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                         SECURITIES AND EXCHANGE COMMISSION
                               WASHINGTON, D.C. 20549
                                          
                                     FORM 10-K
        
(X)  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE 
     ACT OF 1934
                        FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
                                          
                                         OR

( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 
                           Commission file number 0-27670

                            ENGINEERING ANIMATION, INC.
              (Exact Name of Registrant as Specified in its Charter)

                   DELAWARE                                  42-1323712
       (State or Other Jurisdiction                       (I.R.S. Employer
                    of                                   Identification No.)
      Incorporation or Organization)

                      2321 North Loop Drive, Ames, Iowa  50010
               (Address of principal executive offices and zip code)
                                          
                                   (515) 296-9908
                (Registrant's telephone number, including area code)

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

Securities registered pursuant to Section 12(g) of the Act:  
                                TITLE OF CLASS
                     Common Stock, $.01 par value per share

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 
405 of Regulation S-K is not contained herein, and will not be contained, to 
the best of 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.

The aggregate market value of the voting stock held by non-affiliates of the 
registrant as of March 9, 1998 was approximately $310,449,520.  The number of 
outstanding shares of Registrant's Common Stock as of that date was 9,873,475.

Documents Incorporated by Reference:

None

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                                       PART I

ITEM 1.   BUSINESS

     EAI specializes in developing and applying three-dimensional ("3D") and
two-dimensional ("2D") visualization technology to meet the productivity,
communication, education and entertainment needs of its clients. The Company
utilizes its core technical competencies in high speed, real time graphics,
CAD/CAE/CAM interfaces, distributed databases and Internet/intranet
communications to provide solutions through two inter-related product lines: 
enterprise-wide product visualization software (software products) and
interactive multimedia and custom animation products (interactive products).
Utilizing its broad base of technology,  EAI offers software products that allow
customers to reduce time-to-market and to decrease product development costs. 
Utilizing its experience and its extensive library of computer generated
animation assets, EAI offers interactive products with realistic, high quality
3D animations at reasonable prices within a short time frame. 

     The Company has organized its operations under two divisions: 

     SOFTWARE DIVISION:  EAI's Software Division develops, produces and sells a
variety enterprise-wide product data visualization and collaboration software
solutions for major manufacturing corporations.  EAI's VisProducts, a suite of
visualization software products, enables users to perform sophisticated product
visualization, digital prototyping and engineering design and analysis tasks.
EAI's products are platform independent, interface seamlessly with most popular
CAD/CAE/CAM and product data management ("PDM") software systems, operate on all
major workstation platforms including Windows NT, and allow access to
visualizations with personal computers, including laptops, thereby allowing
customers to use VisProducts with their existing hardware and software. When
deployed on an enterprise-wide basis, the Company's VisProducts enable the
creation of a collaborative visual environment that allows functional groups
throughout the organization, including engineering, manufacturing, marketing,
sales and support, to more easily visualize products, see the effects of changes
during the development process and communicate in real time. This collaborative
approach can help reduce the total time required for products to move from
initial concept through final manufacturing by identifying problems early in the
design cycle. 

     In November 1997, the Company acquired two software companies, Rosetta
Technologies, Inc. ("Rosetta") and Cimtech, Inc., which does business as
Cimtechnologies Corporation ("Cimtech"), each with well-established
visualization and collaboration software product lines which complement those of
the Company. Rosetta, a privately held company located in Beaverton, Oregon,
developed and marketed software for 2D viewing and markup under the trademarks
PreVIEW and Prepare. Cimtech, a privately held company located in Ames, Iowa,
developed and marketed factory layout software under the names FactoryFLOW,
FactoryCAD, FactoryOPT and FactoryPLAN.  The software products of both Rosetta
and Cimtech are offered to the same industrial and 

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manufacturing client base as to which VisProducts are offered.  The Company 
is in the process of integrating the Rosetta and Cimtech software products 
with EAI's VisProducts suite of software and is integrating the development 
and sales and marketing staffs of the companies in order to take full 
advantage of the synergy of the technologies and respective customer bases 
that have been brought together by the acquisitions. The senior management of 
both Rosetta and Cimtech have joined the management of the Company to assist 
it in bringing the new integrated line of product visualization, digital 
prototyping, enterprise-wide collaboration, and factory layout software 
together in a single family of computer software products. 

     INTERACTIVE DIVISION:  EAI's Interactive Division produces interactive
multimedia products for use in the education, consumer and entertainment
markets. From its early success in developing interactive multimedia products
for educational book publishers, the Company has expanded its client base to
include the development of such products for toy companies, museums, computer
game publishers, a medical device manufacturer, and state lottery gaming
companies.  Similarly, from its early success in producing custom computer
animations for use by attorneys at trial in complex cases, the Company has
expanded its client base to include the production of 3D animated movies for
pharmaceutical companies, manufacturers, and producers of entertainment and
educational programming. 

INDUSTRY TRENDS

     Visualization and 3D graphics technology are changing the way information
is conveyed, shared and manipulated. In the fields of engineering,
manufacturing, industrial design, interactive multimedia, education, corporate
communications and entertainment, visualization has become increasingly popular
for various reasons: 

SOFTWARE PRODUCTS TRENDS

     MANUFACTURERS' NEED TO ACCELERATE TIME-TO-MARKET:  Businesses that develop,
manufacture and market products are competing globally to reduce time-to-market,
drive down costs and increase product quality. Competitive pressures have forced
companies to seek technological solutions to accelerate product development,
from the first stage of conceptual design through manufacturing of the final
product. Meanwhile, mechanical products have become more complex, and the design
of those products has become more difficult. In response to the need to
accelerate time-to-market and to compete more effectively, manufacturing
companies increasingly rely on a digital product design process, including
computer-aided design, engineering and manufacturing.
     
     MANUFACTURER'S NEED FOR PRODUCT VISUALIZATION AND VIRTUAL PROTOTYPING: 
Design teams continue to make extensive use of expensive and time-consuming
physical prototypes to represent designs interpreted from CAD schematics. Many
CAD/CAE/CAM products also fail to bring design teams together because the
products are slow in translating data into images, and they render images of
insufficient quality. 

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These limitations increase design time and inhibit design teams from working 
concurrently to develop and revise product designs.  
     
     MANUFACTURER'S NEED FOR  VIEWING AND COLLABORATION:  The Company also
believes that a new market is emerging in the engineering and manufacturing
environments for products that will electronically manage, distribute and
display technical information. In these environments, valuable information that
describes how products are engineered, manufactured, and supported throughout
the product's life cycle is increasingly being created and managed
electronically. The information is not only important to the engineering and
manufacturing team, it is also important to other functions in the company (e.g.
finance, marketing and others) as well as suppliers, customers, and other
partners. However, because of the heterogeneous computing environments found in
many companies, the information cannot be shared electronically with everyone
who needs it.  In addition, current PDM software does not provide manufacturers
with the full range of viewing, analysis, markup and annotation capabilities
needed for true enterprise-wide collaboration. Accordingly, the Company believes
that there is strong demand in the design and engineering market for software
products that enable an enterprise-wide, team-based approach to manufacturing
which combines resources from engineering, manufacturing, marketing, sales and
support. This requires software that can effectively interface with existing
CAD/CAE/CAM software and PDM software to facilitate real time collaboration
across multiple departments, facilities and suppliers.

     MANUFACTURERS' NEED TO OPTIMIZE FACTORY FLOOR PROCESSES:  In addition to
accessing, managing, and sharing data about the products they produce, the
Company believes that manufacturers also need to access, manage and share data
about the design, cost and efficiency of the layout of the manufacturing factory
floor. Traditionally, manufacturers have undertaken factory layout with no
standard design methodology nor means for multiple persons to access any portion
of the layout.  This has resulted in engineers spending more time redrawing and
designing industrial facilities, limited access to factory layout data and
increased industrial design and manufacturing costs.

     INCREASED USE OF CORPORATE INTERNET/INTRANET SYSTEMS:  For a broad range of
commercial organizations, the Internet and corporate intranets are increasingly
becoming the preferred method for communicating electronically, distributing and
retrieving information and conducting commerce. The number of Internet/intranet
users is expected to be approximately 200 million by the end of 1999, compared
to approximately 56 million at the end of 1995. The rapid commercialization of
the Internet and the growth of corporate intranets have resulted in a
commensurate rise in demand for software for these platforms by corporations.

INTERACTIVE PRODUCTS TRENDS

     ENHANCED MULTIMEDIA CAPABILITY OF PERSONAL COMPUTERS:  Once dominated by
software run on expensive engineering workstations, the market for interactive
multimedia products has been expanding in recent years due to the greater
graphic and 

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audio capabilities of home computers. In 1995, an estimated 20.9 million 
multimedia personal computers were shipped worldwide, a significant increase 
from an estimated 10.3 million units in 1994. Multimedia personal computer 
shipments are expected to increase at a compound annual growth rate of 17 
percent from 1995 to 2000.
     
     GROWING CONSUMER DEMAND FOR EDUCATIONAL SOFTWARE:  Educational software is
transforming the way children and adults learn, providing curriculum-based
programs used for skill building as well as products that increase other
capabilities, such as imagination, innovation and creativity. The market for
educational software for multimedia personal computers is expected to continue
to grow. In addition, educational software publishers are increasingly enhancing
traditional print textbooks by packaging them with interactive software as a
means of increasing sales. 

     GROWING CONSUMER DEMAND FOR GAME AND ENTERTAINMENT SOFTWARE:  In the past
several years, interactive multimedia game software has been one of the leading
categories of software growth both in terms of sales volume and growth in sales
volume.  As game and entertainment software becomes easier to install and use
and game and entertainment titles are marketed to new audiences, it is expected
that interactive multimedia entertainment products could achieve mass market
status.
     
     PUBLISHERS' RELIANCE ON SOFTWARE DEVELOPERS:  The highly competitive nature
of the interactive multimedia software industry has forced publishers to look
for reliable, outside developers of cutting-edge 3D graphics to provide content
for new interactive titles. Publishers typically do not possess the design
skills, 3D animation tools or libraries of computerized animation assets
required to produce high-quality 3D content in a cost-effective manner. As a
result, publishers are increasingly relying on third party developers to provide
this content for their multimedia software products. While the publishers retain
the overall distribution rights to the multimedia software products, the content
provider is generally hired to produce the content for a fixed fee and then
receives a royalty based on sales of the product. This allows the content
provider to share in the success of the product, while limiting the downside
risk. 

SOFTWARE PRODUCTS

     EAI offers a broad range of visualization software products that enable
users to perform sophisticated design and analysis tasks. The Company's software
products interface seamlessly with most popular CAD/CAE/CAM software and PDM
environments, operate on all major engineering workstations and operating
systems, including Windows NT, and provide the ability to access visualizations
with personal computers, including laptops.  Using the Company's digital
prototyping and animation products, users can visualize, analyze and manipulate
highly realistic, extremely complex computer-generated models. The Company's
VisProducts include applications supporting digital prototyping and
collaborative communication of visualizations.  The Company's products enable
design teams to identify design problems early in the product 

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development process, thereby significantly shortening time-to-market and 
reducing manufacturing costs. 

     When deployed on an enterprise-wide basis, the Company's VisProducts enable
the creation of a collaborative visual environment that allows functional groups
throughout the organization, including engineering, manufacturing, marketing,
sales and support, to visualize products more easily, see the effects of changes
during the development process and communicate in real time. EAI's software
relies on proprietary rendering algorithms that maximize the use of computer
hardware. The Company's visualization software integrates 3D and 2D product data
within one environment, allowing for the viewing and comparing of legacy data
and new product data within one visual environment.  EAI's VisProducts also
offer a variety of modular solutions that can be added to the Company's
visualization software to meet the specific needs of any user,  department or
corporation.  These modular solutions extend the functionality of EAI's product
visualization software, allow for special measurement, configuration management,
interference analysis and assembly sequencing capabilities. 

     During 1997 the Company added a number of new products and modules, in
addition to the products added through its acquisitions.  The Company's primary
software products are:

     VisMockUp is a powerful digital prototyping software product that combines
3D visualization technology with a number of tools designed to analyze an entire
assembly, including interference and collision detection, proximity and
attribute filtering and measurement tools. In addition, VisMockUp provides users
with a range of tools that enable collaboration across a corporate intranet. 

     VisFly is a high performance engineering visualization product that permits
viewing of complex models, accepting and analyzing data imported from most
CAD/CAE/CAM software programs. VisFly enables interactive real time viewing of
complex CAD/CAE/CAM designs and lets users visually "fly through" large models
to view assemblies and components in detail. VisFly was chosen by Industry Week
Magazine as one of 25 products to receive its 1996 Technology and Innovation
Award. 

     VisNetwork enables quick access and viewing of distributed visual data by
seamlessly integrating with CAD and PDM systems to manage complex visual
information.  VisNetwork helps companies intelligently manage and distribute
product data while allowing multiple people involved in a product development
effort to access the most current design data.  With VisNetwork, users from
various departments in a company can view distributed product data by selecting
particular attributes, regions of interest or the entire product and then view
and analyze product data in an integrated visual environment.

     NetFly is an intranet connection that makes the advantages of VisFly
accessible to entire design teams. Using NetFly, engineers can interact with
VisFly models across a 

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corporate intranet and communicate about specific design issues, enhancing 
the concurrent engineering process. NetFly also allows non-VisFly users to 
participate directly in the design review process regardless of the computer 
platform being used. NetFly's ability to utilize corporate intranets and 
interface with product data management and database systems when used with 
other VisProducts can shorten design cycles and reduce costs while also 
increasing the overall quality of the final design. 

     VisLab uses proprietary, advanced hardware-based rendering technology to
produce 3D animations from CAD/CAE/CAM models faster than competing products.
VisLab integrates CAD/CAE/CAM, kinematics and analysis data within a single
visual environment. Users can transform complex, technical information into
accurate, clear, visually accessible computer animations in a matter of minutes
or hours, saving valuable time. These animations are used in design reviews,
product training and concept presentations.

     The Company's factory layout and design software products sold under the
names of FactoryCAD, FactoryFLOW, FactoryPLAN, and FactoryOPT, provide drafting,
design, and analysis solutions for manufacturing facility layout problems. 
Working within the AutoCAD graphical environment, the Company's software
products allow industrial engineers and corporate management to improve
locations of machines, storage and material handling equipment in order to
support continuous flow manufacturing and to reduce costs, work-in-process, lot
sizes and processing time.
     
     PreVIEW is an interactive product data viewer designed for engineering and
manufacturing environments.  PreVIEW works with PDMs, which are databases that
contain, organize and maintain data and information related to a product. 
PreVIEW enables users to exchange this information electronically, regardless of
the computer platform or software application, providing a more efficient
process for accessing and using the information.  PreVIEW provides the
capabilities to view 3D vector data, make annotations to the design without
changing the original, fully interpret designs by generating new views, and
discriminate entities and layers, or measuring geometry.  PreVIEW Conference is
a conferencing tool that links users over LANs, WANs, or modems and allows them
to share product information interactively.

     Prepare is a set of intelligent, batch-oriented utilities that help manage
product data in heterogeneous computing environments where users have many
different, and often incompatible engineering document formats.  Prepare runs on
UNIX and PC servers to handle conversion from a wide variety of graphics and
text formats into industry-standard formats.  Prepare can also consolidate
diverse source data formats into standard archiving formats and optimize PDM
viewing environments by preprocessing complex source files into standard
distribution formats.

INTERACTIVE PRODUCTS

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     The Company develops high quality interactive products that exploit the
visualization capabilities of multimedia personal computers. The Company
delivers its interactive products on CD-ROMs for use on the PC or Macintosh
("Mac"), through the Internet and through other media and in other formats.
These interactive software products combine 3D technology, Internet
communication, text, animated color graphic images, music and digitized speech
into educational and information based programs. Due to high production costs,
interactive CD-ROM software products traditionally have provided only 2D and
limited 3D animations. By utilizing the Company's proprietary technology,
databases of anatomical and engineering data and library of animation assets,
EAI can reduce the time and cost required to produce interactive software
products containing extensive 3D animations. 

     EAI produces highly realistic 3D animations for use in interactive software
products for academic and consumer markets and 3D animations for business.  The
Company's interactive products provide ready access and ease of use while
simultaneously increasing the speed, quality, detail and accuracy of 3D
animations. One key attribute of the Company's solution is EAI's reliance on its
proprietary 3D visualization software products to improve the speed and
capability of its custom animation and interactive software products. For
example, the Company's VisLab product is used in the production of interactive
software and custom animation products, enabling cost-effective and fast
production. In addition, the Company currently has over 900 gigabytes of
animation assets stored in digital format and a library containing over 10,000
minutes of EAI-produced animation, which provide a ready source of content for
producing interactive software products and custom animation products. Finally,
the Company's databases include the musculoskeletal portion of the EAI Virtual
Human project and data from the National Library of Medicine Visible Human
project, as well as other content created for the Company's interactive
projects. These attributes permit the Company to offer interactive products on a
fixed price basis, which is a competitive advantage.

     In 1997, the Company produced interactive products for clients in a wide 
range of markets, including pharmaceutical, corporate communications, 
litigation and entertainment markets. EAI's interactive products typically 
range from $25,000 to over $1.0 million in price. Customers of EAI's custom 
animation products have included 3M, Abbott Laboratories, Conoco Inc., Deere 
& Company, The Discovery Channel, Glaxo Wellcome Plc., Merck & Co., Inc., 
National Geographic and most of the major automotive manufacturers, including 
Chrysler Corporation, Freightliner Corp., Ford Motor Company, General Motors 
Corporation, Isuzu Motors Limited, Mitsubishi Corporation, Nissan Motor 
Corporation, Ltd., Subaru of America, Inc., Suzuki Motor Corporation, Toyota 
Motor Corporation and Volkswagen AG.  The Company also supplied custom 
animations for two television productions.  The Discovery Channel's ECO 
CHALLENGE cable television special included the Company's custom animations 
to illustrate the challenges posed by the environment of the Pacific 
Northwest to competitors in the Eco Challenge race.  The National 
Broadcasting Co., Inc. ("NBC") aired a National Geographic television special 
on asteroids, entitled ASTEROIDS: 

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DEADLY IMPACT, that used EAI custom animations to depict the results of an 
asteroid impact on the Earth.  Interactive products for the consumer and 
publishing markets include: THE BARBIE MAGIC HAIRSTYLER, published and 
distributed by Mattel Inc., THE DYNAMIC HUMAN VERSION 2.0, published and 
distributed by WCB/McGraw-Hill, and THE MAGIC 3D COLORING BOOK and COLOR A 
STORY IN 3D, published and distributed by the Consumer Division of IBM.

STRATEGY

     The Company's objective is to be the leading provider of computer software
solutions to manufacturers and other industrial users for their visualization,
prototyping, factory planning and enterprise-wide collaboration needs while also
exploiting its own visualization technologies and animation assets to develop
interactive multimedia products and 3D animated movies for the educational,
entertainment, pharmaceutical and general corporate markets.  Key elements of
the Company's strategy for obtaining this objective include the following: 

     INCREASE PENETRATION IN INDUSTRIAL AND MANUFACTURING MARKETS:  EAI plans to
continue to enhance its suite of software products to provide industrial and
manufacturing clients with a complete collaborative visual environment. The
Company will seek to increase its market penetration by leveraging its
relationships with major manufacturers and suppliers in the automotive,
aerospace, heavy equipment and other manufacturing industries by cross-selling
its software product lines to such clients. 
     
     EXPAND SEAMLESS INTEGRATION OF EAI SOFTWARE PRODUCTS:   The Company intends
to continue its efforts to expand its line of software integration products
which provide seamless transition from EAI's software products to all major
CAD/CAE/CAM  and PDM software.  Such integration allows large industrial and
manufacturing clients to create an enterprise-wide environment in which
otherwise incompatible software applications can communicate with and exchange
data with one another.  The Company also intends to continue its effort to
provide for the seamless integration of 2D and 3D product data.
     
     EXPLOIT CROSS-PLATFORM NATURE OF EAI SOFTWARE PRODUCTS:  The Company's
software products operate on personal computers as well as all major engineering
workstations.  The Company intends to exploit the ability of its software
products to access product data and information with personal computers used in
areas beyond design and engineering, such as manufacturing, marketing, sales and
support. 

     BUILD INTERNATIONAL PRESENCE:  The Company believes that there are
significant opportunities to expand sales of its software products in Europe and
Asia.  In 1997, the Company opened sales offices in Germany, France, Italy,
United Kingdom and Malaysia.  The Company intends to continue development of a
larger sales and marketing presence in Europe and Asia by adding additional
sales personnel and recruiting additional distributors.  In addition, the
Company intends to expand its international presence by 

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leveraging its existing relationships with the domestic units of 
multinational corporations to develop sales to their European and Asian 
business units. 

     LEVERAGE STRATEGIC RELATIONSHIPS:  The Company has strategic development,
marketing and distribution relationships with major hardware and software
companies including Hewlett-Packard, AutoDesk,  Structural Dynamics Research
Corp. ("SDRC") and major CAD/CAE/CAM and PDM companies.  For example, EAI worked
with Hewlett-Packard to co-develop DirectModel, an application development
toolkit that allows programmers to write custom applications to manipulate large
CAD/CAE/CAM models. In addition to being marketed by Hewlett-Packard and
incorporated into Microsoft's DirectX multimedia framework, DirectModel will be
incorporated in the Company's product visualization and digital prototyping
software products. EAI intends to cultivate such mutually-beneficial strategic
relationships in order to expand the distribution of the Company's products.

     EXPLOIT PROPRIETARY VISUALIZATION TECHNOLOGY TO CREATE VALUE-ADDED
PRODUCTS:  In addition to developing and selling its software products to
industrial and manufacturing clients, the Company also utilizes its software
internally to produce value-added products such as interactive CD-ROMs, custom
interactive multimedia software systems, Internet Web sites and 3D animated
movies.  EAI intends to continue to build its proprietary databases of 3D
animation data to deliver high quality interactive multimedia products and 3D
animated movies at a reasonable price within a short time frame. By using and
reusing its existing proprietary visualization technology and its library of
animation assets, the Company can reduce the time and cost required to complete
projects.
     
     PURSUE NEW MARKETS FOR INTERACTIVE MULTIMEDIA PRODUCTS AND 3D ANIMATED
MOVIES:  EAI plans to continue to capitalize on its core 3D visualization,
interactive and Internet technologies and its library of animation assets to
provide high quality 3D interactive software products to the educational and
consumer markets as well as new markets such as games, entertainment and
engineering. For instance, the Company has leveraged its expertise in human
anatomy to develop a number of interactive software products for the medical and
academic markets. The Company intends to continue to pursue new opportunities
for interactive software products by developing content for use in software
products published and distributed by third parties. 
     
     ENHANCE SYNERGY BETWEEN SOFTWARE AND INTERACTIVE MULTIMEDIA PRODUCTS:  By
utilizing its proprietary software products internally, EAI not only improves
its ability to deliver high quality interactive and animation products in a
timely manner, but also continuously modifies and enhances such software. Such
enhancements or modifications may be added to the commercial versions of the
Company's VisProducts as new features or improvements. 
     
     EMPLOY A HIGHLY EDUCATED STAFF FROM MULTIPLE DISCIPLINES:  EAI employs
highly educated professionals, including 29 who hold doctoral degrees and an
additional 72 who hold master's degrees. These science, engineering and medical
professionals, as well as 

<PAGE>

in-house artists, enable the Company to differentiate its products by 
providing a high level of scientific precision and visual detail. 

MARKETING AND DISTRIBUTION

     MARKETING AND DISTRIBUTION OF SOFTWARE PRODUCTS:  EAI markets and sells its
software products through a variety of channels including its own sales force,
distributors, and through bundling and distribution agreements (OEM agreements)
with other hardware companies, such as Hewlett Packard, and other software
companies, such as SDRC, and major PDM companies. In North America, the Company
markets and sells its software products through a direct sales force operating
from a number of locations.  In 1997, the Company expanded its direct sales and
marketing operations in Europe and added additional distributors in Asia.  EAI
currently maintains sales offices in Germany, France, Italy, United Kingdom and
Malaysia. The Company intends to open additional sales offices in Europe and
Asia as appropriate while increasing its presence by pursuing additional
distributors for its products.
     
     The Company's software products permit the creation of a collaborative
visual environment, which enables design teams to identify design problems early
in the product development process, thereby significantly shortening time to
market and reducing manufacturing costs. For example, Ford selected EAI's
VisProducts as a key component of Ford's global drive to reduce time to market
and increase quality. Other customers of EAI's software products include
Lockheed Martin Corporation, 3M, Abbott Laboratories, Allied Signal Inc., The
Boeing Company, Case Corporation, Caterpillar Inc., General Dynamics
Corporation, Honda Motor Co., ITT Automotive, Inc., Johnson & Johnson,
Mascotech, Inc., Mazda Motor Corporation, Motorola, Inc., Sandia National Labs,
Sony Corporation, Toshiba Corporation, Toyota Motor Corporation and Westinghouse
Electric Corporation.  One customer, Structural Dynamics Research Corporation
(SDRC), a reseller of the Company's software products, was responsible for 19%
of revenues in 1997.  Included in SDRC's sales were those to Ford and its
subsidiaries and some of its suppliers.

     MARKETING AND DISTRIBUTION OF INTERACTIVE PRODUCTS FOR PUBLISHERS:  EAI
generally develops interactive multimedia software products for the publishers
of such products in exchange for a development fee.  The Company employs a
direct sales force to market its interactive products to publishers.  The
Company relies upon its publisher customers  for the marketing and sale of such
products to the ultimate purchaser. Following the distribution of the product by
the publisher, the Company may be entitled to receive a royalty based on a
percentage of the publisher's sales of the product. This method of development
and distribution is used for most of the interactive multimedia products created
by the Company for retail sale including, for example, THE BARBIE MAGIC
HAIRSTYLER, published and distributed by Mattel Inc., THE DYNAMIC HUMAN VERSION
2.0, published and distributed by  WCB/McGraw-Hill, and THE MAGIC 3D COLORING
BOOK and COLOR A STORY IN 3D, published and distributed by the Consumer Division
of IBM.

<PAGE>

     MARKETING AND DISTRIBUTION OF INTERACTIVE PRODUCTS FOR COMMERCIAL USE:  The
Company also markets interactive software products to numerous commercial
customers for use in training, development or promotional activities. Marketing
and sales of interactive products for commercial use is undertaken by a direct
sales force. Examples of interactive training software developed by the Company
for commercial use include products for Abbott Laboratories, Hoechst Marion
Roussel North America and Sikorsky Aircraft. The Company also creates
interactive products on a custom basis which  are distributed directly to
commercial customers, such as law firms and pharmaceutical companies, that
desire to use 3D graphics and animation as a communication tool. The Company
advertises in selected legal publications and participates in national and
regional trade shows. The Company employs a direct sales staff that frequently
give lectures to selected trade groups, including medical professionals,
attorneys, insurance executives and insurance claims adjusters. In response to
qualified customer inquiries, EAI prepares, at no cost to the customer, a
written proposal including price, completion date and a detailed itemization of
the features to be included in the animation. The majority of the Company's
custom animation products are sold on a fixed-price basis, although, when
requested, the Company will charge on an hourly basis. The completed product is
typically delivered to the customer on videotape or CD-ROM. 

INTERNATIONAL ACTIVITIES

     In 1997, approximately 11% of the Company's total revenues were derived
from foreign sales.  The Company maintains sales offices in France, Germany,
Italy, the United Kingdom and Malaysia.  These offices market the Company's
products and solicit orders, which are then accepted and filled in the United
States.  These offices do not represent a material portion of the Company's
assets.  The Company also markets products to foreign customers through
independent distributors.  Since the Company does not produce any products
outside the United States, all foreign revenues represent export sales.

     The amounts of EAI's foreign revenues for each of the last three fiscal
years are set forth under the caption "International Operations" in Note 1 to
the Company's Consolidated Financial Statements, which are set forth in Item 8
of this report.

     The Company's international operations are subject to a number of risks
including currency fluctuations, changes in foreign governments and their
policies, and expropriation or requirements of local or shared ownership.  The
Company believes that the geographic dispersion of its sales tends to mitigate
these risks.

COMPETITION

SOFTWARE PRODUCTS 

     The Company believes that the main competitive factors for product
visualization software products are high speed, real time graphics capabilities,
multiple CAD/CAE/CAM interfaces and platform independence, distributed database
capability and Internet/intranet communication. Although the Company believes it
has a technological advantage over potential competitors in these markets,
maintaining its advantage will require continuing investment by the Company in
research and 

<PAGE>

development and sales and marketing. Although the Company has yet to face 
significant direct competition in those markets in which the Company offers 
its  visualization software products, large computer companies or companies 
competing in the CAD/CAE/CAM or virtual reality software markets could offer 
products with the same or similar functionality as the Company's VisProducts. 
Such companies, some of which have substantially greater financial, 
technical, marketing and other resources than EAI, include Autodesk, Inc., 
Dassault Systemes S.A., Division Plc., IBM, Parametric Technology Corporation 
(PTC), SDRC and Silicon Graphics, Inc. (SGI). For example, in 1997, PTC began 
offering ProModelView, a 3D viewer for its Pro/E line of software products 
and Dassault Systemes S.A. began offering 4D Navigator, a 3D viewer for its 
CATIA line of software products.  Similarly, Division Plc., a company which 
has traditionally specialized in virtual reality software, now offers a 3D 
viewer. The Company believes that it has significant technical and cost 
advantages relative to these products.

INTERACTIVE PRODUCTS 

     The interactive software industry is intensely competitive. The Company's
sales to academic and consumer markets may be adversely affected by the
increasing number of competitive products. The Company believes that the main
competitive factors for this product are content and animation quality,
production speed, distribution capabilities and price. EAI's highly educated
staff and its proprietary databases enable the Company to quickly produce
interactive software products with high quality content. By marketing its
products through strategic partners who are leaders in the publishing field, the
Company is able to leverage established distribution networks. EAI's competitors
in this area include a large number of companies, some of which have
substantially greater financial, technical, marketing and other resources than
EAI, such as Acclaim Entertainment, Inc., Broderbund Software, Inc. Cendant
Corporation, Digital Domain and The Learning Company. Moreover, large
corporations, such as Walt Disney Company and Microsoft Corporation, which have
substantial bases of intellectual property content and substantial financial
resources, have entered or announced their intention to enter the consumer
software market.

     EAI sells its custom animations to a variety of markets, including
biomedical, corporate communications, litigation and entertainment markets. The
Company believes that the main competitive factors in these markets are quality,
accuracy, time-to-market and price. Within the litigation market, the Company
competes not only against small, regional companies that focus on providing
animations for litigation markets, but also against companies that produce these
animations as a complement to their primary businesses of engineering
consulting, communications consulting or studio film production. While the
Company has not faced competition to date in the biomedical market for custom
animations, there can be no assurance that the Company will not face such
competition in the future. The Company believes that it is the only firm that
currently can provide the necessary technology and resources to produce high
quality 3D 

<PAGE>

biomedical animations at a reasonable price. In addition, EAI competes with 
providers of more traditional communications media. 

     EAI believes that special effects firms, which typically target the
entertainment and advertising markets, could refocus their efforts on the
commercial and professional markets in which EAI's custom animation products
compete. These special effects firms, some of which have substantially greater
financial, technical, marketing and other resources than EAI, include Digital
Domain, Dreamworks SKG, Industrial Light & Magic and Pixar. The Company
believes, however, that it has significant cost and speed advantages relative to
these entertainment oriented firms. 
     
     While other animation and interactive software producers offer
visualization, the Company believes that most 3D animation and interactive
software products offered by competitors require lengthy production schedules
and do not contain a significant amount of high quality 3D animation. 

     While the Company believes that many publishers of computer graphics
imaging and animation software target the entertainment market, these firms
could shift their efforts to the commercial markets in which EAI's visualization
software products compete. These entertainment oriented software publishers,
some of which have substantially greater financial, technical, marketing and
other resources than EAI, include Microsoft, Pixar, SGI and Autodesk, Inc. 

PROPRIETARY RIGHTS

     Since its inception in 1988, EAI has amassed a significant proprietary base
of visualization technology. The Company's proprietary technology includes EAI's
library of animation assets, its engineering and biomedical databases and its
proprietary hardware rendering algorithms. For example, the Company's Virtual
Human database contains significant, anatomically correct 3D material on the
male and female bodies. As the number of custom animation products and
interactive software products completed by the Company increases, its library of
proprietary computer animation assets will also continue to grow. 

     The Company relies primarily on a combination of copyright, trademark 
and trade secret laws, employee and third party non-disclosure and 
non-competition agreements and other methods to protect its proprietary 
rights. With respect to its proprietary technology, the Company generally 
relies on trade secret protection. However, the Company may seek patent 
protection on certain technology in the future, if it deems such protection 
appropriate. In addition, the Company has obtained an exclusive license of 
certain proprietary, non-patented visualization technology from Iowa State 
University Research Foundation. 

     EAI has sought registered trademark protection for the Company's
intellectual property, where appropriate. The Company has received registrations
with respect to 

<PAGE>

several of its trademarks and is in the process of registering several other 
trademarks. The Company believes that registered and common law trademarks 
and common law copyrights are important but are less significant to the 
Company's success than factors such as the knowledge, ability and experience 
of the Company's personnel, research and development, brand name recognition 
and product loyalty. 

     EAI protects its proprietary technology through security practices.
Generally, employees must sign a confidentiality agreement, a non-competition
agreement and an agreement that grants the Company ownership of all inventions.
As an additional protective measure, only a limited number of development
personnel have access to the source code for the Company's software and this
access is strictly monitored. The Company's  visualization software products are
sold pursuant to site licensing agreements and licensing agreements that permit
their use by a customer on only one machine at a time and contain a built-in
protective device that effectively prevents copying and use on other machines. 

     The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. Data
developed with funds from government grants are owned by the Company, however,
the government retains the right to use such data for its own purposes without
payment of any fees to the Company. As the number of software products in the
industry increases and the functionality of these products further overlaps,
software developers may become increasingly subject to infringement claims.
There can be no assurance that third parties will not assert infringement claims
against the Company in the future with respect to current or future products, or
that any such assertion will not require the Company to enter into royalty
arrangements or result in costly litigation. 

EMPLOYEES 

     At February 28, 1998, the Company employed 403 people on a full-time basis
and 63 people on a part-time basis. The Company believes that its relations with
its employees are good. The Company and its employees are not parties to any
collective bargaining agreements. 

ITEM 2.   PROPERTIES

     EAI's headquarters in Ames, Iowa, consists of approximately 62,000 square
feet, of which approximately 25,000 square feet are owned by the Company and
approximately 37,000 square feet are leased pursuant to a lease that expires on
July 1, 2006, with options to extend through July 1, 2016.  In the United
States, the Company leases office space in various locations. The Company also
leases office space for sales offices in Munich, Germany; Paris, France;
Coventry, United Kingdom; Turin, Italy; and Penang, Malaysia.

ITEM 3.   LEGAL PROCEEDINGS 

<PAGE>

     The Company is involved from time to time in litigation incidental to its
business. There is currently no material litigation pending. 

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

          None


                                      PART II


ITEM 5.   MARKET FOR REGISTRANTS' COMMON EQUITY AND RELATED STOCKHOLDER
          MATTERS

PUBLIC MARKET FOR COMMON STOCK.

     The Company's Common Stock is traded on the Nasdaq National Market under 
the symbol "EAII."  The following table sets forth, for the periods 
indicated, the range of high and low sale prices for the Common Stock as 
reported by the Nasdaq National Market. The Company completed its initial 
public offering in February 28, 1996. The following prices have been adjusted 
to reflect the Company's three-for-two stock split, payable to shareholders 
of record as of February 12, 1998.

                                                High           Low
Year Ended December 31, 1997
     First Quarter ............................ $17.17        $14.83
     Second Quarter ...........................  24.67         14.33
     Third Quarter ............................  28.17         21.83
     Fourth Quarter ...........................  33.33         23.17

Year Ended December 31, 1996
     First Quarter (from February 28, 1996).... $17.50        $12.83
     Second Quarter ...........................  15.83         12.50
     Third Quarter ............................  16.67         10.67
     Fourth Quarter ...........................  17.83         14.50

     As of March 9, 1998, the Company had 458 holders of record of its Common 
Stock. The Company has not declared or paid any cash dividends on its Common 
Stock since its formation and does not currently intend to declare or pay any 
cash dividends on its Common Stock.  The Company intends to retain future 
earnings for reinvestment in its business.

RECENT UNREGISTERED ISSUANCES OF COMMON STOCK

     On November 26, 1997, the Company issued an aggregate of 184,755 shares 
of Common Stock to acquire Cimtech, Inc. ("Cimtech") in a transaction valued 
at approximately $6 million. The Company acquired Cimtech pursuant to a 
merger of COHO, Inc. ("COHO"), a wholly-owned subsidiary of the Company, with 
and into Cimtech. Pursuant to the terms of the Amended and Restated Agreement 
and Plan of Merger among the Company, Cimtech and COHO, the shareholders of 
Cimtech received approximately 0.12937 of a share of Common Stock for each 
share of Cimtech common stock held at the consummation of the transaction. 
The Company also converted stock options that had been issued to Cimtech 
employees into stock options of the Company at the 0.12937 exchange ratio. 
The shareholders of Cimtech also received certain rights for the registration 
under the Securities Act of the Common Stock in connection with the 
acquisition of Cimtech. The issuance of Common Stock issued in connection 
with the acquisition of Cimtech was exempt from registration under the 
Securities Act of 1933 as amended ("Securities Act") virtue of Section 4(2) 
thereof and Regulation D promulgated thereunder. See "Item 1. Description of 
Business."

     On November 25, 1997, in an unrelated acquisition, the Company issued an 
aggregate of 938,548 shares of Common Stock to acquire Rosetta Technologies, 
Inc. ("Rosetta") in a transaction valued at approximately $25.5 million. The 
Company acquired Rosetta through two separate transactions. In the first 
transaction, Technology Company Ventures, L.L.C., an Oregon limited liability 
company and the holder of approximately 68% of the outstanding common stock 
of Rosetta ("Ventures"), merged with and into Shell Beaver, L.L.C., a 
wholly-owned subsidiary of the Company ("Shell Beaver"). Pursuant to the 
terms of the Amended and Restated Agreement and Plan of Merger among the 
Company, Ventures and Shell Beaver, the members of Ventures received in 
exchange for their Ventures membership interests approximately 0.06215 of a 
share of Common Stock for each share of Rosetta common stock held by Ventures 
at the consummation of the transaction. Miken, Inc. and JFJ Ventures, L.L.C. 
were the only members of Ventures at the time of the consummation of the 
acquisition. In the second transaction, Transitory Beaver, Inc., a 
wholly-owned subsidiary of Shell Beaver ("Transitory Beaver"), merged with 
and into Rosetta, as a result of which Rosetta became an indirect, 
wholly-owned subsidiary of the Company. Pursuant to the terms of the Amended 
and Restated Agreement and Plan of Merger among the Company, Rosetta and 
Transitory Beaver, the holders of Rosetta common stock (other than Shell 
Beaver) received approximately 0.06215 of a share of Common Stock for each 
share of Rosetta common stock held at the consummation of the transaction. In 
addition, the Company converted outstanding stock options to purchase Rosetta 
common stock into stock options of the Company at the 0.06215 exchange ratio. 
The members of Ventures and the shareholders of Rosetta also received certain 
rights for the registration under the Securities Act of the Common Stock 
issued in connection with the acquisition of Rosetta. The issuance of Common 
Stock in connection with the acquisition of Rosetta was exempt from 
registration under the Securities Act by virtue of Section 4(2) thereof and 
Regulation D promulgated thereunder. See "Item 1. Description of Business."

<PAGE>

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA

All financial data has been restated to give retroactive effect to the 
acquisitions of TCV and Cimtech. For further information, see the notes to 
the financial statements.

<TABLE>
<CAPTION>

                                                                Years Ended December 31,
                                                   1997          1996          1995          1994          1993
                                                         in thousands, except per share data
                                            ------------------------------------------------------------------------
<S>                                              <C>           <C>            <C>           <C>            <C>

STATEMENT OF OPERATIONS DATA:

Net revenues                                     $49,717       $27,189        $12,249       $6,324         $3,264
Cost of revenues                                  13,332         7,277          3,100        1,790            821
                                            ------------------------------------------------------------------------
Gross profit                                      36,385        19,912          9,149        4,534          2,443

Operating expenses:
Sales and marketing                               15,406         9,799          3,573        2,068            881
General and administrative                         5,478         3,041          2,276        1,191            711
Research and development                           7,068         3,438          1,992        1,007            645
Acquisition costs                                  8,831             -          2,520            -              -
                                            ------------------------------------------------------------------------

Total operating expenses                          36,783        16,278         10,361        4,266          2,237
                                            ------------------------------------------------------------------------

Income (loss) from operations                       (398)        3,634         (1,212)         268            206
Interest and other income (expense), net           1,522           987           (158)         (73)           (10)
                                            ------------------------------------------------------------------------

Income (loss) before income taxes and 
  minority interst                                 1,124         4,621         (1,370)         195            196
Income taxes                                       2,772         1,744            392           92             87
                                            ------------------------------------------------------------------------

Income (loss) before minority interest            (1,648)        2,877         (1,762)         103            109
Minority interest                                    (49)         (310)          (128)           -              -
                                            ------------------------------------------------------------------------
Net income (loss)                                $(1,697)      $ 2,567        $(1,890)      $  103         $  109
                                            ========================================================================
Basic earnings (loss) per share                  $  (.19)      $   .35        $  (.39)      $  .03         $  .04
Diluted earnings (loss) per share                $  (.19)      $   .30        $  (.39)      $  .03         $  .04



                                                                     At December 31,
                                                   1997          1996          1995          1994          1993
                                                                     in thousands
                                            ------------------------------------------------------------------------

BALANCE SHEET DATA:
                                                                                
Cash and short-term investments                  $40,298       $20,670         $  823         $240        $ 1,189
Working capital                                   54,468        28,918          2,378        1,458          1,610
Total assets                                      81,200        42,299          8,191        3,444          2,572
Long-term debt due after one year                  1,495         1,654          2,352          648            418
Stockholders' equity                              68,331        34,628          2,942        1,801          1,743

</TABLE>


<PAGE>

ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA (CONTINUED)

The earnings per share amounts have been adjusted to reflect the Company's 
three-for-two stock split, payable to shareholders of record as of February 
12, 1998. In addition, the earnings per share amounts prior to 1997 have been 
restated to comply with Statement of Financial Accounting Standards No. 128, 
EARNINGS PER SHARE. For further discussion of earnings per share and the 
impact of Statement 128, see the notes to the consolidated financial 
statements.

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

OVERVIEW

     EAI specializes in developing and applying three-dimensional ("3D") and 
two-dimensional ("2D") visualization technology to meet the productivity, 
communication, education and entertainment needs of its clients through two 
interrelated product lines: enterprise-wide product visualization software 
(software products) and interactive multimedia and custom animation products 
(interactive products).

     The Company's software products enable clients in the automotive, 
aerospace, heavy equipment and other manufacturing industries to collaborate 
in real time using digital prototypes. In 1994, the Company introduced a line 
of 3D software products based on technology used in the production of the 
Company's custom animation products. The Company's Software Division now 
develops, produces and sells a variety of enterprise-wide product data 
visualization and collaboration software solutions for major manufacturing 
corporations. 

     The Company's VisProducts, a suite of visualization software products, 
enable users to perform sophisticated product visualization, digital 
prototyping and engineering design and analysis tasks. The Company's products 
interface seamlessly with most popular CAD/CAM/CAE and product data 
management ("PDM") systems. The products are platform independent and operate 
on all major workstation platforms (both Unix and NT operating systems) and 
allow access to visualizations with personal computers, thereby allowing 
customers to use VisProducts with their existing hardware and software. When 
deployed on an enterprise-wide basis, the Company's VisProducts enable the 
creation of a collaborative visual environment that allows functional groups 
throughout the organization, including engineering, manufacturing, marketing, 
sales and support, to more easily visualize products, see the effects of 
changes during the development process and communicate in real time. This 
collaborative approach can help reduce the total time required for products 
to move from initial concept through final manufacturing by identifying 
problems early in the design cycle.


<PAGE>

     In November 1997, the Company acquired two companies: Rosetta 
Technologies, Inc. which produced a line of software products used for 
viewing and accessing of product design data, and Cimtech Inc., which 
produced a line of software products used for factory design and layout. The 
acquisition of these companies increased the number of products in the 
Company's product line and added management, development and sales employees.

     The Company has historically evaluated acquisition opportunitites, is 
currently evaluating several companies of varying size and anticipates that 
acquisition opportunities will continue to be identified and evaluated in the 
future. No understandings or agreements with respect to any acquisition 
currently under review have been reached and there can be no assurance that 
the Company will, or will not, consummate acquisitions in the future.

     The Company's interactive products apply advanced 3D technology to 
multimedia programs developed for clients targeting the consumer and 
educational markets. In addition to titles published on CD-ROM, the Company 
also produces customized interactive programs for specific educational and 
training situations, including museums, libraries, hospitals and universities.

     The Company's interactive products also combine proprietary animation 
technology with 3D-rich content to address the communication needs of clients 
in the biomedical, multimedia, entertainment, litigation and corporate 
communications markets. The Company uses an extensive library of models and 
textures in addition to a proprietary engineering database to create detailed 
and scientifically accurate animations that conform to the laws of physics.

      In December 1995, the Company completed its first interactive software 
title, The Dynamic Human. In 1996, revenues from interactive products 
continued to increase as the Company introduced additional consumer titles. 
The Company expects that near-term interactive product revenues will consist 
primarily of development fees, as well as royalties from sales of certain of 
its interactive software titles. 

     The Company has experienced some seasonality in sales of software 
products related to budget cycles of its customers which has been reflected in
higher sales in the third and fourth quarters of the year. Consumer purchases 
of interactive products may experience some effects of seasonality created by 
the Christmas holiday. In addition, the Company's sales of interactive 
products in the academic markets may experience some effect of seasonality 
created by the academic school year.

     The Company has scheduled product introductions in 1998. Due to the 
inherent uncertainties of software development, the Company cannot accurately 
predict the exact timing of new product shipments, nor can the Company be 
assured that any significant revenues will be derived from these product 
offerings. Any delays in the scheduled release of these products, or any 
failure to achieve market acceptance of such products among new or existing 
customers, could have a material adverse effect on the Company's revenues and 
operating results.


<PAGE>

<TABLE>
<CAPTION>
NET REVENUES

(in thousands)                       1997          Change          1996          Change          1995
------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>           <C>             <C>          <C>

Software products                  $30,728          113%         $14,422          338%         $3,292
Interactive products                18,989           49%          12,767           43%          8,957
------------------------------------------------------------------------------------------------------
Total                              $49,717           83%         $27,189          122%        $12,249
======================================================================================================

</TABLE>

     The Company's total revenues are derived from sales of software products 
and interactive products. Revenues from sales of software products are 
recognized upon delivery of the software product to the customer and 
satisfaction of significant related obligations, if any. Revenues from 
customer support are included in software product revenues and represent 
less than 5% of total revenues. These revenues are deferred and recognized 
ratably over the period the customer support services are provided.  The 
Company recognizes revenues from software development contracts and 
interactive products based upon labor and other costs incurred and 
progress to completion on contracts.

     The Company's total revenues for 1997 increased 83% to $49.7 million 
from $27.2 million for 1996.  Software product revenues for 1997 increased 
113% to $30.7 million  from $14.4 million for 1996, as a result of increased 
product sales and software development contracts. Interactive product 
revenues for 1997 increased 49% to $19.0 million from $12.8 million for 1996, 
primarily due to additional projects for interactive products. 

     Revenues for 1996 increased 122% to $27.2 million from $12.2 million for 
1995. The increase in revenues was primarily attributable to increased 
software product sales and development contracts and further expansion into 
the interactive product market. 


<TABLE>
<CAPTION>
COST OF REVENUES

(in thousands)                       1997          Change          1996          Change          1995
------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>           <C>             <C>           <C>

Expense                            $13,332           83%          $7,277          135%         $3,100
======================================================================================================

As a percentage of net revenues         27%                           27%                          25%
</TABLE>

     The Company's cost of revenues includes cost of production, packaging 
and distribution costs, royalties and amortization of capitalized software 
costs. Cost of revenues for 1997 increased 83% to $13.3 million from $7.3 
million for 1996, primarily due to expanded software product sales, new 
software product development contracts, and development costs for interactive 
products. The Company's cost of revenues as a percentage of revenues remained 
constant at 27% for 1997 and 1996.


<PAGE>

     Cost of revenues for 1996 increased 135% to $7.3 million from $3.1 
million for 1995. Cost of revenues was 27% of revenues for 1996 and 25% for 
1995. Cost of revenues as a percentage of revenues for 1996 increased 
primarily due to the expenses associated with new software product 
development contracts and increased costs of certain interactive products. 

     The Company capitalizes certain software development costs in accordance 
with Statement of Financial Accounting Standards No. 86, "Accounting for the 
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." For 
1997, 1996 and 1995, the Company capitalized software costs of $1,013,000, 
$343,000 and $263,000, respectively.  The Company is amortizing these costs 
over an estimated economic useful life of three years, or on the ratio of 
current revenues to total projected product revenues, whichever is greater. 
Amortization expenses reported as cost of revenues for 1997, 1996 and 1995 
were  $219,000, $194,000 and $121,000, respectively.



<TABLE>
<CAPTION>
SALES AND MARKETING

(in thousands)                       1997          Change          1996          Change          1995
------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>            <C>            <C>           <C>

Expense                            $15,406           57%          $9,799          174%         $3,573
======================================================================================================
As a percentage of net revenues         31%                           36%                          29%

</TABLE>

     Sales and marketing expenses include personnel costs related to sales, 
marketing and customer service activities, as well as advertising, 
promotional materials, mail campaigns, tradeshows and other costs.  
Sales and marketing expenses for 1997 increased 57% to $15.4 million from 
$9.8 million for 1996.  Sales and marketing expenses were 31% of revenues for 
1997 and 36% for 1996.  The decrease in sales and marketing expenses as a 
percentage of revenues was primarily the result of spreading expenses over 
higher revenues in 1997.

     Sales and marketing expenses for 1996 increased 174% to $9.8 million 
from $3.6 million for 1995. Sales and marketing expenses were 36% of revenues 
for 1996 and 29% for 1995. The increase in sales and marketing expenses as a 
percent of revenues is primarily due to costs associated with expansion of 
the sales force in both product lines, personnel increases in the marketing 
group, additional sales commission expenses associated with higher revenues 
and increased advertising costs.


<PAGE>

<TABLE>
<CAPTION>
GENERAL AND ADMINISTRATIVE

(in thousands)                       1997          Change          1996          Change          1995
------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>            <C>            <C>           <C>
Expense                             $5,478           80%          $3,041           34%         $2,276
======================================================================================================
As a percentage of net revenues         11%                           11%                          19%

</TABLE>

     General and administrative expenses consist primarily of salaries and 
facility costs for administrative, executive and accounting personnel, as 
well as certain consulting expenses, insurance costs, professional fees and 
other costs. General and administrative expenses for 1997 increased 80% to 
$5.5 million from $3.0 million for 1996, primarily as a result of increased 
general and administrative staff and related costs. General and 
administrative expenses remained constant at 11% of revenues for 1997 and 
1996. 

     General and administrative expenses for 1996 increased 34% to $3.0 
million from $2.3 million for 1995. General and administrative expenses were 
11% of revenues for 1996 and 19% for 1995. The decrease in general and 
administrative expenses as a percentage of revenues for 1996 was primarily a 
result of spreading expenses over higher revenues and refining the allocation 
of common costs among departments rather than absorbing these expenses as 
general and administrative.

<TABLE>
<CAPTION>
RESEARCH AND DEVELOPMENT

(in thousands)                       1997          Change          1996          Change          1995
------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>            <C>            <C>           <C>

Expense                             $7,068          106%          $3,438           73%         $1,992
======================================================================================================
As a percentage of net revenues         14%                           13%                          16%
</TABLE>

     The Company's research and development focuses on product development 
and consists primarily of salaries and benefits, related facility costs, 
equipment costs and outside consulting fees. Research and development 
expenses for 1997 increased 106% to $7.1 million from $3.4 million for 1996. 
Research and development expenses were 14% of revenues for 1997 and 13% of 
revenues for 1996. The increase in research and development expenses was 
primarily due to increased staffing and related costs. This increase in 
research and development expenses was partially offset by the increased 
allocation of staffing costs to funded project development activities 
recorded as costs of revenues for 1997.


<PAGE>

     Research and development expenses for 1996 increased 73% to $3.4 million 
from $2.0 million for 1995. Research and development expenses were 13% of 
revenues for 1996 and 16% for 1995. The decrease in research and development 
expenses as a percentage of revenues during 1996 is primarily due to the 
allocation of certain research and development staffing to costs of revenues  
and spreading research and development costs over higher revenues in 1996.

<TABLE>
<CAPTION>
ACQUISITION COSTS

(in thousands)                       1997          Change          1996          Change          1995
------------------------------------------------------------------------------------------------------
<S>                                 <C>            <C>             <C>           <C>           <C>

Expense                             $8,831          N/A               -           N/A          $2,520
======================================================================================================
As a percentage of net revenues         18%                          N/A                           21%
</TABLE>

     In November 1997, the Company acquired Technology Company Ventures, 
L.L.C. ("TCV"), and Cimtech. Both the TCV and Cimtech acquisitions were 
accounted for under the pooling of interests method. As a result of the TCV 
transaction, the Company exchanged approximately 630,000 shares of common 
stock for the outstanding member equity of TCV.  The Company exchanged 
approximately 185,000 shares of common stock for all of the outstanding stock 
of Cimtech. In addition, the outstanding stock options of Rosetta and Cimtech 
were converted into options to purchase approximately 110,000 shares of the 
Company's common stock.

     Also in November 1997, the Company acquired 32% minority interest in 
Rosetta for approximately 309,000 shares of common stock.  In connection with 
the transaction, the Company expensed approximately $5.6 million of acquired 
in-process research and development and recorded approximately $1.0 million 
of goodwill which is being amortized on a straight-line basis over five years.

     In November 1995, TCV acquired approximately a 68% interest in Rosetta. 
Since its inception, TCV has had no other significant activities other than 
its investment in Rosetta. In connection with this transaction, TCV expensed 
approximately $1,770,000 of acquired in-process research and development and 
recorded approximately $312,000 of goodwill, which is being amortized on a 
straight-line basis over five years.


<PAGE>

<TABLE>
<CAPTION>
INCOME TAXES

(in thousands)                       1997          1996           1995
-------------------------------------------------------------------------
<S>                                 <C>           <C>             <C>

Expense                             $2,772        $1,744          $392
=========================================================================
Effective tax rate                     247%           38%          (29%)

</TABLE>

     The effective tax rate for the years ended December 31, 1997 and 1995, 
differs substantially from the statutory tax rate due to nondeductible 
acquisition related costs. The Company's income (loss) before income taxes 
and minority interest for 1997 and 1995 includes expenses for acquired 
in-process research and development and acquisition charges of $8.8 million 
and $2.5 million respectively, which are not deductible for income tax 
purposes. The Company also recorded an income tax benefit of approximately 
$975,000, primarily due to the reversal of a valuation allowance that had 
been previously established to offset a portion of its deferred tax assets.

LIQUIDITY AND CAPITAL RESOURCES 

     The Company historically has satisfied its cash requirements through 
borrowings, operations, capital lease financings and net proceeds of 
approximately $29.0 million from the Company's initial public offering of 
Common Stock in February 1996 and approximately $26.6 million from the 
Company's follow-on offering of Common Stock in June 1997. As of December 31, 
1997, the Company had $40.3 million in cash and short-term investments.

     Net cash provided by operating activities for the year ended December 
31, 1997 was $711,000. Net cash used by operating activities was $2.0 million 
for the year ended December 31, 1996.  Net cash provided by operating 
activities was $1.3 million for the year ended December 31, 1995.

     In 1997, the Company used cash of $14.4 million in its investing 
activities, of which $5.5 million was used to purchase short-term 
investments, $7.7 million was used to purchase property and equipment, $1.0 
million was used for development of software.  In 1996, the company used cash 
of  $15.6 million in its investing activities, of which $9.8 million was used 
to purchase short-term investments, $4.6 million was used to purchase 
property and equipment, and $658,000 was paid as an advance to the developer 
of the Company's new office building.  In 1995, the Company used cash of $2.4 
million in its investing activities, of which $986,000 was used to purchase 
property and equipment, $263,000 was used for the development of software and 
$750,000 was paid as an advance to the developer of the Company's new office 
building. 

     Accounts receivable at December 31, 1997 increased $6.5 million to $15.6 
million from $9.1 million at December 31, 1996.  The increase in accounts 
receivable was primarily due to increased revenues. The Company's accounts 
receivable balance will vary from year to year, depending on revenues, 
contract terms, and timing of collections.


<PAGE>

     The Company had a $1.0 million line of credit agreement with a 
commercial bank, which expired on May 1, 1997 and was secured by 
substantially all of the assets of the Company. Borrowings under the credit 
agreement were limited to a percentage of eligible accounts receivable, as 
defined in the credit agreement. The Company did not renew the credit 
agreement upon its expiration on May 1, 1997.
     
     In addition, the Company had a $500,000 operating line of credit with a 
bank that expired on November 30, 1997. All advances were collateralized by 
accounts receivable and equipment.  

     At December 31, 1997, the Company had $1.7 million of notes  and capital 
leases  payable. The Company used a portion of the net proceeds of its 
follow-on offering to repay a $680,000 note payable.

     The Company believes its cash and short-term investment balances will be 
sufficient to meet anticipated cash needs for working capital and capital 
expenditures for at least the next twelve months. There can be no assurance 
that additional capital beyond the amounts currently forecasted by the 
Company will not be required nor that any such required additional capital 
will be available on reasonable terms, if at all, at such time as required by 
the Company.

SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

     The Company or its representatives may, from time to time, make or 
may have made certain forward-looking statements, orally or in writing, 
including, without limitations, any such statements made or to be made in 
Management's Discussions and Analysis of Financial Conditions and Results of 
Operations contained in its various SEC filings.  The Company wishes to ensure 
that such statements are accompanied by meaningful cautionary statements, so 
as to ensure to the fullest extent possible the protections of the safe 
harbor established in the Private Securities Litigation Reform Act of 1995.  
Accordingly, such statements are qualified in their entirety by reference to 
and are accompanied by the following discussion of certain important factors 
that could cause actual results to differ materially from those projected in 
such forward-looking statements.

     The Company cautions the reader that this list of factors may not be
exhaustive.  The Company operates in a continually changing business
environment, and new risk factors emerge from time to time.  Management cannot
predict such risk factors, nor can it assess the impact, if any, of such risk
factors on the Company's business or the extent to which any factors, or
combination of factors, may cause actual results to differ materially from those
projected in any forward-looking statements.  Accordingly, forward-looking
statements should not be relied upon as a prediction of actual results.

<PAGE>

VARIABILITY OF OPERATING RESULTS 

     The Company has experienced and expects to continue to experience 
fluctuations in its quarterly results.  The Company's revenues are affected 
by a number of factors, including the timing of the introduction of new 
software products and interactive products by the Company and its 
competitors, seasonality of certain customer purchases, product mix, general 
economic conditions and the Company's ability to obtain agreements from 
publishers and distributors to market the Company's products.  The Company's 
operating results also will vary significantly depending on changes in 
pricing, changes in customer budgets and changes in the volume and timing of 
orders received during the quarter, which are difficult to forecast.  As a 
result of the foregoing and other factors, the Company may experience 
material fluctuations in future revenues and operating results on a quarterly 
or annual basis.  Therefore, the Company believes that period to period 
comparisons of its revenues and operating results are not necessarily 
meaningful and should not be relied upon as indicators of future performance.

TECHNOLOGICAL CHANGE AND MARKET ACCEPTANCE

     The Company's success depends on its ability to develop and sell new 
products, develop site licensing agreements with major manufacturers in the 
automotive, aerospace, heavy equipment and other manufacturing industries, 
develop its 3D and 2D software products for new platforms and continue to 
produce high-quality interactive products in a timely and cost effective 
manner. In addition, the Company must continually anticipate, and adapt its 
products to merging computer technologies and capabilities, such as 
enhanced graphics, sound, music, video and speech generation.  The life 
cycles of the Company's products are difficult to estimate because the 
markets that the Company targets are in the early stages of development and 
because of uncertainties arising from the effect of future product 
enhancements, future developments in hardware and software technology and 
future competition.  If the Company's products become outdated and lose 
market share or if new products or existing product upgrades are not 
introduced when demanded by the market or are not accepted by the market, the 
Company's revenues and


<PAGE>

operating results could be materially adversely affected.  There is no 
assurance that the Company will be able to introduce new products on a timely 
basis or that such new products will be accepted in the market.  

IMPACT OF ACQUISITIONS

     In November 1997, the Company acquired Rosetta and Cimtech and will 
continue to identify and evaluate acquisition opportunities in the future. 
Any acquisition, however, involves inherent uncertainties, such as the effect 
on the acquired business of integration into a larger organization and the 
availability of management resources to oversee the operations of the 
acquired business. The Company's ability to integrate the operations of the 
acquired companies is important to its future success. There can be no 
assurance as to the Company's ability to integrate new businesses nor as to 
its success in managing the larger operations resulting therefrom. Even 
though an acquired business may have experienced profitability and growth as 
an independent company prior to its acquisition by the Company, there can be 
no assurance that such profitability and growth will continue thereafter.

DEPENDENCE ON EMERGING MARKET FOR SOFTWARE PRODUCTS AND CUSTOMER CONCENTRATION

     The market for enterprise-wide  visualization software products in the 
automotive, aerospace, heavy equipment and other manufacturing industries is 
emerging and dependent on a number of variables, including customer 
preferences and the rate of adoption of new technology.  There can be no 
assurance that this market will continue to grow or that the Company's 
software products will be accepted by the market.  The Company's growth is 
dependent in part on significant demand for its software products.  In 
addition, as the Company increasingly markets it 3D and 2D visualization 
software as an enterprise-wide solutions, there can be no assurance that large 
customers will be willing to invest in the Company's products on a 
company-wide basis or that users outside the design and engineering areas 
will accept the Company's products.  In 1997, sales of software products to 
one customer accounted for 19% of the Company's revenues.  See "Item 1. 
Business--Marketing and Distribution." There can be no assurance that EAI will 
be able to continue to sell software products to this customer at 1997 levels 
or, if it fails to do so, that the Company will be able to replace this 
customer with new customers.

DEPENDENCE ON EMERGING MARKET FOR INTERACTIVE PRODUCTS 

     The market for interactive multimedia software products is emerging and 
dependent on a number of variables, including consumer preferences, shipments 
of multimedia personal computers, the installed base of multimedia personal 
computers and the number of other publishers creating interactive software 
products.  There can be no assurance that this market will continue to grow. 
The market for games and educational multimedia software is characterized by 
rapid changes in computer hardware and software technology and is highly 
competitive with respect to timely product innovation.  The Company's 
near-term growth is dependent in part on significant demand for its recently 
released interactive products and for its products under development.  
However, the Company does not typically receive royalty revenues from a 
product until the publisher achieves a minimum level of sales of the product, 
which may not occur immediately after delivery of the product to the 
publisher, if at all.  There can be no assurance that the Company's new 
interactive  products will be accepted by the market or that the Company will 
be able to respond effectively to the evolving requirements of the market.

RELIANCE ON THIRD PARTIES TO MARKET AND DISTRIBUTE CERTAIN INTERACTIVE PRODUCTS

     The Company's strategy has been to rely upon third parties to market and 
distribute its interactive products.  EAI does not have an exclusive 
relationship with any of the current distributors of its interactive 
products. The Company's relationships with publishers have involved contracts 
that address a single product or title for a specific


<PAGE>

market area and do not constitute a continuing marketing and distribution 
agreement.  There can be no assurance that the Company's relationships with 
publishers will continue or that the Company will be able to find other means 
to market and distribute its interactive products.  Failure to continue such 
relationships, establish new relationships or develop independent means of 
marketing and distributing interactive products could have a material adverse 
effect on the Company's revenues and operating results.

RELIANCE ON THIRD PARTIES TO MARKET AND DISTRIBUTE CERTAIN SOFTWARE PRODUCTS 

     In addition to marketing the Company's software products directly to end 
users, the Company has contractual relationships with Hewlett-Packard to 
jointly market and Structural Dynamics Research Corporation (SDRC) to jointly 
market and distribute certain of the Company's software products.  Although 
these contracts represent a significant marketing and distribution 
opportunity for the Company's software products, there can be no assurance 
that these contractual relationships will be successful in creating 
significant sales or that these relationships will be continued beyond their 
contract terms.

MANAGEMENT OF GROWTH AND INTERNATIONAL EXPANSION

     The Company has experienced and may continue to experience rapid growth 
which could place a significant strain on the Company's employees, operating 
procedures, financial resources and information systems.  The Company plans 
to introduce a significant number of new products, increase its production 
capacity and development expenditures, expand its sales and marketing 
initiatives and hire additional employees.  Such activities will require 
significant managerial expertise. If the Company is unable to manage its growth 
effectively, the Company's revenues, operating results and financial 
condition could be materially adversely affected. In addition, in connection 
with the Company's plans to increase its sales and marketing presence in 
Europe and Asia, the Company will be incurring expenses in advance of 
revenues. If the Company is unsuccessful in generating sufficient revenues to 
recover their expenses or is unable to hire, train and retain experienced 
international sales and marketing personnel, the Company's revenues, operating 
results and financial conditions could be adversely affected. Increased 
international activity could expose the Company to foreign currency 
fluctuations, foreign labor laws and other unforeseen problems.  

COMPETITION

     The Company expects significant competition in each of its two product 
lines:

SOFTWARE PRODUCTS

     Large computer companies or companies competing in the CAD/CAE/CAM and 
PDM markets could offer products with the same or similar functionality as 
offered by the Company.  Such companies, some of which have substantially 
greater financial and other resources than the Company, include Autodesk 
Inc., Dassault Systemes S.A., Division Plc., IBM, Parametric Technology 
Corp., SDRC, and Silicon Graphics, Inc.   Although the Company believes it 
has a technological advantage over potential competitors in these markets, 
maintaining its advantage will require continuing investment by the Company 
in research and development and sales and marketing.  There can be no 
assurance that the Company will have sufficient resources to make such 
investments or that such investments will be successful.

INTERACTIVE PRODUCTS

     The interactive software publishing industry is intensely competitive.  
The Company's sales to the educational and consumer markets may be adversely 
affected by the increasing number of competitive products. The Company's 
interactive products will compete directly against other educational and 
consumer software products including multi-player Internet games. The 
Company's competitors in this area include a large number of companies, some 
of which have substantially greater financial, technical, marketing and other 
resources than the Company, such as Broderbund Software Inc., Cendant 
Corporation, Digital Domain Inc., GT Interactive Software Corp., and SoftKey


<PAGE>

International Inc.   Moreover, large corporations, such as Microsoft 
Corporation and The Walt Disney Company , which have substantial bases of 
intellectual property content and substantial financial resources, have 
entered or announced their intention to enter the market for consumer 
software.

     While the Company believes that most special effects firms target the 
feature film and advertising markets, these firms could refocus their efforts 
in the commercial markets, an area in which the Company derives a portion of 
its interactive product revenue.  These special effects firms, some of which 
have substantially greater financial, technical, marketing and other 
resources than the Company, include Dreamworks SKG, Industrial Light and 
Magic (a division of Lucasfilm Limited), and Pixar.  In addition, a large 
number of small companies provide custom animations to commercial markets as 
a complement to their primary business of studio film production, engineering 
consulting and communications consulting. 

YEAR 2000 COMPUTER CONVERSION

     The Company has developed and implemented a plan to upgrade its 
information technology in order to prepare for the year 2000 and has 
completed conversion of all critical data processing systems.  All of the 
Company's systems and applications are 2000 compliant.  The company has also 
initiated communications with its significant vendors to determine the extent 
to which the Company's systems may be vulnerable  to third parties' failure 
to remediate their own 2000 issues.  Management currently does not anticipate 
such a failure to be an issue. However, operating results could be impacted 
if the systems of other companies with whom the Company transacts business 
are not compliant in a timely manner. 

PROTECTION OF PROPRIETARY RIGHTS 

     The Company's success and ability to compete is dependent in part upon 
its extensive proprietary technology and databases.  The Company relies 
primarily on a combination of copyright, trademark and trade secret laws, 
employee and third party non-disclosure and non-competition agreements and 
other methods to protect its proprietary rights.  There can be no assurance 
that these measures will prevent the Company's competitors from obtaining or 
using the Company's proprietary technology and databases.  Certain of the 
Company's products include mechanisms intended to prevent or inhibit 
unauthorized copying.  In addition, the Company packages its software 
products with license agreements, which prohibit unauthorized copying of such 
products.  Unauthorized copying does, however, occur in the software 
industry, and if a significant amount of unauthorized copying of the 
Company's products were to occur, the Company's revenues and operating 
results could be adversely affected.  The laws of certain countries in which 
the Company's products are or may be distributed do not protect the Company's 
products and proprietary rights to the same extent as do the laws of the 
United States.  Furthermore, as the number of software products in the 
industry increases and the functionality of these products further overlaps, 
software developers may increasingly become subject to infringement claims.  
There can be no assurance that third parties will not assert infringement 
claims against the Company in the future with respect to current or future 
products, or that any such assertion will not require the Company to enter 
into royalty arrangements or result in costly litigation. 


<PAGE>

DEPENDENCE ON KEY PERSONNEL

     The Company's future success depends in large part on the continued 
service of its key technical, marketing, sales and management personnel and 
on its ability to continue to attract, motivate and retain highly qualified 
employees. The Company's key employees may voluntarily terminate their 
employment with the Company at any time.  Competition for such employees is 
intense and the process of locating key technical and management personnel 
with the combination of skills and attributes required to execute the 
Company's strategy can be lengthy. Accordingly, the loss of the services of 
key personnel could have a material adverse effect on the Company's revenues, 
operating results and financial condition.  The Company maintains key person 
insurance covering certain of its executive officers.  However, the amount of 
insurance may not be sufficient to offset the Company's loss of the services 
of any of its executive officers.

RISK OF LIABILITY CLAIMS BY CUSTOMERS 

     Although the Company has not experienced product liability claims by 
customers, the Company could experience such claims in the future.  The 
Company's interactive software products carry a disclaimer that the products 
should not be used for diagnostic or treatment purposes and are only for 
educational and medical reference purposes.  The Company has general 
liability insurance and insurance for errors and omissions in the content of 
its products. If a liability claim were to be made, there can be no assurance 
that the Company would be successful in defending against the claim or, if 
unsuccessful, that the amount of insurance coverage, if any, would be 
sufficient to pay the claim.


<PAGE>

SHARE PRICE VOLATILITY

     The trading price of the Common Stock could be subject to wide 
fluctuations in response to quarter to quarter variations in operating 
results, changes in earnings estimates by analysts, announcements of 
technological innovations or new products by the Company or its competitors, 
general conditions in the software and computer industries and other events 
or factors.  In addition, in recent years the stock market in general, and 
the shares of technology companies in particular, have experienced extreme 
price fluctuations.  This volatility has had a substantial effect on the 
market prices of securities issued by many companies for reasons unrelated to 
the operating performance of the specific companies.  These broad market 
fluctuations may adversely affect the market price of the Common Stock. 

ANTI-TAKEOVER PROVISIONS 

     The Company's Certificate of Incorporation and By-laws and Delaware law 
contain provisions that may have the effect of delaying, deferring or 
preventing a non-negotiated merger or other business combination involving 
the Company. These provisions are intended to encourage any person interested 
in acquiring the Company to negotiate with and obtain the approval of the 
Board of Directors in connection with the transaction.  Certain of these 
provisions may, however, discourage a future acquisition of the Company not 
approved by the Board of Directors in which stockholders might receive an 
attractive value for their shares or that a substantial number or even a 
majority of the Company's stockholders might believe to be in their best 
interest.  As a result, stockholders who desire to participate in such a 
transaction may not have the opportunity to do so.  Such provisions could 
also discourage bids for the shares of Common Stock at a premium, as well as 
create a depressive effect on the market price of the shares of Common Stock. 
In addition to the Common Stock, the Company's Certificate of Incorporation 
authorizes the issuance of up to 20,000,000 shares of preferred stock.  The 
Company has no current plans to issue any shares of preferred stock.  
However, because the rights and preferences for any series of preferred stock 
may be set by the Board of Directors in its sole discretion, the Company may 
issue preferred stock that has rights and preferences superior to the rights 
of holders of shares of the Common Stock and thus may adversely affect the 
rights of holders of shares of the Common Stock. In addition, the Board of 
Directors has adopted a Stockholders Rights Plan that may have an 
anti-takeover effect and may discourage or prevent takeover attempts not 
first approved by the Board of Directors (including takeovers that certain 
stockholders may deem to be in their best interests).


<PAGE>

DIVIDENDS

     The Company has not paid any dividends and does not currently anticipate 
paying cash dividends in the future.  There can be no assurance that the 
Company will ever pay a cash dividend.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Board of Directors
Engineering Animation, Inc.

     We have audited the accompanying consolidated balance sheets of 
Engineering Animation, Inc. as of December 31, 1997 and 1996, and the related 
consolidated statements of operations, stockholders' equity and cash flows 
for each of the three years in the period ended December 31, 1997.  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 Technology 
Company Ventures, L.L.C., which statements reflect total assets and total 
revenues constituting 9% and 19%, respectively, in 1996 of the related 
consolidated totals. Those statements were audited by other auditors whose 
report has been furnished to us, and our opinion, insofar as it relates to 
data included for Technology Company Ventures, L.L.C., is based solely on the 
report of 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 report of 
other auditors provide a reasonable basis for our opinion. 

     In our opinion, based on our audit and the report of other auditors, 
the financial statements referred to above present fairly, in all material 
respects, the consolidated financial position of Engineering Animation, Inc. 
at December 31, 1997 and 1996, and the consolidated results of its operations 
and its cash flows for each of the three years in the period ended December 
31, 1997, in conformity with generally accepted accounting principles.

                                                        Ernst & Young, LLP
Minneapolis, Minnesota
January 30, 1998


<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Managers and Members of
Technology Company Ventures, L.L.C.:

We have audited the accompanying consolidated balance sheet of Technology 
Company Ventures, L.L.C. (an Oregon limited liability company) as of December 
31, 1996, and the related consolidated statements of operations, member's 
equity and cash flows for the year then ended, not presented separately 
herein. 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 audit.

We conducted our audit in accordance with generally accepted auditing 
standards. These 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 audit provides a 
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above and 
not presented separately herein, present fairly, in all material respects, 
the financial position of Technology Company Ventures, L.L.C. as of December 
31, 1996, and the results of its operations and its cash flows for the year 
then ended, in conformity with generally accepted accounting principles.

                                              ARTHUR ANDERSEN LLP

Portland, Oregon,
  October 14, 1997


<PAGE>

Engineering Animation, Inc.
Consolidated Balance Sheets
(in thousands, except share data)

<TABLE>
<CAPTION>

ASSETS                                                 December 31,
                                                  1997              1996
                                             ----------------------------------
<S>                                             <C>               <C>
Current assets:
  Cash and cash equivalents                     $24,892           $10,786
  Short-term investments                         15,406             9,884
  Accounts receivable, net:
     Billed, less allowance of $842
      and $154, respectively                     15,617             9,095
     Unbilled                                     6,321             3,334
  Deferred income taxes                             814                48
  Prepaid expense and other assets                1,554               447
                                             ----------------------------------
Total current assets                             64,604            33,594

Property and equipment, net                      11,394             5,364

Other Assets:
  Restricted cash                                   210               495
  Note receivable                                 1,408             1,408
  Software development costs, net of
   accumulated amortization
   of $595 and $376, respectively                 1,396               602
  Deferred income taxes                             585                 -
  Goodwill, net of accumulated
   amortization of $139 and $62, respectively     1,212               250
  Other                                             391               586
                                             ----------------------------------
Total assets                                    $81,200           $42,299
                                             ==================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                              $ 2,885           $ 1,358
  Accrued compensation and other accrued
   expenses                                       4,146             1,680
  Deferred revenue                                2,546             1,084
  Deferred income taxes                             113               119
  Current portion of long-term debt and
   lease obligations                                176                69
  Income taxes payable                              270               366
                                             ----------------------------------
Total current liabilities                        10,136             4,676
Convertible note payable--related party               -               351
Long-term debt  and lease obligations due
  after one year                                  1,495             1,303
Deferred income taxes                             1,238               826
Minority interest                                     -               515

Stockholders' equity
  Preferred stock, $.01 par value:
    Authorized shares -- 20,000,000
    Issued and outstanding shares -- None              -                 -
  Common stock, $.01 par value:
    Authorized shares -- 20,000,000
    Issued and outstanding shares --
      9,816,609 in 1997
      and 7,848,725 in 1996                          98                78
  Additional paid-in capital                     69,783            34,403
  Retained earnings (deficit)                    (1,550)              147
                                             ----------------------------------
    Total stockholders' equity                   68,331            34,628
                                             ----------------------------------
Total liabilities and stockholders' equity      $81,200           $42,299
                                             ==================================
</TABLE>

SEE ACCOMPANYING NOTES.


<PAGE>

Engineering Animation, Inc.
Consolidated Statements of Operations
(in thousands, except per share data)


<TABLE>
<CAPTION>
                                                 YEARS ENDED DECEMBER 31,
                                             1997         1996          1995
<S>                                     <C>            <C>           <C>
                                       ----------------------------------------
Net revenues                            $ 49,717       $ 27,189      $ 12,249
Cost of revenues                          13,332          7,277         3,100
                                       ----------------------------------------
Gross profit                              36,385         19,912         9,149

Operating expenses:
  Sales and marketing                     15,406          9,799         3,573
  General and administrative               5,478          3,041         2,276
  Research and development                 7,068          3,438         1,992
  Acquisition costs                        8,831              -         2,520
                                       ----------------------------------------
Total operating expenses                  36,783         16,278        10,361
                                       ----------------------------------------
Income (loss) from operations               (398)         3,634        (1,212)
Interest and other income (expense), net   1,522            987          (158)
                                       ----------------------------------------
Income (loss) before income taxes and
 minority interest                         1,124          4,621        (1,370)
Income taxes                               2,772          1,744           392
                                       ----------------------------------------
Income (loss) before minority interest    (1,648)         2,877        (1,762)
Minority interest                            (49)          (310)         (128)
                                       ----------------------------------------
Net income (loss)                      $  (1,697)      $  2,567      $ (1,890)
                                       ========================================
Earnings (loss) per share:
  Basic                                 $  (0.19)       $  0.35      $  (0.39)
                                       ========================================
  Diluted                               $  (0.19)       $  0.30      $  (0.39)
                                       ========================================
  Weighted average shares outstanding      8,770          7,432         4,805
                                       ========================================
  Weighted average shares
   outstanding and assumed conversion      8,770          8,648         4,805
                                       ========================================
</TABLE>


SEE ACCOMPANYING NOTES.


<PAGE>

Engineering Animation, Inc.
Consolidated Statement of Stockholders' Equity
(in thousands)

<TABLE>
<CAPTION>
                                                                                     ADDITIONAL      RETAINED           TOTAL
                                                            COMMON STOCK              PAID-IN        EARNINGS        STOCKHOLDERS'
                                                       SHARES         AMOUNT          CAPITAL        (DEFICIT)         EQUITY
                                                      ---------------------------------------------------------------------------
<S>                                                    <C>            <C>            <C>             <C>             <C>
Balance at January 1, 1995                             4,431          $  44          $  2,287        $  (530)          $  1,801
  Conversion of accrued salaries and contributed
    equipment into common stock                           22              1                30              -                 31
  Common stock issued for options exercised               13              -                 -              -                  -
Formation of Technology Company Ventures, L.L.C.
  and acquisition of predecessor interest                630              6             2,994              -              3,000
Net loss                                                   -              -                 -         (1,890)            (1,890)
                                                      ---------------------------------------------------------------------------
Balance at December 31, 1995                           5,096             51             5,311         (2,420)             2,942
  Issue of common stock in connection with the
    Company's initial public offering, net of
    offering expenses                                  2,738             27            29,040              -             29,067
  Conversion of accrued salaries into common stock        10              -                40              -                 40
  Common stock issued for options exercised                5              -                12              -                 12
  Net income                                               -              -                 -          2,567              2,567
                                                      ---------------------------------------------------------------------------
Balance at December 31, 1996                           7,849             78            34,403            147             34,628
  Issue of common stock, net of offering expenses      1,500             15            26,610              -             26,625
  Common stock issued for options and warrants
   exercised                                             153              2               625              -                627
  Conversion of notes payable into common stock           25              -               351              -                351
  Purchase of minority interest in Rosetta
   Technologies, Inc.                                    290              3             7,130              -              7,133
  Income tax benefit related to incentive stock
   option plan                                             -              -               664              -                664
  Net loss                                                 -              -                 -         (1,697)            (1,697)
                                                      ---------------------------------------------------------------------------
Balance at December 31, 1997                           9,817          $  98          $ 69,783       $ (1,550)          $ 68,331
                                                      ===========================================================================

</TABLE>

SEE ACCOMPANYING NOTES.


<PAGE>

Engineering Animation, Inc.
Consolidated Statements of Cash Flows
(in thousands)


<TABLE>
<CAPTION>
                                                                 YEARS ENDED DECEMBER 31
                                                      1997            1996            1995
                                                  --------------------------------------------
<S>                                                 <C>             <C>             <C>
OPERATING ACTIVITIES
Net income (loss)                                   $ (1,697)       $ 2,567         $ (1,890)
Adjustments to reconcile net income to net cash
  provided by (used in) operating activities:
    Depreciation and amortization                      2,230          1,134              491
    Deferred income taxes                               (945)           404              295
    Income tax benefit of stock options                  664              -                -
    Write-off of purchased research and development    
     and acquisition costs                             5,599              -            2,520
    Minority interest in income                           49            310              128
    Increase in billed accounts receivable            (6,522)        (6,852)            (311)
    Increase in unbilled accounts receivable          (2,987)        (2,045)          (1,005)
    Increase in prepaid expenses                      (1,107)          (262)              (7)
    Increase in accounts payable                       1,527            657              483
    Increase in accrued expenses                       2,370          1,375              400
    Increase in deferred revenue                       1,462            618              194
    Other                                                 68             56               28
                                                    ------------------------------------------
Net cash provided by (used in) operating activities      711         (2,038)           1,326


INVESTING ACTIVITIES
Issuance of note receivable                                -           (658)            (750)
Purchases of property and equipment                   (7,709)        (4,551)            (986)
Purchases of other assets                               (197)          (193)            (442)
Capitalization of software development costs          (1,013)          (343)            (263)
Purchase of short-term investments                    (5,522)        (9,847)               -
                                                    ------------------------------------------
Net cash used in investing activities                (14,441)       (15,592)          (2,441)

FINANCING ACTIVITIES
Decrease (increase) in restricted cash                   285           (495)               -
Net change in short-term borrowing                         -              -             (200)
Proceeds from long-term debt                           1,349            495            1,769
Payments on long-term debt and
 capital lease obligations                            (1,050)        (1,486)            (354)
Net proceeds from exercise of
 options and warrants                                    627             12                -
Net proceeds from issuance of common stock            26,625         29,067                -
                                                    ------------------------------------------
Net cash provided by financing activities             27,836         27,593            1,215
                                                    ------------------------------------------
Net increase in cash and cash equivalents             14,106          9,963              100
Cash and cash equivalents at beginning of year        10,786            823              723
                                                    ------------------------------------------
Cash and cash equivalents at end of year            $ 24,892       $ 10,786            $ 823
                                                    ==========================================

SUPPLEMENTAL DISCLOSURES
Interest paid                                       $    155       $     83            $ 147
Income taxes paid                                      3,171            886                2
Property and equipment gifted to the Company               -            421                -
Property and equipment purchased through
  capital lease obligations and notes payable              -              -              125
Common stock issued to purchase minority interest
  in Rosetta Technologies, Inc.                        7,133              -                -
Promissory note converted into common stock              351              -                -

</TABLE>

SEE ACCOMPANYING NOTES.


<PAGE>

Engineering Animation, Inc.
Notes to Consolidated Financial Statements 
(in thousands, except share and per share data)


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

BUSINESS AND ORGANIZATION 

Engineering Animation, Inc. (the "Company") develops, produces and sells 
enterprise-wide visualization and interactive software products that address 
visualization, animation and graphics needs of its customers in domestic and 
international commercial markets.

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and 
its wholly-owned subsidiaries. All significant intercompany accounts and 
transactions have been eliminated in consolidation.

The consolidated financial statements are presented giving retroactive effect 
to the Company's acquisitions of Technology Company Ventures, L.L.C. ("TCV") 
and Cimtech, Inc. ("Cimtech") which have been accounted for under the 
pooling of interests method.

CASH EQUIVALENTS 

The Company considers all highly liquid investments with a maturity of three 
months or less when purchased to be cash equivalents. Cash equivalents are 
carried at cost, which approximates market value. 

RESTRICTED CASH

Restricted cash consists of cash committed as collateral for the notes 
payable to the State of Iowa.  As requirements of the note are met, the cash 
will be released in increments of $75 on a quarterly basis.

SHORT-TERM INVESTMENTS

Short-term investments consist of debt securities of the U.S. Government or 
governmental agencies and high-grade commercial paper.  Short-term 
investments are stated at cost plus accrued interest, which approximates 
market. The Company classifies its short-term investments as 
"available-for-sale."


<PAGE>

STOCK-BASED COMPENSATION

The Company has adopted the disclosure only provisions of Statement of 
Financial Accounting Standards No. 123, "Accounting for Stock-Based 
Compensation" but applies Accounting Principles Board Opinion No. 25 (ABP 25) 
and related interpretations in accounting for its stock plans. Under APB 25, 
when the exercise price of employee stock option equals the market price of 
the underlying stock on the date of grant, no compensation expense is 
recognized.

REVENUE RECOGNITION 

Revenue from sales of software products is recognized upon delivery of the 
software product to the customer and satisfaction of significant related 
obligations, if any.  Revenue from development, service and customer support 
contracts is deferred and recognized ratably over the period the services are 
provided.

Revenue is recognized based upon labor and other costs incurred and progress 
to completion on contracts. Unbilled accounts receivable represent revenue 
earned but not yet billable based on terms of the contract. Billings are made 
based on milestones or as otherwise provided for in the contracts.

CONCENTRATIONS OF CREDIT RISK 

Financial instruments that potentially subject the Company to significant 
concentrations of credit risk consist principally of trade accounts 
receivable. This risk is partially mitigated due to the large number and 
diversity of entities comprising the Company's customer base.

INTERNATIONAL OPERATIONS

The Company's international operations represent an increasingly substantial 
portion of its overall operating results.  Sales offices are located in 
France, Germany, Italy, the United Kingdom and Malaysia.

During 1997, foreign revenues were $5,256 or 11% of  total revenues compared 
with $2,505 or 9% of total revenues in 1996 and $599 or 5% of total revenues in
1995.

The Company's international operations are subject to a number of risks 
including currency fluctuations, changes in foreign governments and their 
policies, and expropriation or requirements of local or shared ownership.  
The Company believes that the geographic dispersion of its sales and assets 
partially mitigates these risks.


<PAGE>

FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS

The functional currencies of the Company's foreign subsidiaries are 
considered to be the respective subsidiary's local currency. The effect of 
the cumulative translation adjustment is not material and has not been 
separately disclosed in the Company's financial statements.

PROPERTY AND EQUIPMENT 

Property and equipment is carried at cost. Depreciation and amortization of 
property and equipment is provided over the estimated useful lives of the 
assets, which range from three to seven years, on the straight-line method. 

SOFTWARE DEVELOPMENT COSTS 

The Company capitalizes software development costs in accordance with 
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs 
of Computer Software to be Sold, Leased or Otherwise Marketed." The 
capitalization of these costs begins when a product's technological 
feasibility has been established and ends when the product is available for 
general release to customers. The Company amortizes these costs over an 
estimated economic useful life of three years or on the ratio of current 
revenue to total projected product revenues, whichever is greater. 
Amortization expense was $219, $194 and $121 for the years ended December 31, 
1997, 1996 and 1995, respectively. 

INCOME TAXES 

The Company accounts for income taxes using the liability method. Under this 
method, deferred income taxes are recognized for future tax consequences 
attributable to differences between the financial statement carrying amounts 
of existing assets and liabilities and their respective tax bases. Deferred 
taxes are recorded based on enacted tax laws and tax rates. Changes in 
enacted tax rates will be reflected in tax provision as they occur.

EARNINGS (LOSS) PER SHARE 

In 1997, the Financial Accounting Standards Board issued Statement No. 128, 
"Earnings per Share". Statement 128 replaces the calculation of primary and 
fully diluted earnings per share with basic and diluted earnings per share. 
Unlike primary earnings per share, basic earnings per share excludes any 
dilutive effects of options, warrants and convertible securities.  Diluted 
earnings per share is very similar to the previously reported fully diluted 
earnings per share.  All earnings per share amounts for all periods have been 
presented, and where appropriate, restated to conform to the Statement 128 
requirements.


<PAGE>

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted 
accounting principles requires management to make estimates and assumptions 
that affect the amounts reported in the financial statements and accompanying 
notes. Actual results could differ from those estimates.

2.  ACQUISITIONS

In November 1995, TCV was formed for the purpose of acquiring approximately a 
68% interest in Rosetta Technologies, Inc. ("Rosetta").  Since inception, TCV 
has had no other significant activities other than its investment in Rosetta. 
In connection with this transaction, TCV expensed approximately $1,770 of 
acquired in-process research and development and recorded approximately $312 
of goodwill, which is being amortized on a straight-line basis over five 
years.

In November 1997, the Company acquired Rosetta in two separate transactions 
valued at approximately $25,500. The Company acquired a controlling interest 
in Rosetta through a merger with TCV in which the Company issued 
approximately 630,000 shares of common stock in exchange for the member 
equity of TCV. Subsequent to the TCV merger, the Company acquired the 
remaining minority interest in Rosetta by issuing approximately 309,000 
shares of common stock in a transaction valued at approximately $7,100. The 
minority interest acquisition was accounted for using the purchase method. 
Approximately $5,600 of the purchase price was allocated to in-process 
research and development that had not yet reached technological feasibility 
and had no alternative future use. Accordingly, this amount was charged 
to operations at the date of acquisition and is included in the acquisition 
costs. The in-process research and development was valued using expected 
future cash flows, discounted for risks and uncertainties related to the 
target markets and the completion of the projects. The Company also recorded 
goodwill of $1,039, which is being amortized on a straight-line basis over 
five years.

In November 1997, the Company also acquired Cimtech in a transaction valued 
at approximately $6,000. The Company issued approximately 185,000 shares of 
common stock in exchange for all of the outstanding common stock of Cimtech.

In connection with these November 1997 transactions, the Company also 
recorded approximately $3,200 for transaction costs, employee related expenses 
and other integration costs.

The mergers with TCV and Cimtech were accounted for as pooling of interests. 
Accordingly, the historical financial statements of the Company have been 
restated to include the operating results of TCV and Cimtech for all periods 
presented.

Separate results of operations for periods prior to the acquisitions are as 
follows:

<TABLE>
<CAPTION>
                                        NINE MONTHS
                                            ENDED
                                        SEPTEMBER 30,        YEAR ENDED DECEMBER 31
                                            1997               1996          1995
                                      ---------------------------------------------
                                        (UNAUDITED)
<S>                                     <C>                  <C>           <C>
Revenues:
  EAI                                      $27,564           $20,413       $10,415
  TCV                                        4,622             5,292           764
  Cimtech                                    2,167             1,484         1,070
                                      ---------------------------------------------
  Combined                                 $34,353           $27,189       $12,249
                                      =============================================
Net income (loss):
  EAI                                      $ 3,515           $ 1,851      $    431
  TCV                                          260               674        (2,241)
  Cimtech                                      220                42           (80)
                                      ---------------------------------------------
  Combined                                 $ 3,995           $ 2,567      $ (1,890)
                                      =============================================
</TABLE>


<PAGE>

3.  NOTE RECEIVABLE

During 1995, the Company entered into a loan agreement whereby the Company 
agreed to loan approximately $750 to the developer of a building the Company 
leases. During 1996, the Company loaned an additional $658 to the developer. 
The Company began leasing the building July 1996. Interest, at a rate of 
2.25% above the U. S. Treasury three-year constant rate, began accruing and 
is payable monthly upon commencement of the lease. The principal is due June 
2016, unless the developer sells the building to an unaffiliated third party, 
at which time the principal and interest accrued to date becomes immediately 
due. The note receivable is collateralized by a second mortgage on the 
building. 

4.  PROPERTY AND EQUIPMENT

Property and equipment at December 31, 1997 and 1996 consists of the following:

<TABLE>
<CAPTION>
                                                   1997             1996
                                              -------------------------------
<S>                                            <C>                 <C>
Computer equipment and software                $ 8,513             $ 4,995
Office equipment and furniture                   2,690               1,758

Leasehold improvements                             284                 230
Construction in progress                         3,081                   -
                                              -------------------------------
Total (at cost)                                 14,568               6,983
Less  accumulated depreciation                  (3,174)             (1,619)
                                              -------------------------------
Net property and equipment                    $ 11,394             $ 5,364
                                              ===============================

</TABLE>

5.  DEBT 

The Company had a $1,000 line of credit agreement with a commercial bank that 
expired on May 1, 1997. In addition, the Company had a $500 operating line of 
credit with a bank that expired on November 30, 1997. No amounts were 
outstanding on either line at December 31, 1996.

Long-term debt at December 31, 1997 and 1996 consists of the following:


<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        1997            1996
                                                    ---------------------------
<S>                                                   <C>             <C>
Non-interest bearing note payable, due in
  monthly installments of $2,381, commencing
  July 1998 through June 2005; collateralized
  by all equipment of the Company                     $   200         $   200


<PAGE>

Note  payable collateralized by restricted cash;
  forgiven at the rate of $75,000 each quarter
  as goals are met                                        75            375

Forgiveable note with interest accruing at 6%
  commencing November 1997 due October 2000;
  job attainment goals must be met for principal
  and interest to be forgiven                            500              -

Non-interest bearing note payable commencing
  November 1997 due December 2007; job attainment
  goals must be met to remain non-interest bearing       500              -

6% note payable, collateralized by Company assets          -            430

Capital lease obligations                                 41             73

Other notes payable with interest ranging from
  0% to 6%, and payments due from 1998 through
  2007                                                   355            294
                                                    ---------------------------
                                                       1,671          1,372

Less amounts due within one year                         176             69
                                                    ---------------------------
Long-term debt due after one year                    $ 1,495        $ 1,303
                                                    ===========================

</TABLE>


<TABLE>
<CAPTION>

Future maturities of long-term debt and capital lease obligations are
as follows:
           <S>                                              <C>
           1999                                                  $ 204
           2000                                                    690
           2001                                                     95
           2002                                                    146
           Thereafter                                              360
                                                           -----------
                                                               $ 1,495
                                                           ===========

</TABLE>


<PAGE>

6. OPERATING LEASES

In June 1996, the Company entered into a new operating lease for office 
facilities upon completion of construction of the underlying building. The 
rent is $411 annually for 10 years. The Company also has operating leases for 
additional office space and equipment with various lease terms expiring 
through 2006. Rent expense for the years ended December 31, 1997, 1996 and 
1995 was $1,535, $765 and $486, respectively. 

The future minimum lease payments at December 31, 1997 are as follows:

<TABLE>
<CAPTION>

<S>                                                             <C>
1998                                                            $  1,615
1999                                                               1,586
2000                                                               1,584
2001                                                               1,477
2002                                                               1,064
Thereafter                                                         1,687
                                                              ----------
                                                                $  9,013
                                                              ==========

</TABLE>

7. CONVERTIBLE NOTE PAYABLE - RELATED PARTY

The Company had a $351 convertible promissory note with a corporation 
controlled by one of its minority shareholders. The note was due in full on 
November 15, 1998 and bore interest at the rate of 10% per annum. Interest 
was paid monthly. The note was convertible into the Company's common stock at 
a conversion rate of $20.11 per share and was converted into 17,454 shares of 
common stock in November 1997.

8. ROYALTY AGREEMENTS 

The Company has entered into royalty agreements with various entities to use 
and distribute products in conjunction with the Company's software products. 
Royalty payments for the years ended December 31, 1997, 1996 and 1995 were 
$277, $415, and $170, respectively.


<PAGE>

9.  INCOME TAXES

The components of income tax expense are as follows:
<TABLE>
<CAPTION>

                                           1997         1996          1995
                                         ----------------------------------
<S>                                      <C>          <C>          <C>
Current:
  Federal                                $ 3,491      $ 1,203      $     73
  State                                      226          137            22
                                         -----------------------------------
                                           3,717        1,340            95
Deferred                                      72          404           297
Change in valuation allowance             (1,017)           -             -
                                         ----------------------------------
Total                                    $ 2,772      $ 1,744       $   392
                                         ==================================

</TABLE>

A reconciliation of income tax computed at the US statutory rate to the
effective income tax rate is as follows:

<TABLE>
<CAPTION>
                                               1997         1996          1995
                                           ------------------------------------
<S>                                        <C>           <C>           <C>
Tax at US statutory rate                   $    382      $ 1,571       $  (466)
  State  income  taxes, net of federal
    tax benefit                                 191          251            66
Non-deductible acquisition costs              3,058            -           857
Change in valuation allowance                (1,017)           -             -
All other, net                                  158          (78)          (65)
                                           ------------------------------------
                                            $ 2,772      $ 1,744       $   392
                                           ====================================

</TABLE>

Significant components of the Company's deferred income tax liabilities and 
assets at December 31, 1997 and 1996 are as follows:

<TABLE>
<CAPTION>
                                                           1997          1996
                                                      -------------------------
<S>                                                   <C>            <C>
Deferred tax liabilities:
  Tax over book depreciation                          $    (595)     $   (326)
  Capitalized software development costs                   (530)         (262)
  Other, net                                               (226)         (357)
                                                      ------------------------
Total deferred tax liabilities                           (1,351)         (945)
Deferred tax assets:

  Accounts  receivable,  principally  due to 
    allowance for doubtful accounts                         297            48
Paid time-off accrual                                       229             -
  Net operating loss carryforwards                          858         1,017
  Other, net                                                 15             -
                                                     -------------------------
Total deferred tax assets                                 1,399         1,065
  Less valuation allowance                                    -        (1,017)

</TABLE>


<PAGE>

<TABLE>
<CAPTION>

<S>                                                   <C>            <C>
                                                      -------------------------
Net deferred tax assets                                   1,399            48
                                                      -------------------------
Net deferred tax asset (liability)                     $     48      $   (897)
                                                      =========================

</TABLE>


<PAGE>

At December 31, 1997, the Company has net operating loss carryforwards of 
$2,300 for federal income tax purposes that expire in the years 2003 through 
2011. Section 382 of the Internal Revenue Code restricts the annual 
utilization of the NOL's incurred prior to a change in ownership. Such a change 
in ownership occurred in connection with TCV's acquisition of the majority 
interest of Rosetta in 1995 and with the Company's 1997 acquisitions of 
Cimtech and TCV. As a result of the 1995 transaction, the Company is limited 
to using approximately $190 of the net operating loss carryforwards generated 
prior to the 1995 transaction in any one year. The Company does not believe 
that the utilization of the NOL's carryforward for the 1997 acquired 
companies will be significantly limited under Section 382.

10. CAPITAL STOCK, STOCK SPLIT AND STOCK OPTIONS 

CAPITAL STOCK

The Company adopted a stockholders rights plan effective at the time of the
initial public offering. Under the plan, each share of common stock has
associated with it one preferred share purchase right ("Right"). The terms of
the Rights are set forth in the Rights Agreement.

STOCK SPLIT

The Board of Directors approved a three-for-two stock split to be affected in 
the form of a stock dividend, payable to shareholders of record as of 
February 12, 1998.  Accordingly, all share, per share, weighted average share 
and stock option information has been restated to reflect the split.

STOCK OPTIONS

The Company has stock option arrangements with various officers, directors,
other members of management and employees. The options are generally granted at
fair market value. The options generally vest over periods of five years and
must be exercised no later than 10 years from the date of grant.

In 1994, the Company issued non-qualified options to purchase 532,032 shares of
common stock for $1.33 per share to two officer/stockholders. These options,
which are not part of the 1994 stock option plan described below, are fully
vested and remain exercisable through June 2009.

During 1994, the Company adopted the Engineering Animation, Inc. 1994 Stock
Option Plan providing for issuance of incentive or non-qualified options to
employees based upon management discretion. During 1997, the Company amended the
plan to increase the number of shares reserved for issuance by 285,000. The
Company has reserved 1,785,000 shares of common stock for issuance under this
plan. 

In February 1995, the Company issued non-plan/non-qualified options to
purchase 221,250 shares of common stock at prices ranging from $2.67 to $8.00
per share to five executives. The options are fully vested and remain
exercisable through February 2005.


<PAGE>

In January 1996, the Company adopted a Non-Employee Directors Option Plan.
During 1997, the Company decreased the number of shares reserved for issuance by
285,000. The Company has reserved 90,000 shares of common stock for issuance
under this Plan. 

During 1997, the Company adopted the Engineering Animation, Inc. 1997 
Non-Qualified Stock Option Plan providing for issuance of non-qualified 
options to employees based upon management discretion. The Company reserved 
600,000 shares of common stock for issuance under this plan.

A summary of common stock option activity, and related information for the years
ended December 31 follows:

<TABLE>
<CAPTION>

                                                    1997                      1996                     1995
                                                        WEIGHTED-                 WEIGHTED-                   WEIGHTED-
                                                         AVERAGE                   AVERAGE                    AVERAGE
                                                        EXERCISED                 EXERCISED                  EXERCISED
                                           OPTIONS       PRICE       OPTIONS        PRICE       OPTIONS        PRICE
<S>                                      <C>            <C>        <C>            <C>          <C>           <C>
Outstanding at beginning of year         2,049,353       $6.13      1,264,353      $ 2.27        888,452      $  1.32
Granted                                    386,043       19.99        808,265       12.07        432,794         4.10
Exercised                                 (153,329)       4.26         (4,158)       3.01              -            -
Forfeited                                 (131,355)      10.73        (19,107)       2.43        (56,892)        1.39
                                         ---------                  ---------                  ---------  
Outstanding at end of year               2,150,712       $8.45      2,049,353      $ 6.13      1,264,353        $2.27
                                         =========                  =========                  =========
Exercisable at end of year               1,138,793       $3.88        999,599      $ 2.48        887,000        $2.37
                                         =========                  =========                  =========
Weighted-average fair value of 
options granted during the year                          $6.98                     $ 4.52                      $   .35

</TABLE>


Exercise prices for options outstanding at December 31, 1997 are as follows:


<TABLE>
<CAPTION>

                                      NUMBER OF OPTIONS       RANGE OF EXERCISE
                                                                   PRICES
<S>                                   <C>                     <C>
                                           756,735            $  .003  - $ 1.33
                                           483,872               2.57  -   8.00
                                           715,758              10.67  -  19.92
                                           181,973              22.09  -  29.63
                                            12,374              30.25  -  31.50
                                        -----------
                                         2,150,712            $  .003  - $31.50
                                        ===========
</TABLE>

The weighted-average remaining contractual life of these options is ten years.

Pro forma information regarding net income and earnings per share is required 
by Statement 123, which also requires that the information be determined as 
if the Company has accounted for its employee stock options granted 
subsequent to December 31, 1994 under the fair value method of that 
Statement. The fair value for these options was estimated at the date of 
grant using the Black-Scholes option pricing model with the following 
weighted-average assumptions for 1997, 1996 

<PAGE>

and 1995, respectively: risk-free interest rates ranging from 5.7% to 6.2%; a 
dividend yield of 0.0%; volatility factors of the expected market price of 
the Company's common stock of .34, .40 and .01, and a weighted-average 
expected life of the option of four years.

The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense net of related pro forma tax benefits over the options'
vesting period. The Company's pro forma information follows:

<TABLE>
<CAPTION>
                                          1997         1996         1995
                                      -------------------------------------
<S>                                   <C>            <C>         <C>
Pro forma net income (loss)           $  (2,666)     $ 2,270     $  (1,920)
Pro forma earnings (loss) per share:
    Basic                             $   (0.30)     $  0.31     $   (0.40)
    Diluted                           $   (0.30)     $  0.26     $   (0.40)

</TABLE>

Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect is not representative of future pro
forma amounts.

11. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted earnings per
share, adjusted for the three-for-two stock split:

<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31
                                           ----------------------------------
                                              1997          1996       1995
                                           ------------------------------------
<S>                                        <C>           <C>         <C>
Numerator:

Net income (loss)                          $ (1,697)     $  2,567    $  (1,890)
                                           ====================================
Denominator:
Denominator  for  basic  earnings per
share - weighted average shares              8,770          7,432        4,805

Stock options                                    -          1,216            -
                                           ------------------------------------
Denominator  for diluted earnings per
share  -  adjusted  weighted  average

shares and assumed conversions               8,770          8,648        4,805
                                           ====================================

Basic earnings (loss) per share            $  (0.19)     $   0.35    $   (0.39)
                                           ====================================
Diluted earnings (loss) per share          $  (0.19)       $  0.30   $   (0.39)
                                           ====================================
</TABLE>


<PAGE>

12.  EMPLOYEE RETIREMENT PLAN 

The Company has a 401(k) plan which covers substantially all employees who meet
the minimum age requirement. The Company is required to match one-half of the
employee's contribution up to a maximum Company contribution of the first 4% of
the employee's compensation. Plan expense for 1997, 1996 and 1995 was
approximately $211, $130 and $58 respectively.

13. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:

NOTES RECEIVABLE--the carrying amount reported in the balance sheet for the note
receivable approximates its fair value as it carries a floating rate of
interest.

LONG-TERM DEBT--the carrying amounts reported in the balance sheet for the
Company's bank notes payable approximate their fair values as they bear variable
rates of interest. The Company believes that the municipal notes, issued to the
Company to encourage and facilitate expansion and increased employment,
approximate their fair values as they were negotiated and issued in the latter
half of 1997. The prime lending rate in 1997 approximated the rate in 1996 and,
accordingly, the fair value change would be immaterial.

14. MAJOR CUSTOMERS

One major customer accounted for 19% of revenues for 1997.  Two major customers
accounted for 26% of revenues in 1996. One major customer accounted for 10% of
revenues for 1995. 

15.  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table sets forth selected unaudited quarterly financial
information for 1997. The Company believes that all necessary adjustments have
been included in the amounts stated below to present fairly the selected
quarterly information.

<TABLE>
<CAPTION>

                                           THREE MONTHS ENDED                      YEAR ENDED
                          MARCH 31,      JUNE 30,    SEPTEMBER 30,  DECEMBER 31,   DECEMBER 31
                             1997          1997           1997         1997*          1997*
<S>                       <C>            <C>         <C>            <C>           <C>
Net revenues                  $ 9,699      $11,095      $13,559      $15,364        $49,717
Gross profit                    7,091        8,110       10,151       11,033        $36,385
Operating expenses              5,736        6,490        7,648       16,909        $36,783
Operating income (loss)         1,355        1,620        2,503       (5,876)       $  (398)
Net income (loss)                 906        1,199        1,890       (5,692)       $(1,697)
Earnings per share:                
   Basic                          .12          .15          .20        ( .59)         ( .19)
   Diluted                        .10          .13          .17        ( .59)         ( .19)
</TABLE>

*  Includes acquisition costs of $8,831 for write-off of in-process technology
   and transaction expenses, offset by the reversal of previously established 
   deferred tax valuation allowance of $975.

<PAGE>


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

     During 1997, there were no disagreements with the Company's independent
public accountants on accounting procedures or accounting and financial
disclosures.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                     DIRECTORS

     The Board of Directors of Engineering Animation, Inc. consists of five 
directors, divided into three classes. At the 1998 Annual Meeting of 
Stockholders, two nominees are to be elected, with each director to serve 
for a term of three years or until his successor is duly elected and 
qualified. The remaining three directors will continue to serve as set forth 
below, with two directors having terms expiring on the date of the annual 
meeting to be held in 1999 and one director having a term expiring on the 
date of the annual meeting to be held in 2000. The nominees, Martin J. 
Vanderploeg and Laurence J. Kirshbaum, are currently directors of the 
Company. 

     The following sets forth with respect to the nominees and each director
continuing to serve, their names, ages, principal occupations and other
information, based upon information received from them. 
                                          
        NOMINEES FOR ELECTION TO THE BOARD OF DIRECTORS FOR THREE-YEAR TERMS
                 EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 2001

MARTIN J. VANDERPLOEG, Ph.D., 41.  (Director since 1988). Dr. Vanderploeg
co-founded the Company in 1988. He has served as Executive Vice President since
October 1993 and as the Company's Secretary from June 1990 until November 1995.
Dr. Vanderploeg's prior experience includes serving as a faculty member in
mechanical engineering at Iowa State University and performing contract research
for a number of large corporations. Dr. Vanderploeg earned a Ph.D. in Mechanical
Engineering from Michigan State University and is a licensed Professional
Engineer. 

LAURENCE J. KIRSHBAUM, 53.  (Director since 1995). Mr. Kirshbaum has been
Chairman of Time Warner Trade Publishing since 1997 and was previously President
and CEO of Warner Books


<PAGE>

Inc., a subsidiary of Time Warner Inc., since 1984. Mr. Kirshbaum earned a B.A.
from the University of Michigan. 

         MEMBERS OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE WITH TERMS
                 EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 1999

MATTHEW M. RIZAI, Ph.D., 41.  (Director since 1990). Dr. Rizai has been
Chairman, Chief Executive Officer, President and a director of the Company since
joining the Company in June 1990 and has been Treasurer since November 1995.
Dr. Rizai's prior experience includes serving as: associate with a venture
capital firm; senior research engineer with General Motors Corporation; and
development engineer with Ford Motor Company. Dr. Rizai earned a Ph.D. in
Mechanical Engineering from Michigan State University and an M.B.A. from the
University of Chicago. 

MICHAEL CROW, PH.D., 42.  (Director since 1991). Dr. Crow has been Vice Provost
at Columbia University since August 1991. Dr. Crow served as the Director of the
Institute for Physical Research and Technology and the Office of Science Policy
and Research at Iowa State University from July 1985 to June 1991. Dr. Crow
earned a Ph.D. in Public Administration (Science and Technology Policy) from
Syracuse University. 


         MEMBER OF THE BOARD OF DIRECTORS CONTINUING IN OFFICE WITH A TERM
                 EXPIRING AT THE ANNUAL MEETING TO BE HELD IN 2000

JAMIE A. WADE, 49.  (Director since 1995). Mr. Wade has served as Vice President
of Administration and General Counsel to the Company since June 1994 and
Secretary since November 1995. From 1983 to 1994, Mr. Wade was a partner with
Davis, Hockenberg, Wine, Brown, Koehn & Shors, P.C., a Des Moines law firm.
Mr. Wade earned a J.D. from Drake University Law School and a B.A. from Drake
University College of Business. 


<PAGE>

                        EXECUTIVE OFFICERS AND KEY EMPLOYEES

     Following is certain information concerning the executive officers and
certain other key employees of Engineering Animation, Inc., based on information
furnished by them.

EXECUTIVE OFFICERS

MATTHEW M. RIZAI, PH.D., 41
Chairman, Chief Executive Officer, President and Treasurer

     Dr. Rizai has been Chairman, Chief Executive Officer, President and a
director of the Company since joining the Company in June 1990 and has been
Treasurer since November 1995. Dr. Rizai's prior experience includes serving as:
associate with a venture capital firm; senior research engineer with General
Motors Corporation; and development engineer with Ford Motor Company. Dr. Rizai
earned a Ph.D. in Mechanical Engineering from Michigan State University and an
M.B.A. from the University of Chicago.

MARTIN J. VANDERPLOEG, PH.D., 41
Executive Vice President and Director

     Dr. Vanderploeg has served as a director since co-founding the Company in
1988, as Executive Vice President since October 1993 and as the Company's
Secretary from June 1990 until November 1995. Dr. Vanderploeg's prior experience
includes serving as a faculty member in mechanical engineering at Iowa State
University and performing contract research for a number of large corporations.
Dr. Vanderploeg earned a Ph.D. in Mechanical Engineering from Michigan State
University and is a licensed Professional Engineer.

JAMIE A. WADE, 49
Vice President of Administration, General Counsel, Secretary and Director

     Mr. Wade has served as Vice President of Administration and General Counsel
to the Company since June 1994 and Secretary since November 1995. From 1983 to
1994, Mr. Wade was a partner with Davis, Hockenberg, Wine, Brown, Koehn & Shors,
P.C., a Des Moines law


<PAGE>

firm. Mr. Wade earned a J.D. from Drake University Law School and a B.A. from 
Drake University College of Business.

JEROME M. BEHAR, 40
Vice President of Finance and Chief Financial Officer

     Mr. Behar has served as Vice President of Finance and Chief Financial
Officer since August 1997.  Prior to joining the Company in May 1997, Mr. Behar
had served since April 1996 as director of finance at MagiNet Corporation, a
Silcon-Valley based, international supplier of on-demand video systems.  Mr.
Behar's prior experience includes serving as vice president of finance and
administration at Western Lodging Corporation from September 1994 to April 1996
and as controller of Matrix Pharmaceutical, Inc. from March 1992 to September
1994.  Executive and management positions were held at International Risk
Control, Inc. and the Cooper Companies, Inc.  Mr. Behar is a Certified Public
Accountant.  He earned an M.B.A. from Stanford University and a B.A. in business
administration from Michigan State University.

JAY E. SHANNAN, PH.D., 35
Vice President of Operations

     Dr. Shannan is a co-founder of the Company and has served as Vice President
of Operations since June 1990. Dr. Shannan earned a Ph.D. in Mechanical
Engineering from Iowa State University.

JEFF D. TROM, PH.D., 37
Vice President of Software Development

     Dr. Trom is a co-founder of the Company and has served as Vice President of
Software Development since June 1990. Dr. Trom served as the Company's Treasurer
from June 1990 to November 1995. Dr. Trom earned a Ph.D. in Mechanical
Engineering from Iowa State University.

MICHAEL J. JABLO, 45
Vice President, Co-General Manager Software Division

     Mr. Jablo has served in his current capacity since joining the Company in
October 1995. From January 1990 to October 1995 Mr. Jablo was employed by Mentor
Graphics Corporation where he ultimately served as North Central area sales
manager. Mr. Jablo earned an M.B.A. from the University of Detroit as well as a
B.S. in Mechanical Engineering and a B.S. in Business Management from Bradley
University.

ADRIAN SANNIER, PH.D., 36
Vice President and General Manager, Interactive Division

     Dr. Sannier has served as Vice President of Interactive Production since
February 1997 and prior to that served as the Company's Vice President of New
Product Development since 


<PAGE>

February 1996. From 1990 until joining the Company, Dr. Sannier was employed 
in a variety of positions by CIMLINC Incorporated, a provider of business 
process execution software to the aerospace industry and heavy equipment 
manufacturers, most recently as Vice President, Product Development. Dr. 
Sannier earned a Ph.D. and a B.S. in Electrical Engineering and Systems 
Science from Michigan State University.

PATRICIA F. JOHNSON, 46
Vice President of Human Resources

     Ms. Johnson has served as Vice President of Human Resources since
December 1997.  Prior to joining EAI, Ms. Johnson worked at Disney Feature
Animation, where she was director of human resources for three years. Ms.
Johnson has also served as director of human resources for NBC Entertainment,
and worked twelve years for Digital Equipment Corporation in various human
resources management roles.  She holds a B.A. from University of Northern
Colorado, Greeley.

MICHAEL N. BARRY, 54
Vice President, Co-General Manager Software Division

     Mr. Barry has served as Vice President, Co-General Manager Software
Division since joining the Company in November 1997 upon the Company's
acquisition of Rosetta Technologies, Inc. ("Rosetta").  Mr. Barry had served as
President of Rosetta since co-founding that company in February 1986.  Mr. Barry
has also worked at Computervision in several senior management positions.

OTHER KEY EMPLOYEES

KENNETH VARTANIAN, 51
Vice President of North American Sales

     Mr. Vartanian has served as Vice President of North American Sales since 
the Company's acquisition of Rosetta in November 1997.  Mr. Vartanian had 
served as vice president of marketing of Rosetta since January 1993 and was a 
co-founder of Rosetta.  Mr. Vartanian has also served as director of 
marketing for Computervision.  Mr. Vartanian holds a M.B.A. from Northeastern 
University.

JAMES L. RYAN, 42
Vice President of Marketing

     Mr. Ryan has served as Vice President of Marketing since the Company's
acquisition of Rosetta in November 1997.  Mr. Ryan had served as the Vice
President of Services of Rosetta since July 1997.  Mr. Ryan also served as
director of IBM's Worldwide Product Data Management Solutions from January 1993
to September 1997.

<PAGE>

GUIDO T. PERSCH, PH.D., 43
Vice President of Engineering Software

     Dr. Persch has served as Vice President of Engineering Software since the
Company's acquisition of Rosetta in November 1997.  Dr. Persch had been Vice
President of Engineering and led the Rosetta product development organizations
since January 1994.  Dr. Persch has also held senior development management
positions at Cadre Technologies from January 1993 to December 1993 and prior to
that at Software AG and Siemens/Intel.  Dr. Persch holds a Ph.D. in Computer
Science from University of Karlsruhe, Germany.

                         SECTION 16(a) BENEFICIAL OWNERSHIP
                                REPORTING COMPLIANCE

     Section 16(a) of the Exchange Act requires that the Company's executive
officers, directors and beneficial owners of 10% or more of the Company's Common
Stock file initial reports of ownership and of changes of ownership with the
Securities and Exchange Commission and Nasdaq. Executive officers, directors and
10% beneficial owners are required by securities regulations to furnish the
Company with copies of all Section 16(a) forms they file. 

     Due to a clerical error, the Form 5's filed by Drs. Rizai, Vanderploeg,
Shannan and Trom and Messrs. Wade, Jablo and Sannier with respect to the year
ended December 31, 1996, each understated the number of shares subject to
options granted in 1996.  This misstatement was corrected on the Form 5's filed
by these individuals with respect to the year ended December 31, 1997.  Based
solely on a review of the copies of Section 16(a) forms furnished to the Company
and written representations from the Company's executive officers and directors,
the Company believes that all other filing requirements were met during fiscal
year 1997.


<PAGE>

ITEM 11. EXECUTIVE COMPENSATION 

                               EXECUTIVE COMPENSATION

     The following table summarizes the compensation paid to or earned by the
Named Executive Officers for the fiscal year ended December 31, 1997 and each of
the previous two fiscal years. 

                             SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                                                                 LONG TERM
                                                                                                COMPENSATION
                                                                                                 NUMBER OF
                                                                                                 SECURITIES
                                                            ANNUAL COMPENSATION                  UNDERLYING           ALL OTHER
 NAME AND PRINCIPAL POSITION                    YEAR         SALARY ($)       BONUS ($)            OPTIONS         COMPENSATION ($)
<S>                                             <C>          <C>              <C>               <C>                <C>
 Matthew M. Rizai                               1997           235,000        28,000(1)               -              6,404(2)
   Chief Executive Officer,                     1996           180,000             -             60,000              5,805(2)
   President and Treasurer                      1995           150,000        70,000            105,000             14,623(2)

 Martin J. Vanderploeg                          1997           235,000        28,000(1)               -              6,404(3)
   Executive Vice President                     1996           180,000             -             60,000              5,683(3)
                                                1995           150,000        75,000            105,000              3,000(3)

 Michael J. Jablo                               1997           363,777(4)          -(1)               -              2,398(5)
   Vice President of Software                   1996           170,776(4)     25,000             18,000              2,308(5)
   Sales and Marketing                          1995            35,873(4)          -             56,250                  -


 Jamie A. Wade                                  1997           140,000         6,000(1)               -              1,694(6)
   Vice President of Administration,            1996           120,000         6,000             16,500              1,740(6)
   General Counsel and Secretary                1995            90,000        25,000             19,500                450(6)


 Patricia F. Johnson                            1997           109,583        25,000(1)(7)               -             25,364(8)
   Vice President of Human Resources


</TABLE>
-------------
(1)  The Named Executive Officers also received the following bonuses on
     January 31, 1998:  Dr. Rizai $205,000, Dr. Vanderploeg $205,000, Mr. Jablo
     $75,000, Mr. Wade $30,000 and Ms. Johnson, $30,000.

(2)  Consists of $1,470 and $2,205 of premiums on a life insurance policy
     paid in 1997 and 1996, respectively, $11,395 paid in lieu of vacation in
     1995 and $4,934, $3,600 and $3,228 of matching contributions by the 
     Company to the Engineering Animation, Inc. Retirement Plan made in 1997, 
     1996 and 1995, respectively. 

(3)  Consists of $1,470 and  $2,083 of premiums on a life insurance policy
     paid in 1997 and 1996 and $4,934, $3,600 and $3,000 of matching 
     contributions by the Company to the Engineering Animation, Inc. Retirement
     Plan made in 1997, 1996 and 1995, respectively. 

(4)  Includes $223,777, $64,776 and $15,000 in sales commissions in 1997,
     1996 and 1995, respectively. 

(5)  Consists of $160 and $309 of premiums on a life insurance policy paid
     in 1997 and 1996, respectively, and $2,238 and $1,999 of matching 
     contributions by the Company to the Engineering Animation, Inc. Retirement
     Plan made in 1997 and 1996, respectively. 


<PAGE>

(6)  Consists of $234 and $480 of premiums on a life insurance policy paid
     in 1997 and 1996, respectively and $1,460 and $1,260 and $450 of matching
     contributions by the Company to the Engineering Animation, Inc. Retirement
     Plan made in 1997, 1996 and 1995, respectively. 

(7)  Consists of a signing bonus paid to Ms. Johnson upon her joining the
     Company.

(8)  Consists of expenses incurred by Ms. Johnson in connection with
     relocating to Iowa, which expenses were reimbursed by the Company.


                               OPTION GRANTS IN 1997

     None of the Named Executive Officers received option grants for the fiscal
year ended December 31, 1997.

                            1997 YEAR-END OPTION VALUES

     The following table provides information regarding stock options held by
the Named Executive Officers as of December 31, 1997.

<TABLE>
<CAPTION>

                                                               NUMBER OF UNEXERCISED                VALUE OF UNEXERCISED
                             SHARES                             OPTIONS AT FISCAL             IN-THE-MONEY OPTIONS AT FISCAL
                            ACQUIRED          VALUE                 YEAR-END (#)                       YEAR-END ($)(1)
 NAME                     ON EXERCISE (#)   REALIZED ($)    EXERCISABLE    UNEXERCISABLE      EXERCISABLE       UNEXERCISABLE
<S>                       <C>               <C>             <C>            <C>                <C>               <C>
Matthew M. Rizai                 -                -            399,516          54,000         11,076,636           976,500
Martin J.  Vanderploeg           -                -            399,516          54,000         11,076,636           976,500
Michael J. Jablo                 -                -             38,250          36,000          1,018,500           845,250
Jamie A. Wade                7,500          222,500             23,944          27,055            646,822           690,678
Patricia F. Johnson              -                -              6,000          24,000             95,000           380,000

</TABLE>
---------------
(1)  Value is calculated by subtracting the exercise price per share from
     the last reported market price at December 31, 1997 and multiplying the
     result by the number of shares subject to the option. 

                       EMPLOYMENT AND SEVERANCE ARRANGEMENTS

     The Company entered into employment agreements with Dr. Rizai,
Dr. Vanderploeg and Mr. Wade as of January 1, 1996, each of which expire on
December 31, 1999. Dr. Rizai's agreement provides that he will be employed as
the Company's Chairman, Chief Executive Officer and President at an annual
salary of $180,000. Dr. Vanderploeg's agreement provides that he will be
employed as the Company's Executive Vice President at an annual salary of
$180,000. Mr. Wade's agreement provides that he will be employed as the
Company's Vice President of Administration, General Counsel and Secretary at an
annual salary of $120,000. Each of the agreements provides that the base salary
will be reviewed annually and that the executive will receive an annual
performance bonus as determined by the Board of Directors and, for Dr. Rizai


<PAGE>

and Dr. Vanderploeg, a car allowance. The employment agreements also include
certain non-competition and confidentiality provisions. 

     The Company has also entered into severance agreements with each of
Dr. Rizai, Dr. Vanderploeg and Mr. Wade, each dated as of the effective date of
the respective officer's employment agreement. The severance agreements provide
for payment of a lump sum equal to two times the sum of the employee's base
salary and the bonus paid to the employee in the prior year for Dr. Rizai and
Dr. Vanderploeg (one times that sum for Mr. Wade) and continuation of benefits
for two years (one year in the case of Mr. Wade) upon (i) termination of
employment by the Company without cause, (ii) termination of employment by the
employee for good reason (including change in control of the Company),
(iii) death or (iv) permanent disability. The Company may terminate the
employment of the executive at any time for cause without the payment of
severance. The agreements with Dr. Rizai and Dr. Vanderploeg also provide that,
upon termination by the Company without cause or by the executive for good
reason, the Company upon demand by the executive would be required to file a
registration statement for all shares of Common Stock that the executive then
owned or had the right to acquire upon exercise of options then held and would
be required to include any such shares in any other registration statement filed
by the Company. 

     The Company entered into an employment agreement with Mr. Jablo as of
September 18, 1995 that terminates (i) by mutual agreement of the Company and
Mr. Jablo, (ii) upon Mr. Jablo's death or disability, (iii) at the option of the
Company for cause or (iv) upon the dissolution or bankruptcy of the Company.
This agreement provides that Mr. Jablo will be employed as the Company's Vice
President of Sales and Marketing at an initial annual salary of $106,000 per
year and a car allowance. In addition to base salary, the agreement provides for
the payment of commissions on sales of the Company's 3D visualization software
products at rates established by the Company's President to Mr. Jablo.  The
agreement also contains certain non-competition and confidentiality provisions.
Mr. Jablo's employment agreement contains severance provisions that require the
payment by the Company to Mr. Jablo of (i) an amount equal to the total
compensation paid to Mr. Jablo during the first year of the agreement if the
agreement were terminated following a merger, sale or change of control of the
Company and (ii) an amount equal to one-half of the total compensation paid to
Mr. Jablo during the first year of the agreement if the agreement were
terminated for cause (as defined in the agreement) by the Company after the
first anniversary of the agreement.

                               DIRECTOR COMPENSATION

     Directors who are not currently officers or employees of the Company
receive a yearly retainer fee of $20,000 plus $1,000 and reimbursement of
expenses for attending each meeting of the Board of Directors and each meeting
of any committee.

     The Company's directors who are not employees of the Company are eligible
to participate in the Company's Non-Employee Directors Stock Option Plan (the
"Director Option Plan"). The Director Option Plan is administered by the
Chairman of the Board of Directors along with other employee directors, if any,
selected by the Chairman. Pursuant to the Director 


<PAGE>

Option Plan, non-employee directors of the Company will receive initial 
options to purchase 7,500 shares of Common Stock in the year that they join 
the Board and options to purchase an additional 3,750 shares of Common Stock 
for each subsequent year of service. The exercise price of the options is the 
fair market value of the Company's Common Stock on the date of grant. The 
initial stock options granted under the Director Option Plan vest over four 
years and subsequent options vest upon grant.  All such options have a term 
of 10 years and may not be transferred other than by will or by the laws of 
descent and distribution. 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The following table sets forth certain information regarding the beneficial
ownership of the shares of the Company's Common Stock as of February 27, 1998 by
(i) each person known by the Company to beneficially own more than 5% of the
Company's Common Stock, (ii) each director and nominee for director, (iii) the
Chief Executive Officer and the four next most highly compensated executive
officers of the Company (together, the "Named Executive Officers") and (iv) by
all directors, nominees for director and executive officers of the Company as a
group. 

<TABLE>
<CAPTION>

                                                          SHARES       PERCENTAGE
                                                       BENEFICIALLY    BENEFICIALLY
 NAMED EXECUTIVE OFFICERS AND DIRECTORS                   OWNED          OWNED (1)
<S>                                                   <C>             <C>
 Matthew M. Rizai (2)                                       867,154        8.45%
 Martin J. Vanderploeg (3)                                  867,154        8.45%
 Michael Crow (4)                                            75,498         *
 Michael J. Jablo (5)                                        41,250         *
 Jamie A. Wade (6)                                           39,793         *
 Laurence J. Kirshbaum (7)                                    8,625         *
 Patricia F. Johnson (7)                                      6,000         *
 All directors and executive officers as a group (12      3,068,976       28.36%
 persons)  


 OTHER 5% STOCKHOLDERS
 Jeff D. Trom (8)                                           652,776        6.61%
 AMVESCAP PLC (9)                                           631,800        6.41%
 FMR Corp. (10)                                             624,450        6.33%
 Dresdner RCM Global Investors LLC (11)                     577,500        5.86%

</TABLE>

--------------

*   Less than one percent. 

(1)  Except as indicated in the footnotes to this table and subject to
     applicable community property laws, the persons named in this table have
     sole voting and investment power with respect to all shares beneficially
     owned by them. The number of shares shown as owned by, and the voting power
     of, individual stockholders includes shares that are not currently
     outstanding, but that such stockholders are entitled to acquire or will be
     entitled to acquire within 60 days. Such shares are deemed to be
     outstanding for the purpose of computing the percentage of outstanding
     Common Stock owned by the particular 


<PAGE>

     stockholder, but are not deemed to be outstanding for the purpose of 
     computing the percentage ownership of any other person. 

(2)  Consists of 467,638 shares held by the Matthew Rizai Family Limited
     Partnership and 399,516 shares issuable upon exercise of vested options and
     options that will vest within 60 days. Dr. Rizai's address is c/o
     Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010. 

(3)  Includes 399,516 shares issuable upon exercise of vested options and
     options that will vest within 60 days. Dr. Vanderploeg's address is c/o
     Engineering Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010. 

(4)  Includes 18,375 shares issuable upon exercise of vested options and options
     that will vest within 60 days.

(5)  Includes 38,250 shares issuable upon exercise of vested options and options
     that will vest within 60 days.

(6)  Consists of 6,249 shares held in Mr. Wade's individual Retirement Account
     and 26,044 shares issuable upon exercise of vested options and options that
     will vest within 60 days.

(7)  Consists of shares issuable upon exercise of vested options and options
     that will vest within 60 days.

(8)  Includes 18,375 shares issuable upon exercise of vested options and options
     that will vest within 60 days. Dr. Trom's address is c/o Engineering
     Animation, Inc., 2321 North Loop Drive, Ames, Iowa 50010. 

(9)  Information provided in a Schedule 13G filed by AMVESCAP PLC ("AMVESCAP")
     on February 11, 1998. AMVESCAP has shared voting and dispositive power with
     respect to 631,800 shares. The Schedule 13G indicates that the shares are
     held by AVZ, Inc.; AIM Management Group, Inc; AMVESCAP Group Services,
     Inc.; INVESCO, Inc. and INVESCO North American Holdings, Inc., subsidiaries
     of AMVESCAP. AMVESCAP's address is Devonshire Square, London EC2M 4YR,
     England 

(10) Information provided in a Schedule 13G filed on February 10, 1998 by FMR
     Corp. ("FMR").  FMR has sole voting and dispositive power with respect to
     624,450 shares.  The shares are held by FMR's subsidiary, Fidelity
     Management and Research Company.  FMR's address is 82 Devonshire Street,
     Boston, Massachusetts 02109.

(11) Information provided in a Schedule 13G filed on February 6, 1998 by
     Dresdner RCM Global Investors LLC ("Dresdner").  Dresdner has sole voting
     power with respect to 513,750 shares and sole dispositive power with
     respect to 577,500 shares. RCM Limited L.P. ("RCM") is the Managing Agent
     of Dresdner. RCM General Corporation is the 


<PAGE>

     General Partner of RCM. Dresdner's address is 4 Embarcadero Center, 
     Suite 3000, San Francisco, California 94111. 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.


<PAGE>

                                      PART IV

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

(a)(1)    Financial Statements 

          The following consolidated financial statements of Engineering 
          Animation, Inc. and its subsidiaries are included in Part II of
          this report:
<TABLE>
<CAPTION>
                                                                         PAGE
<S>                                                                   <C>
          Report of Ernst & Young LLP                                      32

          Report of Arthur Andersen LLP                                    33
     
          Consolidated Balance Sheets - December 31, 1997 and 1996         34
     
          Consolidated Statements of Operations - years ended 
          December 31, 1997, 1996 and 1995                                 35

          Consolidated Statements of Stockholders' Equity - years
          ended December 31, 1997, 1996 and 1995                           36

          Consolidated Statements of Cash Flows - years ended 
          December 31, 1997, 1996 and 1995                                 37

          Notes to Consolidated Financial Statements                       38

</TABLE>

(a)(2)    Financial Statement Schedule

          None.

(a)(3)    List of Exhibits: 

<TABLE>
<CAPTION>
          Exhibit
          Number    Description 
          --------  ------------
<S>                 <C>
          2.1       Amended and Restated Agreement and Plan of Merger among
                    the Company, COHO, Inc. and Cimtech, Inc**

          2.2       Amended and Restated Agreement and Plan of Merger among
                    the Company, Shell Beaver, L.L.C. and Technology Company
                    Ventures, Inc**

          2.3       Amended and Restated Agreement and Plan of Merger among
                    the Company, Transitory Beaver, Inc. and Rosetta 
                    Technologies, Inc.**

          3.1       Certificate of Incorporation*

          3.2       By-laws*

          4.1       Specimen Common Stock Certificate*

          4.2       Rights Agreement between the Company and First Chicago Trust
                    Company of New York, dated as of January 1, 1996*
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

<S>                 <C>
          10.1      Amended and Restated 1994 Stock Option Plan+*

          10.2      Non-Employee Directors Stock Option Plan+*

          10.3      1997 Non-Qualified Stock Option Plan+***

          10.4      Employment and Severance Agreements by and between the
                    Company and Matthew M. Rizai, dated as of January 1, 1996+*

          10.5      Employment and Severance Agreements by and between the
                    Company and Martin J. Vanderploeg, dated as of January 1,
                    1996+*

          10.6      Employment and Severance Agreements by and between the
                    Company and Jamie A. Wade, dated as of January 1, 1996+*

          10.7      Employment and Severance Agreements by and between the
                    Company and Jay E. Shannan, dated as of January 1, 1996+*

          10.8      Employment and Severance Agreements by and between the
                    Company and Jeff D. Trom, dated as of January 1, 1996+*

          10.9      Employment Agreement by and between the Company and Michael
                    J. Jablo, dated as of September 18, 1995+*

          10.10     Option Agreement by and between the Company and Matthew M.
                    Rizai, dated June 9, 1994+*

          10.11     Option Agreement by and between the Company and Martin J.
                    Vanderploeg, dated June 9, 1994+*

          10.12     Option Agreement by and between the Company and Matthew M.
                    Rizai, dated as of February 11, 1995+*

          10.13     Option Agreement by and between the Company and Martin J.
                    Vanderploeg, dated February 11, 1995+*

          10.14     Option Agreement by and between the Company and Jay E.
                    Shannan, dated February 11, 1995+*

          10.15     Option Agreement by and between the Company and Jeff D.
                    Trom, dated February 11, 1995+*

          10.16     Option Agreement by and between the Company and Jamie A.
                    Wade, dated February 11, 1995+*
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

<S>                 <C>
          10.17     Ground Lease Agreement between Iowa State University
                    Research Park Corporation and the Company, dated June 1,
                    1995*

          10.18     Mortgage between CRE, Inc. and the Company, dated June 29,
                    1995*

          10.19     Lease Assignment and Agreement between CRE, Inc. and the
                    Company, dated June 14, 1995*

          10.20     Lease Agreement between CRE, Inc. and the Company, dated
                    June 14, 1995*

          10.21     Work for hire Contracts between Wm. C. Brown Publishers, a
                    division of Wm. C. Brown Communication, Inc. and the
                    Company, dated November 14, 1994, as amended by Addendum
                    dated December 21, 1995*

          10.22     Publishing Agreement between Mosby-Year Book, Inc. and the
                    Company, dated November 1, 1995*

          10.23     Design and Development Agreement between Warner Books, Inc.
                    and the Company, dated July 17, 1995*

          10.24     Distribution Agreement between SDRC Operations, Inc. and the
                    Company, dated December 29, 1995*

          10.25     License Agreement between the Company and Iowa State
                    University Research Foundation, dated July 30, 1990, as
                    amended on November 15, 1993*

          10.26     Employment Agreement by and between the Company and Michael
                    Barry, dated as of November 26, 1997+

          10.27     Employment Agreement by and between the Company and 
                    Patricia F. Johnson, dated as of December 26,
                    1996+

          10.28     Employment Agreement by and between the Company and 
                    Jerome M. Behar, dated as of May 2, 1997+

          10.29     Employment Agreement by and between the Company and 
                    Adrian Sannier, dated as of January 18, 1996+

          21.1      Subsidiaries of the Company

          23.1      Consent of Ernst & Young LLP

          23.2      Consent of Arthur Andersen LLP

          27.1      Financial Data Schedule

</TABLE>


<PAGE>

-----------------
+         Denotes compensatory plan.
*         Incorporated herein by reference from the Company's Registration
          Statement on Form S-1, SEC file no. 33-80705.
**        Incorporated herein by reference from the Company's Current Report
          on Form 8-K filed December 10, 1997.
***       Incorporated herein by reference from the Company's Quarterly Report
          on Form 10-Q for the quarter ended September 30, 1997.


          
(b)   Form 8-K

      Form 8-K filed December 10, 1997 relating to the Company's acquisition 
      of Cimtech, Rosetta and TCV. Included Item 2 and Item 7. Financial 
      statements filed included: (i) Unaudited Pro Forma Combined Financial 
      Statement of the Company, Cimtech, TCV and Rosetta, (ii) Cimtech 
      Financial Statements, (iii) TCV Financial Statements, and (iv) Rosetta 
      Financial Statements.


<PAGE>

                                     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 March 11, 1998.

                                               ENGINEERING ANIMATION, INC.

                                               By:    /s/  Jamie A. Wade 
                                                    ----------------------
                                                     Jamie A. Wade
                                                     Vice President of 
                                                     Administration, General
                                                     Counsel, Secretary and
                                                     Director


          Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 11, 1998 by the following persons on
behalf of the Registrant in the capacities indicated.



                     SIGNATURE                               TITLE

   /s/     Matthew M. Rizai                    Chairman, Chief Executive
  ------------------------------------         Officer, President, Treasurer and
           Matthew M. Rizai                    Director (Principal Executive 
                                               Officer)

   /s/     Martin J. Vanderploeg               Executive Vice President and
   -----------------------------------         Director
           Martin J. Vanderploeg

   /s/     Jerome M. Behar                     Vice President of Finance
   -----------------------------------         (Principal Financial and 
           Jerome M. Behar                     Accounting Officer)

   /s/     Jamie A. Wade                       Vice President of
   -----------------------------------         Administration, General Counsel,
           Jamie A. Wade                       Secretary and Director


   /s/     Michael Crow                        Director
   ----------------------------------                  
           Michael Crow

   /s/     Lawrence J. Kirshbaum               Director
   ----------------------------------
           Lawrence J. Kirshbaum


<PAGE>

                             INDEX TO EXHIBITS


EXHIBIT
NUMBER                   DESCRIPTION

10.26               Employment Agreement by and between the Company and
                    Michael Barry, dated as of November 26, 1997

10.27               Employment Agreement by and between the Company and
                    Patricia F. Johnson, dated as of December 26, 1996

10.28               Employment Agreement by and between the Company and
                    Jerome M. Behar, dated as of May 2, 1997

10.29               Employment Agreement by and between the Company and 
                    Adrian Sannier, dated as of January 18, 1996

21.1                Subsidiaries of the Company

23.1                Consent of Ernst & Young LLP

23.2                Consent of Arthur Andersen LLP

27.1                Financial Data Schedule