EVANS & SUTHERLAND COMPUTER CORP - 10-K Annual Report

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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, 2001

/ / 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 Identification No.)
Incorporation or Organization)

600 KOMAS DRIVE, SALT LAKE CITY, UTAH 84108
(Address of Principal Executive (Zip Code)
Offices)

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. / /

The aggregate market value of the voting and non-voting Common Stock held by
non-affiliates of the registrant as of March 1, 2002 was approximately
$33,242,000, based on the closing market price of the Common Stock on such date,
as reported by The Nasdaq Stock Market.

The number of shares of the registrant's Common Stock outstanding at
March 1, 2002 was 10,398,314.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2002 Annual Meeting of Shareholders
to be held on May 16, 2002 are incorporated by reference into Part III hereof.

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EVANS & SUTHERLAND COMPUTER CORPORATION
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 2001

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FORM 10-K

PART I

ITEM 1. BUSINESS

GENERAL

Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S," "we,"
"us," or "our") was incorporated in the State of Utah on May 10, 1968. An
established high-technology company, E&S is a worldwide leader in providing
visual system solutions for simulation. E&S visual systems are used in military
and commercial training simulators, planetariums and interactive domed theaters,
as well as engineering and other applications. E&S is unique among visual
simulation companies in that it offers a complete range of solutions from low
cost, PC-based products to the most advanced systems in the world. All E&S
products are backed by unrivaled customer service and support, ensuring
customers low life-cycle cost and the best value in visual simulation.

E&S's principal offices are located at 600 Komas Drive, Salt Lake City, Utah
84108, and its telephone number is (801) 588-1000. E&S's home page on the
Internet is www.es.com. You can learn more about E&S by reviewing SEC filings on
the E&S web site. The SEC also maintains a web site at www.sec.gov that contains
reports, proxy statements and other information regarding SEC registrants,
including E&S. E&S makes its web site content available for information purposes
only. It should not be relied upon for investment purposes, nor is it
incorporated by reference into this Form 10-K.

During 2001, our core computer graphics technology was shared among three
business groups:

(1) Simulation Group, which produces a full range of image generators,
software, databases, and display systems for military and commercial
simulation;

(2) REALimage Solutions Group, which provides graphics acceleration
technology for PC-based simulation, the professional digital content
creation (DCC) market, and video processing technology for animation,
broadcasting, and netcasting applications; and

(3) Applications Group, which leverages our core technologies and applies
them to other growth markets, such as digital theaters and visualization
software for real estate development applications.

RESTRUCTURING

Early in 2001, we announced our intention to spin out or sell our REALimage
Solutions Group. In the third quarter of 2001, E&S sold the REALimage Group to
Real Vision, Inc., a Japanese company that has been a partner with E&S in the
development of technology for professional video applications. The sale was for
a maximum value of $12 million, consisting of cash of $6.3 million plus future
royalties, on a when and if earned basis, of up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City during the transition period. Shortly after the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.

Throughout 2001, we had been actively seeking sale or spin-off opportunities
for our RAPIDsite-TM- visualization solutions business which is part of the
Applications Group. The general economic downturn made it difficult to sell this
business. In December, we decided to discontinue the RAPIDsite business and
incorporate its technology into the core simulation business.

In the third quarter of 2001, we initiated a restructuring plan focused on
reducing the operating cost structure of E&S. As part of the plan, we recorded a
charge of $2.1 million relating to a reduction

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in force of approximately 80 employees. In the fourth quarter of 2001, we
extended the restructuring plan initiated in the third quarter. As part of the
plan, we recorded a charge of $0.7 million relating to a reduction in force of
approximately 12 employees. We estimate that this restructuring plan will reduce
expenses by $8.2 million per year going forward. As of December 31, 2001, we had
paid $1.9 million in severance benefits. The majority of the remaining benefits
will be paid out over the next two quarters. The charge was recorded in
accordance with Emerging Issues Task Force Issue 94-03 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit (Including
Certain Cost Incurred in a Restructuring)" and Staff Accounting Bulletin
No. 100, "Restructuring and Impairment Charges".

In the third quarter of 1999, E&S initiated a restructuring plan focused on
reducing the operating cost structure of its REALimage Solutions Group. As part
of the plan, E&S recorded a charge of $1.5 million relating to 28 employee
terminations, including 17 employees in San Jose and 11 employees in Salt Lake
City. The charge was recorded in accordance with Emerging Issues Task Force
Issue 94-03, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit (Including Certain Costs Incurred in a Restructuring)."

During 2000, after all employee severance costs were incurred, E&S reversed
$0.8 million of the restructuring charge as a result of certain employees being
transferred within E&S rather than being terminated and estimated severance and
related charges being lower than expected for the terminated employees.

FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS

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

These forward-looking statements include, but are not limited to, the
following statements:

- the successful execution of the Big 6 programs by the end of 2002;

- we will generate $5 million of cash per quarter and will be profitable in
the second half of 2002;

- projections of sales and net income and issues that may affect sales or
net income;

- projections of capital expenditures;

- plans for future operations;

- financing needs or plans;

- plans relating to our products and services;

- Simulation Group will experience growth in its markets as simulation
training increases in value as an alternative to other training methods,
and as simulation training technology and cost-effectiveness improve;

- additional enhancements to iNTegrator will expand its functionality and
help secure E&S's dominant position in its main target markets, both
commercial and military simulation;

- E&S is able to compete effectively in the simulation market and will
continue to be able to do so in the foreseeable future;

- approximately two-third's of Simulation Group's 2001 backlog will be
converted to sales in 2002 and replaced with new orders;

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- the Applications Group's new product will be launched in the first half of
2002;

- our properties are suitable for our immediate needs;

- total research and development spending will be lower in 2002 than in
2001;

- E&S will ultimately prevail in the litigation with Lockheed Martin
Corporation;

- E&S will not be liable for any further material liquidated damages and
late delivery penalties during 2002;

- existing cash, cash equivalents, borrowings available under E&S's various
borrowing facilities, other asset-related cash sources and expected cash
from future operations will be sufficient to meet E&S's anticipated
working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months;

- the guarantees of E&S issued in connection with the services of our joint
venture entity, Quest Flight Training Ltd., to the UK Ministry of Defence
or other parties will not be called upon for payment or performance;

- revenue is expected to contract by 10% from 2001 to 2002; and

- assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described in the "Factors That May Affect Future Results" discussion
under Item 7--Management's Discussion and Analysis of Financial Condition and
Results of Operations on page 35 of this annual report, important factors to
consider in evaluating such forward-looking statements include risk of product
demand, market acceptance, economic conditions, competitive products and
pricing, difficulties in product development, product delays, commercialization
and technology, and E&S's ability to maintain credit facilities to support its
operations on favorable and acceptable terms. 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

During 2001, our business units were aggregated into the following three
reportable segments: the Simulation Group, the REALimage Solutions 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. As described above under the heading "Restructuring",
we sold the REALimage Solutions Group and discontinued the RAPIDsite business in
the Applications Group. Financial information by reportable segment for each of
the three years ended December 31, 2001 is included in Note 18 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 30% of
the worldwide market for government and military applications and commercial
airline training simulators. The group anticipates growth in these markets as
simulation training increases in value as an alternative to other training
methods, and as simulation training technology and cost-effectiveness improve.

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Throughout 2001, we continued development of our
iNTegrator-Registered Trademark- software product, which provides the real-time
control and modeling tools for the Symphony-TM- family of hardware platforms.
Performance optimizations and new functionality have continuously been added
with each new software release to meet existing contract requirements and to
increase the product performance. While the majority of iNTegrator development
is complete, some additional enhancements are planned in 2002, which management
believes will expand its functionality and help secure our dominant position in
our main target markets, both commercial and military.

In addition to continued development of iNTegrator software, we completed
the major development efforts on our most advanced image generator product,
Harmony-Registered Trademark-. All major Harmony programs are now in training or
in final stages of completion and acceptance.

PRODUCTS & MARKETS

The Simulation Group provides a complete line of visual systems for flight
and ground training and related services to the United States and international
armed forces, NASA, commercial airlines, and aerospace companies. E&S remains an
industry leader in visual systems sales to many U.S. government agencies and
more than 20 foreign governments for training military vehicle operators. The
Simulation Group is also a leading independent supplier of visual systems for
commercial airline flight simulators. This group provides over 30% of the visual
systems installed in full-flight training simulators for commercial airlines,
training centers, simulator manufacturers, and aircraft manufacturers.

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

Generally, the Simulation Group's visual systems products consist of the six
major components listed below. These components are available as subsystems, but
are typically sold together as a complete visual system solution delivered to an
end user or prime contractor.

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

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

(3) Databases depicting synthetic environments are offered as options or as
custom solutions. The group provides database development as well as
database development tools such as iNTegrator and
EaSIEST-Registered Trademark-. Databases developed using iNTegrator are a
key element of the Symphony product family. These can be run on a full
range of image generators.

(4) Simulation of sensor imagery such as radar, infrared, and night vision
goggles (NVG) is often provided with the visual systems for
high-performance fixed and rotary wing aircraft. E&S develops and
manufactures a variety of hardware and software products to achieve
realistic

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sensor simulation, including the Vanguard-Registered Trademark- radar
image generator, infrared postprocessors, and customized systems for
either simulated or stimulated NVG solutions.

(5) System integration and installation services are offered in support of
the total simulator system. We have the capability to act as the main
prime contractor for large commercial and military contracts requiring
total systems integration.

(6) A full range of customer support services is offered to prime
contractors, system integrators, and military or commercial end users.
Service and Support product offerings include customized support
packages, called Encore(SM), that provide complete maintenance, spares,
and round-the-clock technical support; SimTech Training, which provides
training to the customers' simulation technicians and engineers; and
Computer-Based Training.

E&S also develops complete simulation solutions for specific training
applications. In 2001, we announced two new products, the Mission Command
Trainer, or MCT-TM-, and the Air Traffic Control Trainer, or ATCT-TM-. The MCT
is a low-cost tactics simulator that provides realistic command training,
mission planning, and mission rehearsal in a virtual environment against an
intelligent virtual enemy, all in the safety and security of a classroom.
Developed in a partnership with MicroNav, Ltd., one of the world's leading
producers of air traffic control training software, the ATCT is a complete,
advanced 3D tower simulator for licensing, refresher training, and conversion
training.

The Simulation Group's products are marketed worldwide by E&S and qualified
distributors. Products and services are sold directly to end users by E&S as a
prime contractor, through simulator prime contractors with E&S acting as a
subcontractor, and through system OEMs. E&S continues to form both domestic and
international alliances with aerospace and simulation companies that dominate
their respective market segments. Such strategic alliances have proved to be an
effective method for accessing specific markets. In addition, we have OEM and
Value Added Reseller agreements with several major distributors in Europe and
Asia.

COMPETITIVE CONDITIONS

Primary competitive factors for the Simulation Group's products are
performance, price, service, and product availability. Because competitors are
constantly striving to improve their products, the group must ensure that it
continues to offer products with the best performance at a competitive price.
Prime contractors, including Lockheed Martin, Flight Safety International (FSI),
Thales Training & Simulation Ltd., and CAE Electronics, Ltd. (CAE), offer
competing visual systems in the simulation market. We believe we are able to
compete effectively in this environment and will continue to be able to do so in
the foreseeable future. In 2001, the group was awarded several highly
competitive orders against FSI and CAE, the principal competitors in the
commercial simulation market. In the military simulation market, the group
competes primarily with Silicon Graphics, Inc. and CAE. In the low-cost,
PC-based market, our simFUSION product competes against companies that focus on
PC simulation using graphics accelerator cards, such as Quantum 3D.

In February 2001, a team of industry leaders led by Evans & Sutherland was
selected by the U.S. Army Simulation, Training, and Instrumentation Command
(STRICOM) to receive an Indefinite Delivery/Indefinite Quantity (ID/IQ)
contract. Under the terms of the contract, the E&S team is prequalified to bid
as a prime contractor on STRICOM contracts valued at up to $4 billion over the
next eight years.

A team comprised of E&S and others is one of 17 prime contractor teams
selected by STRICOM for the Virtual Domain, one of four business domains that
include Constructive, Live, and Test-Instrumentation. Core members of the E&S
team include Cubic Applications, Inc., CACI, J.F. Taylor, Inc., Raydon, and MTI.
The team also includes 13 subcontractors with extensive backgrounds in military
simulation.

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E&S is also a member of two contractor teams selected by STRICOM last fall
for the Constructive Domain. These key contract awards position Evans &
Sutherland to provide its state-of-the-art visual systems support, including
image generation, display systems, and database development, for future STRICOM
programs.

BACKLOG

The Simulation Group's backlog was $104.2 million on December 31, 2001,
compared with $134.6 million on December 31, 2000. It is anticipated that
approximately two-thirds of the 2001 backlog will be converted to sales in 2002.

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. The U.S.
Government, and other governments, may terminate any of our government contracts
and, in general, subcontracts, at their convenience as well as for default based
on performance. If any of our government contracts were to be terminated for
convenience, we generally would be entitled to receive payment for work
completed and allowable termination or cancellation costs.

Upon termination for convenience of a fixed-price type contract, we normally
are entitled, to the extent of available funding, to receive the purchase price
for delivered items, reimbursement for allowable costs for work-in-progress and
an allowance for profit on the contract or adjustment for loss if completion of
performance would have resulted in a loss. Upon termination for convenience of a
cost reimbursement contract, we normally are entitled, to the extent of
available funding, to reimbursement of allowable costs plus a portion of the
fee. The amount of the fee recovered, if any, is related to the portion of the
work accomplished prior to termination and is determined by negotiation.

U.S. government contracts also are conditioned upon the continuing
availability of Congressional appropriations. Long-term government contracts and
related orders are subject to cancellation if appropriations for subsequent
performance periods become unavailable. Congress usually appropriates funds on a
fiscal-year basis even though contract performance may extend over many years.
Consequently, at the outset of a program, the contract is usually partially
funded, and Congress annually determines if additional funds are to be
appropriated to the contract.

REALIMAGE SOLUTIONS GROUP

The REALimage Solutions Group was sold to Japan-based Real Vision, Inc., in
September 2001. As part of Real Vision, the group is continuing to develop the
"Studio-on-a-Chip" technology, which brings together real-time graphics and
video in a unique and effective way to support all aspects of visual content
creation for broadcasting and netcasting applications. The sale was for a
maximum value of $12 million, consisting of cash of $6.3 million plus future
royalties, on a when and if earned basis, up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City during the transition period. Shortly after the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.

PRODUCTS & MARKETS

Prior to 2002, the REALimage Solutions Group developed and sold graphics
chips and graphics subsystems for professional PC workstations. Early in 2000,
the group's strategic focus changed from development and manufacture of graphics
accelerator cards for professional digital content creation customers to
development of the next generation REALimage chip, the RI 5000. This chip,
referred to

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as "Studio-on-a-Chip", brings together both graphics and video processing
technology on a single chip for digital video content creation and
post-production.

The group also began to establish a new application and market for REALimage
technology in 2000 when REALimage chips were selected by Honeywell for use in
cockpit navigation systems for military aircraft and business jets.

COMPETITIVE CONDITIONS

Due to the sale of the REALimage Solutions Group to Real Vision, Inc. of
Japan, we do not compete in this industry or market any longer.

BACKLOG

Because of the shift in strategic focus, the in-process development of the
new RI 5000 chipset, and the sale of REALimage, the group has no backlog as of
December 31, 2001, compared to $0.7 million as of December 31, 2000.

APPLICATIONS GROUP

The Applications Group is composed of synergistic businesses that use E&S
core technology in growth markets. The group's products are applications that
leverage E&S's technology and apply them to other growth markets. After these
applications have been developed and produced, our strategy is to spin them off
or sell them to companies involved in complementary businesses.

PRODUCTS & MARKETS

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

In 2001, the Applications Group achieved several important milestones. The
Applications Group launched its second interactive show called Crack the Cosmic
Code. The show debuted at the StarRider theater at Exploration Place in Wichita,
Kansas. The Applications Group continued its development of its new product,
which will be launched in the first half of 2002, as well as several new domed
theater shows, which are available to theaters around the world for licensing.

In 2001, the Applications Group continued to expand the market for E&S
RAPIDsite-TM-. E&S RAPIDsite is a photorealistic visualization tool designed for
use by real-estate developers, consulting engineers, architects, and municipal
planners involved with all types of land development projects. RAPIDsite
features fast 3D-model construction, accelerated graphics rendering performance
and easy-to-use interactive exploration of a proposed development on a Windows
NT computer with an OpenGL graphics accelerator.

Throughout 2001, we had been actively seeking sale or spin-off opportunities
for our RAPIDsite-TM- visualization solutions business which is part of the
Applications Group. The general economic

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downturn made it difficult to sell this business. In December, we decided to
discontinue the RAPIDsite business.

COMPETITIVE CONDITIONS

Primary competitive factors for the Applications Group's products are
functionality, performance, price, and access to customers and distribution
channels. Our 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.

BACKLOG

The Applications Group's backlog was $2.7 million December 31, 2001,
compared with $7.4 million on December 31, 2000. It is anticipated that most of
the 2001 backlog will be converted to sales in 2002.

SIGNIFICANT CUSTOMERS

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

Sales to the U.S. government, either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $69.5 million or 48% of total
sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total
sales in 2001, 2000, and 1999, respectively. Sales to the United Kingdom
Ministry of Defense, either directly or indirectly through sales to prime
contractors or subcontractors, accounted for $13.6 million or 9% of total sales,
$22.3 million or 13% and $33.8 million or 17% of total sales in 2001, 2000 and
1999, respectively.

In 2001, sales to Thales Training & Simulation Ltd. totaled $23.9 million or
16.4% of total sales of which 57% related to U.S. government and United Kingdom
Ministry of Defence contracts and sales to The Boeing Company totaled
$15.1 million or 10% of total sales of which 100% related to U.S. government and
United Kingdom Ministry of Defence contracts.

In 2000, sales to Lockheed Martin Corporation were $22.5 million or 14% of
total sales, of which 100% related to U.S. government and United Kingdom
Ministry of Defence contracts and sales to Thales Training & Simulation Ltd.
were $19.6 million or 12% of total sales, of which 58% related to United Kingdom
Ministry of Defence contracts.

In 1999, sales to Lockheed Martin Corporation were $35.8 million or 18% of
total sales, of which 100% related to U.S. government and United Kingdom
Ministry of Defence contracts and sales to The Boeing Company were
$25.4 million or 13% of total sales, of which 100% related to U.S. government
and United Kingdom Ministry of Defence contracts.

All of our sales to significant customers are within the Simulation Group.

DEPENDENCE ON SUPPLIERS

Most of our current 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, we stock a substantial inventory, or
obtain the agreement of the vendor to maintain adequate stock for future
demands, and/or attempt to develop alternative components or sources where
appropriate.

On June 3, 1999, we entered into an electronic manufacturing services
agreement with Sanmina Corporation (now Sanmina-SCI). The agreement commits us
to purchase a minimum of $22 million of electronic products and assemblies from
Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum
purchase levels, subject to adjustment, we may be required to pay 25 percent of
the

12

difference between the $22 million and the amount purchased. We have fully
satisfied the requirements of this contract, which ends in June 2002. Various
alternatives, which include a renewed contract with Sanmina-SCI, are being
evaluated.

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. and internationally, we hold active patents that cover many
aspects of our graphics technology. Several patent applications are presently
pending in the U.S., Japan, and several European countries, and other patent
applications are in preparation. E&S actively pursues patents on its new
technology. E&S routinely copyrights software, documentation, and chip masks
designed by us and institutes copyright registration for such software,
documentation, and masks when appropriate.

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. Our research and development expenses were $28.8 million,
$44.3 million, and $44.4 million in 2001, 2000, and 1999, respectively. As a
percentage of sales, research and development expenses were 20%, 27%, and 22% in
2001, 2000, and 1999, respectively. We continue to fund substantially all
research and development efforts internally. It is anticipated that high levels
of research and development will be needed to continue to ensure that we
maintain technical excellence, leadership, and market competitiveness. However,
due to the sale of the REALimage Solutions Group, the discontinuation of the
RAPIDsite business and the reduction of effort required to develop our Harmony
and iNTegrator products, management expects that the total research and
development spending necessary to continue the timely development of products
will be lower in 2002 than in 2001.

INTERNATIONAL SALES

Sales of products known to be ultimately installed outside the United States
are considered international sales by E&S and were $49.5 million,
$60.9 million, and $86.7 million in 2001, 2000, and 1999, respectively.
International sales represented 34%, 36%, and 43% of total sales in 2001, 2000,
and 1999, respectively. For additional information, see Note 19 of Notes to
Consolidated Financial Statements included in Part II of this annual report.

EMPLOYEES

As of March 1, 2002, Evans & Sutherland and its subsidiaries employed a
total of 724 persons compared to 847 employees as of March 2, 2001. We believe
our relations with our employees are good. None of our employees is subject to
collective bargaining agreements.

ENVIRONMENTAL STANDARDS

We believe our 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.

13

STRATEGIC RELATIONSHIPS

In October 2001, we announced an agreement with NVIDIA-Registered Trademark-
Corporation. As part of this agreement, NVIDIA Corporation acquired certain key
3D-graphics patents from E&S and the companies agreed to a broad cross-license
of technologies.

This agreement with NVIDIA allows E&S to leverage its general graphics
technology into high volume markets, while adding new capabilities including
NVIDIA's programmable Shader technology to E&S's base of unique technology and
patents for the simulation industry.

During the fourth quarter of 2001, E&S entered into a multiyear agreement
with graphics technology leader ATI Technologies Inc., under which ATI will
provide graphics accelerator chips for our next-generation PC-based visual
systems. ATI chips will replace REALimage chips in E&S's next-generation
Ensemble and simFUSION image generators.

On July 22, 1998, Intel purchased 901,408 shares of E&S'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 $24.0 million. In
March 2001, Intel converted the 901,408 shares of E&S's preferred stock into
901,408 shares of E&S's common stock. In March 2001, Intel and E&S amended the
preferred stock and warrant purchase agreement to terminate certain contractual
rights of Intel, including registration rights, board and committee observation
rights, right of first refusal, right of participation, right of maintenance,
standstill agreement, and right to require E&S to repurchase the preferred stock
in the event of any transaction qualifying as a specific corporate event. E&S
also entered into an agreement to accelerate development of high-end graphics
and video subsystems for Intel-based workstations in July 1998.

ACQUISITIONS AND DISPOSITIONS

Early in 2001, we announced our intention to spin out or sell our REALimage
Solutions Group. In the third quarter of 2001, E&S sold the REALimage Solutions
Group to Real Vision, Inc., a Japanese company that has been a partner with E&S
in the development of technology for professional video applications. The sale
was for a maximum value of $12 million, consisting of cash of $6.3 million plus
future royalties, on a when and if earned basis, up to $6 million for REALimage
technology, other assets, and the performance of certain development support
during a seven-month transition period leading to closing the transaction in
April 2002. Real Vision has indicated it will continue the development of the
technology, and E&S is maintaining a technical staff to support Real Vision in
Salt Lake City during the transition period. As part of the sale of the
REALimage Group, E&S closed its offices in Seattle, Washington, and San Jose,
California.

In December 2000, we completed the divestiture of our German subsidiary via
a management-led buyout and recorded a loss of $0.3 million. The former
subsidiary, which was called Evans & Sutherland Computer GmbH, now operates
under a new name. The divested company has no remaining connection with E&S. We
will continue to operate in Germany and throughout Europe under our own name,
providing marketing, sales, and support for our growing visual systems business
and traditional customer base.

On March 28, 2000, we sold certain assets of our Application Group relating
to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million, and the assumption of
certain liabilities. On June 15, 2000, we received additional common stock of
RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at
$1.5 million related to the successful development of a product included in the
purchased assets.

14

On June 3, 1999, we sold certain of our manufacturing capital assets and
inventory of $6.0 million to Sanmina Corporation (now Sanmina-SCI) as part of
our efforts to outsource the production of certain electronic products and
assemblies. In addition, we entered into an electronic manufacturing services
agreement with Sanmina-SCI. The electronic manufacturing services agreement
commits us to purchase a minimum of $22.0 million of electronic products and
assemblies from Sanmina-SCI each year until June 3, 2002. If we fail to meet
these minimum purchase levels, subject to adjustment, we may be required to pay
25% of the difference between the $22.0 million and the amount purchased. We
have fully satisfied the requirements of this contract, which ends in
June 2002. Various alternatives, which include a renewed contract with
Sanmina-SCI, are being evaluated.

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

To further expand E&S's presence within the workstation graphics
marketplace, on June 26, 1998, E&S 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. E&S
paid approximately $1.2 million and incurred transaction costs of approximately
$250,000.

ITEM 2. PROPERTIES

Evans & Sutherland's principal executive, engineering, manufacturing and
operations facilities for each of its business segments are located in the
University of Utah Research Park, in Salt Lake City, Utah, where it owns seven
buildings totaling approximately 450,000 square feet. E&S occupies four
buildings and leases one of the remaining three buildings to other businesses.
The remaining two buildings are vacant. We plan to sell the three buildings we
do not occupy. The buildings are located on land leased from the University of
Utah (the "U of U Property") with an initial term of 40-years or longer. Five of
the buildings have land leases that expire in 2030, with a ten-year renewal
option. The remaining two buildings have land leases that expire in 2012 and
2014 respectively, with 40-year renewal options. All of our interests in the U
of U Property are subject to a lien by Foothill Capital Corporation to secure
repayment of the borrowing facility as set forth in the Liquidity and Capital
Resources section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations. E&S and its subsidiaries hold leases on
several sales, operations, service and production facilities located throughout
the United States, Europe and Asia, none of which is material to our
manufacturing, engineering or operating facilities. 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

LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION
(UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C,
FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation served E&S
with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit
in and for Orange County, Florida. Lockheed alleged in the complaint that we
breached a contract to provide certain visual systems for the Combined Arms
Tactical Trainer program for the United Kingdom Ministry of Defence. The
contract has an original value of $33.9 million. In the complaint, Lockheed
seeks compensatory damages of $8.5 million plus interest as well as
consequential damages and attorneys' fees. The $8.5 million being sought from
E&S by Lockheed was paid to us from May 1999 to March 2000 and was recognized as
revenue by us during 1999. On June 12, 2000, we filed our answer and
counterclaim. In the counterclaim, we allege as grounds for

15

recovery against Lockheed (1) breach of contract, (2) breach of implied covenant
of good faith and fair dealing, (3) unjust enrichment, (4) unfair competition,
(5) misappropriation of trade secrets, (6) intentional interference with
advantageous business relationship, (7) replevin, and (8) promissory estoppel.
In our counterclaim, we seek compensatory damages of not less than
$10.0 million and not more than $25.4 million.

On June 14, 2000, the case was removed to the Orlando Division of the United
States District Court for the District of Florida where it currently remains. On
July 7, 2000, Lockheed answered our counterclaim but also filed a motion for
dismissal of our counterclaims for unjust enrichment, unfair competition,
promissory estoppel, and incidental damages. On July 24, 2000, we filed our
opposition to Lockheed's motion to dismiss our counterclaims. On October 20,
2000 the court denied Lockheed's motion to dismiss in its entirety, without
prejudice. On January 16, 2001, we filed a motion for partial summary judgment,
asking the court to dismiss all of Lockheed's breach of contract claims. The
court denied that motion on August 30, 2001, citing the existence of material
disputed facts. On September 6, 2001 the court granted Lockheed's leave to amend
its complaint, which was filed on September 17, 2001. We filed a motion to
dismiss these new claims on October 4, 2001, and Lockheed has opposed it. The
court currently has that motion under advisement.

Discovery in the matter is scheduled to conclude on September 30, 2002. A
trial date is currently set for March, 2003. We dispute Lockheed's allegations
in the complaint, are vigorously defending the action, and are vigorously
prosecuting our counterclaims. Although management believes E&S will ultimately
prevail in the litigation, an unfavorable outcome of these matters would have a
material adverse impact on our financial condition and operations.

In the normal course of business, E&S has various other 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, we believe the ultimate disposition of these matters would have a
material adverse effect on our consolidated financial condition, liquidity or
results of operations.

16

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 2001.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following sets forth certain information regarding the executive
officers of E&S as of March 1, 2002:

Mr. Oyler was appointed President and Chief Executive Officer of E&S and a
member of the Board of Directors in December 1994. He is also a director of Ikos
Systems, Inc. Before joining Evans & Sutherland, Mr. Oyler served as President
of AMG, Inc. from mid-1990 until December 1994, and a Senior Vice President for
Harris Corporation from 1976 through mid-1990. He has seven years of service
with E&S.

Mr. Figgins was appointed Vice President, Product Marketing, in
January 2002. He joined E&S as Vice President and General Manager, PC
Simulation, in April of 1998, and was appointed Vice President of the Simulation
Group in January 1999. In June 2001, he was appointed Vice President and
Operating Officer, Simulation Group. Before joining E&S, Mr. Figgins served as
Vice President of Business Development and Marketing for Raytheon Training,
where he was employed from May 1986 to April 1998. Mr. Figgins has over
25 years experience in the simulation and training industry and has held
increasingly responsible technical, marketing and management positions in small,
medium and large organizations with senior executive positions in the last
decade. Mr. Figgins is a graduate of Royal Air Force Halton and holds a M.S in
Management from Purdue University. He has four years of service with E&S.

Mr. Frazier was appointed Vice President, Strategic Visualization, in
January 2002. He joined E&S in September 1997 as Vice President, Programs. In
June of 1998, Mr. Frazier was appointed Vice President, Programs and Shared
Technology. In April of 1999, he was appointed Vice President and General
Manager, Systems. Mr. Frazier served as Vice President and General Manager of
Simulation Systems until June of 2001, when he was appointed Vice President and
Operating Officer for Simulation. Prior to his assignment at E&S, he was
Director, Technology Development and Advanced Programs at Lockheed Martin
Tactical Defense Systems. Before working with Lockheed Martin, he held
increasingly responsible assignments in Simulation for LORAL Corporation. He has
four years of service with E&S.

Mr. Thomas was appointed Vice President and Chief Financial Officer in
December 2000 and Corporate Secretary in February 2001. He became Treasurer in
January 2002. He joined E&S in

17

August 2000 as Vice President, Finance, for the Simulation Group. From May 1998
to August 2000, Mr. Thomas was Executive Vice President and Chief Financial
Officer for Edge Technologies, Inc. During the three year period from 1995 to
1998, Mr. Thomas was Chief Financial Officer for Stanley Aviation Corporation.
Previously, he was a Director of Finance for a Hughes Aircraft Company
subsidiary, Financial Executive and Strategic Planner for a Large Scale
Information Technology Business Unit, and Senior Business Manager and Assistant
Controller for multiple divisions of Hughes. Mr. Thomas was employed by Hughes
from 1982 to 1995. He has one year of service with E&S.

Mr. Atchison was appointed Vice President, Manufacturing, Service, and
Support, in October 2001. He joined E&S in 1998, when E&S acquired Silicon
Reality, Inc. in June 1998, and served as Director, Materials, until July of
1999, when he was appointed Vice President, Manufacturing. At Silicon Reality,
Mr. Atchison was Vice President, Operations, Chief Operating Officer, and Chief
Financial Officer from October 1997 to June 1998. Prior to Silicon Reality, he
was Vice President, Investor Relations and Business Development for Alphatec,
and managed production control for National Semiconductor/ Fairchild. He has
three years of service with E&S.

Mr. Gibbs is the Vice President and General Manager of the Simulation
Systems Business Unit. Prior to this role, he served as General Manager of the
Service and Support Division. He has also held management positions in Supply
Chain Management and Quality Assurance. Mr. Gibbs received a B.S. in Mathematics
from the University of Utah. Mr. Gibbs has been with E&S for over 15 years.

Mr. Flitton was appointed Vice President and General Manager for the
Commercial Simulation division of Evans & Sutherland in January 2002.
Mr. Flitton has been in the simulation industry since 1979, and has been with
E&S since 1994. His first assignment with E&S, was as UK Product Manager for the
Commercial Simulation group, followed by an 18-month assignment as Program
Manager for the E&S subsidiary Xionix Simulation, in Dallas TX. Mr. Flitton then
moved to the E&S Salt Lake City Headquarters and held the positions of US
Regional Program Manager and then Products Director for the Commercial Airline
group. His prior assignment was as the Product Manager for high-end IG systems
within the Simulation Systems Group in Salt Lake City. Prior to joining E&S,
Mr. Flitton served a full engineering apprenticeship with Rediffusion Simulation
in the UK. Mr. Flitton was Principal Engineer and then Group Leader of the
Visual Engineering Group of Rediffusion. Mr. Flitton has a BEng Hons in
Electo/Mechanical Engineering from the University of Brighton (UK) and an M.B.A.
from the University of Warwick (UK). He is also Member of The Royal Aeronautical
Society (MRAeS).

18

FORM 10-K

PART II

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

PRICE RANGE OF COMMON STOCK

Our 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 our common stock for the fiscal quarters indicated, as reported by The
Nasdaq Stock Market. Quotations represent actual transactions in Nasdaq's
quotation system but do not include retail markup, markdown or commission.

APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

On March 1, 2002, there were 657 shareholders of record of our common stock.
Because brokers and other institutions hold many of our shares on behalf of
shareholders, we are unable to estimate the total number of shareholders
represented by these record holders.

DIVIDENDS

We have never paid a cash dividend on our common stock, retaining our
earnings for the operation and expansion of our business. We intend for the
foreseeable future to continue the policy of retaining our earnings to finance
the development and growth of our business. The payment of dividends is
restricted under the terms of our credit facilities. See "Item 7--Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."

19

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected financial data for the five fiscal years ended
December 31, 2001 are derived from our Consolidated Financial Statements. The
selected financial data should be read in conjunction with our Consolidated
Financial Statements and related notes included elsewhere in this annual report.
See also "Management's Discussion and Analysis of Financial Condition and
Results of Operations."

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

(1) During 2001, we incurred an impairment loss of $0.2 million and
restructuring charges of $2.8 million. See Notes 1 and 21 of the Notes to
Consolidated Financial Statements included in Part II of this annual report.

(2) During 2000, we recorded deferred tax expense of $20.6 million as a result
of our decision to fully reserve net deferred tax assets due to cumulative
net operating losses and the cancellation of a significant contract and the
related complaint filed by Lockheed Martin Corporation.

(3) During 1999, we incurred a write-off of inventories of $13.2 million, an
impairment loss of $9.7 million and a restructuring charge of $1.5 million.
See Notes 1 and 21 of the Notes to Consolidated Financial Statements
included in Part II of this annual report.

(4) During 1998, we incurred a $20.8 million charge to expense acquired
in-process technology in connection with the acquisitions of
AccelGraphics, Inc. and Silicon Reality, Inc.

20

QUARTERLY FINANCIAL DATA (UNAUDITED)

(In thousands, except per share amounts)

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

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

(2) During the third quarter of 2001, we recorded a restructuring charge of
$2.1 million and an income tax benefit of $2.0 million as a result of the
resolution of certain tax contingencies.

(3) During the fourth quarter of 2001, we recorded a $9 million gain on the sale
of certain patents. Also during this quarter, we recorded an impairment loss
of $0.2 million, a restructuring charge of $0.7 million and an income tax
benefit of $1.6 million as a result of the resolution of certain tax
contingencies.

(4) During the second quarter of 2000, we recorded a negative adjustment to
revenue of $10.9 million as a result of the cancellation of a significant
contract by Lockheed. Additionally, we recorded deferred tax expenses of
$20.6 million as a result of our decision to fully-reserve net deferred tax
assets due to cumulative net operating losses and the cancellation of a
significant contract and the related civil complaint filed by Lockheed.

(5) During the third quarter of 2000, we recorded a $6.7 million gain on the
sale of certain investment securities and a $1.9 million loss on available
for sale investment securities whose market value decline was determined to
be other than temporary.

(6) During the fourth quarter of 2000, we recorded a $5.9 million loss on
available for sale investment securities whose market value decline was
determined to be other than temporary.

21

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

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of sales and expenses during the reporting
period. Actual results could differ from those estimates. A summary of
significant accounting policies can be found in Note 1 to the consolidated
financial statements. We have identified the accounting policies which are
critical to our business and the understanding of our results of operation and
financial position.

REVENUE RECOGNITION

Revenue from long-term contracts which require significant production,
modification or customization is recorded using the percentage-of-completion
method, using the ratio of costs incurred to management's estimate of total
anticipated costs. Our estimates of total anticipated costs include assumptions,
such as estimated man-hours to complete, estimated materials costs, and
estimates of other direct and indirect costs. Actual results may vary
significantly from our estimates. If the actual costs are higher than
management's anticipated total costs, then an adjustment is required to reduce
the previously recognized revenue as the ratio of costs incurred to management's
estimate was overstated. If actual costs are lower than management's anticipated
total costs, then an adjustment is required to increase the previously
recognized revenue as the ratio of costs incurred to management's estimate was
understated.

COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS AND
BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

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
on the balance sheets. As revenue recognized on these long-term contracts
includes estimates of management's anticipated total costs, the amounts in costs
and estimated earnings in excess of billings on uncompleted contracts and
billings in excess of costs and estimated earnings on uncompleted contracts also
include these estimates.

INVENTORIES

Inventory amounts include materials at standard costs. Inventory also
includes inventoried costs on programs and long-term contracts which includes
direct engineering and production costs and applicable overhead, not in excess
of estimated realizable value, which have not yet been recognized as cost of
sales. We periodically review inventories for excess and obsolete amounts as
well as for amounts which are in excess of estimated realizable value, and
provide a reserve that we consider sufficient to cover these items. Assumptions
on which we estimate this reserve include future sales, pricing of future
products and estimates of total anticipated costs to complete projects. Changes
in any of these assumptions would result in adjustments to our operating
results.

ACCRUED EXPENSES

Accrued expenses include amounts for liquidated damages and late delivery
penalties on contracts on which we are late in delivering our products. (See
Note 8 to the consolidated financial statements). We have included all amounts
which management believes we are liable as of December 31, 2001. These
liquidated damages are based, in part, on our estimate of when we will complete
certain projects. To the extent delivery dates are not consistent with our
estimates, these liquidated damage

22

accruals may require additional adjustments. We are currently a party to
contracts which include further possible liquidated damages and late delivery
penalties.

LEGAL PROCEEDINGS

Lockheed Martin Corporation served us with a complaint on March 23, 2000
alleging breach of contract and is seeking $8.5 million in compensatory damages
plus interest as well as consequential damages and attorneys' fees. We believe
that a loss with respect to the $8.5 million collected from Lockheed as asserted
in their legal proceedings is remote and that no amount can be currently
estimated. As additional information becomes available, we will assess the
appropriateness of the accounting and reflect adjustments as considered
necessary. Although management believes we will ultimately prevail in the
litigation, an unfavorable outcome of these matters would have a material
adverse effect on our financial condition and liquidity.

INCOME TAXES

As part of the process of preparing our consolidated financial statements we
are required to estimate our actual income taxes in each of the jurisdictions in
which we operate. This involves estimating our actual current tax exposure
together with assessing temporary differences resulting from differing
treatments of items, such as accrued liabilities, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent we establish a valuation
allowance or increase or decrease this allowance in a period, we must include a
corresponding adjustment within the tax provision in the statement of
operations. Significant management judgment is required to determine our
provision for income taxes, our deferred tax assets and liabilities and any
valuation allowance recorded against our net deferred tax assets.

ALLOWANCE FOR DOUBTFUL ACCOUNTS

The preparation of our financial statements requires us to make estimates
and assumptions that affect the reported amount of assets at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. We specifically analyze accounts receivable and consider
historic experience, customer creditworthiness, facts and circumstances specific
to outstanding balances, current economic trends and changes in our payment
terms when evaluating the adequacy of the allowance for doubtful accounts.
Changes in any of these factors may result in material differences in the
expense recognized for bad debts.

CERTAIN DEFENSE CONTRACTS

A significant factor in our financial performance is six large, fixed price
defense contracts which use our Harmony image generator. These six contracts
represented a significant portion of our $27.5 million net loss for the year
2001. We entered into these contracts between two and four years ago. However,
these six contracts are now 90% complete and we expect to have these contracts
essentially completed by 2002 year end.

23

RESULTS OF OPERATIONS

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

2001 VS. 2000

SALES

In 2001, our total sales decreased $21.7 million, or 13% ($145.3 million in
2001 compared to $167.0 million in 2000). Sales in the Simulation Group declined
$14.6 million, or 10% ($135.3 million in 2001 compared to $149.9 million in
2000). Sales in the REALimage Solutions Group declined $4.0 million, or 70%
($1.7 million in 2001 compared to $5.7 million in 2000). Sales in the
Applications Group declined $3.1 million, or 27% ($8.2 million in 2001 compared
to $11.3 million in 2000). The primary reason for the decline in sales in the
Simulation Group is due to delays in government programs relating to our Harmony
image generator. In addition, the Simulation Group also experienced a decline in
sales volumes to its commercial airline customers. These declines more than
offset increases in the sales volumes of our simFUSION PC-based image generator
and support services. The decrease in the REALimage Solutions Group declined as
this group was sold during the third quarter of 2001. Sales in the Applications
Group declined due to lower sales volumes of our planetarium and large-format
entertainment products.

GROSS PROFIT

Gross profit was essentially unchanged in 2001 from 2000 (both
$29.4 million). As a percent of sales, gross profit increased to 20.3% in 2001
from 17.6% in 2000. Gross profit in the Simulation Group improved due to higher
sales volumes and lower costs of sales for support services and lower

24

costs of sales on sales to commercial airline customers. These improvements in
the Simulation Group were offset by lower sales to government customers and
higher costs of sales on sales of simFUSION PC-based image generators. The lower
sales to government customers was due to delays and cost over-runs on programs
involving our Harmony image generator. Gross profit in the Applications Group
increased as cost of sales decreased on sales of planetarium systems and higher
sales of our RAPIDsite real-estate planning tool.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses decreased $4.3 million, or 13%
($30.1 million in 2001 compared to $34.4 million in 2000). As a percent of
sales, selling, general and administrative expenses increased to 20.7% in 2001
from 20.6% in 2000. These expenses decreased in the Simulation Group as the
result of lower headcount and lower incentive bonus expense. Selling, general
and administrative expenses decreased in the Application Group due to lower
headcount, lower commissions due to lower orders, lower advertising and lower
incentive bonus expense. The decrease in selling, general and administrative
expenses in 2001 is also partially due to all operating costs from April 1
through August 31, 2001 of $1.3 million associated with the REALimage Solutions
Group being recorded in the "REALimage transition costs" expense category.
Selling, general and administrative expenses were $31.4 million including the
$1.3 million of costs associated with the REALimage Solutions Group.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $15.5 million, or 35%
($28.8 million in 2001 compared to $44.3 million in 2000). As a percent of
sales, research and development expenses declined to 19.8% in 2001 from 26.5% in
2000. Research and development expenses in the Simulation Group declined during
2001 as a result of lower labor and related expenses as the effort required on
our Harmony, iNTegrator, Ensemble and PC-based simulation products has declined.
Research and development expenses in the Applications Group were essentially
unchanged. The decrease in research and development expenses in 2001 is also
partially due to all operating costs from April 1 through August 31, 2001
associated with the REALimage Solutions Group being recorded in the "REALimage
transition costs" expense category. Research and development expenses were
$32.7 million including these costs associated with the REALimage Solutions
Group. Due to the sale of the REALimage Solutions Group, the discontinuation of
the RAPIDsite business and the reduction of effort required to develop our
Harmony and iNTegrator products, management expects that the total research and
development spending necessary to continue the timely development of products
will be lower in 2002 than in 2001.

REALIMAGE TRANSITION COSTS

During the second quarter of 2001, we decided to sell the REALimage
Solutions Group. Accordingly, REALimage transition costs include all the
expenses associated with the REALimage Solutions Group that were incurred in the
second and third quarters of 2001. These costs totaled $5.3 million and were
3.6% of revenues for 2001. On August 31, 2001, we finalized an asset purchase
and intellectual property license agreement to sell the REALimage Solutions
Group to Real Vision, Inc. of Japan for a maximum value of $12.3 million which
is expected to close in April 2002. The consideration to E&S consisted of
$4.0 million cash, a receivable for $2.3 million which was paid in
December 2001, and future royalties payable on a when and if earned basis of up
to a maximum of $6.0 million. The consideration to Real Vision, Inc. consists of
REALimage technology, other assets, and an obligation from E&S to provide
certain development support of the REALimage technology during a seven-month
transition period concluding in April 2002. During 2000, no comparable
transition costs were incurred.

25

RESTRUCTURING CHARGE

During 2001, we initiated a restructuring plan focused on reducing the
operating cost structure of E&S. As part of the plan, we recorded a charge of
$2.8 million relating to a reduction in force of approximately 92 employees. We
estimate that this restructuring plan will reduce expenses by $8.2 million per
year going forward. As of December 31, 2001, we had paid $1.9 million in
severance benefits. The majority of the remaining benefits will be paid out over
the next two quarters. We also recognized a restructuring charge of
$1.5 million in 1999 and reversed $0.8 million of that charge in 2000. The
charge in 1999 was based on the expected costs related to the termination of 28
employees. The reversal of a portion of these charges in 2000 was the result of
certain of these employees being transferred within E&S rather than being
terminated and, therefore, these termination costs were not incurred. In
addition, estimated severance and related charges were lower than expected for
the terminated employees.

IMPAIRMENT LOSS

We recognized an impairment loss of $0.2 million in 2001 and there was no
such charge in 2000. The 2001 charge was 0.2% of sales. The impairment loss
related to the write-off of goodwill, acquired in our acquisition of
AccelGraphics, Inc. and Silicon Reality, Inc. in the second quarter of 1998.

GAIN ON SALE OF ASSETS HELD FOR SALE

In the fourth quarter of 2001, we recognized a gain of $9.0 million on the
sale of certain of our key 3D-graphics patents. This gain on sale of assets held
for sale was 6.2% of sales in 2001 and there was no such transaction in 2000.

GAIN ON SALE OF BUSINESS UNIT

We recognized a gain on sale of business unit of $0.8 million in 2001 and
$1.9 million in 2000. As a percent of sales the gain was 0.5% in 2001 and 1.1%
in 2000. The 2001 gain was the result of our sale of our REALimage Solutions
Group to Real Vision, Inc. of Japan. The sale was for a maximum value of
$12 million, consisting of cash of $6.3 million plus future royalties, on a when
and if earned basis, up to $6 million, for REALimage technology, other assets,
and the performance of certain development support during a seven-month
transition period leading to closing the transaction in April 2002. The 2000
gain was the result of our sale of certain assets of our Application Group
relating to its digital studio business to RT-SET Real Time Synthesized
Entertainment Technology Ltd. ("RT-SET") and its subsidiary, RT-SET
America Inc., for $1.4 million in cash, common stock of RT-SET and the
assumption of certain liabilities.

OTHER INCOME (EXPENSE), NET

Other income (expense), net improved by $1.4 million (an expense of
$2.6 million in 2001 compared to an expense of $4.0 million in 2000). The loss
on write-down of investment securities improved $7.5 million ($0.3 million in
2001 compared to $7.8 million in 2000). The losses in both years are the result
of other-than-temporary declines in the values of certain marketable investment
securities of E&S. The gain on sale of investment securities declined
$6.0 million ($0.5 million in 2001 compared to $6.5 million in 2000). The larger
gain in 2000 was primarily due to the sale of our investment in Silicon Light
Machines, Inc. to Cypress Semiconductor, Inc. ("Cypress") in which we received
Cypress stock. Interest income was essentially zero in 2001 compared to
$0.7 million in 2000. Interest expense increased $0.3 million to $2.5 million in
2001 from $2.2 million in 2000. The increase in net income expense was due to
lower average cash balances and higher average borrowing balances in 2001
compared to 2000.

26

INCOME TAXES

E&S recorded an income tax benefit of $3.2 million in 2001 compared to an
expense of $19.0 million in 2000. Income tax benefit of $3.2 million for 2001 is
primarily attributable to adjustments to prior year tax provisions as the result
of the resolution of certain worldwide tax contingencies. Included in this
amount is $0.6 million for withholding taxes paid in Japan for taxes associated
with the REALimage transaction. During the second quarter of 2000, we increased
our deferred tax asset valuation allowance by $20.6 million. As a result of
cumulative net operating losses, and the cancellation of a significant contract
and the related civil complaint filed by Lockheed as discussed in Note 14 to the
consolidated financial statements, we fully reserved our net deferred tax assets
which previously existed at the end of the first quarter of 2000 and those
deferred tax assets recognized during the second quarter of 2000. These net
deferred tax assets relate to temporary differences, tax credit carry forwards
and net operating loss carry forwards. The valuation allowance was recorded in
accordance with SFAS 109, which requires that a valuation allowance be
established when there is significant uncertainty as to the realizability of the
deferred tax assets. We evaluate the realizability of our deferred tax assets on
a quarterly basis. If the deferred tax assets are realized in the future, or if
a portion or all of the valuation allowance is no longer deemed to be necessary,
the related tax benefits will reduce future income tax provisions.

2000 VS. 1999

SALES

In 2000, our total sales decreased $33.9 million, or 17% ($167.0 million in
2000 compared to $200.9 million in 1999). Sales in the Simulation Group
decreased $20.7 million, or 12% ($149.9 million in 2000 compared to
$170.6 million in 1999). Sales in REALimage Solutions Group decreased
$16.3 million, or 74% ($5.7 million in 2000 compared to $22.0 million in 1999).
Sales in the Applications Group increased $3.0 million, or 36% ($11.3 million in
2000 compared to $8.3 million in 1999). The decrease in sales in the Simulation
Group is due to the cancellation of the contract with Lockheed Martin
Corporation for the delivery of visual systems to the United Kingdom Ministry of
Defence ("UK MOD") for the Combined Arms Tactical Trainer program ("UK CATT")
and an adjustment to revenue on percent complete contracts where a review of the
estimated costs to complete the contracts resulted in a negative adjustment to
revenue of $10.9 million in the second quarter of 2000. The decrease was
partially offset by increased sales volume of visual systems to commercial
airline customers, increased sales volumes of our simFUSION workstation-based
product and increased sales related to customer service and support contracts.
The decrease in sales in the REALimage Solutions Group is due to a decrease in
the number of units sold and decreased selling prices of existing products due
to increased competition and delays in the introduction of new products. The
increase in sales in the Applications Group is due to an increase in sales
volume of large-format entertainment products and planetarium systems which is
partially offset by decreased sales of our digital video products due to the
sale of this business to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary RT-SET America Inc. (together "RT-SET") in
the first quarter of 2000.

GROSS PROFIT

Gross profit decreased $30.7 million, or 51% ($29.4 million in 2000 compared
to $60.1 million in 1999). As a percent of sales, gross profit decreased to
17.6% in 2000 from 29.9% in 1999. Gross profit in the Simulation Group in 2000
was negatively impacted by (i) the cancellation of the UK CATT contract due to
the loss of revenue and the write-off of obsolete and excess inventory specific
to the UK CATT contract, (ii) adjustment for estimated actual costs at
completion of contract on percent-complete contracts of $16.7 million
($10.9 million as a reduction in sales as discussed previously, and
$5.8 million as an increase in cost of sales relating to contracts with total
estimated actual costs that

27

exceed the contract value) and (iii) higher costs on several contracts to
government customers which include the Harmony image generator. Gross profit in
the REALimage Solutions Group decreased due to lower revenue attributed to a
decrease in the number of units sold and decreased selling prices of existing
products due to increased competition and delays in the introduction of new
products. Gross profit in the Applications Group increased due to increased
revenue from sales of large-format entertainment products and planetarium
systems which was partially offset by decreased sales of our digital video
products.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses decreased $10.2 million, or 23%
($34.4 million in 2000 compared to $44.6 million in 1999). As a percent of
sales, selling, general and administrative expenses were 20.6% in 2000 compared
to 22.2% in 1999. The decrease in these expenses in the Simulation Group is due
primarily to lower marketing headcount, lower marketing consulting expenses and
lower marketing travel expenses. The decrease in these expenses in the REALimage
Solution Group is due to decreased sales volume resulting in decreased
commissions and other selling-related costs and decreased labor and associated
costs due to lower headcount as a result of the restructuring which took place
at the end of the third quarter of 1999. The decrease in these expenses in the
Applications Group is due to the reduction of employees and related expenses as
a result of the sale of certain assets of our digital video products business to
RT-SET.

RESEARCH AND DEVELOPMENT

Research and development expenses decreased $10.2 million, or 23%
($34.4 million in 2000 compared to $44.6 million in 1999). As a percent of
sales, research and development expenses were 20.6% in 2000 compared to 22.2% in
1999. Research and development expenses in the Simulation Group increased due to
increased efforts of the continued development of our simFUSION
workstation-based product and other value-priced simulation products. Research
and development expenses relating to the REALimage Solutions Group decreased due
to decreased headcount as a result of the group's restructuring at the end of
the third quarter of 1999.

AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS

Amortization of goodwill and other intangible assets decreased
$1.3 million, or 87% ($0.2 million in 2000 compared to $1.5 million in 1999).
The decrease in this expense was due to the write-off of $9.3 million of
goodwill and other intangible assets during the third quarter of 1999 in the
REALimage Solutions Group.

IMPAIRMENT LOSS

We recognized an impairment loss of $9.7 million in 1999 and related to the
write-down to fair value of goodwill, intangibles and other long-lived assets
acquired in our acquisitions of AccelGraphic, Inc. and Silicon Reality, Inc. in
the second quarter of 1998. The impairment consisted of the write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. There was no such charge in 2000.

RESTRUCTURING CHARGE

We recognized a restructuring charge of $1.5 million in 1999 and reversed
$0.8 million of that charge in 2000. The charge in 1999 was based on the
expected costs related to the termination of 28 employees. The reversal of a
portion of these charges in 2000 was the result of certain of these employees
being transferred within E&S rather than being terminated and, therefore, these
termination costs were not incurred. In addition, estimated severance and
related charges were lower than expected for the terminated employees.

28

GAIN ON SALE OF BUSINESS UNIT

During 2000, we sold certain assets of our Applications Group relating to
its digital video business and recognized $1.9 million of gain on the
transaction. See "Item 1--Business--Acquisitions and Dispositions." There was no
such event in 1999.

OTHER INCOME (EXPENSE), NET

Other income (expense), net was a net expense of $4.0 million in 2000
compared to a net income of $1.1 million in 1999. Interest income declined
$1.1 million, or 61% ($0.7 million in 2000 compared to $1.8 million in 1999).
The decline in interest income is due to lower average balances of cash, cash
equivalents and short-term investments in 2000 compared to 1999 and due to
interest income received in 1999 on delayed income tax refunds. Interest expense
increased $0.9 million or 69% ($2.2 million in 2000 compared to $1.3 million in
1999). The increase was due to higher average borrowing balances and a higher
average rate of interest paid on those borrowings in 2000 compared to 1999. Loss
on write-down of investment securities increased $7.4 million, or 1,850%
($7.8 million in 2000 compared to $0.4 million in 1999). The losses in both
years are the result of other-than-temporary declines in the values of certain
marketable investment securities of E&S. In 2000 we recognized $6.5 million gain
on the sale of investment securities. This gain was primarily due to the sale of
our investment in Silicon Light Machines, Inc. to Cypress in which we received
Cypress stock. There was no such event in 1999.

INCOME TAXES

Income tax expense (benefit) increased $34.4 million (expense of
$19.0 million in 2000 compared to a benefit of $15.4 million in 1999). During
the second quarter of 2000, we increased our deferred tax asset valuation
allowance by $20.6 million. As a result of the net operating loss in the second
quarter of 2000, the cumulative net operating losses for 2000, 1999 and 1998,
and the cancellation of a significant contract and the related civil complaint
filed by Lockheed as discussed in Note 14 to the consolidated financial
statements, we fully reserved our net deferred tax assets which previously
existed at the end of the first quarter of 2000 and those deferred tax assets
recognized during the second quarter of 2000. These net deferred tax assets
relate to temporary differences, tax credit carry forwards and net operating
loss carry forwards. The valuation allowance was recorded in accordance with
SFAS 109, which requires that a valuation allowance be established when there is
significant uncertainty as to the realizability of the deferred tax assets. We
evaluate the realizability of our deferred tax assets on a quarterly basis. If
the deferred tax assets are realized in the future, or if a portion or all of
the valuation allowance is no longer deemed to be necessary, the related tax
benefits will reduce future income tax provisions.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 2001, we had working capital of $54.5 million, including
cash, cash equivalents and restricted cash of $11.5 million, compared to working
capital of $75.1 million at December 31, 2000 including cash, cash equivalents,
short-term investments and restricted cash of $13.9 million. During 2001, we
used $28.2 million of cash in our operating activities, generated $12.4 million
of cash in our investing activities and generated $14.6 million of cash in our
financing activities.

Cash from our operating activities was provided by a $12.5 million decrease
in net costs and estimated earnings in excess of billings on uncompleted
contracts. The decrease in net costs and estimated earnings in excess of
billings on uncompleted contracts was due to the achievement of billing
milestones during the year and the adjustment to revenue on percent complete
contracts due to the change in estimated actual costs to complete the contracts.
Cash used in our operating activities included a $15.6 million decrease in
accounts payable and a $8.5 million decrease in accrued expenses.

29

Our investing activities included purchases of property, plant and equipment
of $6.6 million, proceeds from the sale of certain patents of $9.0 million,
proceeds from the sale of our REALimage Solutions Group of $6.3 million and
proceeds from sale of investment securities of $3.8 million.

Our financing activities during the year included net borrowings of
$13.0 million, proceeds from issuances of common stock of $0.4 million, and a
decrease in restricted cash of $1.2 million.

In December 2000, we entered into a secured credit facility (the "Foothill
Facility") with Foothill Capital Corporation ("Foothill"). The Foothill Facility
provides for borrowings and the issuance of letters of credit up to
$30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill
Facility whereby Foothill waived all events of financial covenant default
through December 31, 2001 and revised E&S's 2002 financial covenants. The
Foothill Facility expires in December 2002. Borrowings under the Foothill
Facility bear interest at the Wells Fargo Bank National Association prevailing
prime rate plus 1.5% to 3.0%, depending on the amount outstanding. The Foothill
Facility provides Foothill with a first priority perfected security interest in
substantially all of our assets, including, but not limited to, all of our
intellectual property. Pursuant to the terms of the Foothill Facility, all cash
receipts of E&S must be deposited into a Foothill controlled account. The
Foothill Facility, among other things, (i) requires E&S to maintain certain
financial ratios and covenants, including a minimum tangible net worth that
adjusts each quarter, a minimum unbilled receivables to billed receivables
ratio, and a limitation of $12.0 million of aggregate capital expenditures in
any fiscal year; (ii) restricts our 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 our outstanding shares without
the prior consent of the lender. Due to Foothill's waiver on February 22, 2002
of E&S's noncompliance with financial covenants through December 31, 2001 and
the modification of the financial covenants, we are currently in compliance with
our financial covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should the need
arise, we will negotiate with Foothill to modify and expand various financial
ratios and covenants, however no assurance can be given that such negotiations
will result in modifications that will allow us to continue to be in compliance
or otherwise be acceptable to us. E&S will need to replace the Foothill Facility
on or before December 14, 2002. In the event E&S is not able to obtain an
acceptable credit facility to replace the Foothill Facility on or before
December 14, 2002, E&S may be unable to meet its anticipated working capital
needs, routine capital expenditures, and current debt service obligations on a
short-term and long-term basis. As of December 31, 2001, we have $15.7 million
in outstanding borrowings and $6.0 million in outstanding letters of credit
under the Foothill Facility. Since the end of 2001, we have progressed against
the facility, and as of March 12, 2002 have $6.1 million in outstanding debt and
$4.8 million in outstanding letters of credit.

Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans &
Sutherland Computer Corporation, has a $3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the
Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75%
per annum. As of December 31, 2001, there were $4.9 million in outstanding
borrowings. As of March 12, 2002, we had fully paid-off the outstanding balance.
The Overdraft Facility is subject to reduction or demand repayment for any
reason at any time at Lloyds' discretion and expires on November 30, 2002.
Evans & Sutherland Computer Limited executed a letter of negative pledge in
favor of Lloyds whereby it agreed not to sell or encumber its assets, except in
the ordinary course of business. Covenants contained in the Overdraft Facility
restrict dividend payments from Evans & Sutherland Computer Limited and require
maintenance of certain financial covenants. In addition, at December 31, 2001,
we have $0.9 million of cash on deposit with Lloyds in a restricted cash
collateral account to support certain obligations that the bank guarantees.

In July 2000, we formed a joint venture with Quadrant Group plc known as
Quest Flight Training Limited ("Quest"). Quest provides certain equipment,
software, training and other goods and services to the Secretary of State for
Defence of the U.K. Ministry of Defence and other related governmental

30

entities with regard to an upgrade of the Ministry of Defence E3D Facility and
E3D Sentry Aircrew Training Services. In connection with the services of Quest
to the U.K. Ministry of Defence, we guaranteed various obligations of Quest.
Some of our guaranteed obligations are without any maximum amount. We believe
that the guarantees we isssued in connection with this project will not be
called upon for payment or performance; however, no assurance can be made that
we will not be obligated to satisfy the obligations of the guarantees.

As of December 31, 2001, we 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 our common stock at a conversion price of $42.10 or 428,000 shares of
our common stock, subject to adjustment. The 6% Debentures are redeemable at our
option, in whole or in part, at par.

On February 18, 1998, our Board of Directors authorized the repurchase of up
to 600,000 shares of our 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, our Board of Directors authorized
the repurchase of an additional 1,000,000 shares of our common stock. Between
February 18, 1998 and December 31, 1999, we repurchased 1,136,500 shares of our
common stock, leaving 463,500 shares available for repurchase as of March 12,
2002. We did not repurchase any shares of our stock during 2001. Stock may be
acquired on 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. The Foothill Facility requires that
we obtain prior consent from Foothill before we repurchase any shares.

We also maintain trade credit arrangements with certain of our suppliers.
The unavailability of a significant portion of, or the loss of, the various
borrowing facilities of E&S or trade credit from suppliers would have a material
adverse effect on our financial condition and operations.

In the event our various borrowing facilities were to become unavailable, we
were unable to make timely deliveries of products pursuant to the terms of
various agreements with third parties, or certain of our contracts were
adversely impacted for failure to meet delivery requirements, we may be unable
to meet our anticipated working capital needs, routine capital expenditures, and
current debt service obligations on a short-term and long-term basis.

We believe that the principal sources of liquidity for 2002 will be a result
of cash flows from operations and proceeds on the sale of certain of our
buildings which, subsequent to December 31, 2001, have been designated by
management as assets to be disposed of. Positive cash flows from operations
during 2002 are largely expected as a result of the restructuring which has
taken place, the progress to date on our Harmony image generator fixed-price
contracts and other cost-cutting measures which will be implemented during 2002.
Circumstances that could materially affect liquidity in 2002 include, but are
not limited to, the following: (i) our ability to meet contractual milestones
related to the delivery and integration of our Harmony image generators,
(ii) our ability to successfully develop and produce new technologies and
products, (iii) our ability to meet our forecasted sales levels during 2002,
(iv) our ability to reduce costs and expenses, (v) our ability to maintain our
commercial simulation business in light of current economic conditions and
(vi) our ability to favorably negotiate sale agreements related to certain of
our buildings.

Management believes that existing cash, cash equivalents, borrowings
available under our various borrowing facilities, other asset-related cash
sources and expected cash from future operations will be sufficient to meet our
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Foothill Facility expires in
December 2002 and the Overdraft Facility expires on November 30, 2002. We
anticipate the need to replace these credit facilities; however, there can be no
assurances that we will be successful in renegotiating our existing borrowing
facilities or obtaining additional debt or equity financing. Our cash and cash
equivalents,

31

subject to various restrictions previously set forth, are available for working
capital needs, capital expenditures, strategic investments, mergers and
acquisitions, stock repurchases and other potential cash needs as they may
arise.

EFFECTS OF INFLATION

The effects of inflation were not considered material during fiscal years
2001, 2000 and 1999, and are not expected to be material for fiscal year 2002.

ACQUIRED IN-PROCESS TECHNOLOGY

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

Failure to complete the development of these projects in their entirety, or
in a timely manner, has had a material adverse impact on E&S's results of
operations. We recorded an impairment loss of $0.2 million relating to the
remaining balance of goodwill at the time of the sale of the REALimage Solutions
Group, in the third quarter of 2001. During the third quarter of 1999, we
recorded an impairment loss of $9.7 million consisting of a write-off of
$4.9 million of goodwill, $4.4 million of intangible assets and $0.4 million of
property, plant and equipment. Actual sales, operating profits and cash flows
attributable to acquired in-process technology have been significantly lower
than the original projections used to value such technology in connection with
each of the respective acquisitions. On-going operations and financial results
for the acquired technology and E&S as a whole are subject to a variety of
factors which may not have been known or estimable at the date of such
acquisitions, and the estimates discussed below should not be considered our
current projections for operating results for the acquired businesses or E&S as
a whole. Following is a description of the acquired in-process technology and
the estimates made by E&S for each of the technologies.

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

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

MULTIPLE-CONTROLLER GRAPHICS SUBSYSTEMS (2200). This technology is a
high-end graphics subsystem involving the parallel use of two or four
controllers. This technology is aimed at super users in the graphics area
who need significant increases in performance and features to accomplish
their tasks and are willing to pay the increased price necessary to support
those

32

requirements. During the third quarter of 1999, we determined the technology
and graphics subsystem, as originally designed, would not be a viable
product in the workstation marketplace. The cost to complete this project
subsequent to the acquisition of AGI was $1.7 million. The project was
completed in the fourth quarter of 1999, approximately 9 months later than
planned. This project was funded by working capital. The assigned value for
this acquired in-process technology was $2.7 million.

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

The AccelGALAXY performed below sales estimates due to the delay in our
product introduction by E&S and a delayed design win at one major OEM. These
delays, in addition to increased competition, caused an erosion of approximately
50% of the projected average selling price for the AccelGALAXY and a loss of
projected unit sales. Subsequent to our acquisition of AGI, the developer of the
chip used on the AccelGMX also acquired a board company and entered the graphics
accelerator market in direct competition with the AccelGMX. Due to the advantage
of producing the chip, the competitor can produce a comparable product at a
lower cost; thus, the AccelGMX has performed below sales estimates and we no
longer expects to generate significant sales from this product. The E&S
Lightning 1200 performed below sales estimates due to the delay in our product
introduction. As a result of the delay in product introduction, most
OEMs selected a competing product. The expected sales volume and average selling
price of the E&S Lightning 1200 have been significantly reduced. At the time of
the sale of the REALimage Solutions Group in the third quarter of 2001, sales of
all the group's products had decreased to nominal levels.

We periodically review the value assigned to the separate components of
goodwill, intangibles and other long-lived assets through comparison to
anticipated, undiscounted cash flows from the underlying assets to assess
recoverability. The assets are considered to be impaired when the expected
future undiscounted cash flows from these assets do not exceed the carrying
balances of the related assets. Based on the events described above and in
accordance with SFAS 121 during the third quarter of 1999 we recorded an
impairment loss of $9.7 million related to the acquisition of AGI and SRI. The
impairment loss consisted of the write-off of $4.9 million of goodwill,
$4.4 million of intangible assets and $0.4 million of property, plant and
equipment. We recorded an impairment loss of $0.2 million relating to the
remaining value of goodwill at the time of the sale of the REALimage Solutions
Group in the third quarter of 2001.

OUTLOOK

2002 is expected to be a year that returns E&S to a focus on its core
business. This encompasses visualization systems, components, spares, repairs,
and training for the simulation marketplace. Our focus is a function of the sale
of the REALimage Solutions Group in 2001 and closing down the RAPIDsite business
in 2001. Implicit in these changes is a consolidation of the business base.
Revenues are expected to contract by 10% from the $145 million mark set in 2001.
However, a more focused management team coupled with core product offerings is
expected to revive our financial performance through higher margin business. New
2001 core business bookings, averaging greater than 40% gross margin, have
positioned our year-end backlog, of $104 million, to support this improvement.

Our main near-term challenge continues to be the completion of our initial
Harmony programs (referred to as the "Big 6 Programs"). We did make significant
progress on these programs during

33

2001. Our return to profitability, on a quarter-by-quarter basis, is dependent
in large part on the successful execution of these programs in the first half of
2002. Year-to-date 2002, milestones are being met, a majority of first unit
systems have passed testing, and several are already in training. Combined, the
Big 6 Programs are in excess of 90% complete. In looking towards the second half
of the year when these programs are expected to be essentially complete, we
believe that the financial posture will be much improved. Cash generation for
the second half of 2002 is expected to increase to a level of $5 million per
quarter from operations and profits are expected to be produced.

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

These forward-looking statements include, but are not limited to, the
following statements:

- the successful execution of the Big 6 programs by the end of 2002;

- we will generate $5 million of cash per quarter and will be profitable in
the second half of 2002;

- projections of sales and net income and issues that may affect sales or
net income;

- projections of capital expenditures;

- plans for future operations;

- financing needs or plans;

- plans relating to our products and services;

- Simulation Group will experience growth in its markets as simulation
training increases in value as an alternative to other training methods,
and as simulation training technology and cost-effectiveness improve;

- additional enhancements to iNTegrator will expand its functionality and
help secure E&S's dominant position in its main target markets, both
commercial and military simulation;

- E&S is able to compete effectively in the simulation market and will
continue to be able to do so in the foreseeable future;

- approximately two-third's of Simulation Group's 2001 backlog will be
converted to sales in 2002 and replaced with new orders;

- the Applications Group's new product will be launched in the first half of
2002;

- our properties are suitable for our immediate needs;

- total research and development spending will be lower in 2002 than in
2001;

- E&S will ultimately prevail in the litigation with Lockheed Martin
Corporation;

- E&S will not be liable for any further material liquidated damages and
late delivery penalties during 2002;

- existing cash, cash equivalents, borrowings available under E&S's various
borrowing facilities, other asset-related cash sources and expected cash
from future operations will be sufficient to meet E&S's anticipated
working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months;

- the guarantees of E&S issued in connection with the services of our joint
venture entity, Quest Flight Training Ltd. to the UK Ministry of Defence
or other parties will not be called upon for payment or performance;

- revenue is expected to contract by 10% from 2001 to 2002; and

34

- assumptions relating to the foregoing.

Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified. Future events
and actual results could differ materially from those set forth in, contemplated
by, or underlying the forward-looking information. Our actual results could
differ materially from these forward-looking statements. In addition to the
other risks described in the "Factors That May Affect Future Results" discussed
below, important factors to consider in evaluating such forward-looking
statements include risk of product demand, market acceptance, economic
conditions, competitive products and pricing, difficulties in product
development, product delays, commercialization and technology, and our ability
to maintain credit facilities to support our operations on favorable and
acceptable terms. In light of these risks and uncertainties, there can be no
assurance that the events contemplated by the forward-looking statements
contained in this annual report will, in fact, occur.

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

OUR BUSINESS MAY SUFFER IF OUR 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.

OUR STOCK PRICE MAY BE ADVERSELY IMPACTED IF OUR SALES OR EARNINGS FAIL TO MEET
EXPECTATIONS

Our stock price is subject to significant volatility and will likely be
adversely affected if sales or earnings in any quarter fail to meet the
investment community's expectations. Our sales and earnings may fail to meet
expectations because they fluctuate and are difficult to predict. Our earnings
during 2001 and 2000 fluctuated significantly from quarter to quarter. One of
the reasons we experience such fluctuations is that the largest share of our
sales and earnings is from our Simulation Group, which typically has long
delivery cycles and contract lengths. The timing of customer acceptance of
certain large-scale commercial or government contracts may affect the timing and
amount of sales that can be recognized; thus, causing our periodic operating
results to fluctuate. Our results may further fluctuate if United States and
international governments delay or even cancel production on large-scale
contracts due to lack of available funding.

35

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

- delays in the availability of products,

- delays from chip suppliers,

- discontinuance of key components from suppliers,

- other supply constraints,

- transit interruptions,

- 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.

OUR SIGNIFICANT DEBT COULD ADVERSELY AFFECT OUR FINANCIAL RESOURCES AND PREVENT
US FROM SATISFYING OUR DEBT SERVICE OBLIGATIONS

We have a significant amount of indebtedness and may also incur additional
indebtedness in the future. We may not generate sufficient cash flow from
operations, or have future borrowings available to us, sufficient to pay our
debt. At December 31, 2001, total indebtedness was $38.9 million and our total
stockholders' equity was $64.7 million.

Our ability to make debt payments or refinance our indebtedness depends on
future performance, which, to a certain extent, is subject to general economic,
financial, competitive and other factors, some of which are beyond our control.
Based upon our current level of operations and anticipated growth, management
believes that available cash flow, together with available credit, will be
adequate to meet our financial needs. There can be no assurance, however, that
our business will generate sufficient cash flow from operations or that future
borrowings will be available in an amount sufficient to enable us to pay our
debts or to make necessary capital expenditures, or that any refinancing of debt
would be available on commercially reasonable terms or at all.

Our substantial indebtedness could have important consequences including,
but not limited to, the following:

- the ability to obtain additional financing for working capital, capital
expenditures, acquisitions, or other purposes may be impaired or
unavailable;

- a portion of cash flow will be used to pay interest expense, which will
reduce the funds that would otherwise be available for operations and
future business opportunities;

- a substantial decrease in net operating cash flows or an increase in
expenses could make it difficult for us to meet our debt service
requirements and force us to modify operations;

- we may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage;

- our substantial indebtedness may make us more vulnerable to a downturn in
our business or in the economy generally; and

36

- some of our existing debt contains financial and restrictive covenants
that limit our ability to, among other things, borrow additional funds,
acquire and dispose of assets, and pay cash dividends.

A portion of our outstanding indebtedness bears interest at variable rates.
Any increase in interest rates will reduce funds available to us for our
operations and future business opportunities and will exacerbate the
consequences of our leveraged capital structure.

COVENANTS AND RESTRICTIONS IN OUR CREDIT DOCUMENTS LIMIT OUR ABILITY TO TAKE
CERTAIN ACTIONS

Our credit documents contain significant financial and operating covenants
that limit the discretion of management with respect to certain business
matters. These covenants include, among others, restrictions on our ability to:

- declare dividends or redeem or repurchase capital stock;

- incur certain additional debt;

- grant liens;

- make certain payments and investments;

- sell or otherwise dispose of assets; and

- consolidate with other entities.

We must also meet certain financial ratios and tests, including a minimum
tangible net worth that adjusts each quarter, an unbilled receivables to billed
receivables ratio, and a limitation of $12.0 million of aggregate capital
expenditures in any fiscal year. Failure to comply with the obligations
contained in the credit documents could result in an event of default, and
possibly the acceleration of the related debt and the acceleration of debt under
other instruments evidencing debt that may contain cross-acceleration or
cross-default provisions. On February 22, 2002, Foothill agreed to waive all
events of financial covenant default through December 31, 2001 and to revise our
2002 financial covenants. Therefore, we are currently in compliance with our
financial covenants, although a continuation of recent negative operating trends
could impact our future compliance with such covenants. Should the need arise,
we will negotiate with our lenders to modify and expand various financial
covenants, however, no assurance can be given that such negotiations will result
in modifications that will allow us to continue to be in compliance or otherwise
be acceptable to us.

DELAYS IN THE TIMELY DELIVERY OF OUR PRODUCTS MAY PREVENT US FROM INVOICING OUR
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS.

In accordance with accounting for long-term contracts, we record an asset
for our costs and estimated earnings that exceed the amount we are able to bill
our customers on uncompleted contracts. At December 31, 2001, $29.8 million of
our costs and estimated earnings that exceeded our billings on uncompleted
contracts related to four contracts with four different customers. We are not
able to bill these amounts unless we meet certain contractual milestones related
to the delivery and integration of our Harmony image generators. Our failure to
achieve these contractual milestones by timely delivering and integrating our
Harmony image generators may significantly impact our ability to recover our
costs and estimated earnings that exceeded our billings on uncompleted
contracts, which could severely impact our cash flow.

37

FAILURE TO PROTECT OUR INTELLECTUAL PROPERTY COULD HARM OUR NAME RECOGNITION
EFFORTS AND ABILITY TO COMPETE EFFECTIVELY

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

OUR SIGNIFICANT INVESTMENT IN RESEARCH AND DEVELOPMENT MAY NOT BE REALIZED

We have no assurance that our significant investment in research and
development will generate future sales or benefits. We currently make and plan
to continue to make a significant investment in research and development. Total
spending for research and development was $28.8 million or 19.8% of sales in
2001 as compared to $44.3 million or 26.5% of sales in 2000. Developing new
products and software is expensive and often involves a long payback cycle.
While we have every reason to believe these investments will be rewarded with
sales-generating products, customer acceptance ultimately dictates the success
of development and marketing efforts.

WE MAY NOT CONTINUE TO BE SUCCESSFUL IF WE ARE UNABLE TO DEVELOP, PRODUCE AND
TRANSITION OUR 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, and termination of our 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:

- development delays,

38

- late release of products to manufacturing,

- quality or yield problems experienced by production or suppliers,

- variations in product costs,

- excess inventories of older products and components, and

- delays in customer purchases of existing products in anticipation of the
introduction of new products.

IN THE EVENT WE SUFFER FURTHER PRODUCT DELAYS, WE MAY BE REQUIRED TO PAY CERTAIN
CUSTOMERS SUBSTANTIAL LIQUIDATED DAMAGES AND OTHER PENALTIES

The variety and complexity of our high technology product lines require us
to deal with suppliers and subcontractors supplying highly specialized parts,
operating highly sophisticated and narrow tolerance equipment in performing
highly technical calculations. The processes of planning and managing
production, inventory levels and delivery schedules are also highly complex and
specialized. Many of our products must be custom designed and manufactured,
which is not only complicated and expensive, but can also require a number of
months to accomplish. Slight errors in design, planning and managing production,
inventory levels, delivery schedules, or manufacturing can result in
unsatisfactory products that may not be correctable. If we are unable to meet
our delivery schedules, we may be subject to penalties, including liquidated
damages that are included in some of our customer contracts. During the fourth
quarter of 1999, we accrued $8.2 million for payments of liquidated damages and
penalties due to product delays. As of December 31, 2000, we have paid
$6.0 million in connection with liquidated damages. During 2000, we accrued an
additional $0.9 million for late delivery penalties. During 2001 we accrued
$2.9 million to cover penalties, against which we paid $2.7 million. In 2001, we
also accrued $1.5 million to cover additional costs incurred by customers. There
is no assurance that we may not incur substantial liquidated damages in the
future in connection with further product delays.

WE MAY NOT MAINTAIN A SIGNIFICANT PORTION OF OUR SALES IF WE FAIL TO MAINTAIN
OUR UNITED STATES GOVERNMENT CONTRACTS

In 2001, 48% of our sales were to agencies of the United States government,
either directly or through prime contractors or subcontractors, for which there
is intense competition. Accordingly, we have no assurance that we will be able
to maintain a significant portion of our sales. These sales are subject to the
inherent risks related to government contracts, including uncertainty of
economic conditions, changes in government policies and requirements that may
reflect rapidly changing military and political developments, and unavailability
of funds. These risks also include technological uncertainties and obsolescence,
and dependence on annual Congressional appropriation and allotment of funds. In
the past, some of our programs have been delayed, curtailed, or terminated.
Although we cannot predict such uncertainties, in our opinion there are no
spending reductions or funding limitations pending that would impact our
contracts.

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

39

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.

OUR SALES MAY SUFFER IF WE LOSE CERTAIN SIGNIFICANT CUSTOMERS

We currently derive a significant portion of our sales from a limited number
of non-U.S. government customers. The loss of any one or more of these customers
could have a material adverse effect on our business, financial condition and
results of operations. We were dependent on four of our non-U.S. government
customers for approximately 32% of our consolidated sales in 2001. We expect
that sales to a limited number of customers will continue to account for a
substantial portion of our sales in the foreseeable future. We have no assurance
that sales from this limited number of customers will continue to reach or
exceed historical levels in the future. We do not have supply contracts with any
of our significant customers.

OUR SALES WILL DECREASE IF WE FAIL TO MAINTAIN OUR INTERNATIONAL BUSINESS

Any reduction of our international business could significantly affect our
sales. Our international business accounted for 34% of our 2001 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 material
hedging activities to offset the risk of exchange rate fluctuations.

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 previously.

FUTURE LOSSES COULD IMPAIR OUR ABILITY TO RAISE CAPITAL OR BORROW MONEY AND
CONSEQUENTLY AFFECT OUR STOCK PRICE

Although we recorded net sales of $145.3 million for the twelve months ended
December 31, 2001, we incurred a net loss of $27.5 million in 2001. We have
incurred net losses totaling $136.5 million over the past four years. We cannot
assure you that we will be profitable in future periods. Losses in future
periods could impair our ability to raise additional capital or borrow money as
needed, could decrease our stock price and could cause a violation of certain
covenants in our credit facilities.

IF OUR COMMERCIAL SIMULATION BUSINESS DECLINES, OUR SALES WILL DECREASE

We have no assurance that our commercial simulation (airline) business will
continue to succeed. Our commercial simulation business currently accounts for
approximately 15% to 20% of our sales. This business is subject to many of the
risks related to the commercial simulation market that may

40

adversely affect our business. The following risks are characteristic of the
commercial simulation market:

- uncertainty of economic conditions,

- dependence upon the strength of the commercial airline industry,

- air pilot training requirements,

- competition,

- changes in technology, and

- timely performance by subcontractors on contracts in which E&S is the
prime contractor.

WE MAY MAKE ACQUISITIONS THAT ARE UNSUCCESSFUL OR STRAIN OR DIVERT OUR RESOURCES
FROM MORE PROFITABLE OPERATIONS

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

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

OUR OPERATIONS COULD BE HURT BY TERRORIST ATTACKS AND OTHER ACTIVITIES THAT MAKE
AIR TRAVEL DIFFICULT OR REDUCE THE WILLINGNESS OF OUR COMMERCIAL AIRLINE
CUSTOMERS TO PURCHASE OUR SIMULATION PRODUCTS.

During 2001, $30.0 million, or 21% of our total revenue generated from our
Simulation Group, was derived from sales of our simulation products to
commercial airline companies and other third parties in the commercial airline
industry. The demand for our various commercial simulation products and services
is heavily dependant upon new orders from these commercial airline customers. In
the event terrorist attacks or other activities make air travel difficult or
reduce the demand or willingness of our customers to purchase our commercial
simulation products, our revenue may decline substantially. Since September 11,
2001, training requirements have increased to certify pilots, co-pilots and
flight engineers for different aircraft types and changing flight procedures. In
conjunction with this trend, the Simulation Group has been contacted by one of
our largest commercial customers to deliver two-times the average annual number
of systems. In addition to these additional systems, the contract provides for
an option to deliver further systems in 2002. However, at this time, we are
unable to predict the long-term impact of these events on either our industry as
a whole or on our operations and financial condition in particular.

OUR SHAREHOLDERS MAY NOT REALIZE CERTAIN OPPORTUNITIES BECAUSE OF THE
ANTI-TAKEOVER EFFECT OF STATE LAW

We may be 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

41

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 our board of directors.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The principal market risks to which we are exposed are changes in foreign
currency exchange rates and changes in interest rates. Our international sales,
which accounted for 34% of our total sales in 2001 are concentrated in the
United Kingdom, continental Europe and Asia. Foreign currency purchase and sale
contracts are entered into for periods consistent with related underlying
exposures and do not constitute positions independent of those exposures. We do
not enter into contracts for trading purposes and do not use leveraged
contracts. As of December 31, 2001, we had no material sales or purchase
contracts in currencies other than U.S. dollars and had no foreign currency
sales or purchase contracts.

We reduce our exposure to changes in interest rates by maintaining a high
proportion of our debt in fixed-rate instruments. As of December 31, 2001, 47%
of our total debt was in fixed-rate instruments. Had we fully drawn on our
$30 million revolving line of credit with Foothill Capital Corporation and our
foreign line of credit, 39% of our total debt would be in fixed-rate
instruments.

The information below summarizes E&S's market risks associated with debt
obligations as of December 31, 2001. 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 6% Debentures bear a fixed
rate of interest. The information below should be read in conjunction with
Note 10 of Notes to the Consolidated Financial Statements in Part II of this
annual report.

42

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 Auditors

- Consolidated Balance Sheets as of December 31, 2001 and 2000

- Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2001

- Consolidated Statements of Comprehensive Loss for each of the years in the
three-year period ended December 31, 2001

- Consolidated Statements of Stockholders' Equity for each of the years in
the three-year period ended December 31, 2001

- Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2001

- Notes to Consolidated Financial Statements for each of the years in the
three-year period ended December 31, 2001

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

- Schedule II--Valuation and Qualifying Accounts for each of the years in
the three-year period ended December 31, 2001

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.

43

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. We believe 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
our business.

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

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

James R. Oyler William M. Thomas
Vice President and Chief Financial
President and Chief Executive Officer Officer

REPORT OF INDEPENDENT AUDITORS

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

We have audited the consolidated financial statements of Evans & Sutherland
Computer Corporation and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of Evans & Sutherland'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 auditing standards generally
accepted in the United States of America. 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, 2001 and
2000, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.

KPMG LLP

Salt Lake City, Utah
March 15, 2002

44

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

45

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

46

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(IN THOUSANDS)

47

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(IN THOUSANDS)

48

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

49

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2001, DECEMBER 31, 2000 AND DECEMBER 31, 1999

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS

Evans & Sutherland Computer Corporation ("Evans & Sutherland," "E&S," "we,"
"us" or "our") 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. Our core computer graphics technology is used to produce high
performance image generators for simulation including PC-based visual system
products, to provide graphics acceleration technology to the professional
digital content creation market, and to apply our core technologies to the
expanding market of PC-based applications and products.

BASIS OF PRESENTATION

The consolidated financial statements include the accounts of E&S and its
wholly-owned subsidiaries. All inter-company accounts and transactions have been
eliminated in consolidation. Certain reclassifications have been made in the
2000 and 1999 consolidated financial statements and notes to conform to the 2001
presentation.

LIQUIDITY

Management believes that existing cash, cash equivalents, borrowings
available under its various borrowing facilities, cash expected from the
anticipated sale of certain of E&S's buildings, other asset-related cash sources
and expected cash from future operations will be sufficient to meet our
anticipated working capital needs, routine capital expenditures and current debt
service obligations for the next twelve months. The Foothill Facility expires in
December 2002 and the Overdraft Facility expires on November 30, 2002 (see
Note 10). There can be no assurances that we will be successful in renegotiating
our existing borrowing facilities or obtaining additional debt or equity
financing. Our cash and cash equivalents, subject to various restrictions, are
available for working capital needs, capital expenditures, strategic
investments, mergers and acquisitions, stock repurchases and other potential
cash needs as they may arise.

During 2002, we expect to generate cash due to improved earnings, moving
unbilled receivables into receivables and cash, reducing inventory and the sale
of some of our real estate. Due to these expected developments, we expect our
liquidity position to improve and for Foothill to continue the facility.

In the event our various borrowing facilities were to become unavailable, we
were unable to timely deliver products pursuant to the terms of various
agreements with third parties, or certain of our contracts were adversely
impacted for failure to meet delivery requirements, we may be unable to meet our
anticipated working capital needs, routine capital expenditures, and current
debt service obligations on a short-term and long-term basis.

REVENUE RECOGNITION

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

We have adopted the American Institute of Certified Public Accountants
("AICPA") Statement of Position ("SOP") 97-2, "Software Revenue Recognition", as
modified by SOP 98-9. SOP 97-2 generally requires revenue earned on software
arrangements involving multiple elements such as software products,
enhancements, post-contract customer support, installation and training to be
allocated to each element based on the relative fair values of the elements. The
fair value of an element must be based on evidence that is specific to the
vendor. The revenue allocated to software products is generally recognized upon
delivery of the products. The revenue allocated to post-contract customer
support is generally recognized over the support period.

We recognize revenues from product sales that do not require significant
production, modification, or customization when the following criteria are met:
we have signed a non-cancelable agreement; we have delivered the product; there
are no uncertainties surrounding product acceptance; the fees are fixed and
determinable; and collection is considered probable.

Revenue from long-term contracts which require significant production,
modification or customization is recognized in accordance with provisions of SOP
81-1 "Accounting for Performance of Construction-Type and Certain
Production-Type Contracts" using the ratio of costs incurred to management's
estimate of total anticipated costs. If estimated total costs on any contract
indicate a loss, we provide 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.

CASH AND CASH EQUIVALENTS

We consider all highly liquid financial instruments purchased with an
original maturity to E&S of 90 days or less to be cash equivalents. Cash
equivalents include debt securities and money-market funds of $0 and
$3.8 million at December 31, 2001 and 2000, respectively.

RESTRICTED CASH

We have restricted deposits pledged as collateral on overdraft protection,
letters of credit and certain other obligations all of which mature or expire
within one year.

INVENTORIES

Inventory amounts include materials at standard costs. Inventory also
includes inventoried costs on programs and long-term contracts which includes
direct engineering and production costs and applicable overhead, not in excess
of estimated realizable value, which have not yet been recognized as cost of
sales. Spare parts and general stock materials are stated at cost not in excess
of realizable value. We periodically review inventories for excess and obsolete
amounts and provide a reserve that we consider sufficient to cover any excess
and obsolete inventories.

PROPERTY, PLANT AND EQUIPMENT

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

ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS

We periodically review the value assigned to the separate components of
goodwill, intangibles and other long-lived assets through comparison to
anticipated, undiscounted cash flows from the underlying

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assets to assess recoverability. The assets are considered to be impaired when
the expected future undiscounted cash flows from these assets do not exceed the
carrying balances of the related assets. The impairment loss of $9.7 million for
the year ended December 31, 1999, as determined in accordance with Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of",
relates to the write-down to fair value of goodwill, intangibles and other
long-lived assets acquired in the acquisition of AccelGraphics, Inc. ("AGI") and
Silicon Reality, Inc. ("SRI"). Fair value was determined utilizing discounted
cash flow analyses and the replacement cost approach. The impairment loss
consisted of the write-off of $4.9 million of goodwill, $4.4 million of
intangible assets and $0.4 million of property, plant and equipment.

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

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill and other intangible assets at December 31, 2000 consisted
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 and other intangible assets were being amortized using the
straight-line method over a period of seven years for goodwill and six months to
seven years for other intangible assets. As of December 31, 2000 accumulated
amortization of goodwill and other intangible assets was $15.9 million.

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

We classify our marketable debt and equity securities as available-for-sale.
Available-for-sale securities are recorded at fair value. Unrealized holding
gains and losses, net of the related tax effect, are excluded from earnings and
are reported as a component of accumulated other comprehensive income (loss)
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. 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
marketable and non-marketable investment securities.

Non-marketable investment securities are recorded at the lower of cost or
fair value. Some of the factors that are considered in determining the fair
value of these securities include analyses of each investee's financial
condition and operations, the status of its technology and strategies in place
to

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achieve its objectives. Our 50% investment in a joint venture is stated at cost,
adjusted for equity in undistributed earnings since acquisition.

WARRANTY RESERVE

We provide 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

We have adopted the footnote disclosure provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS 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 Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees". We have elected to continue to apply the provisions of APB
25 and provide pro forma footnote disclosures required by SFAS 123.

INCOME TAXES

We use 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 carry-forwards.
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

Prior to their disposition in 2000 (See Note 2) the local foreign currency
was the functional currency for our German subsidiaries. Our United Kingdom
subsidiary uses the U.S. dollar as its functional currency. Assets and
liabilities of German operations were translated to U.S. dollars at the current
exchange rates as of the applicable balance sheet date. Sales and expenses were
translated at the average exchange rates prevailing during the period.
Adjustments resulting from translation were reported as a separate component of
stockholders' equity. Certain transactions of the German subsidiaries were
denominated in currencies other than the functional currency, including
transactions with the parent company. Transaction gains and losses were included
in other income (expense) for the period in which the transaction occurred.

ESTIMATES

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

CONCENTRATION OF CREDIT RISK

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

In the normal course of business, E&S provides unsecured credit terms to its
customers. Accordingly, we perform ongoing credit evaluations of our customers
and maintain allowances for possible losses which, when realized, have generally
been within the range of management's expectations.

In accordance with accounting for long-term contracts, we record an asset
for costs and estimated earnings in excess of billings on uncompleted contracts.
At December 31, 2001, $29.8 million of the costs and estimated earnings in
excess of billings on uncompleted contracts pertain to four contracts with four
different customers. The billing of these amounts is contingent upon the
successful completion of contractual milestones related to the delivery and
integration of Harmony image generators. We expect to achieve most of the
remaining billing milestones during 2002. Our inability to achieve these
contractual milestones may significantly impact the realization of such amounts
and have a material adverse impact to the operating results and liquidity of
E&S.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". SFAS 133, as amended by
SFAS 137 and SFAS 138, is effective for all fiscal years beginning after
June 15, 2000. SFAS 133 establishes new accounting and reporting standards for
companies to report information about derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. We adopted SFAS 133 as of January 1, 2001. The
impact of adopting SFAS 133 was not material to the financial statements.

In July 2001, the FASB issued SFAS No. 141, "Accounting for Business
Combinations" and No. 142, "Accounting for Goodwill and Other Intangible
Assetds". SFAS 141 is effective for E&S beginning July 1, 2001. The Statement
establishes accounting and reporting standards for business combinations and
prohibits the use of the pooling-of-interests method of accounting for those
transactions after June 30, 2001. SFAS 142 is effective for E&S beginning
January 1, 2002. The Statement establishes accounting and reporting standards
for goodwill and intangible assets. Beginning January 1, 2002, we do not have
any goodwill, therefore the impact of adopting SFAS 142 is not expected to be
material to the financial statements.

In October 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" and No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of".
SFAS 143 is effective for E&S beginning July 1, 2002. The Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. The impact of adopting SFAS 143 is not expected to be material

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

to the financial statements. SFAS 144 establishes one accounting model for
long-lived assets to be disposed of by sale and addresses significant
implementation issues. SFAS No. 144 is effective for E&S beginning after
January 1, 2002. Management does not expect the adoption of this statement to
have a material impact on its financial statements.

(2) ACQUISITIONS AND DISPOSITIONS

In the third quarter of 2001, E&S sold the REALimage group to Real
Vision, Inc., a Japanese company. The sale was for a maximum value of
$12 million, consisting of cash of $6.3 million plus future royalties, on a when
and if earned basis, up to $6 million for REALimage technology, other assets,
and the performance of certain development support during a seven-month
transition period leading to closing the transaction in April 2002. Real Vision
has indicated it will continue the development of the technology, and E&S is
maintaining a technical staff to support Real Vision in Salt Lake City during
the transition period. As part of the sale of the REALimage Group, E&S closed
its offices in Seattle, Washington, and San Jose, California and recorded an
impairment loss of $0.2 million related to the write-off of certain remaining
goodwill balances. E&S is recognizing the proceeds received on the sale of the
REALimage Group on a percent complete basis over the seven-month transition
period ending in April, 2002. The gain on sale of business unit recognized
through December 31, 2001 is calculated based on the ratio of costs incurred to
management's estimate of anticipated costs to be incurred during the transition
period and excludes $0.6 million of withholding taxes which have been recorded
as income tax expense on the accompanying statement of operations.

In the fourth quarter of 2001 we recognized $9.0 million on the sale of
certain of our key 3D-graphics patents, which were being held for sale, to
NVIDIA Corporation.

In December 2000, we completed the divestiture of our German subsidiary via
a management-led buyout and recorded a loss of $0.3 million. The former
subsidiary, which was called Evans & Sutherland Computer GmbH, now operates
under a new name. The divested company has no remaining connection with E&S. We
will continue to operate in Germany and throughout Europe under our own name,
providing marketing, sales, and support for our growing visual systems business
and traditional customer base.

On March 28, 2000, we sold certain assets of its Applications Group relating
to digital video products to RT-SET Real Time Synthesized Entertainment
Technology Ltd. and its subsidiary, RT-SET America Inc., for $1.4 million in
cash, common stock of RT-SET Real Time Synthesized Entertainment
Technology Ltd. valued at approximately $1.0 million, and the assumption of
certain liabilities. On June 15, 2000, we received additional common stock of
RT-SET Real Time Synthesized Entertainment Technology Ltd. valued at
$1.5 million as consideration for the successful development of a product
included in the purchased assets. We recognized a gain of $1.9 million on the
sale of these assets.

On June 3, 1999, we sold certain of our manufacturing capital assets and
inventory of $6.0 million to Sanmina-SCI as part of our efforts to outsource the
production of certain electronic products and assemblies. In addition, we
entered into an electronic manufacturing services agreement with Sanmina-SCI.
The electronic manufacturing services agreement commits E&S to purchase a
minimum of $22.0 million of electronic products and assemblies from Sanmina-SCI
each year until June 3, 2002. If we fail to meet these minimum purchase levels,
subject to adjustment, we may be required to pay 25% of the difference between
the $22.0 million and the amount purchased.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(3) INVENTORIES

Inventories consist of the following (in thousands):

(4) COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS

Comparative information with respect to uncompleted contracts is summarized
as follows (in thousands):

(5) PROPERTY, PLANT AND EQUIPMENT

The cost and estimated useful lives of property, plant and equipment are
summarized as follows (dollars in thousands):

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All buildings and improvements owned by E&S 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 five leases for an additional ten years. At the end of the lease
term, including any extension, the buildings and improvements revert to the
lessor. We have undertaken actions to sell certain buildings that are not, or
will not be used in operations by us. Accordingly, subsequent to December 31,
2001, we have designated these as assets to be disposed of.

(6) LEASES

We lease certain of our buildings and related improvements to third parties
under non-cancelable operating leases. Cost and accumulated depreciation of the
leased buildings and improvements at December 31, 2001 were $8.9 million and
$3.7 million, respectively. Rental income for all operating leases for 2001,
2000 and 1999 was $2.2 million, $1.8 million and $1.6 million, respectively.

We occupy real property and use certain equipment under lease arrangements
that are accounted for as operating leases. Rental expenses for all operating
leases for 2001, 2000 and 1999 were $4.0 million, $2.0 million and
$2.1 million, respectively.

At December 31, 2001, 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):

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(7) INVESTMENTS

We had the following investments in marketable equity securities, adjusted
for unrealized holding gains and losses and other-than-temporary declines in
fair value, nonmarketable equity securities, adjusted for other-than-temporary
declines in fair value and a joint venture (in thousands):

Quantum is a start-up company that owns patented technology to improve
cathode raytube (CRT) performance used in large projection systems. 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 E&S or
to complement our strategic direction.

We own, including total shares purchased or available to purchase under
warrants, less than 15% of the outstanding common stock and common stock
equivalents of Quantum and TGS. We have one of six seats on TGS's board of
directors. There are no inter-company transactions, technological dependencies,
related guarantees, obligations, contingencies, interchange of personnel, nor
ability to exercise significant influence on any of the companies in which we
have investments. Accordingly, we account for Quantum and TGS utilizing the cost
method.

We have a 50% interest in Quest Flight Training Ltd. (Quest), a joint
venture providing aircrew training services for the United Kingdom Ministry of
Defence under a 30 year contract. The investment is accounted for under the
equity method. Equity in earnings of Quest of $74,000 in 2001 and $43,000 in
2000 is recorded in other income (expense). The financial position and operating
results of Quest are immaterial to our financial results. We guarantee a portion
of the joint venture's third-party borrowings. At December 31, 2001, Quest had
outstanding debt of $7.4 million. Management believes, based on current facts
and circumstances and the joint venture's financial position and operating
results, that the likelihood of a payment pursuant to such guarantee is remote.
However, if we were required to make such a payment it would have a material
adverse impact on our operating results and liquidity.

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During 2000, we recognized a $6.7 million gain on the sale of our investment
in SLM to Cypress in which we received shares of Cypress stock which was offset
by a $0.2 million loss on the subsequent sale of certain Cypress shares. During
2001, we sold our remaining interest in Cypress for cash proceeds of
$3.8 million. During 2001, 2000 and 1999 we wrote down our investments in
marketable securities by $0.3 million, $7.8 million and $0.4 million
respectively due to other-than-temporary declines in market value. These amounts
are recorded in other income (expense), net in our consolidated statements of
operations.

(8) ACCRUED EXPENSES

Accrued expenses consist of the following (in thousands):

On October 16, 1997, E&S and CAE Electronics Ltd. ("CAE") entered into a
Sub-Contract (the "Sub-Contract") for E&S to design, develop and deliver the
visual system components and visual databases required for certain dynamic
mission simulators and tactical control centers, to be integrated with our
Harmony image generation equipment (the "Harmony VSC"). As of December 31, 1999,
the Harmony VSC had not been integrated with the dynamic mission simulators or
tactical control centers. Pursuant to the terms of the Sub-Contract, the
integration was to be completed during 1999. Consequently, as of December 31,
1999, in accordance with the liquidated damages provision of the Sub-Contract,
we incurred liquidated damages on this Sub-Contract totaling $6.0 million. E&S
and CAE agreed to an interim solution, which provides for the installation of
our ESIG 4530 image generators to integrate with the dynamic mission simulators
and tactical control centers until our Harmony VSC are able to support the
dynamic mission simulators and tactical control centers. As of December 31,
2000, integration of a Harmony VSC with a dynamic mission simulator has been
tested. A Harmony VSC is currently being installed and integrated with a dynamic
mission simulator at the training site. Upon successful completion of the
integration, the ESIG 4530 image generators currently installed at the training
site will be replaced with Harmony VSCs. We have agreed to pay CAE
(i) $0.5 million for reimbursement of certain expenses and costs incurred by CAE
relating to the integration and retrofit of the ESIG 4530 to the dynamic mission
simulators and tactical control centers and (ii) $5.5 million as liquidated
damages resulting from certain delays of the Harmony VSC. As of December 31,
2000, we have paid $6.0 million to CAE. As of December 31, 2001 we have agreed
to pay $1.5 million of additional costs incurred by CAE for retrofit of the
simulators with the Harmony Visual System (VSC). If further delays in the
integration of the Harmony VSC occur, we may be obligated to pay CAE additional
penalties.

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(9) EMPLOYEE BENEFIT PLANS

Pension Plan (the "Plan")--We have 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. Our funding policy is to contribute
amounts sufficient to satisfy regulatory funding standards, based upon
independent actuarial valuations.

Supplemental Executive Retirement Plan ("SERP")--We have a non-qualified
SERP. The SERP, which is unfunded, provides eligible executives defined pension
benefits, outside our 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 (in thousands):

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Net periodic pension and other postretirement benefit costs include the
following components (in thousands):

Deferred Savings Plan--We have a deferred savings plan that qualifies under
Section 401(k) of the Internal Revenue Code. The plan covers all employees of
E&S who have at least one year of service and who are age 18 or older. We make
matching contributions of 50 percent of each employee's contribution not to
exceed six percent of the employee's compensation. Our contributions to this
plan for 2001, 2000 and 1999 were $1.1 million, $1.0 million and $1.1 million,
respectively.

Life Insurance--We purchase 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, 2001 and 2000, the investment
in the policies was $2.7 million and $3.2 million, respectively, and net life
insurance expense was $0.1 million, $0.1 million and $0.2 million for 2001,
2000, 1999, respectively.

(10) LONG-TERM DEBT

Included in long-term debt is 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 our
common stock at a conversion price of $42.10 or 428,000 shares of our common
stock subject to adjustment. The 6% Debentures are redeemable at our option, in
whole or in part, at par.

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The following is a summary of lines of credit (dollars in thousands):

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

In December 2000, we entered into a secured credit facility (the "Foothill
Facility") with Foothill Capital Corporation ("Foothill"). The Foothill Facility
provides for borrowings and the issuance of letters of credit up to
$30.0 million. On February 22, 2002, E&S and Foothill amended the Foothill
Facility whereby Foothill waived all events of financial covenant default
through December 31, 2001 and revised E&S's 2002 financial covenants. The
Foothill Facility expires in December 2002. Borrowings under the Foothill
Facility bear interest at the Wells Fargo Bank National Association prevailing
prime rate plus 1.5% to 3.0%, depending on the amount outstanding. In addition,
the Foothill Facility has an unused line fee equal to 0.375% per annum times the
difference between $30.0 million and the sum of the average undrawn portion of
the letters of credit and the average daily balance of all outstanding
borrowings, payable each quarter. The Foothill Facility provides Foothill with a
first priority perfected security interest in substantially all of our assets,
including, but not limited to, all of our intellectual property. Pursuant to the
terms of the Foothill Facility, all cash receipts of E&S must be deposited into
a Foothill controlled account.

The Foothill Facility, among other things, (i) requires E&S to maintain
certain financial ratios and covenants, including a minimum tangible net worth
that adjusts each quarter, a minimum unbilled receivables to billed receivables
ratio, and a limitation of $12.0 million of aggregate capital expenditures in
any fiscal year; (ii) restricts our 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 our outstanding shares without
the prior consent of the lender. Due to Foothill's waiver on February 22, 2002
of E&S's noncompliance with financial covenants through December 31, 2001 and
the modification of the financial covenants, we are currently in compliance with
its financial covenants and ratios, although a continuation of recent negative
trends could impact future compliance with such covenants. Should the need
arise, we will negotiate with Foothill to modify and expand various financial
ratios and covenants, however no assurance can be given that such negotiations
will result in modifications that will allow us to continue to be in compliance
or otherwise be acceptable to E&S. E&S will need to replace the Foothill
Facility on or before December 14, 2002. In the event E&S is not able to obtain
an acceptable credit facility to replace the Foothill Facility on or before
December 14, 2002, E&S may be unable to meet its anticipated working capital
needs, routine capital expenditures, and current debt service obligations on a
short-term and long-term basis. As of December 31, 2001, we have $15.7 million
in outstanding borrowings and $6.0 million in outstanding letters of credit
under the Foothill Facility.

Evans & Sutherland Computer Limited, a wholly-owned subsidiary of Evans &
Sutherland Computer Corporation, has a $3.0 million overdraft facility (the
"Overdraft Facility") with Lloyds TSB Bank plc ("Lloyds"). Borrowings under the
Overdraft Facility bear interest at Lloyds' short-term offered rate plus 1.75%
per annum. As of December 31, 2001, there were $4.9 million in outstanding

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

borrowings. The Overdraft Facility is subject to reduction or demand repayment
for any reason at any time at Lloyds' discretion and expires on November 30,
2002. Evans & Sutherland Computer Limited executed a letter of negative pledge
in favor of Lloyds whereby it agreed not to sell or encumber its assets, except
in the ordinary course of business. Covenants contained in the Overdraft
Facility restrict dividend payments from Evans & Sutherland Computer Limited and
require maintenance of certain financial covenants. In addition, at
December 31, 2001, we have $0.9 million of cash on deposit with Lloyds in a
restricted cash collateral account to support certain obligations that the bank
guarantees.

(11) INCOME TAXES

Income tax benefit of $3.2 million for 2001 is primarily attributable to
adjustments to prior years tax provisions as a result of the resolution of
certain worldwide tax contingencies. Included in this amount is $0.6 million for
withholding taxes paid in Japan for taxes associated with the REALimage
transaction. Components of income tax expense (benefit) attributable to earnings
before income taxes for 2000 and 1999 are as follows (in thousands):

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 as a
result of the following (in thousands):

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 2001 and 2000, are presented below (in thousands):

Worldwide income before income taxes for the years ended December 31, 2001,
2000 and 1999, consisted of the following (in thousands):

We have total federal net operating loss carryovers of $81.0 million, of
which $24.3 million expire in 2021, $45.4 million expire in 2020, and the
remainder expires between 2006 and 2019. We have various tax credit carryovers
of $5.2 million that expire between 2003 and 2021. We also have state net
operating loss carryovers that expire depending on the rules of the various
states to which the loss is allocated.

During the years ended December 31, 2001 and 2000, we increased the
valuation allowance on deferred tax assets by approximately $13.2 million and
$40.7 million, respectively. These amounts relate to an increase in the general
valuation allowance established under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", which requires that
a valuation allowance be established when it is more likely than not that the
net deferred tax assets will not be realized.

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

On March 9, 2002, President Bush signed into law the Jobs Creation and
Worker Assistance Act of 1992. Among other provisions, the Act provides for a
5-year carryback of losses generated in 2001 without the normal alternative
minimum tax limitation. We expect to be able to generate some additional federal
tax refunds due to this new law.

(12) 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 our 6% Debentures ($6.8
and $7.9 million as of December 31, 2001 and 2000, respectively) is based on
quoted market prices.

(13) COMMITMENTS AND CONTINGENCIES

On November 27, 2000, we entered into a three year agreement with a third
party to provide E&S with certain copy service, mail service, software and
equipment through November 30, 2003. Minimum commitments under this agreement
totaled $640,000 at December 31, 2001.

On September 26, 2000, we entered into a purchase agreement with a third
party that commits E&S to purchase a minimum $4.5 million of licensed products
and support for design development software. The agreement is effective for a
period of three years with an option to renew the agreement for an additional
two-year term.

On June 3, 1999, we entered into an electronic manufacturing services
agreement with Sanmina Corporation (now Sanmina-SCI). The agreement commits us
to purchase a minimum of $22 million of electronic products and assemblies from
Sanmina-SCI each year until June 3, 2002. If we fail to meet these minimum
purchase levels, subject to adjustment, we may be required to pay 25 percent of
the difference between the $22 million and the amount purchased. We have fully
satisfied the requirements of this contract, which ends in June 2002. Various
alternatives, which include a renewed contract with Sanmina-SCI, are being
evaluated.

Certain of our contracts to deliver Harmony image generators contain
liquidated damage provisions for delays in delivery. We incurred $2.9 million,
$0.9 million and $8.2 million for such damages in 2001, 2000 and 1999,
respectively. If further delays in the delivery of the Harmony image generator
occur, we may incur additional liquidated damages.

(14) LEGAL PROCEEDINGS

LOCKHEED MARTIN CORPORATION V. EVANS & SUTHERLAND COMPUTER CORPORATION
(UNITED STATES (MIDDLE) DISTRICT COURT (FLORIDA), CASE NO. 6:00-CV-755-ORL-19C,
FILED ON MAY 23, 2000). On May 23, 2000, Lockheed Martin Corporation served E&S
with a civil complaint filed in the Circuit Court of the Ninth Judicial Circuit
in and for Orange County, Florida. Lockheed alleged in the complaint that we
breached a contract to provide certain visual systems for the Combined Arms
Tactical Trainer program for the United Kingdom Ministry of Defence. The
contract has an original value of $33.9 million. In the complaint, Lockheed
seeks compensatory damages of $8.5 million plus interest as well as
consequential damages and attorneys' fees. The $8.5 million being sought from
E&S by Lockheed was paid to us from May 1999 to March 2000 and was recognized as
revenue by us during 1999. On June 12, 2000, we filed its answer and
counterclaim. In the counterclaim, we allege as grounds for recovery against
Lockheed (1) breach of contract, (2) breach of implied covenant of good faith
and fair dealing, (3) unjust enrichment, (4) unfair competition,
(5) misappropriation of trade secrets, (6) intentional interference with
advantageous business relationship, (7) replevin, and (8) promissory

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

estoppel. In its counterclaim, we seek compensatory damages of not less than
$10.0 million and not more than $25.4 million.

On June 14, 2000, the case was removed to the Orlando Division of the United
States District Court for the District of Florida where it currently remains. On
July 7, 2000, Lockheed answered our counterclaim but also filed a motion for
dismissal of our counterclaims for unjust enrichment, unfair competition,
promissory estoppel, and incidental damages. On July 24, 2000, we filed our
opposition to Lockheed's motion to dismiss these certain counterclaims of E&S.
On October 20, 2000 the court denied Lockheed's motion to dismiss in its
entirety, without prejudice. On January 16, 2001, we filed a motion for partial
summary judgment, asking the court to dismiss all of Lockheed's breach of
contract claims. The court denied that motion on August 30, 2001, citing the
existence of material disputed facts. On September 6, 2001 the court granted
Lockheed's leave to amend its complaint, which was filed on September 17, 2001.
We filed a motion to dismiss these new claims on October 4, 2001, and Lockheed
has opposed it. The court currently has that motion under advisement.

Discovery in the matter is scheduled to conclude on September 30, 2002. A
trial date is currently set for March, 2003. We dispute Lockheed's allegations
in the complaint, is vigorously defending the action, and is vigorously
prosecuting its counterclaims. Although management believes E&S will ultimately
prevail in the litigation, an unfavorable outcome of these matters would have a
material adverse impact on our financial condition and operations.

In the normal course of business, E&S has various other 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, we believe the ultimate disposition of these matters would have a
material adverse effect on our consolidated financial condition, liquidity or
results of operations.

(15) STOCK OPTION AND STOCK PURCHASE PLANS

Stock Option Plans--We have stock incentive plans that provide for the grant
of options to officers and employees to acquire shares of our 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. We grant options to our directors under our Director Plan. Option
grants are

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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):

Shareholders authorized an additional 850,000 and 400,000 shares to be
granted under the plans during 2001 and 2000, respectively. As of December 31,
2001, options to purchase 1,303,000 shares of common stock were authorized and
reserved for future grant.

The following table summarizes information about fixed stock options
outstanding as of December 31, 2001 (options in thousands):

We account 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, our net

67

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

loss and loss per common share would have been changed to the following pro
forma amounts (in thousands, except per share data):

The per share weighted-average fair value of stock options granted during
2001, 2000 and 1999 was $1.92, $5.91 and $5.32, respectively. 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 2001, 2000 and 1999:

Stock Purchase Plan--We have an employee stock purchase plan whereby
qualified employees are allowed to have up to 10% of their annual earnings
withheld to purchase our common stock at 85% 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 63,000, 84,000 and 58,000 were purchased under this plan in
fiscal 2001, 2000 and 1999, and as of December 31, 2001, 50,000 shares were
available for future issuance under this plan.

(16) PREFERRED STOCK

PREFERRED STOCK--CLASS A

We have 5,000,000 authorized shares of Class A Preferred Stock. Prior to
1998, we 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 E&S 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 E&S 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 our
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 E&S at a price of
$0.01 per Right before November 30, 2008.

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

In the event that we are 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 our 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.

On June 7, 2000, E&S and American Stock Transfer & Trust Company amended the
Rights to allow the State of Wisconsin Investment Board to acquire beneficial
ownership up to 19.9% of our outstanding common shares without triggering the
exercisability of the Rights.

PREFERRED STOCK--CLASS B

We have 5,000,000 authorized shares of Class B Preferred Stock. On July 22,
1998, Intel Corporation ("Intel") purchased 901,408 shares of our 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
$24.0 million. In March 2001, Intel converted the 901,408 shares of our
preferred stock into 901,408 shares of our common stock. In March 2001, Intel
and E&S amended the preferred stock and warrant purchase agreement to terminate
certain contractual rights of Intel, including registration rights, board and
committee observation rights, right of first refusal, right of participation,
right of maintenance, standstill agreement, and right to require E&S to
repurchase the preferred stock in the event of any transaction qualifying as a
specific corporate event.

(17) NET INCOME (LOSS) PER COMMON SHARE

Net income (loss) per common share is computed based on the weighted-average
number of common shares and, as appropriate, dilutive common stock equivalents
outstanding during the period. Stock options, warrants, and the 6% Debentures
are considered to be common stock equivalents.

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

In calculating net loss per common share, the net loss was the same for both
the basic and diluted calculation. The diluted weighted average number of common
shares outstanding during 2001, 2000 and 1999 excludes common stock issuable
pursuant to outstanding stock options, the 6% Debentures and the Class B-1
Preferred Stock because to do so would have had an anti-dilutive effect on loss
per common share. The total number of common shares excluded from diluted loss
per share related to the above was approximately 2.2 million, 2.8 million and
2.5 million in 2001, 2000 and 1999, respectively.

(18) SEGMENT AND RELATED INFORMATION

Our business units have been aggregated into three reportable segments:
Simulation, REALimage Solutions and Applications. These reportable segments
offer different products and services and are

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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
REALimage Solutions segment provides graphics acceleration technology to the
professional digital content creation market. The Applications segment provides
digital video applications for entertainment, educational and multimedia
industries. As discussed in Note 2, we sold the REALimage Solutions segment in
the third quarter of 2001.

The accounting policies of the segments are the same as those described in
the summary of significant accounting policies (Note 1). We evaluate segment
performance based on income (loss) from operations before income taxes, interest
income and expense, other income and expense and foreign exchange gains and
losses. Our assets are not identifiable by segment.

The 2001 operating income amount for the REALimage Solutions segment
includes a $9.0 million gain on the sale of assets held for sale, a
$0.8 million gain on sale of business unit and an impairment loss of
$0.2 million. The restructuring charge of $2.8 million in 2001 affected all
segments. The operating loss amount for 2000 for the REALimage Solutions segment
included a credit of $0.8 million related to the reversal of restructuring
charge accruals established in prior years.

The operating loss in 1999 for the Simulation segment includes a write-off
of inventories of $12.1 million. The operating loss in 1999 for the REALimage
Solutions segment includes an impairment loss of $9.7 million, a restructuring
charge of $1.5 million and a write-off of inventories of $1.1 million.

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(19) GEOGRAPHIC INFORMATION

The following table presents sales by geographic location based on the
location of the use of the product or services. Sales within individual
countries greater than 10% of consolidated sales are shown separately (in
thousands):

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

(20) SIGNIFICANT CUSTOMERS

Sales to the U.S. government, either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $69.5 million or 48% of total
sales, $66.7 million or 40% of total sales, and $84.5 million or 42% of total
sales, in 2001, 2000 and 1999, respectively. Sales to the United Kingdom
Ministry of Defence ("UK MOD"), either directly or indirectly through sales to
prime contractors or subcontractors, accounted for $13.6 million or 9% of total
sales, $22.3 million or 13% of total sales, and $33.8 million or 17% of total
sales in 2001, 2000 and 1999, respectively.

In 2001, sales to Thales Training & Simulation ("Thales") were
$23.9 million or 16% of total sales, of which 57% related to UK MOD sales and
sales to The Boeing Company ("Boeing") were $15.1 million of 10% of total sales,
of which 100% related to U.S. government or UK MOD contracts.

In 2000, sales to Lockheed Martin Corporation ("Lockheed") were
$22.5 million or 14% of total sales, of which 100% related to U.S. government
and UK MOD contracts and sales to Thales Training & Simulation Ltd. were
$19.6 million or 12% of total sales, of which 58% related to UK MOD contracts.
In 1999, sales to Lockheed were $35.8 million or 18% of total sales, of which
100% related to U.S. government and UK MOD contracts, and sales to The Boeing
Company ("Boeing") were $25.4 million or 13% of total sales, of which 100%
related to U.S. government and UK MOD contracts.

Aggregated accounts receivable from agencies of the United States
government, either directly or indirectly through prime or subcontractors, was
$10.8 million or 29% of gross accounts receivable at December 31, 2001 and
$9.3 million or 24% of gross accounts receivable at December 31, 2000.
Aggregated accounts receivable from the UK MOD, either directly or indirectly
through prime or subcontractors, was $5.4 million or 15% of gross accounts
receivable at December 31, 2001 and

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EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

$2.1 million or 5% of gross accounts receivable at December 31, 2000. Aggregated
accounts receivable from the Federal Department of Defense of the Federal
Republic of Germany, either directly or indirectly through prime or
subcontractors, was $3.3 million or 9% of gross accounts receivable at
December 31, 2001 and $10.6 million or 27% of gross accounts receivable at
December 31, 2000.

The amount of costs and estimated earnings in excess of billings on
uncompleted contracts from agencies of the United States government and the UK
MOD, either directly or indirectly through prime or subcontractors was
$9.8 million and $28.7 million, or 21% and 60% of total costs and estimated
earnings in excess of billings on uncompleted contracts, respectively, at
December 31, 2001. The amount of costs and estimated earnings in excess of
billings on uncompleted contracts from agencies of the United States government
and the UK MOD, either directly or indirectly through prime or subcontractors,
was $16.8 million and $20.5 million, or 25% and 30% of total costs and estimated
earnings in excess of billings on uncompleted contracts, respectively, at
December 31, 2000.

(21) RESTRUCTURING CHARGE

In the third quarter of 2001, we initiated a restructuring plan focused on
reducing the operating cost structure of E&S. As part of the plan, we recorded a
charge of $2.1 million relating to a reduction in force of approximately 80
employees. In the fourth quarter of 2001, we extended the restructuring plan
initiated in the third quarter. As part of the plan, we recorded a charge of
$0.7 million relating to a reduction in force of approximately 12 employees. As
of December 31, 2001, we had paid $1.9 million in severance benefits related to
these restructurings. The majority of the remaining benefits will be paid out
over the next two quarters. The charge was recorded in accordance with Emerging
Issues Task Force Issue 94-03 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit (Including Certain Cost Incurred in
a Restructuring)" and Staff Accounting Bulletin No. 100, "Restructuring and
Impairment Charges".

In the third quarter of 1999, we initiated a restructuring plan focused on
reducing the operating cost structure of its REALimage Solutions Group. As part
of the plan, we recorded a charge of $1.5 million relating to 28 employee
terminations, including 17 employees in San Jose and 11 employees in Salt Lake
City.

During 2000, after all employee severance costs were incurred, we reversed
$0.8 million of the 1999 restructuring charge as a result of certain employees
being transferred within E&S rather than being terminated and estimated
severance and related charges being lower than expected for the terminated
employees.

(22) RELATED PARTY TRANSACTIONS

We had purchases of $0.4 million during 1999, from a supplier for which our
Chief Executive Officer serves as a director.

(23) REALIMAGE TRANSITION COSTS

Early in 2001, we announced our intention to spin out or sell its REALimage
Solutions Group. Therefore, we categorized all the costs and expenses associated
with the REALimage Solutions Group from the beginning of 2001 until the sale of
the business in the third quarter of 2001 in the REALimage transition costs
expense category. These expenses totaled $5.3 million.

72

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

"None"

FORM 10-K

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information regarding our directors is incorporated by reference from
"Election of Directors" in the Proxy Statement to be delivered to shareholders
in connection with the 2002 Annual Meeting of Shareholders to be held on
May 16, 2002.

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 2002 Annual Meeting of Shareholders to be held on May 16, 2002.

Information concerning our current executive officers 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 2002 Annual Meeting of Shareholders to be held on May 16,
2002.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

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 2002 Annual Meeting of
Shareholders to be held on May 16, 2002.

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 2002 Annual Meeting of Shareholders to be
held on May 16, 2002.

73

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 Auditors

Consolidated Balance Sheets as of December 31, 2001 and 2000

Consolidated Statements of Operations for each of the years in the
three-year period ended December 31, 2001

Consolidated Statements of Comprehensive Loss for each of the years in the
three-year period ended December 31, 2001

Consolidated Statements of Stockholders' Equity for each of the years in the
three-year period ended December 31, 2001

Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 2001

Notes to Consolidated Financial Statements for each of the years in the
three-year period ended December 31, 2001

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.

3. Exhibits

2.1 Agreement and Plan of Merger, dated April 22, 1998, among Evans &
Sutherland Computer Corporation, E&S Merger Corp., and
AccelGraphics, Inc., filed as Annex I to Evans & Sutherland Computer
Corporation'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 Evans &
Sutherland Computer Corporation's Annual Report on Form 10-K, SEC File
No. 000-08771, 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
Evans & Sutherland Computer Corporation's Annual Report on Form 10-K,
SEC File No. 000-08771, 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 Evans & Sutherland Computer Corporation,
filed as Exhibit 3.1 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended September 25, 1998, and incorporated
herein by this reference.

74

3.2 Amended and Restated Bylaws of Evans & Sutherland Computer Corporation,
filed as Exhibit 3.2 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.

3.3 Amendment No. 1 to the Amended and Restated Bylaws of Evans &
Sutherland Computer Corporation, filed as Exhibit 3.3 to Evans &
Sutherland Computer Corporation's Form 10-K for the year ended
December 31, 2000, 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 Evans & Sutherland Computer Corporation's Registration Statement on
Form 8-A filed December 8, 1998, and incorporated herein by this
reference.

4.2 First Amendment to Rights Agreement dated as of June 7, 2000 between
Evans & Sutherland Computer Corporation and American Stock Transfer &
Trust Company, filed as Exhibit 10.14 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.

* 10.1 1985 Stock Option Plan, as amended, filed as Exhibit 1 to Evans &
Sutherland Computer Corporation'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 Evans & Sutherland Computer Corporation's Annual Report
on Form 10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1989, and incorporated herein by this reference.

* 10.3 1991 Employee Stock Purchase Plan of Evans & Sutherland Computer
Corporation, as amended as of February 21, 2001, filed as exhibit 4.1
to Evans & Sutherland Computer Corporation's Post Effective Amendment
No. 1 to Registration Statement on Form S-8, SEC File No. 33-39632, and
incorporated herein by this reference.

* 10.4 Evans & Sutherland Computer Corporation 1998 Stock Option Plan, as
amended as through May 17, 2000, filed as exhibit 4.1 to Evans &
Sutherland Computer Corporation's Post Effective Amendment No. 1 to
Registration Statement on Form S-8, SEC File No. 333-58733, and
incorporated herein by this reference.

* 10.5 Evans & Sutherland Computer Corporation's 1995 Long-Term Incentive
Equity Plan, filed as Exhibit 10.11 to Evans & Sutherland Computer
Corporation's Annual Report on Form 10-K, SEC File No. 000-08771, for
the fiscal year ended December 29, 1995, and incorporated herein by
this reference.

* 10.6 Evans & Sutherland Computer Corporation's Executive Savings Plan, filed
as Exhibit 10.14 to Evans & Sutherland Computer Corporation's Annual
Report on Form 10-K, SEC File No. 000-08771, for the fiscal year ended
December 29, 1995, and incorporated herein by this reference.

* 10.7 Evans & Sutherland Computer Corporation's Supplemental Executive
Retirement Plan (SERP), filed as Exhibit 10.15 to Evans & Sutherland
Computer Corporation's Annual Report on Form 10-K, SEC File
No. 000-08771, 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,
filed as Exhibit 10.8 to Evans &

75

Sutherland Computer Corporation's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and incorporated herein by this
reference.

10.9 Addendum to Business Loan Agreement by and between U.S. Bank National
Association and Evans & Sutherland Computer Corporation as of
February 5, 1999, filed as Exhibit 10.9 to Evans & Sutherland Computer
Corporation's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998, and incorporated herein by reference.

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

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

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

10.14 Loan Agreement by and between Zions First National Bank, a national
banking association, and Evans & Sutherland Computer Corporation, dated
March 31, 2000, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended March 31, 2000 and
incorporated herein by this reference.

10.15 $15,000,000 Promissory Note in favor of Zions First National Bank, a
national banking association, dated March 31, 2000, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.

10.16 Trust Deed, Assignment of Rents, Security Agreement and Fixture Filing
executed by Evans & Sutherland Computer Corporation to Zions First
National Bank, a national banking association, in favor of Zions First
National Bank, a national banking association, dated March 31, 2000,
filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended March 31, 2000, and incorporated herein
by this reference.

10.17 Assignment of tenant's Interest in Ground Lease for Security executed
by Evans & Sutherland Computer Corporation and Zions First National
Bank, a national banking association, dated March 31, 2000, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.

10.18 Assignment of Lease by Evans & Sutherland Computer Corporation and
Zions First National Bank, a national banking association, dated
March 31, 2000, filed as Exhibit 10.5 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended March 31, 2000, and
incorporated herein by this reference.

10.19 Commercial Credit and Security Agreement, dated March 2, 1998, between
Evans & Sutherland Computer Corporation and First Security Bank, N.A.,
filed as Exhibit 10.6 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended March 31, 2000, and incorporated herein
by this reference.

76

10.20 Modification Agreement dated February 22, 2000, between Evans &
Sutherland Computer Corporation and First Security Bank, N.A., filed as
Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended March 31, 2000, and incorporated herein by this
reference.

10.21 Letter of Credit and Reimbursement Agreement between Evans & Sutherland
Computer Corporation and Zions First National Bank, dated April 24,
2000, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.

10.22 Supplemental Letter of Credit and Reimbursement Agreement between
Evans & Sutherland Computer Corporation and Zions First National Bank,
dated May 31, 2000, filed as Exhibit 10.2 to Evans & Sutherland
Computer Corporation's Form 10-Q for the quarter ended June 30, 2000,
and incorporated herein by this reference.

10.23 Managed Agency Account Assignment Agreement between Evans & Sutherland
Computer Corporation and Zions First National Bank, dated May 31, 2000,
filed as Exhibit 10.3 to Evans & Sutherland Computer Corporation's
Form 10-Q for the quarter ended June 30, 2000, and incorporated herein
by this reference.

10.24 Second Loan Modification Agreement made and entered into effective
June 30, 2000 by and among Evans & Sutherland Computer Corporation,
Evans & Sutherland Computer GmbH, Evans & Sutherland Computer Limited,
Evans & Sutherland Graphics Corporation and Zions First National Bank,
a national banking association, filed as Exhibit 10.4 to Evans &
Sutherland Computer Corporation's Form 10-Q for the quarter ended
June 30, 2000, and incorporated herein by this reference.

10.25 $15,000,000 Renewal and Substitute promissory Note in favor of Zions
First National Bank, a national banking association, dated June 30,
2000, filed as Exhibit 10.5 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended June 30, 2000, and
incorporated herein by this reference.

* 10.26 Employment agreement between Evans & Sutherland Computer Corporation
and James R. Oyler, dated May 16, 2000, filed as Exhibit 10.6 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

* 10.27 Employment agreement between Evans & Sutherland Computer Corporation
and Richard J. Gaynor, dated May 16, 2000, filed as Exhibit 10.7 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

* 10.28 Employment agreement between Evans & Sutherland Computer Corporation
and David B. Figgins, dated May 16, 2000, filed as Exhibit 10.8 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

* 10.29 Employment agreement between Evans & Sutherland Computer Corporation
and George K. Saul, dated May 16, 2000, filed as Exhibit 10.9 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

* 10.30 Employment agreement between Evans & Sutherland Computer Corporation
and Robert H. Ard, dated May 16, 2000, filed as Exhibit 10.10 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

77

* 10.31 Employment agreement between Evans & Sutherland Computer Corporation
and Thomas Atchison, dated July 25, 2000, filed as Exhibit 10.11 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

10.32 Overdraft Facility dated June 15, 2000 between Evans & Sutherland
Computer Limited and Lloyds TSB Bank plc, filed as Exhibit 10.12 to
Evans & Sutherland Computer Corporation's Form 10-Q for the quarter
ended June 30, 2000, and incorporated herein by this reference.

* 10.33 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and James R. Oyler, dated September 22, 2000, filed as
Exhibit 10.1 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.34 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Richard J. Gaynor, dated September 22, 2000, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.35 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and David B. Figgins, dated September 22, 2000, filed as
Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.36 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and George K. Saul, dated September 22, 2000, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.37 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Robert H. Ard, dated September 22, 2000, filed as
Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.38 Amendment to employment agreement between Evans & Sutherland Computer
Corporation and Thomas Atchison, dated September 22, 2000, filed as
Exhibit 10.6 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.39 Employment agreement between Evans & Sutherland Computer Corporation
and Nicholas J. Iuanow, dated September 22, 2000, filed as
Exhibit 10.7 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 29, 2000, and incorporated herein by this
reference.

* 10.40 Employment agreement between Evans & Sutherland Computer Corporation
and William M. Thomas, dated December 22, 2000, filed as Exhibit 10.40
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference
herein.

10.41 Loan and Security Agreement by and between Evans & Sutherland Computer
Corporation and Foothill Capital Corporation, dated December 14, 2000,
filed as Exhibit 10.41 to Evans & Sutherland Computer Corporation's
Annual Report on Form 10-K for the fiscal year ended December 31, 2001,
and incorporated herein by this reference.

10.42 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill

78

Capital Corporation, dated December 14, 2001, filed as Exhibit 10.42 to
Evans & Sutherland Computer Corporation's Form 10-K for the year ended
December 31, 2000, and incorporated herein by this reference herein.

10.43 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.43 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference herein.

10.44 Leasehold Deed of Trust, Assignment of Rents, Security Agreement and
Fixture filing between Evans & Sutherland Computer Corporation, Chicago
Title Company, Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.44 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.

10.45 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed as Exhibit 10.45
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.

10.46 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed as Exhibit 10.46
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.

10.47 Absolute Assignment of Sub-Leases and Rent by Evans & Sutherland
Computer Corporation, dated December 14, 2001, filed as Exhibit 10.47
to Evans & Sutherland Computer Corporation's Form 10-K for the year
ended December 31, 2000, and incorporated herein by this reference.

10.48 Pledge and Security Agreement between Evans & Sutherland Computer
Corporation and Foothill Capital Corporation, dated December 14, 2001,
filed as Exhibit 10.48 to Evans & Sutherland Computer Corporation's
Form 10-K for the year ended December 31, 2000, and incorporated herein
by this reference.

10.49 Intellectual Property Security Agreement between Evans & Sutherland
Computer Corporation and Foothill Capital Corporation, dated
December 14, 2001, filed as Exhibit 10.49 to Evans & Sutherland
Computer Corporation's Form 10-K for the year ended December 31, 2000,
and incorporated herein by this reference.

10.50 Amendment No. 1 to Series B Preferred Stock and Warrant Purchase
Agreement between Evans & Sutherland Computer Corporation and Intel
Corporation, dated effective as of March 1, 2001, filed as
Exhibit 10.50 to Evans & Sutherland Computer Corporation's Form 10-K
for the year ended December 31, 2000, and incorporated herein by this
reference.

10.51 Asset Purchase and Intellectual Property License Agreement between Real
Vision Inc. and Evans & Sutherland Computer Corporation, dated
August 31, 2001, filed as Exhibit 10.1 to Evans & Sutherland Computer
Corporation's Form 10-Q for the quarter ended September 28, 2001, and
incorporated herein by reference.

10.52 Initial License Agreement between Real Vision Inc. and Evans &
Sutherland Computer Corporation, dated August 31, 2001, filed as
Exhibit 10.2 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.

79

10.53 Foothill Covenant waiver for the third quarter 2001, filed as
Exhibit 10.3 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.

10.54 Master Sales Agreement between Evans & Sutherland Computer Corporation
and ATI Technologies Inc., dated August 27, 2001, filed as
Exhibit 10.4 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.

10.55 Software License Agreement between Evans & Sutherland Computer
Corporation and ATI Technologies Inc., dated August 27, 2001, filed as
Exhibit 10.5 to Evans & Sutherland Computer Corporation's Form 10-Q for
the quarter ended September 28, 2001, and incorporated herein by
reference.

10.56 Amendment Number One to Loan and Security Agreement and Waiver by and
between Foothill Capital Corporation and Evans & Sutherland Computer
Corporation, dated February 22, 2002, filed herein.

10.57 Patent Purchase and License Agreement between Nvidia
International Inc., Evans & Sutherland Computer Corporation, and
Evans & Sutherland Graphics Corporation, dated October 15, 2001, filed
herein.

10.58 Patent Cross License Agreement between Nvidia Corporation and Evans &
Sutherland Computer Corporation, dated October 15, 2001, filed herein.
Certain information in this exhibit will be omitted and filed
separately with the Securities and Exchange Commission pursuant to a
confidential treatment request under Rule 24b-2 of the Securities and
Exchange Act of 1934, as amended.

21.1 Subsidiaries of Registrant, filed herein.

23.1 Consent of Independent Auditors, filed herein.

24.1 Powers of Attorney for Messrs. James R. Oyler, William M. Thomas,
Gerald S. Casilli, Wolf-Dieter Hass and Ivan E. Sutherland, filed
herein.

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

* Management contract for Compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 14(c) of Form 10-K.

TRADEMARKS USED IN THIS FORM 10-K

AccelGALAXY, AccelGMX, Digistar, E&S, E&S Lightning 1200, EaSIEST, Ensemble,
ESIG, Harmony, INTegrator, RAPIDsite, REALimage, simFUSION, StarRider, Symphony
and Vanguard 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.

80

SCHEDULE II

EVANS & SUTHERLAND COMPUTER CORPORATION AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
(IN THOUSANDS)

81

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 29, 2002 By: /s/ JAMES R. OYLER
-----------------------------------------
JAMES R. OYLER, PRESIDENT

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

Director, Chief Executive
/s/ JAMES R. OYLER Officer and President
------------------------------------------- (Principal Executive March 29, 2002
JAMES R. OYLER Officer)

Vice President, Chief
/s/ WILLIAM M. THOMAS Financial Officer, Treasurer
------------------------------------------- and Corporate Secretary March 29, 2002
WILLIAM M. THOMAS (Principal Financial and
Accounting Officer)

*
------------------------------------------- Director March 29, 2002
GERALD S. CASILLI

*
------------------------------------------- Director March 29, 2002
WOLF-DIETER HASS

*
------------------------------------------- Director March 29, 2002
IVAN E. SUTHERLAND

*By: /s/ WILLIAM M. THOMAS
--------------------------------------
WILLIAM M. THOMAS March 29, 2002
*Attorney-in-Fact