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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                  FORM 10-K/A-2

(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 of                      (I.R.S. Employer  
Incorporation or Organization)                      Identification No.)
                                                    
                     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 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


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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. 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


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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 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


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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 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


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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 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


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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

     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


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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: 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


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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 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


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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 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


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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.

     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.


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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 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


                                     12


<PAGE>   13


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 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 several of its trademarks and is in the process of registering
several other trademarks. The


                                     13


<PAGE>   14



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.


                                     14


<PAGE>   15



ITEM 3. LEGAL PROCEEDINGS

     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



                                     15



<PAGE>   16
 


                                    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.


<TABLE>
<CAPTION>
                                                            High         Low
                                                         ---------    ---------
<S>                                                      <C>          <C>
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
</TABLE>


     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 issued in connection with the acquisition of Cimtech.
The issuance of Common Stock in connection with the acquisition of Cimtech was
exempt from registration under the Securities Act of 1933 as amended
("Securities Act") by virtue


                                     16


<PAGE>   17



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. ("Ventures"), an Oregon
limited liability company and the holder of approximately 68% of the outstanding
common stock of Rosetta, 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".


                                     17



<PAGE>   18



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>
                                           RESTATED         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                             12,276       6,940       3,100       1,790         821
                                           --------------------------------------------------------
Gross profit                                 37,441      20,249       9,149       4,534       2,443

Operating expenses:
Sales and marketing                          15,406       9,799       3,573       2,068         881
General and administrative                    6,457       3,316       2,276       1,191         711
Research and development                      7,068       3,438       1,992       1,007         645
Acquisition costs                             5,057          62       2,520          --          --
                                           --------------------------------------------------------
Total operating expenses                     33,988      16,615      10,361       4,266       2,237
                                           --------------------------------------------------------
Income (loss) from operations                 3,453       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 interest                             4,975       4,621      (1,370)        195         196
Income taxes                                  2,772       1,744         392          92          87
                                           --------------------------------------------------------
Income (loss) before minority interest        2,203       2,877      (1,762)        103         109
Minority interest                               (49)       (310)       (128)         --          --
                                           --------------------------------------------------------
Net income (loss)                          $  2,154    $  2,567    $ (1,890)   $    103    $    109
                                           ========================================================
Basic earnings (loss) per share            $    .25    $    .35    $   (.39)   $    .02    $    .02
Diluted earnings (loss) per share          $    .21    $    .30    $   (.39)   $    .02    $    .02

<CAPTION>
                                           RESTATED            At December 31,
                                             1997      1996       1995     1994     1993
                                                               in thousands
                                           --------------------------------------------------
<S>                                         <C>       <C>       <C>       <C>       <C>   
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                                 85,051    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                         72,182    34,628     2,942     1,801     1,743   
</TABLE> 
                                           


                                      18


<PAGE>   19



     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.

     The data pertaining to 1997 has been restated from what was previously
reported due to a modification of the methods used to value the in-process
research and development written off in connection with the acquisition of
Rosetta Technologies, Inc. See Note 16 to the consolidated financial statements
for additional information.

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.

     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.


                                      19


<PAGE>   20


     The Company has historically evaluated acquisition opportunities, 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.

RESTATEMENT

     The Company has restated its 1997 financial statements to reflect the
modification of methods used to value acquired in-process research and
development recorded and written off in connection with the Company's November,
1997 acquisition of Rosetta Technologies, Inc. The revised calculations of the
value of the acquired in-process technology are based on adjusted after-tax cash
flows that gives explicit consideration to the

                                      20


<PAGE>   21
SEC Staff's views on in-process research and development as set forth in its
September 9, 1998 letter to the American Institute of Certified Public
Accountants.

     The in-process research and development charge was reduced from $5.6
million to $1.7 million resulting in an increase to intangible assets of $3.9
million. As a result, an additional amortization expense of $63,000 was recorded
during the fourth quarter of 1997.


NET REVENUES

<TABLE>
<CAPTION>

(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.

COST OF REVENUES

<TABLE>
<CAPTION>
(in thousands)           1997     Change     1996     Change     1995
-------------------------------------------------------------------------
<S>                     <C>       <C>      <C>        <C>       <C>
Expense                 $12,276    77%     $ 6,940     124%     $ 3,100
=========================================================================

As a percentage of
net revenues                25%                26%                  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 77% to $12.3 million from $6.9 million for
1996, primarily due


                                      21


<PAGE>   22
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 was 25% for 1997 and 26% for 1996.

     Cost of revenues for 1996 increased 124% to $6.9 million from $3.1 million
for 1995. Cost of revenues was 26% 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.

SALES AND MARKETING

<TABLE>
<CAPTION>
(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.

GENERAL AND ADMINISTRATIVE

<TABLE>
<CAPTION>

(in thousands)                1997     Change     1996     Change     1995
-----------------------------------------------------------------------------
<S>                          <C>        <C>      <C>         <C>     <C>   
Expense                      $6,457     95%      $3,316      46%     $2,276
=============================================================================

As a percentage of
net revenues                    13%                 12%                 19%
</TABLE>


                                      22


<PAGE>   23
     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 95% to $6.5
million from $3.3 million for 1996, primarily as a result of increased general
and administrative staff and related costs. General and administrative expenses
were 13% of revenues for 1997 and 12% of revenues for 1996.

     General and administrative expenses for 1996 increased 46% to $3.3 million
from $2.3 million for 1995. General and administrative expenses were 12% 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.

RESEARCH AND DEVELOPMENT

<TABLE>
<CAPTION>

(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.

     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.

ACQUISITION COSTS

<TABLE>
<CAPTION>
(in thousands)             1997      Change      1996     Change    1995
----------------------------------------------------------------------------
<S>                       <C>         <C>        <C>      <C>       <C>
Expense                   $5,057      N/M        $62      N/M       $2,520
============================================================================

As a percentage of
net revenues                 10%                  0%                   21%
</TABLE>

                                      23


<PAGE>   24
     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
this transaction, the Company expensed approximately $1.7 million of acquired
in-process research and development and recorded approximately $2.7 million of
goodwill and $2.2 million of developed technology. Both are 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 $1.8 million 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.

     Goodwill and developed technology amortization was $140,000 in 1997
compared to $62,000 in 1996.

INCOME TAXES

<TABLE>
<CAPTION>

(in thousands)             1997                1996                1995
----------------------------------------------------------------------------
<S>                        <C>                 <C>                 <C>      
Expense                    $2,772              $1,744              $392
============================================================================

Effective tax rate            56%                 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 $5.1 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


                                      24


<PAGE>   25



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.

     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.


                                      25


<PAGE>   26
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 Condition 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.

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,
emerging 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



                                      26



<PAGE>   27



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
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 its 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


                                      27
<PAGE>   28


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 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' revenues, operating results and financial condition could be materially
adversely affected. In addition, in the 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 these expenses or is unable to hire,
train and retain experienced international sales and marketing personnel, the
Company' revenues, operating results and financial condition could be adversely
affected. Increased international activity could expose the Company to foreign
currency fluctuations, foreign labor laws and other unforeseen problems


                                      28


<PAGE>   29



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 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


                                      29


<PAGE>   30
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.

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


                                      30


<PAGE>   31


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.

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).

                                      31


<PAGE>   32



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.


                                      32


<PAGE>   33



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 audits 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.

     As discussed more fully in Note 16, the Company has revised the amount 
allocated to acquired in-process research and development in connection with its
1997 acquisition of Rosetta Technologies, Inc., and has restated its 1997
consolidated financial statements, accordingly.

                                                            Ernst & Young LLP

Minneapolis, Minnesota
January 30, 1998, except for Note 16
as to which the date is February 15, 1999

     


                                      33


 
<PAGE>   34



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. 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 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


                                      34


<PAGE>   35
Engineering Animation, Inc.
Consolidated Balance Sheets
(in thousands, except share data)

<TABLE>
<CAPTION>
                                                                           December 31,       
ASSETS                                                               1997             1996    
                                                                   RESTATED
                                                                   -----------------------------
<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 $202 and $62,                                    
    respectively                                                       5,063              250   
  Other                                                                  391              586   
                                                                                                
                                                                     ------------------------   
Total assets                                                         $85,051          $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)                                          2,301              147   
                                                                     ------------------------   
    Total stockholders' equity                                        72,182           34,628   
                                                                     ------------------------   
Total liabilities and stockholders' equity                           $85,051          $42,299   
                                                                     ========================   
</TABLE> 

See accompanying notes.                                                       


                                      35


<PAGE>   36



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

<TABLE>
<CAPTION>
                                                YEARS ENDED DECEMBER 31,
                                             1997        1996        1995
                                           RESTATED
                                           ---------------------------------
<S>                                        <C>         <C>         <C>
Net revenues                               $ 49,717    $ 27,189    $ 12,249
Cost of revenues                             12,276       6,940       3,100
                                           -------------------------------- 
Gross profit                                 37,441      20,249       9,149

Operating expenses:
  Sales and marketing                        15,406       9,799       3,573
  General and administrative                  6,457       3,316       2,276
  Research and development                    7,068       3,438       1,992
  Acquisition costs                           5,057          62       2,520
                                           -------------------------------- 
Total operating expenses                     33,988      16,615      10,361
                                           -------------------------------- 
Income (loss) from operations                 3,453       3,634      (1,212)
Interest and other income (expense), net      1,522         987        (158)
                                           -------------------------------- 
Income (loss) before income taxes and
  minority interest                           4,975       4,621      (1,370)
Income taxes                                  2,772       1,744         392
                                           -------------------------------- 
Income (loss) before minority interest        2,203       2,877      (1,762)
Minority interest                               (49)       (310)       (128)
                                           -------------------------------- 
Net income (loss)                          $  2,154    $  2,567    $ (1,890)
                                           ================================ 
Earnings (loss) per share:
  Basic                                    $   0.25    $   0.35    $  (0.39)
                                           ================================ 
  Diluted                                  $   0.21    $   0.30    $  (0.39)
                                           ================================ 

  Weighted average shares outstanding         8,770       7,432       4,805
                                           ================================ 
  Weighted average shares outstanding and
  assumed conversion                         10,131       8,648       4,805
                                           ================================ 
</TABLE>

See accompanying notes.


                                      36


<PAGE>   37


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                                          --         --            --            2,154          2,154      

                                                 --------------------------------------------------------------
Balance at December 31, 1997                     9,817   $     98      $ 69,783         $  2,301       $ 72,182      
                                                 ==============================================================   
</TABLE>

See accompanying notes.

                                       37
<PAGE>   38
Engineering Animation, Inc.
Consolidated Statements of Cash Flows
(in thousands)

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                                  1997        1996      1995
                                                                RESTATED
                                                               ---------------------------------
<S>                                                            <C>         <C>         <C>      
OPERATING ACTIVITIES
Net income (loss)                                              $  2,154    $  2,567    $ (1,890)
Adjustments to reconcile net income to net cash provided by
   (used in) operating activities:
     Depreciation and amortization                                2,293       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                                          1,685        --         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 


                                       38
<PAGE>   39

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."

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 


                                       39

<PAGE>   40


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.

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.


                                       40
<PAGE>   41


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.

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 


                                       41
<PAGE>   42


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 $1,700 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 approximately $2,700 and developed technology of approximately
$2,200, which are both 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.

                                       42
<PAGE>   43


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>

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>

                                        
                                       43
<PAGE>   44
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>
                                                                 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

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

Forgivable 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>

Future maturities of long-term debt and capital lease obligations are as
follows:

<TABLE>
<CAPTION>

<S>         <C>
1999           $204
2000            690
2001             95
2002            146
Thereafter      360
             ------
             $1,495
             ======
</TABLE>


                                      44



<PAGE>   45
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>
<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.

9. INCOME TAXES

The components of income tax expense for years ended December 31 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>


                                      45


<PAGE>   46


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


<TABLE>
<CAPTION>

                                     1997     1996      1995
                                  ---------------------------
<S>                               <C>       <C>      <C>
Tax at U.S. 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)
                                                    ----------------- 
Net deferred tax assets                              1,399         48
                                                    ----------------- 
Net deferred tax asset (liability)                  $   48   $   (897)
                                                    =================
</TABLE>

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.


                                       46

<PAGE>   47

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.

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:

                                        
                                       47


<PAGE>   48



<TABLE>
<CAPTION>

                                               1997                             1996                             1995
                                   ------------------------------------------------------------------------------------------------
                                             WEIGHTED-AVERAGE                 WEIGHTED-AVERAGE                 WEIGHTED-AVERAGE
                                   OPTIONS   EXERCISED PRICE        OPTIONS   EXERCISED PRICE        OPTIONS   EXERCISED 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>
              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 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.


                                      48


<PAGE>   49



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)             $1,185     $2,270     $(1,920)
Pro forma earnings (loss) per share:
  Basic                                 $ 0.14     $ 0.31     $ (0.40)
  Diluted                               $ 0.12     $ 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)                         $  2,154    $2,567    $(1,890)
                                            =============================
Denominator:
  Denominator for basic earnings
      per share - weighted average shares      8,770     7,432      4,805
  Stock options                                1,361     1,216          -
                                            -----------------------------
Denominator for diluted earnings
  per share - adjusted weighted
  average shares and assumed
  conversions                                 10,131     8,648      4,805
                                            =============================
Basic earnings (loss) per share             $  0.25     $ 0.35    $ (0.39)
                                            =============================
Diluted earnings (loss) per share           $  0.21     $ 0.30    $ (0.39)
                                            =============================
</TABLE>

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.

                                      49


<PAGE>   50



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  *
                                                               RESTATED      RESTATED
                         --------------------------------------------------------------
<S>                      <C>        <C>       <C>            <C>           <C>
Net revenues                $9,699   $11,095        $13,559       $15,364       $49,717
Gross profit                 7,247     8,387         10,463        11,344       $37,441
Operating expenses           5,892     6,767          7,960        13,369       $33,988
Operating income (loss)      1,355     1,620          2,503        (2,025)      $ 3,453
Net income (loss)              906     1,199          1,890        (1,841)      $ 2,154
Earnings per share
  Basic                        .12       .15            .20         ( .19)          .25
  Diluted                      .10       .13            .17         ( .19)          .21
</TABLE>

     *  Includes acquisition costs of $5,057 for write-off of in-process
        technology and transaction expenses, offset by the reversal of
        previously established deferred tax valuation allowance of $975.

16. RESTATEMENT

The Company has restated its 1997 financial statements to reflect the
modification of methods used to value acquired in-process research and
development recorded and written off in connection with the Company's November,
1997 acquisition of Rosetta Technologies, Inc. The revised calculations of the
value of the acquired in-process technology are based on adjusted after-tax
cash flows that gives explicit consideration to the SEC Staff's views on
in-process research and development as set forth in its September 9, 1998
letter to the American Institute of Certified Public Accountants.

                                      50


<PAGE>   51
The in-process research and development charge was reduced from $5.6 million to
$1.7 million resulting in an increase to intangible assets of $3.9 million. As a
result, an additional amortization expense of $63,000 was recorded during the
fourth quarter of 1997.

The effect of the restatement related to acquired in-process technology in the
following table presents the impact on the Company's results of operations for
the year ended December 31, 1997, the quarter ended December 31, 1997 and its 
financial position at December 31, 1997 (in thousands)


<TABLE>
<CAPTION>
                                                            Year Ended         Quarter Ended  
                                                         December 31, 1997    December 31, 1997
<S>                                                             <C>                <C>        
Results of Operations:                                                                        
  Income before income taxes and minority                                                     
    interest as previously reported                             $ 1,124            $(5,461)   
  Adjustment related to acquired in-process technology            3,851              3,851    
                                                                                              
                                                                -------            -------    
  Restated                                                      $ 4,975            $(1,610)   
                                                                =======            =======    
                                                                                              
Net loss as previously reported                                 $(1,697)           $(5,692)   
  Adjustment related to acquired in-process technology            3,851              3,851    
                                                                                              
                                                                                              
                                                                -------            -------    
  Restated net income                                           $ 2,154            $ 1,841    
                                                                =======            =======    
                                                                                              
                                                                                              
Earnings(loss) per share:                                                                     
  As previously reported                                        $ (0.19)           $ (0.59)   
  Adjustment related to acquired in-process technology             0.40               0.40    
                                                                                              
                                                                -------            -------    
  Restated earnings per share                                   $  0.21            $ (0.19)   
                                                                =======            =======    
                                                                          
<CAPTION>                                                                 
                                                                          
                                                         December 31, 1997    
                                                                          
Financial Position:                                                       
  Goodwill as previously reported                               $ 1,212   
  Adjustment related to acquired in-process technology            3,851   
                                                                          
                                                                -------   
  Restated                                                      $ 5,063   
                                                                =======   
                                                                          
                                                                          
  Retained earnings(deficit), as previously reported            $(1,550)  
  Adjustment related to acquired in-process technology            3,851   
                                                                          
                                                                -------   
  Restated                                                      $ 2,301   
                                                                =======   
</TABLE>

The adjustment results from the decrease in the value assigned to acquired 
in-process technology and the increased amortization of goodwill.


                                       51

<PAGE>   52


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.


                                       52
<PAGE>   53


                                    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 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

                                        
                                       53

<PAGE>   54


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.


                      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.

                                       54

<PAGE>   55


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 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.

                                       55
<PAGE>   56


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


                                       56

<PAGE>   57


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.

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.



                                       57

<PAGE>   58
 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
                                                 ANNUAL COMPENSATION           SECURITIES
                                              ------------------------         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.

                                      58


<PAGE>   59


(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
                                                           OPTIONS AT FISCAL       IN-THE-MONEY OPTIONS AT
                     SHARES ACQUIRED        VALUE             YEAR-END (#)         FISCAL 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
and Dr. Vanderploeg, a car allowance. The employment agreements also include
certain non-competition and confidentiality provisions.


                                      59


<PAGE>   60


     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 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 

                                       60

<PAGE>   61



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 persons)        3,068,976               28.36%

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 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 

                                      61


<PAGE>   62


     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 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.


                                       62


<PAGE>   63

                                    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 the
        Company's 10-K/A-2 filed March 1, 1999: 

                         Page
                         ----
        Report of Ernst & Young LLP ......................................  33

        Report of Arthur Andersen LLP ....................................  34

        Consolidated Balance Sheets - December 31, 1997 and 1996 .........  35

        Consolidated Statements of Operations - years ended
        December 31, 1997, 1996 and 1995 .................................  36

        Consolidated Statements of Stockholders' Equity - years
        ended December 31, 1997, 1996 and 1995 ...........................  37

        Consolidated Statements of Cash Flows - years ended
        December 31, 1997, 1996 and 1995 .................................  38

        Notes to Consolidated Financial Statements .......................  39

(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*++
</TABLE>

                                       63

<PAGE>   64

     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*++

    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+*++


                                       64

<PAGE>   65

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

    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 for fiscal year ended December 31, 1997
           (filed only in electronic format)

                                        
                                       65
                                        

<PAGE>   66

    27.2    Financial Data Schedule for Quarters 1, 2, and 3 of 1997
            (filed only in electronic format)

    27.3    Financial Data Schedule for fiscal year ended December 31, 1996 
            (filed only in electronic format)

    27.4    Financial Data Schedule for Quarters 1, 2, and 3 of 1996
            (filed only in electronic format)




_____________
     +    Denotes compensatory plan.
     ++   Previously filed
     
     *    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)  Reports on 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.

                                       66

<PAGE>   67


                                   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 3, 1999.

                                 ENGINEERING ANIMATION, INC.

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


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 3, 1999 by the following persons on behalf
of the Registrant in the capacities indicated.



          Signature                   Title
          ---------                   -----

/s/ Matthew M. Rizai               
------------------------------     Chairman, Chief Executive Officer,
Matthew M. Rizai                   President, Treasurer and 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 
Jerome M. Behar                    Financial and Accounting Officer)
                                   
/s/ Jamie A. Wade
------------------------------     Vice President of Administration,
Jamie A. Wade                      General Counsel, Secretary and Director

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

/s/ Laurence J. Kirshbaum
------------------------------     Director
Laurence J. Kirshbaum


                                       67

<PAGE>   68
                               INDEX TO EXHIBITS

EXHIBIT
NUMBER                         DESCRIPTION
------                         -----------

 23.1                          Consent of Ernst & Young LLP

 23.2                          Consent of Arthur Andersen LLP

 27                            Financial Data Schedules





                                       68