================================================================
9/30/94 12/31/94 3/31/95 6/30/95
-------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $14,211 $17,157 $14,563 $14,513

Gross profit $10,521 $13,000 $10,937 $10,887

Income from operations $ 17 $ 1,143 $ 407 $ 41

Net income $ 102 $ 892 $ 557 $ 227

Income per share $ 0.01 $ 0.10 $ 0.06 $ 0.03

Shares used in computing income
per share 8,778 8,763 8,935 8,851
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED (PREVIOUSLY REPORTED)
=====================================================================================
9/30/95 12/31/95 3/31/96 6/30/96
-------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues $15,050 $20,341 $17,356 $16,743

Gross profit $11,466 $15,669 $13,140 $12,716

Income (loss) from operations $ 852 $ 2,886 $ 2,090 $(1,976)

Net income (loss) $ 440 $ 2,020 $ 1,595 $ (951)

Income (loss) per share $ 0.05 $ 0.22 $ 0.17 $ (0.09)

Shares used in computing income
(loss) per share 9,109 9,203 9,369 10,091
</TABLE>

TRENDS AND RISK FACTORS
The following discusses trends and risk factors inherent in the Company's
business environment.

NEW OPERATING SYSTEMS
In August 1995, Microsoft Corporation released Windows 95, a 32-bit operating
system that is the successor product to the DOS operating system and the
Windows 3.1 operating environment. Almost all of the Company's current
products have been developed to be used with 32-bit operating systems which
also encompasses Windows NT. Because Windows 3.1 is currently the most
prevalent operating environment on PCs, Windows 95 and

20
<PAGE> 23

Windows NT are expected to be the dominant operating systems in the future.
Currently, the Windows 95/NT upgrade cycle is occurring at a slower rate than
initially expected. As the rate of upgrade to Windows 95/NT increases, it
should initiate a strong product upgrade cycle as customers purchase 32-bit
applications that take advantage of the enhanced capabilities. However, there
can be no assurance that upgrades to Windows 95/NT will occur at a rate
sufficient to benefit the Company's efforts to sell its 32-bit products. The
Company's future revenue could be negatively impacted by the rate at which
customers transition to the Windows 95/NT environments.

NEW PRODUCT INTRODUCTIONS
The Company's future financial performance will depend in significant part upon
the successful development and introduction of new and enhanced versions of its
products and customer acceptance of these products, of which there can be no
assurance.

LICENSING AGREEMENTS
The Company's business strategy includes entering into licensing agreements
with third parties in an effort to increase brand awareness for the Company's
products by associating the Micrografx name with products and services which
customers already know. One such licensing agreement is with Hallmark Cards,
Inc. relating to the Hallmark Connections Card Studio product for the consumer
greeting card software market. The Hallmark Connections Card Studio product
accounted for $9.7 million or approximately 13% of the Company's fiscal 1996
revenues. Hallmark Cards, Inc. has recently announced the introduction of a
new product for the consumer greeting card market in conjunction with Microsoft
Corporation which will compete directly with the Company's greeting card
products, and Hallmark Cards, Inc. has advised the Company that it does not
intend to renew the Company's license agreement for the Hallmark Connections
Card Studio product. The license expires in September 1997 unless earlier
terminated. The Company expects the new competing Hallmark/Microsoft product
to be shipped in the first quarter of fiscal 1997. In light of the above, the
Company has entered into a licensing agreement with American Greetings
Corporation for a new product for the consumer greeting card market, American
Greetings CreataCard Plus, to be shipped in the first quarter of fiscal 1997.
Based upon Hallmark Cards, Inc.'s product introduction with Microsoft, the
maturing life cycle of the Company's Hallmark Connections Card Studio product,
increasing competition and other factors, the Company expects that it will not
be able to rely on continued sales of the Hallmark Connections Card Studio
product, particularly not at the revenue levels experienced in fiscal 1996.
Therefore, the Company expects that its success in the consumer greeting card
software market will be dependent upon the successful market introduction and
market acceptance of the American Greetings CreataCard Plus, of which there can
be no assurance. Because the American Greetings product is a new market
entrant in the consumer greeting card market, having a suggested retail price
that is 40% lower than the Company's Hallmark Connections Card Studio and in
light of the competition it will confront from the new Hallmark/Microsoft
product, there can be no assurance that in fiscal 1997 the American Greetings
product, when combined with sales of the Hallmark Connections Card Studio
product, will generate revenues which are comparable to the revenues generated
by the Hallmark Connections Card Studio product in fiscal 1996.

The Company's product offering in fiscal 1996 included Crayola Art and Crayola
Art Studio 2, pursuant to a license agreement between the Company and Binney &
Smith Properties, Inc., a subsidiary of Hallmark Cards, Inc. Together these
products accounted for $4.3 million or 5.9% of fiscal 1996 revenues. This
license agreement expires on December 31, 1996, at which time the Company must
discontinue distribution of these products, except that it may sell off
existing inventories through March 31, 1997. The Company does not expect that
this license agreement will be renewed.

TECHNOLOGICAL CHANGE
The personal computer industry is subject to rapid technological change and
continuing development of new and enhanced operating environments. The success
of the Company's products will depend to a large extent upon the Company's
ability to continue to develop and introduce innovative and competitive
products on a cost-effective and timely basis, of which there can be no
assurance.

21
<PAGE> 24

COMPETITION
The personal computer applications software market is highly competitive. The
Company's competitors include many companies who have larger technical staffs,
more established and larger marketing and sales organizations and significantly
greater financial resources than does the Company. Additionally, recent merger
activity in the applications software market has served to strengthen the
merging companies' ability to compete.

INTERNATIONAL OPERATIONS
The Company anticipates that international net revenues will continue to
account for a significant portion of net revenues, which will result in a
significant portion of the Company's net revenues being subject to the risks
inherent in international operations. These risks include unexpected changes
in regulatory requirements, exchange rates, tariffs and other barriers,
difficulties in staffing and managing foreign subsidiary operations, and
potentially adverse tax consequences.

CHANGES IN DISTRIBUTION CHANNELS
The retail distribution channel for software products is currently undergoing
significant changes, with the expansion of software products into mass
merchandisers and computer superstores. Additionally, the Company distributes
its consumer products through channels not typically associated with software
products, including mass merchandisers and toy stores. The Company's success
depends in part on the ability to identify and respond to changes in the
distribution channel.

SEASONALITY
The Company's results of operations are subject to significant quarterly
variations. Causes of these variations include seasonality of the retail
software market, delays in the introduction of new or enhanced versions of the
Company's products, timing and cost of new product upgrades and introductions,
and large distribution channel sales following the introduction of new or
updated products. Historically, as is typical in the retail software industry,
the Company has experienced some seasonal variations in demand, with sales
declining somewhat in the summer months and increasing somewhat during the
Christmas quarter and first calendar quarter.

UPGRADES
Product upgrades, which enable users to upgrade from earlier versions of the
Company's products, or from competitors' products, typically have lower prices
than new products, resulting in lower gross profit margins. The Company plans
to continue upgrading successful products in the future.

INTERNET
The Company provides products for use in the Internet market. The Internet
market is rapidly evolving and is characterized by an increasing number of
market entrants. As is typical in the case of a new and evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Critical issues concerning the
commercial use of the Internet (including security, reliability, cost, ease of
use and access, and quality of service) remain unresolved and may impact the
growth of Internet use, together with the software standards and electronic
media employed in such markets.

GROSS PROFIT
Product margins vary according to product mix and the geographical region in
which the products are sold. Changes in product mix, including the mix of
upgrade sales, the transition to "suite" products accompanied with
value-pricing, as well as changes in the components of direct costs, may
negatively affect the Company's gross profit in future periods.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 1996, the Company's principal sources of liquidity consisted of
cash and cash equivalents of $13.8 million and short-term investments of $4.8
million. The Company maintains approximately $6 million in total credit
facilities, all of which was unused at June 30, 1996.

22
<PAGE> 25

As discussed in Notes to Consolidated Financial Statements, the Company renewed
its line of credit agreement effective January 1, 1996. The renewed line of
credit remains secured by certain receivables and fixed assets and contains
financial covenants, including limitations on minimum tangible net worth, net
liquid assets and quick ratio, as defined. The revolving line of credit is due
on demand on January 5, 1997 and bears interest at the bank's prime rate (8.25%
at June 30, 1996).

CASH FLOWS DURING FISCAL 1996
For the year ended June 30, 1996, cash provided by operating and financing
activities exceeded cash used in investing activities, resulting in an increase
in cash and cash equivalents of $2.5 million. Cash flows from operating
activities generated $8.5 million in cash during fiscal 1996, primarily due to
positive income, and non-cash expenses partially offset by higher receivables
and a decrease in payables.

Cash flows from investing activities used $6.8 million during fiscal 1996 and
consisted primarily of purchases of property and equipment, and additions to
capitalized software development costs and acquired product rights.
Expenditures for property and equipment during fiscal 1996 were $1.7 million
and consisted primarily of personal computer upgrades. Investments of $6.1
million were also made in capitalized software development costs and acquired
product rights related to the development of new and enhanced versions of the
Company's products.

Cash flows from financing activities provided $1.8 million in cash during
fiscal 1996, due primarily to proceeds received from employee stock programs.
This inflow of cash was partially offset by cash used to repay all outstanding
notes payable and to repurchase approximately 80,000 shares of treasury stock.

CAPITAL RESOURCES
As of June 30, 1996, the Company had no significant commitments for capital
expenditures.

The Company believes that cash flow from operations, existing cash, and
existing borrowing arrangements will be sufficient to meet the Company's
capital requirements in the short-term (the next 12 months). The Company
believes that thereafter its liquidity requirements could be met with cash flow
from operations, and existing cash and short-term investment balances.

OTHER MATTERS
The assets and liabilities of non-U.S. operations are translated into U.S.
dollars at exchange rates in effect as of the respective balance sheet dates,
and revenue and expense accounts of these operations are translated at average
exchange rates during the month the transactions occurred. Unrealized
translation gains and losses are included as an adjustment to shareholders'
equity. The Company has mitigated a portion of its currency exposure through
decentralized sales, marketing and administrative operations. When necessary,
the Company may also hedge to prevent material exposure.

LITIGATION
The Company is party to various legal proceedings arising from the normal
course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's results of
operations or its financial position.

RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, Statement of Financial Accounting Standard ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" was issued which applies to fiscal
years beginning after December 15, 1995. This statement defines a fair value
based method of accounting for employee stock options, which measures
compensation cost at the grant date based on the fair value of the award and
recognizes the compensation cost over the service period, which is usually the
vesting period. The statement gives the Company the option of continuing to
account for employee stock options using the intrinsic value based method of
accounting under the existing Accounting Principles Board Opinion ("APB") No.
25, "Accounting for Stock Issued to Employees". The Company will elect to
continue accounting for employee stock options under APB No. 25. However, it
will be required to make pro

23
<PAGE> 26

forma disclosures beginning in fiscal year 1997 of net income and earnings per
share, as if SFAS No. 123's method of accounting had been adopted.

FORWARD-LOOKING STATEMENTS
The Company notes that each of the above forward-looking statements are subject
to change based on various important factors, including, without limitation,
competitive actions in the market place and the factors noted above under
"Trends and Risk Factors".

24
<PAGE> 27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)

<TABLE>
<CAPTION>
JUNE 30,
1996 1995
-------- --------
ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,790 $ 11,329

Short-term investments 4,844 5,312

Accounts receivable, net 9,417 9,232

Inventories 1,284 1,308

Deferred tax asset 497 484

Other current assets 1,709 1,472
-------- --------

Total current assets 31,541 29,137

Property and equipment, net 3,150 4,631

Capitalized software development costs, net 3,451 3,596

Acquired product rights, net 1,831 1,302

Other assets 125 624

-------- --------
Total assets $ 40,098 $ 39,290
======== ========
</TABLE>

See accompanying notes.

25
<PAGE> 28

MICROGRAFX, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)

<TABLE>
<CAPTION>
JUNE 30,

1996 1995
-------- --------

LIABILITIES AND SHAREHOLDERS' EQUITY

<S> <C> <C>
Current liabilities:

Accounts payable $ 4,230 $ 6,158

Accrued compensation and benefits 1,422 1,399

Other accrued liabilities 3,299 3,224

Income taxes payable 820 710

Accrued royalties 538 130

Notes payable - 790

-------- --------
Total current liabilities 10,309 12,411

Deferred income taxes 632 867

Other liabilities 52 36

Shareholders' equity:

Common stock, $.01 par value,

20,000 shares authorized; 10,800 and 10,132 shares

issued; 10,218 and 9,630 shares outstanding 108 101

Additional capital 28,677 24,747

Retained earnings 4,686 3,574

Cumulative translation adjustment (1,230) (279)

Less - treasury stock (582 and 502 shares), at cost (3,136) (2,167)

-------- --------
Total shareholders' equity 29,105 25,976
-------- --------
Total liabilities and shareholders' equity $ 40,098 $ 39,290
======== ========
</TABLE>

See accompanying notes.

26
<PAGE> 29

MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net revenues $ 72,919 $ 64,345 $ 61,505
Cost of revenues 17,497 16,148 15,026
-------- -------- --------
Gross profit 55,422 48,197 46,479

Operating expenses:
Sales and marketing 35,108 34,703 33,089
General and administrative 8,219 7,607 9,147
Research and development 7,638 5,358 6,785
Acquisition charges 3,379 - -
Restructuring charges - - 3,813
-------- -------- --------
Total operating expenses 54,344 47,668 52,834

-------- -------- --------
Income (loss) from operations 1,078 529 (6,355)

Interest income (878) (734) (559)
Interest expense 14 83 147
Other (income) expense, net 353 (277) 963

-------- -------- --------
Total non operating (income) expense (511) (928) 551
-------- -------- --------
Income (loss) before income taxes 1,589 1,457 (6,906)

Income taxes 477 762 (1,138)

-------- -------- --------
Net income (loss) $ 1,112 $ 695 $ (5,768)
======== ======== ========

Income (loss) per share $ 0.11 $ 0.07 $ (0.64)
======== ======== ========

Shares used in computing
income (loss) per share 10,136 9,480 8,986
======== ======== ========
</TABLE>

See accompanying notes

27
<PAGE> 30

MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
---------------- ADDITIONAL RETAINED TRANSLATION TREASURY
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT STOCK TOTAL
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>

BALANCE, JUNE 30, 1993 9,034 $90 $19,931 $8,647 ($375) ($978) $27,315
Common stock issued under stock option
plan 265 3 947 - - - 950
Common stock issued under stock purchase
plan 142 1 629 - - - 630
Common stock issued by Visual Software,
Inc. 80 1 227 - - - 228
Tax benefit of stock options exercised - - 519 - - - 519
Stock warrants issued - - 23 - - - 23
Issuance of restricted stock (45 shares) - - (139) - - 370 231
Treasury stock acquired (107 shares) - - - - - (726) (726)
Translation of foreign currency financial
statements - - - - 309 - 309
Net loss - - - (5,768) - - (5,768)

--------------------------------------------------------------------------
BALANCE, JUNE 30, 1994 9,521 95 22,137 2,879 (66) (1,334) 23,711
Common stock issued under stock option
plan 65 1 246 - - - 247
Common stock issued under stock purchase
plan 125 1 532 - - - 533
Common stock issued by Visual Software,
Inc. 421 4 1,783 - - - 1,787
Tax benefit of stock options exercised - - 49 - - - 49
Treasury stock acquired (145 shares) - - - - - (833) (833)
Translation of foreign currency financial
statements - - - - (213) - (213)
Net income - - - 695 - - 695
--------------------------------------------------------------------------
BALANCE, JUNE 30, 1995 10,132 101 24,747 3,574 (279) (2,167) 25,976
Common stock issued under stock option
plan 421 4 2,841 - - - 2,845
Common stock issued under stock purchase
plan 144 2 671 - - - 673
Common stock issued by Visual Software,
Inc. 103 1 418 - - - 419
Translation of foreign currency financial
statements - - - - (951) - (951)
Treasury stock acquired (80 shares) - - - - - (969) (969)
Net income - - - 1,112 - - 1,112
--------------------------------------------------------------------------
BALANCE, JUNE 30, 1996 10,800 $108 $28,677 $4,686 ($1,230) ($3,136) $29,105
==========================================================================
</TABLE>

See accompanying notes

28
<PAGE> 31

MICROGRAFX, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $1,112 $ 695 $ (5,768)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 8,492 8,113 8,611
Acquisition charge 1,359 - -
Restructuring charge - - 3,813
Deferred income taxes and other 187 234 (1,793)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable (810) (4,141) 3,354
(Increase) decrease in inventories (161) 544 (363)
(Increase) decrease in other current assets (267) 93 820
(Decrease) increase in payables and accruals (1,542) (342) 1,793
(Decrease) increase in income taxes payable 110 751 -
-------- -------- --------
Total adjustments 7,368 5,252 16,235
-------- -------- --------
Net cash provided by operating activities 8,480 5,947 10,467
-------- -------- --------
Cash flows from investing activities:
Proceeds from maturities of short-term investments 6,778 7,441 7,959
Purchases of short-term investments (6,310) (5,507) (8,311)
Capitalization of software development costs and
purchases of acquired product rights (6,115) (5,324) (4,215)
Purchases of property and equipment, net (1,679) (1,820) (2,627)
Other 499 (109) (110)
-------- -------- --------
Net cash used in investing activities (6,827) (5,319) (7,304)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable - 700 -
Payments of notes payable (790) (1,570) (1,964)
Increase in due to related parties - 938 738
Proceeds from employee stock programs 3,518 779 1,603
Proceeds from issuance of common stock - - 217
Tax benefits realized from stock transactions - 49 519
Treasury stock acquired (969) (833) (495)
-------- -------- --------
Net cash provided by financing activities 1,759 63 618
-------- -------- --------

Effect of exchange rates on cash and cash equivalents (951) (213) 309

Net increase in cash and cash equivalents 2,461 478 4,090
Cash and cash equivalents, beginning of year 11,329 10,851 6,761
-------- -------- --------
Cash and cash equivalents, end of year $ 13,790 $ 11,329 $ 10,851
======== ======== ========
</TABLE>

See accompanying notes.

29
<PAGE> 32

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
1996 1995 1994
------- --------- ---------
<S> <C> <C> <C>
Cash paid for --
Interest $ 4 $ 66 $ 114
Income taxes $ 355 $ 9 $ 31
</TABLE>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JUNE 30, 1996

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

THE COMPANY
Micrografx, Inc. ("Micrografx" or the "Company") was founded in 1982 and
incorporated in 1984 in the state of Texas. Micrografx develops and markets
graphics software which enhances visual communication and empowers creative
expression.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and accounts have been eliminated.

On April 2, 1996, the Company acquired all of the issued and outstanding
capital stock and options of Visual Software, Inc., a California corporation
("Visual"). The acquisition has been accounted for as a pooling of interests.
Accordingly, the accompanying consolidated financial statements have been
restated to retroactively include the accounts and operations of Visual for all
periods presented. See "Acquisition of Visual Software, Inc." included herein.

CHANGE IN FISCAL YEAR
On May 10, 1994 the Board of Directors approved the changing of the Company's
fiscal year end to periods ending June 30. This change became effective for
the period ending June 30, 1994 and the Company filed a transition report on
Form 10-Q for the three month transition period ended June 30, 1994. This
change in year end better reflects the current nature of the Company's
business. The accompanying financial statements have been restated to conform
to the June 30 year end.

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 reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.

INVENTORIES
Inventories are stated at the lower of cost or market using a weighted-average
method. Finished goods inventories include costs of material, labor and
overhead. Major classes of inventory include the following (in thousands):

<TABLE>
<CAPTION>
June 30,
-------------------
1996 1995
-------- --------
<S> <C> <C>
Raw materials $ 849 $ 814
Finished goods 435 494
-------- --------
$ 1,284 $ 1,308
</TABLE>

30
<PAGE> 33

PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is provided for using the straight-line method over
the following estimated useful lives:

Computers and equipment 2-5 Years
Software 2-5 Years
Furniture and fixtures 5-7 Years
Leasehold improvements Shorter of Term of Lease or
Asset Life

CAPITALIZED SOFTWARE DEVELOPMENT COSTS AND ACQUIRED PRODUCT RIGHTS
In accordance with Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," the Company capitalizes certain software development costs incurred
after technological feasibility is achieved and also capitalizes costs of
acquiring certain product rights in connection with the development of its
computer software products. Capitalized costs are reported at the lower of
unamortized cost or net realizable value. Capitalized software development
costs and acquired product rights are amortized straight-line over the
estimated economic life of the products that ranges from 12 to 24 months, which
approximates amortization based on the ratio of current net sales over future
estimated net sales. The Company begins amortization when the products are
available for general release to customers. All other research and development
expenditures are charged to research and development expense in the period
incurred.

FOREIGN CURRENCY
For the majority of the Company's foreign subsidiaries, the functional currency
is the local currency of the country. Accordingly, assets and liabilities of
the foreign subsidiaries are translated to U.S. dollars at year end exchange
rates. Income and expense items are translated at the average rates of
exchange prevailing during the year. The adjustments resulting from
translating the financial statements of foreign subsidiaries are reflected as
cumulative translation adjustments, a reduction of shareholders' equity.

The net foreign currency exchange gains (losses) were $(399,000), $268,000 and
$(940,000) for fiscal 1996, 1995 and 1994, respectively.

DERIVATIVE INSTRUMENTS
The Company periodically enters into derivative financial transactions to hedge
existing or projected exposures to changing foreign exchange rates. The
Company does not enter into derivative transactions for speculative purposes.
Foreign currency hedges are carried at fair value with the resulting gains and
losses reflected in other (income) expense.

REVENUE RECOGNITION
Revenues on applications software product sales are recognized when the related
products are shipped to customers, net of discounts and allowances for
estimated future returns. The Company offers "stock balancing" (the ability to
return slow-moving or obsolete products) to distributors and dealers. Products
may be exchanged for credit against future purchases of other Company products
on a minimum of a dollar-for-dollar basis. Defective products may be returned
for credit or exchange. Returns in excess of the allowance could occur if a
significant amount of the Company's products proved to be defective.

The Company periodically offers rebates to distributors, the amounts of which
are primarily based on sales volume. The Company also offers distributors and
resellers incentives and co-op funds, generally 2-10% of amounts invoiced, that
are used to promote the Company's products. These funds are generally paid as
a credit against outstanding invoices and are included in sales and marketing
expense during the period in which revenue is recognized.

31
<PAGE> 34

ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense was
$5,528,000, $8,429,000 and $8,465,000 in 1996, 1995 and 1994, respectively.

STOCK-BASED COMPENSATION
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation" was
issued which applies to fiscal years beginning after December 15, 1995. This
statement defines a fair value based method of accounting for employee stock
options, which measures compensation cost at the grant date based on the fair
value of the award and recognizes the compensation cost over the service
period, which is usually the vesting period. The statement gives the Company
the option of continuing to account for employee stock options using the
intrinsic value based method of accounting under the existing Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company will elect to continue accounting for employee stock options under
APB No. 25. However, it will be required to make pro forma disclosures
beginning in fiscal year 1997 of net income and earnings per share, as if SFAS
No. 123's method of accounting had been adopted.

RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform with
current year presentation.

ACQUISITION OF VISUAL SOFTWARE, INC.
On April 2, 1996, the Company acquired all of the issued and outstanding
capital stock and options of Visual. In connection with the acquisition,
Micrografx also agreed to exchange shares of its common stock for the 20%
outstanding minority interest in Visual Worlds Development Corporation ("VWD")
owned by persons other than Visual. VWD was an 80% owned subsidiary of Visual
prior to the acquisition. Visual and its subsidiaries are engaged in the
development and marketing of 3-D graphics software and Micrografx intends to
continue the business of Visual. Micrografx issued approximately 0.36547
shares of common stock for each outstanding share of common stock of Visual,
approximately 0.2930 shares of its common stock for each outstanding option,
net of the option exercise price, and an aggregate of 3,655 shares of its
common stock for the 20% interest in VWD owned by the minority stockholders of
VWD. As a result, a total of approximately 882,536 shares of the common stock
of Micrografx were issued in connection with these transactions.

Separate results for the periods prior to the acquisition are presented below
(in thousands, except per share data). The summary below is not necessarily
indicative of results that may be obtained in the future.

<TABLE>
<CAPTION>
Net Income Earnings
Net Revenues (Loss) Per Share
------------ ---------- ---------
<S> <C> <C> <C>
Year ended June 30, 1994
Micrografx $ 60,732 $ (4,816) $(0.56)
Visual 773 (952) $(2.83)
---------- ---------
Combined $ 61,505 $ (5,768) $(0.64)

Year ended June 30, 1995
Micrografx $ 60,444 $ 1,778 $ 0.20
Visual 3,901 (1,083) $(1.66)
---------- ---------
Combined $ 64,345 $ 695 $ 0.07

Period from July 1, 1995 to April 1,
1996 (unaudited)
Micrografx $ 52,747 $ 4,055 $ 0.44
Visual 3,429 (1,992) $(2.50)
---------- ---------
Combined $ 56,176 $ 2,063 $ 0.21
</TABLE>

32
<PAGE> 35

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company considers all highly liquid securities with original maturities of
three months or less to be cash equivalents. All short-term investments have
maturities within one year of the balance sheet date. Cash and cash
equivalents and short-term investments consist of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
-------------------------
1996 1995
---------- ---------
<S> <C> <C>
Cash and cash equivalents:
Cash $ 2,475 $ 5,151
U.S. Treasury securities - 395
Money market funds 3,819 3,120
Commercial paper 7,496 2,663
---------- ---------
Total cash and cash equivalents 13,790 11,329

Short-term investments:
U.S. Treasury securities 1,497 3,866
Government backed issues 3,075 1,303
Money market funds 272 143
---------- ---------
Total short-term investments 4,844 5,312

Total cash and short-term investments $ 18,634 $ 16,641
========== =========
</TABLE>

The appropriate classification of securities is determined at the time of
purchase and reevaluated as of each balance sheet date. The Company has
classified its cash equivalents as available for sale and its short-term
investments as held to maturity. The available-for-sale securities are carried
at cost which approximates fair value. The held-to- maturity securities are
recorded at amortized cost, adjusted for the amortization or accretion of
premiums and discounts. Gross realized and unrealized gains and losses for
each of these classifications of securities were not material at June 30, 1996
and 1995. The fair value of securities is based on quoted market prices, where
available, or quotes from external pricing sources such as brokers for those or
similar investments and issues. Gross sale proceeds from available-for-sale
securities were $110,450,000 and $96,290,000 in 1996 and 1995, respectively.
The cost of available-for-sale securities sold is based on the specific
identification method.

ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
-----------------------
1996 1995
------- -------
<S> <C> <C>
Trade Receivables $12,509 $11,211
Allowances (3,092) (1,979)
------- -------
Accounts receivable, net $ 9,417 $ 9,232
======= =======
</TABLE>

Allowances consist of reserves for returns, reserves for bad debt and accruals
for co-op and incentive programs.

At June 30, 1996 and 1995, approximately 68% and 60%, respectively, of trade
receivables represented amounts due from ten customers. At June 30, 1996, the
Company had two customers with receivable balances of 28% and 11% of trade
receivables. At June 30, 1995, the Company had two customers with receivable
balances of 16% and 14% of trade receivables. The credit risk in the Company's
trade accounts receivable is substantially mitigated by the Company's credit
evaluation process, credit insurance policies, reasonably short collection
terms and the geographical diversification of revenues.

33
<PAGE> 36

The Company distributes its products domestically through independent,
non-exclusive distributors, authorized dealers, and its corporate sales
representatives located throughout the United States. The Company distributes
its products internationally through independent, non-exclusive distributors
located primarily in Western Europe and Japan. In fiscal 1996, the Company had
one customer whose sales accounted for 17% of net revenues; in fiscal 1995, two
customers' sales accounted for 15% and 11% of net revenues; and in fiscal 1994,
two customers' sales each accounted for 10% of net revenues.

PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):

<TABLE>
<CAPTION>
June 30,
-------------------
1996 1995
------- -------
<S> <C> <C>
Computers and equipment $ 9,830 $11,522
Furniture and fixtures 522 1,826
Leasehold improvements 545 488
------- -------
10,897 13,836
Less -- accumulated depreciation (7,747) (9,205)
------- -------
Property and equipment, net $ 3,150 $ 4,631
======= =======
</TABLE>

INTANGIBLE ASSETS

Capitalized software development costs and acquired product rights consist of
the following (in thousands):
<TABLE>
<CAPTION>
June 30,
------------------
1996 1995
------ ------
<S> <C> <C>
Capitalized software development costs $6,213 $7,306
Less -- accumulated amortization (2,762) (3,710)
------ ------
Capitalized software development costs, net $3,451 $3,596
====== ======

Acquired product rights $3,957 $2,440
Less -- accumulated amortization (2,126) (1,138)
------ ------
Acquired product rights, net $1,831 $1,302
====== ======
</TABLE>

During the years ended June 30, 1996, 1995 and 1994, the Company capitalized
$6,115,000, $5,324,000 and $4,215,000, respectively, of software development
costs and acquired product rights. Amounts amortized and charged to cost of
revenues for capitalized software development costs and acquired product rights
during the years ended June 30, 1996, 1995 and 1994 were $5,573,000,
$5,445,000 and $6,015,000, respectively. Additionally, the Company wrote down
capitalized software development costs and acquired product rights to net
realizable value by approximately $43,000, $93,000 and $170,000 in fiscal 1996,
1995 and 1994, respectively.

DEBT

Lines of Credit
The Company's $6 million line of credit was renewed effective January 1, 1996
and expires on January 5, 1997. The line of credit is secured by certain
receivables and fixed assets and contains certain financial covenants,
including limitations on minimum tangible net worth, net liquid assets and
quick ratio, as defined. The revolving line of credit is due on demand or
January 5, 1997, and bears interest at the bank's prime rate (8.25% at June 30,
1996). Commitment fees related to the line of credit are 0.25% of the unused
line of credit per year. At June 30, 1996 and 1995, no borrowings on the line
were outstanding.

34
<PAGE> 37

Prior to the merger, Visual maintained a separate $1,000,000 line of credit
with a bank in Guernsey. The line of credit was secured by a stockholder's
cash deposit for the same amount and guaranteed by the stockholder. Interest
was charged at a rate of 1 percent per annum over the interest rate applied to
cash deposits (5.95% at June 30, 1995). The commitment had an initial term of
six months through October 1995, and was extended for another six months
through April 1996. Visual had $700,000 outstanding under the line of credit
at June 30, 1995. On April 2, 1996, all amounts owed to the bank in Guernsey
were paid in connection with the merger with Visual.

Due to Related Parties
During the year ended June 30, 1995, $743,000 in amounts due to related
parties, which were owed to Visual shareholders and were non-interest bearing,
unsecured and convertible to common stock, were canceled and exchanged for
common stock.

At June 30, 1995, $40,000 of the amounts due to related parties was
non-interest bearing, unsecured and payable on demand. An additional $50,000
was unsecured and bore interest at 7.01% per annum. Both amounts due to
related parties were repaid in connection with the merger with Visual.

INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of existing differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income
tax purposes. Current and noncurrent deferred income tax assets and
liabilities are classified on the balance sheet based on the classification of
the assets and liabilities giving rise to these differences. Deferred tax
assets and liabilities that are not related to an asset or liability for
financial reporting are classified according to the expected reversal of the
temporary difference.

Components of the provision for income taxes on income from continuing
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Years Ended June 30,
------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 13 $ 143 $ (555)
State and local - 6 27
Foreign 721 440 67
-------- -------- --------
Total current provision (benefit) 734 589 (461)
Deferred Federal provision (benefit) (257) 173 (677)
-------- -------- --------
Total income tax provision (benefit) $ 477 $ 762 $ (1,138)
======== ======== ========
</TABLE>

35
<PAGE> 38

The provision for income taxes is reconciled with the Federal statutory rate as
follows (in thousands):

<TABLE>
<CAPTION>
Years Ended June 30,
----------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) computed at
federal statutory rate $ 540 $ 495 $ (2,348)
Nondeductible acquisition expenses 358 - -
State and local taxes, net of
federal tax benefit - - 31
Foreign tax rate differential 214 67 43
Change in valuation allowance (862) 80 1,897
Research and development credit
carryforward - - (689)
Other 227 120 (72)
--------- --------- ---------
Tax provision (benefit) $ 477 $ 762 $ (1,138)
========= ========= =========
</TABLE>

Components of the net deferred income tax assets (liabilities) are as follows
(in thousands):

<TABLE>
<CAPTION>
June 30,
-------------------
Deferred Tax Assets 1996 1995
-------------------
<S> <C> <C>
Tax credit carryforwards $ 1,953 $ 1,940
Net operating loss carryforward 2,304 1,912
Depreciation 326 -
Reserves and other accrued expenses not
currently deductible for tax purposes 1,131 1,055
-------------------
Total deferred tax assets 5,714 4,907

Deferred Tax Liabilities
Capitalized software development costs
currently deductible for tax purposes (1,796) (1,617)
Depreciation - (8)
Undistributed earnings in foreign subsidiaries (788) (788)
Other (402) (291)
-------------------
Total deferred tax liabilities (2,986) (2,704)

Total net deferred tax assets 2,728 2,203
Valuation allowance (2,863) (2,586)

-------------------
Net deferred tax liabilities, net of valuation $ (135) $ (383)
===================
</TABLE>

At June 30, 1996, the Company has research and development tax credit
carryforwards of $1,690,000 for Federal tax purposes, which expire between 2006
and 2009. In addition, the Company has alternative minimum tax credit
carryforwards of $263,000 that may be carried forward indefinitely as a credit
against the Company's current tax liability. The Company also has net
operating loss carryforwards of $1,644,000 exclusive of Visual's losses that
expire in 2009. Visual had net operating loss carryforwards of $5,129,000 for
federal tax purposes, which expire between 2006 and 2009. The annual
utilization of these carryforwards will be limited.

36
<PAGE> 39

As required by SFAS 109, the Company has recognized deferred tax assets for
these tax credit and net operating loss carryforwards. Pursuant to the
requirements of SFAS 109, a valuation allowance must be provided when it is
more likely than not that the deferred tax asset will not be realized. The
Company has provided a valuation allowance with respect to a portion of the
deferred tax assets as the Company does not deem the full recovery of such
amounts at this time to be more likely than not. The valuation allowance was
increased by $1,139,000 in fiscal 1996 for stock option deductions, the benefit
of which will be credited to additional capital, rather than a reduction of
income tax expense, when realized. In fiscal 1996, the valuation allowance was
reduced by $862,000 as a result of taxable income in fiscal 1996. Management's
assessment is based upon current and anticipated operations, current tax laws,
and other qualitative and quantitative factors. In subsequent periods, the
Company may adjust the valuation allowance, to the extent that utilization of
the deferred tax asset is more likely than not, as defined by SFAS 109.

SHAREHOLDERS' EQUITY

COMMON STOCK REPURCHASE
On May 10, 1994, the board of directors authorized the purchase of up to one
million shares of Micrografx common stock on the open market over a five year
period as market conditions warrant. The purpose of the program is to fund
existing employee stock benefit programs and will be funded by normal working
capital. As of June 30, 1996, the Company had repurchased 315,100 shares at an
average price of $7.65 per share. During fiscal 1996, the Company rescinded
the stock repurchase program.

EMPLOYEE BENEFIT PROGRAMS

STOCK OPTION PLANS
The Company has reserved 4,800,000 shares of its Common Stock for issuance in
connection with its stock option plans for employees and non-employees, which
are administered by the Company's Stock Option Committee.

Each option issued under the plans terminates at the time designated by the
Board of Directors, not to exceed 10 years. The exercise price and vesting
schedule for each option is determined by the Company's Stock Option Committee,
based on the fair market value of the Company's stock at the grant date, and is
payable when the option is exercised. Options that terminate under the
provisions of the plan subsequently become available for reissuance.

Outstanding options are summarized as follows:

<TABLE>
<CAPTION>
Shares Exercise Price
========= =================
<S> <C> <C> <C>
Balance, June 30, 1993 856,440 $0.013 - $11.125
Granted 1,270,499 $5.750 - $ 9.375
Exercised (265,120) $0.417 - $ 8.000
Canceled (374,593) $3.000 - $11.250
---------
Balance, June 30, 1994 1,487,226 $0.013 - $11.125
Granted 471,338 $5.375 - $ 7.625
Exercised (65,276) $2.707 - $ 8.000
Canceled (764,544) $0.013 - $11.125
---------
Balance, June 30, 1995 1,128,744 $4.750 - $ 8.250
Granted 625,782 $8.375 - $16.000
Exercised (421,008) $4.750 - $12.250
Canceled (120,516) $5.375 - $14.375
---------
Balance, June 30, 1996 1,213,002 $5.375 - $16.000
=========
</TABLE>

At June 30, 1996, options to purchase 183,773 shares of common stock were
exercisable under the plans.

37
<PAGE> 40

In July 1995, Visual's Board of Directors issued options to purchase 241,000
shares of Visual's common stock at $1 per share resulting in $120,000 of
compensation expense being recorded. These options were to vest ratably over
four years and immediately vest in the event of a merger. As part of the
merger with Micrografx, such options were exchanged for Micrografx common stock
based on their relative fair value.

EMPLOYEE STOCK PURCHASE PLAN
The Company's Employee Stock Purchase Plan allows eligible employees to
authorize the Company to withhold from 1% to 10% of gross earnings. Shares are
purchased by participants at the lower of 85% of the fair market value per
share at the beginning or ending of each offering period. As of June 30, 1996,
800,000 shares were authorized for the plan, approximately 549,000 shares were
issued, and approximately $66,000 had been withheld for the purchase of shares
for the November 1996 offering period.

SAVINGS PLAN
The Micrografx, Inc. 401(k) Savings Plan allows eligible employees to elect to
reduce their current compensation by up to 15%, subject to certain maximum
dollar limitations prescribed by the Internal Revenue Code ($9,500 in 1996),
and have the amount contributed to the plan as salary deferral contributions.
The Company may make employer contributions to the plan at the discretion of
the Board of Directors. During fiscal 1996, 1995 and 1994, the Company
contributed approximately $128,000, $86,000 and $116,000 to the plan,
respectively. At June 30, 1996, there were approximately 130 participants in
the plan.

COMMITMENTS AND CONTINGENCIES

Leases
The Company leases its office and warehouse space and certain equipment under
non cancelable operating lease agreements. Rent expense of $1,348,000,
$1,496,000 and $1,660,000 was recorded for the years ended June 30, 1996, 1995
and 1994, respectively. Future minimum lease payments for operating leases are
as follows (in thousands):

<TABLE>
<CAPTION>
Years Ending June 30,
----------------------------------
<S> <C>
1997 $ 1,008
1998 846
1999 836
2000 417
2001 248
Thereafter -
----------
$ 3,355
----------
</TABLE>

Forward Contracts
The Company periodically enters into foreign exchange contracts to hedge
against certain exposure to changes in foreign currency exchange rates. This
exposure results from the Company's foreign operations that are denominated in
currencies other than the U.S. dollar. The Company revalues foreign exchange
contracts at each balance sheet date, which approximates fair value, and
records the exchange difference as an unrealized gain or loss. This gain or
loss is included in other (income) expense, net. As of June 30, 1996, the
Company had a foreign exchange option contract outstanding, representing the
option to purchase 150,000,000 Yen at $105.26 expiring September 1996. The
cost of the option is not material and is being amortized over the option
period. During fiscal 1996, gains and losses associated with foreign exchange
contracts were not material. During fiscal 1995 and 1994, the Company
recognized approximately $167,000 and $179,000, respectively, in exchange
losses associated with foreign exchange contracts.

38
<PAGE> 41

Litigation
The Company is party to various legal proceedings arising from the normal
course of business activities, none of which, in management's opinion, is
expected to have a material adverse impact on the Company's results of
operations or its financial position.

ACQUISITION AND RESTRUCTURING CHARGES

Acquisition Charges
On April 2, 1996, Micrografx acquired all of the issued and outstanding capital
stock and options of Visual, which has been accounted for as a pooling of
interests. As a result of this acquisition, the Company incurred charges for
professional services, the write-offs of costs related to certain software
products which will not be actively marketed, exit costs, and costs to
eliminate excess personnel and duplicate leases of approximately $3,379,000, of
which $1,359,000 was non-cash.

The fiscal 1996 charges resulting from the acquisition consisted of the
following (in thousands):

<TABLE>
<CAPTION>
Incurred as of
Accrued June 30, 1996
---------------------------
<S> <C> <C>
Acquisition transaction costs $ 1,115 $ 913
Asset write-downs:
Inventory and accounts 840 395
Acquired product rights 158 158
Fixed assets 241 168
Severance and other 1,025 787
---------------------------
Total acquisition charges $ 3,379 $ 2,421
</TABLE>

The severance charges resulted from the closing of Visual's general and
administrative support office and the related termination of 21 Visual
employees.

Restructuring Charges
In September 1993, the Company hired a new President and Chief Executive
Officer. In connection with this change and his influence on management and
direction, the Company initiated several actions that required accounting
consideration in the quarter ended December 31, 1993. These changes include
the closing of the Company's Scandinavian subsidiaries, the consolidation of
corporate headquarters personnel into one building, and the ceasing of
marketing activities associated with certain of the Company's products. These
actions resulted in excess lease space, severance and asset write-downs of
approximately $3,813,000, of which $1,500,000 was non-cash.

As a result of the Scandinavian office closure and the consolidation of
international operations, 22 associates were laid off. In the U.S., eight
positions were eliminated in connection with the streamlining of operations and
outsourcing of certain functions, and the decision to eliminate members from
executive management.

39
<PAGE> 42

The fiscal 1994 restructuring charge consisted of the following (in thousands):

<TABLE>
<CAPTION>
Accrued
---------
<S> <C>
Office consolidation costs $ 1,788
Product-related write-downs:
Inventory and accounts receivable 364
Acquired product rights 800
Severance and other 861
---------
Total restructuring charges $ 3,813
</TABLE>

As of June 30, 1996, no restructuring accruals remained that were applicable to
the 1994 restructuring.

INCOME (LOSS) PER SHARE
Income per share for fiscal 1996 and 1995 is based on the weighted average
common and dilutive equivalent shares outstanding using the treasury stock
method. For fiscal 1996 and 1995, there were approximately 9,798,000 and
9,455,000 weighted average shares outstanding, respectively, and 338,000 and
25,000 common stock equivalents, respectively, from the Company's stock option
plans.

For purposes of calculating the loss per share in fiscal 1994, only weighted
average shares outstanding of 8,986,000 were used, as inclusion of common stock
equivalents would be anti-dilutive.

Fully diluted income per share was not materially different from primary
earnings per share for all years presented.

RELATED PARTIES
At June 30, 1996, the Company had guaranteed $1,157,000 in loans from a bank to
certain directors and officers of the Company. The loans bore interest at the
bank's prime rate (8.25% at June 30, 1996) plus 0.5% and mature on February 10,
1997. Subsequent to June 30, 1996, the Company was released by the bank from
its guarantees on these loans.

At June 30, 1996 and 1995, the Company had unsecured notes receivable of
$90,000 from certain employees which bear interest at rates ranging from 5% to
6% per annum.

On May 31, 1994, the Company's former President and Chief Executive Officer
("the Borrower"), became indebted to the Company for the principal sum of
$325,000. The promissory note underlying this loan was secured by a second
mortgage on the Borrower's primary residence. Interest on the promissory note
was payable annually as it accrued at a per annum rate of 4.85%. During fiscal
1996, the Borrower repaid the principal sum of $325,000 and interest of
$19,000.

SEGMENT INFORMATION
The Company operates in a single industry segment: the development, marketing
and support of personal computer applications and systems software products.
Virtually all products sold in Europe are manufactured in the Netherlands.
Substantially all other products are manufactured in Richardson, Texas. Net
revenues for each segment include only sales to unaffiliated customers; there
were no intra-segment revenues for the periods presented. Income (loss) from
operations is net revenues less cost of goods sold and operating expenses for
each geographical region. In fiscal 1996, 1995 and 1994, cost of revenues
include direct costs incurred by each segment and an allocation of amortization
of capitalized software development costs and acquired product rights.

40
<PAGE> 43

Summary information regarding the Company's geographical regions is presented
below (in thousands):

<TABLE>
<CAPTION>
Years Ended June 30,
Net revenues 1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
U.S. $ 34,413 $ 27,845 $ 26,094
Germany 11,111 12,833 16,069
France 4,335 5,101 3,966
Japan 10,010 6,849 3,233
Rest of World 13,050 11,717 12,143
--------- --------- --------
Total $ 72,919 $ 64,345 $ 61,505
</TABLE>

<TABLE>
<CAPTION>
Income (loss) from operations 1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
U.S. $ 1,109 $ (837) $ (4,199)
Germany 134 (80) 1,554
France 64 (34) (1,617)
Japan 300 906 (112)
Rest of World (529) 574 (1,981)
--------- --------- --------
Total $ 1,078 $ 529 $ (6,355)
</TABLE>

<TABLE>
<CAPTION>
Identifiable assets 1996 1995 1994
-----------------------------------------
<S> <C> <C> <C>
U.S. $ 28,991 $ 26,061 $ 27,159
Germany 1,005 1,443 1,830
France 396 839 623
Japan 2,474 3,057 2,676
Rest of World 7,232 7,890 6,289
--------- --------- --------
Total $ 40,098 $ 39,290 $ 38,577
</TABLE>

41
<PAGE> 44

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Micrografx, Inc.:

We have audited the accompanying consolidated balance sheets of Micrografx,
Inc. (a Texas corporation) and subsidiaries as of June 30, 1996 and 1995, and
the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of Visual Software,
Inc., a company acquired during 1996, in a transaction accounted for as a
pooling of interests, as discussed in the Notes to Consolidated Financial
Statements. Such statements are included in the consolidated financial
statements of Micrografx, Inc. and subsidiaries and reflect total assets and
total revenues of 3 percent and 6 percent, respectively, in 1995, and 1 percent
of revenue in 1994, of the related consolidated totals. These statements were
audited by other auditors whose report has been furnished to us and our
opinion, insofar as it relates to the amounts included for Visual Software,
Inc., is based solely upon the report of the other auditors.

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 and the report of other
auditors provide a reasonable basis for our opinion.

In our opinion, based on our audits and the report of the other auditors, the
financial statements referred to above present fairly, in all material
respects, the financial position of Micrografx, Inc. and subsidiaries as of
June 30, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.

/s/ Arthur Andersen LLP

Dallas, Texas
August 2, 1996

42
<PAGE> 45

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

The Company had no disagreements on accounting or financial disclosure matters
with its independent public accountants to report under this Item 9.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information contained under the caption "Election of Directors" in the
Company's Proxy Statement is incorporated herein by reference. See Item 1
"Executive Officers" included herein for information concerning executive
officers.

ITEM 11. EXECUTIVE COMPENSATION

Information contained under the caption "Executive Compensation" in the
Company's Proxy Statement is incorporated herein by reference, except for the
information contained in the sections entitled "Report of the Compensation
Committee and Stock Option Committee on Executive Compensation" and "Stock
Performance Graph" which shall not be deemed incorporated by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Information contained under the caption "Principal Shareholders and Stock
Ownership of Management" in the Company's Proxy Statement is incorporated
herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Information contained under the caption "Certain Transactions" in the Company's
Proxy Statement is incorporated herein by reference.

PART IV

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

(a) 1. Financial Statements

The consolidated financial statements included in Item 8,
Financial Statements and Supplementary Data, are set forth in
the Index to Financial Statements and Financial Statement
Schedules listed on page 46 of this report

2. Financial Statement Schedules

The consolidated financial statement schedules are set forth
in the Index to Financial Statements and Financial Statement
Schedules listed on page 46 of this report.

3. Exhibits

The exhibits filed in response to Item 601 of Regulation S-K
are listed in the Exhibit Index contained elsewhere herein.

** 2.1 Agreement and Plan of merger with Visual Software, Inc. dated
as of February 27, 1996 (the exhibits and schedules listed
therein have been omitted but will be provided to the
Commission upon request). (Exhibit 2)

* 3.1 Articles of Incorporation of the Company, as amended (Exhibit
3.1)

43
<PAGE> 46

**** 3.2 Amendment to Articles of Incorporation of the Company (Exhibit
3.2)

* 3.3 Amended and Restated Bylaws of the Company (Exhibit 3.3)

**** 3.4 Amendment to Amended and Restated Bylaws of the Company
(Exhibit 3.4)

* 4.1 Specimen stock certificate evidencing the Common Stock
(Exhibit 4.1)

* 10.1 Incentive and Nonstatutory Stock Option Plan, as amended
(Exhibit 10.2)

*** 10.2 Amendment to the Incentive and Nonstatutory Stock Option Plan
(Exhibit 10.3)

* 10.4 Form of International Distributor Agreement used by the
Company (Exhibit 10.3)

* 10.5 Stock Purchase Agreement, dated January 23, 1989, among the
Company and the purchasers named therein (the "Stock Purchase
Agreement") (Exhibit 10.6)

* 10.6 Amended and Restated Shareholder Agreement, dated January 23,
1989, among the Company and the shareholders named therein
(the "Shareholder Agreement") (Exhibit 10.7)

* 10.7 Amendment to Stock Purchase Agreement (Exhibit 10.8)

* 10.8 Amendment to Shareholder Agreement (Exhibit 10.9)

* 10.9 Cross Licensing Agreement dated December 15, 1989, between the
Company and Microsoft Corporation (Exhibit 10.12)

* 10.10 Employee Non-Disclosure Agreement, dated August 29, 1984,
between the Company and J. Paul Grayson (Exhibit 10.15)

*** 10.11 Employee Stock Purchase Plan (Exhibit 10.26)

***** 10.12 Agreement dated September 8, 1993, between the Company and
Hallmark Cards, Incorporated. (Exhibit 10.25)

***** 10.13 Revolving Credit and Term Loan Agreement dated July 1, 1993,
between the Company and Northpark National Bank. (Exhibit
10.26)

***** 10.14 Micrografx, Inc. 1995 Stock Option Plan. (Exhibit 10.27)

***** 10.15 Micrografx, Inc. 1993 Restricted Stock Plan. (Exhibit 10.28)

***** 10.16 Executive Severance Agreement dated March 24, 1994, between
the Company and Herman DeLatte. (Exhibit 10.32)

***** 10.17 Employee Non-Disclosure Agreement dated March 24, 1994,
between the Company and Herman DeLatte. (Exhibit 10.36)

***** 10.18 Employee Non-Disclosure Agreement dated July 28, between the
Company and Gregory A. Peters. (Exhibit 10.37)

44
<PAGE> 47

****** 10.19 Micrografx, Inc. 1995 Director Stock Option Plan (Exhibit
10.29)

21.1 Subsidiaries of the Company.

23.1 Consent of Arthur Andersen LLP

23.2 Consent of Roth Bookstein & Zaslow LLP

99.1 Report of Independent Public Accountants

* Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1,
file No. 33-34842.

** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Current Report on Form 8-K, dated
April 2, 1996.

*** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Registration Statement on Form S-1, file
No. 33-42195.

**** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1993.

***** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended March 31, 1994.

****** Incorporated by reference to the exhibit shown in parenthesis
filed in the Company's Annual Report on Form 10-K for the year
ended June 30, 1995.

(b) Reports on Form 8-K. During the last quarter of the year ended June 30,
1996, the Company filed a Form 8-K dated April 2, 1996, with the
Securities and Exchange Commission to report the acquisition of Visual
Software, Inc.

45
<PAGE> 48

INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES

ITEM 14 (a)

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets at June 30, 1996, and 1995 25
Consolidated Statements of Operations for the Years Ended June 30, 1996, 1995, and 1994 27
Consolidated Statements of Shareholders' Equity for the Years Ended
June 30, 1996, 1995, and 1994 28
Consolidated Statements of Cash Flows for the Years Ended June 30, 1996, 1995, and 1994 29
Notes to Consolidated Financial Statements 30
Report of Independent Public Accountants 42

CONSOLIDATED FINANCIAL STATEMENT SCHEDULES

Report of Independent Public Accountants 48
Schedule II - Valuation and Qualifying Accounts 49
</TABLE>

All other schedules are omitted as the required information is inapplicable

46
<PAGE> 49

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on September 27,
1996.

MICROGRAFX, INC.

By: /s/ J. Paul Grayson
-------------------------------------
J. Paul Grayson
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)

By: /s/ Larry G. Morris
-------------------------------------
Larry G. Morris
Chief Financial Officer and Treasurer
(Principal Financial Officer)

By: /s/ Darryl R. Halbert
-------------------------------------
Darryl R. Halbert
Controller

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ J. Paul Grayson Chairman of the Board of Directors September 27, 1996
- ----------------------------- and Chief Executive Officer
J. Paul Grayson

/s/ Eugene P. Beard Director September 27, 1996
- -----------------------------
Eugene P. Beard

/s/ David S. Gergacz Director September 27, 1996
- -----------------------------
David S. Gergacz

/s/ Robert Kamerschen Director September 27, 1996
- -----------------------------
Robert Kamerschen

/s/ Seymour Merrin Director September 27, 1996
- -----------------------------
Seymour Merrin

/s/ Robert S. Miller Director September 27, 1996
- -----------------------------
Robert S. Miller
</TABLE>

47
<PAGE> 50

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Shareholders of Micrografx, Inc.:

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Micrografx, Inc. (a Texas corporation) and
subsidiaries included in this Form 10-K and have issued our report thereon
dated August 2, 1996. Our audits were made for the purpose of forming an
opinion on the basic consolidated financial statements taken as a whole. We
did not audit the financial statements of Visual Software, Inc., a company
acquired during 1996 in a transaction accounted for as a pooling of interests,
as discussed in the Notes to Consolidated Financial Statements. Such statements
are included in the consolidated financial statements of Micrografx, Inc. and
subsidiaries and reflect total assets and total revenues of 3 percent and 6
percent, respectively, in 1995, and 1 percent of revenue in 1994, of the
related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us and our opinion, insofar as it relates to
the amounts included for Visual Software, Inc., is based solely upon the report
of the other auditors. Schedule II of the Form 10-K is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, based on our audits and the report of the other
auditors, fairly states in all material respects, the financial data required
to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.

/s/ Arthur Andersen LLP

Dallas, Texas
August 2, 1996

48
<PAGE> 51

SCHEDULE II
MICROGRAFX, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS

(in thousands)

<TABLE>
<CAPTION>
Balance At Charged Charged Balance
Beginning To Costs To Other at End
Description of Period and Expenses Accounts (b) Deductions of Period
- ------------------------------------------------------------------------------------------ ----------------
<S> <C> <C> <C> <C> <C>
Years Ended June 30,

1994
- --------------------------
Allowance for doubtful
accounts: $ 364 $ 734 - $ 760 (a) $ 338
Allowance for sales
returns: $ 1,181 - $ 1,953 - $ 3,134

1995
- --------------------------
Allowance for doubtful
accounts: $ 338 $ 190 - $ 117 (a) $ 411
Allowance for sales
returns: $ 3,134 - $ (1,799) - $ 1,335

1996
- --------------------------
Allowance for doubtful
accounts: $ 411 $ 126 - $ 205 (a) $ 332
Allowance for sales
returns: $ 1,335 $ 600 (c) $ 26 - $ 1,961
</TABLE>

(a) Represents amounts written-off during the year, net of recoveries.

(b) The allowance for sales returns is recorded as a reduction of revenues.

49
<PAGE> 52
INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>

** 2.1 Agreement and Plan with Visual Software, Inc. dated as of
February 27, 1996 (the exhibits and schedules listed therein
have been omitted but will be provided to the Commission upon
request). (Exhibit 2)