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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                  ------------

FORM 10-K (Mark One)

[ 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

[   ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE  ACT OF 1934  For  the  transition  period  from  ____________  to
     ____________

                          Commission file number 0-8771
                                  ------------

                               EVANS & SUTHERLAND
                              COMPUTER CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)

           Utah                                            87-0278175
(State or Other Jurisdiction of                         (I.R.S. Employer
Incorporation or Organization)                           Identification No.)

600 Komas Drive, Salt Lake City, Utah                       84108
Address of Principal Executive Offices)                   (Zip Code)

       Registrant's telephone number, including area code: (801) 588-1000

           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, $.20 par value
                       6% Convertible Debentures Due 2012
                         Preferred Stock Purchase Rights

         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 3, 2000 was approximately
$91,001,000, based on the closing market price of the Common Stock on such date,
as reported by The Nasdaq Stock Market.

         The number of shares of the  registrant's  Common Stock  outstanding at
March 3, 2000 was 9,344,935.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Portions  of the  Proxy  Statement  for  the  2000  Annual  Meeting  of
Shareholders to be held on May 17, 2000 are  incorporated by reference into Part
III hereof.

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                     EVANS & SUTHERLAND COMPUTER CORPORATION
                                    FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<S>      <C>        <C>                                                                                       <C>
PART I
         Item 1.    Business..................................................................................  5
         Item 2.    Properties................................................................................ 14
         Item 3.    Legal Proceedings......................................................................... 14
         Item 4.    Submission of Matters to a Vote of Security Holders....................................... 14

PART II
         Item 5.    Market For Registrant's Common Equity and
                     Related Stockholder Matters.............................................................. 16
         Item 6.    Selected Consolidated Financial Data...................................................... 17
         Item 7.    Management's Discussion and Analysis of Financial Condition and
                     Results of Operations.................................................................... 19
         Item 7A.   Quantitative and Qualitative Disclosures About Market Risk................................ 33
         Item 8.    Financial Statements and Supplementary Data............................................... 34
                      Report of Management.................................................................... 35
                      Report of Independent Accountants....................................................... 35
                      Consolidated Balance Sheets............................................................. 36
                      Consolidated Statements of Operations................................................... 37
                     Consolidated Statements of Comprehensive Income.......................................... 38
                      Consolidated Statements of Stockholders' Equity......................................... 39
                      Consolidated Statements of Cash Flows................................................... 40
                      Notes to Consolidated Financial Statements.............................................. 41
         Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 63

PART III
         Item 10.   Directors and Executive Officers of the Registrant........................................ 63
         Item 11.   Executive Compensation.................................................................... 63
         Item 12.   Security Ownership of Certain Beneficial Owners and Management............................ 63
         Item 13.   Certain Relationships and Related Transactions............................................ 63

PART IV
         Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K.......................... 64

         Signatures .......................................................................................... 68
</TABLE>

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                                    FORM 10-K

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Evans  &  Sutherland   Computer   Corporation  ("Evans  &  Sutherland,"
"E&S(R)," or the  "Company")  was  incorporated  in the State of Utah on May 10,
1968. The Company is an  established  high-technology  company with  outstanding
computer graphics  technology and a worldwide  presence in  high-performance  3D
visual  simulation.  In addition,  E&S is now applying the core  technology into
higher-growth   personal  computer  ("PC")  products  for  both  simulation  and
workstations.  During 1999, the Company's core computer graphics  technology was
shared among the Company's:

         (1)  Simulation Group, which produces high performance image generators
              for simulation including PC-based visual system products;

         (2)  Workstation  Products  Group,  which provides  original  equipment
              manufacturers  ("OEMs") of personal workstations with high quality
              graphics performance; and

         (3)  Applications  Group, which applies the Company's core technologies
              to the expanding market of PC-based applications and products.

         Unless  the  context  otherwise  requires,  as used  herein,  the  term
"Company"   refers  to  Evans  &  Sutherland   Computer   Corporation   and  its
subsidiaries.  The Company's  headquarters are located at 600 Komas Drive,  Salt
Lake City, Utah 84108, and its telephone number is (801) 588-1000. The Company's
web page on the world wide web is http://www.es.com.

RECENT DEVELOPMENTS

         In February  2000,  the  Company  changed  the  strategic  focus of its
Workstation  Products  Group to the  high-end  digital  content  creation  (DCC)
segment.  The  Company  will  provide  the base  graphics  and video  processing
technology  to leading  hardware  system-solution  providers in the high-end DCC
segment. The goal of the group, now called the REALimage(TM) Solutions Group, is
to provide a  "studio-on-a-chip"  to bring together real-time graphics and video
in a unique and effective way to support all aspects of visual content  creation
for broadcasting and netcasting applications.

         On October  16,  1997,  the Company and CAE  Electronics  Ltd.  ("CAE")
entered  into a  Sub-Contract  (the  "Sub-Contract")  for the Company to design,
develop and deliver the visual system  components and visual databases  required
for certain  dynamic  mission  simulators and tactical  control  centers,  to be
integrated with the Company's  Harmony image generation  equipment (the "Harmony
VSC"). As of December 31, 1999, the Harmony VSC had not been integrated with the
dynamic mission simulators or tactical control centers. Pursuant to the terms of
the Sub-Contract, the integration was to be completed during 1999. Consequently,
as of December 31, 1999, in accordance with the liquidated  damages provision of
the Sub-Contract,  the Company incurred  liquidated damages on this Sub-Contract
totaling $6.0 million. The Company and CAE agreed to an interim solution,  which
provides for the  installation  of the Company's  ESIG 4530 image  generators to
integrate with the dynamic mission simulators and tactical control centers until
the Company's Harmony VSC are able to support the dynamic mission simulators and
tactical control centers. The Company has agreed to pay CAE (i) $0.5 million for
reimbursement  of certain  expenses  and costs  incurred by CAE  relating to the
integration and retrofit of the ESIG 4530 to the dynamic mission  simulators and
tactical control centers and (ii) $5.5 million as liquidated  damages  resulting
from certain delays of the Harmony VSC. If further delays in the  integration of
the  Harmony  VSC occur,  the Company  may be  obligated  to pay CAE  additional
liquidated  damages.  The Company will also be  obligated  to pay certain  costs
associated  with the anticipated  switch-over  from the ESIG 4530 to the Harmony
VSC.  CAE agreed to pay the  Company  certain  advance  payments  totaling  $7.2
million  upon the  successful  completion  of specified  milestones  towards the
integration of the ESIG 4530 image generators.

                                       5

<PAGE>

         On March 28, 2000, the Company sold certain assets of its  Applications
Group  relating  to  digital  video  products  to RT-SET  Real Time  Synthesized
Entertainment  Technology Ltd. and its subsidiary,  RT-SET America Inc. for $1.4
million  cash,  common  stock of  RT-SET  Real  Time  Synthesized  Entertainment
Technology  Ltd.  valued at  approximately  $1.0 million and the  assumption  of
certain  liabilities.  The Company may receive additional common stock of RT-SET
Real Time Synthesized Entertainment Technology Ltd. valued up to $3.0 million in
the event that a product currently being developed and included in the purchased
assets meets certain  specified  performance  criteria  within a specified  time
period.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

          This annual  report,  including all documents  incorporated  herein by
reference,  includes certain "forward-looking  statements" within the meaning of
that term in Section 27A of the Securities Act of 1933, as amended,  and Section
21E of the Exchange Act of 1934,  as amended,  including,  among  others,  those
statements  preceded  by,  followed  by  or  including  the  words  "estimates,"
"believes,"   "expects,"   "anticipates,"   "plans,"   "projects,"  and  similar
expressions.

         These  forward-looking  statements may include projections of sales and
net income  and  issues  that may affect  sales or net  income;  projections  of
capital  expenditures;  plans for future  operations;  financing needs or plans;
plans relating to the Company's products and services;  and assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties,  some of which cannot be predicted or  quantified.  Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying  the  forward-looking  information.  Our actual  results could
differ  materially  from these  forward-looking  statements.  In addition to the
other risks described in the "Factors That May Affect Future Results" discussion
under Item 7 - Management's  Discussion and Analysis of Financial  Condition and
Results of Operations  in Part II of this annual  report,  important  factors to
consider in evaluating such  forward-looking  statements include risk of product
demand,  market  acceptance,  economic  conditions,   competitive  products  and
pricing, difficulties in product development,  product delays, commercialization
and  technology.  In light of these  risks  and  uncertainties,  there can be no
assurance  that  the  events  contemplated  by  the  forward-looking  statements
contained in this annual report will, in fact, occur.

REPORTABLE SEGMENTS

         The Company's  business units have been  aggregated  into the following
three reportable segments: the Simulation Group, the Workstation Products Group,
and the  Applications  Group. The three groups benefit from shared core graphics
technology  and each group's new products are based on open Intel and  Microsoft
hardware and software standards. Each reportable segment markets its products to
a worldwide customer base. Financial  information by reportable segment for each
of the three years ended  December  31, 1999 is included in note 19 of the Notes
to Consolidated Financial Statements included in Part II of this annual report.

Simulation Group

         E&S  is  an  industry  leader  in  providing  visual  systems  to  both
government and commercial  simulation  customers.  The Simulation Group provides
more than 50  percent  of the  worldwide  market  for  government  and  military
applications and commercial airline training  simulators.  The group anticipates
continued growth in these marketplaces as simulation training increases in value
as an  alternative  to  other  training  methods,  and  as  simulation  training
technology and cost-effectiveness improve.

         In the third quarter of 1999,  E&S announced  simFUSION(TM),  the first
OpenGL(R)  PC-based  image  generator  which extends the Company's  Symphony(TM)
family of compatible  simulation products to the low-cost simulation market. The
Symphony family of products now includes the Harmony(TM)  image generator system
on the high end,  Ensemble(TM)  in the  mid-range  and simFUSION on the low-end.
simFUSION is bundled with  third-party  software  packages and is sold worldwide
through qualified distributors.

         Throughout 1999, the Company continued development of its iNTegrator(R)
software product that provides the real-time  control and modeling tools for the
Symphony product family.  Performance  optimizations and new functionality  have
continuously been added with each new software release to meet existing contract
requirements and to increase the product performance.  The Company plans to make
further  enhancements of iNTegrator  throughout 2000 to increase performance and
to support new functionality in the hardware.

                                       6

<PAGE>

         In the fourth  quarter  of 1999,  E&S  announced  the  inauguration  of
Encore,  an  innovative  new approach to customer  service and  support.  Encore
combines the latest advancements in manufacturing and interactive communications
technology to offer E&S customers a comprehensive,  flexible, and cost-effective
customer service and support program.  Encore combines web-based technology with
new physical distribution  locations to deliver timely support as efficiently as
possible.  Encore  customers will have immediate  access to service  information
through  customized,  secure,  private  web  sites  providing  product  news and
announcements,  documentation,  and  on-line  spares and  repairs  tracking.  In
addition,  each customer will have a single-point E&S contact who can be reached
through  the  web  site  to  ensure   continuity   throughout  the  procurement,
installation,  operation,  and  maintenance  processes.  The  status of  monthly
service agreements will also be visible, allowing customers to plan and forecast
their budgets accurately and reduce unplanned  expenses for spares,  repairs and
on-site support.

Products & Markets

         The Simulation Group provides a broad line of visual systems for flight
and ground training and related services to the United States and  international
armed forces, NASA, and aerospace companies.  E&S remains an industry leader for
visual systems sales to various United States government  agencies and more than
20 foreign  governments  for the primary  purpose of training  military  vehicle
operators. The Simulation Group is also a leading independent supplier of visual
systems for flight simulators for commercial airlines.  This group provides over
50 percent of the visual systems  installed in full-flight  training  simulators
for civil airlines,  training  centers,  simulator  manufacturers,  and aircraft
manufacturers.

         The group's visual systems create dynamic, high quality, out-the-window
scenes that simulate the view vehicle  operators see when performing tasks under
actual  operating  conditions.  The visual  systems are an integral part of full
mission  simulators,  which incorporate a number of other components,  including
cockpits or vehicle cabs and large hydraulic motion systems.

         Generally,  the Simulation  Group's visual systems  products consist of
the  following  five  major  components.   These  components  are  available  as
sub-systems,  but are  typically  sold  together  as a  complete  visual  system
solution delivered to an operator or prime contractor.

         (1)  Image  generators  ("IG"s)  create  computer-generated   real-time
              images  and  send  these  images  to  display  devices,   such  as
              projectors or computer monitors.  The group's primary IG offerings
              include the ESIG(TM) line and the Symphony family of products from
              Harmony on the high end to OpenGL  PC-based  simFUSION  at the low
              end. E&S offers a complete, high-to-low family of IGs that can use
              the  same  software  and  databases.  Harmony  is  the  industry's
              flagship for highest  performance,  Ensemble is the first PC-based
              true  image  generator  offering  deterministic   performance  and
              simulation-specific  functionality  and  simFUSION  is  the  first
              OpenGL  PC-based  image  generation  system  targeted  at low-cost
              applications.  E&S is the only visual system  provider  offering a
              complete  line of compatible  and scalable  products for real-time
              simulation and visualization.

         (2)  Display systems consist of projectors,  display screens,  computer
              monitors,  and  specialized  optics.  These  display  systems  are
              offered  in  a  broad  range  of   configurations,   from  onboard
              instrument  displays to domes offering a 360-degree field of view,
              depending on the applications.

         (3)  Databases of synthetic  environments  are offered as options or as
              custom creations.  The group provides database development as well
              as database  development tools such as EaSIEST(TM) and iNTegrator.
              Databases  developed  using  iNTegrator  are a key  element of the
              Symphony product family. These can be run on a full range of image
              generators,  from the PC-based  simFUSION to the high-end  Harmony
              systems.

         (4)  The  simulation  of sensor  imagery such as radar,  infrared,  and
              night  vision  goggles  (NVG) is often  provided  with the  visual
              systems for high-performance  fixed and rotary wing aircraft.  E&S
              develops  and  manufactures  a variety of  hardware  and  software
              products to achieve  realistic  sensor  simulation,  including the
              Vanguard  radar image  generator,  infrared post  processors,  and
              customized   systems  for  either   simulated  or  stimulated  NVG
              solutions.

         (5)  System  integration,  installation  and support  services are also
              differentiating elements of all systems and components sold.

                                       7

<PAGE>

         The Simulation  Group's products are marketed  worldwide by the Company
and qualified distributors. Products and services are sold directly to end users
by E&S as a prime  contractor,  through  simulator  prime  contractors  with E&S
acting as a subcontractor, and through system OEMs. E&S continues to develop and
form both domestic and international  marketing alliances,  which are proving to
be an effective method of reaching  specific markets.  In addition,  the Company
has OEM  agreements  for its  visual  system  products  with a  number  of major
companies such as STN Atlas Elektronik GmbH in Germany and Mitsubishi  Precision
Co., Ltd. in Japan.

Competitive Conditions

         Primary  competitive  factors for the Simulation  Group's  products are
performance,  price, service, and product availability.  Because competitors are
constantly  striving to improve  their  products,  the group must ensure that it
continues to offer products with the best  performance  at a competitive  price.
Prime  contractors,  including  Lockheed  Martin,  Flight  Safety  International
("FSI") and CAE Electronics, Ltd. ("CAE"), offer competing visual systems in the
simulation  market.  The Company  believes it is able to compete  effectively in
this  environment  and  will  continue  to be able  to do so in the  foreseeable
future. In 1999, the group was awarded several highly competitive orders against
FSI and CAE, the principal  competitors in the commercial  simulation market. In
the  military  simulation  market,  the group  competes  primarily  with Silicon
Graphics,  Inc.  and  CAE.  In the  low-cost,  PC-based  market,  the  Company's
simFUSION  product competes against  companies  producing  graphics  accelerator
cards, such as Quantum 3D.

Backlog

         The Simulation Group's backlog was $149.1 million on December 31, 1999,
compared with $146.7 million on December 31, 1998. It is  anticipated  that most
of the 1999 backlog will be converted to sales in 2000.

Business Subject to Government Contract Renegotiation

         A significant  portion of the Simulation  Group's business is dependent
on contracts and subcontracts associated with government business. In the normal
course of this business,  the government  may  renegotiate  profits or terminate
contracts  or  subcontracts.  Management  does not believe,  however,  that such
renegotiations  or  terminations  would  have a material  adverse  effect on the
Company's consolidated financial condition, liquidity, or results of operations.

Workstations Products Group (Renamed REALimage Solutions Group)

         The  Workstation  Products  Group develops and sells graphics chips and
graphics subsystems for the personal workstation  marketplace.  This group sells
to personal workstation OEMs and to end-users

         To expand the Company's workstation graphics  development,  integration
and distribution within the workstation  graphics  marketplace,  the Company, on
June 26, 1998, through its wholly-owned subsidiary,  Evans & Sutherland Graphics
Corporation  ("ESGC"),  acquired all of the outstanding  stock of AccelGraphics,
Inc.   ESGC  is  based  in  San  Jose,   California,   and  is  a  provider   of
high-performance,  cost-effective, three-dimensional graphics subsystem products
for the Windows NT(R)-based  personal  workstation market. To further expand the
Company's  presence within the  workstation  graphics  marketplace,  on June 26,
1998, the Company acquired the assets and assumed certain liabilities of Silicon
Reality,  Inc.  ("SRI"),  a designer and  developer of 3D graphics  hardware and
software products for the PC workstation marketplace.

         In February  2000,  the  Company  changed  the  strategic  focus of its
Workstation  Products  Group to the  high- end DCC  segment.  The  Company  will
provide the base graphics and video  processing  technology to leading  hardware
system-solution  providers in the  high-end DCC segment.  The goal of the group,
now called the REALimage(TM) Solutions Group, is to provide a "studio-on-a-chip"
to bring together  real-time graphics and video in a unique and effective way to
support all aspects of visual content  creation for  broadcasting and netcasting
applications.


                                       8
<PAGE>


Products & Markets

         The group provides a family of  REALimage(TM)  chip-based,  3D graphics
subsystems  and their  associated  software  to  personal  workstation  OEMs.  A
majority  of the  group's  sales  are  currently  derived  from the E&S  Tornado
3000(TM) and the E&S Lightning 1200(TM) products.  The current product lines are
summarized below:
<TABLE>
<CAPTION>
       Product Line             Introduction Date                               Description
<S>                             <C>                   <C>

E&S Tornado 3000                    June 1999          Based  on  the  REALimage  3000  chipset,   positioned  as  a
                                                       professional card for animation and modeling  applications in
                                                       the DCC  segment  and  for  users  of CAD  and  visualization
                                                       simulation   applications.   It  is  Pentium  III  ready  and
                                                       incorporates E&S's software architecture, DYNAMICgeometry(TM).

                                                       Based  on  the  REALimage  1200  chipset,   positioned  as  a
E&S Lightning 1200                 March 1999          professional   card   for   price-sensitive   users  of  CAD,
                                                       modeling, DCC, and visualization simulation applications,  is
                                                       Pentium   III   ready   and   incorporates   E&S's   software
                                                       architecture, DYNAMICgeometry.

AccelGALAXY(TM)                     July 1998          Based  on  the  REALimage  2100  chipset,   positioned  as  a
                                                       mid-range  card for a variety  of  professional  applications
                                                       and was  upgraded  with new driver  software in March 1999 to
                                                       be  Pentium   III   ready,   incorporating   E&S's   software
                                                       architecture, DYNAMICgeometry.
</TABLE>


         These products support a wide range of professional  OpenGL(R) graphics
applications,   including  mechanical  computer  automated  design,  engineering
analysis,  digital  content  creation,  visualization,   simulation,  animation,
entertainment and architectural,  engineering and construction.  To optimize its
position in these markets,  E&S has maintained close working  relationships with
many  independent  software  vendors that provide  products into these  markets.
Consequently,  E&S  is  certified  and/or  tested  on  most  of the  popular  PC
workstation applications.

         Another  partnership  important  to  the  group's  ability  to  deliver
competitive products to personal  workstation OEMs and hardware  system-solution
providers  within the DCC  segment  is E&S's  alliance  with  Intel  Corporation
("Intel").  Intel and the Company have an agreement to accelerate development of
high-end  graphics  and video  subsystems  for  Intel-based  workstations.  This
coordinated  development  effort with Intel gives E&S a potential  advantage  in
keeping pace with new chip  releases by Intel thereby  providing E&S  customers,
potentially, with timely and optimal graphics solutions.

         The  REALimage   Solutions   Group  also  benefits  from  the  advanced
technology  developed in the Company's  Simulation Group, and then in turn flows
technology  back to the simulation  business,  particularly  for PC-based visual
systems.

         This group's  products are currently  sold to OEM  customers  primarily
through direct sales and to end users through the Company's e-commerce web site,
ESDirect.  The group also  utilizes  sales  representatives  to support sales to
distributors  around  the  world  and  has  a  non-exclusive   partnership  with
Mitsubishi Electronics to manufacture and sell certain specific  REALimage-based
chipsets.


                                       9
<PAGE>


Competitive Conditions

         Primary   competitive  factors  for  the  REALimage  Solutions  Group's
products are performance,  price,  product  availability and access to customers
and distribution  channels. The group's future success will depend in large part
on achieving  design wins and having current and future  products  chosen as the
graphics  subsystem  by  leading  hardware  system-solution  providers  into the
high-end DCC segment.  The group's current OEM customers typically introduce new
system configurations as often as twice a year, usually based on spring and fall
design cycles.  Accordingly,  the group's existing  products and future products
must have competitive  performance levels or the group must introduce timely new
products with such  performance  characteristics  in order to be included in new
system configurations.

         The  REALimage   Solutions   Group's  principal   competitors   include
Intergraph, Inc., a system OEM that uses its own chip design, 3Dlabs Inc., Ltd.,
a company  that sells  graphics  subsystems  based on its own chipsets to system
OEMs, and companies such as S3 Incorporated  and ELSA Inc. that utilize graphics
chips of other  companies  such as IBM and NVIDIA  Corporation  ("NVIDIA").  The
group also competes  indirectly  with Silicon  Graphics,  Inc.  because  Silicon
Graphics,  Inc. employs a vertical system sales strategy that competes  directly
with  Dell  Computer  Corporation,   Hewlett-Packard  Company,  Compaq  Computer
Corporation and other historical E&S customers. Competition may also emerge from
companies such as ATI Technologies Inc., NVIDIA and Intel, who currently provide
lower performance graphics products for the consumer PC market.

Backlog

         The REALimage  Solutions  Group's  backlog was $0.2 million on December
31, 1999,  compared  with $3.0 million on December 31, 1998.  The group  expects
that the 1999  backlog  will be  converted  to  sales  in  2000.  The  REALimage
Solutions  Group's business  operates off very short lead times as is typical in
the PC industry.  Sales of the group's  products are primarily  made pursuant to
standard purchase orders that are cancelable without significant penalties.

Applications Group

         The  Applications  Group is composed of new and synergistic  businesses
that use E&S core  technology  in  growth  markets.  The  group's  products  are
applications  that  leverage the  technology  of the  Company's  Simulation  and
Workstation Products Groups and apply them to other growth markets.

Products & Markets

         The Applications  Group's digital theater  products  include  hardware,
software,  and content for both the entertainment and educational  marketplaces.
Digital theater focuses on immersive  all-dome  theater  applications  combining
colorful    digitally    produced    imagery,     full-spectrum    audio,    and
audience-participation   capability.   The  group  provides  turnkey   solutions
incorporating visual systems and sub-systems from the Simulation and Workstation
Products Groups. E&S integrates these systems with projection  equipment,  audio
components,  and audience-participation  systems from other suppliers.  Products
include Digistar(R),  a calligraphic  projection system designed to compete with
analog  star  projectors  in  planetariums,   and  StarRider(R),  a  full-color,
interactive,  domed  theater  experience.  The  group is a leading  supplier  of
digital display systems in the planetarium marketplace.

         The digital video products  provide  Windows NT, open system,  standard
platform  based virtual  studio  systems for digital  content  production in the
television broadcast, film, video, corporate training and multimedia industries.
The  E&S  solution  offers  significant  improvement  in  cost,  ease of use and
flexibility compared with the traditional, proprietary UNIX-based systems common
in this  developing  market.  The  group's  products  are  all-inclusive  system
solutions that  incorporate  visual system  components  and subsystems  from the
Simulation and Workstation  Products  Groups.  E&S  MindSet(TM),  Virtual Studio
System(TM) and the  FuseBox(TM)  control  software with real-time frame accurate
camera  tracking and enable live talent to perform in real time on a virtual set
generated  using E&S 3D computer  technology.  The video output of the set meets
today's digital  broadcast video standards.  Systems are installed  worldwide in
production, postproduction, broadcast and educational applications.


                                       10
<PAGE>


         During 1999, the Applications Group introduced E&S  RAPIDsite(TM).  E&S
RAPIDsite  is  a  photo-realistic   visualization   tool  designed  for  use  by
real-estate developers,  consulting engineers, architects and municipal planners
involved  with  urban,   suburban  and  environmentally   sensitive  development
projects.  E&S  RAPIDsite  features  fast  3D-model  construction,   accelerated
graphics  rendering  performance  and easy-to-use  interactive  exploration of a
proposed  development  on a  Windows  NT  computer  with  an  Open  GL  graphics
accelerator.

         The Applications Group's products are sold directly to end-users by E&S
as a prime contractor, sales representatives or distributors.

Competitive Conditions

     Primary  competitive  factors for the  Applications  Group's  products  are
functionality,  performance,  price and  access to  customers  and  distribution
channels.  The  Company's  digital  theater  products  compete with  traditional
optical-mechanical  products  and  digital  display  systems  offered by Minolta
Planetarium  Co. Ltd.,  GoTo Optical Mfg.  Co.,  Carl Zeiss Inc.,  Spitz,  Inc.,
Trimension,  Inc. and Sky-Skan, Inc. The competitors for the virtual set product
are mostly small  companies  including  Orad Hi-Tec Systems Ltd. and RT-SET Real
Time  Synthesized  Entertainment  Technology Ltd., both Israeli  companies.  The
competitors  of E&S  RAPIDsite  are  MultiGen-Paradigm,  Inc.  and  Discreet,  a
division of Autodesk, Inc.

Backlog

         The Applications Group's backlog was $7.2 million on December 31, 1999,
compared with $6.0 million on December 31, 1998. It is anticipated  that most of
the 1999 backlog will be converted to sales in 2000.

SIGNIFICANT CUSTOMERS

         Worldwide  customers using E&S products include U.S. and  international
armed forces, NASA, aerospace companies,  most major airlines, PC manufacturers,
film and video studios, laboratories, museums, planetariums and science centers.

         Sales to the U.S.  government,  either  directly or indirectly  through
sales to prime contractors or subcontractors, accounted for $84.5 million or 42%
of total sales, $70.8 million or 37% of total sales, and $45.5 million or 29% of
total sales in 1999,  1998 and 1997,  respectively.  Sales to the United Kingdom
Ministry of Defense ("UK MOD"),  either directly or indirectly  through sales to
prime contractors or subcontractors, accounted for $33.8 million or 17% of total
sales and $32.1 million or 17% of total sales in 1999 and 1998, respectively.

         In 1999, sales to Lockheed Martin  Corporation  ("Lockheed") were $35.8
million or 18% of total sales,  of which 100% related to U.S.  government and UK
MOD contracts and sales to The Boeing Company  ("Boeing")  were $25.4 million or
13% of  total  sales,  of  which  100%  related  to U.S.  government  and UK MOD
contracts.  In 1998, sales to Boeing were approximately  $28.1 million or 15% of
total sales, of which  approximately  98% related to U.S.  government and UK MOD
contracts,  and sales to Lockheed  were  approximately  $22.0  million or 11% of
total sales, of which approximately 91% related to U.S. government contracts. In
1997, sales to Thomson Training & Simulation Ltd. ("Thomson") were $19.3 million
or 12% of total sales.

         All of the  Company's  sales to  significant  customers  are within the
Simulation Group.

DEPENDENCE ON SUPPLIERS

         Most of the  Company's  parts  and  assemblies  are  readily  available
through  multiple  sources in the open  market;  however,  a limited  number are
available  only from a single  source.  In these  cases,  the  Company  stocks a
substantial  inventory,  or obtains  the  agreement  of the  vendor to  maintain
adequate  stock for future  demands,  and/or  attempts  to  develop  alternative
components or sources where appropriate.


                                       11
<PAGE>


         On June 3, 1999, the Company  entered into an electronic  manufacturing
services agreement with Sanmina  Corporation.  The agreement commits the Company
to purchase a minimum of $22.0  million of  electronic  products and  assemblies
from Sanmina  Corporation  each year until June 3, 2002. If the Company fails to
meet these minimum  purchase levels,  subject to adjustment,  the Company may be
required to pay 25 percent of the  difference  between the $22.0 million and the
amount   purchased.   As  of  December  31,  1999,  the  Company  had  purchased
approximately  $15.0 million of electronic  products and assemblies from Sanmina
Corporation since the date of the agreement. Management expects that the Company
will satisfy this minimum purchase commitment.

SEASONALITY

         E&S believes  there is no inherent  seasonal  pattern to its  business.
Sales  volume  fluctuates   quarter-to-quarter   due  to  relatively  large  and
nonrecurring individual sales and customer-established shipping dates.

INTELLECTUAL PROPERTY

         E&S owns a number of patents  and  trademarks  and is a licensee  under
several  others.  In the U.S.,  the Company holds active patents that cover many
aspects of the Company's graphics  technology.  Several patent  applications are
presently  pending  in the  U.S.,  Japan and  several  European  countries.  E&S
copyrights  chip masks  designed  by the Company  and has  instituted  copyright
procedures for these masks in Japan.  E&S does not rely on, and is not dependent
on, patent and/or trademarks ownership to maintain its competitive  position. In
the event any or all  patents are held to be invalid,  management  believes  the
Company would not suffer  significant  long-term damage.  However,  E&S actively
pursues patents on its new technology.

RESEARCH & DEVELOPMENT

         E&S considers the timely  development and  introduction of new products
to be essential to maintaining  its  competitive  position and  capitalizing  on
market opportunities. The Company's research and development expenses were $44.4
million,  $31.8 million and $25.5 million in 1999, 1998 and 1997,  respectively.
As a percentage of sales,  research and  development  expenses were 22%, 17% and
16% in  1999,  1998  and  1997,  respectively.  The  Company  continues  to fund
substantially all research and development efforts internally. It is anticipated
that high  levels of  research  and  development  will be needed to  continue to
ensure that the Company maintains technical excellence,  leadership,  and market
competitiveness.

INTERNATIONAL SALES

         Sales of products known to be ultimately  installed  outside the United
States are considered international sales by the Company and were $86.7 million,
$84.9  million  and  $94.6  million  in  1999,  1998  and  1997,   respectively.
International  sales  represented  43%, 44% and 59% of total sales in 1999, 1998
and 1997,  respectively.  For  additional  information,  see note 20 of Notes to
Consolidated Financial Statements included in Part II of this annual report.

EMPLOYEES

         As of March 3, 2000, Evans & Sutherland and its subsidiaries employed a
total of 935 persons.  The Company believes its relations with its employees are
good.  None of the  Company's  employees  are subject to  collective  bargaining
agreements.

ENVIRONMENTAL STANDARDS

         The Company believes its facilities and operations are within standards
fully acceptable to the Environmental  Protection Agency and that all facilities
and procedures are in accordance with environmental  rules and regulations,  and
international, federal, state, and local laws.


                                       12
<PAGE>


STRATEGIC RELATIONSHIP

         On July 22, 1998,  Intel  Corporation  purchased  901,408 shares of the
Company's  preferred  stock plus a warrant to  purchase  an  additional  378,462
shares of the  preferred  stock at an exercise  price of $33.28125 per share for
approximately $24 million. These preferred shares have no dividend rights. Intel
has certain contractual rights,  including registration rights, a right of first
refusal, and a right to require the Company to repurchase the preferred stock in
the event of any transaction  qualifying as a Corporate Event, as defined below.
If Intel fails to exercise its right of first  refusal as to a Corporate  Event,
Intel shall,  upon the  Company's  entering  into an  agreement to  consummate a
Corporate  Event,  have  the  right  to  sell to the  Company  any or all of the
preferred stock. The potential mandatory redemption amount is the greater of (i)
the  original  price per share  purchase  price paid by Intel or (ii) either the
highest price per share of capital stock (or equivalent) paid in connection with
a Corporate  Event or, if the  transaction  involves  the sale of a  significant
subsidiary or assets or the licensing of intellectual property, Intel's pro rata
share of the consideration received,  directly or indirectly,  by the Company in
such  transaction  based on its then  fully-diluted  ownership of the  Company's
capital  stock.  A  Corporate  Event  shall mean any of the  following,  whether
accomplished  through  one or a series  of  related  transactions:  (i)  certain
transactions  that result in a greater than 33% change in the total  outstanding
number of voting securities of the Company immediately after such issuance; (ii)
an  acquisition  of  the  Company  or any of  its  significant  subsidiaries  by
consolidation,  merger,  share purchase or exchange or other  reorganization  or
transaction  in  which  the  holders  of  the  Company's  or  such   significant
subsidiary's outstanding voting securities immediately prior to such transaction
own, immediately after such transaction,  securities  representing less than 50%
of the voting  power of the  Company,  any such  significant  subsidiary  or the
person issuing such  securities or surviving such  transaction,  as the case may
be; (iii) the acquisition of all or substantially  all the assets of the Company
or any  significant  subsidiary;  (iv) the  grant by the  Company  or any of its
significant subsidiaries of an exclusive license for any material portion of the
Company's or such  significant  subsidiary's  intellectual  property to a person
other than Intel or any of its subsidiaries; or (v) any transaction or series of
related  transactions  that result in the failure of the majority of the members
of the  Company's  Board of Directors  immediately  prior to the closing of such
transaction or series of related  transactions  failing to constitute a majority
of the  Board  of  Directors  (or  its  successor)  immediately  following  such
transaction or series of related transactions.  The Company also entered into an
agreement to accelerate  development of high-end  graphics and video  subsystems
for Intel-based workstations.

ACQUISITIONS AND DISPOSITIONS

         On June 26, 1998,  the Company,  through its  wholly-owned  subsidiary,
Evans & Sutherland Graphics  Corporation,  acquired all of the outstanding stock
of AccelGraphics, Inc. to expand the Company's workstation graphics development,
integration and distribution  within the workstation  graphics  marketplace.  To
acquire AGI the Company paid  approximately  $23.7 million in cash and 1,109,303
shares of the Company's  common  stock,  which was valued at $25.7  million.  In
addition,  the Company  converted  all  outstanding  AGI options into options to
purchase approximately 351,000 shares of common stock of the Company with a fair
value of $3.4  million and  incurred  transaction  costs of  approximately  $1.1
million.

         To  further  expand  the  Company's  presence  within  the  workstation
graphics  marketplace,  on June 26,  1998,  the Company  acquired the assets and
assumed certain  liabilities of Silicon Reality,  Inc., a designer and developer
of  3D  graphics   hardware  and  software   products  for  the  PC  workstation
marketplace.   The  Company  paid   approximately   $1.2  million  and  incurred
transaction costs of approximately $250,000.

         On June 3, 1999, the Company sold certain of its manufacturing  capital
assets and  inventory  for $6.0  million to Sanmina  Corporation  as part of the
Company's efforts to outsource the production of certain electronic products and
assemblies.  In addition,  the Company entered into an electronic  manufacturing
services  agreement  with  Sanmina  Corporation.  The  electronic  manufacturing
services agreement commits the Company to purchase a minimum of $22.0 million of
electronic products and assemblies from Sanmina Corporation each year until June
3, 2002. If the Company fails to meet these minimum purchase levels,  subject to
adjustment, the Company may be required to pay 25 percent the difference between
the $22.0 million and the amount purchased.

                                       13

<PAGE>

ITEM 2.  PROPERTIES

         Evans & Sutherland's principal executive,  engineering,  and operations
facilities  for each of its business  segments are located in the  University of
Utah  Research  Park,  in Salt Lake City,  Utah,  where it owns seven  buildings
totaling  approximately  450,669  square feet.  E&S occupies five  buildings and
leases the  remaining  two  buildings to other  businesses.  The  buildings  are
located on land leased from the  University  of Utah on 40-year land leases that
expire in 2026.  Two  buildings  have  options  to renew the land  leases for an
additional  40 years,  and four have  options  to renew the land  leases  for 10
years.  The  Company  also owns 46 acres of land in North Salt Lake.  E&S has no
encumbrance on any of the real property.  The Company and its subsidiaries  hold
leases on several sales,  operations,  service and production facilities located
throughout the United States,  Europe and Asia, none of which is material to the
Company's  manufacturing,  engineering or operating  facilities.  The largest of
these is a 20,000  square foot  facility in San Jose,  California.  E&S believes
that these  properties  are  suitable  for its  immediate  needs and it does not
currently plan to expand its facilities or relocate.


ITEM 3.  LEGAL PROCEEDINGS

         Neither  the  Company  nor any of its  subsidiaries  is a party  to any
material legal proceeding.  However, the Company is involved in ordinary routine
litigation incidental to its business.


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

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of fiscal year 1999.


EXECUTIVE OFFICERS OF THE REGISTRANT

         The following  sets forth certain  information  regarding the executive
officers of the Company as of March 31, 2000:

<TABLE>
<CAPTION>
         Name                       Age                                          Position
------------------------   -----------------------    ---------------------------------------------------------------
<S>                                 <C>              <C>

Stewart Carrell                      66               Chairman of the Board of Directors

James R. Oyler                       54               President and Chief Executive Officer

Robert Ard                           46               Vice President - Applications Group

David B. Figgins                     51               Vice President - Simulation Group

Richard J. Gaynor                    40               Vice President and Chief Financial Officer

Mark C. McBride                      38               Vice President, Corporate Controller and Corporate Secretary

George Saul                          49               Vice President - REALimage Solutions Group

------------------------
</TABLE>

Mr.  Carrell was elected  Chairman of the Board of  Directors  of the Company in
March  1991.  He has been a member of the Board for 16 years.  He also serves as
the  Chairman of Seattle  Silicon  Corporation,  and he is a director of Tripos,
Inc.  From  mid-1984  until  October  1993,  Mr.  Carrell was Chairman and Chief
Executive Officer of Diasonics,  Inc., a medical imaging company.  From November
1983 until early 1987,  Mr.  Carrell was also a General  Partner in  Hambrecht &
Quist LLC, an investment banking and venture capital firm.


                                       14
<PAGE>


Mr. Oyler was appointed President and Chief Executive Officer of the Company and
a member of the Board of  Directors in December  1994.  He is also a director of
Ikos Systems, Inc. and Silicon Light Machines.  Previously,  Mr. Oyler served as
President of AMG, Inc. from  mid-1990  through  December 1994 and as Senior Vice
President of Harris Corporation from 1976 through mid-1990. He has five years of
service with the Company.

Mr. Ard was appointed Vice President of the  Applications  Group in May 1999. He
joined  the  Company  in June  1998  as  Vice  President  and  General  Manager.
Previously,  he was President of Model  Technology,  Inc.  where he was employed
from July 1996 to May 1998. From June 1989 to July 1996, Mr. Ard was employed by
Mentor  Graphics  Corporation as Vice  President and General  Manager of various
divisions. He has one year of service with the Company.

Mr.  Figgins was appointed  Vice  President of the  Simulation  Group in January
1999. He joined the Company in April 1998 as Vice  President of PC Simulation in
the Simulation Group. Previously,  he was Vice President of Business Development
and Marketing for Raytheon Training where he was employed from May 1986 to April
1998. He has one year of service with the Company.

Mr.  Gaynor  joined  the  Company in January  2000 as Vice  President  and Chief
Financial   Officer.   Prior  to  joining  the   Company,   he  was   Operations
Controller/Vice  President of Finance for Cabletron  Systems,  Inc. where he was
employed  from May 1994 to December  1999.  Previously,  Mr. Gaynor held various
finance positions at Digital Equipment Corporation and Wang Laboratories. He has
less than one year of service with the Company.

Mr. McBride has been Vice  President and Corporate  Controller  since  September
1996 and was appointed  Corporate  Secretary in March 1998. Prior to joining the
Company,   he  was  Senior  Vice  President  and  Chief  Financial   Officer  at
HealthRider,  Inc. from  September 1993 to September  1996.  From August 1985 to
September 1993, he was employed by Price  Waterhouse LLP in various  capacities,
ending with Senior Manager. Mr. McBride is a Certified Public Accountant. He has
three years of service with the Company.

Mr. Saul was  appointed  Vice  President  of the  REALimage  Solutions  Group in
December  1999.  He  joined  the  Company  in June 1998 and was  appointed  Vice
President of  Administration in October 1998. From January 1997 to June 1998, he
was President and Chief Executive  Officer of Silicon Reality,  Inc., a graphics
technology start-up company E&S acquired in June 1998. Previously,  Mr. Saul was
Vice  President of Hitachi  Semiconductor  America  where he was  employed  from
January  1991 to January  1997.  He also held  various  management  positions at
Fairchild Semiconductor Corporation and National Semiconductor  Corporation.  He
has one year of service with the Company.

                                       15
<PAGE>



                                    FORM 10-K

                                     PART II

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

PRICE RANGE OF COMMON STOCK

         The Company's  common stock trades on The Nasdaq Stock Market under the
symbol  "ESCC."  The  following  table  sets forth the range of the high and low
sales prices per share of the  Company's  common  stock for the fiscal  quarters
indicated,  as reported by The Nasdaq Stock Market.  Quotations represent actual
transactions  in Nasdaq's  quotation  system but do not include  retail  markup,
markdown or commission.

                                             HIGH                     LOW
                                        --------------           --------------
1999
   First Quarter                           $    18 3/16             $  12
   Second Quarter                          $    19                  $  12 3/8
   Third Quarter                           $    15                  $  12 1/16
   Fourth Quarter                          $    14 1/8              $  10 7/16


1998
   First Quarter                           $   31 1/4               $  26 1/2
   Second Quarter                              30                      22 1/2
   Third Quarter                               29                      13 3/4
   Fourth Quarter                              22 1/2                  12


APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

         On  March 3,  2000,  there  were  744  shareholders  of  record  of the
Company's  common  stock.  Because  many of such  shares are held by brokers and
other institutions on behalf of shareholders,  the Company is unable to estimate
the total number of shareholders represented by these record holders.

DIVIDENDS

         Evans & Sutherland  has never paid a cash dividend on its common stock,
retaining its earnings for the  operation  and  expansion of its  business.  The
Company intends for the  foreseeable  future to continue the policy of retaining
its earnings to finance the development and growth of its business.

                                       16
<PAGE>


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

The following  selected  financial data for the five fiscal years ended December
31, 1999 are derived from the Company's Consolidated  Financial Statements.  The
selected  financial  data  should  be read in  conjunction  with  the  Company's
Consolidated  Financial  Statements and related notes included elsewhere in this
annual  report.  See also  "Management's  Discussion  and  Analysis of Financial
Condition and Results of Operations."

<TABLE>
<CAPTION>
                                                          (In thousands, except per share amounts)

                                             1999(1)         1998(2)          1997           1996          1995(3)
                                            -----------    ------------    -----------    -----------    ------------
FOR THE YEAR
<S>                                         <C>             <C>             <C>            <C>            <C>
Sales                                       $  200,885      $  191,766      $ 159,353      $ 130,564      $ 113,194

Net income (loss) before
extraordinary gain and
accretion of preferred stock                   (23,454)        (15,983)         5,080         10,352         20,484

Net income (loss) per common share
before extraordinary gain:
      Basic                                      (2.49)          (1.70)          0.56           1.16           2.37
      Diluted                                    (2.49)          (1.70)          0.53           1.12           2.33

Average weighted number of common
Shares outstanding
      Basic                                      9,501           9,461          9,060          8,944          8,639
      Diluted                                    9,501           9,461          9,502          9,222          8,785

AT END OF YEAR

Total assets                                $  258,464      $  275,668      $ 234,390      $ 210,891      $ 211,002
Long-term debt, less current portion            18,015          18,062         18,015         18,015         18,015
Redeemable preferred stock                      23,772          23,544              -              -              -
Stockholders' equity                           137,194         165,083        165,634        160,472        148,491

</TABLE>


                 .........

(1)      During 1999,  the Company  incurred a write-off of inventories of $13.2
         million, an impairment loss of $9.7 million and a restructuring  charge
         of $1.5  million.  See notes 1, 4 and 22 of the  Notes to  Consolidated
         Financial Statements included in Part II of this annual report.

(2)      During 1998,  the Company  incurred a $20.8  million  charge to expense
         acquired  in-process  technology in connection with the acquisitions of
         AccelGraphics,  Inc. and Silicon Reality,  Inc. See note 2 of the Notes
         to Consolidated Financial Statements included in Part II of this annual
         report.

(3)      During 1995,  the Company  repurchased  $2.4 million of 6%  Convertible
         Subordinated  Debentures ("6%  Debentures")  on the open market.  These
         purchases  resulted in an  extraordinary  gain, net of income taxes, of
         approximately $0.3 million in 1995.




                                       17
<PAGE>




QUARTERLY FINANCIAL DATA  (Unaudited)

(In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                           April 2                  July 2                 Oct. 1(1)                 Dec. 31
                                        ------------            ------------             ------------             ------------
<S>                                      <C>                      <C>                     <C>                     <C>
1999

Sales                                        $49,746                  $44,023                 $48,704                  $58,412

Gross profit                                  22,378                   17,603                   7,477                   12,641

Net income (loss) before income taxes            379                   (4,980)                (28,020)                  (6,246)

Net income (loss) applicable to common stock     204                   (3,493)                (18,033)                  (2,360)

Net income (loss) per common share(3):
   Basic                                        0.02                    (0.36)                  (1.91)                   (0.25)
   Diluted                                      0.02                    (0.36)                  (1.91)                   (0.25)


                                                                            Quarter Ended
                                          March 27                June 26(2)               Sept. 25                  Dec. 31
                                        ------------            ------------             ------------             ------------
1998

Sales                                       $ 42,421                 $ 43,638                $ 47,262                 $ 58,445

Gross profit                                  17,125                   19,279                  20,637                   24,405

Net income (loss) before income                2,353                  (17,063)                 (1,219)                   2,072

Net income (loss) applicable to common stock   1,589                  (18,271)                   (794)                   1,398

Net income (loss) per common share(3):
   Basic                                        0.18                    (2.04)                  (0.08)                    0.14
   Diluted                                      0.17                    (2.04)                  (0.08)                    0.13

----------
</TABLE>

(1)      During the third quarter of 1999,  the Company  incurred a write-off of
         inventories of $13.2 million,  an impairment loss of $9.7 million and a
         restructuring  charge  of $1.5  million.  See  notes 1, 4 and 22 of the
         Notes to Consolidated  Financial Statements included in Part II of this
         annual report.

(2)      The second  quarter of 1998 includes a $20.8 million  charge to expense
         acquired  in-process  technology in connection with the acquisitions of
         AccelGraphics,  Inc. and Silicon Reality,  Inc. See note 2 of the Notes
         to Consolidated Financial Statements included in Part II of this annual
         report.

(3)      Earnings per share are computed  independently for each of the quarters
         presented and therefore may not sum to the total for the year.

                                       18
<PAGE>


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

         The  following  discussions  should  be read in  conjunction  with  the
Company's  Consolidated  Financial  Statements  contained herein under Item 8 of
this annual report.

<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                                 1999                  1998                   1997
                                                              -----------            ----------            -----------
<S>                                                           <C>                    <C>                   <C>
Sales                                                            100.0%                 100.0%                100.0%
Cost of sales                                                     63.5%                  57.5%                 52.8%
Write-off of inventories                                           6.6%                     -                     -
                                                              -----------            ----------            -----------
      Gross profit                                                29.9%                 42.5%                 47.2%
                                                              -----------            ----------            -----------
Operating expenses:
      Selling, general and administrative                         21.4%                 20.9%                 22.2%
      Research and development                                    22.1%                 16.6%                 16.0%
      Amortization of goodwill and other intangible assets         0.8%                  2.5%                    -
      Impairment loss                                              4.8%                    -                     -
      Restructuring charge                                         0.7%                    -                     -
      Write-off of acquired in-process technology                    -                  10.8%                    -
                                                              -----------            ----------            -----------

     Operating expenses                                           49.8%                 50.8%                 38.2%
                                                              -----------            ----------            -----------

     Operating income (loss)                                     (19.9)%                (8.3)%                 9.0%
Other income (expense)                                             0.6%                  1.1%                 (4.7)%
                                                              -----------            ----------            -----------
     Pretax income (loss)                                        (19.3)%                (7.2)%                 4.3%
Income tax expense (benefit)                                      (7.6)%                 1.1%                  1.1%
                                                              -----------            ----------            -----------
     Net income (loss)                                           (11.7)%                (8.3)%                 3.2%
Accretion of preferred stock                                       0.1%                  0.1%                    -
                                                              -----------            ----------            -----------
Net income (loss) applicable to common stock                     (11.8)%                (8.4)%                 3.2%
                                                              ===========            ==========            ===========
</TABLE>


RESULTS OF OPERATIONS

1999 vs. 1998

Sales

         In 1999,  the  Company's  total sales  increased  $9.1  million,  or 5%
($200.9  million  in 1999  compared  to  $191.8  million  in  1998).  Sales  for
simulation  products  increased  $3.6  million,  or 2%  ($170.6  million in 1999
compared  to  $167.0  million  in 1998).  The  increase  in sales of  simulation
products is primarily due to increased  sales volumes due to stronger  demand by
U.S.  and  European  government  customers  that  offset a  decline  in sales to
commercial  airline  customers.  Sales of  workstation  products  increased $4.5
million,  or 26% ($22.0 million in 1999 compared to $17.5 million in 1998).  The
increase  in sales in  workstation  products is  primarily  due to the effect of
having  a  full  year  of  sales  in  1999  relating  to  the   acquisition   of
AccelGraphics,  Inc.  which was  purchased  at the end of the second  quarter of
1998.  See  "Item  1  Business  -  Acquisitions  and  Dispositions."   Sales  of
applications  products  increased  $1.0  million,  or 14% ($8.3  million in 1999
compared to $7.3 million in 1998). The increase in sales of application products
is  primarily  due  to  increased  sales  volumes  of  planetarium  systems  and
large-format entertainment products.


                                       19
<PAGE>


Write-off of Inventories

         During the third  quarter of 1999,  the Company  performed  significant
testing of the software relating to its Harmony image generator product that had
been delayed. As a result of the testing, the Company determined that certain of
the inventories  previously purchased for the Harmony image generator had become
technologically  obsolete  and  did  not  properly  function  with  the  updated
software.  In connection with this assessment,  the Company recorded a charge of
$12.1  million to write-off  obsolete,  excess and  overvalued  inventories.  In
addition,  during the third quarter of 1999, the Company  wrote-off $1.1 million
of Workstation  Products Group  inventories  related to end-of-life or abandoned
product lines.

Gross Profit

         Gross profit  decreased  $21.3  million,  or 26% ($60.1 million in 1999
compared  to $81.4  million  in 1998).  As a  percent  of  sales,  gross  margin
decreased to 29.9% in 1999 from 42.5% in 1998.  The decrease in gross profit was
impacted by the  write-off of $13.2 million of obsolete,  excess and  overvalued
inventories.  Gross profit was also affected by technical issues causing product
delays,  which caused some  contract  milestones  to be missed in the  Company's
international simulation business. The Company accrued $8.2 million against cost
of sales in 1999 for liquidated  damages and late delivery penalties as a result
of these  product  delays.  Excluding  the  impact of these two  charges,  gross
margins were 40.6% in 1999, as compared to 42.5% in 1998.  The decrease in gross
margin was due to higher than expected costs on certain  contracts to government
customers which include the Harmony and Ensemble image generators.  In addition,
gross margin for the Company's  workstation products decreased in 1999 as it has
changed  its  business  model from one based on  royalty  income to one based on
sales  of  graphic   subsystems  which  has  product  costs  consistent  with  a
manufacturing  operation.  Gross profit for the Company's  workstation  products
also  decreased  due to a decrease  in the  number of units  sold and  decreased
selling  prices  of  existing  products  and the  delay in  introduction  of new
products.

Selling, General and Administrative

         Selling, general and administrative expenses increased $2.9 million, or
7% ($43.0  million in 1999 compared to $40.1 million in 1998) and increased as a
percent  of sales to 21.4% in 1999 from  20.9% in 1998.  The  increase  in these
expenses  was due to the impact of having a full year of costs  associated  with
ESGC (formerly AccelGraphics, Inc.) in 1999 compared to a half year in 1998, and
higher  costs due to increased  headcount  related to the  Company's  recruiting
efforts, new business development and launch of E&S RAPIDsite.

Research and Development

         Research and  development  expenses  increased  $12.6  million,  or 40%
($44.4  million in 1999  compared to $31.8  million in 1998) and  increased as a
percent  of sales to 22.1% in 1999 from  16.6% in 1998.  The  increase  in these
costs was due to  increased  development  efforts  of the  Company's  iNTegrator
software.  This software  provides the real-time  control and modeling tools for
the Symphony product family, which includes Harmony,  Ensemble and simFUSION. In
addition,  the increase in these expenses was due to the impact of having a full
year of ESGC costs in 1999 compared to a half year in 1998.

Amortization of Goodwill and Other Intangible Assets

         Amortization  of goodwill and other  intangible  assets  declined  $3.3
million,  or 68% ($1.5  million in 1999  compared to $4.8 million in 1998).  The
decrease in these  expenses was due to the write-off of $9.3 million of goodwill
and other  intangible  assets during the third quarter of 1999.  The goodwill is
being amortized using the straight-line  method over an estimated useful life of
seven  years.  The  other  intangible  assets  are  being  amortized  using  the
straight-line  method over  estimated  useful  lives  ranging from six months to
seven years.


                                       20
<PAGE>


Impairment Loss

         In the third quarter of 1999, the Company  recorded an impairment  loss
of $9.7  million,  as  determined  in  accordance  with  Statement  of Financial
Accounting  Standards  No.  121 (SFAS 121)  "Accounting  for the  Impairment  of
Long-Lived  Assets and for Long-Lived Assets to be Disposed of," relating to the
write-down to fair value of goodwill,  intangibles and other  long-lived  assets
acquired in the  acquisitions  of AGI and SRI. The impairment  loss consisted of
the write-off of $4.9 million of goodwill, $4.4 million of intangible assets and
$0.4  million of  property,  plant and  equipment.  No such loss was incurred in
1998.

         In addition to  continued  losses at AGI, the  impairment  loss was the
result  of  the  following  additional  circumstances:  (i)  delays  in  product
introductions    for   the    AccelGALAXY,    E&S   Lightning   1200   and   the
multiple-controller  graphics subsystems product line; (ii) the developer of the
chip used on the  AccelGMX  acquired a board  company and  entered the  graphics
accelerator  market  in  direct   competition  with  the  AccelGMX;   and  (iii)
introduction of lower-end  products by competitors which can perform many of the
functions  of  the  higher-end  3D  graphics  cards.  Furthermore,  the  Company
determined  that a  manufacturer  of a chip  to be  used in  various  new  board
products  was  unable  to   manufacture   a  designed   chip  with  agreed  upon
specifications.

Restructuring Charge

         In the third  quarter of 1999,  the Company  initiated a  restructuring
plan  focused on  reducing  the  operating  cost  structure  of its  Workstation
Products  Group.  As part of the plan,  the  Company  recorded  a charge of $1.5
million  relating to 28 employee  terminations.  As of December  31,  1999,  the
Company had paid $354,000 in employee severance benefits. The remaining benefits
will be paid out over the next two years. No such charge was incurred in 1998.

Acquired In-Process Technology

         In the second quarter of 1998, the Company  recognized $20.8 million of
expense to write-off acquired in-process  technology related to the acquisitions
of AGI and SRI. No such expense was recognized in 1999.

Other Income (Expense), Net

         Other  income  (expense),  net  decreased  $1.0  million,  or 48% ($1.1
million in 1999  compared  to $2.1  million in 1998).  Interest  income was $1.9
million  and $2.7  million  in 1999 and  1998,  respectively.  The  decrease  in
interest  income is  primarily  due to the decrease in the average cash and cash
equivalents  and  short-term  investment  balances  in 1999 as compared to 1998.
During  1998,  the Company  recognized a gain of $2.5 million as a result of the
sale of its investment in Sense8 Corporation.  The Company recognized a loss due
to the write-down of its investment  securities of $0.4 million and $1.1 million
in 1999 and 1998,  respectively.  The  write-downs  were necessary as management
believed that the decline in market value of these  investments  below cost were
other than  temporary.  Other was $0.9  million  income in 1999 and $0.6 million
expense in 1998. Increase in other income is due to foreign currency transaction
gains  and  other  miscellaneous  items in 1999  compared  to  foreign  currency
transaction losses in 1998 and other miscellaneous items.

Income Taxes

         The  effective tax rate was 39.7% of pre-tax loss in 1999 and was 30.7%
of pre-tax income excluding the write-off of acquired  in-process  technology in
1998.  The change in the  effective  tax rate is due to the Company  incurring a
pre-tax  loss in 1999 and the benefit of  research  and other tax  credits.  The
Company expects the effective income tax rate in 2000 to approximate the rate in
1998.

                                       21
<PAGE>


1998 vs. 1997

Sales

         In 1998, sales increased $32.4 million, or 20% ($191.8 million compared
to $159.4  million  in 1997).  Sales for  simulation  products  increased  $21.0
million, or 14% ($167.0 million in 1998 compared to $146.0 million in 1997). The
increase in sales of  simulation  products is primarily  due to increased  sales
volumes due to strong  demand by U.S.  and  European  government  customers  and
commercial  airline  customers.  Sales of workstation  products  increased $11.6
million,  or 199% ($17.5 million in 1998 compared to $5.8 million in 1997).  The
increase in sales of workstation products is primarily due to the acquisition of
AGI. at the end of the second  quarter of 1998.  Sales of  application  products
declined $0.2  million,  or 3% ($7.3 million in 1998 compared to $7.5 million in
1997).  The  decrease  in sales of  application  products  is  primarily  due to
decreased  sales  volumes of  location-based  entertainment  products  partially
offset by increased sales volumes of virtual studio systems.

Gross Profit

         Gross  margin  decreased  to 42.5%  in 1998  from  47.2%  in 1997.  The
decrease in gross margin is primarily due to the increased sales volumes related
to contracts in which the Company functions as the prime  contractor,  increased
competition  and the change in the nature of the sales derived from  workstation
products.  Contracts  in which the  Company  functions  as the prime  contractor
include  costs  related  to  work   performed  by   subcontractors   which  have
significantly  lower gross  margins than work  performed by the Company.  During
1997 and the first half of 1998,  sales  related to  workstation  products  were
derived primarily from royalties which had minimal associated cost of sales. Due
to the  acquisition of AGI, sales in the second half of 1998 related to sales of
graphics  subsystems  which had product costs  consistent  with a  manufacturing
operation.

Selling, General and Administrative

         Selling, general and administrative expenses increased $4.8 million, or
14% ($40.1 million in 1998 compared to $35.3 million in 1997) but decreased as a
percent of sales  (20.9% in 1998  compared  to 22.2% in 1997).  The  increase in
these   expenses  is  primarily   due  to  increased   selling,   marketing  and
administrative expenses related to the operations of ESGC during the second half
of 1998,  increased labor costs due to increased headcount and increased selling
and  marketing  costs  related  to  tradeshows,  travel and  commissions.  These
increases were partially offset by a decrease in incentive bonus expense.

Research and Development

         Research and development expenses increased $6.3 million, or 25% ($31.8
million in 1998 compared to $25.5  million in 1997) and increased  slightly as a
percent of sales  (16.6% in 1998  compared  to 16.0% in 1997).  The  increase in
these expenses is primarily due to increased  research and development  expenses
related to the  operations  of ESCG during the second half of 1998 and increased
labor,  materials and design costs to support increased research and development
activity in both the Simulation and Workstation Products Groups.

Acquired In-Process Technology

         In the second quarter of 1998, the Company  recognized $20.8 million of
expense to write-off acquired in-process  technology related to the acquisitions
of AGI and SRI. No such expense was recognized in 1997.

Amortization of Goodwill and Other Intangible Assets

         Amortization  of goodwill and other  intangible  assets  increased $4.7
million  ($4.8  million in 1998  compared to $29,000 in 1997).  The  increase in
these  expenses  is due to the  amortization  of goodwill  and other  intangible
assets related to the  acquisitions  of AGI and SRI during the second quarter of
1998.

                                       22
<PAGE>


Other Income (Expense), Net

         Other income (expense), net was $2.1 million of income in 1998 and $7.6
million of expense in 1997. Interest income was $2.7 million and $3.2 million in
1998 and 1997, respectively. The decrease in interest income is primarily due to
the decrease in the average cash and cash equivalents and short-term investments
balances in 1998 as compared to 1997. During 1998, the Company recognized a gain
of $2.5 million as a result of the sale of its investment in Sense8 Corporation.
The Company recognized a loss due to the write-down of its investment securities
of  $1.1  million  and  $9.6  million  in 1998  and  1997,  respectively.  These
write-downs  were  necessary as  management  believed that the decline in market
value of these investments below cost were other than temporary. During 1998 the
Company liquidated one of its investment  securities that it had written down to
zero in 1997 and recognized no gain or loss.

Income Taxes

     The  effective  tax  rate,  excluding  the  write-off  acquired  in-process
technology,  was  30.7%  and  25.7%  of  pre-tax  earnings  in  1998  and  1997,
respectively.


LIQUIDITY AND CAPITAL RESOURCES

         At  December  31,  1999,  the  Company  had  working  capital of $116.9
million,  including cash, cash  equivalents and short-term  investments of $22.9
million,  compared to working  capital of $134.4  million at December  31, 1998,
including  cash, cash  equivalents and short-term  investments of $27.7 million.
During 1999, the Company  generated $10.4 million and $15.9 million of cash from
its operating activities and investing activities,  respectively,  and used $5.2
million of cash in its financing activities.

         The uses of cash from operating activities included a net loss of $23.5
million,  an increase in net costs and estimated  earnings in excess of billings
on uncompleted  contracts of $16.4 million, an increase in deferred income taxes
of $8.5 million,  an increase in  inventories  of $6.1 million and a decrease in
accounts payable of $5.0 million.  These uses of cash were more than offset by a
decrease in accounts receivable of $17.5 million,  depreciation and amortization
of $15.5 million,  write-off of  inventories  of $13.2  million,  an increase in
accrued liabilities of $11.0 million and an impairment loss of $9.7 million. The
increase  in  net  costs  and  estimated  earnings  in  excess  of  billings  on
uncompleted  contracts was due to timing of revenue and delay in meeting certain
billing  milestones.  Certain  billing  milestones have not been achieved due to
product  delays  related  to the  delivery  and  integration  of  Harmony  image
generators.  The increase in  inventories  was due to an increase in inventories
related to the Harmony image generator.  The decrease in accounts receivable was
due to  less  billings  due to  product  delays  related  to  the  delivery  and
integration  of the Harmony  image  generator  and an  increased  effort on cash
collections.

         The Company's  investing  activities during 1999 included proceeds from
the sale of  short-term  investments  of $39.8  million  offset by  purchases of
short-term  investments  of $14.7  million in funds.  Proceeds  from the sale of
certain  manufacturing  assets  generated  $6.0 million of cash and purchases of
property, plant and equipment used $14.5 million of cash.

         Financing  activities  during 1999 included  proceeds received from the
issuance of common stock  relating to stock option  exercise of $1.4 million and
net repayments under line of credit agreements of $1.1 million. In addition, the
Company used $5.5 million of cash to repurchase shares of its common stock.

         During 1999,  the Company  maintained  an unsecured  revolving  line of
credit with U.S.  Bank,  N.A.  that expired on February 10, 2000.  The revolving
line of credit  provided for  borrowings by the Company of up to $20.0  million.
Borrowings  bore interest at the  prevailing  prime rate minus 1.0% or the LIBOR
rate plus 1.0%. The unsecured, revolving line of credit, among other things, (i)
required the Company to maintain certain financial  ratios;  (ii) restricted the
Company's ability to incur debt or liens; sell, assign,  pledge or lease assets;
or merge with another company; and (iii) restricted the payment of dividends and
repurchase of any of the Company's  outstanding  shares without prior consent of
the  lender.  The  Company  made no  borrowings  under this line of credit.  The
Company  also has an  unsecured  revolving  line of credit  with a foreign  bank
totaling  approximately  $4.6 million,  of which  approximately $1.9 million was
unused and available at December 31, 1999.

                                       23

<PAGE>

         The Company has received a  commitment  letter from a lender to provide
the Company a revolving  line of credit for  borrowings  by the Company of up to
$15.0 million.  The Company  expects to close on the line of credit on or before
April 30, 2000. In the event the Company is not  successful in closing this or a
comparable credit facility, the Company's operations could be severely impaired.
There can be no assurance  that the Company will be  successful  in  negotiating
additional debt financing.

         The Company has a $12.5  million  unsecured  Letter of Credit line with
U.S. Bank, N.A. for which there was $11.8 million outstanding as of December 31,
1999. In addition,  the Company has a $4.6 million Letter of Credit  outstanding
with Bank One, N.A. In March 2000,  the Company  added a $5.0 million  unsecured
Letter of Credit line with First  Security  Bank,  N.A. Also in March 2000,  the
Company  established  a  $10.0  million  unsecured  surety  line  with  American
International Companies and its affiliates.

         At December 31, 1999 the Company had approximately  $18.0 million of 6%
Convertible  Subordinated  Debentures,  due 2012,  which are  unsecured  and are
convertible at the holder's option into shares of the Company's  common stock at
a conversion  price of $42.10 or 428,000  shares of the Company's  common stock,
subject to adjustment.  These securities are redeemable at the Company's option,
in whole or in part, at par.

         On February 18, 1998, the Company's  Board of Directors  authorized the
repurchase of up to 600,000 shares of the Company's common stock,  including the
327,000 shares still available from the repurchase authorization approved by the
Board of Directors on November 11,  1996.  On September 8, 1998,  the  Company's
Board of Directors  authorized the repurchase of an additional  1,000,000 shares
of the  Company's  common stock.  Subsequent  to February 18, 1998,  the Company
repurchased  1,136,500  shares  of its  common  stock,  leaving  463,500  shares
available for repurchase as of March 30, 2000. Stock may be acquired in the open
market or through negotiated transactions. Under the program, repurchases may be
made from time to time,  depending on market conditions,  share price, and other
factors.

         Management believes that existing cash, cash equivalents and short-term
investment balances,  borrowings that will be available under its line of credit
agreements, assuming the Company secures up to a $15.0 million line of credit on
or before April 30, 2000, and cash from future  operations will be sufficient to
meet  the  Company's   anticipated   working  capital  needs,   routine  capital
expenditures  and current debt service  obligations  for the next twelve months.
The Company's  cash, cash  equivalents and short-term  investments are available
for working capital needs, capital expenditures,  strategic investments, mergers
and  acquisitions,  stock repurchases and other potential cash needs as they may
arise. On a longer-term basis, if future cash from operations and line of credit
agreements  are not  sufficient to meet the  Company's  cash  requirements,  the
Company may be required to seek  additional  financing from the issuance of debt
or  equity  securities.  There can be no  assurances  that the  Company  will be
successful in renegotiating  its existing line of credit agreements or obtaining
additional debt or equity financing.

ACQUIRED IN-PROCESS TECHNOLOGY

         In connection  with the  acquisitions  of AGI and SRI, the Company made
allocations  of the purchase  price to various  acquired  in-process  technology
projects.  These amounts were expensed as  non-recurring  charges in the quarter
ended June 26,  1998  because the  acquired  in-process  technology  had not yet
reached technological feasibility and had no future alternative uses.

         Failure  to  complete  the  development  of  these  projects  in  their
entirety,  or in a timely  manner,  has had a  material  adverse  impact  on the
Company's  results of operations.  During the third quarter of 1999, the Company
recorded an  impairment  loss of $9.7 million  consisting of a write-off of $4.9
million of  goodwill,  $4.4  million of  intangible  assets and $0.4  million of
property,  plant and equipment.  Actual sales,  operating profits and cash flows
attributable to acquired  in-process  technology have been  significantly  lower
than the original  projections  used to value such technology in connection with
each of the respective  acquisitions.  On-going operations and financial results
for the acquired  technology and the Company as a whole are subject to a variety
of  factors  which  may not have  been  known or  estimable  at the date of such
acquisitions,  and the estimates  discussed  below should not be considered  the
Company's current  projections for operating results for the acquired businesses
or the Company as a whole. Following is a description of the acquired in-process
technology and the estimates made by the Company for each of the technologies.

                                       24

<PAGE>

         Mid-range  Professional Graphics Subsystem (2100). This technology is a
         graphics  subsystem  with built in VGA core and  integral  DMA engines.
         This technology  provides superior  graphics  performance over previous
         technologies,  and  includes  features  such as stereo and dual monitor
         support and various  texture memory  configurations.  The technology is
         used in the AccelGALAXY product, which was completed and began shipping
         to customers in late third  quarter of 1998.  The cost to complete this
         project  subsequent to the  acquisition  of AGI was $0.3 million,  $0.1
         million over the budgeted amount and was funded by working capital. The
         project was also completed a month later than  scheduled.  The assigned
         value for this acquired in-process technology was $6.1 million.

         CAD-focused  Professional Graphics Subsystem (1200). This technology is
         a  graphics  subsystem  with  lower  costs  compared  to the  mid-range
         technology,  resulting in a more  cost-effective  graphics solution for
         the  end-user.  It  provides  the cost  sensitive  user  with  adequate
         graphics   performance,   with  few  features  and  a  single   texture
         configuration  option. The technology is used in the E&S Lightning 1200
         product,  which  was  completed  in March  1999 and began  shipping  to
         customers in April 1999.  The cost to complete this project  subsequent
         to the  acquisition  of AGI was $0.5  million,  $0.2  million  over the
         budgeted  amount and was funded by working  capital.  This  project was
         completed  five months later than  originally  projected.  The assigned
         value for this acquired in-process technology was $6.2 million.

         Multiple-Controller  Graphics  Subsystems (2200).  This technology is a
         high-end graphics  subsystem  involving the parallel use of two or four
         controllers.  This  technology  is aimed at super users in the graphics
         area who need  significant  increases  in  performance  and features to
         accomplish  their  tasks and are  willing  to pay the  increased  price
         necessary to support  those  requirements.  During the third quarter of
         1999, the Company determined the technology and graphics subsystem,  as
         originally  designed,  would not be a viable product in the workstation
         marketplace.  The  cost to  complete  this  project  subsequent  to the
         acquisition  of AGI was $1.7 million.  The project was completed in the
         fourth quarter of 1999, approximately 9 months later than planned. This
         project  was funded by working  capital.  The  assigned  value for this
         acquired in-process technology was $2.7 million.

         On-board  Geometry  Engine  Graphics  Subsystem  (AccelGMX(TM)).   This
         technology is a mid-range  graphics subsystem with a geometry engine on
         board. This technology is aimed at the performance  intensive  graphics
         end-user.  It  has  fewer  features  than  the  mid-range  professional
         technology,  but faster geometry  performance compared to the mid-range
         professional  technology on Pentium II processors.  This technology was
         completed in the third  quarter of 1998 and the  AccelGMX  product that
         uses this technology began shipping to customers at that time. The cost
         to complete this project  subsequent to the acquisition of AGI was $0.1
         million and was funded by working capital.  The assigned value for this
         acquired in-process technology was $5.3 million.

         The AccelGALAXY has performed below sales estimates due to the delay in
product  introduction  by the Company and a delayed design win at one major OEM.
These  delays,  in  addition  to  increased  competition,  caused an  erosion of
approximately 50% of the projected average selling price for the AccelGALAXY and
a loss of projected unit sales.  Subsequent to the Company's acquisition of AGI,
the developer of the chip used on the AccelGMX also acquired a board company and
entered the graphics accelerator market in direct competition with the AccelGMX.
Due to the  advantage  of  producing  the chip,  the  competitor  can  produce a
comparable product at a lower cost; thus, the AccelGMX has performed below sales
estimates and the Company no longer expects to generate  significant  sales from
this product.  The E&S Lightning 1200 has performed below sales estimates due to
the delay in product  introduction  by the Company.  As a result of the delay in
product introduction, most OEMs selected a competing product. The expected sales
volume  and  average   selling  price  of  the  E&S  Lightning  1200  have  been
significantly reduced.

         The Company  periodically  reviews the value  assigned to the  separate
components  of  goodwill,   intangibles  and  other  long-lived  assets  through
comparison to anticipated, undiscounted cash flows from the underlying assets to
assess  recoverability.  The  assets  are  considered  to be  impaired  when the
expected  future  undiscounted  cash flows  from these  assets do not exceed the
carrying balances of the related assets. Based on the events described above and
in accordance  with  Statement of Financial  Accounting  Standards No. 121 (SFAS
121)  "Accounting  for the  Impairment of Long-Lived  Assets and for  Long-Lived

                                       25

<PAGE>

Assets to be Disposed of," during the third quarter of 1999 the Company recorded
an impairment  loss of $9.7 million  related to the  acquisition of AGI and SRI.
The impairment loss consisted of the write-off of $4.9 million of goodwill, $4.4
million of intangible assets and $0.4 million of property, plant and equipment.

YEAR 2000 ISSUE

         The Company  began  preparation  for the Year 2000 date  transition  in
1996. In connection with this effort,  the Company completed an inventory of all
mission critical systems with Year 2000 implications,  assessed the readiness of
those  systems,  and replaced,  retired or upgraded  those systems that were not
Year 2000  ready.  During the Year 2000 date  transition,  the  Company  did not
experience any failure of mission  critical  systems nor has it experienced  any
significant  problem with regard to third party suppliers.  The Company does not
anticipate any material adverse effect to its business in the future as a result
of Year 2000 related problems;  however, it is possible that such problems might
still arise.

         The  Company  primarily  used  internal   resources  to  implement  its
readiness plan and to upgrade or replace and test systems and products  affected
by the Year 2000 issue.  The Company's  total cost relating to these  activities
has not been and is not  expected  to be  material  to the  Company's  financial
position, results of operations, or cash flows. The Company also does not expect
to incur any material costs in the future associated with any Year 2000 issues.

EFFECTS OF INFLATION

         The effects of inflation  were not  considered  material  during fiscal
years 1999,  1998 and 1997,  and are not expected to be material for fiscal year
2000.

OUTLOOK

         Looking forward, the Company expects sales to decline slightly in 2000.
The decline in expected sales is due primarily to lower anticipated sales in the
workstation  products  business,  which the  Company  restructured  in the third
quarter   of   1999.    This    business   is   now   refocused   on   providing
application-specific solutions requiring high-performance graphics together with
value-added features for simulation,  video and digital content creation.  Sales
in the simulation and  applications  businesses are expected to increase in 2000
as compared to 1999 as orders and backlog continue to grow in those  businesses.
As of December 31, 1999 the Company's orders backlog was $156.5 million.

         The Company's main challenges  result from managing the introduction of
new products  into its business and  developing  new products into markets where
the Company is a  relatively  new entrant.  These risks  increase if the Company
fails to make these  product  introductions  on schedule and on budget or if the
Company is beaten to market by its competitors.

         The Company is in the process of completing  certain  contracts,  which
include the  Harmony  image  generator.  Certain of these  contracts  were to be
completed and integrated during 1999. Consequently,  as of December 31, 1999, in
accordance with original contractual provisions, the Company incurred liquidated
damages and late delivery penalties  totaling $8.2 million.  The Company expects
to pay most of this amount in 2000.  The Company is also  developing new content
to  enhance  its  StarRider  interactive   planetarium  product,  is  developing
workstation   products  to  provide  application  specific  solutions  requiring
high-performance  graphics for simulation,  video and digital content  creation,
and  is  expanding  the  product  features  and  marketing  distribution  of its
RAPIDsite  digital  real-estate  planning  product.  The  Company  is  investing
considerable resources in capital equipment,  human resources and other research
and development expenses to develop these new products. The near-term success of
the Company is  dependent  in large part in the  successful  execution  of these
programs.


                                       26
<PAGE>


          The foregoing contains "forward-looking statements" within the meaning
of that term in Section  27A of the  Securities  Act of 1933,  as  amended,  and
Section 21E of the Exchange Act of 1934,  as amended,  including,  among others,
those  statements  preceded by, followed by or including the words  "estimates,"
"believes,"   "expects,"   "anticipates,"   "plans,"   "projects,"  and  similar
expressions.

         These  forward-looking  statements may include projections of sales and
net income  and  issues  that may affect  sales or net  income;  projections  of
capital  expenditures;  plans for future  operations;  financing needs or plans;
plans relating to the Company's products and services;  and assumptions relating
to the foregoing. Forward-looking statements are inherently subject to risks and
uncertainties,  some of which cannot be predicted or  quantified.  Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying  the  forward-looking  information.  Our actual  results could
differ  materially  from these  forward-looking  statements.  In addition to the
other risks  described  below in the "Factors That May Affect  Future  Results,"
important  factors to consider in  evaluating  such  forward-looking  statements
include  risk  of  product  demand,  market  acceptance,   economic  conditions,
competitive products and pricing,  difficulties in product development,  product
delays,   commercialization  and  technology.   In  light  of  these  risks  and
uncertainties,  there can be no assurance  that the events  contemplated  by the
forward-looking statements contained in this annual report will, in fact, occur.


FACTORS THAT MAY AFFECT FUTURE RESULTS

         Evans & Sutherland's  domestic and international  businesses operate in
highly  competitive  markets that  involve a number of risks,  some of which are
beyond our control.  While we are optimistic about our long-term prospects,  the
following  discussion  highlights  some risks and  uncertainties  that should be
considered in evaluating its growth outlook.

E&S's Business May Suffer if its Competitive Strategy is Not Successful

         Our continued  success depends on our ability to compete in an industry
that is highly  competitive,  with rapid  technological  advances and constantly
improving products in both price and performance.  As most market areas in which
we operate continue to grow, we are experiencing increased  competition,  and we
expect this trend to continue.  In recent years, we have been forced to adapt to
domestic and worldwide political,  economic, and technological developments that
have strongly affected our markets.  Under our current competitive  strategy, we
endeavor to remain  competitive by growing existing  businesses,  developing new
businesses internally,  selectively acquiring businesses, increasing efficiency,
improving  access to new markets,  and reducing  costs.  Although our  executive
management  team and Board of  Directors  continue  to review  and  monitor  our
strategic plans, we have no assurance that we will be able to continue to follow
our current strategy or that this strategy will be successful.

E&S's Stock  Price May be  Adversely  Impacted if its Sales or Earnings  Fail to
Meet Expectations

         Our stock price is subject to significant volatility and will likely be
adversely  affected  if  sales  or  earnings  in any  quarter  fail to meet  the
investment  community's  expectations.  Our sales and  earnings may fail to meet
expectations  because they fluctuate and are difficult to predict.  Our earnings
during 1998 and 1999 fluctuated  significantly  from quarter to quarter.  One of
the reasons we  experience  such  fluctuations  is that the largest share of our
sales and  earnings  is from our  Simulation  Group,  which  typically  has long
delivery  cycles and  contract  lengths.  The timing of customer  acceptance  of
certain large-scale commercial or government contracts may affect the timing and
amount of sales that can be  recognized;  thus,  causing our periodic  operating
results to  fluctuate.  Our results may further  fluctuate if United  States and
international  governments  delay  or  even  cancel  production  on  large-scale
contracts due to lack of available funding.


                                       27
<PAGE>


         Our  earnings  may not meet either  investor  or internal  expectations
because our budgeted  operating  expenses are relatively fixed in the short term
and even a small  sales  shortfall  may  cause a  period's  results  to be below
expectations.  Such a sales  shortfall  could  arise from any number of factors,
including:

         o     delays in the availability of products,
         o     delays from chip suppliers,
         o     discontinuance of key components from suppliers,
         o     other supply constraints,
         o     transit interruptions,
         o     overall economic conditions, and
               customer demand.

         Another reason our earnings may not meet expectations is that our gross
margins are heavily influenced by mix  considerations.  These mix considerations
include the mix of lower-margin prime contracts versus sub-contracts, the mix of
new products and markets  versus  established  products and markets,  the mix of
high-end products versus low-end products,  as well as the mix of configurations
within these product  categories.  Future  margins may not duplicate  historical
margins or growth rates.

In the Event E&S is Not Successful in Securing Acceptable Credit Facilities, Our
Business,  Financial  Condition,  and  Results of  Operations  Will be  Severely
Impaired.

         Our business requires significant levels of capital to finance accounts
receivable, research and development of our products, and product inventory that
is not financed by trade  creditors.  We have financed our growth and cash needs
to date primarily  through working  capital  financing  facilities,  bank credit
lines, equity offerings, and cash generated from our operations.

         Our $20.0 million  revolving  line of credit  agreement with U.S. Bank,
N.A. expired on February 10, 2000. We are currently in need of a credit facility
to provide  liquidity  and  resources  to fund our current  level of  operations
through the year 2000.  Although  we have  received a  commitment  letter from a
lender to provide a  revolving  line of credit with terms  acceptable  to us, we
cannot assure you that we will be successful in closing this line of credit.  In
the event we are not successful in closing this or a comparable credit facility,
or a  significant  portion  of our credit  facilities  become  unavailable,  our
business,  financial  condition,  and  results of  operations  could be severely
impaired.  Such an event could render us unable to pay our  obligations  as they
become due.


Delays in the Timely  Delivery of Our Products May Prevent Us From Invoicing Our
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts.

         In accordance  with  accounting for long-term  contracts,  we record an
asset for our costs and estimated earnings that exceed the amount we are able to
bill our customers on uncompleted contracts. At December 31, 1999, $50.1 million
of our costs and estimated  earnings  that exceeded our billings on  uncompleted
contracts  related to five contracts with four different  customers.  We are not
able to bill these amounts unless we meet certain contractual milestones related
to the delivery and integration of our Harmony image generators.  Our failure to
achieve these  contractual  milestones by timely  delivering and integrating our
Harmony image  generators  may  significantly  impact our ability to recover our
costs  and  estimated   earnings  that  exceeded  our  billings  on  uncompleted
contracts, which could severely impact our cash flow.


                                       28
<PAGE>


Failure to Protect Our  Intellectual  Property  Could Harm Our Name  Recognition
Efforts and Ability to Compete Effectively

         Currently, we rely on a combination of patents, trademarks,  copyrights
and common law  safeguards  including  trade secret  protection.  To protect our
intellectual  property rights in the future,  we intend to continue to rely on a
combination  of  patents,  trademarks,  copyrights  and common  law  safeguards,
including  trade  secret  protection.  We  also  rely  on  restrictions  on use,
confidentiality and nondisclosure  agreements and other contractual arrangements
with our employees,  affiliates,  customers,  alliance partners and others.  The
protective  steps we have taken may be inadequate to deter  misappropriation  of
our  intellectual  property  and  proprietary  information.  A third party could
obtain our proprietary information or develop products or technology competitive
with  ours.  We may be  unable  to  detect  the  unauthorized  use  of,  or take
appropriate steps to enforce our intellectual property rights. Effective patent,
trademark,  copyright and trade secret  protection may not be available in every
country in which we offer or intend to offer our  products  and  services to the
same  extent  as in  the  United  States.  Failure  to  adequately  protect  our
intellectual  property  could  harm or even  destroy  our  brands and impair our
ability to compete  effectively.  Further,  enforcing our intellectual  property
rights could result in the  expenditure of significant  financial and managerial
resources and may not prove successful.

We Could Incur Substantial Costs Defending Our Intellectual Property from Claims
of Infringement

         The  industry  is  characterized  by  frequent   litigation   regarding
copyright,  patent and other intellectual  property rights. We may be subject to
future  litigation  based on claims that our products  infringe the intellectual
property  rights of  others or that our own  intellectual  property  rights  are
invalid.  Claims of  infringement  could  require us to reengineer or rename our
products  or seek to obtain  licenses  from third  parties in order to  continue
offering our products.  Licensing or royalty agreements, if required, may not be
available on terms  acceptable to us or at all. Even if  successfully  defended,
claims of  infringement  could also result in significant  expense to us and the
diversion of our management and technical resources.

E&S's Significant Investment in Research and Development May Not Payoff

         We have no assurance  that our  significant  investment in research and
development  will generate future sales or benefits.  We currently make and plan
to continue to make a significant investment in research and development.  Total
spending for research and  development was $44.4 million or 22% of sales in 1999
as  compared  to $31.8  million  or 17% of sales in  1998.  This  investment  is
necessary  for us to be able to compete  in the  graphics  simulation  industry.
Developing  new products and  software is  expensive  and often  involves a long
payback cycle.  While we have every reason to believe these  investments will be
rewarded with sales-generating products, customer acceptance ultimately dictates
the success of development and marketing efforts.

E&S May Not Continue to be  Successful  if it is Unable to Develop,  Produce and
Transition New Products

         Our continued  success  depends on our ability to develop,  produce and
transition  technologically  complex and innovative  products that meet customer
needs. We have no assurance that we will be able to  successfully  continue such
development, production and transition.

         The  development  of new  technologies  and  products  is  increasingly
complex and  expensive,  which among other risks,  increases the risk of product
introduction   delays.   The  introduction  of  a  new  product  requires  close
collaboration  and  continued   technological   advancement  involving  multiple
hardware and software design and manufacturing teams within E&S as well as teams
at outside suppliers of key components. The failure of any one of these elements
could  cause  our new  products  to fail to meet  specifications  or to miss the
aggressive timetables that we establish and the market demands.

         As the variety and  complexity of our product  families  increase,  the
process of planning  and managing  production,  inventory  levels,  and delivery
schedules  also  becomes  increasingly  complex.  There  is  no  assurance  that
acceptance  of and demand for our new products will not be affected by delays in
this process.  Additionally, if we are unable to meet our delivery schedules, we
may be subject to the penalties,  including liquidated damages that are included
in some of our customer contracts.

                                       29

<PAGE>

         Product  transitions  are a recurring  part of our business.  Our short
product  life  cycles  require  our  ability to  successfully  manage the timely
transition from current products to new products. In fact, it is not unusual for
us to announce a new product while its  predecessor is still in the final stages
of its development.
Our transition results could be adversely affected by such factors as:

         o     development delays,
         o     late release of products to manufacturing,
         o     quality or yield problems experienced by production or suppliers,
         o     variations in product costs,
         o     excess inventories of older products and components, and
         o     delays in  customer  purchases  of existing  products in
               anticipation  of the  introduction  of new products.

In the Event E&S  Suffers  Further  Product  Delays,  E&S May Be Required to Pay
Certain Customers Substantial Liquidated Damages

         The variety and complexity of our high technology product lines require
us to deal with suppliers and subcontractors supplying highly specialized parts,
operating  highly  sophisticated  and narrow  tolerance  equipment in performing
highly   technical   calculations.   The  processes  of  planning  and  managing
production,  inventory levels and delivery schedules are also highly complex and
specialized.  Many of our products  must be custom  designed  and  manufactured,
which is not only  complicated  and expensive,  but can also require a number of
months to accomplish.  Slight errors in either the design, planning and managing
production, inventory levels, delivery schedules, or manufacturing can result in
unsatisfactory  products that may not be  correctable.  If we are unable to meet
our delivery  schedules,  we may be subject to penalties,  including  liquidated
damages that are included in some of our customer  contracts.  During the fourth
quarter of 1999, we accrued $8.2 million for payments of liquidated  damages and
penalties due to product delays. As of March 30, 2000, we have paid $3.3 million
to one customer in connection  with  liquidated  damages.  There is no assurance
that we may not incur substantial liquidated damages in the future in connection
with further  product delays that could exceed $8.2 million that we have already
accrued.

E&S May Not Maintain a Significant  Portion of its Sales if it Fails to Maintain
its United States Government Contracts

         In  1999,  42% of our  sales  were to  agencies  of the  United  States
government, either directly or through prime contractors or subcontractors,  for
which there is intense  competition.  Accordingly,  we have no assurance that we
will be able to  maintain a  significant  portion of our sales.  These sales are
subject  to the  inherent  risks  related  to  government  contracts,  including
uncertainty  of  economic   conditions,   changes  in  government  policies  and
requirements   that  may  reflect  rapidly   changing   military  and  political
developments,   and   unavailability   of  funds.   These  risks  also   include
technological   uncertainties  and   obsolescence,   and  dependence  on  annual
Congressional  appropriation  and allotment of funds.  In the past,  some of our
programs have been delayed, curtailed, or terminated. Although we cannot predict
such  uncertainties,  in our opinion there are no spending reductions or funding
limitations pending that would impact our contracts.

         Other characteristics of the government contract market that may affect
our  operating  results  include the  complexity of designs,  the  difficulty of
forecasting  costs and  schedules  when  bidding  on  developmental  and  highly
sophisticated  technical  work,  and the speed with which  product  lines become
obsolete due to technological  advances and other factors  characteristic of the
market.  Our earnings may vary  materially on some contracts  depending upon the
types of government long-term contracts undertaken,  the costs incurred in their
performance,  and the achievement of other performance objectives.  Furthermore,
due to the intense competition for available United States government  business,
maintaining or expanding government business  increasingly requires us to commit
additional working capital for long-term programs and additional  investments in
company-funded research and development.


                                       30
<PAGE>


         Our dependence on government contracts may lead to other perils as well
because  as  a  United  States  government  contractor  or  sub-contractor,  our
contracts and operations are subject to government oversight. The government may
investigate  and make inquiries of our business  practices and conduct audits of
our contract  performance and cost accounting.  These investigations may lead to
claims against E&S. Under United States government  procurement  regulations and
practices,  an  indictment  of a  government  contractor  could  result  in that
contractor  being fined and/or  suspended for a period of time from  eligibility
for bidding on, or for award of, new government  contracts;  a conviction  could
result in debarment for a specified period of time.

E&S's Sales May Suffer if it Loses Certain Significant Customers

         We currently  derive a significant  portion of our sales from a limited
number of non-U.S.  government  customers.  The loss of any one or more of these
customers  could  have a  material  adverse  effect on our  business,  financial
condition and results of  operations.  In 1999 we were dependent on three of our
customers  for  approximately  24% of our  consolidated  sales.  In 1998 we were
dependent on three of our customers for  approximately  27% of our  consolidated
sales.  We expect that sales to a limited  number of customers  will continue to
account for a substantial  portion of our sales in the  foreseeable  future.  We
have no assurance that sales from this limited number of customers will continue
to reach or  exceed  historical  levels  in the  future.  We do not have  supply
contracts with any of our significant customers.

E&S's Sales Will Decrease if it Fails to Maintain its International Business

         Any reduction of our international  business could significantly affect
our sales. Our  international  business  accounted for 43% of our 1999 sales. We
expect that international sales will continue to be a significant portion of our
overall business in the foreseeable future.

         Our  international  business  experiences  many of the same  risks  our
domestic  business  encounters as well as  additional  risks such as exposure to
currency   fluctuations   and  changes  in  foreign   economic   and   political
environments.  Despite our exposure to currency fluctuations, we are not engaged
in any hedging activities to offset the risk of exchange rate fluctuations.  The
recent economic crisis  affecting the Asian markets is an example of a change in
a foreign economic environment that could affect our international business. Any
similar economic downturns may also decrease the number of orders we receive and
our receivable collections.

         Our international  transactions  frequently involve increased financial
and legal risks arising from  stringent  contractual  terms and  conditions  and
widely differing legal systems,  customs, and standards in foreign countries. In
addition,  our  international  sales  often  include  sales to  various  foreign
government  armed forces,  with many of the same inherent risks  associated with
United States government sales identified above.

If E&S's Commercial Simulation Business Fails, E&S's Sales will Decrease

         We have no assurance that our commercial  simulation (airline) business
will continue to succeed. Our commercial  simulation business currently accounts
for  approximately  10% to 20% of our sales. This business is subject to many of
the risks related to the commercial  simulation market that may adversely affect
our business.
The following risks are characteristic of the commercial simulation market:

         o     uncertainty of economic conditions,
         o     dependence upon the strength of the commercial airline industry,
         o     air pilot training requirements,
         o     competition,
         o     changes in technology, and
         o     timely performance by subcontractors on contracts in which E&S is
               the prime contractor.

                                       31

<PAGE>

E&S May Not Meet its Sales Projections if its New Businesses Fail

         We  have  no  assurance  that  our  new  businesses  will  gain  market
acceptance  or survive the intense  competitive  pressures  of their  respective
markets.  Our new businesses  currently  account for approximately 12% to 15% of
our sales in the  aggregate;  however,  we project sales of these  businesses to
decline in 2000 but then grow  approximately  15% to 25% of sales in  subsequent
years.  These  businesses  will not  survive  and we will  not  meet  our  sales
projections if we are unable to:

         o     develop  strong  partner   relationships  with  manufacturers  of
               computer  chips and  hardware  system-solution  providers  in the
               digital content creation segment,
         o     gain market acceptance of new technology and increase market size
               and  demand in a  developing  new market in our  digital  theater
               business, and
         o     gain market acceptance of E&S RAPIDsite.

         Other  factors  that may also affect the success of our new  businesses
include  technological  uncertainties and obsolescence,  uncertainty of economic
conditions,  unavailability of working capital,  and other risks inherent in new
businesses.

Future  Losses  Could  Impair our Ability to Raise  Capital or Borrow  Money and
Consequently Affect our Stock Price

         Although we recorded net sales of $200.9  million for the twelve months
ended  December  31,  1999,  we  incurred  a net loss of $23.5  million in 1999,
compared to a net loss of $16.0  million in 1998.  We cannot  assure you that we
will be profitable in future periods.  Losses in future periods could impair our
ability  to raise  additional  capital  or  borrow  money as  needed,  and could
decrease our stock price.

We May Make Acquisitions that are Unsuccessful or Strain or Divert Our Resources
from More Profitable Operations

         We  intend  to  consider  acquisitions,   alliances,  and  transactions
involving other companies that could complement our existing business.  However,
we may not be able to  identify  suitable  acquisition  parties,  joint  venture
candidates,  or  transaction  counterparties.  Also,  even  if we  can  identify
suitable  parties,  we may not be able to  obtain  the  financing  necessary  to
complete any such transaction or consummate these  transactions on terms that we
find favorable.

         We may also not be able to  successfully  integrate any businesses that
we acquire into our existing  operations.  If we cannot  successfully  integrate
acquisitions,  our operating  expenses may increase.  This increase would affect
our net  earnings,  which could  adversely  affect the value of our  outstanding
securities.  Moreover,  these types of  transactions  may result in  potentially
dilutive issuances of equity securities,  the incurrence of additional debt, and
amortization of expenses related to goodwill and intangible assets, all of which
could adversely affect our profitability.  These  transactions  involve numerous
other risks as well,  including the diversion of management attention from other
business  concerns,  entry into  markets in which we have had no or only limited
experience,  and the  potential  loss of key  employees  of acquired  companies.
Occurrence of any of these risks could have a material adverse effect on us.

Year 2000 Compliance -- Undiscovered Year  2000-Related  Computer Problems Could
Disrupt Our Operations.

         Many currently  installed computer systems and software were written to
accept and process only two digit entry codes for the year when  storing  dates.
Beginning  with the year 2000,  these entry codes will need to accept four digit
entries to distinguish  21st century dates from 20th century dates. As a result,
computer  systems and  products may need to be upgraded to solve this problem to
avoid  incorrect  or lost data.  We  utilize a  significant  number of  computer
software  programs  and  operating  systems  across  our  entire   organization,
including  applications  used  in  sales,  shipping,   product  design,  product
operation,  financial business systems,  and various  administrative  functions.
When  the  century  changed,  we  experienced  no  disruption  to  our  business
operations and no product failures as a result of year 2000 compliance issues or
otherwise.  If our  suppliers,  vendors  or  distributors  fail  to  timely  and
completely correct their own year 2000 software, firmware and hardware problems,
or if any of them convert to a system that is incompatible with our systems, our
ability to deliver our products and services could be disrupted.

                                       32
<PAGE>

E&S's  Shareholders  May  Not  Realize  Certain  Opportunities  Because  of  the
Anti-Takeover Effect of State Law

         We are  subject  to the  Utah  Control  Shares  Acquisition  Act  which
provides  that any person who  acquires  20% or more of the  outstanding  voting
shares of a publicly  held Utah  corporation  will not have  voting  rights with
respect  to  the  acquired  shares  unless  a  majority  of  the   disinterested
shareholders of the corporation  votes to grant such rights.  This could deprive
shareholders of opportunities  to realize takeover  premiums for their shares or
other advantages that large  accumulations of stock would provide because anyone
interested in acquiring E&S could only do so with the cooperation of the board.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The principal  market risks to which the Company is exposed are changes
in foreign currency  exchange rates and changes in interest rates. The Company's
international  sales,  which  accounted for 43% of the Company's  total sales in
1999 are  concentrated  in the  United  Kingdom,  continental  Europe  and Asia.
Foreign  currency  purchase  and sale  contracts  are  entered  into for periods
consistent  with related  underlying  exposures and do not constitute  positions
independent  of those  exposures.  The Company does not enter into contracts for
trading purposes and does not use leveraged contracts.  As of December 31, 1999,
the Company had no material sales or purchase contracts in currencies other than
U.S. dollars and had no foreign currency sales or purchase contracts.

         The  Company  reduces  its  exposure  to changes in  interest  rates by
maintaining  a high  proportion  of its debt in  fixed-rate  instruments.  As of
December  31,  1999,  88%  of  the  Company's   total  debt  was  in  fixed-rate
instruments.  Had the Company drawn on its $20 million  revolving line of credit
with U.S.  Bank  National  Association  and the remainder of its foreign line of
credit, 58% of the Company's total debt would be in fixed-rate  instruments.  In
addition, the Company maintains an average maturity of its short-term investment
portfolio  under twelve months to avoid large changes in its market value. As of
December 31, 1999,  all but $500,000 in  investments  had  maturities  within 90
days.

         The information  below summarizes the Company's market risks associated
with debt  obligations and short-term  investments as of December 31, 1999. Fair
values have been determined by quoted market prices.  For debt obligations,  the
table below presents the principal cash flows and related interest rates at year
end by fiscal year of maturity.  Bank borrowings bear variable rates of interest
and the convertible  subordinated  debentures bear a fixed rate of interest. For
short-term  investments,  the  interest  rate  disclosed  presents  the weighted
average rate of the portfolio at year end. The information  below should be read
in conjunction  with notes 3, 11 and 12 of Notes to the  Consolidated  Financial
Statements in Part II of this annual report.

<TABLE>
<CAPTION>
                            Rate         2000         2001       2002      2003      2004       There-      Total         Fair
                                                                                                After                    Value
<S>                       <C>          <C>         <C>           <C>       <C>       <C>       <C>         <C>         <C>
                           --------    ---------    ---------    ------    ------    ------    ---------   ---------    ---------
Debt
Bank borrowings in
Deutsche Marks               6.4%      $  2,559            -         -         -         -           -     $  2,559     $  2,559
Other                      Various           50            -         -         -         -           -           50           50
                                       ---------    ---------    ------    ------    ------    ---------   ---------    ---------
Total Notes Payable                    $  2,609            -         -         -         -           -     $  2,609        2,609
                                       =========    =========    ======    ======    ======    =========   =========    =========

Convertible
subordinated
   Debentures                6.0%             -            -         -         -         -     $ 18,015    $ 18,015     $ 13,061
                                       ---------    ---------    ------    ------    ------    ---------   ---------    ---------

Total long-term debt                          -            -         -         -         -     $ 18,015    $ 18,015     $ 13,061
                                       =========    =========    ======    ======    ======    =========   =========    =========

Short-term Investments       5.9%      $    748            -         -         -         -            -         748          748
                                       =========    =========    ======    ======    ======    =========   =========    =========
</TABLE>


                                       33
<PAGE>




ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The following  constitutes a list of Financial  Statements  included in
Part II of this report:

     Report of Management

     Report of Independent Accountants

     Consolidated Balance Sheets as of December 31, 1999 and 1998

     Consolidated  Statements of Operations  for the three years ended  December
     31, 1999

     Consolidated  Statements of Comprehensive  Income for the three years ended
     December 31, 1999

     Consolidated  Statements of Stockholders'  Equity for the three years ended
     December 31, 1999

     Consolidated  Statements  of Cash Flows for the three years ended  December
     31, 1999

     Notes to  Consolidated  Financial  Statements  for the  three  years  ended
     December 31, 1999

         The  following  consists  of a list of  Financial  Statement  Schedules
included in Part IV of this report:

     Schedule  II -  Valuation  and  Qualifying  Accounts  for the  years  ended
     December 31, 1999, 1998 and 1997

     Schedules  other than those listed above are omitted because of the absence
     of  conditions  under  which  they are  required  or because  the  required
     information is presented in the Financial Statements or notes thereto.


                                       34
<PAGE>


REPORT OF MANAGEMENT

         Responsibility  for the  integrity  and  objectivity  of the  financial
information  presented  in this  report  rests  with the  management  of Evans &
Sutherland.   The  accompanying  financial  statements  have  been  prepared  in
conformity with generally accepted accounting principles applied on a consistent
basis and, where  necessary,  include  estimates  based on management  judgment.
Management also prepared other information in this report and is responsible for
its accuracy and consistency with the financial statements.

         Evans & Sutherland has established and maintains an effective system of
internal  accounting  controls.   The  Company  believes  this  system  provides
reasonable   assurance  that   transactions  are  executed  in  accordance  with
management  authorization  in order to permit  the  financial  statements  to be
prepared with integrity and reliability and to safeguard,  verify,  and maintain
accountability  of assets.  In addition,  Evans & Sutherland's  business  ethics
policy requires  employees to maintain the highest level of ethical standards in
the conduct of the Company's business.

         Evans &  Sutherland's  financial  statements  have been audited by KPMG
LLP,  independent  public  accountants.  Management  has made  available all the
Company's  financial  records and  related  data to allow KPMG LLP to express an
informed professional opinion in their accompanying report.

         The Audit  Committee  of the Board of  Directors  is  composed of three
independent directors and meets regularly with the independent  accountants,  as
well as with Evans &  Sutherland  management,  to review  accounting,  auditing,
internal accounting control and financial reporting matters.

  James R. Oyler                                       Richard J. Gaynor
  President and                                        Vice President and
  Chief Executive Officer                              Chief Financial Officer

REPORT OF INDEPENDENT ACCOUNTANTS

The Board of Directors and Stockholders
Evans & Sutherland Computer Corporation:

         We have  audited  the  consolidated  financial  statements  of  Evans &
Sutherland  Computer  Corporation and subsidiaries as listed in the accompanying
index. In connection with our audits of the consolidated  financial  statements,
we  have  also  audited  the  financial  statement  schedule  as  listed  in the
accompanying  index.  These  consolidated  financial  statements  and  financial
statement  schedule are the  responsibility  of the  Company's  management.  Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements and financial statement schedule based on our audits.

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

         In our opinion, the consolidated financial statements referred to above
present  fairly,  in all material  respects,  the financial  position of Evans &
Sutherland  Computer  Corporation  and  subsidiaries as of December 31, 1999 and
1998,  and the results of their  operations and their cash flows for each of the
years in the  three-year  period ended  December 31, 1999,  in  conformity  with
generally  accepted  accounting  principles.  Also in our  opinion,  the related
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.

                                            KPMG LLP

Salt Lake City,  Utah
February 14,  2000,  except as to Note 24,
which is as of March 28, 2000

                                       35
<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)
<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                  ------------------------------------
                                                                                      1999                   1998
                                                                                  -------------          -------------
<S>                                                                              <C>                     <C>
Assets:
   Cash and cash equivalents                                                      $     22,110               $ 1,834
   Short-term investments                                                                  748                25,907
   Accounts receivable, less allowances for doubtful
      receivables of $1,322 in 1999 and $1,616 in 1998                                  28,743                46,866
   Inventories                                                                          40,588                53,319
   Costs and estimated earnings in excess of billings
      on uncompleted contracts                                                          80,457                58,682
   Deferred income taxes                                                                15,923                 9,450
   Prepaid expenses and deposits                                                         7,844                 7,278
                                                                                  -------------          -------------

         Total current assets                                                          196,413               203,336

Property, plant and equipment, net                                                      52,184                53,693
Investment securities                                                                    4,467                 3,380
Deferred income taxes                                                                    4,418                 2,487
Goodwill and other intangible assets, net                                                  552                11,351
Other assets                                                                               430                 1,421
                                                                                  -------------          -------------
         Total assets                                                             $    258,464           $   275,668
                                                                                  =============          =============

Liabilities and stockholders' equity:
   Line of credit agreements                                                      $      2,657           $     4,298
   Accounts payable                                                                     19,575                24,667
   Accrued expenses                                                                     39,057                27,147
   Customer deposits                                                                     4,720                 3,339
   Income taxes payable                                                                  1,062                 2,436
   Billings in excess of costs and estimated earnings on
      Uncompleted contracts                                                             12,412                 7,092
                                                                                  -------------          -------------
         Total current liabilities                                                      79,483                68,979
                                                                                  -------------          -------------

Long-term debt                                                                          18,015                18,062
                                                                                  -------------          -------------

Commitments and contingencies (notes 7, 10 and 15)

Redeemable preferred stock, class B-1, no par value; authorized
   1,500,000 shares; issued and outstanding 901,408 shares                              23,772                23,544
                                                                                  -------------          -------------
Stockholders' equity:
   Preferred stock, no par value; authorized 8,500,000 shares;
      no shares issued and outstanding                                                       -                     -
   Common stock, $.20 par value; authorized 30,000,000 shares;
      Issued and outstanding 9,678,938 shares in 1999 and 9,597,660
      Shares in 1998                                                                     1,936                 1,920
   Additional paid-in capital                                                           24,086                23,420
   Common stock in treasury, at cost; 352,500 shares                                    (4,709)                    -
   Retained earnings                                                                   115,816               139,498
   Accumulated other comprehensive income                                                   65                   245
                                                                                  -------------          -------------
         Total stockholders' equity                                                    137,194               165,083
                                                                                  -------------          -------------

                   Total liabilities and stockholders' equity                     $    258,464           $   275,668
                                                                                  =============          =============
</TABLE>


     See accompanying notes to consolidated financial statements

                                       36
<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>


                                                                                Year ended December 31,
                                                                         1999             1998             1997
                                                                     -------------    -------------    -------------
<S>                                                                  <C>              <C>              <C>
Sales                                                                $   200,885       $  191,766       $  159,353
Cost of sales                                                            127,556          110,320           84,139
Write-off of inventories                                                  13,230                -                -
                                                                     -------------    -------------    -------------
         Gross profit                                                     60,099           81,446           75,214
                                                                     -------------    -------------    -------------

Expenses:
   Selling, general and administrative                                    43,039           40,088           35,304
   Research and development                                               44,358           31,797           25,492
   Amortization of goodwill and other intangible assets                    1,515            4,767               29
   Impairment loss                                                         9,693                -                -
   Restructuring charge                                                    1,460                -                -
   Write-off of acquired in-process technology                                 -           20,780                -
                                                                     -------------    -------------    -------------
                                                                         100,065           97,432           60,825
                                                                     -------------    -------------    -------------

Operating income (loss)                                                  (39,966)         (15,986)          14,389
                                                                     -------------    -------------    -------------

Other income (expense):
   Interest income                                                         1,849            2,659            3,239
   Interest expense                                                       (1,333)          (1,335)          (1,300)
   Loss on write down of investment securities                              (350)          (1,075)          (9,575)
   Gain on sale of investment securities                                       -            2,493                -
   Other                                                                     933             (613)              85
                                                                     -------------    -------------    -------------
                                                                           1,099            2,129           (7,551)
                                                                     -------------    -------------    -------------

Income (loss) before income taxes                                        (38,867)         (13,857)           6,838

Income tax expense (benefit)                                             (15,413)           2,126            1,758
                                                                     -------------    -------------    -------------
         Net income (loss)                                               (23,454)         (15,983)           5,080

Accretion of redeemable preferred stock                                      228               95                -
                                                                     -------------    -------------    -------------
Net income (loss) applicable to common stock                         $   (23,682)     $   (16,078)     $     5,080
                                                                     =============    =============    =============

Net income (loss) per common share:
   Basic                                                             $     (2.49)     $     (1.70)     $      0.56
                                                                     =============    =============    =============

   Diluted                                                           $     (2.49)     $     (1.70)     $      0.53
                                                                     =============    =============    =============

</TABLE>

     See accompanying notes to consolidated financial statements

                                       37
<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                               Year ended December 31,
                                                                1999                     1998                    1997
                                                            ------------             ------------            ------------
<S>                                                         <C>                      <C>                     <C>
Net income (loss)                                            $ (23,454)               $ (15,983)                $ 5,080

Other comprehensive income (loss):
   Foreign currency translation adjustments                       (337)                     126                     297
   Unrealized gains (losses) on securities                         (48)                     (89)                  1,505
   Reclassification adjustment for losses included
       in net income (loss)                                        275                        -                    (868)
                                                            ------------             ------------            ------------

Other comprehensive income (loss)before income taxes              (110)                      37                     934

Income tax expense (benefit) related
   to items of other comprehensive income (loss)                    70                       12                     240
                                                            ------------             ------------            ------------

Other comprehensive income (loss), net of income taxes            (180)                      25                     694
                                                            ------------             ------------            ------------

Comprehensive income (loss)                                  $ (23,634)               $ (15,958)                $ 5,774
                                                            ============             ============            ============
</TABLE>



     See accompanying notes to consolidated financial statements

                                       38
<PAGE>





            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                      (In thousands, except share amounts)
<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                                   Additional                                Other
                                              Common Stock          Paid-In     Treasury      Retained   Comprehensive
                                          Shares       Amount       Capital      Stock        Earnings       Income        Total
                                        ---------    ---------    ----------   ---------     ----------    ----------   ----------
<S>                                      <C>         <C>           <C>         <C>           <C>           <C>         <C>
Balance at December 27, 1996               9,057      $ 1,811       $ 8,639     $     -       $ 150,496     $   (474)   $ 160,472

Issuance of common stock for cash            183           37         3,104           -               -            -        3,141

Common stock repurchased
   and retired                              (173)         (35)       (4,590)          -               -             -      (4,625)

Compensation expense on
   employee stock purchase plan                -            -           102           -               -             -         102

Tax benefit from issuance of
   common stock to employees                   -            -           770           -               -             -         770

Other comprehensive income                     -            -             -           -               -           694         694

Net earnings                                   -            -             -           -           5,080             -       5,080
                                        ---------    ---------    ----------   ---------     ----------    ----------   ----------

Balance at December 31, 1997               9,067        1,813         8,025           -         155,576           220     165,634

Issuance of common stock for cash            156           32         1,990           -               -             -       2,022

Common stock issued in
   connection with acquisitions            1,109          222        28,373           -               -             -      28,595

Common stock repurchased
   and retired                              (734)        (147)      (15,538)          -               -             -     (15,685)

Compensation expense on
   employee stock purchase plan                -            -           186           -               -             -         186

Tax benefit from issuance of
   common stock to employees                   -            -           384           -               -             -         384

Other comprehensive income                     -            -             -           -               -            25          25

Net loss                                       -            -             -           -         (15,983)            -     (15,983)

Accretion of redeemable
    preferred stock                            -            -             -           -             (95)            -         (95)
                                        ---------    ---------    ----------   ---------     ----------    ----------   ----------

Balance at December 31, 1998               9,598        1,920        23,420           -         139,498           245     165,083

Issuance of common stock for cash            142           28         1,361           -               -             -       1,389

Repurchase of 413,500 common
   shares                                    (61)         (12)         (911)     (4,709)              -             -      (5,632)

Compensation expense on
   employee stock purchase plan                -            -           117           -               -             -         117

Tax benefit from issuance of
   common stock to employees                   -            -            99           -               -             -          99

Other comprehensive income                     -            -             -           -               -          (180)       (180)

Net loss                                       -            -             -           -         (23,454)            -     (23,454)

Accretion of redeemable
    preferred stock                            -            -             -           -            (228)            -        (228)
                                        ---------    ---------    ----------   ---------     ----------    ----------   ----------

Balance at December 31, 1999               9,679      $ 1,936      $ 24,086    $ (4,709)      $ 115,816          $ 65   $ 137,194
                                        =========    =========    ==========   =========     ==========    ==========   ==========
</TABLE>


          See accompanying notes to consolidated financial statements

                                       39
<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                              Year ended December 31,
                                                                                        1999            1998           1997
                                                                                     ------------    -----------    ------------
<S>                                                                                 <C>             <C>             <C>
Cash flows from operating activities:
   Net income (loss)                                                                 $  (23,454)     $ (15,983)      $     5,080

   Adjustments to reconcile  net income (loss) to net cash Provided by (used in)
      operating activities:
         Write-off of inventories                                                        13,230              -                 -
         Impairment loss                                                                  9,693              -                 -
         Depreciation and amortization                                                   15,499         15,934            10,041
         Provision for losses on accounts receivable                                        558            496               370
         Provision for obsolete and excess inventories                                      910          1,987             1,009
         Provision for warranty expense                                                     958            872               726
         Deferred income taxes                                                           (8,475)        (2,919)           (3,299)
         Loss on write-down of investment securities                                        350          1,075             9,575
         Gain on sale of investment securities                                                -         (2,493)                -
         Write-off of acquired in-process technology                                          -         20,780                 -
         Other, net                                                                         732            868               169
         Changes in assets and  liabilities,  net of effect of  purchase/sale of
           business:
            Accounts receivable                                                          17,474         (3,613)           (2,935)
            Inventories                                                                  (6,104)       (28,867)           (8,641)
            Costs and estimated earnings in excess of billings on uncompleted
              contracts, net                                                            (16,446)        (6,110)          (15,060)
            Prepaid expenses and deposits                                                  (565)        (3,533)           (1,430)
            Accounts payable                                                             (5,041)         5,699             8,071
            Accrued expenses                                                             10,970           (266)            1,161
            Customer deposits                                                             1,381         (3,235)            4,496
            Income taxes                                                                 (1,275)        (1,473)            4,958
                                                                                     ------------    -----------    ------------
             Net cash provided by (used in) operating activities                         10,395        (20,781)           14,291
                                                                                     ------------    -----------    ------------
Cash flows from investing activities:
   Purchases of short-term investments                                                  (14,700)       (22,217)          (80,443)
   Proceeds from sale of short-term investments                                           39,767        47,691            77,858
   Purchase of investment securities                                                       (636)          (541)           (4,208)
   Proceeds from sale of investment securities                                                -          3,304                 -
   Purchases of property, plant and equipment                                           (14,530)       (18,516)          (10,804)
   Proceeds from sale of certain manufacturing assets                                     6,010              -                 -
   Payments for business acquisitions, net of cash acquired                                   -         (7,603)                -
                                                                                     ------------    -----------    ------------
             Net cash provided by (used in) investing activities                         15,911          2,118           (17,597)
                                                                                     ------------    -----------    ------------
Cash flows from financing activities:
   Borrowings under line of credit agreements                                               716          3,915                 -
   Payments under line of credit agreements                                              (1,869)        (1,575)           (3,827)
   Net proceeds from issuance of common stock                                             1,389          2,022             3,141
   Net proceeds from issuance of preferred stock                                              -         23,544                 -
   Payments for repurchases of common stock                                              (5,478)       (15,685)           (4,625)
                                                                                     ------------    -----------    ------------
             Net cash provided by (used in) financing activities                         (5,242)        12,221            (5,311)
                                                                                     ------------    -----------    ------------
Effect of foreign exchange rates on cash and cash equivalents                              (788)           100               272
                                                                                     ------------    -----------    ------------
Net change in cash and cash equivalents                                                   20,276        (6,342)           (8,345)
Cash and cash equivalents at beginning of year                                             1,834         8,176            16,521
                                                                                     ------------    -----------    ------------
Cash and cash equivalents at end of year                                             $    22,110     $   1,834       $     8,176
                                                                                     ============    ===========    ============

Supplemental  Disclosures of Cash Flow Information  Cash paid (received)  during
the year for:
   Interest                                                                          $     1,321     $   1,309       $     1,351
   Income taxes                                                                           (5,846)        7,130             1,915
Accretion of redeemable preferred stock                                                      228            95                 -

</TABLE>

     See accompanying notes to consolidated financial statements

                                       40
<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


           December 31, 1999, December 31, 1998 and December 31, 1997


(1)       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         Description of Business

         Evans & Sutherland Computer  Corporation ("E&S" or the "Company") is an
         established  high-technology company with outstanding computer graphics
         technology  and a  worldwide  presence  in  high-performance  3D visual
         simulation.  In addition, E&S is now applying this core technology into
         higher-growth personal computer ("PC") products for both simulation and
         workstations.  The Company's core computer graphics  technology is used
         to produce high performance  image generators for simulation  including
         PC-based  visual  system  products,   to  provide  original   equipment
         manufacturers  of  personal  workstations  with high  quality  graphics
         performance,  and to  apply  the  Company's  core  technologies  to the
         expanding market of PC-based applications and products.

         Basis of Presentation

         The  consolidated  financial  statements  include  the  accounts of the
         Company and its wholly-owned  subsidiaries.  All intercompany  accounts
         and  transactions  have  been  eliminated  in  consolidation.   Certain
         reclassifications  have  been  made in the 1998  and 1997  consolidated
         financial statements to conform to the 1999 presentation.

         Revenue Recognition

          Sales  includes  revenue from system and software  products,  software
          license rights and service contracts.

         In October 1997, the American Institute of Certified Public Accountants
         ("AICPA") issued  Statement of Position ("SOP") 97-2,  Software Revenue
         Recognition,  which supersedes SOP 91-1, Software Revenue  Recognition.
         Effective  January 1, 1998,  the Company  adopted the provisions of SOP
         97-2 as modified by SOP 98-9. Revenue was recognized in accordance with
         SOP 97-2 in 1999 and 1998 and SOP 91-1 in prior years.

         SOP 97-2 generally  requires  revenue  earned on software  arrangements
         involving  multiple elements such as software  products,  enhancements,
         post-contract  customer  support,   installation  and  training  to  be
         allocated  to each  element  based on the  relative  fair values of the
         elements.  The fair value of an element must be based on evidence  that
         is specific to the vendor.  The revenue  allocated to software products
         is generally  recognized  upon  delivery of the  products.  The revenue
         allocated to post  contract  customer  support is generally  recognized
         over the support period.

         The Company recognizes  revenues from product sales that do not require
         significant  production,   modification,   or  customization  when  the
         following  criteria  are met:  the Company  has signed a  noncancelable
         agreement;  the  Company  has  delivered  the  product;  there  are  no
         uncertainties  surrounding product  acceptance;  the fees are fixed and
         determinable; and collection is considered probable.

         Revenue from long-term contracts which require significant  production,
         modification    or     customization     is    recorded    using    the
         percentage-of-completion  method,  determined  by  the  units-delivered
         method,  or when there is  significant  nonrecurring  engineering,  the
         ratio of costs incurred to management's  estimate of total  anticipated
         costs.  If estimated  total costs on any contract  indicate a loss, the
         Company  provides  currently  for  the  total  anticipated  loss on the
         contract.  Billings on uncompleted  long-term  contracts may be greater
         than or  less  than  incurred  costs  and  estimated  earnings  and are
         recorded  as an asset or  liability  in the  accompanying  consolidated
         balance sheets.

                                       41
<PAGE>

         Cash and Cash Equivalents

         The Company considers all highly liquid financial instruments purchased
         with an original  maturity to the Company of 90 days or less to be cash
         equivalents.  Cash  equivalents  consist of debt  securities  and money
         market funds of $15.5  million and $1.8 million as of December 31, 1999
         and 1998, respectively.

         Inventories

         Inventoried  costs on programs and long-term  contracts  include direct
         engineering and production costs and applicable overhead, not in excess
         of estimated  realizable  value. In accordance with industry  practice,
         inventoried  costs include  amounts  relating to programs and contracts
         with long production  cycles,  a portion of which is not expected to be
         realized  within one year.  Inventories  are stated at  standard  cost,
         which  approximates   average  cost.  Spare  parts  and  general  stock
         materials  are stated at cost not in excess of  realizable  value.  The
         Company  periodically  reviews  inventories  for  excess  and  obsolete
         amounts and provides a reserve that it  considers  sufficient  to cover
         any excess and obsolete inventories.

         Property, Plant and Equipment

         Property,  plant and  equipment  are stated at cost.  Depreciation  and
         amortization are computed using the  straight-line  method based on the
         estimated useful lives of the related assets.

         Accounting for Impairment of Long-Lived Assets

         The Company  periodically  reviews the value  assigned to the  separate
         components of goodwill, intangibles and other long-lived assets through
         comparison to anticipated,  undiscounted cash flows from the underlying
         assets  to assess  recoverability.  The  assets  are  considered  to be
         impaired when the expected  future  undiscounted  cash flows from these
         assets do not exceed the carrying  balances of the related assets.  The
         impairment  loss of $9.7 million,  as  determined  in  accordance  with
         Statement  of  Financial   Accounting  Standards  No.  121  (SFAS  121)
         "Accounting for the Impairment of Long-Lived  Assets and for Long-Lived
         Assets to be Disposed  of," relates to the  write-down to fair value of
         goodwill,  intangibles  and other  long-lived  assets  acquired  in the
         acquisition of  AccelGraphics,  Inc. ("AGI") and Silicon Reality,  Inc.
         ("SRI").  Fair  value was  determined  utilizing  discounted  cash flow
         analyses  and  the  replacement  cost  approach.  The  impairment  loss
         consisted of the write-off of $4.9 million of goodwill, $4.4 million of
         intangible assets and $0.4 million of property, plant and equipment.

         In addition to  continued  losses at AGI, the  impairment  loss was the
         result  of  the  following  additional  circumstances:  (i)  delays  in
         production  introductions  for the AccelGALAXY,  E&S Lightning 1200 and
         the  multiple-controller  graphics  subsystems  product line;  (ii) the
         developer of the chip used on the AccelGMX acquired a board company and
         entered the graphics  accelerator market in direct competition with the
         AccelGMX;  and (iii)  introduction of lower-end products by competitors
         which can perform many of the  functions of the  higher-end 3D graphics
         cards.  Furthermore,  the Company  determined  that a manufacturer of a
         chip to be used in various new board products was unable to manufacture
         a designed chip with agreed upon specifications.

         Goodwill and Other Intangible Assets

         Goodwill and other intangible  assets consist primarily of goodwill and
         other intangible assets recorded in connection with the acquisitions of
         AccelGraphics,  Inc. and Silicon  Reality,  Inc. on June 26, 1998.  The
         other  intangible  assets are being amortized  using the  straight-line
         method  over six months to seven  years.  As of  December  31, 1999 and
         1998, accumulated  amortization of goodwill and other intangible assets
         was $15.7 million and $4.9 million, respectively.


                                       42
<PAGE>


         Software Development Costs

         Software development costs, if material,  are capitalized from the date
         technological  feasibility  is achieved  until the product is available
         for general release to customers.  Such deferrable  costs have not been
         material during the periods presented.

         Investments

         The Company  classifies  its marketable  debt and equity  securities as
         available-for-sale.  Available-for-sale securities are recorded at fair
         value.  Unrealized  holding  gains and  losses,  net of the related tax
         effect,  are excluded  from earnings and are reported as a component of
         accumulated other comprehensive income until realized.  Dividend income
         is recognized  when earned.  Realized gains and losses from the sale of
         securities  are included in results of operations and are determined on
         the specific-identification basis.

         Nonmarketable  investment  securities are recorded at the lower of cost
         or fair value.  Some of the factors that are  considered in determining
         the fair value of these securities  include analyses of each investee's
         financial  condition and  operations,  the status of its technology and
         strategies in place to achieve its objectives.  A decline in the market
         value  below  cost that is deemed  other than  temporary  is charged to
         results of  operations  resulting  in the  establishment  of a new cost
         basis  for  both   available-for-sale   and  nonmarketable   investment
         securities.

         Warranty Reserve

         The Company  provides a warranty  reserve for estimated future costs of
         servicing products under warranty agreements extending for periods from
         90 days to one year.  Anticipated  costs for product warranty are based
         upon estimates derived from experience  factors and are recorded at the
         time of sale or over the contract period for long-term contracts.

         Stock-Based Compensation

         The Company has adopted the footnote disclosure provisions of Statement
         of Financial  Accounting Standards (SFAS) No. 123, Accounting for Stock
         Based Compensation.  SFAS 123 encourages entities to adopt a fair value
         based  method  of  accounting  for  stock  options  or  similar  equity
         instruments.  However,  it also allows an entity to continue  measuring
         compensation   cost   for   stock   based    compensation   using   the
         intrinsic-value   method  of   accounting   prescribed   by  Accounting
         Principles  Board (APB) Opinion No. 25,  Accounting for Stock Issued to
         Employees  (APB 25).  The  Company has elected to continue to apply the
         provisions  of  APB 25  and  provide  pro  forma  footnote  disclosures
         required by SFAS 123.

         Income Taxes

         The  Company  uses the asset and  liability  method of  accounting  for
         income taxes. Under the asset and liability method, deferred tax assets
         and  liabilities  are  recognized  for  the  future  tax   consequences
         attributable to differences  between the financial  statement  carrying
         amounts of existing  assets and  liabilities  and their  respective tax
         bases and  operating  loss and tax credit  carryforwards.  Deferred tax
         assets and liabilities are measured using enacted tax rates expected to
         apply  to  taxable  income  in  the  years  in  which  those  temporary
         differences  are  expected to be  recovered  or settled.  The effect on
         deferred  tax  assets  and  liabilities  of a  change  in tax  rates is
         recognized in income in the period that includes the enactment date.


                                       43
<PAGE>


         Foreign Currency Translation

         The local foreign currency is the functional currency for the Company's
         foreign subsidiaries.  Assets and liabilities of foreign operations are
         translated  to U.S.  dollars at the  current  exchange  rates as of the
         applicable balance sheet date. Sales and expenses are translated at the
         average  exchange  rates  prevailing  during  the  period.  Adjustments
         resulting  from  translation  are  reported as a separate  component of
         stockholders' equity.  Certain transactions of the foreign subsidiaries
         are  denominated  in  currencies  other than the  functional  currency,
         including  transactions with the parent company.  Transaction gains and
         losses are included in other income  (expense)  for the period in which
         the transaction occurs.

         Estimates

         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities, the disclosure of contingent assets and liabilities at the
         date of the financial  statements and the reported amounts of sales and
         expenses during the reporting period.  Actual results could differ from
         those estimates.

         Concentration of Credit Risk

         Financial   instruments  that   potentially   subject  the  Company  to
         concentrations  of credit risk are primarily  cash,  cash  equivalents,
         short-term   investments   and  accounts   receivable.   The  Company's
         short-term investment portfolio consists of investment-grade securities
         diversified among security types, industries and issuers. The Company's
         investments  are  managed by  recognized  financial  institutions  that
         follow the Company's investment policy. The Company's policy limits the
         amount of credit exposure in any one issue, and the Company believes no
         significant  concentration  of credit risk exists with respect to these
         investments.

         In the normal course of business, the Company provides unsecured credit
         terms to its  customers.  Accordingly,  the  Company  performs  ongoing
         credit  evaluations  of its  customers  and  maintains  allowances  for
         possible  losses which,  when  realized,  have been within the range of
         management's expectations.

         In accordance  with  accounting  for long-term  contracts,  the Company
         records an asset for costs and estimated earnings in excess of billings
         on uncompleted  contracts.  At December 31, 1999,  $50.1 million of the
         costs and  estimated  earnings  in excess of  billings  on  uncompleted
         contracts pertain to five contracts with four different customers.  The
         billing of these amounts is contingent  upon the successful  completion
         of contractual  milestones  related to the delivery and  integration of
         Harmony image generators.  The Company expects to achieve these billing
         milestones  during  2000.  The  Company's  inability  to achieve  these
         contractual milestones may significantly impact the realization of such
         amounts.

         Recent Accounting Pronouncements

         In June 1998, SFAS No. 133, "Accounting for Derivative  Instruments and
         Hedging  Activities" was issued. The statement requires  derivatives to
         be recorded on the balance sheet as assets or liabilities,  measured at
         fair value. Gains or losses resulting from changes in fair value of the
         derivatives are recorded  depending upon whether the  instruments  meet
         the  criteria  for  hedge  accounting.  The  impact  of  adopting  this
         statement  is  not   anticipated   to  be  material  to  the  financial
         statements.  This  statement  is effective  for fiscal years  beginning
         after June 15, 1999.


                                       44
<PAGE>


(2)       BUSINESS ACQUISITIONS

         On June 26, 1998, the Company acquired all of the outstanding  stock of
         AccelGraphics,  Inc.  for  approximately  $23.7  million  in  cash  and
         1,109,303  shares of the Company's  common  stock,  which was valued at
         $25.7 million.  In addition,  the Company converted all outstanding AGI
         options into options to purchase approximately 351,000 shares of common
         stock of the Company  with a fair value of $3.4  million  and  incurred
         transaction  costs of  approximately  $1.1  million.  AGI was  based in
         Milpitas,   California,   and  was  a  provider  of   high-performance,
         cost-effective,  three-dimensional  graphics subsystem products for the
         professional  Windows NT and Windows 95 markets.  The  acquisition  was
         accounted for by the purchase method and,  accordingly,  the results of
         operations  of AGI have been  included  in the  Company's  consolidated
         financial statements from June 26, 1998 forward.

         Also on June 26,  1998,  the  Company  acquired  the assets and assumed
         certain  liabilities of Silicon  Reality,  Inc. for a purchase price of
         approximately   $1.2   million,    including   transaction   costs   of
         approximately  $250,000.  SRI is based in Federal Way, Washington,  and
         designs and produces  three-dimensional  graphics hardware and software
         products for the personal  computer  marketplace.  This acquisition was
         accounted for by the purchase method and,  accordingly,  the results of
         operations  of SRI have been  included  in the  Company's  consolidated
         financial statements from June 26, 1998 forward.

         A  modified  income  approach  was used to  allocate  a portion  of the
         purchase  price  to the  acquired  in-process  technology.  Under  this
         method,   the  fair  value  for  the  in-process   technology  in  each
         acquisition was based on analysis of the markets,  projected cash flows
         and risks  associated  with achieving  such  projected  cash flows.  In
         developing these cash flow projections,  sales were forecasted based on
         relevant  factors,  including  aggregate  sales  growth  rates  for the
         business as a whole,  individual product sales,  characteristics of the
         potential  market  for  the  products,  the  anticipated  life  of  the
         technology  under  development  and the  stage  of  completion  of each
         project.   Operating   expenses  and  resulting   profit  margins  were
         forecasted  based  on the  characteristics  and  cash  flow  generating
         potential  of  the  acquired   in-process   technology,   and  included
         assumptions  that certain expenses would decline over time as operating
         efficiencies   were   obtained  or  support   requirements   decreased.
         Appropriate  adjustments  were made to  operating  income to derive net
         cash  flow,  and  the  estimated  net  cash  flows  of  the  in-process
         technologies in each  acquisition were then discounted to present value
         using rates of return that the Company  believes  reflect the  specific
         risk/return characteristics of these research and development projects.

         The  projected  sales  used in the income  approach  are based upon the
         sales likely to be generated  upon  completion  of the projects and the
         beginning  of  commercial  sales,  as  estimated  by  management.   The
         projections  assume that the product  will be  successful  and that the
         product's development and  commercialization  meet management's current
         time schedule.

         In  determining  the  operating  cash  flows  related   exclusively  to
         in-process  technology,  management has considered the  contribution of
         both prior  technologies  (as  demonstrated by prior products) and core
         technology  or  know-how  that is generic  among most or all  products.
         Where appropriate, the operating income estimates for each project have
         been  apportioned  between  in-process  technology and the  appropriate
         intangible asset (i.e. various core technologies). The operating income
         apportionment  factor was determined on the basis of an analysis of the
         specific contribution of each element of core technology to the subject
         in-process technology, the estimated effect of this contribution on the
         profitability  of the  subject  in-process  project,  and the  relative
         importance of the core technology to the product's ultimate customer.

         The discount rate applicable to in-process technology projects reflects
         the risks  inherent in each project.  This rate is higher than the rate
         applied to AGI's current products, as the current products have already
         demonstrated  their   technological   feasibility  product  and  market
         acceptance.


                                       45
<PAGE>


         The discount  rate for  in-process  technology  considers the following
         risk  elements (in  addition to the baseline  business and market risks
         considered  as part of the  current  product  discount  rate);  risk of
         successfully  completing the in-process  technology project,  risk that
         market  demand will exist in the future for the  in-process  technology
         product, risk that the forecasted cost structure will be possible,  and
         the risk that as yet  unknown  competitive  products  will  emerge.  An
         after-tax  rate  of 20 to 30  percent  was  applied  to the  in-process
         technology projects.

         The sales earned by the in-process  technology  products  represent the
         return on all of the  assets  acquired  under the  agreement.  The cash
         flows generated by the new products must provide a return on each asset
         purchased  that is  consistent  with the value and the relative risk of
         that asset. To separately  value in-process  technology,  the value and
         required  rate  of  return  for  other  identifiable   assets  must  be
         determined.  The  required  return on these other  assets is charged to
         (deducted  from) the cash flows  generated by the projects shown in the
         in-process  technology  model to determine the  incremental  cash flows
         specifically attributable to the in-process technology project.

         As part of the  analysis,  management  determined  individual  rates of
         return  applicable to each asset identified in the allocation table and
         estimated the effective  capital  charge to be applied to the valuation
         of in-process  technology.  Capital  charges have been made for returns
         related to current assets, fixed assets, workforce and tradename.

         The total  purchase price and final  allocation  among the tangible and
         intangible  assets  and  liabilities   acquired   (including   acquired
         in-process technology) is summarized as follows (dollars in thousands):

           Total Purchase Price:

                Total cash consideration     $    24,688
                Total stock consideration         25,695
                Value of options assumed           3,400
                Transaction costs                  1,350
                                            -------------
                                             $    55,133
                                            =============

                                                                 Amortization
                                                                    Period
                                                                   (Months)
                                                                ---------------
           Purchase Price Allocation:

           Net tangible assets               $    17,329
           Intangible assets:
              Workforce-in-place                   1,019              60
              Customer list                          250              60
              AccelGraphics name                     699              36
              Current products                     5,640            6 - 24
              Core technology                      1,754              84
              Goodwill                             7,662              84
           In-process technology                  20,780           Expensed
                                             ------------
                                             $    55,133
                                             ============


                                       46
<PAGE>


         At the time of the  acquisition,  the  estimated  costs to complete the
         projects  related to  in-process  technology  was $1.2  million.  As of
         December 31, 1999 and 1998,  costs incurred on these projects were $2.6
         million and $0.9 million,  respectively.  All projects were complete as
         of December 31, 1999 and no further costs are expected to be incurred.

         The following unaudited pro forma financial  information (in thousands,
         except per share amounts)  presents the combined  results of operations
         of the  Company,  AGI and SRI for 1998 and 1997 as if the  acquisitions
         had  occurred  as of the  beginning  of 1997,  after  giving  effect to
         certain  adjustments,  including,  but not limited to,  amortization of
         goodwill and other  intangible  assets,  decreased  interest income and
         entries to  conform to the  Company's  accounting  policies.  The $20.8
         million  charge for acquired  in-process  technology  has been excluded
         from the pro forma results as it is a material non-recurring charge.

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

           Net sales                       $   208,503            $   208,503
           Net loss                             (4,836)                (4,836)
           Loss per share:
              Basic                              (0.46)                 (0.46)
              Diluted                            (0.46)                 (0.46)


(3)       SHORT-TERM INVESTMENTS

         The amortized cost, gross unrealized holding gains and losses, and fair
         value of short-term  available-for-sale  marketable investments were as
         follows (in thousands):
<TABLE>
<CAPTION>
                                                Amortized        Gross          Gross           Fair
                                                  cost        unrealized     unrealized        value
                                                                holding        holding
                                                                 gains         losses
                                               ------------   ------------   ------------   -------------
<S>                                            <C>            <C>            <C>            <C>
At December 31, 1999:
  State and municipal securities:
      Maturing in one year or less             $       752             -             (4)            748
      Maturing between one and two years                 -             -              -               -
                                               ------------   ------------   ------------   -------------
                                               $       752    $        -     $       (4)    $       748
                                               ============   ============   ============   =============

                                                Amortized        Gross          Gross           Fair
                                                  cost        unrealized     unrealized        value
                                                                holding        holding
                                                                 gains         losses
                                               ------------   ------------   ------------   -------------
At December 31, 1998:
  State and municipal securities:
      Maturing in one year or less             $     6,370    $      202     $         -    $     6,572
      Maturing between one and two years             2,212             -            (140)         2,072
  Corporate debt securities:
      Maturing in one year or less                   8,634            10               -          8,644
      Maturing between one and two years             8,603            35             (19)         8,619
                                               ------------   ------------   ------------   -------------
                                               $    25,819     $     247      $     (159)    $   25,907
                                               ============   ============   ============   =============
</TABLE>
                                       47
<PAGE>

(4)       INVENTORIES

         Inventories consist of the following (in thousands):

                                                        December 31,
                                                   1999             1998
                                               -------------    -------------


          Raw materials                         $    26,803     $    26,084
          Work-in-process                            11,479          23,511
          Finished goods                              2,306           3,724
                                               -------------    -------------
                                               $     40,588     $    53,319
                                               =============    =============

        During the third  quarter of 1999,  the  Company  performed  significant
        testing of the software  relating to its Harmony image generator product
        that  had  been  delayed.  As a  result  of  the  testing,  the  Company
        determined that certain of the inventories  previously purchased for the
        Harmony image generator had become technologically  obsolete and did not
        properly  function with the updated  software.  In connection  with this
        assessment,  the Company recorded a charge of $12.1 million to write-off
        obsolete,  excess and overvalued  inventories.  In addition,  during the
        third quarter of 1999, the Company wrote-off $1.1 million of Workstation
        Products Group  inventories  related to end-of-life or abandoned product
        lines.

(5)       LONG-TERM CONTRACTS

         Comparative information with respect to uncompleted long-term contracts
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
                                                                                            December 31,
                                                                                    1999                   1998
                                                                                --------------         --------------
          <S>                                                                   <C>                   <C>

          Accumulated costs and estimated
             earnings on uncompleted contracts                                  $  350,193             $   236,757
          Less total billings on uncompleted contracts                            (282,148)               (185,167)
                                                                                --------------         --------------
                                                                                $   68,045             $    51,590
                                                                                ==============         ==============

          Costs and estimated earnings in excess of
             billings on uncompleted contracts
          Billings in excess of costs and estimated                             $   80,457             $    58,682
             earnings on uncompleted contracts                                     (12,412)                 (7,092)
                                                                                --------------         -------------
                                                                                $   68,045             $    51,590
                                                                                ==============         ==============
</TABLE>


                                       48
<PAGE>


(6)       PROPERTY, PLANT AND EQUIPMENT

         The cost and  estimated  useful lives of property,  plant and equipment
are summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
                                                                     Estimated                December 31,
                                                                   useful lives
                                                                                         1999              1998
                                                                   --------------    -------------     -------------
          <S>                                                     <C>               <C>               <C>

          Land                                                           -           $      1,436      $      1,436
          Buildings and improvements                                 40 years              39,983            37,378
          Manufacturing machinery and equipment                    3 to 8 years            86,433            86,730
          Office furniture and equipment                              8 years               9,265            10,500
          Construction-in-process                                        -                  3,559             3,330
                                                                                     -------------     -------------
                                                                                          140,676           139,374
          Less accumulated depreciation and amortization
                                                                                          (88,492)          (85,681)
                                                                                     -------------     -------------
                                                                                     $     52,184       $    53,693
                                                                                     =============     =============
</TABLE>


         All buildings and improvements  owned by the Company are constructed on
         land leased from an  unrelated  third party.  Such leases  extend for a
         term of 40 years  from 1986,  with  options to extend two of the leases
         for an  additional  40  years  and the  remaining  four  leases  for an
         additional  ten  years.  At the end of the lease  term,  including  any
         extension, the buildings and improvements revert to the lessor.

(7)       LEASES

         The Company leases certain of its buildings and related improvements to
         third  parties  under   noncancelable   operating   leases.   Cost  and
         accumulated  depreciation of the leased  buildings and  improvements at
         December  31, 1999 were $8.9  million and $3.3  million,  respectively.
         Rental income for all operating leases for 1999, 1998 and 1997 was $1.6
         million, $1.5 million and $1.1 million, respectively.

         The Company  occupies  real property and uses certain  equipment  under
         lease  arrangements that are accounted for as operating leases.  Rental
         expenses  for all  operating  leases for 1999,  1998 and 1997 were $2.1
         million, $2.3 million and $1.7 million, respectively.

         At  December  31,  1999,  the future  minimum  rental  income and lease
         payments  under  operating   leases  that  have  initial  or  remaining
         noncancelable  lease  terms in  excess of one year are as  follows  (in
         thousands):

                                                 Rental               Rental
                                                 income             Commitment
                                             ------------       ---------------
              Year ending December 31,
                 2000                        $     1,295          $     2,961
                 2001                              1,125                2,475
                 2002                              1,034                1,975
                 2003                              1,034                1,789
                 2004                                673                1,477
                Thereafter                           477               10,631
                                             ------------       ---------------
                                             $     5,638          $    21,308
                                             ============       ===============


                                       49
<PAGE>


  (8)     INVESTMENT SECURITIES

         The  Company  had  the  following   investments  in  marketable  equity
         securities,  adjusted  for  unrealized  holding  gains and  losses  and
         other-than-temporary  declines in fair value, and nonmarketable  equity
         securities,  adjusted for  other-than-temporary  declines in fair value
         (in thousands):
                                                           December 31,
                                                      1999              1998
                                                   -----------      -----------
           Marketable securities:
              Iwerks Entertainment, Inc. (Iwerks)   $   150          $    225
              C-3D Digital Inc. (C3-D)                  525                 -
                                                   -----------      -----------
                                                        675               225
                                                   -----------      -----------
           Nonmarketable securities:
              Silicon Light Machines (SLM)            3,276             2,655
              Total Graphics Solutions N.V. (TGS)       500               500
              Other                                      16                 -
                                                   -----------      -----------
                                                      3,792             3,155
                                                   -----------      -----------
           Total investment securities              $ 4,467           $ 3,380
                                                   ===========      ===========


         Iwerks designs, engineers, manufactures, markets and services high-tech
         entertainment  attractions  which employ a variety of projection,  show
         control, ride simulation and software  technologies.  C3-D develops and
         manufacturers    three-dimensional    imagery   and   virtual   reality
         entertainment  for television and the Internet.  There were  unrealized
         gains on the marketable  securities of $44,000 and unrealized losses on
         marketable securities of $0.3 million as of December 31, 1999 and 1998,
         respectively.  SLM is a  development-stage  company engaged in research
         and development of high-resolution  displays.  TGS develops and markets
         portable graphics software tools,  which provide hardware  independence
         for application developers. Each investment in nonmarketable investment
         securities  was made  either to  enhance a  current  technology  of the
         Company or to complement the Company's strategic direction.

         The Company  owns,  including  total  shares  purchased or available to
         purchase under warrants,  less than 15% of the outstanding common stock
         and common stock  equivalents of SLM and TGS. The Company has one of 11
         seats on SLM's board of  directors  and one of six seats on TGS's board
         of directors.  There are no  intercompany  transactions,  technological
         dependencies,   related   guarantees,    obligations,    contingencies,
         interchange of personnel, nor ability to exercise significant influence
         on  any  of  the  companies  in  which  the  Company  has  investments.
         Accordingly,  the Company  accounts for SLM and TGS  utilizing the cost
         method.

         During 1999 and 1997,  the Company wrote down its  investment in Iwerks
         by  $0.4   million   and  $1.5   million,   respectively,   due  to  an
         other-than-temporary  decline in market value. During 1998, the Company
         sold all of its holdings in Sense8 Corporation for net proceeds of $3.3
         million, recognizing a $2.5 million gain. The Company had an investment
         in nonmarketable equity securities of $3.0 million,  made in 1995, that
         was deemed to be permanently impaired and written down to zero in 1997.
         This  investment  was  disposed of during 1998  resulting in no gain or
         loss.


                                       50
<PAGE>


(9)       ACCRUED EXPENSES

         Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                              December 31,
                                                                                        1999                1998
                                                                                     -----------         -----------

           <S>                                                                      <C>                  <C>

           Pension plan obligation (note 10)                                         $  12,124           $   8,611
           Compensation and benefits                                                    13,021              11,256
           Liquidated damages and late delivery penalties                                8,200                   -
           Other                                                                         5,712               7,280
                                                                                     -----------         -----------
                                                                                     $  39,057           $  27,147
                                                                                     ===========         ===========
</TABLE>


          On October 16,  1997,  the Company and CAE  Electronics  Ltd.  ("CAE")
          entered into a Sub-Contract  (the  "Sub-Contract")  for the Company to
          design,  develop and deliver the visual system  components  and visual
          databases required for certain dynamic mission simulators and tactical
          control  centers,  to be integrated  with the Company's  Harmony image
          generation equipment (the "Harmony VSC"). As of December 31, 1999, the
          Harmony  VSC  had  not  been   integrated  with  the  dynamic  mission
          simulators or tactical control  centers.  Pursuant to the terms of the
          Sub-Contract,  the  integration  was  to  be  completed  during  1999.
          Consequently,  as  of  December  31,  1999,  in  accordance  with  the
          liquidated damages provision of the Sub-Contract, the Company incurred
          liquidated  damages on this  Sub-Contract  totaling $6.0 million.  The
          Company and CAE agreed to an interim solution,  which provides for the
          installation of the Company's ESIG 4530 image  generators to integrate
          with the dynamic mission simulators and tactical control centers until
          the  Company's  Harmony VSC are able to support  the  dynamic  mission
          simulators and tactical control centers. The Company has agreed to pay
          CAE (i) $0.5 million for  reimbursement  of certain expenses and costs
          incurred by CAE relating to the  integration  and retrofit of the ESIG
          4530 to the dynamic  mission  simulators and tactical  control centers
          and (ii) $5.5 million as  liquidated  damages  resulting  from certain
          delays of the Harmony VSC. If further delays in the integration of the
          Harmony VSC occur,  the Company may be obligated to pay CAE additional
          liquidated damages.  The Company will also be obligated to pay certain
          costs  associated with the anticipated  switch-over from the ESIG 4530
          to the Harmony VSC. In addition,  the Company  incurred  late delivery
          penalties related to two other sub-contracts of $2.2 million in 1999.

(10)      EMPLOYEE BENEFIT PLANS

         Pension Plan (the "Plan") - The Company has a defined  benefit  pension
         plan covering substantially all employees who have attained age 21 with
         service in excess of one year.  Benefits at normal  retirement age (65)
         are based  upon the  employee's  years of  service  and the  employee's
         highest  compensation for any consecutive five of the last ten years of
         employment.  The  Company's  funding  policy is to  contribute  amounts
         sufficient  to  satisfy  regulatory   funding  standards,   based  upon
         independent actuarial valuations.

         Supplemental  Executive  Retirement  Plan  ("SERP") - The Company has a
         non-qualified  SERP.  The SERP,  which is unfunded,  provides  eligible
         executives  defined  pension  benefits,  outside the Company's  pension
         plan,  based  on  average  earnings,   years  of  service  and  age  at
         retirement.


                                       51
<PAGE>


         The following  provides a reconciliation of benefit  obligations,  plan
         assets, and funded assets of the Plan and SERP (in thousands):
<TABLE>
<CAPTION>

                                                               Pension Plan                        SERP
                                                        ----------------------------    ---------------------------
                                                           1999            1998            1999           1998
                                                        ------------    ------------    ------------   ------------
           <S>                                         <C>             <C>             <C>            <C>

           Change in benefit obligation:
              Beginning of year                         $  42,637       $  36,212       $    5,431     $    5,262
              Service cost                                  3,252           2,601              739            828
              Interest cost                                 2,892           2,501              418            355
              Actuarial (gain) loss                        (8,780)          2,344              216         (1,014)
              Benefits paid                                (3,097)         (1,021)             (92)             -
              Curtailment                                       -               -             (963)             -
                                                        ------------    ------------    ------------   ------------
              End of year                               $  36,904       $  42,637       $    5,749      $   5,431
                                                        ============    ============    ============   ============



           Change in plan assets:
              Fair value at beginning of year           $  40,221       $  36,768
              Actual return on plan assets                  6,597           4,475
              Benefits paid                                (3,097)         (1,022)
                                                        ------------    ------------
              Fair value at end of year                 $  43,721       $  40,221
                                                        ============    ============


           Reconciliation of funded status:
              Funded status                             $   6,817      $   (2,416)     $   (5,749)    $   (5,431)
              Unrecognized actuarial (gain) loss          (15,254)         (2,805)            590          1,391
              Unrecognized prior service cost                 771             161             543            874
              Unrecognized transition obligation              158             238               -              -
                                                        ------------    ------------    ------------   ------------
           Net amount recognized                        $  (7,508)     $   (4,822)     $   (4,616)    $   (3,166)
                                                        ============    ============    ============   ============

           Amounts recognized in the consolidated balance sheets:
                 Accrued benefit liability              $  (7,508)     $   (4,822)     $   (4,616)    $   (3,166)
                 Additional minimum liability                   -               -               -           (623)
                                                        ------------    ------------    ------------   ------------
                 Net amount recognized                  $  (7,508)     $   (4,822)     $   (4,616)    $   (3,789)
                                                        ============    ============    ============   ============

           Assumptions (weighted average):
              Discount rate                                    6.8%            6.8%            7.8%           6.8%
              Expected return on plan assets                   9.0%            9.0%             N/A            N/A
</TABLE>


                                       52
<PAGE>


          Net periodic  pension and other  postretirement  benefit costs include
          the following components (in thousands):
<TABLE>
<CAPTION>
                                                          Pension Plan                           SERP
                                                 -------------------------------    --------------------------------
                                                  1999       1998        1997        1999        1998        1997
                                                 --------   --------    --------    --------    --------    --------
           <S>                                   <C>        <C>         <C>        <C>         <C>          <C>

           Components of net periodic benefit cost:
              Service cost                       $3,252     $2,601      $2,025      $   739     $   828     $   327
              Interest cost                       2,892      2,501       2,007          418         355         252
              Expected return on assets          (3,575)    (3,264)     (2,924)           -           -           -
              Amortization of actuarial(gain)
                loss                                  -        (15)       (300)          53         143         115
              Amortization    of   prior   year
                service cost                         37          4           5           73          73         106
              Amortization of transition             79         79          79            -           -           -
                                                 --------   --------    --------    --------    --------    --------
              Net periodic benefit cost          $2,685     $1,906      $   892     $ 1,283     $ 1,399     $   800
                                                 ========   ========    ========    ========    ========    ========
</TABLE>


         Deferred  Savings  Plan - The Company has a deferred  savings plan that
         qualifies  under Section 401(k) of the Internal  Revenue Code. The plan
         covers  all  employees  of the  Company  who have at least  one year of
         service  and  who are  age 18 or  older.  The  Company  makes  matching
         contributions  of 50 percent  of each  employee's  contribution  not to
         exceed  six  percent  of the  employee's  compensation.  The  Company's
         contributions  to this plan for 1999,  1998 and 1997 were $1.1 million,
         $1.0 million and $1.0 million, respectively.

         Life  Insurance - The Company  purchases  company-owned  life insurance
         policies  insuring  the  lives  of  certain  employees.   The  policies
         accumulate  asset  values  to meet  future  liabilities  including  the
         payment of employee benefits such as supplemental  retirement benefits.
         At December 31, 1999 and 1998, the investment in the policies was $ 3.1
         million and $2.6 million,  respectively, and net life insurance expense
         was $0.2  million,  $0.5  million and $0.1  million for 1999,  1998 and
         1997, respectively.

(11)      LINES OF CREDIT

         The following is a summary of lines of credit (dollars in thousands):
<TABLE>
<CAPTION>
                                                                                      1999                 1998
                                                                                   ------------         -----------
          <S>                                                                     <C>                   <C>

          Balance at end of year                                                   $   2,657            $   4,298
          Weighted average interest rate at end of year                                  6.0%                 6.9%
          Maximum balance outstanding during the year                              $   4,298            $   4,298
          Average balance outstanding during the year                              $   3,320            $   4,239
          Weighted average interest rate during the year                                 6.4%                 7.4%

</TABLE>

         The average balance  outstanding and weighted average interest rate are
         computed  based  on the  outstanding  balances  and  interest  rates at
         month-end during each year.

         In November 1998,  the Company  entered into a revolving line of credit
         agreement  with U.S. Bank National  Association.  The revolving line of
         credit  provided for  borrowings by the Company of up to $20.0 million.
         Borrowings bore interest at the prevailing prime rate minus 1.0% or the
         LIBOR rate plus 1.0%.  The revolving line of credit expired on February
         10, 2000. The unsecured,  revolving line of credit, among other things,
         (i) required the Company to maintain  certain  financial  ratios;  (ii)
         restricted the Company's ability to incur debt or liens;  sell, assign,
         pledge  or  lease  assets;   merge  with  another  company;  and  (iii)
         restricted  the  payment  of  dividends  and  repurchase  of any of the
         Company's outstanding shares without prior consent of the lender. There
         were no borrowings under this agreement  outstanding as of December 31,
         1999.  The  Company  also has an  unsecured  revolving  line of  credit
         agreement with a foreign bank totaling approximately $4.6 million as of
         December 31, 1999, of which  approximately  $1.9 million was unused and
         available.

                                       53
<PAGE>

         The Company has a $12.5  million  unsecured  Letter of Credit line with
         U.S.  Bank,  N.A.  for which there was $11.8  million and $6.6  million
         outstanding  as  of  December  31,  1999  and  1998,  respectively.  In
         addition,  the Company has a $4.6 million Letter of Credit  outstanding
         with Bank One, N.A.

(12)      LONG-TERM DEBT

         Long-term  debt is  comprised  of  approximately  $18.0  million  of 6%
         Convertible  Subordinated Debentures due in 2012 (the "6% Debentures").
         The  6%  Debentures   are  unsecured  and  are   convertible   at  each
         bondholder's  option into  shares of the  Company's  common  stock at a
         conversion  price of $42.10 or 428,000  shares of the Company's  common
         stock subject to  adjustment.  The 6% Debentures  are redeemable at the
         Company's option, in whole or in part, at par.

(13)      INCOME TAXES

         Components  of income tax expense  (benefit)  attributable  to earnings
before income taxes (in thousands):
<TABLE>
<CAPTION>
                                                                                            Share
                                                                                             and
                                                                                            stock
                                                                                           option
                                                              Current       Deferred       benefit         Total
                                                             ----------    -----------    ----------    -----------
           <S>                                              <C>           <C>            <C>           <C>

           Year ended December 31, 1999:
              Federal                                        $  (6,734)    $  (6,816)     $     85      $ (13,465)
              State                                               (150)       (2,056)           14         (2,192)
              Foreign                                              244             -             -            244
                                                             ----------    -----------    ----------    -----------
                                                             $  (6,640)    $  (8,872)     $     99       $(15,413)
                                                             ==========    ===========    ==========    ===========

           Year ended December 31, 1998:
              Federal                                        $   3,520     $  (2,336)     $    330       $  1,514
              State                                                761          (385)           54            430
              Foreign                                              182             -             -            182
                                                             ----------    -----------    ----------    -----------
                                                             $   4,463     $  (2,721)     $    384       $  2,126
                                                             ==========    ===========    ==========    ===========

           Year ended December 31, 1997:
              Federal                                        $   5,327     $  (4,476)     $    663       $  1,514
              State                                                858          (721)          107            244
                                                             ----------    -----------    ----------    -----------
                                                             $   6,185     $   (5,197)    $    770       $  1,758
                                                             ==========    ===========    ==========    ===========
</TABLE>


         The actual tax expense differs from the expected tax expense  (benefit)
         as computed  by  applying  the U.S.  federal  statutory  tax rate of 35
         percent  for 1999 and 1998 and 34  percent  for 1997 as a result of the
         following (in thousands):
<TABLE>
<CAPTION>
                                                                                1999          1998          1997
                                                                            ------------  ------------   -----------
          <S>                                                               <C>          <C>             <C>

          Tax (benefit) at U.S. federal statutory rate                      $(13,603)     $ (4,850)      $  2,325
          In-process research and development                                      -         7,245              -
          Losses (gains) of foreign subsidiaries                                   -          (101)          (115)
          Earnings of foreign sales corporation                                 (232)         (305)          (228)
          State taxes (net of federal income tax benefit)                     (1,425)          280            161
          Research and development and foreign tax credits                      (925)         (604)             -
          Foreign taxes                                                          244           182              -
          Other, net                                                             528           279           (385)
                                                                            ------------  ------------   -----------

                                                                            $(15,413)     $  2,126       $  1,758
                                                                            ============  ============   ===========
</TABLE>

                                       54

<PAGE>

         The tax effects of temporary  differences that give rise to significant
         portions of the deferred tax assets and deferred tax  liabilities as of
         December 31, 1999 and 1998, are presented below (in thousands):

<TABLE>
<CAPTION>
                                                                                             1999          1998
                                                                                          ------------   ----------
         <S>                                                                             <C>             <C>
         Deferred tax assets:
             Warranty, vacation, and other accruals                                       $   3,357      $   3,619
               Inventory reserves and other inventory-related
                  temporary basis differences                                                 4,106          3,478
             Pension accrual                                                                  4,469          2,866
             Long-term contract related temporary differences                                 1,000            537
             Net operating loss carryforwards                                                 2,529          1,997
             Unrealized loss on marketable equity securities                                     17             89
             Write-down of investment securities                                              1,341          1,341
             Liquidated damages and late delivery penalties                                   3,198              -
             Credit carryforwards                                                             2,012            587
             Other                                                                              343            373
                                                                                          ------------   ----------
                   Total gross deferred tax assets                                           22,372         14,887
                   Less valuation allowance                                                     117            117
                                                                                          ------------   ----------
                   Total deferred tax assets                                                 22,255         14,770
                                                                                          ------------   ----------
         Deferred tax liabilities:
             Intangible assets                                                                  (155)       (1,893)
             Plant and equipment, principally due to
               differences in depreciation                                                    (1,707)         (853)
             Other                                                                               (52)          (87)
                                                                                          ------------   ----------
                   Total gross deferred tax liabilities                                       (1,914)       (2,833)
                                                                                          ------------   ----------
                   Net deferred tax asset                                                 $   20,341      $ 11,937
                                                                                          ============   ==========

                   Net current deferred tax asset                                         $   15,923      $  9,450
                   Net non-current deferred tax asset                                          4,418         2,487
                                                                                          ------------   ----------
                   Net deferred tax asset                                                 $   20,341      $ 11,937
                                                                                          ============   ==========
</TABLE>

         The 1998  domestic  net  deferred  tax asset  includes the deferred tax
         assets and  liabilities  resulting  from the Company's  acquisition  of
         AccelGraphics,  Inc.  as  described  in note 2. The net tax  effect  of
         acquiring these deferred tax assets and liabilities of $1.0 million was
         credited against goodwill.

         Certain  reclassifications  were made  during  1999  between  beginning
         deferred  tax  assets  and  liabilities  and the  current  tax  payable
         accounts.  These  reclassification  entries  were  made to  adjust  the
         beginning deferred tax assets to the tax return amounts.

         Management believes the existing net deductible  temporary  differences
         will  reverse  during the  periods in which the Company  generates  net
         taxable income.  The Company has a strong taxable earnings history.  To
         utilize  100%  of  the  deferred  tax  assets,   the  Company  and  its
         subsidiaries will need to recognize approximately $50 million of future
         taxable income, net of loss carryback potential.  A valuation allowance
         is provided  when it is more  likely than not that some  portion of the
         deferred tax asset may not be realized.  The Company has  established a
         valuation  allowance  primarily for net  operating  loss and tax credit
         carryforwards   from  an  acquired   subsidiary  as  a  result  of  the
         uncertainty of realization.  The Company's  valuation allowance did not
         change in 1999 and changed by $36,000 in 1998.

                                       55
<PAGE>

         The Company has a net  operating  loss and research  credits  carryover
         from its  acquisition of  AccelGraphics,  Inc. of $5.0 million and $0.4
         million respectively.  These carryover credits begin to expire in 2010.
         The  Company  has  federal  and state  research  credit  carryovers  of
         approximately $1.1 million and $0.5 million,  respectively. The credits
         will  expire in 2019 and 2013,  respectively.  The  Company  also has a
         state net operating  loss  carryforward  that expires  depending on the
         rules of the various states to which the loss is allocated.

(14)      DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS

         The carrying amount of cash and cash equivalents,  receivables, line of
         credit agreements,  accounts payable, and accrued expenses approximates
         fair  value  because  of their  short  maturity.  The fair value of the
         Company's  long-term debt instruments  ($13.1 million and $16.3 million
         as of  December  31,  1999 and 1998,  respectively)  is based on quoted
         market prices.

(15)      COMMITMENTS AND CONTINGENCIES

         In the normal course of business,  the Company has various legal claims
         and other  contingent  matters,  including  items raised by  government
         contracting  officers and auditors.  Although the final outcome of such
         matters  cannot  be  predicted,   the  Company  believes  the  ultimate
         disposition of these matters will not have a material adverse effect on
         the Company's consolidated financial condition, liquidity or results of
         operations.

          On June 3, 1999, the Company sold certain manufacturing capital assets
          and inventory for $6.0 million to Sanmina  Corporation  as part of the
          Company's  efforts to outsource the  production of certain  electronic
          products  and  assemblies.  In addition,  the Company  entered into an
          electronic  manufacturing services agreement with Sanmina Corporation.
          The  agreement  commits  the  Company  to  purchase a minimum of $22.0
          million of electronic products and assemblies from Sanmina Corporation
          each year  until  June 3,  2002.  If the  Company  fails to meet these
          minimum  purchase  levels,  subject to adjustment,  the Company may be
          required to pay 25 percent of the difference between the $22.0 million
          and the amount  purchased.  As of December 31,  1999,  the Company had
          purchased  approximately  $15.0  million of  electronic  products  and
          assemblies from Sanmina  Corporation  since the date of the agreement.
          Management expects that the Company will satisfy this minimum purchase
          commitment.

         Certain  of the  Company's  contracts  to  deliver  the  Harmony  image
         generator contain  liquidated damage provisions for delays in delivery.
         At December  31, 1999,  the Company had incurred  $8.2 million for such
         damages.  If  further  delays  in the  delivery  of the  Harmony  image
         generator occur, the Company may incur additional liquidated damages.

                                       56
<PAGE>

(16)      STOCK OPTION AND STOCK PURCHASE PLANS

         Stock Option Plans - The Company has stock incentive plans that provide
         for the grant of options to officers and employees to acquire shares of
         the Company's  common stock at a purchase price  generally equal to the
         fair market value on the date of grant.  Options generally vest ratably
         over three  years and expire ten years from date of grant.  The Company
         grants options to its directors under its Director Plan.  Option grants
         are limited to 10,000 shares per director in each fiscal year.  Options
         generally  vest  ratably  over four years and expire ten years from the
         date of grant. A summary of activity follows (shares in thousands):
<TABLE>
<CAPTION>
                                                          1999                    1998                   1997
                                                 ---------------------   --------------------   ---------------------
                                                         Weighted-average         Weighted-average       Weighted-average
                                                             exercise                exercise               exercise
                                                 Number        price     Number        price    Number         price
                                                   of                      of                     of
                                                 shares                  shares                 shares
                                                 --------   ----------   --------    --------   --------    ---------
          <S>                                    <C>        <C>          <C>         <C>        <C>        <C>
          Outstanding at beginning of year         2,084    $  13.80       1,640     $ 20.38      1,309     $ 18.14
          Granted                                    472       14.25       2,105       16.80        570       24.55
          Assumed in acquisitions                      -           -         351        9.69          -           -
          Exercised                                 (84)        7.72        (116)      10.70       (159)      16.21
          Canceled                                 (385)       14.32      (1,896)      22.15        (80)      21.78
                                                 --------                --------                -------
          Outstanding at end of year               2,087       14.05       2,084       13.80      1,640       20.38
                                                 ========                ========               ========

          Exercisable at end of year               1,219       14.16         532       13.74        597       16.40
                                                 ========                ========               ========

          Weighted-average fair value of
             options   granted  during  the
             year                                               5.32                    5.82                   8.81

</TABLE>

         Shareholders  authorized  an  additional  450,000,  400,000 and 450,000
         shares  to be  granted  under  the plans  during  1999,  1998 and 1997,
         respectively.  As of December  31,  1999,  options to purchase  759,000
         shares of common stock were authorized and reserved for future grant.

         On September 29, 1998,  the Board of Directors  approved a stock option
         repricing  program  whereby each eligible stock option could be amended
         to have an  exercise  price  equal to $13.56  (the  September  29, 1998
         closing  price of the Company  stock) if the optionee  agreed to reduce
         the amount of options  repriced by 20% and to accept an amended vesting
         period. The vesting period for the repriced options was amended to vest
         in one year for all options that were vested as of  September  29, 1998
         and to vest  ratably over three years for all options that were not yet
         vested as of September 29, 1998. As a result,  approximately  1,698,000
         options were  surrendered  by  employees  for  approximately  1,354,000
         repriced  options and are  included in the table  above.  The  repriced
         options expire ten years from the date of the repriced grant.

         The following table  summarizes  information  about fixed stock options
         outstanding as of December 31, 1999 (options in thousands):
<TABLE>
<CAPTION>
                                                    Options outstanding                      Options Exercisable
                                        ---------------------------------------------    ----------------------------
                   Range of                Number         Weighted-       Weighted-         Number        Weighted-
                   Exercise              Outstanding       average         average       Exercisable       Average
                    prices                  as of         remaining       exercise          as of         Exercise
                                          12/31/99       contractual        price          12/31/99         price
                                                             life
           --------------------------   --------------   -------------   ------------    -------------   ------------
           <S>                          <C>                 <C>          <C>             <C>            <C>

           $    0.48  -   $  12.12               58           8.4        $     9.79              23      $     6.76
               12.19  -      13.25              408           7.0             12.60             269           12.47
               13.31  -      13.56            1,088           8.6             13.56             685           13.56
               13.56  -      16.69              360           8.5             14.68             103           14.84
               17.00  -      22.70              165           6.7             20.37             134           20.89
               24.25  -      32.87                8           7.6             25.82               5           25.82
                                        --------------                                   -------------
                0.48  -      32.87            2,087           8.1             14.05           1,219           14.16
                                        ==============                                   =============
</TABLE>
                                       57
<PAGE>

         The  Company  accounts  for these  plans  under APB 25,  under which no
         compensation cost has been recognized.  Had compensation cost for these
         plans been  determined  consistent  with SFAS 123,  the  Company's  net
         income  (loss) and  income  (loss)  per  common  share  would have been
         changed to the following pro forma  amounts (in  thousands,  except per
         share data):
<TABLE>
<CAPTION>
                                                                         1999             1998             1997
                                                                     -------------     ------------     ------------
            <S>                                      <C>            <C>               <C>               <C>
            Net earnings (loss)                       Pro forma      $    (26,995)     $    (21,093)     $   2,545

            Basic earnings (loss) per common share    Pro forma             (2.84)            (2.22)          0.28

            Diluted earnings (loss) per common share  Pro forma             (2.84)            (2.22)          0.27
</TABLE>


         Pro forma net earnings  reflects  only options  granted  subsequent  to
         December 29, 1994. Therefore,  the effect that calculating compensation
         cost for stock-based  compensation  under SFAS 123 has on the pro forma
         net earnings as shown above may not be representative of the effects on
         reported net earnings for future years.

         The fair value of each  option  grant is  estimated  on the date of the
         grant using the Black-Scholes  option-pricing  model with the following
         weighted-average  assumptions  used for grants  during  1999,  1998 and
         1997:

                                      1999            1998             1997
                                  ------------    ------------    -------------

         Expected life (in years)       2.6             2.3            2.6
         Risk-free interest rate        6.3%            4.6%           5.7%
         Expected volatility             52%             49%            47%
         Dividend yield                   -               -              -

         Stock  Purchase Plan - The Company has an employee  stock purchase plan
         whereby  qualified  employees  are  allowed  to have up to 10% of their
         annual earnings  withheld to purchase the company's  common stock at 85
         percent  of the  market  value of the stock at the time of the sale.  A
         total of 500,000 shares are authorized under the plan.  Shares totaling
         58,000,  43,000 and  26,000  were  purchased  under this plan in fiscal
         1999,  1998 and 1997, and as of December 31, 1999,  197,000 shares were
         available for future issuance under this plan.

(17)      PREFERRED STOCK

         Preferred Stock - Class A

         The Company has 5,000,000 authorized shares of Class A Preferred Stock.
         Prior to 1998,  the  Company  had  reserved  300,000  shares of Class A
         Preferred Stock as Series A Junior  Preferred Stock under a shareholder
         rights plan which expired in November 1998. In November 1998, the Board
         of Directors  declared a dividend of one preferred stock purchase right
         ("Right") for each  outstanding  share of common stock, par value $0.20
         per share of the Company  for  shareholders  of record on November  19,
         1998, and for all future  issuances of common stock. The Rights are not
         currently  exercisable or transferable  apart from the common stock and
         have voting rights or rights to receive dividends.  Each Right entitles
         the registered  holder to purchase from the Company one thousandth of a
         share of  Preferred  Stock at a price per share of  $60.00,  subject to
         adjustment.  The Rights will be exercisable ten business days following
         a public  announcement  of a person  or  group  of  affiliated  persons
         acquiring  beneficial  ownership  of  15%  or  more  of  the  Company's
         outstanding  common  shares or following the  announcement  of a tender
         offer or exchange offer upon the  consummation of which would result in
         the beneficial  ownership by a person or group of affiliated persons of
         15% or more of the  outstanding  Company's  stock.  The  Rights  may be
         redeemed by the Company at a price of $0.01 per Right  before  November
         30, 2008.

                                       58
<PAGE>

         In the event that the Company is acquired in a merger or other business
         combination transaction, provision shall be made so that each holder of
         a Right,  excluding  the  Rights  beneficially  owned by the  acquiring
         persons,  will have the right to receive,  upon exercise thereof at the
         then current exercise price,  that number of shares of common shares of
         the surviving company which at the time of such transaction will have a
         market value of two times the exercise price of the Right. In the event
         that a person  or  group  of  affiliated  persons  acquires  beneficial
         ownership of 15% or more of the Company's  outstanding  common  shares,
         provision  shall be made so that each holder of a Right,  excluding the
         Rights  beneficially  owned by the  acquiring  persons,  shall have the
         right to receive,  upon exercise thereof,  a share of common stock at a
         purchase price equal to 50% of the then current exercise price.

         Preferred Stock - Class B

         The Company has 5,000,000 authorized shares of Class B Preferred Stock.
         During July 1998,  the Company  designated  1,500,000 of the  5,000,000
         authorized  shares as Class B-1 Preferred  Stock. On July 22, 1998, the
         Company obtained approximately $24.0 million, less transaction costs of
         approximately  $0.5 million,  of financing  through the sale of 901,408
         shares of the Company's Class B-1 Preferred  Stock,  no par value,  and
         issued warrants to purchase 378,462  additional shares of the Company's
         Class B-1 Preferred  Stock at an exercise  price of $33.28125 per share
         to Intel  Corporation  ("Intel").  The Class B-1 Preferred Stock has no
         dividend  rights.  Intel  has  certain  contractual  rights,  including
         registration  rights, a right of first refusal,  and a right to require
         the Company to  repurchase  the 901,408  shares of Class B-1  Preferred
         Stock,  378,462  shares  underlying  the warrant,  and shares of common
         stock  of  the  Company  issuable  upon  conversion  of the  Class  B-1
         Preferred  Stock (the "Intel  Shares") in the event of any  transaction
         qualifying as a Corporate  Event,  as defined below.  If Intel fails to
         exercise  its right of first  refusal as to a  Corporate  Event,  Intel
         shall,  upon the  Company's  entering into an agreement to consummate a
         Corporate  Event,  have the right to sell to the  Company any or all of
         the Intel Shares.  The  potential  mandatory  redemption  amount is the
         greater  of (i) the  original  price per share  purchase  price paid by
         Intel or (ii) either the highest  price per share of capital  stock (or
         equivalent)  paid in  connection  with a  Corporate  Event  or,  if the
         transaction involves the sale of a significant  subsidiary or assets or
         the licensing of intellectual  property,  Intel's pro rata share of the
         consideration received,  directly or indirectly, by the Company in such
         transaction based on its then fully-diluted  ownership of the Company's
         capital  stock.  A  Corporate  Event  shall mean any of the  following,
         whether accomplished  through one or a series of related  transactions:
         (i) certain  transactions  that result in a greater  than 33% change in
         the  total  outstanding  number  of voting  securities  of the  Company
         immediately after such issuance;  (ii) an acquisition of the Company or
         any of its significant  subsidiaries by  consolidation,  merger,  share
         purchase or exchange or other  reorganization  or  transaction in which
         the  holders  of  the  Company's  or  such   significant   subsidiary's
         outstanding  voting  securities  immediately  prior to such transaction
         own, immediately after such transaction,  securities  representing less
         than 50% of the  voting  power  of the  Company,  any such  significant
         subsidiary  or the person  issuing such  securities  or surviving  such
         transaction,  as the  case  may be;  (iii)  the  acquisition  of all or
         substantially  all  the  assets  of  the  Company  or  any  significant
         subsidiary;  (iv) the grant by the  Company  or any of its  significant
         subsidiaries  of an exclusive  license for any material  portion of the
         Company's or such significant  subsidiary's  intellectual property to a
         person  other  than  Intel  or  any  of its  subsidiaries;  or (v)  any
         transaction  or  series  of  related  transactions  that  result in the
         failure  of the  majority  of the  members  of the  Company's  Board of
         Directors  immediately  prior to the  closing  of such  transaction  or
         series of related  transactions failing to constitute a majority of the
         Board  of  Directors  (or its  successor)  immediately  following  such
         transaction or series of related transactions.

(18)      NET INCOME (LOSS) PER COMMON SHARE

         Net  income   (loss)  per  common  share  is  computed   based  on  the
         weighted-average number of common shares and, as appropriate,  dilutive
         common stock equivalents  outstanding during the period.  Stock options
         are considered to be common stock equivalents.

                                       59
<PAGE>

         Basic net income  (loss)  per common  share is the amount of net income
         (loss)  for  the  period  available  to  each  share  of  common  stock
         outstanding during the reporting period.  Diluted net income (loss) per
         share is the amount of net income  (loss) for the period  available  to
         each share of common stock outstanding  during the reporting period and
         to each share that would have been outstanding assuming the issuance of
         common  shares for all dilutive  potential  common  shares  outstanding
         during the period.

         In calculating  net income per common share,  the net income (loss) was
         the same for  both the  basic  and  diluted  calculation.  The  diluted
         weighted  average number of common shares  outstanding  during 1999 and
         1998  excludes  common stock  issuable  pursuant to  outstanding  stock
         options,  the 6%  Convertible  Debentures  and the Class B-1  Preferred
         Stock  because  to do so would  have  had an  anti-dilutive  effect  on
         earnings  per common  share.  A  reconciliation  between  the basic and
         diluted  weighted  average  number of common  shares is  summarized  as
         follows (in thousands):

                                                1999        1998        1997
                                             ---------    --------    --------

Basic weighted average number of common shares
   outstanding during the year                   9,501       9,461       9,060

Weighted average number of dilutive common
   stock options outstanding during the year         -           -         442
                                             ---------    --------    --------
Diluted weighted average number of common
   shares outstanding during the year            9,501       9,461       9,502
                                             =========    ========    ========

(19)      SEGMENT AND RELATED INFORMATION

         During  1998,  the Company  adopted  SFAS No. 131,  "Disclosures  about
         Segments of an Enterprise  and Related  Information"  which changed the
         way the Company reports information about its operating segments.

         The Company's business units have been aggregated into three reportable
         segments:  simulation,  workstation  products and  applications.  These
         reportable  segments  offer  different  products  and  services and are
         managed and evaluated  separately  because each segment uses  different
         technologies  and  requires   different   marketing   strategies.   The
         simulation  segment  provides a broad line of visual systems for flight
         and ground  simulators for training  purposes to government,  aerospace
         and commercial  airline  customers.  The workstations  products segment
         provides graphics  accelerator  products,  including graphics chips and
         subsystems,   to  the   personal  PC   workstation   marketplace.   The
         applications   segment   provides   digital  video   applications   for
         entertainment, educational and multimedia industries.

         The accounting policies of the segments are the same as those described
         in the summary of significant accounting policies (Note 1). The Company
         evaluates  segment  performance  based on income (loss) from operations
         before  income  taxes,  interest  income and expense,  other income and
         expense and foreign exchange gains and losses. The Company's assets are
         not identifiable by segment.
<TABLE>
<CAPTION>
                                                         Simulation     Workstation      Applications      Total
                                                                         Products
                                                         -----------    ------------     ------------    ----------
           <S>                                          <C>             <C>              <C>             <C>
           Year ended December 31, 1999:
              Sales                                      $  170,578     $  21,961         $   8,346       $ 200,885
              Operating income (loss)                        (8,686)      (26,685)           (4,595)        (39,966)

           Year ended December 31, 1998:
              Sales                                         167,014        17,453             7,299         191,766
              Operating income (loss)                        22,094       (30,663)           (7,417)        (15,986)

           Year ended December 31, 1997:
              Sales                                         146,014         5,847             7,492         159,353
              Operating income (loss)                        23,263          (717)           (8,157)         14,389

</TABLE>

                                       60
<PAGE>



         The  operating  loss in 1999  for the  Simulation  segment  includes  a
         write-off of inventories  of $12.1 million.  The operating loss in 1999
         for the  Workstation  Products  segment  includes an impairment loss of
         $9.7 million, a restructuring charge of $1.5 million and a write-off of
         inventories  of $1.1  million.  The  operating  loss  in  1998  for the
         Workstation   Products   segment   includes  a  write-off  of  acquired
         in-process technology of approximately $20.8 million.

(20)      GEOGRAPHIC INFORMATION

         The following table presents sales by geographic  location based on the
         location of the use of the product or services. Sales within individual
         countries  greater than 10% of consolidated  sales are shown separately
         (in thousands):
<TABLE>
<CAPTION>
                                                             1999                 1998                1997
                                                         -------------        -------------       -------------
           <S>                                           <C>                 <C>                 <C>
           United States                                 $    114,190         $    106,858        $     64,711
           United Kingdom                                      50,100               41,029              12,008
           Europe (excluding United Kingdom)                   27,777               25,039              47,168
           Pacific Rim                                          8,324               18,257              27,789
           Other                                                  494                  583               7,677
                                                         -------------        -------------       -------------
                                                         $    200,885         $    191,766        $    159,353
                                                         =============        =============       =============
</TABLE>

         The  following  table  presents   property,   plant  and  equipment  by
         geographic location based on the location of the assets (in thousands):

                                                   1999               1998
                                               -----------       -------------

           United States                         $  51,715         $   52,876
           Europe                                      469                817
                                               -----------       -------------
              Total property, plant and
                equipment, net                   $  52,184         $   53,693
                                               ===========       =============


(21)      SIGNIFICANT CUSTOMERS

         Sales to the U.S.  government,  either  directly or indirectly  through
         sales to prime  contractors  or  subcontractors,  accounted  for  $84.5
         million or 42% of total sales, $70.8 million or 37% of total sales, and
         $45.5  million  or  29%  of  total  sales  in  1999,   1998  and  1997,
         respectively.  Sales to the United  Kingdom  Ministry  of Defense  ("UK
         MOD"), either directly or indirectly through sales to prime contractors
         or  subcontractors,  accounted  for $33.8 million or 17% of total sales
         and $32.1 million or 17% of total sales in 1999 and 1998, respectively.

         In 1999, sales to Lockheed Martin  Corporation  ("Lockheed") were $35.8
         million  or  18 % of  total  sales,  of  which  100%  related  to  U.S.
         government  and UK MOD  contracts,  and  sales  to The  Boeing  Company
         ("Boeing")  were  $25.4  million or 13% of total  sales,  of which 100%
         related to U.S.  government  and UK MOD  contracts.  In 1998,  sales to
         Boeing were approximately $28.1 million or 15% of total sales, of which
         approximately 98% related to U.S. government and UK MOD contracts,  and
         sales to  Lockheed  were  approximately  $22.0  million or 11% of total
         sales, of which approximately 91% related to U.S. government contracts.
         In 1997, sales to Thomson  Training & Simulation Ltd.  ("Thomson") were
         $19.3 million or 12% of total sales. All sales to significant customers
         are within the simulation segment.


                                       61
<PAGE>


         Aggregated  accounts  receivable  from  agencies  of the United  States
         government,   either   directly   or   indirectly   through   prime  or
         subcontractors, was $7.2 million or 24% of gross accounts receivable at
         December 31, 1999 and $14.0 million or 29% of gross accounts receivable
         at December 31, 1998.  Aggregated  accounts receivable from the UK MOD,
         either directly or indirectly through prime or subcontractors, was $5.6
         million or 19% of gross  accounts  receivable  at  December  31,  1999.
         Aggregated  accounts  receivable from the Federal Department of Defense
         of the  Federal  Republic  of Germany,  either  directly or  indirectly
         through  prime  or  subcontractors,  was $3.2  million  or 11% of gross
         accounts receivable at December 31, 1999.

         The amount of costs and  estimated  earnings  in excess of  billings on
         uncompleted contracts from agencies of the United States government and
         the  UK  MOD,   either   directly  or   indirectly   through  prime  or
         subcontractors,  was $11.1 million and $41.3 million, or 14% and 51% of
         total costs and estimated earnings in excess of billings on uncompleted
         contracts,  respectively, at December 31, 1999. The amount of costs and
         estimated earnings in excess of billings on uncompleted  contracts from
         agencies  of the  United  States  government  and  the UK  MOD,  either
         directly  or  indirectly  through  prime or  sub-contractors,  was $9.4
         million and $22.7 million,  or 16% and 39% of total costs and estimated
         earnings in excess of billings on uncompleted contracts,  respectively,
         at December 31,  1998.  The amount of costs and  estimated  earnings in
         excess of billings on uncompleted contracts from agencies of the United
         States  government  was  $21.4  million,  or 41%  of  total  costs  and
         estimated earnings in excess of billings on uncompleted  contracts,  at
         December 31, 1997.

(22)      RESTRUCTURING CHARGE

         In the third  quarter of 1999,  the Company  initiated a  restructuring
         plan  focused  on  reducing  the  operating   cost   structure  of  its
         Workstation Products Group. As part of the plan, the Company recorded a
         charge of $1.5 million relating to 28 employee terminations,  including
         17  employees  in San Jose and 11  employees  in Salt Lake City.  As of
         December 31, 1999, the Company had paid $354,000 in employee  severance
         benefits.  The  remaining  benefits  will be paid out over the next two
         years.  The charge was recorded in accordance with Emerging Issues Task
         Force  Issue  94-03   "Liability   Recognition  for  Certain   Employee
         Termination  Benefits and Other Costs to Exit (Including  Certain Costs
         Incurred in a Restructuring)."

(23)      RELATED PARTY TRANSACTIONS

         The  Company  had  purchases  of $0.4  million,  $1.4  million and $0.6
         million during 1999, 1998 and 1997,  respectively,  from a supplier for
         which the Company's Chief Executive Officer serves as a director. Trade
         payables to the  supplier  were zero and $0.4  million at December  31,
         1999 and 1998, respectively.

(24)      SUBSEQUENT EVENTS

         On March 28, 2000, the Company sold certain assets of its  Applications
         Group   relating  to  digital  video   products  to  RT-SET  Real  Time
         Synthesized  Entertainment  Technology Ltd. and its subsidiary,  RT-SET
         America Inc. for $1.4  million  cash,  common stock of RT-SET Real Time
         Synthesized  Entertainment Technology Ltd. valued at approximately $1.0
         million  and the  assumption  of certain  liabilities.  The Company may
         receive  additional  common  stock  of  RT-SET  Real  Time  Synthesized
         Entertainment  Technology  Ltd.  valued up to $3.0 million in the event
         that a product  currently being developed and included in the purchased
         assets meets certain specified  performance criteria within a specified
         time period.

         On March 28,  2000,  the Company  received a  commitment  letter from a
         lender to provide the Company a revolving line of credit for borrowings
         by the Company of up to $15.0 million.  The Company expects to close on
         the line of credit on or before  April 30,  2000.  In March  2000,  the
         Company added a $5.0 million unsecured Letter of Credit line with First
         Security  Bank,  N.A. and a $10.0  million  unsecured  surety line with
         American International Companies and its affiliates.


                                       62
<PAGE>





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

                                     "None"


                                    FORM 10-K

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         Information  regarding  directors  of the  Company is  incorporated  by
reference from "Election of Directors" in the Proxy Statement to be delivered to
shareholders  in connection  with the 2000 Annual Meeting of  Shareholders to be
held on May 17, 2000.

         Information  required by Item 405 of Regulation S-K is  incorporated by
reference from "Compliance with Section 16(a) of the Securities  Exchange Act of
1934" in the Proxy  Statement to be delivered to shareholders in connection with
the 2000 Annual Meeting of Shareholders to be held on May 17, 2000.

         Information  concerning  current  executive  officers of the Company is
incorporated  by  reference  to the  section  in Part I hereof  found  under the
caption "Executive Officers of the Registrant."


ITEM 11. EXECUTIVE COMPENSATION

         Information  regarding  this item is  incorporated  by  reference  from
"Executive  Compensation" in the Proxy Statement to be delivered to shareholders
in connection with the 2000 Annual Meeting of Shareholders to be held on May 17,
2000.


ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         Information  regarding  this item is  incorporated  by  reference  from
"Security  Ownership of Certain  Beneficial  Owners and Management" in the Proxy
Statement to be delivered to  shareholders  in  connection  with the 2000 Annual
Meeting of Shareholders to be held on May 17, 2000.


ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Information  regarding  this item is  incorporated  by  reference  from
"Executive   Compensation  -  Summary   Compensation   Table,"  "Report  of  the
Compensation  and  Stock  Options  Committee  of the  Board of  Directors,"  and
"Termination  of Employment  and Change of Control  Arrangements,"  in the Proxy
Statement to be delivered to  shareholders  in  connection  with the 2000 Annual
Meeting of Shareholders to be held on May 17, 2000.

                                       63
<PAGE>


                                    FORM 10-K

                                     PART IV


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

         The  following  constitutes a list of Financial  Statements,  Financial
Statement Schedules, and Exhibits required to be used in this report:

1. Financial Statements - Included in Part II, Item 8 of this report:

          Report of Management

          Report of Independent Accountants

          Consolidated Balance Sheets as of December 31, 1999 and 1998

          Consolidated  Statements  of  Operations  for the  three  years  ended
               December 31, 1999

          Consolidated  Statements of  Comprehensive  Income for the three years
               ended December 31, 1999

          Consolidated  Statements of  Stockholders'  Equity for the three years
               ended December 31, 1999

          Consolidated  Statements  of Cash  Flows  for the  three  years  ended
               December 31, 1999

          Notesto  Consolidated  Financial  Statements for the three years ended
               December 31, 1999

2. Financial Statement Schedules - included in Part IV of this report:

         Schedule II - Valuation and Qualifying Accounts

         Schedules  other than those  listed  above are  omitted  because of the
         absence of  conditions  under  which they are  required  or because the
         required  information is presented in the financial statements or notes
         thereto.

     Exhibits

        2.1    Agreement  and Plan of Merger,  dated April 22,  1998,  among the
               Company,  E&S Merger Corp.,  and  AccelGraphics,  Inc.,  filed as
               Annex I to the Company's  Registration Statement on Form S-4, SEC
               File No. 333-51041, and incorporated herein by this reference.

        3.1    Articles of  Incorporation,  as amended,  filed as Exhibit 3.1 to
               the  Company's  Annual  Report on Form 10-K for the  fiscal  year
               ended  December  25,  1987,  and  incorporated   herein  by  this
               reference.

        3.1.1  Amendments  to Articles of  Incorporation  filed as Exhibit 3.1.1
               to the  Company's  Annual Report on Form 10-K for the fiscal year
               ended  December  30,  1988,  and  incorporated   herein  by  this
               reference.

        3.1.2  Certificate of  Designation,  Preferences and Other Rights of the
               Class B-1 Preferred Stock of the Company, filed as Exhibit 3.1 to
               the Company's Form 10-Q for the quarter ended September 25, 1998,
               and incorporated herein by this reference.

        3.2    By-laws, as amended, filed as Exhibit 3.2 to the Company's Annual
               Report on Form 10-K for the fiscal year ended  December 25, 1987,
               and incorporated herein by this reference.

                                       64

<PAGE>

        4.1    Form of Rights Agreement,  dated as of November 19, 1998, between
               Evans  &  Sutherland  Computer  Corporation  and  American  Stock
               Transfer  Trust Company which  includes as Exhibit A, the form of
               Certificate of Designation for the Rights, as Exhibit B, the form
               of Rights  Certificate  and as  Exhibit  C, a Summary  of Rights,
               filed as Exhibit 1 to the  Company's  Registration  Statement  on
               Form 8-A filed December 8, 1998, and incorporated  herein by this
               reference.

        10.1   1985  Stock  Option  Plan,  filed as  Exhibit 1 to the  Company's
               Post-Effective  Amendment No. 1 to Registration Statement on Form
               S-8,  SEC File  No.  2-76027,  and  incorporated  herein  by this
               reference.

        10.2   1989  Stock  Option  Plan for  Non-employee  Directors,  filed as
               Exhibit 10.5 to the Company's  Annual Report on Form 10-K for the
               fiscal year ended December 29, 1989, and  incorporated  herein by
               this reference.

        10.3   The Company's 1991 Employee Stock Purchase Plan, filed as Exhibit
               4.1 to the Company's Registration Statement on Form S-8, SEC File
               No. 33-39632, and incorporated herein by this reference.

        10.4   1998 Stock  Option  Plan,  filed as  Appendix A to the  Company's
               Definitive  Proxy  Statement  filed April 20, 1998,  incorporated
               herein by this reference.

        10.5   The Company's  1995  Long-Term  Incentive  Equity Plan,  filed as
               Exhibit 10.11 to the Company's Annual Report on Form 10-K for the
               fiscal year ended December 29, 1995, and  incorporated  herein by
               this reference.

        10.6   The Company's  Executive  Savings Plan, filed as Exhibit 10.14 to
               the  Company's  Annual  Report on Form 10-K for the  fiscal  year
               ended  December  29,  1995,  and  incorporated   herein  by  this
               reference.

        10.7   The  Company's  Supplemental  Executive  Retirement  Plan (SERP),
               filed as Exhibit  10.15 to the  Company's  Annual  Report on Form
               10-K  for  the  fiscal  year  ended   December  29,   1995,   and
               incorporated herein by this reference.

        10.8   Business  Loan  Agreement  by  and  between  U.S.  Bank  National
               Association  and Evans & Sutherland  Computer  Corporation  as of
               November 13, 1998, and filed herein.

        10.9   Addendum to Business  Loan  Agreement  by and between  U.S.  Bank
               National  Association and Evans & Sutherland Computer Corporation
               ("Borrower") as of February 5, 1999, and filed herein.

        10.10  Form of Severance  Agreement  dated  December  11,  1998,  by and
               between  Evans &  Sutherland  Computer  Corporation  and James R.
               Oyler, William C. Gibbs and John T. Lemley, and filed herein.

        10.11  Severance  Agreement  dated  December  11,  1998,  by and between
               Evans & Sutherland Computer  Corporation and Mark C. McBride, and
               filed herein.

        10.12  Series B Preferred Stock and Warrant Purchase  Agreement dated as
               of July 20,  1998,  between the  Company  and Intel  Corporation,
               filed as Exhibit 4.2 to the  Company's  Form 10-Q for the quarter
               ended  September  25,  1998,  and  incorporated  herein  by  this
               reference.

        10.13  Warrant to  Purchase  Series B  Preferred  Stock dated as of July
               22,  1998,  between the Company and Intel  Corporation,  filed as
               Exhibit  4.3 to the  Company's  Form 10-Q for the  quarter  ended
               September 25, 1998, and incorporated herein by this reference.


                                       65
<PAGE>


        10.14  Master Agreement for Electronic  Manufacturing Services, dated as
               of June 3, 1999, between Evans & Sutherland Computer  Corporation
               and Sanmina  Corporation,  filed as Exhibit 10.1 to the Company's
               Form 10-Q for the quarter  ended July 2, 1999,  and  incorporated
               herein by this reference.

        21.1   Subsidiaries of Registrant, filed herein.

        23.1   Consent of Independent Accountants, filed herein.

        24.1   Powers  of  Attorney  for  Messrs.  Stewart  Carrell,  Gerald  S.
               Casilli,  Peter O. Crisp,  Richard J.  Gaynor,  Mark C.  McBride,
               James R. Oyler and Ivan E. Sutherland, filed herein.

        27     Financial Data Schedule, filed herein.


4.       Reports on 8-K:  None

TRADEMARKS USED IN THIS FORM 10-K

         AccelGALAXY,  AccelGMX, Digistar,  DYNAMICgeometry,  E&S, E&S Lightning
1200, EaSIEST, Ensemble, ESIG, FuseBox, Harmony, iNTegrator, MindSet, REALimage,
simFUSION,  StarRider,  Symphony and Virtual  Studio  System are  trademarks  or
registered  trademarks  of Evans & Sutherland  Computer  Corporation.  All other
product, service, or trade names or marks are the properties of their respective
owners.



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<PAGE>


                                   Schedule II

            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

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

                                 (in thousands)
<TABLE>
<CAPTION>

                                        Balance at                Additions               Deductions        Balance
                                       beginning of       Charged to       Through         Charged         at end of
                                           year         cost and           business        (recovered)        year
                                                         expenses        acquisitions       against
                                                                                           allowance
                                       -------------    ------------     -------------    -------------    -----------
<S>                                    <C>              <C>             <C>              <C>              <C>
Allowance for doubtful
receivables

December 31, 1999                      $      1,616     $       558      $           -     $       852      $   1,322
December 31, 1998                               851             496              1,013             744          1,616
December 31, 1997                               563             370                  -              82            851


Inventory Reserves

December 31, 1999                      $      6,963     $       910      $           -     $      1,826     $   6,047
December 31, 1998                             7,635           1,987              1,350            4,009         6,963
December 31, 1997                             7,137           1,009                  -              511         7,635


Warranty Reserves

December 31, 1999                      $      1,436     $       958      $           -     $      1,018     $   1,376
December 31, 1998                               880             872                494              810         1,436
December 31, 1997                               808             726                  -              654           880

</TABLE>



                                       67
<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.


EVANS & SUTHERLAND COMPUTER CORPORATION


March 30, 2000            By:               /S/  James R. Oyler
                             -----------------------------------------
                                            JAMES R. OYLER, PRESIDENT

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this report has been signed below by the  following  persons on behalf of
the registrant and in the capacities and on the dates indicated.
<TABLE>
<S>                                                <C>                                     <C>

                    *                               Chairman of the                         March 30, 2000
STEWART CARRELL                                     Board of Directors


   /S/  James R. Oyler                              Director and President                  March 30, 2000
--------------------------------------------
JAMES R. OYLER                                      (Chief Executive Officer)


   /S/  Richard J. Gaynor                           Vice President and Chief                March 30, 2000
--------------------------------------------
RICHARD J. GAYNOR                                   Financial Officer
                                                    (Principal Financial Officer)

   /S/  Mark C. McBride                             Vice President and                      March 30, 2000
--------------------------------------------
MARK C. MCBRIDE                                     Corporate Controller
                                                    (Principal Accounting Officer)

                    *                               Director                                March 30, 2000
--------------------------------------------
GERALD S. CASILLI


                    *                               Director                                March 30, 2000
--------------------------------------------
PETER O. CRISP


                    *                               Director                                March 30, 2000
--------------------------------------------
IVAN E. SUTHERLAND



By:      /S/  Mark C. McBride                                                               March 30, 2000
   -----------------------------------------
             MARK C. MCBRIDE
              *Attorney-in-Fact
</TABLE>

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