UNITED STATES
                       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, 1998

[ ] 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 5, 1999 was approximately
$105,050,000

         The  Registrant  had issued  and  outstanding  9,586,463  shares of its
common stock on March 5, 1999.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III  incorporates  information by reference from the  Registrant's
1999 Proxy  Statement for its Annual Meeting of  Shareholders  to be held on May
20, 1999.


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                     EVANS & SUTHERLAND COMPUTER CORPORATION
                                    FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998

<TABLE>
<S>      <C>        <C>                                                                                      <C>
PART I
         Item 1.    Business.................................................................................. 5
         Item 2.    Properties................................................................................12
         Item 3.    Legal Proceedings.........................................................................12
         Item 4.    Submission of Matters to a Vote of Security Holders.......................................12

PART II
         Item 5.    Market Price of and Dividends on the Registrant's Common Equity and
                     Related Stockholder Matters..............................................................14
         Item 6.    Selected Consolidated Financial Data......................................................15
         Item 7.    Management's Discussion and Analysis of Financial Condition and
                     Results of Operations....................................................................17
         Item 7A.   Quantitative and Qualitative Disclosures About Market Risk................................28
         Item 8.    Financial Statements and Supplementary Data...............................................30
                      Report of Management....................................................................31
                      Report of Independent Accountants.......................................................31
                      Consolidated Balance Sheets.............................................................32
                      Consolidated Statements of Operations...................................................33
                      Consolidated Statements of Comprehensive Income.........................................34
                      Consolidated Statements of Stockholders' Equity.........................................35
                      Consolidated Statements of Cash Flows...................................................36
                      Notes to Consolidated Financial Statements..............................................37
         Item 9.    Disagreements on Accounting and Financial Disclosure......................................56

PART III
         Item 10.   Directors and Executive Officers of the Company...........................................56
         Item 11.   Executive Compensation....................................................................56
         Item 12.   Security Ownership of Certain Beneficial Owners and Management............................56
         Item 13.   Certain Relationships and Related Transactions............................................56

PART IV
         Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................57

         Signatures ..........................................................................................61

</TABLE>

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                                     <PAGE>


                                    FORM 10-K

                                     PART I

ITEM 1.  BUSINESS

GENERAL

         Evans  &  Sutherland   Computer   Corporation  ("Evans  &  Sutherland,"
"E&S(R)," or the "Company"),  incorporated in the State of Utah on May 10, 1968,
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 shared among the Company's:

         (1)  Simulation  business to produce high performance  image generators
              for simulation including PC-based visual system products;

         (2)  Workstation   Products  business  to  provide  original  equipment
              manufacturers  ("OEM") of personal  workstations with high quality
              graphics performance; and

         (3)  Applications  business to apply the Company's core technologies to
              the expanding market of PC-based applications and products.

RECENT DEVELOPMENTS

         On June 26, 1998,  the Company,  through its  wholly-owned  subsidiary,
Evans  &  Sutherland  Graphics  Corporation   ("ESGC"),   acquired  all  of  the
outstanding  stock of  AccelGraphics,  Inc.  ("AGI")  to  expand  the  Company's
workstation  graphics  development,  integration  and  distribution  within  the
workstation graphics marketplace. ESGC is based in Milpitas,  California, and is
a  provider  of  high-performance,  cost-effective,  three-dimensional  graphics
subsystem products for the Windows NT(R)-based PC 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.

         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 certain  liquidation and
conversion rights in addition to other rights and preferences.  The Company also
entered into an agreement to  accelerate  development  of high-end  graphics and
video subsystems for Intel-based workstations.

         In the third quarter of 1998, E&S began shipping its Harmony(TM)  image
generator  system.  Harmony is the highest  performance  member of the Company's
Symphony(TM)  family  of  simulation  products.  It  is  selected  by  customers
demanding superior image quality,  deterministic  real-time control and superior
price/performance.   In  the  fourth   quarter  of  1998,   E&S  introduced  and
demonstrated its PC-based  simulation  solution called  Ensemble(TM) which is at
the lower end of the Symphony  line.  Ensemble is the first true PC-based  image
generation simulation system with the scalability, flexibility and affordability
to  create  new  markets  and   applications   for  real-time   simulation   and
visualization. Harmony and Ensemble complete the Company's transition to the new
Symphony product suite offering complete compatibility across the product range.

         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 has
repurchased  784,000 shares of its common stock;  thus, 816,000 shares currently

<PAGE>

remain  available for repurchase as of March 31, 1999.  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.  These  repurchases  are to be used primarily to meet
current and near-term requirements for the Company's stock-based benefit plans.

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, and Section 21E of the
Exchange Act, including, among others, those statements preceded by, followed by
or  including  the  words  "believes,"   "expects,"   "anticipates"  or  similar
expressions.

         These  forward-looking  statements  are based  largely  on our  current
expectations and are subject to a number of risks and uncertainties.  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,
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 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, 1998 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.

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.


<PAGE>


         Generally,  the Simulation  Group's visual systems  products consist of
the  following  four  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 images and send
              these images to display  devices,  such as  projectors or computer
              monitors.  The group's primary IG offerings  include  ESIG(TM) and
              the  Symphony  family of products  from Harmony on the high end to
              PC-based  Ensemble IGs at the low end. E&S is unique in offering a
              complete, high-to-low family of IGs that can use the same software
              and  databases.  While  Harmony  is the  industry's  flagship  for
              highest  performance,  Ensemble is the first true  PC-based  image
              generation simulation system with the scalability, flexibility and
              affordability to create new markets and applications 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  INTegrator(R).  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 Ensemble IG to the high-end Harmony
              systems.

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

         The Simulation  Group's products are marketed  worldwide by the Company
or its agents.  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  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 CAE Electronics, Ltd. ("CAE"), Thomson Training and
Simulation, Ltd. ("Thomson"), and Lockheed Martin 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 1998, the group was awarded several highly competitive orders against
CAE and Flight Safety  International,  Inc.,  the principal  competitors  in the
commercial  simulation market. In both the government and commercial  simulation
markets,  the group  competes  for the  graphics  computers  market with Silicon
Graphics, Inc.

Backlog

         The Simulation Group's backlog was $146.7 million on December 31, 1998,
compared with $151.0 million on December 31, 1997. It is  anticipated  that most
of the 1998 backlog will be converted to revenue in 1999.

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.


<PAGE>


Workstation Products Group

         The  Workstation  Products  Group develops and sells graphics chips and
graphics subsystems for the personal workstation  marketplace.  This group sells
to  most  personal   workstation  OEMs  and  is  gaining  market  share  in  the
professional  graphics  market.  The group  anticipates  continued growth in the
Windows NT workstation marketplace with the market's transition from proprietary
UNIX  architecture  systems  to  Microsoft  and  Intel-based  open  architecture
systems.

         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,  acquired all of the outstanding stock of AccelGraphics,  Inc. ESGC
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., a designer and developer of 3D
graphics hardware and software products for the PC workstation marketplace.

Products & Markets

         The  Workstation  Products  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 revenues are currently derived from
the AccelGALAXY(TM)  product. The group's principal product lines are summarized
below:
<TABLE>
<CAPTION>

       Product Line             Introduction Date                               Description
<S>                               <C>                  <C>
E&S Lightning 1200(TM)             March 1999          Based  on  the  REALimage  1200  chipset,   positioned  as  a
                                                       professional   card   for   price-sensitive   users  of  CAD,
                                                       modeling, DCC, and visualization simulation applications,  is
                                                       Pentium  III ready and  incorporates  E&S's  newest  software
                                                       architecture, DYNAMICgeometry(TM).

AccelGALAXY                         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  newest  software
                                                       architecture, DYNAMICgeometry.

AccelECLIPSE II(TM)               November 1997        Based  on the  REALimage  1000  chipset  and  positioned  for
                                                       mid-level  applications with advanced texture and overlay and
                                                       anti-aliasing support.
</TABLE>

     These families of workstation 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   maintains   close  working
relationships  with more  than 40  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 is E&S's alliance with Intel
Corporation ("Intel"). This alliance was strengthened in July 1998, with Intel's
purchase of 901,408 shares of the Company's  preferred  stock. At the same time,
Intel and the Company also entered into 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 distinct  advantage  in
keeping  pace  with  new  chip  releases  by Intel  thereby  providing  personal
workstation OEMs with timely and optimal graphics solutions.

<PAGE>

         The  Workstation   Products  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 sold to key OEM customers  primarily  through
direct sales.  The  Workstation  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.

Competitive Conditions

         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 the personal  workstation  OEMs.  The group's  major 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 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  Workstation   Products  Group's  principal   competitors   include
Intergraph, Inc., a system OEM that uses its own chip design, 3Dlabs Inc., Ltd.,
that sells  graphics  subsystems  based on their own chipsets to system OEMs and
companies such as Diamond  Multimedia  Systems,  Inc. and ELSA Inc. that utilize
other companies' graphics chips. 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 E&S customers.  Competition may
also emerge  from  companies  such as ATI  Technologies  Inc.,  Intel and nVidia
Corporation,  who currently provide lower performance  graphics products for the
consumer PC market.

Backlog

         The Workstation  Products  Group's backlog was $3.0 million on December
31, 1998,  compared  with $0.2 million on December 31, 1997.  The group  expects
that  most of the 1998  backlog  will be  converted  to  revenue  in  1999.  The
Workstation  Products 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  or
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   hardware.   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.  In December of 1998 the
group debuted "Journey to Infinity" the first  interactive  StarRider(R)  system
and show at the Adler Planetarium and Astronomy Museum in Chicago.


<PAGE>


         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  world-wide in
production,   postproduction,   broadcast  and  educational  applications.   The
Applications  Group's  products are sold directly to end users by E&S as a prime
contractor or selectively through dealers.

Competitive Conditions

         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 and RT-Set,  both Israeli  companies,
Brainstorm,  a Spanish  corporation,  and Peak Systems  GmbH, a German  company.
Discreet  Logic of  Montreal,  Canada has  installed a small  number of high-end
systems.

Backlog

         The Applications Group's backlog was $6.0 million on December 31, 1998,
compared with $3.7 million on December 31, 1997. It is anticipated  that most of
the 1998 backlog will be converted to revenue in 1999.

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.

         In 1998,  sales to the U.S.  government and the United Kingdom Ministry
of Defense ("UK MOD"),  either  directly or  indirectly  through  sales to prime
contractors or subcontractors,  accounted for $70.8 million, or 37% of total net
sales, and $32.1 million, or 17% of total net sales,  respectively.  In 1997 and
1996, sales to the U.S. government,  either directly or indirectly through sales
to prime contractors or subcontractors,  accounted for $45.5 million,  or 29% of
total net sales, and $25.8 million, or 20% of total net sales, respectively.

         In 1998,  sales to The Boeing  Company  ("Boeing")  were  approximately
$28.1 million,  or 15% of total net sales, of which approximately 98% related to
U.S.  government  and  UK MOD  contracts,  and  sales  to  Lockheed  Corporation
("Lockheed")  were  approximately  $22.0 million,  or 11% of total net 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 net sales. In 1996,  sales to Thomson were $15.8 million,  or 12% of total
net sales, sales to Hughes Training Incorporated  ("Hughes") were $14.9 million,
or 11% of total net sales, and sales to Rikei Corporation were $14.3 million, or
11% of total net sales. A portion of the Company's  sales to Hughes was for U.S.
government contracts.

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.

<PAGE>

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 $31.8
million,  $25.5 million and $21.8 million in 1998, 1997 and 1996,  respectively.
As a percentage of sales,  research and development  expenses were 16.6%,  16.0%
and 16.7% in 1998, 1997 and 1996,  respectively.  The Company  continues to fund
substantially all research and development efforts internally. It is anticipated
that high levels of research and  development  will  continue to ensure that the
Company maintains technical excellence, leadership, and market competitiveness.

INTERNATIONAL SALES

         Sales of product  known to be ultimately  installed  outside the United
States are considered international sales by the Company and were $84.9 million,
$94.6  million  and  $88.4  million  in  1998,  1997  and  1996,   respectively.
International  sales  represented  44%, 59% and 68% of total sales in 1998, 1997
and 1996,  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 5, 1999, Evans & Sutherland and its subsidiaries employed a
total of 951 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.

<PAGE>

ITEM 2.  PROPERTIES

         Evans & Sutherland's principal executive,  manufacturing,  engineering,
and  operations  facilities are located in the University of Utah Research Park,
in Salt Lake City,  Utah,  where it owns six  buildings  totaling  approximately
440,000  square feet.  E&S occupies four  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.  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,  service,  and production  facilities
located throughout the United States,  Europe, and Asia. The largest of these is
a 20,000  square  foot  facility  in  Milpitas,  CA.  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 1998.

EXECUTIVE OFFICERS OF THE REGISTRANT

         The following  sets forth certain  information  regarding the executive
officers of the Company as of March 31, 1999:
<TABLE>
<CAPTION>
         Name                       Age                                          Position
------------------------   -----------------------    ---------------------------------------------------------------
<S>                                 <C>               <C>

Stewart Carrell                      65               Chairman of the Board of Directors

James R. Oyler                       53               President and Chief Executive Officer

John T. Lemley                       55               Vice President and Chief Financial Officer

David B. Figgins                     50               Vice President - Simulation Group

William C. Gibbs                     41               Vice President of Corporate Development

Charles R. Maule                     48               Vice President - Workstation Group

Mark C. McBride                      37               Vice President, Corporate Controller and Corporate Secretary

</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 15 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.

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 four years of
service with the Company.

<PAGE>

Mr.  Lemley  joined the Company in  November  1995 as Vice  President  and Chief
Financial Officer.  Prior to coming to the Company, he was Senior Vice President
and Chief Financial Officer at Megahertz Holding Corporation. Previously, he was
with  Medtronic,  Inc.,  where he was Vice President,  Corporate  Controller and
Acting Chief Financial Officer. Prior to Medtronic, Mr. Lemley spent 17 years in
a variety of financial management positions with Hewlett Packard Company. He has
three years 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 Government  Simulation business unit.  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  less  than one year of  service  with the
Company.

Mr.  Gibbs  joined the Company in December  1998 as Vice  President of Corporate
Development. Previously, he was a partner at the law firm of Snell & Wilmer, LLP
from December  1990 to December  1998. He has less than one year of service with
the Company.

Mr. Maule was appointed Vice President of the Workstation Group in January 1999.
He joined the Company in February 1996 as Vice President and General  Manager of
Desktop  Graphics.  Prior to  joining  the  Company,  he was Vice  President  of
Marketing and Strategy for Concurrent Computer  Corporation from October 1994 to
February 1996. Previously,  Mr. Maule served as Director of Business Development
for Lockheed  Missiles & Space Company from November 1992 to September  1994. He
has three years 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
two years of service with the Company.


<PAGE>



                                    FORM 10-K

                                     PART II

ITEM 5.  MARKET PRICE OF AND DIVIDENDS ON THE 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 NASDAQ.  Quotations  represent actual transactions in
NASDAQ's  quotation  system  but do not  include  retail  markup,  markdown,  or
commission.

                                         HIGH                     LOW
                                    --------------           --------------

         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

         1997
         First Quarter              $   28 3/8                 $  22
         Second Quarter                 29 3/4                    22 1/8
         Third Quarter                  33 1/2                    26
         Fourth Quarter                 37                        28 1/4


APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

         On  March 5,  1999,  there  were  790  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.


<PAGE>


ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                   1998(1)         1997           1996        1995(2)       1994(3)
                                                 -----------   ------------   -----------  ------------  ------------
FOR THE YEAR
<S>                                               <C>            <C>           <C>           <C>           <C>
Net sales                                         $ 191,766      $ 159,353     $ 130,564     $ 113,194     $ 113,090

Earnings (loss) before extraordinary gain
   and accretion of preferred stock                 (15,983)         5,080        10,352        20,484       (5,559)

Earnings (loss) per common share before 
   extraordinary gain:

      Basic                                          (1.70)           0.56          1.16          2.37        (0.65)
      Diluted                                        (1.70)           0.53          1.12          2.33        (0.65)

Average weighted number of common shares 
   outstanding:

      Basic                                           9,461          9,060         8,944         8,639         8,520
      Diluted                                         9,461          9,502         9,222         8,785         8,520

AT END OF YEAR

Total assets                                      $ 275,668      $ 234,390     $ 210,891     $ 211,002     $ 180,764
Long-term debt, less current portion                 18,062         18,015        18,015        18,015        20,375
Redeemable preferred stock                           23,544              -             -             -             -
Stockholders' equity                                165,083        165,634       160,472       148,491       127,118

</TABLE>

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

(1)      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

(2)      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.

(3)      During 1994, the Company  repurchased $16.7 million of 6% Debentures on
         the open market. These purchases resulted in an extraordinary gain, net
         of income taxes,  of  approximately  $1.9 million in 1994.  The Company
         incurred a restructuring  charge of $8.2 million. The restructuring was
         undertaken to remove the  Company's  divisional  structure,  reengineer
         research   and   development,   consolidate   manufacturing,   finance,
         administration  and field  service  operations,  and to modify  product
         lines.




<PAGE>




QUARTERLY FINANCIAL DATA  (Unaudited)

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                            Quarter Ended
                                                     --------------------------------------------------------     
                                                       March 27     June 26(1)      Sept. 25       Dec. 31
                                                     -------------  ------------   ------------  ------------    
1998
<S>                                                      <C>           <C>            <C>           <C> 
Net sales                                                $ 42,421      $ 43,638       $ 47,262      $  58,445

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

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

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

Earnings (loss) per common share(2):

   Basic                                                     0.18         (2.04)         (0.08)          0.14
   Diluted                                                   0.17         (2.04)         (0.08)          0.13


                                                                            Quarter Ended
                                                     --------------------------------------------------------
                                                       March 28       June 27       Sept. 26       Dec. 31
                                                     -------------  ------------   ------------  ------------                      
1997

Net sales                                                $ 33,642      $ 37,907       $ 38,450      $ 49,353

Gross profit                                               15,128        17,424         19,284        23,378

Earnings (loss) before income taxes                         2,015         2,707          5,102        (2,986)

Net earnings (loss) applicable to common stock              1,411         1,975          3,825        (2,131)

Earnings (loss) per common share(2):

   Basic                                                     0.16          0.22           0.42        (0.23)
   Diluted                                                   0.15          0.21           0.40        (0.23)

</TABLE>



(1)      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.

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


<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 report.

<TABLE>
<CAPTION>
                                                                 Year                  Year                   Year
                                                                Ended                  Ended                 Ended
                                                               Dec. 31,              Dec. 31,               Dec. 27,
                                                                 1998                  1997                   1996
                                                              -----------            ----------            ----------- 
<S>                                                            <C>                    <C>                   <C> 
Net sales                                                       100.0%                 100.0%                100.0%
Cost of sales                                                    57.5                   52.8                  50.5
                                                              -----------            ----------            -----------
      Gross profit                                               42.5                   47.2                  49.5
Operating expenses
      Selling, general and administrative                        20.9                   22.2                  24.0
      Research and development                                   16.6                   16.0                  16.7
      Write-off of acquired in-process technology                10.8                      -                     -
      Amortization of goodwill and other intangible assets        2.5                      -                     -
                                                              -----------            ----------            -----------       
            Total operating expenses                             50.8                   38.2                  40.7
                                                              -----------            ----------            -----------   
Operating earnings (loss)                                        (8.3)                   9.0                   8.8
Other income (expense), net                                       1.1                   (4.7)                  3.5
                                                              -----------            ----------            -----------   
Earnings (loss) before income taxes                              (7.2)                   4.3                  12.3
Income tax expense                                                1.1                    1.1                   4.4
                                                              -----------            ----------            -----------   
Net earnings (loss)                                              (8.3)                   3.2                   7.9
Accretion of preferred stock                                      0.1                      -                     -
                                                              -----------            ----------            -----------  
Net earnings (loss) applicable to common stock                   (8.4)%                  3.2%                  7.9%
                                                              ===========            ==========            ===========
</TABLE>


RESULTS OF OPERATIONS

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
AccelGraphics,  Inc.  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 Margin

         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  revenues  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,  revenues related to workstation  products were
derived primarily from royalties which had minimal associated cost of sales. Due
to the acquisition of AccelGraphics,  Inc.,  revenues in the second half of 1998
related to sales of graphics  subsystems which had product costs consistent with
a manufacturing operation.

<PAGE>

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   (formerly
AccelGraphics,  Inc.) 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  connection  with the  purchases  of AGI and SRI,  the Company  made
allocations  of the  purchase  price to acquired  in-process  technology.  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.

         Calculations  of the value of the acquired  in-process  technology  are
based on adjusted  after-tax cash flows that give explicit  consideration to the
SEC's views on acquired in-process  technology as set forth in its September 15,
1998 letter to the American Institute of Certified Public Accountants.  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,  revenues were
forecasted based on relevant factors,  including  aggregate revenue growth rates
for the business as a whole, individual product revenues, 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.  As a result of the  valuations,  the amount of  purchase
price allocated to in-process technology was $20.8 million.

         Since  the date of  acquisitions,  the  Company  has used the  acquired
in-process  technology to develop new graphics  subsystem products which have or
will become an extension of the Company's  chip products when  completed.  These
products increase the vertical reach of the Company's product offerings into the
mid-range  and  high-end  graphics  marketplace.  Products  using  the  acquired
in-process  technology  have been  introduced  at various  times  following  the
acquisition date of AGI and SRI, and the Company  currently  expects to complete
the  development  of the remaining  projects at various dates during 1999.  Upon
completion, the Company will offer the related products to its customers.

         The nature of the efforts  required to develop the acquired  in-process
technology  into  commercially   viable  products   principally  relate  to  the
completion of all planning,  designing and testing activities that are necessary
to establish that the products can be produced to meet its design  requirements,
including  functions,  features  and  technical  performance  requirements.  The
Company currently expects that the acquired in-process  technology projects will
be  successfully  developed,  but  there  can be no  assurance  that  commercial
viability of these projects will be achieved. Furthermore, the graphics industry
continues to undergo  tremendous changes in competition and rapid development of
competing technologies. Changes in graphics technology or other developments may
cause the Company to alter or abandon these  development  plans.  The in-process
technologies  will be used in future products and the linear successors to those

<PAGE>

products  and will  not be used as the  foundation  for  alternative  or  future
technologies.

         Failure  to  complete  the  development  of  these  projects  in  their
entirety,  or in a timely  manner,  could have a material  adverse impact on the
Company's operating results,  financial condition and results of operations.  No
assurance can be given that actual revenues and operating profit attributable to
acquired  in-process  technology will not deviate from the  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 acquisition,  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. A description of
the acquired  in-process  technology  and the estimates  made by the Company for
each of the technologies is discussed below.

         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 assigned value to this
         technology is $5.8 million.

         CAD-focused  Professional Graphics Subsystem (1200). This technology is
         a  graphic  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.  This  technology  and a  product  based on this
         technology are still in development with introduction  planned in 1999.
         The assigned value for this technology is $6.0 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.   This  technology  is  in
         development with its introduction date under review. The assigned value
         for this technology is $2.5 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
         assigned value of this technology was $5.1 million.

         At the time of the valuation, the cost to complete all the projects was
$1.2  million.  As of December  31,  1998,  approximately  $0.9 million had been
incurred for these  projects.  Costs to complete the projects are expected to be
approximately $0.4 million.

         As of  December,  the  AccelGALAXY,  using the  Mid-range  Professional
Graphics  technology,  was completed a month later than  scheduled,  with a cost
overrun due to extra work required to successfully achieve  certification on all
required professional applications and the AccelGMX, using the On-board Geometry
Engine Graphics  technology,  was completed on time and on budget.  The AccelGMX
and  AccelGALAXY  products  started  shipping in late third quarter of 1998. The
CAD-focused  Professional  Graphics  Subsystem was on schedule with a small cost
overrun due to board layout and cost issues.  The  Multiple-Controller  Graphics
Subsystems  was  recently  reevaluated  due to changes in the  marketplace.  The
introduction  of a product using this  technology has been delayed  further into
1999.

         The AccelGALAXY has performed below revenue  estimates due to the delay
in product  introduction  by the Company  and a delayed  design win at one major
OEM. Since revenue for this product was only recognized in the fourth quarter of
1998,  management  is unable to predict the long-term  effect of this  one-month
delay. Subsequent to the Company's acquisition of AGI, the developer of the chip

<PAGE>

used on the  AccelGMX  also  acquired a board  company,  Dynamic  Pictures,  and
entered the graphics accelerator market in direct competition with the AccelGMX.
As a result, the AccelGMX has performed below revenue estimates.

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. 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.  Amortization  of goodwill and other  intangible
assets is estimated to be $2.9 million and $2.3 million in fiscal years 1999 and
2000, respectively.

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.  The  Company  expects  the  effective  income tax rate in 1999 to
approximate the rate in 1998.


1997 vs. 1996

Sales

         In 1997, sales increased 22% ($159.4 million compared to $130.6 million
in 1996). Sales for simulation  products increased $27.3 million, or 23% ($146.0
million in 1997  compared to $118.8  million in 1996).  The increase in sales of
simulation  products is primarily  due to increased  sales volumes due to strong
demand by U.S. government  customers and commercial airline customers.  Sales of
workstation  products  increased  $5.8 million ($5.8 million in 1997 compared to
none  in  1996).  The  increase  in  sales  of  workstation  products  is due to
commencement  of this  business  in  1997.  During  1997,  revenues  related  to
workstation  products were derived primarily from royalties based on the sale of
chip  sets by a third  party  to  graphics  subsystem  manufacturers.  Sales  of
application  products  increased  $0.5  million,  or 7%  ($7.5  million  in 1997
compared to $7.0 million in 1996). The increase in sales of application products
is primarily due to the introduction of virtual studio systems  partially offset
by a decrease in sales volumes of digital theater products.

Gross Margin

         Gross  margin  decreased  to 47.2%  in 1997  from  49.5%  in 1996.  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  and
increased  competition.  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.


<PAGE>

 Selling, General and Administrative

         Selling,  general, and administrative  expenses increased $4.0 million,
or 13% ($35.3 million in 1997 compared to $31.3 million in 1996),  but decreased
as a percent of sales (22.2% in 1997 compared to 24.0% in 1996). The increase in
these expenses in 1997 is due primarily to increased selling and marketing costs
related to tradeshow activity and additional selling and administrative expenses
related to the operation of the new businesses.

Research and Development

         Research and development expenses increased $3.7 million, or 17% ($25.5
million in 1997 compared to $21.8  million in 1996),  but decreased as a percent
of sales  (16.0% in 1997  compared  to 16.7% in  1996).  The  increase  in these
expenses  in  1997  is  due  primarily  to  increased  activity  related  to the
introduction of several new products, and additional expenses related to the new
businesses.

Other Income (Expense), Net

         Other  income  (expense),  net, was $7.6 million of expense in 1997 and
$4.5 million of income in 1996. This change was due primarily to a write-down of
the  Company's  investments  in certain  investment  securities  of $9.6 million
during 1997.  There were no gains from sales of  investment  securities  in 1997
compared to a $1.9 million gain in 1996. In addition,  interest income decreased
$0.7 million, or 17% ($3.2 million in 1997 compared to $3.9 million in 1996) due
to the  decrease  in the  average  cash  and  cash  equivalents  and  short-term
investments balances in 1997 as compared to 1996.

Income Taxes

         Provision for income taxes was 25.7% and 35.4% of pre-tax  earnings for
1997 and 1996, respectively.

LIQUIDITY AND CAPITAL RESOURCES

         At  December  31,  1998,  the  Company  had  working  capital of $134.4
million,  including cash, cash  equivalents and short-term  investments of $27.7
million,  compared to working  capital of $129.0  million at December  31, 1997,
including  cash, cash  equivalents and short-term  investments of $57.1 million.
During 1998, the Company used $20.8 million of cash in its operating  activities
and  generated  $2.1 million and $12.2  million of cash from its  investing  and
financing activities, respectively.

         The primary uses of cash from its operating  activities  included a net
loss of $16.0  million,  an  increase  in  inventories  of $28.9  million and an
increase  in  net  costs  and  estimated  earnings  in  excess  of  billings  on
uncompleted contracts of $6.1 million. These primary uses of cash were partially
offset by $15.9 million of depreciation and  amortization  expense and write-off
of acquired in-process  technology of $20.8 million. The increase in inventories
is attributed to the Company's transition to new products that required the need
to carry  inventories of old and new products  simultaneously  and the Company's
initial  transition  efforts to outsource  certain aspects of its  manufacturing
assemblies which resulted in temporary duplications of certain inventories.  The
increases in accounts  receivable and costs and estimated  earnings in excess of
billings on  uncompleted  contracts  was due to the  Company's  overall  revenue
growth in addition to the timing of revenue and billing milestones.

         The  Company's  investing   activities  during  1998  included  capital
expenditures of $18.5 million and payments for the acquisition of AGI and SRI of
$7.6  million,  net of cash  acquired.  Proceeds  from  the  sale of  short-term
investments  totaled  $47.7  million  in  1998  while  purchases  of  short-term
investments used $22.2 million in funds.

         In July 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.  In the
event of a default, Intel has the right to sell to the Company any or all of the
shares  associated with the preferred  stock.  The preferred shares have certain

<PAGE>

liquidation and conversion  rights, in addition to other rights and preferences.
Additional  financing  activities  included proceeds from the issuance of common
stock  relating to the exercise of stock options of $2.0 million and  borrowings
under line of credit agreements of $5.0 million.  In addition,  the Company used
$15.7  million  for the  repurchases  of  common  stock  and  $2.7  million  for
repayments under line of credit agreements.

     In November  1998,  the  Company  entered  into a revolving  line of credit
agreement  with U.S. Bank  National  Association.  The revolving  line of credit
provides for borrowings by the Company of up to $20.0 million.  Borrowings  bear
interest  at the  prevailing  prime rate minus 1.0% or the LIBOR rate plus 1.0%.
The revolving line of credit expires on November 10, 1999. The revolving line of
credit,  among other  things,  (i)  requires  the  Company to  maintain  certain
financial  ratios;  (ii) restricts the Company's ability to incur debt or liens;
sell,  assign,  pledge or lease assets;  merge with another  company;  and (iii)
restricts  the  payment of  dividends  and  repurchase  of any of the  Company's
outstanding  shares  without prior consent of the lender.  The revolving line of
credit is unsecured.  There were no borrowings under this agreement  outstanding
as of March 31, 1999. In addition, the Company has a $7.5 million unsecured line
for letters of credit with U.S. Bank National  Association  for which there were
approximately $6.6 million outstanding at December 31, 1998.

         At  December  31,  1998,  the  Company  had  revolving  line of  credit
agreements  with foreign banks  totaling  approximately  $7.1 million,  of which
approximately $2.8 million was unused and available.

         At December 31, 1998, the Company had 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.

         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 has
repurchased  784,000 shares of its common stock;  thus, 816,000 shares currently
remain  available for repurchase as of March 31, 1999.  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.  These  repurchases  are to be used primarily to meet
current and near-term requirements for the Company's stock-based benefit plans.

     Management  believes that existing cash,  cash  equivalents  and short-term
investment  balances,  borrowings  available under its line of credit agreements
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 existing line of credit agreements are
not  sufficient  to meet the  Company's  cash  requirements,  the Company may be
required  to  renegotiate  its  existing  line  of  credit  agreements  or  seek
additional  financing from the issuance of debt or equity securities.  There can
be no  assurances  that the Company would be  successful  in  renegotiating  its
existing  line of  credit  agreements  or  obtaining  additional  debt or equity
financing.

YEAR 2000 ISSUE

         The Year 2000 issue is the result of potential  problems  with computer
systems or any equipment  with computer chips that store the year portion of the
date as just two digits (for example, 98 for 1998). Systems using this two-digit
approach will not be able to determine  whether "00" represents the year 2000 or
1900. The problem, if not corrected, will make those systems fail altogether or,
even worse, allow them to generate incorrect  calculations  causing a disruption
of normal operations.

         The Company has created a  company-wide  Year 2000 team to identify and
resolve Year 2000 issues associated  either with the Company's  internal systems
or the products and services  sold by the Company.  As part of this effort,  the
Company is  communicating  with its main  suppliers of  technology  products and

<PAGE>

services  regarding  the Year 2000  status of such  products  or  services.  The
Company has identified  and is testing its main internal  systems and expects to
complete testing in early 1999.  Throughout 1999 the Company expects to complete
implementation of any needed Year 2000-related  modifications to its information
systems.  The Company is also currently  assessing its internal  non-information
technology systems, and expects to complete testing and any needed modifications
to these systems in early 1999.

         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  believes that necessary  modifications
will be made on a timely basis.  However,  there can be no assurance  that there
will not be a delay in, or increased costs associated  with, the  implementation
of such  modifications,  or that the Company's suppliers will adequately prepare
for the Year 2000 issue. It is possible that any such delays,  increased  costs,
or  supplier  failures  could have a material  adverse  impact on the  Company's
operations  and  financial  results,  by, for example,  impacting  the Company's
ability to deliver products or services to its customers. The Company expects in
mid-1999 to finalize its  assessment of and  contingency  planning for potential
operational  or  performance  problems  related  to Year  2000  issues  with its
information systems.

         The Company's Year 2000 effort has included testing products  currently
or recently on the  Company's  price list for Year 2000 issues.  Generally,  for
products that were  identified  as needing  updates to address Year 2000 issues,
the Company has prepared or is preparing updates,  or has removed or is removing
the  product  from its price list.  Some of the  Company's  customers  are using
product  versions  that the Company will not support for Year 2000  issues;  the
Company is encouraging  these customers to migrate to current  product  versions
that are Year 2000 ready.

         For  third  party  products  which  the  Company  distributes  with its
products,  the Company  has sought  information  from the product  manufacturers
regarding  the  products'  Year 2000  readiness  status.  Customers  who use the
third-party  products are directed to the product manufacturer for detailed Year
2000    status    information.    On    its    Year    2000    web    site    at
www.es.com/investor/y2k_corp.html,  the Company provides  information  regarding
which of its products are Year 2000 ready and other general  information related
to the Company's Year 2000 efforts.  The Company's total costs relating to these
activities  has not been and is not  expected to be  material  to the  Company's
financial  position  or results  of  operations.  Additionally,  there can be no
guarantee that one or more of the Company's current products do not contain Year
2000 date issues that may result in material costs to the Company.

EFFECTS OF INFLATION

         The effects of inflation  were not  considered  material  during fiscal
years 1998,  1997 and 1996,  and are not expected to be material for fiscal year
1999.

OUTLOOK

         Looking  forward,  the Company  expects  revenue to continue to grow in
1999 as it has during the previous  three fiscal  years.  One good  predictor of
future revenue in the Company's simulation business is its backlog amount. As of
December 31, 1998 the  Company's  orders  backlog was $155.7  million.  Products
within the Workstation  Products and Applications  Groups have much shorter lead
times  between order and  delivery,  therefore  the backlog  amount is much less
useful as a predictor for these businesses.

         The Company's main challenges  result from managing the introduction of
new products into its existing  business  lines and developing new products into
markets where the Company is a relatively  recent entrant.  The Company believes
it will be successful if it can make these  product  introductions  on schedule,
while keeping costs down and avoiding being beaten to the market by competitors.

         As 1999 began,  the Company was in the process of ramping up production
of its Harmony image  generator,  finishing the installation its first StarRider
interactive  planetarium  system,  developing several new graphic subsystems for
use in  personal  workstations  as well as  developing  other new  hardware  and
software start-up businesses. 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.


<PAGE>

         The foregoing  contains  forward-looking  statements that involve risks
and  uncertainties,  including  but not  limited to  quarterly  fluctuations  in
results,  the timely availability and customer  acceptance of new products,  the
impact  of  competitive   products  and  pricing,   general  market  trends  and
conditions,  and other risks  detailed  below in "Factors That May Affect Future
Results". Actual results may vary materially from projected results.

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 the Company's  control.  While E&S  management  is  optimistic  about the
Company's long-term prospects,  the following  discussion  highlights some risks
and  uncertainties  that should be considered in evaluating its growth  outlook.
See "Forward-Looking Statements and Risks" in Part I of this annual report.

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 Revenues or Earnings Fail to
Meet Expectations

         Our stock price is subject to significant volatility and will likely be
adversely  affected if  revenues  or  earnings  in any quarter  fail to meet the
investment community's expectations.  Our revenues and earnings may fail to meet
expectations  because they fluctuate and are difficult to predict.  Our earnings
during 1997 and 1998 fluctuated  significantly  from quarter to quarter.  One of
the reasons we  experience  such  fluctuations  is that the largest share of our
revenues  and  earnings  is from our  core  simulation-related  business,  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 revenue  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.

         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  revenue  shortfall  may cause a  period's  results to be below
expectations.  Such a revenue  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.

<PAGE>

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  revenues 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 $31.8 million or 16.6% of sales
in 1998 as compared to $25.5 million or 16.0% of sales in 1997.  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  revenue-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.

         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.

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

         In  1998,  37% 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.

<PAGE>

         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.

         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 Revenues May Suffer if it Loses Certain Significant Customers

         We  currently  derive a  significant  portion  of our  revenues  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 1998 we were dependent on three of our
customers for  approximately 27% of our consolidated  revenues.  In 1997 we were
dependent on three of our customers for  approximately  26% of our  consolidated
revenues. We expect that sales to a limited number of customers will continue to
account for a substantial  portion of our revenues in the foreseeable future. We
have no  assurance  that  revenues  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 Revenues Will Decrease if it Fails to Maintain its International Business

         Any reduction of our international  business could significantly affect
our revenues. Our international business accounted for 44% of our 1998 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.

<PAGE>

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

         We have no assurance that our commercial  simulation (airline) business
will continue to succeed. Our commercial  simulation business currently accounts
for approximately  15% to 20% of our revenues.  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.

E&S May Not Meet its Revenue 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 revenues in the aggregate;  however,  we project these businesses to grow to
approximately 25% to 30% of revenues for 1999. These businesses will not survive
and we will not meet our revenue projections if we are unable to:

         o     develop  strong  partner   relationships  with  manufacturers  of
               computer chips and personal computers in our workstation products
               group,
         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 in a developing new market in our digital 
               video business.

         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.

E&S's  Operations  Will be  Significantly  Impaired  if it Fails to be Year 2000
Compliant

         We have no  assurance  that all of our internal  systems,  products and
services,  and  suppliers  will be Year  2000  compliant  and  that  the lack of
compliance will not  significantly  impact our operations and financial  results
including our ability to continue as a going concern. The Year 2000 issue is the
result of  potential  problems  with  computer  systems  or any  equipment  with
computer  chips that store the year portion of the date as just two digits (e.g.
98 for  1998).  Systems  using  this  two-digit  approach  will  not be  able to
determine  whether "00"  represents the year 2000 or 1900.  The problem,  if not
corrected, will make those systems fail altogether or, even worse, allow them to
generate incorrect calculations causing a disruption of normal operations.

         Although we have created a company-wide  Year 2000 team to identify and
resolve Year 2000 issues  associated with our  information  and  non-information
technology  systems and our products and services,  we have no assurance that we
will address all potential  problems.  There can be no assurance that there will
not be a delay in, or increased costs  associated  with, the  implementation  of
Year 2000  modifications,  or that our suppliers will adequately prepare for the
Year 2000 issue.  It is  possible  that any such  delays,  increased  costs,  or
supplier  failures  could have a material  adverse  impact on our operations and
financial results, by, for example, impacting our ability to deliver products or
services to our customers.  In mid-1999 we expect to finalize a contingency plan
to cope with potential Year 2000 problems.

<PAGE>

         For third-party products that we distribute with our products,  we have
sought information from the product  manufacturers  regarding the products' Year
2000 readiness status.  We direct customers who use the third-party  products to
the product manufacturer for detailed Year 2000 status information.  On our Year
2000  web  site at  www.es.com/investor/y2k_corp.html,  we  provide  information
regarding which of our products is Year 2000 ready and other general information
related to our Year 2000  efforts.  We have no  assurance  that the  third-party
products  will be Year  2000  ready or that a lack of  readiness  by such  third
parties  will not  materially  adversely  impact our  operations  and  financial
results.

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 44% of the Company's  total sales in
1998 are  concentrated in the United Kingdom,  continental  Europe and Asia. The
Company  manages its exposure to changes in foreign  currency  exchange rates by
entering  into  most of its  sales  and  purchase  contracts  for  products  and
materials  in U.S.  dollars.  Occasionally,  the  Company  enters into sales and
purchase  contracts for products and materials  denominated in currencies  other
than U.S.  dollars and in those cases the Company  enters into foreign  exchange
forward sales or purchase contracts to offset those exposures.  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, 1998,  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,  1998,  81%  of  the  Company's   total  debt  was  in  fixed-rate
instruments;  however,  the Company has a revolving line of credit that provides
for  borrowings  by the  Company of up to $20.0  million.  The  borrowings  bear
interest at a variable rate at the prevailing prime rate minus 1.0% or the LIBOR
rate plus 1.0%.  If the Company  were to borrow all of the $20.0  million of the
revolving line of credit and the $7.1 million of foreign lines of credit, 40% 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, 1998,  the average  maturity of the  Company's  short-term  investments  was
approximately eleven months.


<PAGE>

         The information  below summarizes the Company's market risks associated
with debt  obligations and short-term  investments as of December 31, 1998. 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        1999         2000       2001      2002      2003       There-      Total         Fair
                                                                                                after                    Value
                           ---------    --------    ---------    ------    ------    ------    ---------   ---------    ---------
<S>                        <C>          <C>         <C>          <C>       <C>       <C>       <C>         <C>          <C>
Debt
Bank borrowings in
   Deutsche Marks            6.9%       $ 4,195             -        -         -         -             -    $  4,195     $ 4,195
Other                      Various          103             -        -         -         -             -         103         103
                                        --------    ---------    ------    ------    ------    ---------   ---------    --------- 

Total Notes Payable                     $ 4,298             -        -         -         -             -    $  4,298     $ 4,298
                                        ========    =========    ======    ======    ======    =========   =========    ========= 

Convertible subordinated
   debentures                 6.0%             -            -        -         -         -     $ 18,015     $18,015     $ 16,214
Other                      Various             -            -        -         -         -           47          47           47
                                        --------    ---------    ------    ------    ------    ---------   ---------    --------- 

Total long-term debt                           -            -        -         -         -     $ 18,062    $ 18,062     $ 16,261
                                        ========    =========    ======    ======    ======    =========   =========    =========
                                   
Short-term Investments       5.9%       $15,216     $ 10,691         -         -         -            -    $ 25,907     $ 25,907
                                        ========    =========    ======    ======    ======    =========   =========    =========

</TABLE>

<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, 1998 and December
               31, 1997.

               Consolidated   Statements  of  Operations  for  the  years  ended
               December 31, 1998, December 31, 1997, and December 27, 1996.

               Consolidated  Statements  of  Comprehensive  Income for the years
               ended December 31, 1998, December 31, 1997 and December 27, 1996.

               Consolidated  Statements  of  Stockholders'  Equity for the years
               ended December 31, 1998, December 31, 1997, and December 27, 
               1996.

               Consolidated  Statements  of  Cash  Flows  for  the  years  ended
               December 31, 1998, December 31, 1997, and December 27, 1996.

               Notes to Consolidated Financial Statements.

         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, 1998, December 31, 1997, and December 27, 1996.

         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.

<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 the
Chairman of the Board and all outside  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.

    /s/ James R. Oyler                                /s/ John T. Lemley
    James R. Oyler                                    John T. Lemley
    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  also  have  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, 1998 and
1997,  and the results of their  operations and their cash flows for each of the
years in the  three-year  period ended  December 31, 1998,  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

February 12, 1999
Salt Lake City, Utah


<PAGE>

            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                             -------------------------------
                                                                                  1998              1997
                                                                             -------------    --------------
<S>                                                                            <C>              <C> 
                
Assets:
   Cash and cash equivalents                                                    $   1,834        $    8,176                  
   Short-term investments                                                          25,907            48,928
   Accounts receivable, less allowances for doubtful                         
      receivables of $1,616 in 1998 and $851 in 1997                               46,866            36,066
   Inventories                                                                     53,319            26,885
   Costs and estimated earnings in excess of billings                   
      on uncompleted contracts                                                     58,682            51,799
   Deferred income taxes                                                            9,450             4,224
   Prepaid expenses and deposits                                                    7,278             3,620
                                                                                ----------       -----------
          Total current assets                                                    203,336           179,698

Property, plant and equipment, net                                                 53,693            44,368
Investment securities                                                               3,380             5,000
Deferred income taxes                                                               2,487             3,802
Goodwill and other intangible assets, net                                          11,351               101
Other assets                                                                        1,421             1,421
                                                                                ----------       -----------
           Total assets                                                          $275,668          $234,390
                                                                                ==========       ===========
                                 
Liabilities and stockholders' equity:
   Line of credit agreements                                                    $   4,298          $    950
   Accounts payable                                                                24,667            14,353
   Accrued expenses                                                                27,147            18,061
   Customer deposits                                                                3,339             6,574
   Income taxes payable                                                             2,436             4,462
   Billings in excess of costs and estimated earnings on                    
      uncompleted contracts                                                         7,092             6,341
                                                                                ----------       -----------
          Total current liabilities                                                68,979            50,741
                                                                                ----------       ----------- 
Long-term debt                                                                     18,062            18,015
                                                                                ----------       -----------

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 at
   December 31, 1998 and no shares at December 31, 1997                            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 9,597,660 shares in 1998 and 9,066,743
      shares in 1997                                                                1,920             1,813
   Additional paid-in capital                                                      23,420             8,025
   Retained earnings                                                              139,498           155,576
   Accumulated other comprehensive income                                             245               220
                                                                                ----------       -----------
          Total stockholders' equity                                              165,083           165,634
                                                                                ----------       -----------               
               Total liabilities and stockholders' equity                        $275,668          $234,390
                                                                                ==========       ===========
</TABLE>

           See accompanying notes to consolidated financial statements



<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
                                                                                     Year ended
                                                                      ---------------------------------------
                                                                        Dec. 31,     Dec. 31,     Dec. 27,
                                                                          1998         1997         1996
                                                                      ------------- ------------ ------------             
<S>                                                                     <C>          <C>          <C>
Net sales                                                               $  191,766   $  159,353   $  130,564
Cost of sales                                                              110,320       84,139       65,935
                                                                      ------------- ------------ ------------                     
          Gross profit                                                      81,446       75,214       64,629
                                                                      ------------- ------------ ------------
Expenses:
   Selling, general and administrative
                                                                            40,088       35,304       31,328
   Research and development
                                                                            31,797       25,492       21,753
   Write-off of acquired in-process technology
                                                                            20,780            -            -
   Amortization of goodwill and other intangible assets
                                                                             4,767           29           29
                                                                      ------------- ------------ ------------
                                                                            97,432       60,825       53,110
                                                                      ------------- ------------ ------------
Operating earnings (loss)                                                  (15,986)      14,389       11,519
                                                                      ------------- ------------ ------------            

Other income (expense):
   Interest income                                                           2,659        3,239        3,892
   Interest expense                                                         (1,335)      (1,300)      (1,434)
   Loss on write down of investment securities                              (1,075)      (9,575)           -
   Gain on sale of investment securities                                     2,493            -        1,868
   Other                                                                      (613)          85          184
                                                                      ------------- ------------ -----------
                                                                             2,129       (7,551)       4,510
                                                                      ------------- ------------ ------------              
Earnings (loss) before income taxes                                        (13,857)       6,838       16,029

Income tax expense                                                           2,126        1,758        5,677
                                                                      ------------- ------------ ------------ 
          Net earnings (loss)                                              (15,983)       5,080       10,352

Accretion of preferred stock                                                    95            -            -
                                                                      ------------- ------------ ------------ 
Net earnings (loss) applicable to common stock                        $    (16,078)  $    5,080  $    10,352
                                                                      ============= ============ ============                  

Earnings (loss) per common share:

   Basic                                                              $     (1.70)   $     0.56  $      1.16
                                                                      ============= ============ ============
   Diluted                                                            $     (1.70)   $     0.53  $      1.12
                                                                      ============= ============ ============
                                                                    
</TABLE>

<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                 (In thousands)

<TABLE>
<CAPTION>
                                                                                 Year ended
                                                                ------------------------------------------                   
                                                                  Dec. 31,       Dec. 31,      Dec. 27,
                                                                    1998           1997          1996
                                                                -------------  -------------  ------------                   
<S>                                                              <C>             <C>           <C>
Net earnings (loss)                                              $  (15,983)     $    5,080    $   10,352

Other comprehensive income (loss):
   Foreign currency translation adjustments                             126             297           289
   Unrealized gains (losses) on securities                              (89)          1,505        (3,460)
   Reclassification adjustment for losses included
       in net earnings (loss)                                             -            (868)            -
                                                                -------------  -------------  ------------
Other comprehensive income (loss) before income taxes                    37             934        (3,171)

Income tax expense (benefit) related
   to items of other comprehensive income (loss)                         12             240        (1,123)
                                                                -------------  -------------  ------------                        
Other comprehensive income (loss), net of income taxes                   25             694        (2,048)
                                                                -------------  -------------  ------------ 
Comprehensive income (loss)                                     $   (15,958)     $    5,774   $     8,304
                                                                =============  =============  ============
</TABLE>


<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       Retained     Comprehensive
                                     -----------------------
                                       Shares       Amount     Capital       Earnings        Income           Total
                                     ------------  ---------  -----------   -----------  ----------------  ------------
<S>                                       <C>      <C>         <C>          <C>          <C>               <C>

Balance at December 25, 1995               8,715   $   1,743   $    5,112   $   140,062  $          1,574  $    148,491
                                       
Issuance of common stock for cash            196          39        2,746             -                 -         2,785

Common stock issued in
   connection with acquisitions              149          30           51            82                 -           163

Common stock repurchased
   and retired                                (3)         (1)         (51)            -                 -           (52)

Compensation expense on
   employee stock purchase plan                -           -           90             -                 -            90

Tax benefit from issuance of
   common stock to employees                   -           -          691             -                 -           691

Other comprehensive loss                       -           -           -              -            (2,048)       (2,048)
 
Net earnings                                   -           -           -         10,352                 -        10,352
                                     ------------  ---------  -----------   -----------  ----------------  ------------

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 preferred stock                   -          -             -           (95)                -           (95)
                                     ------------  ---------  -----------   -----------  ----------------  ------------

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

</TABLE>



<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                Year ended
                                                                              -----------------------------------------------
                                                                                 Dec. 31,         Dec. 31,         Dec. 27,
                                                                                   1998             1997             1996
                                                                              -------------    -------------    -------------
<S>                                                                           <C>              <C>              <C>   
Cash flows from operating activities:
   Net earnings (loss)                                                        $    (15,983)    $      5,080     $     10,352
                                                                             
   Adjustments to reconcile  net earnings  (loss) to net cash  
     provided by (used in) operating activities:
          Depreciation and amortization                                             15,934           10,041            9,120   
          Provision for losses on accounts receivable                                  496              370              335
          Provision for write down of inventories                                    1,987            1,009            1,077
          Provision for warranty expense                                               872              726              673
          Deferred income taxes                                                     (2,919)          (3,299)           1,283
          Loss on write down of investment securities                                1,075            9,575                -
          Gain on sale of investment securities                                     (2,493)               -           (1,868)
          Write-off of acquired in-process technology                               20,780                -                -
          Other, net                                                                   868              169              159
          Changes in assets and liabilities net of effects of
          purchase/sale of business:
             Accounts receivable                                                    (3,613)          (2,935)          (7,406)
             Inventories                                                           (28,867)          (8,641)          (4,705)
             Costs and estimated earnings in excess of billings on
               uncompleted contracts, net                                           (6,110)         (15,060)         (19,036)
             Prepaid expenses and deposits                                          (3,533)          (1,430)            (745)
             Accounts payable                                                        5,699            8,071            3,502
             Accrued expenses                                                         (266)           1,161              288
             Customer deposits                                                      (3,235)           4,496           (3,489)
             Income taxes                                                           (1,473)           4,958          (10,461)
                                                                                 ----------       ----------       ----------

         Net cash provided by (used in) operating activities                       (20,781)          14,291          (20,921)
                                                                                 ----------       ----------       ----------
Cash flows from investing activities:
   Purchases of short-term investments                                             (22,217)         (80,443)         (57,354)
   Proceeds from sale of short-term investments                                     47,691           77,858           97,262
   Purchases of investment securities                                                 (541)          (4,208)          (1,447)
   Proceeds from sale of investment securities                                       3,304                -            1,886
   Purchases of property, plant and equipment                                      (18,516)         (10,804)         (10,521)
   Increase in other assets                                                              -                -           (1,463)
   Payments for business acquisitions, net of cash acquired                         (7,603)               -                -
                                                                                 ----------       ----------       ----------

         Net cash provided by (used in) investing activities                         2,118          (17,597)           28,363
                                                                                 ----------       ----------       ----------

Cash flows from financing activities:
   Borrowings under line of credit agreements                                        3,915                -             1,940
   Payments under line of credit agreements                                         (1,575)          (3,827)              (36)
   Net proceeds from issuance of common stock                                        2,022            3,141             2,785
   Net proceeds from issuance of preferred stock                                    23,544                -                 -
   Payments for repurchases of common stock                                        (15,685)          (4,625)                -
                                                                                 ----------       ----------       ----------

         Net cash provided by (used in) financing activities                        12,221           (5,311)            4,689
                                                                                 ----------       ----------       ----------

Effect of foreign exchange rate on cash and cash equivalents                           100              272              (633)
                                                                                 ----------       ----------       ----------

Net change in cash and cash equivalents                                             (6,342)          (8,345)           11,498
                                                                                 
Cash and cash equivalents at beginning of year                                       8,176           16,521             5,023     
                                                                                 ----------       ----------       ----------

Cash and cash equivalents at end of year                                         $   1,834        $   8,176        $   16,521
                                                                                 ==========       ==========       ==========

Supplemental Disclosures of Cash Flow Information Cash paid 
  during the year for:
    Interest                                                                     $   1,309        $   1,351        $    1,385
    Income taxes                                                                     7,130            1,915            14,736
Accretion of preferred stock 
                                                                                        95                -                 -

</TABLE>

<PAGE>


            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

          December 31, 1998, December 31, 1997, and December 27, 1996


(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.

         The  Company  changed  its  fiscal  year end from  the last  Friday  in
         December to a calendar  year end in 1997.  The fiscal year ends for the
         years included in the accompanying  consolidated  financial  statements
         are the periods  ended  December  31,  1998,  December  31,  1997,  and
         December 27, 1996.

         Principles of Consolidation

         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.

         Revenue Recognition

         Net sales include 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.
         Additionally,  in 1998 the AICPA  issued SOP 98-9  Modification  of SOP
         97-2 with Respect to Certain  Transactions.  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 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 which
         is specific to the vendor.  The revenue  allocated to software products
         is generally  recognized  upon  delivery of the  products.  The revenue
         allocated  to  unspecified  upgrades  and  updates  and  post  contract
         customer support is generally recognized as the services are performed.

         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  shipped  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.
<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 $1.8  million and $6.9 million as of December 31, 1998
         and 1997, respectively.

         Inventories

         Raw  materials  and  supplies  inventories  are  stated at the lower of
         weighted-average cost or market. Work-in-process and finished goods are
         stated  on the basis of  accumulated  manufacturing  costs,  but not in
         excess of market  (net  realizable  value).  The  Company  periodically
         reviews  inventories  for  obsolescence  and provides a reserve that it
         considers sufficient to cover any impaired inventories.

         Property, Plant and Equipment

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

         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
         goodwill is being amortized using the  straight-line  method over seven
         years.  The  other  intangible  assets  are being  amortized  using the
         straight-line method over six months to seven years. As of December 31,
         1998  and  1997,   accumulated   amortization  of  goodwill  and  other
         intangible assets was $4.9 million and $0.1 million, respectively.

         The Company assesses  whether its goodwill and other intangible  assets
         are impaired based on a periodic  evaluation of undiscounted  projected
         cash flows through the remaining  amortization period. If an impairment
         exists,  the amount of such impairment is calculated and recorded based
         on the estimated fair value of the asset.

         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 separate
         component of  stockholders'  equity 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 which 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.
<PAGE>

         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.

         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.  Revenues 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  effect  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 revenues
         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.
<PAGE>

         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.

         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.

         In March 1998,  American  Institute  of  Certified  Public  Accountants
         issued Statement of Position  ("SOP") No. 98-1,  "Software for Internal
         Use," which  provides  guidance on accounting  for the cost of computer
         software  developed  or  obtained  for  internal  use.  SOP No. 98-1 is
         effective  for fiscal years  beginning  after  December  15, 1998.  The
         Company  does not expect that the  adoption of SOP No. 98-1 will have a
         material impact on its consolidated financial statements.

         Reclassifications

         Certain  reclassifications  have  been  made  in  the  1997  and  1996
         consolidated financial statements to conform to the 1998 presentation.


(2)       BUSINESS ACQUISITIONS

         On June 26, 1998, the Company acquired all of the outstanding  stock of
         AccelGraphics, Inc. ("AGI") 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 is  based in
         Milpitas,   California,   and  is  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.  ("SRI") 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,  revenues were forecasted based
         on relevant factors,  including  aggregate revenue growth rates for the
         business as a whole,  individual  product revenues,  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
<PAGE>

         using rates of return that the Company  believes  reflect the  specific
         risk/return characteristics of these research and development projects.

         The projected  revenues used in the income  approach are based upon the
         revenues 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.

         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 revenues 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):
<PAGE>

           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                               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
                                               ================

         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            $ 194,146
           Net loss                            (4,836)              (1,545)
           Loss per share:
              Basic                             (0.46)               (0.15)
              Diluted                           (0.46)               (0.15)

         On March 20, 1996,  the Company  acquired  Terabit  Computer  Specialty
         Company,  Inc.  ("Terabit").  Terabit,  established in 1979, developed,
         marketed and supported simulated cockpit instruments and other airborne
         electronics  displays  used in training  simulators  for  military  and
         commercial aircraft.  To effect the acquisition,  149,000 shares of the
         Company's  common  stock  were  issued  in  exchange  for  all  of  the
         outstanding common stock of Terabit.  The acquisition was accounted for
         using the pooling of interests method.

<PAGE>


(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, 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
                                               ============   ============   ============   =============         
At December 31, 1997:
  U.S. government securities:
      Maturing in one year or less             $     3,179    $         -     $        (3)  $      3,176  
      Maturing between one and three years           1,509              7               -          1,516
  State and municipal securities:
      Maturing in one year or less                  14,714             17             (10)        14,721
      Maturing between one and three years           9,389             42             (14)         9,417
  Corporate debt securities:
      Maturing in one year or less                   2,501              1               -          2,502
      Maturing between one and three years          16,045              -            (149)        15,896
  Other                                              1,700              -               -          1,700
                                               ------------   ------------   ------------   -------------
                                               $    49,037    $        67    $        176   $     48,928
                                               ============   ============   ============   =============
</TABLE>



(4)       INVENTORIES

         Inventories consist of the following (in thousands):

                                                        December 31,
                                                   1998             1997
                                              -------------    -------------   

          Raw materials                        $    26,084      $    13,674
          Work-in-process                           23,511           10,040
          Finished goods                             3,724            3,171
                                              -------------    -------------
                                              $     53,319      $    26,885
                                              =============    =============



<PAGE>



(5)       LONG-TERM CONTRACTS

         Comparative  information  with  respect to  uncompleted  contracts  are
summarized as follows (in thousands):
<TABLE>
<CAPTION>

                                                                                      December 31,
                                                                                 1998               1997
                                                                            --------------     -------------
<S>                                                                           <C>                <C>
Accumulated costs and estimated                                                $236,757           $217,354
   earnings on uncompleted contracts
Less total billings on uncompleted contracts                                   (185,167)          (171,896)
                                                                              ------------       ----------- 
                                                                               $ 51,590           $ 45,458
                                                                              ============       ===========

Costs and estimated earnings in excess of
   billings on uncompleted contracts                                           $ 58,682           $ 51,799
Billings in excess of costs and estimated
   earnings on uncompleted contracts                                             (7,092)            (6,341)
                                                                              ------------       -----------
                                                                              $   51,590         $  45,458
                                                                              ============       ===========
</TABLE>


(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           1998               1997
                                                        ---------------      ------------       -----------
          <S>                                            <C>                 <C>                <C> 

          Land                                                 -             $     1,436        $    1,436
          Buildings and improvements                        40 years              37,378            38,152
          Machinery and equipment                         3 to 8 years            94,614            79,372
          Office furniture and equipment                     8 years               2,616             2,178
          Construction-in-process                              -                   3,330             2,030
                                                                              ------------       -----------
                                                                                 139,374           123,168
Less accumulated depreciation and amortization                                   (85,681)          (78,800)
                                                                              ------------       -----------
                                                                              $   53,693        $   44,368
                                                                              ============      ===========

</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, 1998 were $8.2  million and $2.9  million,  respectively.
         Rental income for all operating leases for 1998, 1997 and 1996 was $1.5
         million, $1.1 million and $0.8 million, respectively.

         The Company  occupies  real property and uses certain  equipment  under
         lease  arrangements  which are  accounted  for  primarily  as operating
         leases.  Rental  expenses for all operating  leases for 1998,  1997 and
         1996 were $2.3 million, $1.7 million and $1.5 million, respectively.
<PAGE>

         At  December  31,  1998,  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,
                 1999                        $      816          $     2,438
                 2000                               725                2,250
                 2001                               682                1,825
                 2002                               647                1,530   
                 2003                               647                1,547
                Thereafter                        1,940               10,123
                                             ------------       ---------------
                                             $    5,457          $    19,713
                                             ============       ===============

  (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):
<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                     1998                  1997
                                                                                  ----------           -------------   
           <S>                                                                   <C>                 <C>       
           Marketable securities:
                Iwerks Entertainment, Inc. (Iwerks)                                $     225            $       500
                                                                                  -----------          -------------
           Nonmarketable securities:
                Silicon Light Machines (SLM)                                           2,655                  3,500
                Sense8 Corporation (Sense8)                                                -                    500
                Total Graphics Solutions N.V. (TGS)                                      500                    500
                                                                                  -----------          -------------
                                                                                       3,155                  4,500
                                                                                  -----------          -------------
           Total investment securities                                               $ 3,380           $      5,000
                                                                                  ===========          =============
</TABLE>

         Iwerks designs, engineers, manufactures, markets and services high-tech
         entertainment  attractions  which employ a variety of projection,  show
         control,   ride  simulation  and  software   technologies.   SLM  is  a
         development-stage  company  engaged  in  research  and  development  of
         high-resolution   displays.   Sense8   designs  and  markets   software
         development  tools for multimedia  producers.  TGS develops and markets
         portable  graphics  software tools which provide hardware  independence
         for  application   developers.   Each   investment  in   non-marketable
         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 each company.  The Company has one of
         six  seats on both  SLM's and 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 each investment under the cost method.
<PAGE>

         The Company had an additional investment 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.  During 1998, the Company made an additional net investment of
         $0.3  million in Sense8 and then sold all of its holdings in Sense8 for
         net proceeds of $3.3 million, recognizing a $2.5 million gain.

(9)       ACCRUED EXPENSES

         Accrued expenses consist of the following (in thousands):

                                                           December 31,
                                                    1998                1997
                                                -----------          ----------

           Pension plan obligation (note 10)    $    8,611           $   5,305
           Compensation and benefits                11,256               7,497
           Other                                     7,280               5,259
                                                -----------          ----------
                                                $   27,147            $ 18,061
                                                ===========          ==========

(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.

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

<TABLE>
<CAPTION>
                                                              Pension Plan                          SERP
                                                      ------------------------------    -----------------------------          
                                                            1998             1997            1998            1997
                                                      --------------    ------------    -------------     -----------
           <S>                                          <C>               <C>             <C>             <C>
           Change in benefit obligation:
              Beginning of year                          $  36,212         $25,778         $  5,262        $  3,354
              Service cost                                   2,601           2,025              828             497
              Interest cost                                  2,501           2,007              355             234
              Actuarial (gain) loss                          2,344           7,394           (1,014)          1,177
              Benefits paid                                 (1,021)           (992)               -               -
                                                         -----------       ---------       ----------      ----------       
              End of year                                   42,637          36,212            5,431           5,262
                                                         -----------       ---------       ----------      ----------

           Change in plan assets:
              Fair value at beginning of year               36,768          32,912
              Actual return on plan assets                   4,475           4,848
              Benefits paid                                 (1,022)           (992)
                                                         -----------       ---------                                           
              Fair value at end of year                     40,221          36,768
                                                         -----------       ---------
           Reconciliation of funded status:
              Funded status                                 (2,416)            555           (5,431)         (5,262)
              Unrecognized actuarial (gain) loss            (2,805)         (3,954)           1,391           2,548
              Unrecognized prior service cost                  161             165              874           1,294
              Unrecognized transition obligation               238             317                -               -
                                                         -----------       ---------       ----------      ----------
              Net amount recognized                      $  (4,822)        $(2,917)         $(3,166)        $(1,420)
                                                         ===========       =========       ==========      ==========
</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                              Pension Plan                          SERP
                                                      ------------------------------    -----------------------------
                                                            1998             1997            1998            1997
                                                      --------------    ------------    -------------    ------------
           <S>                                         <C>               <C>              <C>              <C>

           Amounts recognized in the consolidated 
             balance sheets:
              Accrued benefit liability                 $  (4,822)        $ (2,917)        $ (3,166)       $  (1,420)
              Additional minimum liability                      -                -             (623)            (968)
                                                       -----------        ---------       ----------       ----------
             Net amount recognized                      $  (4,822)        $ (2,917)         $(3,789)         $(2,388)
                                                         ===========       =========       ==========      ==========

           Assumptions (weighted average):
              Discount rate                                  6.8%             7.0%             6.8%            7.0%
              Expected return on plan assets                 9.0%             9.0%             N/A             N/A

</TABLE>

          Net periodic  pension and other  postretirement  benefit costs include
          the following components (in thousands):
<TABLE>
<CAPTION>
                                                       Pension Plan                            SERP
                                              --------------------------------    -------------------------------
                                               1998        1997        1996        1998       1997        1996
                                              --------    --------    --------    --------   --------    --------
           <S>                                <C>         <C>         <C>         <C>        <C>         <C>
           Components of net periodic benefit 
             cost:
              Service cost                    $2,601      $2,025      $1,989      $  828      $  327      $  265
              Interest cost                    2,501       2,007       1,776         355         252          98
              Expected return on assets       (3,264)     (2,924)     (2,584)          -           -           -
              Amortization of actuarial
               (gain) loss                       (15)       (300)       (133)        143         115          46
              Amortization of prior year
               service cost                        4           5         (33)         73         106          40
              Amortization of transition          79          79          79           -           -           -
                                              --------    --------    --------    --------   --------    --------
              Net periodic benefit cost       $1,906      $  892      $1,094     $ 1,399    $    800     $   449
                                              ========    ========    ========    ========   ========    ========

</TABLE>
         Deferred  Savings Plan - The Company has a deferred  savings plan which
         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 1998,  1997 and 1996 were $1.0 million,
         $1.0 million and $0.9 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, 1998 and 1997,  the investment in the policies was $2.6
         million and $1.1 million,  respectively, and net life insurance expense
         was $0.5  million,  $0.1  million and $0.1  million for 1998,  1997 and
         1996, respectively.

(11)      LINES OF CREDIT

         The following is a summary of lines of credit (dollars in thousands):
<TABLE>
<CAPTION>

                                                                  1998                 1997 
                                                              ------------         ------------
          <S>                                                  <C>                  <C> 
          Balance at end of year                               $    4,298           $       950
          Weighted average interest rate at end of year               6.9%                  8.0%
          Maximum balance outstanding during the year          $    4,298           $     3,441
          Average balance outstanding during the year          $    4,239           $     1,845
          Weighted average interest rate during the year              7.4%                  7.6%

</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.
<PAGE>

          In November 1998, the Company  entered into a revolving line of credit
          agreement with U.S. Bank National  Association.  The revolving line of
          credit  provides for borrowings by the Company of up to $20.0 million.
          Borrowings  bear interest at the  prevailing  prime rate minus 1.0% or
          the LIBOR  rate plus 1.0%.  The  revolving  line of credit  expires on
          November 10, 1999. The revolving  line of credit,  among other things,
          (i) requires the Company to maintain certain  financial  ratios;  (ii)
          restricts the Company's ability to incur debt or liens;  sell, assign,
          pledge  or  lease  assets;  merge  with  another  company;  and  (iii)
          restricts  the  payment  of  dividends  and  repurchase  of any of the
          Company's  outstanding shares without prior consent of the lender. The
          revolving  line of  credit  is  unsecured.  There  were no  borrowings
          outstanding under this agreement as of December 31, 1998. In addition,
          the Company has a $7.5  million  unsecured  line for letters of credit
          with U.S. Bank National  Association for which there were $6.6 million
          and $4.7  million  outstanding  as of  December  31,  1998  and  1997,
          respectively.

         The Company also has unsecured revolving line of credit agreements with
         foreign banks  totaling  approximately  $7.1 million as of December 31,
         1998, of which approximately $2.8 million was unused and available.

(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>

           At 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
                                                             ==========    ===========    ==========    ===========
           At December 31, 1997:
              Federal                                        $   5,327     $   (4,476)    $     663     $    1,514
              State                                                858           (721)          107            244
                                                             ----------    -----------    ----------    -----------
                                                             $   6,185     $   (5,197)    $     770     $    1,758
                                                             ==========    ===========    ==========    ===========
           At December 27, 1996:
              Federal                                        $   3,130     $    1,200     $     595     $    4,925
              State                                                474            182            96            752
                                                             ----------    -----------    ----------    -----------
                                                             $   3,604     $    1,382     $     691     $    5,677
                                                             ==========    ===========    ==========    ===========
</TABLE>
<PAGE>

         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 1998 and 34  percent  for 1997 and 1996 as a result of the
         following (in thousands):
<TABLE>
<CAPTION>
                                                                               1998          1997           1996    
                                                                            ---------     ---------      ---------
          <S>                                                               <C>           <C>            <C>

          Tax (benefit) at U.S. federal statutory rate                      $ (4,850)     $  2,325       $  5,450
          In-process research and development                                  7,245             -              -
          Losses (gains) of foreign subsidiaries                                (101)         (115)          (165)
          Earnings of foreign sales corporation                                 (305)         (228)          (368)
          State taxes (net of federal income tax benefit)                        280           161            496
          Research and development and foreign tax credits                      (604)            -              -
          Foreign taxes                                                          182             -              -
          Other, net                                                             279          (385)           264
                                                                            -----------   -----------    -----------
                                                                            $  2,126      $  1,758       $  5,677
                                                                            ===========   ===========    ===========
</TABLE>

         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, 1998 and 1997, are presented below (in thousands):
<TABLE>
<CAPTION>
                                                                             Domestic                  Foreign
                                                                      -----------------------    --------------------
                                                                         1998        1997         1998        1997
                                                                      -----------  ----------    --------    --------
         <S>                                                          <C>          <C>           <C>         <C>

         Deferred tax assets:
             Warranty, vacation, and other accruals                   $   3,619    $  1,740       $    -     $     -
               Inventory reserves and other inventory-related
                  temporary basis differences                             3,478         944            -           -    
             Pension accrual                                              2,866       1,626            -           -
             Long-term contract related temporary differences               537         496            -           -
             Net operating loss carryforwards                             1,997         111            -         721
             Unrealized loss on marketable equity securities                 89          41            -           -
             Write-down of investment securities                          1,341       3,591            -           -
             Other                                                          960         342            -           -
                                                                      -----------  ----------    --------    --------
                   Total gross deferred tax assets                       14,887       8,891            -         721
                   Less valuation allowance                                 117         153            -         721
                                                                      -----------  ----------    --------    --------
                   Total deferred tax assets                             14,770       8,738            -           -    
                                                                      -----------  ----------    --------    --------
         Deferred tax liabilities:
             Intangible assets                                           (1,893)          -            -           -
             Plant and equipment, principally due to                                                   -           -
               differences in depreciation                                 (853)       (652)           -           -
             Other                                                          (87)        (60)           -           -
                                                                      -----------  ----------    --------    --------
                   Total gross deferred tax liabilities                  (2,833)       (712)           -           -
                                                                      -----------  ----------    --------    --------
                   Net deferred tax asset                             $  11,937    $  8,026      $     -     $     -
                                                                      ===========  ==========    ========    ========             

                   Net current deferred tax asset                     $   9,450    $  4,224
                   Net non-current deferred tax asset                     2,487       3,802
                                                                      -----------  ----------
                   Net deferred tax asset                             $  11,937    $  8,026
                                                                      ===========  ==========
</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.
<PAGE>

          Certain reclassifications have been made during 1998 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 $18 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 beginning valuation allowance
         changed during 1998 for domestic purposes by $36,000. The change in the
         foreign valuation allowance is primarily attributable to the loss being
         eliminated as part of a recapitalization  plan of the Company's foreign
         operations.

         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.


(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  ($16.3 million and $15.7 million
         as of  December  31,  1998 and 1997,  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.
<PAGE>


(16)      STOCK OPTION AND STOCK PURCHASE PLANS

         Stock  Option  Plans - The  Company  has stock  incentive  plans  which
         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>
                                                          1998                    1997                   1996
                                                 ---------------------   --------------------   ---------------------
                                                             Weighted-               Weighted-              Weighted-
                                                  Number      average     Number      average    Number      average
                                                    of       exercise       of       exercise      of       exercise
                                                  shares      price       shares      price      shares       price
                                                 --------   ----------   --------   ---------   --------    ---------
          <S>                                     <C>       <C>          <C>        <C>         <C>         <C>

          Outstanding at beginning              
             of year                               1,640      $ 20.38      1,309     $ 18.14        842       $ 14.45
          Granted                                  2,105        16.80        570       24.55        724         21.32
          Assumed in acquisitions                    351         9.69          -           -          -             -
          Exercised                                 (116)       10.70       (159)      16.21       (169)        13.44
          Canceled                                (1,896)       22.15        (80)      21.78        (88)        18.20
                                                 --------                --------               --------
          Outstanding at end of year               2,084        13.80      1,640       20.38      1,309         18.14
                                                 ========                ========               ========
          Exercisable at end of year                 532        13.74        597       16.40        271         14.67
                                                 ========                ========               ========

          Weighted-average fair value of
             options granted during the                          5.82                   8.81                     7.15
             year
</TABLE>

         Shareholders  authorized an additional  400,000,  450,000  and 150,000
         shares to be  granted  under the plans  during  1998,  1997  and 1996,
         respectively.  As of December  31,  1998,  options to purchase  528,000
         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.  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, 1998 (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
                                          12/31/98       contractual        price         12/31/98          price
                                                             life
           -------------------------    -------------    -------------    -----------    ------------     -----------
           <S>                          <C>              <C>              <C>             <C>            <C>   
           $     0.48 -   $    2.82              55           7.1         $    1.03              40       $     0.99
                12.12 -       13.25             351           7.3             12.50             252            12.36
                13.56 -       13.56           1,358           9.6             13.56              10            13.56
                14.00 -       16.69             144           6.9             15.02             136            14.96
                18.06 -       22.79             165           7.5             20.84              91            20.93
                23.19 -       32.88              11           8.7             25.99               3            25.45
                                        -------------                                    ------------
                 0.48 -       32.88           2,084           8.8             13.80             532            13.74
                                        =============                                    ============
</TABLE>
<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
         earnings  (loss) and  earnings  (loss) per common share would have been
         changed to the following pro forma  amounts (in  thousands,  except per
         share data):
<TABLE>
<CAPTION>
                                                                            1998           1997           1996
                                                                         -----------     ----------     ----------
           <S>                                                           <C>             <C>            <C>
           Net earnings (loss)                           Pro forma       $(21,093)       $   2,545      $   8,570

           Basic earnings (loss) per common share        Pro forma          (2.22)            0.28           0.96

           Diluted earnings (loss) per commn share       Pro forma          (2.22)            0.27           0.93
</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 1998,  1997,  and
         1996:
<TABLE>
<CAPTION>
                                                                                1998            1997           1996
                                                                             ------------     ----------    -----------
           <S>                                                               <C>              <C>            <C>

           Expected life (in years)                                              2.3             2.6            2.3
           Risk-free interest rate                                              4.6%            5.7%           6.1%
           Expected volatility                                                   49%             47%            49%
           Dividend yield                                                         -               -              -
</TABLE>


         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
         43,000,  26,000 and  31,000  were  purchased  under this plan in fiscal
         1998,  1997 and 1996, and as of December 31, 1998,  255,000 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.
<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, Intel
         Corporation purchased 901,408 shares of this Class B-1 Preferred Stock,
         no par value,  plus a warrant to purchase an additional  378,462 shares
         of Class B-1  Preferred  Stock at an exercise  price of  $33.28125  per
         share  for  approximately  $24.0  million,  less  transaction  costs of
         approximately  $0.5  million.   These  preferred  shares  have  certain
         liquidation  and  conversion  rights,  in addition to other  rights and
         preferences. Upon the occurrence of certain events, Intel has the right
         to sell to the  Company  any or all of the shares  associated  with the
         preferred stock.


(18)      EARNINGS (LOSS) PER COMMON SHARE

         Earnings   (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.

         Basic earnings (loss) per common share is the amount of earnings (loss)
         for the  period  available  to each share of common  stock  outstanding
         during the reporting  period.  Diluted earnings (loss) per share is the
         amount of  earnings  (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  earnings per common share,  the earnings were the same
         for both the  basic  and  diluted  calculation.  The  diluted  weighted
         average number of common shares outstanding during 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):
<TABLE>
<CAPTION>
                                                                                      1998        1997        1996
                                                                                    ---------    --------    --------
           <S>                                                                      <C>          <C>         <C>
           Basic weighted average number of common shares                              9,461       9,060       8,944
              outstanding during the year

           Weighted average number of dilutive common                                      -         442         278
              stock options outstanding during the year
                                                                                    ---------    --------    --------
           Diluted weighted average number of common  
              shares outstanding during the year                                       9,461       9,502       9,222
                                                                                    =========    ========    ========
</TABLE>
<PAGE>

(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,  workstations 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 earnings (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      Other         Total
                                                              Products
                                             -----------     ------------    ------------     ---------    ----------
           <S>                               <C>              <C>            <C>              <C>         <C>
           Year ended December 31, 1998:
              Net sales                      $  167,014       $  17,453      $    7,299       $      -     $ 191,766
              Operating earnings (loss)          22,094         (30,663)         (7,417)             -       (15,986)

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

           Year ended December 27, 1996:
              Net sales                         118,757               -           7,002          4,805       130,564
              Operating earnings (loss)          17,955               -          (1,676)        (4,760)       11,519

</TABLE>

         The  Workstation  Products  segment  operating  loss in 1998 includes a
         write-off of acquired  in-process  technology  of  approximately  $20.8
         million.


(20)      GEOGRAPHIC INFORMATION

         The following table presents  revenues by geographic  location based on
         the location of the use of the product or services. Sales to individual
         countries  greater  than  10%  of  consolidated  net  sales  are  shown
         separately (in thousands):
<TABLE>
<CAPTION>
                                                             1998                 1997                1996
                                                         -------------        -------------       -------------
           <S>                                           <C>                  <C>                 <C>

           United States                                 $    106,858         $     64,711        $     42,196
           United Kingdom                                      41,029               12,008              13,913
           Europe (excluding United Kingdom)                   25,039               47,168              26,621
           Pacific Rim                                         18,257               27,789              44,262
           Other                                                  583                7,677               3,572
                                                         -------------        -------------       -------------
                                                         $    191,766         $    159,353        $    130,564
                                                         =============        =============       =============
</TABLE>
<PAGE>


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

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

           United States                      $  52,876         $   43,501
           Europe                                   817                867
                                              -----------       -------------
           Total property, plant and 
             equipment, net                   $  53,693         $   44,368
                                              ===========       =============


(21)      SIGNIFICANT CUSTOMERS

         In 1998,  sales to the U.S.  government and the United Kingdom Ministry
         of Defense ("UK MOD"),  either directly or indirectly  through sales to
         prime contractors or  subcontractors,  accounted for $70.8 million,  or
         37% of total net sales,  and $32.1 million,  or 17% of total net sales,
         respectively.  In 1997 and 1996, sales to the U.S.  government,  either
         directly  or  indirectly   through  sales  to  prime   contractors   or
         subcontractors, accounted for $45.5 million, or 29% of total net sales,
         and $25.8 million, or 20% of total net sales, respectively.

         In 1998,  sales to The Boeing  Company  ("Boeing")  were  approximately
         $28.1 million,  or 15% of total net sales, of which  approximately  98%
         related to U.S. government and UK MOD contracts,  and sales to Lockheed
         Corporation  ("Lockheed") were approximately  $22.0 million,  or 11% of
         total net 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 net sales.  In 1996,
         sales to Thomson were $15.8 million,  or 12% of total net sales,  sales
         to Hughes Training  Incorporated  ("Hughes") were $14.9 million, or 11%
         of total  net  sales,  and  sales to Rikei  Corporation  equaled  $14.3
         million, or 11% of total net sales. A portion of the Company's sales to
         Hughes  was for U.S.  government  contracts.  All sales to  significant
         customers are within the simulation segment.

         Aggregated  accounts  receivable  from  agencies  of the United  States
         government,   either   directly   or   indirectly   through   prime  or
         sub-contractors,   was  $14.0   million,   or  29%  of  gross  accounts
         receivable,  at  December  31, 1998 and $9.5  million,  or 26% of gross
         accounts  receivable,  at December  31,  1997.  Additionally,  accounts
         receivable  from  Thomson  was $3.5  million,  or 7% of gross  accounts
         receivable,  at  December  31, 1998 and $5.5  million,  or 15% of gross
         accounts receivable, at December 31, 1997.

         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, at December 31, 1998,  respectively.  The amount to the U.S.
         government was $21.4 million, or 41% of costs and estimated earnings in
         excess of billings on uncompleted contracts, at December 31, 1997.

(22)      RELATED PARTY TRANSACTIONS

         The Company had purchases of $1.4 million and $0.6 million  during 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 $0.4  million  and $0.2  million at  December  31,  1998 and 1997,
         respectively.

<PAGE>





ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

                                     "None"


                                    FORM 10-K

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

         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 1999 Annual Meeting of  Shareholders to be
held on May 20, 1999.

         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 1999 Annual Meeting of Shareholders to be held on May 20, 1999.

         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 1999 Annual Meeting of Shareholders to be held on May 20,
1999.


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 1999 Annual
Meeting of Shareholders to be held on May 20, 1999.


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 1999 Annual
Meeting of Shareholders to be held on May 20, 1999.


<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, 1998 and December 31,
          1997

         Consolidated  Statements of Operations for the years ended December 31,
         1998, December 31, 1997, and December 27, 1996

         Consolidated Statements of Comprehensive Income for the years ended
         December 31, 1998, December 31, 1997 and December 27, 1996.

         Consolidated  Statements  of  Stockholders'  Equity for the years ended
         December 31, 1998, December 31, 1997, and December 27, 1996

         Consolidated  Statements of Cash Flows for the years ended December 31,
         1998, December 31, 1997, and December 27, 1996

         Notes to Consolidated Financial Statements for the years ended December
         31, 1998, December 31, 1997, and December 27, 1996

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.


<PAGE>

         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.

         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.


<PAGE>

         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
                  Casilli,  Peter O. Crisp,  John T.  Lemley,  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

         AccelECLIPSE II, AccelGALAXY, AccelGMX, Digistar, DYNAMICgeometry, E&S,
E&S Lightning 1200,  Ensemble,  ESIG,  FuseBox,  Harmony,  iNTegrator,  MindSet,
REALimage,  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.


<PAGE>


                                   Schedule II

            EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

                        VALUATION AND QUALIFYING ACCOUNTS

     Years ended December 31, 1998, December 31, 1997, and December 27, 1996

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

December 31, 1998                      $        851     $       496      $       1,013     $     744        $   1,616

December 31, 1997                               563             370                  -            82              851

December 27, 1996                               172             335                  -           (56)             563


Inventory Reserves
----------------------------------

December 31, 1998                      $      7,635     $     1,987      $       1,350     $   4,009        $   6,963

December 31, 1997                             7,137           1,009                  -           511            7,635

December 27, 1996                             6,277           1,077                  -           217            7,137


Warranty Reserves
---------------------------------

December 31, 1998                      $        880     $       872      $         494     $     810        $   1,436

December 31, 1997                               808             726                  -           654              880

December 27, 1996                               848             673                  -           713              808

</TABLE>

<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 31, 1999            By:           /S/  James R. Oyler
                             -----------------------------------------
                                       JAMES R. OYLER, PRESIDENT

         Pursuant to the  requirements  of the  Securities  and  Exchange Act of
1934,  this  report  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 31, 1999
STEWART CARRELL                                     Board of Directors


   /S/  James R. Oyler                              Director and President                  March 31, 1999
--------------------------------------------
JAMES R. OYLER                                      (Chief Executive Officer)


   /S/  John T. Lemley                              Vice President and Chief                March 31, 1999
--------------------------------------------
JOHN T. LEMLEY                                      Financial Officer
                                                    (Principal Financial Officer)

   /S/  Mark C. McBride                             Vice President and                      March 31, 1999
--------------------------------------------
MARK C. MCBRIDE                                     Corporate Controller
                                                   (Principal Accounting Officer)

                    *                               Director                                March 31, 1999
GERALD S. CASILLI


                    *                               Director                                March 31, 1999
PETER O. CRISP


                    *                               Director                                March 31, 1999
IVAN E. SUTHERLAND



By:      /S/  Mark C. McBride                                                               March 31, 1999
   -----------------------------------------
             MARK C. MCBRIDE
              *Attorney-in-Fact
</TABLE>