SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                   For the fiscal year ended December 31, 1999

                                       OR

            ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

                        Commission file number 000-27670

                           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, $0.01 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.    X
            -----
The  aggregate  market value of the voting and  non-voting  Common Stock held by
non-affiliates  of the  registrant  as of March 31, 2000 was  $140,023,583.  The
number of outstanding  shares of  registrant's  Common Stock as of that date was
12,037,671.

Documents Incorporated by Reference: None

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

                                       1
<PAGE>

                           ENGINEERING ANIMATION, INC.

                                TABLE OF CONTENTS

                                       TO

                         1999 ANNUAL REPORT ON FORM 10-K

     Item                                                                  Page

                                     PART I

1   Business................................................................3

2   Properties.............................................................14

3   Legal Proceedings......................................................14

4   Submission of Matters to a Vote of Security Holders....................14



                                     PART II

5    Market for Registrant's Common Equity and Related Stockholder
     Matters...............................................................15

6    Selected Financial Data...............................................16

7    Management's Discussion and Analysis of Financial Condition and
     Results of Operation..................................................17

7A   Quantitative and Qualitative Disclosures about Market Risk............32

8    Financial Statements and Supplementary Data...........................33

9    Changes in and Disagreements with Accountants on Accounting and
     Financial Disclosure..................................................60



                                    PART III

10   Directors and Executive Officers of the Registrant....................61

11   Executive Compensation................................................63

12   Security Ownership of Certain Beneficial Owners and Management........66

13   Certain Relationships and Related Transactions........................67



                                     PART IV

14   Exhibits, Financial Statement Schedules and Reports on Form 8-K.......68

Signatures.................................................................72



Our registered trademarks, and those of our subsidiaries, include:FactoryCAD(R),
FactoryFLOW(R), FactoryPLAN(R), Jack(R), Sense8(R), VisFactory(R), VisMockUp(R),
VisView(R) and VSA(R). Our trademarks,  and those of our subsidiaries,  include:
e-Vis(TM),  K-Log(TM), OEV(TM), Open Enterprise Visualization(TM),  Open Virtual
Factory(TM),  OVF(TM), VisConcept(TM) and VisPublish3D(TM).All other trademarks,
brand  marks and trade names used in this report are  trademarks,  brand  marks,
trade names or registered  marks of their  respective  owners.  Our domain names
include e-Vis.com and eai.com.

                                       2
<PAGE>

                                     PART I

                                     ITEM 1

                   SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS

         This report,  and statements that we or our  representatives  make, may
contain  forward-looking  statements  that involve risks and  uncertainties.  We
develop forward-looking  statements by combining currently available information
with our beliefs and  assumptions.  These  statements  often  contain words like
believe,  expect,  anticipate,  intend,  contemplate,  seek,  plan,  estimate or
similar  expressions.   Forward-looking   statements  do  not  guarantee  future
performance.  Recognize these  statements for what they are and do not rely upon
them as facts.

         Forward-looking statements involve risks, uncertainties and assumptions
including, but not limited to, those discussed in this report. We may not update
the forward-looking  statements, even if they become incorrect or misleading. We
make these statements  under the protection  afforded them by Section 21E of the
Securities  Exchange Act of 1934, as amended.  Because we cannot  predict all of
the risks and  uncertainties  that may  affect  us,  or  control  the ones we do
predict,  these  risks  and  uncertainties  can  cause  our  results  to  differ
materially from the results we express in our forward-looking statements.

         You  should  carefully  consider  the  risks,  uncertainties  and other
information  described  in  this  report.  These  are  not the  only  risks  and
uncertainties  that we face.  Additional risks and uncertainties  that we do not
know  about,  or that we  currently  believe are  immaterial,  may also harm our
business operations.  If any of these risks or uncertainties actually occur, our
business, financial position, operating results or liquidity could be materially
harmed.

                                    BUSINESS

         Engineering  Animation,  Inc.  develops and  produces  Internet-enabled
visual process management,  collaboration,  communication and analysis solutions
and accompanying services for extended manufacturing enterprises. These software
solutions,  now being  marketed as e-vis.com,  provide  manufacturers  and their
suppliers  and  partners  with shared,  worldwide  access to product and process
data.  Together they can analyze,  visualize and  manipulate  the shared data in
real time.  Our  solutions  enable  the  manufacturing  network  to realize  the
competitive  advantages  of  lowered  costs and  faster  time-to-market  through
improved  product  designs,  enhanced  product  quality and  shorter  production
cycles.

         Major  manufacturers  in the  automotive,  aerospace,  industrial/heavy
equipment, electronics, telecommunications and government/defense industries use
our integrated  enterprise-wide  solutions  across  corporate  intranets and the
Internet.  Our software solutions customers represent over 1,000  manufacturers,
including  Alcatel U.S.A,  The Boeing  Company,  DaimlerChrysler  A.G.,  Deere &
Company, Ford Motor Company, Freightliner Corporation, General Electric Company,
General  Motors  Corporation,  Lockheed  Martin  Corporation,   Motorola,  Inc.,
Navistar   International   Corporation,   Sauer-Sundstrand   Company  and  Xerox
Corporation.

         In 1999, we decided to discontinue  our  Interactive  Games and Science
and  Technology  businesses.  You can find  additional  information  about these
discontinued  operations  later in this  section of the report under the heading
"Discontinued  Operations."  Following  this  event,  we marketed  our  software
products as:

o    the   e-Vis.com   solutions   for   providing   secure,    Internet-enabled
     collaboration;
o    the Open  Enterprise  Visualization  (OEV)  solutions for viewing,
     distributing  and analyzing  product  design data; and
o    the Open Virtual Factory  (OVF)solutions for enhancing the efficiency
     and quality of manufacturing  operations  and  processes,  now called
     our virtual  factory solutions.

                                       3
<PAGE>


       Additional business activities in 1999 included:

o    development of our e-Vis.com Internet portal for manufacturers;
o    the Professional  Services Group continuing to provide customized systems
     integration and deployment  services in support of our software products
     and E-services; and
o    the Litigation Services Group continuing to create software animation
     products for the legal community.

         In July  1999,  we  acquired  Kx  Verksamhetsutveckling  AB, a  Swedish
software  company.  Additional  information  about this acquisition can be found
later in this section,  in  "Management's  Discussion  and Analysis of Financial
Condition  and  Results of  Operations"  (MD&A),  and in Note 3 to the  enclosed
financial statements.

         In March 2000, we sold our  wholly-owned  German  subsidiary  EAI-DELTA
GmbH to Dassault Systemes S.A. for $31 million in cash.  Additional  information
about  this  disposition  of  assets  can be  found  in Note 18 to the  enclosed
financial statements.

         We  incorporated  in 1988 and  became  publicly  traded  in  1996.  Our
corporate  headquarters and technology  center is located in Ames, Iowa. You can
contact us by addressing written  correspondence to 2321 North Loop Drive, Ames,
IA 50010,  or by phoning us at (515)  296-9908.  Our Internet  e-mail address is
eaii@eai.com;  our World  Wide Web home  site is  www.eai.com.  We have  offices
worldwide.

                             OUR E-VIS.COM SOLUTIONS

         Our e-Vis.com solutions provide extended manufacturing enterprises with
secure,  Internet-enabled  collaboration  solutions.  These extended enterprises
gain  project-based  access  to  mission-critical  information  at the speed and
convenience of the Web.  Introduced in 1999, our e-Vis.com portal is designed to
increase  manufacturers'  internal and external  communication and collaboration
capabilities. With these capabilities, manufacturers can:

o        achieve stronger business relationships and supply-chain integration;
o        manage heterogeneous teams and computing systems;
o        decrease time-to-market;
o        improve product quality; and
o        reduce overall costs.

         The  subscription and pay-per-use  features of the e-Vis.com  solutions
mean users can acquire these capabilities without high adoption,  deployment and
maintenance costs.

         Through a  partnership  announced  in July  1999  with  Hewlett-Packard
Company (HP),  our  e-Vis.com  solutions are powered and secured by HP's servers
and its Praesidium  VirtualVault software,  providing a security  infrastructure
and secure  socket  layer  encryption  technology.  For those  wishing to do so,
however,  users may  combine  their  own  security-related  technology  with the
functionality offered by e-Vis.com.

         Using the collaboration features of e-Vis.com,  major manufacturers can
communicate  and interact with their  suppliers and partners in real time around
the world.  Participants  spanning  the  manufacturing  enterprise  spectrum can
create or be invited to join project teams that meet and communicate  within the
Internet.  Within our  e-Vis.com  solutions,  project teams  conveniently  share
documents, applications, information and decisions at on-line speed.

                                       4
<PAGE>

         The e-Vis.com solutions enable project teams to:

o    view and search stored and organized  project-related  2D and 3D documents,
     drawings,  models and other PC created  documents  that have been  gathered
     from multiple sources;

o    participate in on-line design reviews and conferences,  with the ability to
     mark up data and  documents  and  share  the  changes  in real  time on the
     computer  screen,  even if the  program in which the data or  document  was
     created is not installed on the user's computer;

o    participate  in  threaded  discussion  forums  for  on-line  conversations,
     tracking project  decisions and rationale;  and

o    receive notification via e-mail of up-to-the-minute  information related to
     the project,  including notices of data or documents being changed or added
     to a project folder.


         We have developed three deployment options for our e-Vis.com solutions:

o    e-Vis.com Portal - users collaborate  through the Internet by logging on to
     our  subscription-based   on-line  service;

o    e-Vis  Enterprise  -  users  collaborate  within  the  corporate  intranet,
     selectively  opening the  firewalls to connect with  suppliers and partners
     that use the  e-Vis.com  Portal  solution.  Typical  users  would be larger
     companies  interested in maintaining their own systems and internal control
     of sensitive data; and

o    "Powered by"  e-Vis.com -  developers  of  business-to-business  E-commerce
     applications  and services  license a co-branded  version of the  e-Vis.com
     solution in order to power  collaboration for their solutions.  Users would
     include companies developing trade exchanges and business portals.

                    THE CONCEPT OF "OPEN" SOFTWARE SOLUTIONS

         Our "open" visualization software solutions improve communication among
manufacturers' design, engineering,  manufacturing, marketing, purchasing, sales
and support  teams and their  partners and  suppliers,  enabling them to work on
their processes concurrently. Traditionally, these processes involved sequential
steps by separate teams that used  disparate data creation and storage  systems.
Our solutions  allow users to view,  analyze,  manipulate and  communicate  data
across  extended  enterprises,  and  to  do so  without  extensive  training  or
expensive computer hardware.

         Manufacturing  enterprises  using our  software  solutions  can access,
view,  analyze and manage 3D product  data,  2D drawings,  process  information,
product documents and structure information. Our software solutions enable users
to access and visualize product data from any database or data vault in a single
integrated  environment while communicating in real time. Our solutions leverage
our customers'  existing  investments in CAD and PDM by extending data access to
an entire enterprise. Our software solutions allow seamless integration with:

o    enterprise resource planning (ERP) systems;
o    computer-aided   design  (CAD),   computer-aided   engineering   (CAE)  and
     computer-aided  manufacturing (CAM) software; and
o    product data management systems (PDM).


                                       5
<PAGE>

     Our solutions provide advanced  integrated analysis tools for improving the
efficiency of product engineering and manufacturing.  They enable  manufacturers
to improve  product  quality while reducing  errors,  costs and  timetomarket by
allowing, for example:

o    communication,  collaboration  and analysis through a common  framework;
o    management of digital  assets across an enterprise;
o    digital  prototyping inplace of expensive  physical  prototyping;
o    visualization of realistic, life-size  models  for use in concept  design;
     and
o    simulation  of human interaction with digital models.

         Major  manufacturing  customers  use  our  family  of  Open  Enterprise
Visualization  solutions,  which accounted for approximately 34%, 55% and 45% of
our total revenues in 1999, 1998, and 1997.

                     OPEN ENTERPRISE VISUALIZATION SOLUTIONS

         Our Open  Enterprise  Visualization  (OEV) software  solutions  provide
customers  with  large-model  visualization,  real time  collaboration,  digital
prototyping and analysis capabilities. The OEV solutions are used by:

o    engineering departments for digital mockup and product simulation;
o    manufacturing departments for assembly sequencing and factory simulation;
o    sales and marketing  departments  for  presentations,  training and product
     configuration; and
o    service   departments  for  interactive   maintenance  manuals  and  repair
     training.

         Our OEV solutions run on major hardware  platforms,  including Windows,
Windows NT and Unix. They integrate with many of the leading electronic document
management and PDM systems, including:

o    ENOVIA from Dassault Systemes S.A. (Dassault);
o    EDMS from Documentum, Inc.;
o    CADIM-DMS from EIGNER + PARTNER A.G.;
o    Matrix from MatrixOne, Inc.;
o    R3 from SAP A.G.;
o    the  Metaphase  product  line  and  SherpaWORKS  from  Structural  Dynamics
     Research Corporation (SDRC);
o    IMAN from Unigraphics Solutions Inc. (Unigraphics Solutions); and
o    CMS PDM from Workgroup Technology Corporation.

They  also  integrate  with  CAD/CAE/CAM   systems  from  Dassault,   Parametric
Technology Corporation (PTC), SDRC and Unigraphics Solutions.

         OEV products  include VisView and VisMockUp  software and their related
technology components, as well as the VisConcept and VisPublish3D solutions. All
of these solutions are networked by a common integration  framework that enables
seamless movement from one component to another.

                                       6
<PAGE>

         VisView - Our Enterprise-Wide, Product Data Visualization Solution: Our
VisView  software  solution  allows  users  to  visualize  3D  product  data and
assemblies, 2D drawings,  documents and process data. It enables users across an
enterprise to access, view, measure,  markup,  analyze and interact with various
types of product and process data in a single  visual  environment.  Our VisView
software  solution  provides an integrated  system for intuitive  data access on
major hardware platforms.  Users can navigate to specific product information by
clicking  on a drawing,  3D model or product  structure,  or by  entering a part
number or query.

         The component  architecture of our VisView  software allows  enterprise
participants  to tailor the user  interface  and product  structure to fit their
business  needs.  This  framework  offers users the  functionality  of 2D and 3D
visualization,  delivered  in either the VisView  interface or in a standard Web
browser  interface,   making  VisView  software   accessible  to  technical  and
non-technical users.

         VisView software components enable users to:

o    access, view, mark up and measure 2D drawings, images and vector formats;
o    access, view, mark up, measure and interact with 3D product  visualizations
     and their related databases in a single visual environment;
o    view and mark up text-based information originating from process, strategic
     planning and development documentation;
o    access and deliver drawings and 3D models to the enterprise via a corporate
     intranet and the Internet;
o    create tailored product  structures to meet the needs of individual  tasks,
     such as presenting and comparing product revisions;
o    print within PDM environments and integrate third party  applications  such
     as word  processing and  spreadsheet  programs;  and
o    consolidate  diverse source data formats into standard archiving formats to
     save time and reduce network traffic.

         VisMockUp - Our Real Time, Digital Prototyping Solution:  Our VisMockUp
software  solution extends the 3D visualization  and 2D viewing  capabilities of
our VisView  software  solution.  With our  VisMockUp  solution,  users gain the
advantages of digital  prototyping,  avoiding  having to create costly  physical
prototypes.  Users can analyze large CAD assemblies  early in the product design
phase,  avoiding delayed discovery of design problems.  The results are improved
product design and shortened product development time. Users have an opportunity
to realize cost savings, improving their potential for a competitive advantage.

         With our VisMockUp software,  users can create customized  solutions to
meet specific  engineering  and  manufacturing  needs by selecting  from various
component  tools.  For example,  manufacturing  engineers use VisMockUp  digital
prototyping  to  simulate  and  visually  evaluate  manufacturing  and  assembly
processes. They can create 3D visual assembly and disassembly paths, viewable in
real time, by using the VisMockUp assembly motion-sequencing  component.  Motion
sequencing  allows  users  to  predict  motion,  path  movement,  collision  and
interference.  The result is improved product assembly processes.  Additionally,
with the VisMockUp  visual  assembly  motion-sequencing  and playback  features,
users can create  accurate,  easy to  understand  instructions  for assembly and
manufacturing personnel.

         Functions  provided  by some  of the  customizable  VisMockUp  software
solution components include:

o    measuring distances on 3D CAD models;
o    checking for  collisions  when  thousands  of parts are set into motion;
o    managing multiple versions of product design;
o    optimizing the order in which  products are assembled;  and
o    sequencing to minimize part collision or interference.


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<PAGE>

         VisConcept  - Our  1:1  Scale,  Immersive  Visualization  Solution  For
Virtual  Prototyping:  Our  VisConcept  software  solution is designed to enable
users to cost  effectively  experience  product  designs by  creating  1:1 scale
virtual prototypes. Engineers, designers and stylists gain the ablity to explore
design variations and alternatives in a human-scale,  immersive environment that
composites  2D and 3D data in real  time.  The  effects  of design  changes  are
viewable  sooner than if an expensive,  time-consuming  physical  prototype were
built.

         VisConcept  software   components  include  VisConcept  Layout,   which
provides a 2D/graphical user interface-based tool for creating  presentations on
a typical  workstation.  It also includes VisConcept  Presenter,  which supports
human-scale display and human interaction with virtual prototypes.

         VisPublish3D - Our 3D Digital  Publishing  Solution:  Released in April
2000,  our  VisPublish3D  software  solution  is  designed  to  enable  users to
eliminate their need to create expensive technical  illustration.  By leveraging
the 2D and 3D visualization functions of our VisMockUp solution,  users are able
to create documents such as work and assembly instructions, and installation and
operation manuals.

                            VIRTUAL FACTORY SOLUTIONS

         Our virtual factory software solutions enable  manufacturers to design,
analyze, visualize and simulate factory layouts, thereby reducing factory layout
development time and manufacturing costs. With this software,  users can produce
new manufacturing  layouts that improve their efficiency,  productivity,  output
and safety.

         The virtual  factory  software  uses  object-oriented  technology  that
allows users to design and edit factory  layouts easily without  drawing models.
Users can quickly place and connect factory  equipment objects and align objects
with  auto-orientation in a factory layout.  Factory models can then be exported
into  our  solutions  and  accessed  visually  using  a Web  browser,  providing
concurrent  design of tooling and products in a factory layout. We referred to a
previous  version  of  these  solutions  as our  VisFactory  suite  of  software
solutions.

         The  virtual  factory  solutions  are  composed  of three  main  design
processes  that  function  together  to assist  users in  developing  a complete
manufacturing design solution. The three processes include:

o    Process Flow Chart, for developing the manufacturing process plan;
o    VisFactory,  for evaluating factory layout alternatives based upon material
     flow using -
       o   FactoryCAD,  for modeling the production layout using "drag-and-drop"
                Smart Objects;
       o   FactoryPLAN,  for evaluating and comparing factory layout  concepts;
       o   FactoryFLOW,  for viewing product and material flow;and
       o   FactoryBROWSER, for managing changes and collaborating on-line using
             e-Vis;  and
o    Jack, for modeling human interaction with the factory layout.

         Our virtual factory solutions  accounted for approximately 22%, 16% and
18% of our total revenues in 1999, 1998 and 1997.

                           PROFESSIONAL SERVICES GROUP

         Our  Professional  Services Group is comprised of employees who provide
comprehensive  consulting and  implementation  services  relating to our product
offerings.  We evaluate customers'  existing product data architectures,  locate
data residences,  determine access and develop customized  integrated solutions.
We also makes  recommendations  on running  processes  efficiently and implement
training plans to facilitate  smooth  deployments.  Additionally,  we help plan,
install and configure our software solutions,  certify installations and provide
system  administrators  with the  information  needed to maintain  visualization
environments on a departmental,  divisional or enterprise level.  These services
accounted for 37%, 22% and 30% of total our revenues in 1999, 1998 and 1997.


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                           LITIGATION SERVICES

         Our  Litigation  Services  Group  develops 3D computer  animations  for
litigation,  alternative  dispute  resolution,  public hearings,  presentations,
demonstrations and educational  programs.  Combining the knowledge of engineers,
scientists and lawyers with the skills and talents of graphic artists, we create
computer  visualizations  that make complex issues easier to  understand.  Using
proprietary technology and extensive visual databases,  we produce 3D animations
that  accurately  re-create  past  events or events  that take place  beyond the
bounds of normal observation.

                    ACQUISITIONS, DISPOSITIONS AND ALLIANCES

         In July 1999, we acquired Kx  Verksamhetsutveckling  AB (Kx), a Swedish
company that provides a proprietary  database  software  solution  called K-Log,
audio-visual   presentation  rooms  called  K-Room,  and  training  and  support
services.  Additional information about this acquisition and others made in 1998
and  1997  can be  found  in the  MD&A  and  Note  3 to the  enclosed  financial
statements.

         In  March  2000,  we sold  EAI-DELTA  GmbH for $31  million  in cash to
Dassault  Systemes S.A. We had acquired DELTA in December 1998 for approximately
$24 million of our common stock.  Additional  information about this transaction
can be found in the MD&A and Note 18 to the enclosed financial statements.

         In July 1999, we announced a relationship with HP in which HP agreed to
provide hosting services, Web content, marketing funds and support,  consulting,
high-performance server platforms and use of HP's secure Internet infrastructure
for  e-Vis.com.  We have  estimated  the  value  for  this  support  to have the
potential to exceed $150 million over the life of the agreement.

              MARKETING, DISTRIBUTION AND INTERNATIONAL ACTIVITIES

         We market  our  software  products  and  services  through a variety of
channels,  including our own sales force and third party  distributors.  We also
use bundling and distribution  agreements with hardware companies such as HP and
software  companies  such  as  EIGNER  +  PARTNER,   MatrixOne,  SAP,  SDRC  and
Unigraphics Solutions.

         In recent years, we expanded our direct sales and marketing  operations
in  North  America  and  Europe  and  added  additional  distributors  in  Asia.
Acquisitions also helped us to expand our presence in North America,  the United
Kingdom,  Germany and  Sweden.  We also  maintain  additional  sales  offices in
Canada, France, Italy and Malaysia. We intend to increase our global presence by
hiring  additional staff and pursuing  additional  distributors for our products
and  services.  In addition,  we intend to expand our sales  activities  via the
"Powered by"  e-Vis.com  program,  whereby  developers  of  business-to-business
E-commerce  applications  and  services  license  a  co-branded  version  of the
e-Vis.com solution.

         In 1999,  1998 and 1997,  we derived  32%,  27% and 22% of our revenues
from sales to customers outside the United States.  The Risk Factors in the MD&A
and Note 1 to the enclosed financial  statements contain additional  information
about our international activities.



                                       9
<PAGE>

                            RESEARCH AND DEVELOPMENT

         The  rapid-paced  advances in the  Internet-enabled  visualization  and
collaboration  markets require companies like us to devote substantial resources
to research and development  efforts.  These efforts are aimed at enabling us to
establish a presence,  then  maintain  and enhance our  competitive  position in
these markets.

         Our current  efforts focus on the  development of e-Vis.com and further
enhancement  and development of our core product areas - OEV and virtual factory
solutions.

         We spent $21.4 million, $15.9 million and $10.4 million on research and
development in 1999, 1998 and 1997. We anticipate maintaining or increasing this
level of commitment to our research and development efforts.

                                   COMPETITION

         We believe  that the main  competitive  factors for product and process
visualization software include:

o    high speed, real time graphics capabilities;
o    multiple ERP, PDM as well as CAD/CAE/CAM interfaces;
o    hardware platform independence;
o    distributed database capabilities; and
o    Internet/intranet communication.

         We believe  that the main  competitive  factors  for our  collaborative
Internet solutions for the extended  enterprise are, in addition to those listed
above:

o    secure Internet visual collaboration;
o    project-based access to mission-critical information;
o    E-services for the extended enterprise; and
o    value-added content for the manufacturing community.

         Although we believe we have a  technological  advantage  over potential
competitors in these markets,  maintaining an advantage will require  continuing
investments in research and development, sales and marketing.

         The Risk Factors in the MD&A contain  additional  information about our
competition.

                             DISCONTINUED OPERATIONS

         Through our former  Interactive  Division,  we developed,  produced and
sold  a  variety  of  interactive   multimedia   products  to  educational  book
publishers,  computer game publishers, toy companies, museums and pharmaceutical
and medical  device  manufacturers.  In July 1999,  we announced our decision to
withdraw from the Interactive Games and Science and Technology  portions of this
business  by the end of the first  quarter of 2000.  Our  decision to exit these
businesses  resulted  from our  analysis  of the  resources  required  to remain
competitive in the Interactive business and our desire to focus our resources on
our core  businesses.  We continue to do  business  in the  Litigation  Services
portion of this business as described above.

         In 1999,  we recorded a $13.8 million  after-tax  provision for exiting
these operations,  including accruals for severance payments,  asset write downs
and estimated  operating losses during the phase out period. We believe that our
financial  statements  contain an adequate  provision  for the ultimate  loss on
discontinuation of these operations. Note 2 to the enclosed financial statements
contains additional information about our discontinued operations.

                                       10
<PAGE>

                             ADDITIONAL INFORMATION

    You can find information about the following topics as indicated below.

 ------------------------------------------ ------------------------------------
   Geographic financial information            Notes 1 and 16 to the enclosed
                                               financial statements
 ------------------------------------------- -----------------------------------
   Key customers                               Risk Factors in the MD&A and Note
                                               15 to the enclosed financial
                                               statements
 ------------------------------------------- -----------------------------------



                               PROPRIETARY RIGHTS

         We have a significant proprietary base of visualization,  collaboration
and data management  technology.  This includes  computer  software that we have
created as well as other computer software obtained through acquisitions.

         We rely 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  our  proprietary   rights.  We  consider  our  proprietary
technology  a trade  secret and  sometimes  file for  patents.  We often  obtain
registered trademark protection.

         We authorize our customers to use our visualization,  collaboration and
data  management   technology   through  various   licensing   arrangements  and
subscription agreements. We also use confidentiality,  non-compete and invention
disclaimer  contractual  clauses. As an additional  protective measure, we limit
the number of development  personnel who have access to our source code. Some of
our software also contains built-in protection that effectively prevents copying
and use on other machines.

         We license  third party  software  from others for use in our  software
products  under a variety of  different  licensing  arrangements.  Some of these
arrangements  require  us to  pay  license  fees  or  royalties  for  use of the
software.  Open source code licensing arrangements require us to make the source
code  for the  third  party  software  and its  derivative  works  available  to
end-users.

         We believe that our products,  trademarks and other proprietary  rights
do not  infringe  on  other's  proprietary  rights.  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.  We can make no  assurance  that  others  will not  assert
infringement  claims  against  us, or that these  claims  will not require us to
enter into royalty arrangements or result in costly litigation.

                                    EMPLOYEES

         At December 31, 1999, we had 919 full-time and 38 part-time  employees.
We  believe  that  relations  with our  employees  are good.  We do not have any
collective bargaining agreements with our employees. As stated in Note 18 to the
enclosed  financial  statements,  due to events subsequent to year-end,  we have
approximately 769 full-time and 32 part-time employees as of March 31, 2000.

                                       11
<PAGE>

                            EXECUTIVE OFFICERS OF EAI

         The Board of Directors generally appoints the executive officers at the
first meeting of the Board held after the annual  meeting of  stockholders.  The
executive  officers  hold office until a successor  is elected and  qualified or
until death,  resignation or removal in accordance with our by-laws. Our current
executive officers are:



Matthew M. Rizai

Age:               43

Title:             Chairman, Chief Executive Officer and Treasurer

Experience:  Dr.  Rizai has been our  Chairman,  Chief  Executive  Officer and a
Director  since joining EAI in June 1990. He has been  Treasurer  since November
1995. He was President  from June 1990 until  November  1999.  Dr. Rizai's prior
experience  includes  serving as an  associate  with a venture  capital  firm, a
senior  research  engineer  with General  Motors  Corporation  and a 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.

Robert M. Nierman

Age:               55

Title:             President and Chief Operating Officer

Experience:  Mr.  Nierman has served as President  since November 1999 and Chief
Operating Officer since joining EAI in May 1999. He was Executive Vice President
from May until November 1999. Mr. Nierman's prior experience includes serving as
Executive  Vice  President and Chief  Operating  Officer of Structural  Dynamics
Research  Corporation (SDRC) from January 1997 until May 1999, and President and
Chief Executive Officer of Metaphase Technologies,  Inc. from October 1992 until
December 1996. Mr. Nierman attended Cornell University.

Martin J. Vanderploeg

Age:               43

Title:             Executive Vice President

Experience:  Dr. Vanderploeg  co-founded EAI in 1988. He has served as Executive
Vice  President  since October 1993. Dr.  Vanderploeg  has been a Director since
1988.  He was  Secretary  from June 1990 until  November  1995 and a  Co-General
Manager of the Software  Division from October 1997 until August 1999. His 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.


                                       12
<PAGE>

Jamie A. Wade

Age:               51

Title:             Vice President of Administration, General Counsel and
                   Secretary

Experience:  Mr. Wade has served as our Vice  President  of  Administration  and
General Counsel since June 1994 and Secretary since November 1995. He has been a
Director  since  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.


Robert L. Cyr

Age:               40

Title:             Vice President of Worldwide Sales and Marketing

Experience:  Mr. Cyr has served as our Vice  President  of  Worldwide  Sales and
Marketing  since January 2000.  Prior to that, Mr. Cyr was Vice President of the
Americas   and  Asia   Pacific   for  SDRC  in  1998.   Mr.   Cyr   worked   for
Honeywell-Measurex  Corporation (and formerly  Measurex  Corporation)  from 1995
through 1997,  serving in several national and  international  sales and service
vice presidential  positions.  He earned a B.S. in Chemical Engineering from the
University of Maine's Bowdoin College.


Michael K. O'Gara

Age:               53

Title:             Vice President of Finance and Chief Financial Officer

Experience: Mr. O'Gara joined EAI in October 1999, serving as our Vice President
of  Business  Operations  until March 2000,  when he became  Vice  President  of
Finance  and Chief  Financial  Officer.  Prior to joining  EAI,  he served as an
executive of business  operations  for SDRC from January 1997 until August 1999,
and Chief Financial Officer for Metaphase  Technologies,  Inc. from October 1992
until December 1996. Mr. O'Gara earned a B.S. in Accounting from Minnesota State
University - Mankato.

Jeff D. Trom

Age:               40

Title:             Vice President and Chief Technology Officer

Experience:  Dr.  Trom,  a  co-founder  of EAI,  has held the  position  of Vice
President since June 1990, and Chief Technology  Officer since November 1999. He
served as Treasurer  from June 1990 until November 1995. Dr. Trom earned a Ph.D.
in Mechanical Engineering from Iowa State University.



                                       13
<PAGE>



                                     ITEM 2

                                   PROPERTIES

         Our headquarters in Ames, Iowa, consists of approximately 95,100 square
feet, of which we own approximately  61,700 square feet and lease  approximately
33,400  square feet under a lease that expires on July 1, 2006,  with options to
extend  through July 1, 2016. We lease office space in various  locations in the
United States,  United Kingdom and Germany,  and also lease an office in each of
the following countries: Canada, France, Italy, Malaysia and Sweden.

                                     ITEM 3

                                LEGAL PROCEEDINGS

         In  February  1999,  actions  were filed  against us and certain of our
current and former  executive  officers in the United States  District Court for
the Southern  District of Iowa.  These actions allege that we violated  Sections
10(b) and 20(a) of, and Rule 10b-5 under,  the Securities  Exchange Act of 1934.
They allege that we made false or  misleading  statements of material fact about
our accounting for in-process  research and  development in connection  with the
Rosetta   Technologies,   Inc.   (Rosetta)  and  Sense8   Corporation   (Sense8)
acquisitions and our 1999 business  prospects.  They seek  unspecified  damages.
These claims are now  consolidated  into one class action  purporting to include
individuals  who purchased our common stock between  February 19, 1998 and April
6, 1999.  The court has appointed  lead  plaintiffs  and co-lead  counsel in the
action.  The court has granted in part and dismissed in part the motion we filed
to dismiss the  plaintiffs'  amended  complaint.  We intend to oppose the action
vigorously.

         In  October  1999,  actions  were filed  against us and  certain of our
current and former  executive  officers in the United States  District Court for
the Southern  District of Iowa.  These actions allege that we violated  Sections
10(b) and 20(a) of, and Rule 10b-5 under,  the Securities  Exchange Act of 1934.
They allege that we made false or  misleading  statements of material fact about
our  financial  results  for the second  quarter of 1999.  These  claims are now
consolidated  into one  class  action  purporting  to  include  individuals  who
purchased our common stock between July 29, 1999 and October 1, 1999.  The court
has  appointed  lead  plaintiffs  and lead  counsel in the action.  We intend to
oppose the action vigorously.

         We are involved from time to time in other litigation incidental to our
business.  We believe that current  pending  litigation will not have a material
adverse effect on our business.

                                     ITEM 4

               Submission of Matters to a Vote of Security Holders

         None



                                       14
<PAGE>



                                     PART II

                                     ITEM 5

                      MARKET FOR REGISTRANT'S COMMON EQUITY
                         AND RELATED STOCKHOLDER MATTERS

Public Market for Common Stock

         Our common stock is traded on the Nasdaq Stock Market  National  Market
under the symbol  "EAII." We completed our initial  public  offering on February
28, 1996. The following table sets forth,  for the periods  indicated,  the high
and low closing  prices for the common  stock as  reported  by the Nasdaq  Stock
Market  National   Market.   The  prices  have  been  adjusted  to  reflect  our
three-for-two  stock split,  paid to  shareholders  of record as of February 12,
1998.
<TABLE>
<CAPTION>

                                               High                      Low

     Year ended December 31, 1998
<S>                                           <C>                       <C>
         First Quarter........................$45.75....................$28.33
         Second Quarter........................61.00.....................42.00
         Third Quarter.........................69.75.....................36.88
         Fourth Quarter........................55.50.....................32.13

                                               High                      Low

     Year ended December 31, 1999
         First Quarter................... ....$61.88....................$40.31
         Second Quarter................... ....42.13.....................14.88
         Third Quarter.........................25.31.....................15.81
         Fourth Quarter........................11.00......................7.25

</TABLE>

         On March 31, 2000, we had 1,105  holders of record of common stock.  We
have not  declared  or paid any cash  dividends  on the common  stock  since our
formation  and we do not  currently  intend to do so. We intend to retain future
earnings for reinvestment in our business.

Recent Unregistered Issuances of Common Stock

         On July 27,  1999,  we acquired  Kx  Verksamhetsutveckling  AB (Kx),  a
privately  held  company  in  Gothenburg,  Sweden.  The  acquisition,  including
transaction costs and assumed net liabilities,  was valued at approximately $3.1
million.  We paid cash of $1.8  million and issued  56,000  shares of our common
stock to the Kx  stockholders,  who are persons  outside the United  States,  in
compliance with the registration exemption under Rule 903 of Regulation S of the
Securities Act of 1933, as amended,  in exchange for all the outstanding  common
stock  of Kx.  We  accounted  for the  transaction  as a  purchase.  See Item 1.
Business-Acquisitions.



                                       15
<PAGE>



                                     ITEM 6

                             SELECTED FINANCIAL DATA

         We have  presented the financial  data to give  retroactive  effect for
discontinued  operations  related  to our exit  from the  Interactive  Games and
Science and Technology  businesses.  The revenues and expenses  related to these
businesses are included in income (loss) from  discontinued  operations,  net of
tax,  below.  In  addition,  the  financial  statements  for  1999  include  the
operations of Kx  Verksamhetsutveckling AB (Kx) since July 27, 1999, the date of
the acquisition, which was accounted for as a purchase. For further information,
see the "Notes to Consolidated Financial Statements."
<TABLE>
<CAPTION>

     (in thousands, except per share data)                                        Years ended December 31,
                                                                      1999        1998        1997         1996        1995
                                                               ---------------------------------------------------------------
Statement of Operations Data:
<S>                                                                 <C>         <C>         <C>          <C>          <C>
Revenues                                                            $ 70,736    $ 89,911    $ 57,630     $ 39,870     $23,376
Cost of revenues                                                      32,713      23,120      18,004       15,161      10,766
                                                               ---------------------------------------------------------------
Gross profit                                                          38,023      66,791      39,626       24,709      12,610

Operating expenses
   Sales and marketing                                                28,556      21,576      14,665        9,696       4,543
   General and administrative                                         15,950      11,326       9,065        5,707       4,425
   Research and development                                           21,409      15,949      10,383        6,158       3,973
   Goodwill and developed technology
      amortization expense                                             2,835       1,838         140           62           -
   Acquisition costs and non-recurring expenses                         (925)     12,237       4,917            -       2,520
                                                               ---------------------------------------------------------------
Total operating expenses                                              67,825      62,926      39,170       21,623      15,461
                                                               ---------------------------------------------------------------

Operating income (loss) from continuing operations                   (29,802)      3,865         456        3,086      (2,851)
Interest and other income (expense), net                                 959       1,660       1,465          847        (208)
                                                               ---------------------------------------------------------------

Income (loss) from continuing operations
   before income tax and minority interest                           (28,843)      5,525       1,921        3,933      (3,059)
Income tax expense (benefit)                                          (5,260)      5,517       1,584        1,574        (249)
                                                               ---------------------------------------------------------------

Income (loss) from continuing operations
   before minority interest                                          (23,583)          8         337        2,359      (2,810)
Minority interest                                                          -           -         (49)        (310)       (128)
                                                               ---------------------------------------------------------------
Income (loss) from continuing operations                             (23,583)          8         288        2,049      (2,938)
Income (loss) from discontinued operations,
    net of tax                                                       (16,888)        372         808          733       1,018
                                                               ---------------------------------------------------------------

Net income (loss)                                                  $ (40,471)      $ 380     $ 1,096      $ 2,782    $ (1,920)
                                                               ===============================================================
</TABLE>
<TABLE>
<CAPTION>


Earnings (loss) per share:
Basic:
<S>                                                                  <C>          <C>         <C>          <C>        <C>
  Continuing operations                                              $ (1.98)     $ 0.00      $ 0.03       $ 0.24     $ (0.50)
  Discontinued operations                                              (1.42)       0.03        0.08         0.08        0.17
                                                               ---------------------------------------------------------------
    Total                                                            $ (3.40)     $ 0.03      $ 0.11       $ 0.32     $ (0.33)
                                                               ===============================================================

Diluted:
  Continuing operations                                              $ (1.98)     $ 0.00      $ 0.02       $ 0.21     $ (0.50)
  Discontinued operations                                              (1.42)       0.03        0.07         0.07        0.17
                                                               ---------------------------------------------------------------
    Total                                                            $ (3.40)     $ 0.03      $ 0.09       $ 0.28     $ (0.33)
                                                               ===============================================================
</TABLE>

                                       16
<PAGE>

<TABLE>
<CAPTION>

(in thousands)                                                         December 31,
                                                      1999        1998         1997        1996        1995
                                               -------------------------------------------------------------
Balance Sheet Data:
Cash, cash equivalents and
 <S>                                               <C>         <C>          <C>         <C>         <C>
  short-term investments                           $10,939     $35,496      $41,287     $21,048     $ 1,430
Working capital                                     20,265      50,512       49,899      25,978       2,309
Total assets excluding net assets
  from discontinued operations                      80,564     103,004       81,271      39,458      10,235
Total assets                                        80,564     115,590       90,493      47,195      12,365
Long-term debt                                         616       1,480        1,569       3,136       3,374
Stockholders' equity                                55,191      93,539       75,083      35,838       3,786

</TABLE>


                                     ITEM 7

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                 OF FINANCIAL CONDITION AND RESULTS OF OPERATION

          PLEASE SEE THE  SECTION  ENTITLED  "SAFE  HARBOR  FOR  FORWARD-LOOKING
STATEMENTS" SET FORTH AT THE BEGINNING OF THIS REPORT.

                                    Overview

         Engineering  Animation,  Inc.  develops and  produces  Internet-enabled
visual process management,  collaboration,  communication and analysis solutions
and  accompanying  services  for  extended  manufacturing   enterprises.   Major
manufacturers  in  the  automotive,   aerospace,   industrial/heavy   equipment,
electronics,   telecommunications  and  government/defense  industries  use  our
integrated   enterprise-wide   solutions  across  corporate  intranets  and  the
Internet.

         Our software  solutions  provide  manufacturers and their suppliers and
partners with shared,  worldwide  access to product and process  data.  Together
they can analyze,  visualize and  manipulate  the shared data in real time.  Our
solutions enable the manufacturing network to realize the competitive advantages
of lowered costs and faster  time-to-market  through  improved  product designs,
enhanced product quality and shorter production cycles.

         Our software products include: the Open Enterprise  Visualization (OEV)
solutions for viewing,  distributing and analyzing  product design data; and the
virtual   factory   solutions  for  enhancing  the  efficiency  and  quality  of
manufacturing operations and processes. In 1999, we announced the development of
e-Vis.com,   our  Internet   portal  for  providing   enterprise   and  supplier
collaboration, integration and E-services to manufacturers.

         In  addition,  our  Professional  Services  Group  provides  customized
systems  integration and deployment services in support of our software products
and  E-services.  Our  Litigation  Services  Group  creates  software  animation
products for the legal community.

          In February  1999,  we restated  earnings for the years ended 1998 and
1997 to reflect  the  Securities  and  Exchange  Commission's  new  guidance  on
accounting for  in-process  research and  development  charges  associated  with
acquisitions.  In October 1999, we restated  earnings for the second  quarter of
1999 to reflect the reversal of an order that had been recorded in contravention
of our revenue recognition policy.

                                       17
<PAGE>

         We announced, on July 6, 1999, that we would exit our Interactive Games
and Science and  Technology  businesses by the end of the first quarter of 2000.
We established a provision for discontinued  operations in the second quarter of
1999 to  cover  the  estimated  costs  of  exiting  these  businesses  including
operating  losses  during the phase out period.  We believe that this  provision
will be sufficient to cover any further costs. Our prior financial  results have
been  presented  to reflect the  Interactive  Games and  Science and  Technology
businesses  as  discontinued  operations.  We  discontinued  the  use of the EAI
Interactive and Software Division names.

         On July 19, 1999,  we  announced a  relationship  with  Hewlett-Packard
Company (HP). HP agreed to support  e-Vis.com and is providing hosting services,
Web content,  marketing funds and support,  consulting,  high-performance server
platforms and use of HP's secure Internet  infrastructure.  In exchange, HP will
receive royalties from us based on total portal revenue.

         We announced,  on March 1, 2000, the signing of a definitive  agreement
with  Dassault  Systemes  S.A.  for the sale of  EAI-DELTA  GmbH (DELTA) for $31
million in cash. The resulting  pre-tax gain, net of transaction  costs, will be
recognized  in the first  quarter  of 2000 as an  extraordinary  gain on sale of
subsidiary. The transaction closed on March 24, 2000.

         We  also   announced   we  will  record  a   restructuring   charge  of
approximately  $6.0  million  in the first  quarter  of 2000  related to actions
associated with redefining the Company's infrastructure.  The charge may include
severance costs, asset write-downs, office closings and other expenses.

Acquisitions

         On July 27,  1999,  we acquired  Kx  Verksamhetsutveckling  AB (Kx),  a
privately  held  company  in  Gothenburg,  Sweden.  The  acquisition,  including
transaction costs and assumed net liabilities,  was valued at approximately $3.1
million.  We paid cash of $1.8 million and issued  56,000 shares of common stock
in exchange for all the outstanding  common stock of Kx. Kx provides  integrated
software  solutions,   training  and  support  for  manufacturing  customers  in
Scandinavia.  We have accounted for the  acquisition of Kx as a purchase and all
intangibles  associated  with the purchase are being  amortized  over five years
using the straight-line method.

         On December  22,  1998,  we  completed  the  acquisition  of DELTA.  In
connection  with the  acquisition,  we issued  approximately  557,000  shares of
common  stock in exchange  for all the  outstanding  common  stock of DELTA in a
transaction valued at approximately $24.0 million.  Our acquisition of DELTA was
accounted for as a pooling of interests.

         On  September  22,  1998,  we completed  the  acquisition  of Variation
Systems Analysis,  Inc. (VSA). We issued approximately  542,000 shares of common
stock  in  exchange  for  all  of  the  outstanding  common  stock  of  VSA in a
transaction  valued  at  approximately  $26.0  million.   This  acquisition  was
accounted for as a pooling of interests.

         On  September  22,  1998,  we  completed  the  acquisition  of  Transom
Technologies,  Inc. (Transom).  We issued approximately 192,000 shares of common
stock in  exchange  for all of the  outstanding  preferred  and common  stock of
Transom in a transaction valued at approximately $13.0 million. This acquisition
was accounted for as a pooling of interests.

         On June 17, 1998, we completed  the  acquisition  of Sense8.  We issued
approximately  158,000  shares of our  common  stock for all of the  outstanding
shares  of  Sense8.  The  transaction,   including  transaction  costs  and  net
liabilities assumed, was valued at approximately $9.7 million.  This acquisition
was accounted for as a purchase.

                                       18
<PAGE>

         On November 26, 1997, we acquired  Cimtech,  Inc.  (Cimtech) by issuing
approximately  185,000  shares  of  common  stock  in  exchange  for  all of the
outstanding  common stock of Cimtech in a  transaction  valued at  approximately
$6.0 million. This acquisition was accounted for as a pooling of interests.

         On November 25, 1997, we acquired Rosetta in two separate  transactions
valued at  approximately  $25.5 million.  We acquired a controlling  interest in
Rosetta  through  a  merger  with  Technology  Company  Ventures,  LLC  (TCV) by
exchanging  approximately  630,000  shares of common  stock for the  outstanding
member equity of TCV. This phase was accounted for as a pooling of interests. We
subsequently  acquired  the  remaining  minority  interest in Rosetta by issuing
approximately  309,000  shares of common  stock.  The  minority  interest in the
acquisition was accounted for as a purchase.

RESULTS OF OPERATIONS

         For all periods presented below, the results of operations  include the
operating  results  of Kx  beginning  July  27,  1999  and  do not  include  our
discontinued Interactive Games and Science and Technology businesses.

Revenues

         Our revenues are derived from software licenses,  software  development
contracts, professional services, customer support and maintenance. We recognize
revenue  allocated to software  licenses when an arrangement to deliver software
does  not   require   significant   additional   production,   modification   or
customization  and all four basic  criteria in the  Statement of Position  (SOP)
97-2,  as  amended,  issued  by  the  American  Institute  of  Certified  Public
Accountants  (AICPA)  have been met.  The four basic  criteria  are:  persuasive
evidence that an  arrangement  exists,  delivery has  occurred,  fee is fixed or
determinable  and  collection  of the  resulting  receivable  is  probable.  For
contracts  with multiple  obligations,  such as  deliverable  and  undeliverable
software  licenses,  maintenance or other services,  we allocate revenue to each
component  of the  contract  based on  vendor-specific  objective  evidence.  We
recognize revenues from software development contracts and professional services
based upon labor  costs  incurred  and  progress  to  completion  on  contracts.
Revenues  from  customer  support and  maintenance  are deferred and  recognized
ratably over the period these services are provided.
<TABLE>
<CAPTION>

                                    REVENUES

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>           <C>              <C>           <C>                 <C>
Revenues                                  $70,736       (21)%            $89,911       56%                 $57,630
==================================================================================================================
</TABLE>

         Revenues decreased 21% to $70.7 million for 1999 from $89.9 million for
1998.  Growth in services and  maintenance  revenues was offset by a decrease in
revenues from software licenses.  We attribute this decrease in 1999 revenues to
a number of factors, including the following.


o    As we continue to expand our partner  program,  the ratio of our  partners'
     sales to our direct sales has  increased.  Revenues  from partner sales are
     typically lower because they are royalty-based.

o    A number of our major customers  placed fewer large orders as they deployed
     across their enterprises prior year purchases of our products.

o    Our customers are changing the  fundamental  way in which they purchase and
     deploy software  within their  organizations.  As the Internet  becomes the
     primary distribution medium, the subscription model or monthly usage fee is
     replacing  the large,  one-time  licensing fee we have  experienced  in the
     past.


         Revenues increased 56% to $89.9 million for 1998 from $57.6 million for
1997.  The  increase  was  attributed  to growth in sales of software  licenses,
services and maintenance.

                                       19
<PAGE>


<TABLE>
<CAPTION>

                                COST OF REVENUES

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>             <C>           <C>                 <C>
Expense                                   $32,713        41%             $23,120       28%                 $18,004
==================================================================================================================

As a percentage
of revenues                                   46%                            26%                               31%
</TABLE>


         Our cost of revenues  includes direct labor and other costs  associated
with funded software  development,  customer support and professional  services,
packaging  and  distribution  costs,  royalty fees paid to third  parties  under
licensing agreements and amortization of capitalized software costs.

         Cost of  revenues  increased  41% to $32.7  million for 1999 from $23.1
million for 1998 primarily due to higher  compensation and related expenses from
the increased number of employees in our professional  services group and higher
royalty  fees.  The increase in the number of employees was in  anticipation  of
higher volume from our software  business.  Our cost of revenues as a percentage
of  revenues  increased  to 46% from 26% for  1999  and  1998  primarily  due to
software license revenues being lower than expected in 1999.

         Cost of  revenues  increased  28% to $23.1  million for 1998 from $18.0
million for 1997  primarily due to expanded  software  product  sales,  software
product development and professional service contracts.  Our cost of revenues as
a percentage of revenues  decreased to 26% from 31% for 1998 and 1997  primarily
due to a larger share of overall  revenues  being derived from sales of software
licenses.

         For 1999, 1998 and 1997, we capitalized software costs of $1.4 million,
$0.8 million and $1.0  million,  respectively.  We amortize  these costs over an
estimated  economic  useful  life of three  years,  or on the  ratio of  current
revenues to total projected product  revenues,  whichever  amortization  expense
amount is greater.  Amortization expenses reported as cost of revenues for 1999,
1998 and 1997 were  $733,000,  $521,000 and $219,000,  respectively.  We compare
unamortized   computer   software   costs  with  net   realizable   value  on  a
product-by-product   basis.   These  estimates  are  based  upon  all  available
information,  including life cycles and revenues from similar products, our past
history,  the market for the products,  our existing  customer  base,  and other
factors  unique to the  products.  Recoverability  is  subject to changes in our
business  model and the demand for the product  either because of general market
conditions or the introduction of new products by competitors.

<TABLE>
<CAPTION>
                               SALES AND MARKETING

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>             <C>           <C>                 <C>
Expense                                   $28,556        32%             $21,576       47%                 $14,665
==================================================================================================================

As a percentage
of revenues                                   40%                            24%                               25%
</TABLE>

         Sales and  marketing  expenses  include  personnel  and facility  costs
related  to  sales,  marketing  and  customer  service  activities,  as  well as
advertising,  promotional materials, trade shows, travel, depreciation and other
costs.

         Our sales and  marketing  expenses  increased  32% to $28.6 million for
1999 from $21.6  million for 1998  primarily  due to personnel  increases in the
sales  and  marketing  groups  and  related  expenses  and  increased  marketing
expenditures.  This  increase  was  partially  offset by lower sales  commission
expense  associated with lower revenues.  Sales and marketing expenses increased
to 40% of total  revenues  for  1999  from  24% for  1998  primarily  due to the
personnel  increases and software  license revenues being lower than expected in
1999.

                                       20
<PAGE>

         Our sales and  marketing  expenses  increased  47% to $21.6 million for
1998 from $14.7  million for 1997  primarily  due to personnel  increases in the
sales and marketing  groups and related  expenses,  additional  sales commission
expenses associated with higher revenues and increased  marketing  expenditures.
Sales and marketing  expenses  decreased to 24% of total  revenues for 1998 from
25% for 1997.

                           GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>             <C>           <C>                  <C>
Expense                                   $15,950        41%             $11,326       25%                  $9,065
==================================================================================================================

As a percentage
of revenues                                   23%                            13%                               16%
</TABLE>

         General and administrative  expenses consist primarily of personnel and
facility costs for administrative,  information  systems,  legal,  executive and
accounting  staff,  as well as certain  consulting  expenses,  insurance  costs,
professional fees, depreciation expense, bad debt expense and other costs.

         General and administrative  expenses increased 41% to $16.0 million for
1999 from $11.3  million for 1998.  The increase was  primarily due to personnel
increases and related expenses,  increased outside professional services and bad
debt  expense.  General and  administrative  expenses  increased to 23% of total
revenues for 1999 from 13% for 1998 primarily due to the personnel increases and
software license revenues being lower than expected in 1999.

         General and administrative  expenses increased 25% to $11.3 million for
1998 from $9.1 million for 1997.  The increase  was  primarily  due to personnel
increases  and  related  expenses  as we built  our  infrastructure  to  support
increased  operations.  General and administrative  expenses decreased to 13% of
total revenues for 1998 from 16% in 1997.

                            RESEARCH AND DEVELOPMENT
<TABLE>
<CAPTION>

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                       <C>            <C>             <C>           <C>                 <C>
Expense                                   $21,409        34%             $15,949       54%                 $10,383
===================================================================================================================

As a percentage
of revenues                                   30%                            18%                               18%
</TABLE>

         Research and development expenses focus on software product development
and consist  primarily of personnel  costs,  related  facility costs,  equipment
costs, depreciation and amortization expenses and outside consulting fees.

         Research and  development  expenses  increased 34% to $21.4 million for
1999 from $15.9 million for1998 primarily due to personnel increases and related
expenses and increased  outside  consulting  expenses.  Included in research and
development expenses in 1999 is a write-off of $840,000 of intangible assets for
unused technology.  Research and development  expenses increased to 30% of total
revenues for 1999 from 18% for 1998,  primarily due to the  personnel  increases
and  software  license  revenues  being lower than  expected  in 1999.  Although
software  license  revenues have  decreased,  we expect to at least maintain the
previous levels of investments made in research and development.

                                       21
<PAGE>

          Research and development  expenses  increased 54% to $15.9 million for
1998 from $10.4  million  for 1997  primarily  due to  personnel  increases  and
related  expenses  and  increased  outside  consulting  expenses.  Research  and
development expenses remained at 18% of total revenues for 1998 and 1997.

             GOODWILL AND DEVELOPED TECHNOLOGY AMORTIZATION EXPENSE
<TABLE>
<CAPTION>

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>              <C>                                 <C>
Expense                                    $2,835        54%              $1,838       N/M                    $140
==================================================================================================================

As a percentage                                4%                             2%                               N/M
of revenues
</TABLE>

         Goodwill and developed  technology  amortization expense relates to the
acquisitions  made in 1999,  1998  and  1997 as  stated  in the  section  titled
"Acquisitions" above.

<TABLE>
<CAPTION>

                  ACQUISITION COSTS AND NON-RECURRING EXPENSES

(in thousands)                               1999      Change               1998     Change                   1997
------------------------------------------------------------------------------------------------------------------
<S>                                        <C>                           <C>           <C>                  <C>
Expense                                    $(925)        N/M             $12,237       149%                 $4,917
===================================================================================================================

As a percentage
of revenues                                  (1)%                            14%                                9%
</TABLE>


         In December 1999, we reversed $0.9 million of transaction costs accrued
in connection  with  acquisitions  made in 1998.  The excess  accrual was due to
lower than expected costs and expenses associated with the acquisitions.

         In 1998, we incurred  acquisition  and  non-recurring  expenses of $6.1
million in conjunction with the  acquisitions of DELTA,  VSA and Transom.  These
acquisitions were accounted for as poolings.

         We  incurred a  non-recurring  charge of $1.9  million  for  in-process
research  and  development  in  the  second  quarter  of  1998  related  to  the
acquisition of Sense8, which was accounted for as a purchase.

         We incurred a non-recurring charge of $4.2 million in the first quarter
of 1998,  attributable  to  technology  licensed  from HP and  General  Electric
Corporate Research and Development.

         In 1997, we incurred  acquisition  and  non-recurring  expenses of $3.2
million  in  conjunction  with the  acquisitions  of  Cimtech  and TCV.  We also
incurred a  non-recurring  charge of $1.7 million in the fourth  quarter of 1997
for  in-process  research  and  development  related to the  acquisition  of the
minority interest in Rosetta.

                                       22
<PAGE>

                          INCOME TAX EXPENSE (BENEFIT)
<TABLE>
<CAPTION>

(in thousands)                               1999                           1998                              1997
------------------------------------------------------------------------------------------------------------------
<S>                                      <C>                              <C>                               <C>
Expense (benefit)                        $(5,260)                         $5,517                            $1,584
==================================================================================================================

Effective tax rate                            18%                           100%                               82%
</TABLE>

         The  effective  tax  rate  for  1999  differs  substantially  from  the
statutory  tax  rate   primarily  due  to  goodwill  and  developed   technology
amortization  of $1.8 million,  which is not  deductible for income tax purposes
and the creation of a valuation  allowance.  In the fourth  quarter of 1999,  we
recorded  a  valuation  allowance  of $11.6  million  to offset a portion of our
deferred  tax  assets,  of which $6.0  million  of the  valuation  allowance  is
attributable to discontinued operations.  The carrying value of the net deferred
tax asset net of the valuation allowance is $7.7 million.

          The  effective tax rates for 1998 and 1997 differ  substantially  from
the statutory tax rate primarily due to acquisition  related costs.  Our pre-tax
income for 1998 and 1997 includes goodwill and developed technology amortization
expense  and  acquired   in-process   research  and  development   expenses  and
acquisition  charges of $14.1  million and $5.1 million,  respectively.  Most of
these are not  deductible  for income tax  purposes.  In January  1997,  we also
recorded an income tax benefit of $1.0  million due to the reversal of valuation
allowances  that had been  previously  established  to offset a  portion  of our
deferred tax assets.

                         QUARTERLY RESULTS OF OPERATIONS

         See "Notes to the Consolidated Financial Statements - Note 14.
Quarterly Results of Operations."


                         LIQUIDITY AND CAPITAL RESOURCES

         The following  discussion of liquidity and capital  resources  includes
our continuing and discontinued operations.

         We have historically  satisfied cash requirements  through  borrowings,
operations,  capital  lease  financing  and  aggregate  net proceeds from public
offerings of common stock.

         As of  December  31,  1999,  we had  $10.9  million  in cash  and  cash
equivalents.  We consider 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.

         In 1999, net cash used in operating  activities  was $12.2 million.  We
experienced  lower revenues and cash  collections  on those revenues  during the
year.  We  also  incurred  cash  outflows   associated  with  discontinuing  our
Interactive  Games and  Science and  Technology  businesses  that will  continue
through the end of the first quarter of 2000. During the second quarter of 1999,
$3.1 million of accounts receivable  attributed to software license and deferred
maintenance revenue were sold to a third party finance company on a non-recourse
basis.  Net cash provided by operations  was $1.8 million in 1998,  and net cash
used in operating activities was $77,000 in 1997.

         In 1999,  net cash used in investing  activities  was $2.0 million.  An
increase  of $10.9  million in  property  and  equipment  was due to the cost of
expanding our  facilities by $4.7 million and purchases of computers,  furniture
and  equipment  of $6.2  million.  This  was  offset  by net  maturities  in our
short-term  investments of $11.9  million.  We paid $1.8 million in cash for the
purchase of Kx and $1.6  million was spent on  software  development  costs that
were capitalized.

         In 1998, we used cash of $9.6 million in investing activities. This was
primarily due to our property and equipment  increasing $10.5 million because of
the expansion of our  facilities by $4.3 million and our purchases of computers,
furniture  and  equipment  of $6.2  million.  This was  partially  offset by net
maturities in our short-term  investments of $3.5 million. In 1997, we used cash
of $15.6 million in investing activities. We increased our short-term investment
portfolio  by $5.5  million  and used $8.7  million  to  purchase  property  and
equipment.

                                       23
<PAGE>

         In 1999,  net cash provided by financing  activities  was $2.0 million.
The main  financing  sources were proceeds  from stock option  exercises and net
increases in our lines of credit.

         In 1998,  net cash provided by financing  activities  was $5.4 million.
The main financing sources were proceeds from stock option exercises,  issuances
of common stock and the increase in a line of credit. At December 31, 1998, $3.0
million from this line of credit was  utilized.  In 1997,  net cash  provided by
financing  activities  was $30.4 million  primarily due to a public  issuance of
common stock.

         In March  2000,  our sale of DELTA  generated  cash  proceeds  of $31.0
million,  which will be used in current  operations.  We had two lines of credit
with commercial  banks. One of the lines of credit,  totaling $1.0 million,  was
secured and has been paid off. The other line of credit,  totaling $3.5 million,
is  unsecured  and expires on May 31,  2000.  We plan to repay the $3.5  million
outstanding balance on or before May 31, 2000.

         We believe that our current cash and cash  equivalent  balances will be
sufficient  to meet  anticipated  cash needs for  working  capital  and  capital
expenditures through the next twelve months.  However, there can be no assurance
that additional  capital beyond the amounts currently  forecasted by us will not
be required or that any such  required  additional  capital will be available on
reasonable terms, if at all, at such times as we may require it.

New Accounting Pronouncements

         In 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2, Software
Revenue  Recognition,  With  Respect to Certain  Transactions."  This  statement
requires  recognition of revenue using the "residual  method." This applies when
we have  vendor-specific  objective  evidence  (VSOE) of the fair  values of all
undelivered elements in a multiple-element arrangement that is not accounted for
using long-term contract  accounting.  This also applies when VSOE of fair value
does not exist for one or more of the delivered elements in the arrangement. All
revenue-recognition criteria in SOP 97-2, other than the requirement for VSOE of
the fair value of each delivered element of the arrangement,  must be satisfied.
This statement amends SOP 98-4, "Deferral of the Effective Date of the Provision
of SOP 97-2," by extending the deferral of the  application of several  passages
of SOP 97-2 through  fiscal years ending on or before March 15, 1999.  All other
provisions  of SOP 97-2 are  effective  for  transactions  entered into by us in
fiscal years ending after March 15, 1999.

         Under the residual method, the arrangement is recognized when the total
value of the  undelivered  elements,  as  indicated  by VSOE,  is  deferred  and
subsequently  recognized in accordance  with the relevant  sections of SOP 97-2,
and the difference between the total arrangement fee and the amount deferred for
the undelivered elements is recognized by us as revenue related to the delivered
elements.

         We  adopted  SOP 98-9 on  January  1,  2000.  It is  expected  that the
adoption will not have a significant effect on our financial position, operating
results or liquidity.

         In 1998, the Financial  Accounting  Standards Board issued Statement of
Financial   Accounting  Standard  (SFAS)  No.  133  "Accounting  for  Derivative
Instruments and Hedging Activities,"  establishing new standards for recognizing
all derivatives as either assets or liabilities, and measuring those instruments
at fair value.  Currently,  we do not  anticipate  that SFAS No. 133 will have a
material  impact on our financial  position,  results of operation or liquidity.
SFAS No. 133 is effective on January 1, 2001.

                                       24
<PAGE>

                                    DIVIDENDS

         We have not paid any cash  dividends  and do not  currently  anticipate
paying cash dividends in the future. There can be no assurance that we will ever
pay a cash dividend.  Prior to our acquisition of DELTA in December 1998,  DELTA
had declared and paid dividends to its shareholders.

                         YEAR 2000 READINESS DISCLOSURE

         Through 1999, we continued evaluating the effect of Year 2000 issues on
our core software products, mission critical facilities, databases, and hardware
and software  systems.  Under a plan  formulated in 1998 to  coordinate  our Y2K
efforts company-wide, the Vice President of Administration directed a task force
comprised of high level  managers  that oversaw the  evaluation of our products,
facilities and operations. In general, the plan called for:

o    creating an inventory of current  products,  mission  critical  facilities,
     databases and systems;
o    analyzing our state of knowledge regarding their Y2K readiness;
o    gathering additional information through contacts or testing, where needed;
o    assessing  whether a risk  existed  and what to do about  it;  and
o    developing and implementing remedies, where needed.

         We addressed the Y2K-related issues we identified through these efforts
and, where appropriate,  communicated our result to our customers.  We developed
pages within our corporate Web site to communicate with the public about our Y2K
readiness.

         We believe our efforts were  successful.  We have not  experienced  any
disruption of our business as a result of Y2K-related  issues.  We will continue
to be watchful for  late-developing  Y2K issues.  We cannot assure you, however,
that all Y2K  issues  have  surfaced  or, if they were to,  that they  would not
materially adversely affect our business operations or financial statements.

                                       25
<PAGE>

                                  RISK FACTORS

         You should  carefully  consider the risks and  uncertainties  described
below and other  information  in this  report.  These are not the only risks and
uncertainties  that we face.  Additional risks and uncertainties  that we do not
know  about or that we  currently  believe  are  immaterial  may  also  harm our
business operations.  If any of these risks or uncertainties actually occur, our
business, financial position, operating results or liquidity could be materially
harmed.  Please refer to the section  titled  "Safe  Harbor For  Forward-Looking
Statements" set forth at the beginning of this report.

INDUSTRY RISKS

Failure to Adapt to Technological Changes or a Lack of Market Acceptance for Our
Products or Services Could Harm Our Business

         Our revenues, operating results and liquidity may decline if:

o    our products and services become outdated;
o    we are unable to introduce  new products or services,  or upgrade  existing
     products or services, when the market demands them; or
o    the market does not accept our products or services or their upgrades.

     Therefore, our success depends on our ability to:

o    anticipate  our  customers'  evolving   visualization,   collaboration  and
     communication   requirements;
o    adapt our software products for new platforms;
o    cost-effectively  develop,  produce,  market and sell high-quality products
     and services that timely address our customers' requirements;
o    capture and retain  major  manufacturers  as our  customers;  and
o    attract other  companies to make their software  products  compatible  with
     ours.

         Since we provide products and services in a rapidly changing  industry,
we try to anticipate emerging computer technologies and capabilities.  We cannot
assure you that we will be able to  introduce  new  products  and  services on a
timely  basis or that our new  products  and  services  will be  accepted in the
market.  Because  we target  developing  markets  in which we are  uncertain  of
effects of future product  enhancements,  future technological  developments and
future competition, we cannot accurately predict the life cycles of our products
and services.

The Markets for Our Software Products and Services are Emerging and May Not
Continue to Grow

         Software  licensing of our OEV and virtual  factory  solutions  and the
sales of related services currently constitute the majority of our revenues. The
market  for  these  enterprise-wide  visualization  and  collaboration  software
products and services in the  automotive,  aerospace,  heavy equipment and other
manufacturing  industries  is  still  emerging  and  dependent  on a  number  of
variables,  including customer preferences and the rate at which customers adopt
and deploy new technologies.  Our growth depends on whether there is significant
market   demand  for  these   solutions  and   services,   particularly   on  an
enterprise-wide  basis.  We cannot assure you that the software  products market
will  continue to grow or that the market will  continue to demand or accept our
software products and support services.

         Additionally,  we have invested significant  resources in our e-Vis.com
solutions.  The on-line market is a new industry that is currently  experiencing
rapid growth. Its future growth and direction, however, are unknowns. Our growth
in this  business  will  depend  on how  well we  anticipate  the  manufacturing
market's on-line collaboration and communication  requirements,  and our success
in communicating  and delivering our on-line  capabilities to the market.  We do
not have any prior  experience in this market and cannot assure you that we will
be successful.

                                       26
<PAGE>

COMPANY RISKS

Our Quarterly Operating Results May Fluctuate; Our Future Revenue and
Profitability Are Uncertain

         We historically have experienced fluctuations in our quarterly revenues
and operating  results and we expect to experience  fluctuations  in the future.
Since our quarterly and annual  revenues and operating  results vary, we believe
that period-to-period comparisons of results are not necessarily meaningful. You
should not rely on  period-to-period  comparisons  as  indicators  of our future
performance.

         If revenues fall below our  expectations in a particular  quarter,  our
business  could be  harmed.  General  economic  conditions  affect  our  revenue
expectations, as well as the following factors:

o    difficulties in forecasting the volume and timing of customer orders;
o    the timing of our introduction of new products relative to our competitors'
     introduction of similar products;
o    our arrangements to market our products;
o    customer budgets and  willingness  to pay for delivered  products and
     services; and
o    our ability to competitively price our products and services.

         The revenue flow from our OEV and virtual  factory  solutions sales and
licensing is uneven within a fiscal quarter.  Sales typically occur in the third
month of a  quarter,  and often in the last week or days of a  quarter.  Factors
contributing to this pattern include:

o    long lead times on  customer  budgetary  approvals,  which tend to be given
     late in a quarter;
o    the  tendency  of  customers  to wait  until late in a quarter to commit to
     purchase in the hope of obtaining more  favorable  pricing from one or more
     competitors seeking their business;
o    at times, seasonal influences; and
o    the fourth quarter influence of customers  spending their remaining capital
     budget  authorization  prior to new budget constraints in the first quarter
     of the following year.

         Shortfalls  from  anticipated  revenue  or revenue  recognition  delays
result in  significant  variations  in our  operating  results  from  quarter to
quarter.  On the other hand, our expenses are relatively fixed in the near term,
or they may  increase  as our  research  and  development  efforts  increase  in
anticipation of new market opportunities or in response to competitive pressure.
We do not anticipate this pattern changing.

         Additionally,  we find it  difficult  to forecast  quarterly  licensing
revenue.  Our sales cycle, from initial  evaluation to delivery of software,  is
lengthy and varies substantially from customer to customer,  particularly in the
cases of customized  business  solutions.  Even though we intend to decrease our
involvement with customized business  solutions,  we do not anticipate that this
change will improve our ability to forecast quarterly revenue.

         We anticipate our e-Vis.com sales will be primarily subscription-based.
We will  recognize  revenue  from  these  sales  ratably  over  the  life of the
subscription.  The degree to which these sales will have any leveling  effect on
our revenue flow depends  particularly upon how quickly we grow this area of our
business.  However,  we  have  no  prior  experience  with a  subscription-based
business.  We cannot  assure  you that  these  sales will have any effect on our
results.

                                       27
<PAGE>

Our Share Price is Volatile

         The market price of our common stock has been and is likely to continue
to be volatile and significantly affected by factors such as:

o    general market conditions and market conditions affecting technology stocks
     in  particular;
o    actual or  anticipated  fluctuations  in our quarterly or annual  operating
     results;
o    announcements  relating to customer contracts,  investments,  acquisitions,
     divestitures;
o    discontinued operations, layoffs or corporate actions such as stock splits;
     and
o    industry conditions or trends.

         The  stock  market  has  experienced   significant   price  and  volume
fluctuations that have particularly  affected the market prices of the stocks of
technology  companies.  These broad market or technology sector fluctuations may
adversely affect the market price of our common stock.

         The  market  price of our  common  stock has also been and is likely to
continue to be affected by expectations  of analysts and investors.  Reports and
statements of analysts do not necessarily reflect our views.

Failure to Integrate Acquired Businesses Could Harm Our Business

         We need to successfully  integrate the businesses that we have acquired
and any  businesses  that we may acquire in the  future.  Each  acquisition  has
required  us to pay  significant  attention  to  the  integration  of  products,
processes, personnel and culture, including the following specific items:

o    the acquired businesses' response to integration into our organization;
o    our  ability  to   effectively   manage  the  operations  of  the  acquired
     businesses; and
o    the profitability and growth of the acquired businesses.

         We may not be able successfully to integrate  businesses we acquired in
the past or businesses we may acquire in the future.

Decreased Sales to a Key Customer or Industry Could Harm Our Business

         In 1999,  11% and 10% of our revenues  came from sales and licensing of
software products and services to  DaimlerChrysler  and SDRC,  respectively.  We
cannot  assure you that we will be able to continue to sell or license  software
products and services to these customers at 1999 levels or, if we fail to do so,
that we will be able to  replace  them  with new  customers.  In  addition,  the
automotive industry accounts for a large portion of our other software customers
and a target market for our on-line services.  Decreased demand for our software
products  and  services by  automotive  companies  or the lack of demand for our
on-line services in this industry would harm our business.

                                       28
<PAGE>

We May Face Significant Competition

         There are large  software  companies and companies in the CAD, CAE, CAM
and PDM markets offering solutions with visualization  functionality  similar to
that available through our software  products.  These companies include Dassault
Systemes  S.A.  and  Parametric  Technology  Corporation.  We have  also  formed
partnerships with other companies in these markets by licensing  portions of our
technology to them, which enables them to offer visualization  solutions.  These
companies  include  Unigraphics  Solutions Inc.,  Structural  Dynamics  Research
Corporation and SAP A.G.

         Companies like NexPrise,  Inc. and Framework  Technologies  Corporation
offer  solutions  with  collaboration  functionality  similar  to  that  of  our
products.  Companies offering Internet visual collaboration functions similar to
ours include Alibre, Inc. and CoCreate Software, Inc.

         Although we believe that we have technical  advantages over competitors
in these  markets,  maintaining  these  advantages  will  require our  continued
investment in research and development and sales and marketing. We cannot assure
you that we will have  sufficient  resources to make  continued  investments  in
these areas or that our efforts will be successful.  Moreover,  we cannot assure
you that technical advantages will mean success in the market.

         The markets for  manufacturing-oriented  portal and exchange  solutions
are new and experiencing rapid growth and evolution. Internet providers in these
markets,  like  VerticalNet,  Inc.,  Ariba,  Inc.,  Commerce  One  Inc.  and  i2
Technologies,  Inc., offer manufacturers  vertical and horizontal solutions that
compete  with certain of the  functions  offered by our  solutions.  At the same
time,    major    manufacturers,    including    those   in   the    automotive,
telecommunications,  and aerospace and defense  industries,  have announced that
they are forming their own industry  exchanges and portals  focused on their own
needs.  Competition to be the  Internet-enabled  solution  provider to these and
other consolidated customer bases will be significant. We cannot assure you that
we will be successful in this business.

We Rely on Third Parties to Market and Distribute Our Products and Services, in
Addition to Our Own Sales Force

         We market our  products  and  services to end users both  directly  and
indirectly.  Our success  depends in part on  agreements  with third  parties to
market and  distribute  our products and services.  These  agreements  represent
significant  marketing and distribution  opportunities for our software products
and  services.  However,  we cannot  assure  you that these  relationships  will
continue beyond their contract terms or that they will be performed to our level
of expectation.

         In  addition,  our success  depends on our own sales  force.  Our sales
force must be able to adapt to changes in our marketing  strategy.  In the past,
we focused our efforts on selling discrete  software  products to our customers.
With the  advances  in our  technology  and the  changes in the  market,  we are
transitioning  our  marketing   strategy  to  selling  business  solutions  that
incorporate many of our products. We cannot assure you that our sales force will
deliver this message to our customers in a manner that will ensure our success.

         Moreover,  our  success  depends on our own sales force  achieving  its
sales  objectives.  We  assign  our  sales  personnel  sales  quota,  to which a
percentage  of  their  compensation  is  tied.  While  the  quota  and  variable
compensation are intended as incentives to enhance  performance,  the success of
these  factors  depends on how well we estimate and link the two,  given current
market conditions. We cannot assure you that we will achieve the proper balance.
Additionally,  the on-line  services  market is  emerging.  Our sales force must
contend with an emerging  market and  introduce our new products and services to
this market. We cannot assure you that their efforts will be successful.

                                       29
<PAGE>

We Must Effectively Manage Our Resources in Anticipation of and Response to Our
Business Direction

         Over the past two and one-half years, we have experienced  significant,
yet opposite  growth  trends in  responding  to the needs of the market.  First,
through  acquisitions,  we  rapidly  increased  our  product  offerings,  staff,
facilities  and  revenues.  Then,  with  revenues  declining,  we refocused  our
business direction and, in the process, discontinued businesses, divested assets
and reduced staff.  These  expanding and  contracting  trends exert  significant
strain  on  our  employees,   operating  procedures,   financial  resources  and
information systems.

         We cannot assure you that these pressures will lessen as we continually
reassess  and adjust our business  model in response to the market.  Our success
will depend in part on our ability to effectively  transition our activities and
resources to meet these changes. We expect that our operating results, liquidity
and financial position would suffer if we were unable to manage our resources in
response to our evolving business direction.

We Face Risks Associated with Our International Business

          Our international  operations and revenues have increased in the past.
In March  2000,  we sold  DELTA,  which  had  contributed  significantly  to our
international  revenues.  We cannot  assure  you that our future  revenues  from
international business will continue to increase.

           In 1999, sales to international  customers represented 32% of our net
revenues.  As a  result,  we are  subject  to the risks of  conducting  business
outside the United States, including:

o    changes in regulatory requirements;
o    the burdens of complying with a variety of foreign laws;
o    fluctuations in currency exchange rates and tariffs;
o    other trade barriers and restrictions; and
o    slower collection periods.

         We do not know what  effect  such  regulatory,  geopolitical  and other
factors will have on our business in the future or if we will have to modify our
business. In addition, the laws of certain foreign countries may not protect our
proprietary rights to the same extent as do the laws of the United States.

We Face Risks Related to Our  Intellectual Property Rights

         Our extensive  proprietary  technology and databases are crucial to our
success and ability to compete.  We protect  our  proprietary  rights  through a
combination of:

o    copyright, trademark and trade secret laws;
o    employee and third party non-disclosure and non-competition agreements; and
o    negotiated contract terms and conditions.

 However, these measures may not prevent our competitors from obtaining or using
our proprietary technology and databases.

         We have  incorporated  into or employed  mechanisms with certain of our
products and  services  designed to prevent or inhibit  unauthorized  copying or
use. Also, we package our software  products and services with  agreements  that
prohibit their unauthorized copying and use. Nevertheless, certain users do copy
or use software  without  authorization,  despite our efforts.  If a significant
amount of unauthorized copying or use of our products or services were to occur,
it would negatively impact our revenues and operating results.

                                       30
<PAGE>

         Also,  we  believe  that as the  number  of  software  products  in the
industry  increases and the  functionality of these products  further  overlaps,
assertions  of  infringement  claims will become more common.  If third  parties
assert infringement claims against us, it is possible that we will have to enter
into royalty arrangements or engage in costly litigation, which could negatively
affect our profitability.

Internet-Associated Problems Encountered by Our Customers May Adversely Affect
Us

         We have  partnered  with HP for it to provide the hosting and  security
functions for our e-Vis.com business solution. If HP were unable or unwilling to
provide  these  functions  in a  timely,  uninterrupted  or secure  manner,  our
business  could be  negatively  affected by  customers'  decisions  to reduce or
discontinue the use of our Internet solutions.

         Additionally,   factors   like   natural   disasters,   electrical   or
telecommunication failures, sabotage, vandalism or human error may interrupt our
services  and  cause our  customers  to  reduce  or  terminate  their use of our
solutions.  Any of these events could negatively affect our revenues,  operating
results, liquidity or financial position.

Our Success Depends on Our Key Personnel

         Our  success  depends  in large  part on our  ability  to  continue  to
attract,  motivate and retain key  technical,  marketing,  sales and  management
personnel.  If one of our key  employees  decides to leave EAI,  we will have to
find a replacement  with the  combination of skills and attributes  necessary to
execute our strategy.  Because  competition for skilled employees is intense and
the process of finding  qualified  individuals can be lengthy and expensive,  we
believe that the loss of the services of key personnel could  negatively  affect
our revenues, operating results, liquidity and financial position.

         We maintain key person life insurance covering our executive  officers.
Nevertheless,  the amount of insurance may be insufficient to offset the loss of
their services.

                                       31
<PAGE>

                                     ITEM 7A

           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Rates

         Our revenues  originating outside the U.S. for 1999, 1998 and 1997 were
32%, 27% and 22% of total revenues. International sales are made mostly from our
foreign  subsidiaries  in  local  currency.   Certain  international  sales  are
denominated in U.S.  dollars.  Our subsidiaries  incur most of their expenses in
local currency.

         Our   international   business  is  subject  to  risks  typical  of  an
international  business  including,  but  not  limited  to:  differing  economic
conditions,  changes in  political  climate,  differing  tax  structures,  other
regulations and restrictions and foreign currency volatility. Our future results
could be adversely impacted by changes in these or other factors.

Interest Rates

         Our long-term debt in 1999 included two lines of credit with commercial
banks.  Both lines of credit,  one totaling $3.5 million and the other  totaling
$1.0 million, had floating rates of interest. All other long-term debt had fixed
rates of interest ranging from 0% to 6%.

                                       32
<PAGE>

                                     ITEM 8

                   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                          Independent Auditors' Report

The Board of Directors and Shareholders
Engineering Animation, Inc.

         We  have  audited  the  accompanying   consolidated  balance  sheet  of
Engineering  Animation,  Inc. and  subsidiaries as of December 31, 1999, and the
related  consolidated   statements  of  operations,   stockholders'  equity  and
comprehensive  income  (loss)  and cash  flows  for the year then  ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
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
present fairly, in all material respects,  the financial position of Engineering
Animation,  Inc. and  subsidiaries  as of December 31, 1999,  and the results of
their operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.

                                                               /s/ KPMG LLP


Minneapolis, Minnesota
March 24, 2000


                                       33
<PAGE>


                         Report of Independent Auditors

The Board of Directors and Shareholders
Engineering Animation, Inc.

         We  have  audited  the  accompanying   consolidated  balance  sheet  of
Engineering   Animation,   Inc.  as  of  December  31,  1998,  and  the  related
consolidated statements of operations,  shareholders' equity, and cash flows for
each of the two years in the period ended  December  31,  1998.  Our audits also
included the  financial  statement  schedule  listed in the Index at Item 14(a).
These financial  statements and schedule are the responsibility of the Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements and schedule based on our audits.

         We conducted our audits in accordance with auditing standards generally
accepted in the United States.  Those standards require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.  An
audit also includes  assessing the accounting  principles  used and  significant
estimates  made by  management,  as well as  evaluating  the  overall  financial
statement  presentation.  We believe that our audits provide a reasonable  basis
for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Engineering  Animation,  Inc. at December 31, 1998, and the consolidated results
of its  operations  and its cash  flows for each of the two years in the  period
ended  December 31, 1998, in conformity  with  accounting  principles  generally
accepted in the United  States.  Also,  in our  opinion,  the related  financial
statement  schedule,   when  considered  in  relation  to  the  basic  financial
statements  taken as a whole,  presents  fairly  in all  material  respects  the
information set forth therein.

                                                     /s/ Ernst & Young LLP



Minneapolis, Minnesota
February 15, 1999

                                       34
<PAGE>

<TABLE>
<CAPTION>


Engineering Animation, Inc.
Consolidated Balance Sheets

(thousands, except share and per share data)

                                                                                         December 31,
Assets                                                                               1999            1998
                                                                           --------------------------------
Current assets:
<S>                                                                               <C>             <C>
     Cash and cash equivalents                                                    $ 10,939        $ 23,623
     Short-term investments                                                              -          11,873
     Accounts receivable, net:
       Billed, less allowance for doubtful accounts of $714 in 1999
           and $300 in 1998                                                         18,649          26,684
       Unbilled                                                                      2,308           3,595
     Deferred income taxes                                                           7,758           1,250
     Income taxes receivable                                                           693           1,882
     Prepaid expenses and other assets                                               3,091           1,997
                                                                           --------------------------------
 Total current assets                                                               43,438          70,904

 Property and equipment, net                                                        22,168          15,848

 Other assets:
     Restricted cash                                                                    30              60
     Note receivable                                                                 1,408           1,408
     Software development costs, net of accumulated
       amortization of $967 in 1999 and $774 in 1998                                 2,373           1,679
     Deferred income taxes                                                               -             769
     Goodwill and developed technology, net of
       accumulated amortization of $4,875 in 1999 and $2,040 in 1998                10,915          10,973
     Other                                                                             232           1,363
     Net assets of discontinued operations                                               -          12,586
                                                                           --------------------------------
Total assets                                                                      $ 80,564       $ 115,590
                                                                           ================================

Liabilities and stockholders' equity
Current liabilities:
     Accounts payable                                                              $ 4,165         $ 3,340
     Accrued compensation and other accrued expenses                                 8,531          10,135
     Lines of credit                                                                 4,500           3,000
     Deferred revenue                                                                5,204           3,590
     Current portion of long-term debt and lease obligations                           773             327
                                                                           --------------------------------
 Total current liabilities                                                          23,173          20,392
 Long-term debt and lease obligations due after one year                               616           1,480
 Other long term liabilities                                                           184             179
 Deferred income taxes                                                                 104               -
 Net liabilities of discontinued operations                                          1,296               -

 Stockholders' equity
     Preferred stock, $0.01 par value:
       Authorized shares - 20,000,000
        Issued and outstanding shares - None                                             -               -
     Common stock, $0.01 par value:
       Authorized shares - 60,000,000
        Issued and outstanding shares - 11,973,221 in 1999
            and 11,772,969 in 1998                                                     120             118
     Additional paid in capital                                                     94,959          92,308
     Accumulated other comprehensive income (loss)
       -foreign currency translation adjustment                                       (506)             24
     Retained earnings (deficit)                                                   (39,382)          1,089
                                                                           --------------------------------
 Total stockholders' equity                                                         55,191          93,539
                                                                           --------------------------------
 Commitments and contingencies

Total liabilities and stockholders' equity                                        $ 80,564       $ 115,590
                                                                           ================================

See accompanying notes.

                                       35
<PAGE>

</TABLE>

<TABLE>
<CAPTION>


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

                                                                              Years ended December 31,
                                                                         1999            1998             1997
                                                             --------------------------------------------------

<S>                                                                  <C>             <C>              <C>
Revenues                                                             $ 70,736        $ 89,911         $ 57,630
Cost of revenues                                                       32,713          23,120           18,004
                                                             --------------------------------------------------
Gross profit                                                           38,023          66,791           39,626

Operating expenses:
   Sales and marketing                                                 28,556          21,576           14,665
   General and administrative                                          15,950          11,326            9,065
   Research and development                                            21,409          15,949           10,383
   Goodwill and developed technology amortization                       2,835           1,838              140
   Acquisition costs and non-recurring expenses                          (925)         12,237            4,917
                                                             --------------------------------------------------
Total operating expenses                                               67,825          62,926           39,170
                                                             --------------------------------------------------

Operating income (loss) from continuing operations                    (29,802)          3,865              456
Interest and other income, net                                            959           1,660            1,465
                                                             --------------------------------------------------

Income (loss) from continuing operations
   before income tax and minority interest                            (28,843)          5,525            1,921
Income tax expense (benefit)                                           (5,260)          5,517            1,584
                                                             --------------------------------------------------

Income (loss) from continuing operations
   before minority interest                                           (23,583)              8              337
Minority interest                                                           -               -              (49)
                                                             --------------------------------------------------
Income (loss) from continuing operations                              (23,583)              8              288
Discontinued operations:
   Income (loss) from discontinued operations,
      net of tax (see note 2)                                          (3,138)            372              808
   Provision for exiting discontinued operations
       including operating losses during phase-out
       period, net of tax (see note 2)                                (13,750)              -                -
                                                             --------------------------------------------------

Net income (loss)                                                   $ (40,471)          $ 380          $ 1,096
                                                             ==================================================


Earnings (loss) per share:
Basic:
  Continuing operations                                               $ (1.98)         $ 0.00           $ 0.03
  Discontinued operations                                               (1.42)           0.03             0.08
                                                             --------------------------------------------------
    Total                                                             $ (3.40)         $ 0.03           $ 0.11
                                                             ==================================================

Diluted:
  Continuing operations                                               $ (1.98)         $ 0.00           $ 0.02
  Discontinued operations                                               (1.42)           0.03             0.07
                                                             --------------------------------------------------
    Total                                                             $ (3.40)         $ 0.03           $ 0.09
                                                             ==================================================

Weighted average shares outstanding                                    11,887          11,549           10,061
Weighted average shares outstanding and
   assumed conversion                                                  11,887          12,772           11,647



See accompanying notes.

                                       36
<PAGE>

</TABLE>



Engineering Animation, Inc.
Consolidated Statement of Stockholders' Equity and Comprehensive Income (Loss)
(in thousands)
<TABLE>
<CAPTION>



                                                                                                Accumulated
                                                                Common Stock        Additional     Other      Retained    Total
                                                             -------------------     Paid-In   Comprehensive  Earnings Stockholders'
                                                              Shares      Amount     Capital    Income (Loss) (Deficit)   Equity
                                                             -------------------   ---------- ---------------- --------- -----------
<S>                <C>                                        <C>       <C>         <C>          <C>          <C>          <C>
Balance at January 1, 1997                                    8,986     $     90    $ 35,607     $    (41)    $    182     $ 35,838
Comprehensive income
   Net income                                                  --           --          --           --          1,096        1,096
   Foreign currency translation adjustment                     --           --          --            (29)        --            (29)
                                                                                                                           --------
Total comprehensive income                                                                                                    1,067
                                                                                                                           --------
Issue of common stock, net of offering
   expenses                                                   1,583           16      29,604         --           --         29,620
Common stock issued for options and
   warrants exercised                                           165            2       1,098         --           --          1,100
Shares redeemed                                                 (12)        --          (303)        --           (363)        (666)
Conversion of notes payable into
   common stock                                                  18         --           351         --           --            351
Purchase of minority interest in
   Rosetta Technologies, Inc.                                   290            3       7,130         --           --          7,133
Income tax benefit related to
   stock option plans                                          --           --           664         --           --            664
Dividends paid by subsidiary                                   --           --          --           --            (24)         (24)
                                                             -------------------     --------     --------     --------    --------
Balance at December 31, 1997                                 11,030          111      74,151          (70)         891       75,083
Comprehensive income
   Net income                                                  --           --          --           --            380          380
   Foreign currency translation adjustment                     --           --          --             94         --             94
                                                                                                                           --------
Total comprehensive income                                                                                                      474
                                                                                                                           --------
Issue of common stock, net of
   offering expenses                                             47         --         1,788         --           --          1,788
Common stock issued for options
   and warrants exercised                                       519            5       2,371         --           --          2,376
Shares redeemed                                                  (7)        --           (41)        --           (149)        (190)
Purchase of Sense8 Corporation                                  158            2       7,037         --           --          7,039
Income tax benefit related to
   stock option plans                                          --           --         5,754         --           --          5,754
Shares issued as non-cash
   compensation                                                  26         --         1,248         --           --          1,248
Dividends paid by subsidiary                                   --           --          --           --            (33)         (33)
                                                            --------------------     --------     --------     --------    --------
Balance at December 31, 1998                                 11,773          118      92,308           24        1,089       93,539
Comprehensive loss
   Net loss                                                    --           --          --           --        (40,471)     (40,471)
   Foreign currency translation adjustment                     --           --          --           (530)        --           (530)
                                                                                                                           --------
Total comprehensive loss                                                                                                    (41,001)
                                                                                                                           --------
Common stock issued for options and
    warrants exercised                                          144            1         969         --           --            970
Income tax benefit related to
   stock option plans                                          --           --           483         --           --            483
Purchase of Kx                                                   56            1       1,199         --           --          1,200
                                                            --------------------    --------     --------     --------     --------
Balance at December 31, 1999                                 11,973     $    120    $ 94,959     $   (506)    $(39,382)    $ 55,191
                                                            ========    ========    ========     ========     ========     ========
</TABLE>

See accompanying notes.

                                       37
<PAGE>

<TABLE>
<CAPTION>

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

                                                                                            Years ended December 31,
Operating activities                                                                   1999             1998              1997
                                                                            ---------------------------------------------------
<S>                                                                               <C>                  <C>             <C>
   Net income (loss)                                                              $ (40,471)           $ 380           $ 1,096
   Adjustments to reconcile net income (loss) to net cash
    provided by (used in) operating activities
      Goodwill and developed technology amortization expense                          2,835            1,838               140
      Depreciation and amortization                                                   5,937            4,563             2,622
      Deferred income taxes                                                          (5,939)             122            (1,527)
      Write-off of purchased in-process research and development costs                    -            1,918             1,684
      Provision for exiting discontinued operations
        including operating losses during phase out period                           13,750                -                 -
      Loss on disposal or impairment of assets                                        1,032                -                 -
      Minority interest in income                                                         -                -                49
      Non-cash compensation expense                                                       -            1,248                 -
      Changes in operating assets and liabilities
       Billed accounts receivable                                                     8,088          (11,091)           (6,596)
       Unbilled accounts receivable                                                   4,816           (1,839)           (3,377)
       Prepaid expenses                                                              (1,000)            (381)           (1,116)
       Accounts payable                                                               1,122             (754)            1,605
       Accrued expenses                                                              (5,802)           1,723             3,407
       Income taxes                                                                   1,695            3,499               322
       Deferred revenue                                                               1,781              580             1,614
                                                                            ---------------------------------------------------
   Net cash provided by (used in) operating activities                              (12,156)           1,806               (77)
                                                                            ---------------------------------------------------
Investing activities
   Purchases of property and equipment                                              (10,948)         (10,519)           (8,746)
   Change in other assets                                                               (34)          (1,285)             (330)
   Capitalization of software development costs                                      (1,581)          (1,390)           (1,013)
   Maturities of marketable securities                                               21,500           51,951            37,068
   Purchase of marketable securities                                                 (9,627)         (48,417)          (42,590)
   Cash purchased in acquisitions                                                       481               79                 -
   Cash consideration for purchase of Kx                                             (1,800)               -                 -
                                                                            ---------------------------------------------------
   Net cash used in investing activities                                             (2,009)          (9,581)          (15,611)
                                                                            ---------------------------------------------------
Financing activities
   Decrease in restricted cash                                                           30              150               285
   Net change in short-term borrowing                                                 1,404            2,473               232
   Proceeds from note receivable                                                          -              116                30
   Proceeds from long-term debt                                                           -              432             1,598
   Payments on long-term debt and capital lease obligations                            (416)          (1,689)           (1,731)
   Dividend distribution by subsidiary                                                    -              (33)              (24)
   Net proceeds from exercise of options and warrants                                   970            2,376             1,100
   Net proceeds from issuance of common stock                                             -            1,598            28,954
                                                                            ---------------------------------------------------
   Net cash provided by financing activities                                          1,988            5,423            30,444
                                                                            ---------------------------------------------------
Net increase (decrease) in cash and cash equivalents                                (12,177)          (2,352)           14,756
                                                                            ---------------------------------------------------
   Effect of exchange rates                                                            (507)              94               (39)
   Cash and cash equivalents at beginning of year                                    23,623           25,881            11,164
                                                                            ---------------------------------------------------
   Cash and cash equivalents at end of year                                        $ 10,939         $ 23,623          $ 25,881
                                                                            ===================================================

Supplemental disclosures
   Interest paid                                                                      $ 146            $ 262             $ 305
   Income taxes (received) paid                                                      (1,206)             715             3,363
   Property and equipment purchased through capital lease
    obligations and notes payable                                                         -              142               121
   Common stock issued to purchase minority interest
    in Rosetta Technologies, Inc.                                                         -                -             7,133
   Promissory note converted into common stock                                            -                -               351
   Common stock issued to purchase Sense8 Corporation                                     -            7,039                 -
   Net liabilities assumed in Sense8 Corporation purchase                                 -            2,628                 -
   Common stock issued to purchase Kx                                                 1,200                -                 -


See accompanying notes.

</TABLE>

                                       38
<PAGE>


Engineering Animation, Inc.
Notes to Consolidated Financial Statements

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business

         Engineering  Animation,   Inc.  (the  Company)  develops  and  produces
Internet-enabled  visual process  management,  collaboration,  communication and
analysis  solutions  and  accompanying   services  for  extended   manufacturing
enterprises. Major manufacturers in the automotive, aerospace,  industrial/heavy
equipment, electronics, telecommunications and government/defense industries use
its integrated  enterprise-wide  solutions  across  corporate  intranets and the
Internet.

         The  Company's  software  solutions  provide  manufacturers  and  their
suppliers  and  partners  with shared,  worldwide  access to product and process
data.  Together they can analyze,  visualize and  manipulate  the shared data in
real time.  Its  solutions  enable  the  manufacturing  network  to realize  the
competitive  advantages  of  lowered  costs and  faster  time-to-market  through
improved  product  designs,  enhanced  product  quality and  shorter  production
cycles.

         Its software products include: the Open Enterprise  Visualization (OEV)
solutions for viewing,  distributing and analyzing  product design data; and the
virtual   factory   solutions  for  enhancing  the  efficiency  and  quality  of
manufacturing  operations  and  processes.  In 1999,  the Company  announced the
development  of  e-Vis.com,  its Internet  portal for providing  enterprise  and
supplier collaboration, integration and E-services to manufacturers.

         In  addition,  the  Professional  Services  Group  provides  customized
systems integration and deployment services in support of the Company's software
products and services.  The Litigation Services Group creates software animation
products for the legal community.

         The Company introduced on May 27, 1999, e-Vis.com,  its Internet portal
for enterprise and supplier  collaboration,  integration  and  E-services.  This
secure,  Web-based  solution  allows  manufacturing  companies to integrate with
their suppliers and create virtual project teams.  e-Vis.com  provides companies
the ability to  collaborate  in real time  across  organization  and  geographic
boundaries,  capture  knowledge about projects and ensure that project teams are
working with current information.

         The  Company  announced  on  July  6,  1999  that  it  would  exit  its
Interactive Games and Science and Technology  businesses by the end of the first
quarter of 2000 and has classified both of these as discontinued operations.

         On  July  19,  1999,  the  Company   announced  a   relationship   with
Hewlett-Packard  Company  (HP).  HP agreed to  support  e-Vis.com  by  providing
hosting  services,  Web  content,  marketing  funds  and  support,   consulting,
high-performance   server   platforms   and   use  of   HP's   secure   Internet
infrastructure.

Basis of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company and its subsidiaries.  The accounts of the Interactive Games and Science
and Technology  businesses,  classified as discontinued  operations during 1999,
are  reflected  as a single line item in the  Company's  consolidated  financial
statements.  All significant  intercompany  accounts and transactions  have been
eliminated in consolidation.

                                       39
<PAGE>

Business Combinations

         Business  combinations  accounted  for under  the  pooling-of-interests
method of accounting include assets, liabilities and stockholders' equity of the
acquired  entities in  combination  with the  Company's  respective  accounts at
recorded  values.  The results of operations of the acquired  entities for these
mergers are included in all periods presented.  Business combinations  accounted
for under the purchase method of accounting include the results of operations of
the acquired business from the date of acquisition. Net assets or liabilities of
the companies  acquired using the purchase  method of accounting are recorded at
their fair  value at the date of  acquisition.  Amounts  allocated  to  acquired
in-process  research and  development  are expensed in the period of acquisition
(for further detail see Note 3).

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.

Short-Term Investments

         Short-term   investments   consist  primarily  of  U.S.  Government  or
governmental   agencies  debt  securities  and  high-grade   commercial   paper.
Short-term  investments  are  stated  at  cost  plus  accrued  interest,   which
approximates market value. 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  (SFAS) No. 123,  "Accounting  for  Stock-Based
Compensation," but applies  Accounting  Principles Board Opinion No. 25 (APB 25)
and related  interpretations  in accounting  for its stock plans.  Under APB 25,
when the exercise  price of an employee  stock option equals the market price of
the  underlying  stock  on  the  date  of  grant,  no  compensation  expense  is
recognized.

Revenue Recognition

         Revenues  are derived  from  software  licenses,  software  development
contracts,  professional services, customer support and maintenance. The Company
recognizes revenue allocated to software licenses when an arrangement to deliver
software does not require significant production,  modification or customization
and all four basic  criteria in the Statement of Position  (SOP) 97-2 as amended
issued by the American  Institute of Certified Public  Accountants  (AICPA) have
been met. The four basic criteria are:  persuasive  evidence that an arrangement
exists,  delivery has occurred,  fee is fixed or determinable  and collection of
the resulting  receivable is probable.  For contracts with multiple  obligations
such as deliverable and undeliverable  software  licenses,  maintenance or other
services,  the Company allocates revenue to each component of the contract based
on vendor-specific  objective  evidence.  The Company  recognizes  revenues from
software development  contracts and professional services based upon labor costs
incurred and progress to completion on contracts. Revenues from customer support
and  maintenance  are  deferred  and  recognized  ratably  over the period these
services are provided. In 1998, the AICPA issued SOP 98-9,  "Modification of SOP
97-2,  Software Revenue  Recognition,  With Respect to Certain  Transactions" to
readdress  vendor-specific  objective evidence.  The Company adopted SOP 98-9 on
January 1,  2000.  It is  expected  that the  adoption  will not have a material
effect on the  Company's  financial  position,  operating  results or liquidity.


                                       40
<PAGE>

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, diversity
and financial strength of entities comprising the Company's customer base.

International Operations

         The Company has international sales offices located in Canada,  France,
Italy and  Malaysia.  Sales and  operating  offices  are  located  in the United
Kingdom, Germany, and Sweden.

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

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 financial
statements of foreign  subsidiaries  have been translated  into U.S.  dollars in
accordance with SFAS No. 52, "Foreign  Currency  Translation." All balance sheet
accounts have been translated  using the exchange rates in effect at the balance
sheet date.  Income  statement  amounts have been  translated  using the average
exchange rate for the year.  The gains and losses  resulting from the changes in
exchange  rates  from  year to year have been  reported  in other  comprehensive
income.  The effect on the  statements of operations  of  transaction  gains and
losses is insignificant for all years presented.

Property and Equipment

         Property and equipment is carried at cost. Depreciation of property and
equipment and  amortization of capital lease assets are computed  principally by
the straight-line method over the following estimated useful lives:

          Building........................................30 years
          Equipment.......................................3 - 7 years
          Leasehold improvements..........................Lesser of term of
                                                          lease or life of asset

Software Development Costs

         Software   development   costs  are   capitalized   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  amortization  expense
amount is greater.  Amortization  expenses were $733,000,  $521,000 and $219,000
for the years ended December 31, 1999, 1998 and 1997, respectively.  The Company
compares  unamortized  computer  software costs with net  realizable  value on a
product-by-product   basis.   These  estimates  are  based  upon  all  available
information,  including  life cycles and  revenues  from similar  products,  the
Company's  past  history,  the market for the products,  the Company's  existing
customer  base,  and other  factors  unique to the products.  Recoverability  is
subject to changes in our business model and the demand for the product  because
of general market conditions or introduction of new products by competitors.

                                       41
<PAGE>

Goodwill

         Goodwill represents the excess of purchase price over the fair value of
net assets  acquired  and is  amortized  using the  straight-line  method over a
period of five years.  The Company  assesses  the  potential  impairment  of its
goodwill based on anticipated cash flows from operations.

Long-Lived Assets

         Long-lived assets and certain identifiable intangibles are reviewed for
impairment  whenever  events  or  changes  in  circumstances  indicate  that the
carrying amount of an asset may not be recoverable.  Recoverability of assets to
be held and used is measured by a comparison of the carrying  amount of an asset
to future net cash flows  expected to be generated by the asset.  If such assets
are  considered to be impaired,  the  impairment to be recognized is measured by
the amount by which the carrying  amount of the assets exceeds the fair value of
the assets.  Assets to be disposed of are  reported at the lower of the carrying
amount  or fair  value  less  costs  to  sell.  As a result  of its  review  for
impairment  of  long-lived  assets the Company  wrote off $840,000 of intangible
assets during 1999 which was included in research and development expense.

Income Taxes

          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 the tax provision as they occur.

Comprehensive Income (Loss)

         Comprehensive income (loss) consists of the Company's net income (loss)
and foreign currency translation adjustment and is presented in the consolidated
statement of stockholders' equity and comprehensive income (loss).

Earnings (Loss) Per Share

         Basic earnings (loss) per share is computed using the weighted  average
number  of common  shares  outstanding.  Diluted  earnings  (loss)  per share is
computed using the  combination of dilutive  assumed  conversion  shares and the
weighted average number of common shares outstanding.

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.

Reclassification

         Certain  prior year  financial  information  has been  reclassified  to
conform to the 1999 financial statement presentation.

                                       42
<PAGE>

2. DISCONTINUED OPERATIONS

         The  Company  announced  on  July  6,  1999  that  it  would  exit  its
Interactive Games and Science and Technology  businesses by the end of the first
quarter of 2000.  The  Company  recorded a provision  for  exiting  discontinued
operations  including  operating  losses  during  the phase out  period of $13.8
million.   The  provision  includes  accruals  for  severance  payments,   asset
write-downs and estimated  operating losses during the phase-out period.  During
the fourth quarter of 1999, the Company  recorded a valuation  allowance of $6.0
million on the deferred tax asset associated with discontinued operations.

     The following table summarizes  revenues from  discontinued  operations and
net income (loss) for the last three years.
<TABLE>
<CAPTION>

                                                                                                      Years ended December  31,
(in thousands)                                                                                  1999           1998            1997
                                                                                            ---------        --------       --------

<S>                                                                                          <C>             <C>            <C>
Revenues from discontinued operations                                                        $  8,156        $ 17,065       $ 15,184
                                                                                             ========        ========       ========


Income (loss) from continuing operations                                                     $(23,583)       $      8       $    288
                                                                                             --------        --------       --------

Discontinued operations:
     Income (loss) from discontinued operations                                                (3,108)            600          1,304
     Income tax expense (benefit) of  income (loss)
      from discontinued operations before valuation allowance                                  (1,181)            228            496
     Deferred tax asset valuation allowance                                                     1,211            --             --

                                                                                             --------        --------       --------
     Net tax expense                                                                               30             228            496
                                                                                             --------        --------       --------
     Net income (loss) from discontinued operations, net of tax                                (3,138)            372            808

     Provision for exiting discontinued operations
        including operating losses during phase out period                                    (13,750)           --             --
     Income tax  benefit of  exiting discontinued operations including
     operating losses during phase-out period before valuation allowance                       (4,820)           --             --
     Deferred tax asset valuation allowance                                                     4,820            --             --
                                                                                             --------        --------       --------
     Net tax expense                                                                             --              --             --
                                                                                             --------        --------       --------
     Provision for exiting discontinued operations
        including operating losses during phase out period, net of tax                        (13,750)           --             --

                                                                                             --------        --------       --------
        Net income (loss)                                                                    $(40,471)       $    380       $  1,096
                                                                                             ========        ========       ========
</TABLE>


                                       43
<PAGE>

3. ACQUISITIONS

         On July 27, 1999,  the Company  acquired Kx  Verksamhetsutveckling  AB,
(Kx), a privately-held company in Gothenburg, Sweden. The acquisition, including
transaction costs and assumed net liabilities,  was valued at approximately $3.1
million.  The  Company  paid cash of $1.8  million and issued  56,000  shares of
common  stock in  exchange  for all of the  outstanding  common  stock of Kx. Kx
provides integrated  software solutions,  training and support for manufacturing
customers in Scandinavia. The Company has accounted for the acquisition of Kx as
a  purchase  and all  intangibles  associated  with this  acquisition  are being
amortized over five years using the straight-line  method.  Pro forma results of
the  purchase  are  not  presented,  as the  amounts  are  not  material  to the
consolidated financial statements.

         On  December  22,  1998,  the  Company  completed  the  acquisition  of
EAI-DELTA  GmbH (DELTA).  The Company  acquired  DELTA by purchasing  all of the
outstanding  shares of  DELTA's  capital  stock  from its six  stockholders.  In
connection with the acquisition, the Company issued approximately 557,000 shares
of common stock with a value of approximately $24.0 million.  The acquisition of
DELTA by the Company was accounted for as a pooling of interests. In March 2000,
DELTA was sold to Dassault  Systemes  S.A. for $31 million in cash.  See Note 18
for further detail.

         On  September  22,  1998,  the Company  completed  the  acquisition  of
Variation Systems Analysis, Inc. (VSA). The Company issued approximately 542,000
shares of common  stock in exchange for all of the  outstanding  common stock of
VSA in a transaction valued at approximately $26.0 million. This acquisition was
accounted for as a pooling of interests.

         On September 22, 1998, the Company completed the acquisition of Transom
Technologies, Inc. (Transom). The Company issued approximately 192,000 shares of
common stock in exchange for all of the  outstanding  preferred and common stock
of  Transom  in a  transaction  valued  at  approximately  $13.0  million.  This
acquisition was accounted for as a pooling of interests.

         On November 26, 1997, the Company acquired Cimtech, Inc. (Cimtech). The
Company issued approximately  185,000 shares of common stock in exchange for all
of  the  outstanding  common  stock  of  Cimtech  in  a  transaction  valued  at
approximately  $6.0 million.  This acquisition was accounted for as a pooling of
interests.

         On November 25, 1997, the Company acquired Rosetta  Technologies,  Inc.
(Rosetta) in two separate  transactions  valued at approximately  $25.5 million.
The Company  acquired a  controlling  interest in Rosetta  through a merger with
Technology  Company  Ventures,  LLC (TCV) by  exchanging  approximately  630,000
shares of common stock for the outstanding  member equity of TCV. This phase was
accounted for as a pooling of interests.  It subsequently acquired the remaining
minority interest in Rosetta by issuing  approximately  309,000 shares of common
stock.  The minority  interest in the  acquisition  was  accounted for using the
purchase method.

                                       44
<PAGE>

         The following  table shows the separate  results of operations  for the
companies  acquired  in 1998 and 1997 as a pooling of  interest  for the periods
prior to the acquisitions.

<TABLE>
<CAPTION>

                Summary of Results of Operations by Entity Acquired

                (in thousands)
                                                                     Years ended December 31,
                                                                      1998              1997
                                                         ------------------------------------
                    Revenues
                             <S>                                  <C>               <C>
                              EAI                                 $ 74,468          $ 27,744
                              DELTA                                  4,675             5,279
                              Transom                                1,019               802
                              VSA                                    9,749            17,016
                              TCV                                        -             4,622
                              Cimtech                                    -             2,167
                                                         ------------------------------------
                              Combined                            $ 89,911          $ 57,630
                                                         ====================================

                Income (loss) from
                 continuing operations
                              EAI                                   $ (249)            $ 866
                              DELTA                                    332               153
                              Transom                                 (473)           (1,040)
                              VSA                                      398              (171)
                              TCV                                        -               260
                              Cimtech                                    -               220
                                                         ------------------------------------
                              Combined                                 $ 8             $ 288
                                                         ====================================
</TABLE>


         On June 17, 1998, the Company exchanged approximately 158,000 shares of
its  common  stock  for  all of the  outstanding  stock  of  Sense8  Corporation
(Sense8).   Based  on  the  value  of  EAI  stock  and  options  exchanged,  the
transaction, including transaction costs and net liabilities assumed, was valued
at approximately $9.7 million.

         The  following  table  shows  the pro  forma  consolidated  results  of
operations  as if Sense8 had been  acquired as of the  beginning  of the periods
presented.

                              Pro Forma Consolidated Results

(in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                 Years ended December 31,

                                                                    1998             1997
                                                              ----------      -----------

<S>                                                             <C>              <C>
Revenues                                                        $ 90,522         $ 61,503
Loss from continuing operations                                   (2,812)          (4,964)
Loss per share from continuing operations                          (0.24)           (0.49)

</TABLE>


                                       45
<PAGE>


         The pro forma results are not  necessarily  indicative of what actually
would have occurred if the acquisition had been in effect for the entire periods
presented.  In  addition,  they are not  intended to be a  projection  of future
results and do not  reflect any  synergies  that might have been  achieved  from
combined operations.

         The Sense8  purchase  consideration  was  allocated  to the  intangible
assets based on fair values as follows:
<TABLE>
<CAPTION>

        (in thousands)

        <S>                                                                <C>
        In-process research and development charged to operations
         in the quarter ended June 30, 1998                             $1,918
        Developed technology                                             3,642
        Goodwill and other intangible assets                             4,107
                                                                   -----------
             Total purchase consideration                               $9,667
                                                                   ===========
</TABLE>

         Management   estimated   that  $1.9  million  of  the  purchase   price
represented purchased in-process research and development ("IPR&D") that had not
yet  reached  technological  feasibility  and  had no  alternative  future  use.
Accordingly,  this amount was  expensed in 1998  following  consummation  of the
acquisition.

         To determine the value of the developed technology ($3.6 million),  the
expected  future  cash  flows  of  the  existing  developed   technologies  were
discounted  taking into  account the  characteristics  and  applications  of the
product,  the size of existing  markets,  growth  rates of  existing  and future
markets as well as an  evaluation of past and  anticipated  product life cycles.
Developed  technologies and goodwill and other  intangible  assets acquired from
Sense8 are being amortized on a straight-line basis over the useful lives of the
assets of five years.

         In connection with the acquisition of the minority interest in Rosetta,
the purchase consideration was allocated as follows:
<TABLE>
<CAPTION>

        (in thousands)

        <S>                                                              <C>
        Net assets acquired                                               $ 965
        In-process research and development charged to operations
             in the quarter ended December 31, 1997                       1,684
        Developed technology                                              2,224
        Goodwill and other intangible assets                              2,729
                                                                       ---------
             Total purchase consideration                               $ 7,602
                                                                      ==========
</TABLE>



         Management   estimated   that  $1.7  million  of  the  purchase   price
represented purchased IPR&D that had not yet reached  technological  feasibility
and had no alternative future use. Accordingly, this amount was expensed in 1997
following  consummation of the acquisition.

         To determine the value of the developed technology ($2.2 million),  the
expected  future  cash  flows  of  the  existing  developed   technologies  were
discounted  taking into  account the  characteristics  and  applications  of the
products,  the size of existing  markets,  growth  rates of existing  and future
markets as well as an  evaluation of past and  anticipated  product life cycles.
Developed  technologies and goodwill and other  intangible  assets acquired from
Rosetta are being amortized on a straight-line basis over five years, the useful
lives of the assets.
                                       46
<PAGE>

           The following  table shows the  components of  acquisition  costs and
non-recurring expenses.


 (in thousands)
<TABLE>
<CAPTION>
                                                                       Years ended December 31,
                                                                      1999        1998         1997
                                                               -------------------------------------
<S>                                                                 <C>        <C>          <C>
 Acquisition costs (reversal)                                       $ (925)    $ 6,070      $ 3,232
 Purchased in-process research and development                           -       1,918        1,685
 Licensed technology                                                     -       4,249            -
                                                               -------------------------------------
 Total acquisition and non-recurring expenses                       $ (925)   $ 12,237      $ 4,917
                                                               =====================================
</TABLE>


4. NOTE RECEIVABLE

         During  1995,  the Company  entered into a loan  agreement  whereby the
Company agreed to loan approximately $750,000 to the developer of a building the
Company  leases.  During 1996, the Company loaned an additional  $658,000 to the
developer.  The Company began  leasing the building in July 1996.  Interest at a
fixed rate of 8.5% began accruing upon  commencement of the lease and is payable
monthly. 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 become  immediately  due. The note  receivable  is  collateralized  by a
second mortgage on the building.

5. PROPERTY AND EQUIPMENT

         Property  and  equipment  at December  31, 1999 and 1998 consist of the
following:

  (in thousands)
<TABLE>
<CAPTION>
                                                         December 31,
                                                       1999          1998
                                               -------------  ------------
<S>                                               <C>            <C>
Computer equipment and software                   $ 13,056       $ 10,531
Equipment and furniture                              5,725          3,436
Buildings and leasehold improvements                 8,044          4,197
Construction in progress                             4,214          3,393
                                               -----------     ----------
Total                                               31,039         21,557
Less accumulated depreciation                       (8,871)        (5,709)
                                               ------------    ----------
Net property and equipment                        $ 22,168       $ 15,848
                                               ============    ==========
</TABLE>


                                       47
<PAGE>


6. DEBT

         Long-term debt at December 31, 1999 and 1998 consists of the following:


(in thousands)
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                          1999        1998
                                                                                      ---------------------

Interest bearing revolving line of credit for $3.5 million with a bank,
   commencing in September 1998 and due May 2000; floating interest
<S>                                                                                   <C>         <C>
   at the bank's base rate less 1% (7.75% at December 31, 1999)                        $ 3,500     $ 3,000

Interest bearing revolving line of credit for $1.0 million with a bank,
   commencing in  January 1999 and due March 2000; floating interest
   at the bank's base rate (8.75% at December 31, 1999)                                  1,000           -

Non-interest bearing note payable, due in monthly installments
   commencing July 1998 through June 2005; collateralized by all equipment
   of the Company                                                                          157         186

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         500

Non-interest bearing note payable commencing November 1997 due
   December 2007; attainment of goals must be met to remain non-interest bearing           400         450

Capital lease obligations                                                                   97         194

Other notes payable with interest ranging from 0% to 4.5%, and payments due
   from 1999 through 2007                                                                  235         477
                                                                                      ---------   ---------

Total debt                                                                               5,889       4,807
Less amounts due within one year                                                         5,273       3,327
                                                                                      ---------   ---------
Long-term debt                                                                           $ 616     $ 1,480
                                                                                      =========   =========
</TABLE>


         Future  maturities of long-term  debt and capital lease  obligations at
December 31, 1999 are as follows:

<TABLE>
<CAPTION>

(in thousands)

<S>                           <C>
2001                          $ 109
2002                            146
2003                             90
2004                             94
Thereafter                      177
                         -----------
Total                         $ 616
                         ===========
</TABLE>


                                       48
<PAGE>

7. OPERATING LEASES

         The Company has operating  leases for office space and  equipment  with
various  lease terms  expiring  through  2008.  Rent expense for the years ended
December  31,  1999,  1998  and 1997 was $3.6  million,  $2.2  million  and $1.4
million, respectively.

        The future minimum lease payments at December 31, 1999 are as follows:
(in thousands)
<TABLE>
<CAPTION>

<S>                         <C>
2000                        $ 3,796
2001                          3,705
2002                          3,314
2003                          2,258
2004                          1,757
Thereafter                    5,293
                       -------------
Total                      $ 20,123
                       =============
</TABLE>



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  expense for the years ended December 31, 1999, 1998 and 1997
was $782,000, $230,000 and $339,000, respectively.

9. INCOME TAXES

         The  components  of income  (loss) from  continuing  operations  before
income taxes and minority interest are as follows:

<TABLE>
<CAPTION>

(in thousands)                                   Years ended December 31,
                                              1999         1998          1997
                                       -----------------------------------------
<S>                                       <C>            <C>           <C>
Domestic                                  $ (29,397)     $ 4,167       $ 1,674
Foreign                                         554        1,358           247
                                       -----------------------------------------
Total                                     $ (28,843)     $ 5,525       $ 1,921
                                       =========================================

</TABLE>


                                       49
<PAGE>


The components of income tax expense (benefit) are as follows:

<TABLE>
<CAPTION>

   (in thousands)                                    Years ended December 31,
                                               1999          1998          1997
                                             ----------------------------------
Current
<S>                                             <C>           <C>           <C>
      Federal                              $  1,805      $  4,073      $  2,776
      State                                  (1,382)          513           176
      Foreign                                   304         1,132           102
                                           ------------------------------------
                                                727         5,718         3,054
Deferred                                    (11,581)         (201)         (453)
Change in valuation allowance                 5,594          --          (1,017)
                                           ------------------------------------
Total                                      $ (5,260)     $  5,517      $  1,584
                                           ====================================
</TABLE>


         A reconciliation of income tax expense (benefit) computed at the U.S.
statutory rate to the effective income tax rate is as follows:
<TABLE>
<CAPTION>

    (in thousands)                                    Years ended December 31,
                                                   1999        1998        1997
                                            ------------------------------------
<S>                                            <C>           <C>          <C>
Tax at US statutory rate                       $ (10,095)    $ 1,934      $ 653
State income taxes, net of Federal tax benefit      (750)        383         54
Non-deductible acquisition costs                       -       1,772      1,748
Goodwill amortization                                998         643          -
Effect of foreign income taxes                      (383)        394         97
Change in valuation allowance                      5,594          -      (1,017)
Other, net                                          (624)        391         49
                                            -----------------------------------
Total                                           $ (5,260)    $ 5,517    $ 1,584
                                            ===================================
</TABLE>


                                       50
<PAGE>



         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the amounts used for income tax  purposes.  Significant
components of the Company's  deferred  income tax  liabilities  and assets as of
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>

(in thousands)                                                December 31,
                                                               1999        1998
                                                        ------------------------
Deferred tax liabilities:
<S>                                                            <C>          <C>
      Tax over book depreciation                            $(1,329)     $ (854)
      Capitalized software development costs                   (855)       (525)
      Other, net                                               (133)       (193)
                                                        ------------------------
Total deferred tax liabilities                               (2,317)     (1,572)

Deferred tax assets:
      Accounts receivable, principally due to
        allowance for doubtful accounts                         390          25
      Accruals                                                1,052         384
      Net operating loss carryforwards                       13,205       2,794
      Other, net                                                918         388
                                                        ------------------------
Total deferred tax assets                                    15,565       3,591
                                                        ------------------------
Valuation allowance                                          (5,594)          -
                                                        ------------------------
Net deferred tax assets                                     $ 7,654     $ 2,019
                                                        ========================
</TABLE>

         The total  deferred  tax assets  indicated  above do not include a $6.0
million   deferred   tax  asset   attributable   to   discontinued   operations.
Additionally,  the  valuation  allowance  indicated  above does not include $6.0
million  attributable to discontinued  operations used to completely  offset the
deferred tax asset attributable to discontinued operations.

         A valuation  allowance  is required to reduce a potential  deferred tax
asset when it is likely that all or some portion of the  potential  deferred tax
asset will not be realized due to the lack of  sufficient  taxable  income.  The
Company has reviewed its taxable earnings history and prospective future taxable
income. Based on this assessment, the Company has provided a valuation allowance
for a portion of the  deferred  tax assets and will  continue to assess the need
for this  allowance.  In addition the Company may be required to provide further
valuation  allowances if the Company does not generate sufficient future taxable
income.

         At  December  31,  1999,  the  Company  had net  operating  loss  (NOL)
carryforwards  of $40.0  million for federal  income tax purposes that expire in
years 2003 through 2019. Additionally,  the Company had $2.6 million of U.S. tax
credits  that expire in years 2001  through  2019.  Section 382 of the  Internal
Revenue Code restricts the annual utilization of the NOL carryforwards  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 will limit the Company's ability to utilize the NOL  carryforwards  existing
when  Rosetta  was  acquired  by TCV.  Changes in  ownership  also  occurred  in
connection with the Company's 1997  acquisitions of TCV and Cimtech and its 1998
acquisitions  of Sense8 and  Transom.  The  Company  does not  believe  that its
utilization  of the  carryforwards  for the companies  acquired in 1997 and 1998
will be significantly limited under Section 382.

         Unremitted earnings of overseas  subsidiaries amounted to approximately
$1.7  million  at  December  31,  1999.  Those  earnings  are  considered  to be
indefinitely reinvested and, accordingly,  no provision for U.S. or state income
taxes has been provided thereon. When those earnings are distributed in the form
of dividends, the Company will be subject to U.S. and state income tax liability
and for taxes  withheld  at the  source of  payment  in the  respective  foreign
jurisdictions.  Determination of the amount of unrecognized deferred U.S. income
tax liability is not practicable because of the complexities associated with the
hypothetical  calculation;  however, income tax credits may substantially offset
any resulting tax liability.

                                       51
<PAGE>

10. CAPITAL STOCK 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. The terms of these rights
are set forth in the Rights  Agreement  between the  Company  and First  Chicago
Trust Company, a division of EquiServe.

Stock Options

         The Company has stock option  arrangements  with various  directors and
officers and other employees.  The options are generally  granted at fair market
value. The options  generally vest over four or five years and must be exercised
no later than 10 to 15 years after the date of grant.

         During 1994, the Company adopted the Engineering  Animation,  Inc. 1994
Stock Option Plan  providing for issuance of either  incentive or  non-qualified
options  to  employees  based upon  management  discretion.  At the 1999  Annual
Meeting,  our stockholders  approved the amendment and restatement of this Plan,
increasing the number of shares reserved for issuance under the Plan by 550,000.
A total of 2,335,000 shares of common stock are reserved for issuance under this
Plan.

         In January 1996, the Company  adopted a Non-Employee  Directors  Option
Plan. Each non-employee director receives an annual grant of 7,500 non-qualified
options under this Plan. 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.  During 1999, the Company amended
the Plan to increase the number of shares reserved for issuance by 435,000.  The
Company has reserved  1,635,000  shares of common stock for issuance  under this
Plan.

         In June 1998,  the Company  acquired  Sense8,  which had a stock option
plan ("1997 Stock  Option/Stock  Issuance Plan") and two individual stock option
agreements.  The Company has assumed Sense8's outstanding  obligations under the
Plan and the  agreements.  Incentive and  non-qualified  options had been issued
under the Plan.  The  Company  has  reserved  6,226  shares of common  stock for
issuance  under the Plan.  Non-qualified  options had been issued  under the two
individual  stock option  agreements.  The Company has reserved  5,078 shares of
common stock for issuance under these agreements.

         In September  1998,  the Company  acquired  Transom,  which had a stock
option plan ("Transom,  Inc. 1996 Equity  Compensation  Plan").  The Company has
assumed  Transom's  outstanding  obligations under this Plan. All options became
immediately   exercisable  as  a  result  of  the  acquisition.   Incentive  and
non-qualified  options had been issued under the Plan.  The Company has reserved
42,681 shares of common stock for issuance under this Plan.

         In April and December 1999,  the Company issued  non-plan/non-qualified
options to  purchase  225,000 and 80,000  shares of common  stock at $15.907 and
$8.282 per share to two newly hired  executives.  These  options  will vest over
four  years  and will  remain  exercisable  through  April  and  December  2009,
respectively.

                                       52
<PAGE>

         A summary of common stock option  activity and related  information for
the indicated years ended December 31, follows:
<TABLE>
<CAPTION>

                                                           1999                         1998                        1997
                                                -------------------------     ------------------------     ----------------------
                                                                Weighted                      Weighted                   Weighted
                                                                Average                       Average                    Average
                                                                Exercise                      Exercise                   Exercise
                                                   Options       Price          Options        Price       Options        Price
                                                ------------   ------------   ------------   ---------    ---------      --------
<S>                                             <C>             <C>           <C>             <C>         <C>              <C>
Outstanding at beginning of year                 2,411,980       $ 19.60      2,200,271       $ 8.57      2,055,461        $ 6.30
Granted                                          1,788,950         20.49        882,784        38.84        421,018         17.20
Exercised                                         (143,952)         6.74       (507,825)        4.29       (147,328)         4.26
Forfeited                                         (670,330)        23.81       (163,250)       22.50       (128,880)        10.80
                                                 ---------                    ---------                  ----------
Outstanding at end of year                       3,386,648       $ 19.80      2,411,980      $ 19.60      2,200,271        $ 8.57
                                                ==========                    =========                  ==========

Exercisable at end of year                       1,264,037       $ 12.11        988,002       $ 7.25      1,180,318        $ 4.19
                                                ==========                    =========                  ==========
Weighted-average fair value of options
granted during the year                                          $ 13.18                     $ 23.22                      $ 14.64

</TABLE>




         The  remaining   contractual  life  and  exercise  prices  for  options
outstanding  and the number of options  exercisable  at December 31, 1999 are as
follows:
<TABLE>
<CAPTION>

                           Options Outstanding
      ---------------------------------------------------------------

                                              Weighted
                                              Average
                                             Remaining
                                            Contractual   Weighted
    Number of              Range of             Life      Average              Options
     Options           Exercise Prices       (in years) Exercise Price      Exercisable
     --------          ------------------     --------- --------------      -----------

     <S>               <C>        <C>            <C>       <C>                 <C>
     525,759           $ 1.073  - $3.540         7.77     $ 1.680              511,157
     639,537             5.000 -   8.438         9.70       7.777              173,258
     502,727             8.500 -  15.420         7.51      13.190              296,298
     489,475            15.500 -  19.917         9.30      16.020               29,810
     486,518            19.920 -  31.500         8.15      27.462              151,560
     544,862            36.000 -  44.250         8.89      42.847               52,361
     197,770            44.500 -  67.000         9.11      50.723               49,595
 ------------                                 -------                       ----------
   3,386,648           $ 1.073 - $67.000         8.63      19.803            1,264,037
 ============                                 =======                       ==========
</TABLE>


         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 1999, 1998 and 1997,  respectively:  risk-free interest rates of
5.6%,  5.0% and  5.7%;  a  dividend  yield of 0.0%;  volatility  factors  of the
expected market price of the Company's  common stock of 0.74, 0.63 and 0.34; and
a weighted-average expected life of the option of 4.9, 5.4 and 4.0 years.

                                       53
<PAGE>

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

         For purposes of pro forma disclosures,  the estimated fair market 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 operations information
follows:
<TABLE>
<CAPTION>

(in thousands, except per share data)                 Years ended December 31,
                                                      1999          1998           1997
                                              ------------------------------------------
<S>                                              <C>            <C>              <C>
Pro forma net loss                               $ (48,305)     $ (3,796)        $ (381)
Pro forma loss per share:
Basic                                              $ (4.06)      $ (0.33)       $ (0.04)
Diluted                                            $ (4.06)      $ (0.33)       $ (0.04)
</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.

                                       54
<PAGE>

11. EARNINGS (LOSS) PER SHARE

The following table sets forth the computation of earnings (loss) per share.
<TABLE>
<CAPTION>
                                                                 Years ended December 31,
                                                              1999            1998            1997
                                                     ----------------------------------------------
(in thousands, except per share data)

Numerator:
<S>                                                      <C>                   <C>           <C>
Income (loss) from continuing operations                 $ (23,583)            $ 8           $ 288
Income (loss) from discontinued operations                 (16,888)            372             808
                                                     --------------   -------------   -------------
Net income (loss)                                        $ (40,471)          $ 380         $ 1,096
                                                     ==============   =============   =============

Denominator:
Denominator for basic earnings (loss) per
   share - weighted average shares                          11,887          11,549          10,061
Stock options and warrants                                       -           1,223           1,586
                                                     --------------   -------------   -------------
Denominator for diluted earnings (loss) per
   share - weighted average
   shares and assumed conversions                           11,887          12,772          11,647
                                                     ==============   =============   =============

Basic earnings (loss) per share
Continuing operations                                      $ (1.98)         $ 0.00          $ 0.03
Discontinued operations                                      (1.42)           0.03            0.08
                                                     --------------   -------------   -------------
   Total                                                   $ (3.40)         $ 0.03          $ 0.11
                                                     ==============   =============   =============

Diluted earnings (loss) per share
   Continuing operations                                   $ (1.98)         $ 0.00          $ 0.02
   Discontinued operations                                   (1.42)           0.03            0.07
                                                     --------------   -------------   -------------
                                                           $ (3.40)         $ 0.03          $ 0.09
                                                     ==============   =============   =============
</TABLE>


                                       55
<PAGE>


12. EMPLOYEE RETIREMENT PLANS

         The Company has a 401(k)  plan that covers the  majority of U.S.  based
employees who meet the minimum age requirement.  The Company matches one-half of
the employee's contribution up to a maximum Company contribution of the first 4%
of the employee's compensation. The Company's matched expense incurred for 1999,
1998 and 1997 was approximately $703,000, $360,000 and $116,000, respectively.

13. FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS

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

         Note Receivable--the  carrying amount reported in the balance sheet for
the note receivable  totaling $1.4 million at December 31, 1999 approximated its
fair value since the prime  lending  rate at December  31, 1999 was equal to the
interest rate on the note  receivable.  At December 31, 1998, the carrying value
for the note receivable was $1.4 million and the fair value was $1.5 million.

         Long-Term  Debt--the carrying amounts reported in the balance sheet for
the  Company's  lines of credit  totaling $4.5 million for 1999 and $3.0 million
for 1998 approximated their fair values as they bear variable rates of interest.
At December 31, 1999, the remaining  notes and capital lease  obligations  had a
carrying  amount of $1.4 million  compared to a fair value of $1.3  million.  At
December 31,  1998,  the carrying  amounts for the  remaining  notes and capital
lease  obligations  approximated  their fair values as they were  negotiated and
issued in the latter half of 1997.  The prime lending rate in 1998  approximated
the rate in 1997 and, accordingly, the fair value change would be immaterial.

                                       56
<PAGE>

14. QUARTERLY RESULTS OF OPERATIONS

         The following table sets forth selected quarterly financial information
from  continuing  operations  for  1999 and  1998.  Operating  expenses  include
acquisition costs and non-recurring  expenses (recoveries) of $0.7 million, $0.7
million,  $0.8 million and $(0.1)  million for the quarters ended March 31, June
30,  September 30, and December 31, 1999.  Acquisition  costs and  non-recurring
expenses  for the year ended  December  31, 1999 total $1.9  million.  Operating
expenses include  acquisition costs and non-recurring  expenses of $4.5 million,
$2.2  million,  $5.7 million and $1.7  million for the quarters  ended March 31,
June  30,   September  30,  and  December  31,  1998.   Acquisition   costs  and
non-recurring expenses for the year ended December 31, 1998 total $14.1 million.
The  Company  believes  that all  necessary  adjustments  have been  included to
present fairly the selected quarterly information.

 Continuing Operations
(in thousands, except per share data)
<TABLE>
<CAPTION>
                                          (Audited)                           (Unaudited)
                                         Year ended                       Three Months ended
                                                      ----------------------------------------------------------------
                                          Dec. 31,         Dec. 31,        Sept. 30,        June 30,        March 31,
                                              1999             1999             1999            1999             1999
                                     --------------   ----------------------------------------------------------------
<S>                                        <C>              <C>              <C>             <C>              <C>
Revenues                                   $70,736          $16,469          $13,799         $20,120          $20,348
Gross profit                                38,023            7,390            5,045          12,310           13,278
Operating expenses                          67,825           18,247           18,467          16,335           14,776
Operating loss                             (29,802)         (10,857)         (13,422)         (4,025)          (1,498)
Loss                                       (23,583)         (10,442)          (9,614)         (2,564)            (963)
Loss per share:
   Basic                                     (1.98)           (0.87)           (0.81)          (0.22)           (0.08)
   Diluted                                   (1.98)           (0.87)           (0.81)          (0.22)           (0.08)
</TABLE>
<TABLE>
<CAPTION>

                                         (Audited)                            (Unaudited)
                                         Year ended                       Three Months ended
                                                      ----------------------------------------------------------------
                                          Dec. 31,         Dec. 31,        Sept. 30,        June 30,        March 31,
                                              1998             1998             1998            1998             1998
                                     --------------   ----------------------------------------------------------------
<S>                                        <C>              <C>              <C>             <C>              <C>
Revenues                                   $89,911          $28,675          $23,049         $20,339          $17,848
Gross profit                                66,791           22,391           17,077          14,310           13,013
Operating expenses                          62,926           16,611           18,142          13,208           14,965
Operating income (loss)                      3,865            5,780           (1,065)          1,102           (1,952)
Income (loss)                                    8            3,074           (2,222)            165           (1,009)
Earnings (loss) per share:
   Basic                                      0.00             0.26            (0.19)           0.01            (0.09)
   Diluted                                    0.00             0.24            (0.19)           0.01            (0.09)

</TABLE>


                                       57
<PAGE>



         The following table sets forth selected quarterly financial information
from discontinued operations for 1999 and 1998.
<TABLE>
<CAPTION>

Discontinued Operations
(in thousands, except per share data)

                                           (Audited)                           (Unaudited)
                                           Year ended                       Three Months ended
                                                      ----------------------------------------------------------------
                                            Dec. 31,         Dec. 31,        Sept. 30,        June 30,        March 31,
                                              1999             1999             1999            1999             1999
                                     --------------   ----------------------------------------------------------------
<S>                                       <C>               <C>                             <C>                  <C>
Income (loss)                             $(16,888)         $(6,031)               -        $(11,320)            $463
Earnings (loss) per share:
   Basic                                     (1.42)           (0.50)               -           (0.96)            0.04
   Diluted                                   (1.42)           (0.50)               -           (0.96)            0.04

<FN>

   Note: For the second quarter ended June 30, 1999, the Company recorded a provision for exiting discontinued
operations including operating losses during the phase out period, net of tax, of $8.9 million. For the fourth quarter
ended Decmber 31, 1999, the Company recorded a valuation allowance of $6.0 million to offset the deferred tax
attributable to discontinued operations. See Note 2 of Notes to Consolidated Financial Statements for more
information.
</FN>
</TABLE>

<TABLE>
<CAPTION>
                                            (Audited)                          (Unaudited)
                                           Year ended                       Three Months ended
                                                      ----------------------------------------------------------------
                                          Dec. 31,         Dec. 31,        Sept. 30,        June 30,        March 31,
                                              1998             1998             1998            1998             1998
                                     --------------   ----------------------------------------------------------------
<S>                                            <C>             <C>               <C>             <C>              <C>
Income (loss)                                 $372            $(591)            $189            $412             $362
Earnings (loss) per share:
   Basic                                      0.03            (0.05)            0.02            0.04             0.03
   Diluted                                    0.03            (0.05)            0.02            0.03             0.03
</TABLE>

15. MAJOR CUSTOMERS

         The Company's  revenue from  continuing  operations is generated from a
significant customer base in diversified  industries across different geographic
areas. A major customer is defined as one that individually represents more than
10% of revenues in any year.  Revenue from one customer  represented 11% in 1999
and 12% in 1997. Another customer represented 15% of revenues in 1998 and 13% of
revenues in 1997, and a third customer  represented  10% of revenues in 1999 and
17% of revenues in 1997.

                                       58
<PAGE>

16. SEGMENT INFORMATION

         During 1999 the Company operated in one business: software products and
 related services for users.

         Information  regarding the Company's operations in different geographic
areas is set forth below.  Revenues  are  reported  based on the location of the
Company's customers.
<TABLE>
<CAPTION>

 Geographic Segments
     (in thousands)                                               Years ended December 31,
                                                           1999             1998            1997
                                                      ---------------  ---------------  --------------
    Revenues by Geographic Region:
    <S>                                                     <C>              <C>             <C>
    United States                                           $ 47,833         $ 66,036        $ 44,846
    Germany                                                   13,812           10,351           5,933
    United Kingdom                                             2,472            2,449           1,332
    Japan                                                      2,171            8,189           2,983
    Other                                                      4,448            2,886           2,536
                                                      ---------------  ---------------  --------------
    Total revenues                                          $ 70,736         $ 89,911        $ 57,630
                                                      ===============  ===============  ==============
</TABLE>

<TABLE>
<CAPTION>

                                                                      At December 31,
    Identifiable Long-Lived Assets:                        1999             1998            1997
                                                      ---------------  ---------------  --------------
    <S>                                                     <C>              <C>             <C>
    United States                                           $ 35,958         $ 30,508        $ 16,930
    Germany                                                      706              682             492
    United Kingdom                                               130               17               9
    Japan                                                          -                -               -
    Other                                                        302               64              31
                                                      ---------------  ---------------  --------------
    Total long-lived assets                                 $ 37,096         $ 31,271        $ 17,462
                                                      ===============  ===============  ==============
</TABLE>



17. LEGAL MATTERS

         In February  1999,  actions were filed  against the Company and certain
current and former  executive  officers in the United States  District Court for
the Southern  District of Iowa.  These actions allege that the Company  violated
Sections 10(b) and 20(a) of, and Rule 10b-5 under,  the Securities  Exchange Act
of 1934.  They allege that the Company made false or  misleading  statements  of
material  fact about  accounting  for  in-process  research and  development  in
connection with the Rosetta and Sense8 acquisitions and 1999 business prospects.
They seek unspecified damages.  These claims are now consolidated into one class
action  purporting to include  individuals  who  purchased  common stock between
February 19, 1998 and April 6, 1999. The court has appointed lead plaintiffs and
co-lead  counsel in the action.  The court has granted in part and  dismissed in
part the motion the Company filed to dismiss the plaintiffs'  amended complaint.
The Company intends to oppose the action vigorously.

         In October  1999,  actions  were filed  against the Company and certain
current and former  executive  officers in the United States  District Court for
the Southern  District of Iowa.  These actions allege that the Company  violated
Sections 10(b) and 20(a) of, and Rule 10b-5 under,  the Securities  Exchange Act
of 1934.  They allege that the Company made false or  misleading  statements  of
material  fact about  financial  results for the second  quarter of 1999.  These
claims  are now  consolidated  into  one  class  action  purporting  to  include
individuals  who purchased the Company's  common stock between July 29, 1999 and
October 1, 1999. The court has appointed lead plaintiffs and lead counsel in the
action. The Company intends to oppose the action vigorously.

                                       59
<PAGE>

          The  Company  is  involved  from  time  to time  in  other  litigation
incidental to its business. The Company believes that current pending litigation
will not have a material adverse effect on its business.

18. SUBSEQUENT EVENTS

         The  Company  announced  on March 1, 2000 the  signing of a  definitive
agreement  with Dassault  Systemes S.A. for the sale of DELTA for $31 million in
cash. A resulting pre-tax gain, net of transaction  costs, will be recognized in
the first quarter of 2000 as an  extraordinary  gain on sale of subsidiary.  The
transaction closed on March 24, 2000.

         The Company  also  announced it will record a  restructuring  charge of
approximately  $6.0  million  in the first  quarter  of 2000  related to actions
associated with redefining the Company's infrastructure.  The charge may include
severance costs, asset write-downs, office closings and other expenses.

19. NEW ACCOUNTING STANDARDS

         In 1998, the Financial  Accounting  Standards Board issued SFAS No. 133
"Accounting   for  Derivative   Instruments  and  Hedging   Activities,"   which
establishes  new standards for  recognizing  all derivatives as either assets or
liabilities,  and  measures  those  instruments  at fair value.  Currently,  the
Company does not anticipate that SFAS No. 133 will have a material impact on its
financial position, results of operation or liquidity. SFAS No. 133 is effective
on January 1, 2001.

                                     ITEM 9

                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

         Ernst & Young LLP (E&Y) resigned as our independent auditor on February
29, 2000.  After  discussions with the Securities and Exchange  Commission,  E&Y
determined  that  it  could  not  meet  the  strict,   SEC  enforced   technical
requirements for auditor  independence  due to certain  bookkeeping work E&Y had
performed at three of our European subsidiaries.  On March 1, 2000, we appointed
KPMG LLP as our independent auditor.  You can find additional  information about
this  change in the  Current  Report  on Form 8-K that we filed  with the SEC on
March 3, 2000.

                                       60
<PAGE>

                                    PART III

                                     ITEM 10

               DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

                                    DIRECTORS

         Five  directors  serve on our Board of  Directors.  The  directors  are
divided into three classes.  At the Annual Meeting this year,  shareholders will
elect  one  director  to serve  for a term of three  years or until a  qualified
successor  director  has been  elected.  The nominee for  election at the Annual
Meeting  (Jamie Wade) is currently on the Board.  The remaining  four  directors
(Matthew Rizai,  Michael Crow, Martin  Vanderploeg and Laurence  Kirshbaum) will
continue to serve on the Board as described below.

         The  nominee and  continuing  directors  have  provided  the  following
information about themselves.

Nominee
-------

Jamie A. Wade

Age:                         51

Director Since:              1995

Experience:  Mr. Wade has served as our Vice  President  of  Administration  and
General  Counsel 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.




Directors Continuing Until 2001 Annual Meeting
----------------------------------------------

Laurence J. Kirshbaum

Age:                         55

Director Since:              1995

Experience:  Mr.  Kirshbaum  has been  Chairman of Time Warner Trade  Publishing
since 1997.  From 1984 to 1997, he was President and CEO of Warner Books Inc., a
subsidiary of Time Warner Inc. Mr. Kirshbaum is a director of Hoover's, Inc., an
Internet  provider of company and industry  information.  Mr. Kirshbaum earned a
B.A. from the University of Michigan.


                                       61
<PAGE>



Martin J. Vanderploeg, Ph.D.

Age:                         43

Director Since:              1988

Experience:  Dr. Vanderploeg  co-founded EAI in 1988. He has served as Executive
Vice  President  since October 1993, as Secretary  from June 1990 until November
1995 and as a  Co-General  Manager of the  Software  Division  from October 1997
until August 1999. His 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.





Directors Continuing Until 2002 Annual Meeting
----------------------------------------------


Michael M. Crow, Ph.D.

Age:                         44

Director Since:              1991

Experience:  Dr. Crow has been  Executive  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.




Matthew M. Rizai, Ph.D.

Age:                         43

Director Since:              1990

Experience:  Dr. Rizai has been our Chairman and Chief  Executive  Officer since
joining EAI in June 1990. He has been Treasurer  since November 1995 and was the
President  from June 1990 until  November  1999.  Dr.  Rizai's prior  experience
includes  serving as an associate with a venture capital firm, a senior research
engineer with General Motors  Corporation  and a 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.

         Information regarding our executive officers is contained in Part 1 of
this report under the title "Executive Officers of EAI."


                                       62
<PAGE>




             SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section 16(a) of the Securities  Exchange Act of 1934 requires that our
executive officers, directors and 10% stockholders file reports of ownership and
changes  of  ownership  of EAI common  stock  with the SEC and the Nasdaq  Stock
Market National Market. Based on a review of copies of these reports provided to
us for 1999, we believe that all filing requirements were met.

                                     ITEM 11

                             EXECUTIVE COMPENSATION

         This  table  summarizes  the  before-tax  compensation  for  the  Chief
Executive Officer and the other four most highly compensated executive officers.
<TABLE>
<CAPTION>

                                            Summary Compensation


                                                                                      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>    <C>
Matthew M. Rizai                            1999        395,000             -           320,000 (1)           10,153 (2)
    Chief Executive Officer                 1998        295,000          200,000         60,000                8,569 (2)
    and Treasurer                           1997        235,000          205,000            -                  8,062 (2)

Robert M. Nierman                           1999        184,524          109,615        265,000                2,086 (4)
    Chief Operating Officer and
    President (3)

Martin J. Vanderploeg                       1999        395,000             -           320,000 (1)           10,153 (5)
    Executive Vice President                1998        295,000          200,000         60,000                8,483 (5)
                                            1997        235,000          205,000            -                  8,062 (5)

Jamie A. Wade                               1999        200,000             -            28,000 (6)            3,958 (7)
    Vice President of Administration,       1998        155,000           40,000          6,000                2,746 (7)
    General Counsel and Secretary           1997        140,000           30,000            -                  2,069 (7)

Jerome M. Behar                             1999        200,000             -             8,000 (6)            3,889 (8)
    Vice President of Finance               1998        150,000           50,000         13,500                3,658 (8)
    and Chief Financial Officer             1997         78,750           20,000         54,750                3,115 (8)
</TABLE>

[FN]
(1)  Includes 200,000 options cancelled in 1999.

(2)  Consists  of $6,953,  $3,463 and $3,128 of  premiums  on a life  insurance
     policy  paid in 1999,  1998 and 1997,  and  $3,200,  $5,106  and $4,934 of
     matching  contributions  by  EAI  to  the  Engineering   Animation,   Inc.
     Retirement Plan made in 1999, 1998 and 1997.

(3)  Mr. Nierman began working at EAI in May 1999.

                                       63
<PAGE>

(4)  Consists of premiums on a life insurance policy paid in 1999.

(5)  Consists  of  $6,953,  $3,463 and $3,128 of  premiums  on a life  insurance
     policy  paid in 1999,  1998 and 1997,  and  $3,200,  $5,020  and  $4,934 of
     matching contributions by EAI to the Engineering Animation, Inc. Retirement
     Plan made in 1999, 1998 and 1997.

(6)  Includes  8,000  shares of  performance  based  grants that fully lapsed on
     February 9, 2000, due to Company performance criteria not being met.

(7)  Consists of $1,648,  $686 and $609 of premiums on a life  insurance  policy
     paid in 1999,  1998 and 1997,  and  $2,310,  $2,060 and $1,460 of  matching
     contributions  by EAI to the Engineering  Animation,  Inc.  Retirement Plan
     made in 1999, 1998 and 1997.

(8)  Consists of $689, $333 and $112 of premiums on a life insurance policy paid
     in  1999,  1998  and  1997,  and  $3,200,   $3,325  and  $750  of  matching
     contributions  by EAI to the Engineering  Animation,  Inc.  Retirement Plan
     made in 1999, 1998 and 1997, and $2,253 paid in 1997 for taxable relocation
     expenses. Mr. Behar was employed from June 1, 1997 until February 29, 2000.
</FN>

                              OPTION GRANTS IN 1999

         This table  provides  information  relating  to the 1999  stock  option
grants to the executive officers listed in the Summary Compensation Table.

<TABLE>
<CAPTION>

                                                                                                           Potential
                                                   % of                                               Realizable Value at
                                                   Total                                                 Assumed Annual
                               Number of          Options                                             Rates of Stock Price
                              Securities         Granted to                                              Appreciation
                               Underlying         Employees        Exercise                            for Option Term
                                Options           in Fiscal         Price        Expiration     ---------------------------
Name                          Granted (#)           Year           $/Share          Date             5% ($)         10% ($)
-------------------  ----------------------     -------------  --------------  ---------------  -----------     -----------

<S>                                <C>                 <C>             <C>           <C>           <C>             <C>
Matthew M. Rizai                   120,000             6.71            44.25         2/09/09       5,575,500       5,841,000
                                   200,000 (1)        11.18            19.69         6/28/09       4,134,480       4,331,360
                             -------------            -----                                      -----------     -----------
                Total              320,000            17.89                                        9,709,980      10,172,360
                             =============            =====                                      ===========     ===========

Robert M. Nierman                  225,000            12.58            15.91         4/30/09       3,758,029       3,936,983
                                    40,000             2.24             8.44         11/4/09         354,396         371,272
                             -------------            -----                                      -----------      ----------

                Total              265,000            14.82                                        4,112,425       4,308,255
                             =============            =====                                      ===========      ==========

Martin J. Vanderploeg              120,000             6.71            44.25         2/09/09       5,575,500       5,841,000
                                   200,000 (1)        11.18            19.69         6/28/09       4,134,480       4,331,360
                             -------------            -----                                      -----------     -----------
                Total              320,000            17.89                                        9,709,980      10,172,360
                             =============            =====                                      ===========      ==========

Jamie A. Wade                        8,000 (2)         0.45            44.25         2/09/09         371,700         389,400
                                    20,000             1.12             8.44        11/04/09         177,198         185,636
                             -------------            -----                                      -----------     -----------
                Total               28,000             1.57                                          548,898         575,036
                             =============            =====                                      ===========      ==========

Jerome M. Behar                      8,000 (2)         0.45            29.75         2/09/09         249,900         261,800
                             =============            =====                                      ===========      ==========
</TABLE>



[FN]

(1) Grant that was cancelled in 1999.
(2) Performance based grant that fully lapsed on February 9, 2000, due to
    Company performance criteria not being met.
</FN>

                                       64
<PAGE>

                           AGGREGATED OPTION EXERCISES
                               IN 1999 AND FISCAL
                             YEAR-END OPTION VALUES

         This table provides information regarding the exercise of stock options
during  1999 by the CEO and the other four most highly  compensated  executives.
The "value  realized"  is  calculated  using the  difference  between the option
exercise  price  and the  price of our  common  stock  on the  date of  exercise
multiplied  by the  number  of  shares  subject  to the  option.  The  "value of
unexercised  in-the-money  options at fiscal year end" is  calculated  using the
difference between the option exercise price and $8.75 (the last reported market
price of our common  stock on December  31,  1999)  multiplied  by the number of
shares  underlying the option.  An option is in-the-money if the market value of
the common stock subject to the option is greater than the exercise price.

<TABLE>
<CAPTION>
                       Aggregated Option Exercises in 1999
                        and Fiscal Year-End Option Values

                                                                          Number of Securities              Value of Unexercised
                                                                         Underlying Unexercised             In-the-Money Options
                                           Shares                          Options at FY-End (#)                 at FY-End ($)
                                         Acquired on      Value        -----------------------------     ---------------------------
Name                                    Exercise (#)    Realized ($)    Exercisable    Unexercisable     Exercisable   Unexercisable
--------------------                    -----------     ------------   ------------------------------    ---------------------------
<S>                                        <C>            <C>             <C>             <C>              <C>              <C>
Matthew M. Rizai                             --              --           274,289         180,000          1,149,349         --
Robert M. Nierman                            --              --              --           265,000               --         12,480
Martin J. Vanderploeg                        --              --           363,903         180,000          1,814,016         --
Jamie A. Wade                              25,300         449,984          13,500          41,200 (1)         31,825       40,440
Jerome M. Behar                              --              --            28,571          45,499 (1)             --           --

</TABLE>

[FN]

(1) Includes 8,000 shares of performance based grants that fully lapsed on
    February 9, 2000, due to Company performance criteria not being met.
</FN>


                      EMPLOYMENT AND SEVERANCE ARRANGEMENTS

         Our employment  agreements with the named executive  officers generally
state the  executives'  compensation  for their first year of employment,  after
which their base salaries are reviewed annually,  with the executives  receiving
annual  performance  bonuses  as  determined  by the  Board  of  Directors.  Mr.
Nierman's agreement states that his term of employment expires in May 2001.

         We also have severance  arrangements with the named executive officers.
Executive  officers  would  receive a lump sum payment equal to the sum of their
base  salary  and bonus paid in the prior  year.  Drs.  Rizai and  Vanderploeg's
agreements  provide  for  two-times  this  amount.  Mr.  Nierman  would  receive
three-times  his then current annual salary and bonus,  or two-times this amount
if a change in  control  occurred  after the first 18 months of his  employment.
Each of the agreements also provides for additional employee benefits and earned
bonuses. The vesting of stock options held by Drs. Rizai and Vanderploeg and Mr.
Nierman's would accelerate, with registration rights.

         Severance  is  triggered  if we  terminate  an  executive's  employment
without cause or if an executive  terminates  employment for good reason,  which
includes a change in control.  In some  instances,  severance is payable upon an
executive's death or permanent disability. Mr. Nierman's severance would trigger
if he were to terminate his employment for good reason or there were a change in
control.

                                       65
<PAGE>

                              DIRECTOR COMPENSATION

         Directors  who are  employees  receive  no fees for their  services  as
directors.  Non-employee  "outside"  directors  receive  an annual  retainer  of
$20,000 as well as a fee of $1,000 and  reimbursement of expenses for each Board
meeting and each committee meeting they attend.

         Our two outside  directors  participate in the  Non-Employee  Directors
Stock Option Plan. The Chairman of the Board,  Matthew Rizai,  administers  this
Plan. Each  non-employee  director  receives an initial option to purchase 7,500
shares of our  common  stock in the year he or she joins the Board and an option
to  purchase  an  additional  7,500  shares for each  subsequent  year he or she
serves. The options have a ten-year term and an exercise price equal to the fair
market value of our common stock on the date the option is granted.  The initial
options  granted  under  the  Plan  become  exercisable  in  four  equal  annual
installments.   Subsequent  options  are  exercisable  when  they  are  granted.
Directors  may not  transfer  the  options  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 shows how much our common stock the directors,  the
named  executive  officers and all  executive  officers and directors as a group
beneficially  owned as of March 31, 2000. The named executive  officers  include
the Chief Executive Officer and the four other most highly compensated executive
officers based on  compensation  earned during 1999. To our knowledge,  no other
person is a beneficial owner of more than 5% of our common stock.

         Beneficial  ownership is a technical term broadly defined by the SEC to
mean more than ownership in the usual sense.  In general,  beneficial  ownership
includes  any shares a director or executive  officer can vote or transfer,  and
stock options that are currently  exercisable  or become  exercisable  within 60
days.  These  shares  are  considered  to be  outstanding  for  the  purpose  of
calculating the percentage of outstanding EAI common stock owned by a particular
stockholder,  but are not  considered  to be  outstanding  for  the  purpose  of
calculating  the percentage  ownership of any other person.  Except as otherwise
noted,  the  stockholders  named in this table have sole  voting and  investment
power for all shares shown as beneficially owned by them.

                                       66
<PAGE>


<TABLE>
<CAPTION>


                                                                         Stock Options
                                                        Shares of         Exercisable
                                                      Common Stock     Within Sixty Days   Percent
Named Executive Officers and Directors                    Owned          After 3/31/00     of Class
-------------------------------------------------------------------------------------------------------
<S>                                                         <C>             <C>             <C>
Jerome M. Behar (1)                                         150             66,250           *
Michael M. Crow                                           63,948            25,200           *
Laurence J. Kirshbaum                                          -            23,250           *
Robert M. Nierman                                              -            56,250           *
Matthew M. Rizai (2), (3)                                467,639           319,289          6.4%
Martin J.Vanderploeg (2)                                 378,026           408,903          6.3%
Jamie A. Wade (4)                                         44,049            17,100           *

All directors and executive officers as a group
   (10 persons)                                        1,419,769           950,367         19.3%

</TABLE>

[FN]
* Less than one percent

(1)   Mr. Behar's employment at EAI ended February 29, 2000.

(2)   Address: c/o Engineering Animation, Inc., 2321 North Loop Drive, Ames,
      Iowa 50010.

(3)   Held by the Matthew Rizai Family Limited Partnership.

(4)   Includes 6,249 shares held in Mr. Wade's Individual Retirement Account.
</FN>

                                     ITEM 13

                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.



                                       67
<PAGE>


                                     PART IV

                                     ITEM 14

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

(a)(1)   Financial Statements

         The  following   consolidated   financial   statements  of  Engineering
         Animation,  Inc. and its  subsidiaries  are included in Part II of this
         report:
                                                                           Page

         Report of KPMG LLP.................................................33

         Report of Ernst & Young LLP........................................34

         Consolidated Balance Sheets - December 31, 1999 and 1998...........35

         Consolidated Statements of Operations - years ended December 31,
         1999, 1998 and 1997 ...............................................36

         Consolidated Statements of Stockholders' Equity and Other
         Comprehensive Income (Loss)-years ended December 31, 1999, 199
         and 1997...........................................................37

         Consolidated Statements of Cash Flows - years ended December 31,
         1999, 1998 and 1997................................................38

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


(a)(2)   Financial Statement Schedule

          Schedule II

(a)(3)   List of Exhibits

         Exhibit

         Number       Description
         ------       ------------------

         2            Purchase and Sale Agreement with Dassault Systemes S.A.,
                      dated as of February 29, 2000  1

         3.1          Certificate of Incorporation, as amended  2

         3.2          By-laws, as amended  3

         4            Rights Agreement with First Chicago Trust Company of
                      New York, dated as of January 1, 1996  4

         10.1         Amended and Restated 1994 Stock Option Plan  5

         10.2         Non-Employee Directors Stock Option Plan  4, 5

         10.3         Matthew M. Rizai Employment and Severance Agreements,
                      dated as of January 1, 1996, and Option Agreements, dated
                      June 9, 1994 and February 11, 1995  4,5

         10.4         Martin J. Vanderploeg Employment and Severance Agreements,
                      dated as of January 1, 1996, and Option Agreements, dated
                      June 9, 1994 and February 11, 1995  4,5

         10.5         Jamie A. Wade Employment and Severance Agreements, dated
                      as of January 1, 1996, and Option Agreement, dated
                      February 11, 1995   4,5


                                       68
<PAGE>



         10.6         Robert M. Nierman Employment Agreement 6, dated April 21,
                      1999, and Option Agreement, dated April 30, 1999  5

         10.7         Jeff D. Trom Employment and Severance Agreements, dated as
                      of January 1, 1996   4, 5

         10.8         Jerome M. Behar Employment Agreement 7, dated as of May 2,
                      1997, and Addendum to Employment Agreement 6, dated
                      August 2, 1999    5

         10.9         Robert L. Cyr Option Agreement, dated December 27, 1999  5

         10.10        Ground Lease Agreement with Iowa State University Research
                      Park Corporation, dated June 1, 1995    4

         10.11        Mortgage with CRE, Inc., dated June 29, 1995  4

         10.12        Lease Assignment and Agreement with CRE, Inc., dated
                      June 14, 1995     4

         10.13        Lease Agreement with CRE, Inc., dated June 14, 1995   4

         21           Subsidiaries

         23.1         Consent of KPMG LLP

         23.2         Consent of Ernst & Young LLP

         27           Financial Data Schedules

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

[FN]
         1            Incorporated herein by reference from our Current Report
                      on Form 8-K dated March 24, 2000.

         2            Incorporated herein by reference from our Quarterly Report
                      on Form 10-Q for the quarter ended September 30, 1998.

         3            Incorporated herein by reference from our Quarterly Report
                      on Form 10-Q for the quarter ended March 31, 1999.

         4            Incorporated herein by reference from our Registration
                      Statement on Form S-1, SEC file no. 33-80705.

         5            Denotes compensatory plan.

         6            Incorporated  herein by reference  from our  Quarterly
                      Report on Form 10-Q for the fiscal quarter ended
                      September 30, 1999.

         7            Incorporated  herein by reference  from our Annual Report
                      on Form 10-K for the fiscal year ended December 31, 1997.
</FN>


(b)      Reports on Form 8-K

         We did not file any  reports  on Form 8-K  during  the last  quarter of
         1999.

                                       69
<PAGE>

          Independent Auditors' Report on Financial Statement Schedule

The Board of Directors and Shareholders
Engineering Animation, Inc.:

Under the date of March 24, 2000, we reported on the consolidated balance sheets
of Engineering Animation, Inc. and subsidiaries as of December 31, 1999, and the
related  consolidated   statements  of  operations,   stockholders'  equity  and
comprehensive income (loss) and cash flows for the year then ended, as contained
in  the  1999  annual  report  to  shareholders.  These  consolidated  financial
statements  and our report thereon are  incorporated  by reference in the annual
report on Form 10-K for the year  1999.  In  connection  with our  audits of the
aforementioned  consolidated  financial  statements,  we also have  audited  the
related financial  statement schedule as listed in the accompanying  index. This
financial statement schedule is the responsibility of the Company's  management.
Our responsibility is to express an opinion on the financial  statement schedule
based on our audit.

In our opinion,  such financial statement schedule,  when considered in relation
to the  basic  consolidated  financial  statements  taken as a  whole,  presents
fairly, in all material respects, the information set forth therein.

                                                       /s/ KPMG LLP



Minneapolis, Minnesota
March 24, 2000

                                       70
<PAGE>

<TABLE>
<CAPTION>

SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
ENGINEERING ANIMATION,INC.
December 31, 1999
(in thousands)

             COLUMN A                  COLUMN B                  COLUMN C                  COLUMN D            COLUMN E
                                                                Additions
                                      Balance at      Charged to           Charged to                         Balance at
                                     Beginning of        Costs               Other                              End of
           Description                  Period        and Expenses         Accounts        Deductions           Period
                                   -----------------  --------------     --------------   -----------          ---------

Year Ended December 31, 1999

   Deducted from assets accounts:
   <S>                                    <C>            <C>              <C>               <C>                    <C>
   Allowance for doubtful accounts        $ 300          $ 1,739          $ -               $ 1,325  (1)           $ 714
                                   ---------------------------------------------------------------------     ------------
              Total                       $ 300          $ 1,739          $ -               $ 1,325                $ 714
                                   =====================================================================     ============


Year Ended December 31, 1998

   Deducted from assets accounts:
   Allowance for doubtful accounts        $ 158           $ 138          $ 181                $ 177    (1)          $ 300
                                   ---------------------------------------------------------------------     ------------
              Total                       $ 158           $ 138          $ 181                $ 177                 $ 300
                                   =====================================================================     ============

Year Ended December 31, 1997

   Deducted from assets accounts:
   Allowance for doubtful accounts         $ 57           $ 146          $ -                   $ 45   (1)           $ 158
                                   ---------------------------------------------------------------------     ------------
              Total                        $ 57           $ 146          $ -                   $ 45                 $ 158
                                   =====================================================================     ============
<FN>

 (1) Uncollectible accounts written off, net of recoveries
</FN>
</TABLE>


                                       71
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 14, 2000.

                           ENGINEERING ANIMATION, INC.
                           By: /s/ Michael K. O'Gara
                                   Michael K. O'Gara

                           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 April 14, 2000 by the following  persons on
behalf of the Registrant in the capacities indicated.

                  Signature                                Title

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

     /s/      Martin J. Vanderploeg            Director
--------------------------------------------
              Martin J. Vanderploeg

     /s/      Michael K. O'Gara                Vice President of Finance and
--------------------------------------------   Chief Financial Officer
              Michael K. O'Gara                (Principal Financial and
                                               Accounting Officer)

     /s/      Jamie A. Wade                    Director
-------------------------------------------
              Jamie A. Wade

     /s/      Michael M. Crow                  Director
-------------------------------------------
              Michael M. Crow

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



                                       72
<PAGE>





                                INDEX TO EXHIBITS

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

10.2                   Amended and Restated 1994 Stock Option Plan

10.6                   Robert M. Nierman Option Agreement, dated April 30, 1999

10.9                   Robert L. Cyr Option Agreement, dated December 27, 1999

21                     Subsidiaries

23.1                   Consent of KPMG LLP

23.2                   Consent of Ernst & Young LLP

27                     Financial Data Schedules


                                        73